OCEANFIRST FINANCIAL CORP 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors OceanFirst Financial Corp.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC 326, Financial Instruments – Credit Losses . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 57 Allowance for credit losses for loans evaluated on a collective portfolio segment basis As discussed in Notes 1 and 5 in the consolidated financial statements, the Company’s allowance for credit losses (collective ACL) for loans evaluated on a collective portfolio segment basis was $48.6 million as of December 31, 2021. The Company’s methodology to measure the collective ACL incorporates both quantitative and qualitative information to assess lifetime expected credit losses at the portfolio segment level. The quantitative component of the loss estimation process utilizes a model, which includes the calculation of loss rates using an open pool method. Under this quantitative model, the Company calculates a loss rate based on historical loan level loss experience for portfolio segments with similar risk characteristics. The Company segments the commercial loan portfolios by risk rating and the residential and consumer loan portfolios by delinquency. The historical loss rate is adjusted for the economic forecast of 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 a reasonable and supportable forecast period and then reverts to the historical loss rate on a straight-line basis. The adjusted loss rate is then applied to the exposure at default on an undiscounted basis. The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the quantitative component of the loss estimation process. Qualitative loss factors are based on judgments of Company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, performance trends, regulatory changes, uncertainty in economic forecasts and other asset specific risk characteristics. We identified the assessment of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL. Specifically, the assessment encompassed the evaluation of the collective ACL methodology, including methods and models used to estimate the (1) quantitative loss rates and the related significant assumptions, including the period of historical loan level loss experience, the economic forecast of select macroeconomic variables, and credit risk ratings for commercial loans, and (2) the qualitative loss factors, including the significant assumptions consisting of the adjustments made to account for the Company specific data, changes in underlying loan composition of specific portfolios, uncertainty of economic forecasts and other asset specific risk characteristics. The assessment also included an evaluation of the performance monitoring of the open pool loss-rate methodology utilized to develop a lifetime loss estimate. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the Company’s measurement of the collective ACL estimate, including controls over the: • evaluation of the collective ACL methodology, including the appropriateness of the open pool loss-rate method • identification and determination of the significant assumptions used in the quantitative model • evaluation of risk ratings for commercial loans • performance monitoring of the open pool loss-rate methodology • evaluation of the qualitative factors, including the significant assumptions used in the measurement of those qualitative factors • analysis of the collective ACL results, trends and ratios. We evaluated the Company’s process to develop the collective ACL estimate by testing certain methods, assumptions and data that the Company used, and considered the relevance and reliability of such sources of data. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in: • evaluating the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles • evaluating the judgments made by the Company relative to the development and performance testing of the open pool loss rate methodology by comparing them to relevant metrics and trends and the applicable industry and regulatory practices • evaluating the selection of the economic forecast scenario by comparing it to forecasts frequently used in the Company’s industry. • testing the period of historical loan level loss experience to evaluate the length of each period by comparison to the Company’s available reliable data and applicable industry practices • testing individual credit risk ratings for a selection of commercial loans by evaluating the financial performance of the borrower, sources of repayment and any relevant guarantees or underlying collateral • evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ACL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models. 58 We also evaluated the cumulative results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the collective ACL estimate by evaluating the: • cumulative results of the audit procedures • qualitative aspects of the Company’s accounting practices • potential bias in the accounting estimate. /s/ KPMG LLP We have served as the Company’s auditor since 1989. Short Hills, New Jersey February 25, 2022 59 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors OceanFirst Financial Corp.: Opinion on Internal Control Over Financial Reporting We have audited OceanFirst Financial Corp. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, statements of changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2022 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Short Hills, New Jersey February 25, 2022 60 OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share amounts) December 31, 2021 December 31, 2020 Assets Cash and due from banks $ 204,949 $ 1,272,134 Debt securities available-for-sale, at estimated fair value (encumbered $ 293,968 at December 31, 2021 and $ 5,339 at December 31, 2020) 568,255 183,302 Debt securities held-to-maturity, net of allowance for securities credit losses of $ 1,467 at December 31, 2021 and $ 1,715 at December 31, 2020 (estimated fair value of $ 1,152,744 at December 31, 2021 and $ 968,466 at December 31, 2020) (encumbered $ 756,706 at December 31, 2021 and $ 418,719 at December 31, 2020) 1,139,193 937,253 Equity investments (encumbered $ 40,122 at December 31, 2021) 101,155 107,079 Restricted equity investments, at cost 53,195 51,705 Loans receivable, net of allowance for loan credit losses of $ 48,850 at December 31, 2021 and $ 60,735 at December 31, 2020 8,583,352 7,704,857 Loans held-for-sale — 45,524 Interest and dividends receivable 32,606 35,269 Other real estate owned 106 106 Premises and equipment, net 125,828 107,094 Bank owned life insurance 259,207 265,253 Assets held for sale 6,229 5,782 Goodwill 500,319 500,319 Core deposit intangible 18,215 23,668 Other assets 147,007 208,968 Total assets $ 11,739,616 $ 11,448,313 Liabilities and Stockholders’ Equity Deposits $ 9,732,816 $ 9,427,616 Securities sold under agreements to repurchase with retail customers 118,769 128,454 Other borrowings 229,141 235,471 Advances by borrowers for taxes and insurance 20,305 17,296 Other liabilities 122,032 155,346 Total liabilities 10,223,063 9,964,183 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation preference, 5,000,000 shares authorized, 57,370 shares issued at both December 31, 2021 and December 31, 2020 1 1 Common stock, $ 0.01 par value, 150,000,000 shares authorized, 61,535,381 and 61,040,894 shares issued at December 31, 2021 and December 31, 2020, respectively; and 59,175,046 and 60,392,043 shares outstanding at December 31, 2021 and December 31, 2020, respectively 611 609 Additional paid-in capital 1,146,781 1,137,715 Retained earnings 442,306 378,268 Accumulated other comprehensive (loss) income ( 2,821 ) 621 Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") ( 8,615 ) ( 7,433 ) Treasury stock, 2,360,335 and 648,851 shares at December 31, 2021 and December 31, 2020, respectively ( 61,710 ) ( 25,651 ) Total stockholders’ equity 1,516,553 1,484,130 Total liabilities and stockholders’ equity $ 11,739,616 $ 11,448,313 See accompanying Notes to Consolidated Financial Statements. 61 OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amount) For the Year Ended December 31, 2021 2020 2019 Interest income: Loans $ 315,237 $ 349,221 $ 279,931 Debt securities 22,033 24,116 23,811 Equity investments and other 4,822 6,271 5,052 Total interest income 342,092 379,608 308,794 Interest expense: Deposits 25,210 48,290 38,432 Borrowed funds 11,544 18,367 14,391 Total 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: Bankcard services revenue 13,360 11,417 10,263 Trust and asset management revenue 2,336 2,052 2,102 Fees and service charges 13,833 15,808 18,500 Net gain on sales of loans 3,186 8,278 16 Net gain on equity investments 7,145 21,214 267 Net (loss) gain from other real estate operations ( 15 ) 35 ( 330 ) Income from bank owned life insurance 6,832 6,424 5,420 Commercial loan swap income 4,095 8,080 5,285 Other 1,159 618 642 Total other income 51,931 73,926 42,165 Operating expenses: Compensation and employee benefits 120,014 114,155 89,912 Occupancy 20,481 20,782 17,159 Equipment 5,443 7,769 7,719 Marketing 2,169 3,117 3,469 Federal deposit insurance and regulatory assessments 6,155 4,871 2,227 Data processing 21,570 17,467 14,814 Check card processing 5,182 5,458 5,956 Professional fees 11,043 12,247 9,338 Federal Home Loan Bank (“FHLB”) advance prepayment fees — 14,257 — Amortization of core deposit intangible 5,453 6,186 4,027 Branch consolidation expense 12,337 7,623 9,050 Merger related expenses 1,503 15,947 10,503 Other operating expense 15,510 16,552 14,968 Total operating expenses 226,860 246,431 189,142 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 63,309 88,574 Dividends on preferred shares 4,016 2,097 — 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 Average basic shares outstanding 59,406 59,919 50,166 Average diluted shares outstanding 59,649 60,072 50,746 See accompanying Notes to Consolidated Financial Statements. 62 OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the Year Ended December 31, 2021 2020 2019 Net income $ 110,076 $ 63,309 $ 88,574 Other comprehensive income: Unrealized (loss) gain on debt securities (net of tax benefit of $ 1,142 in 2021, and tax expense of $ 411 and $ 470 in 2020 and 2019, respectively) ( 3,837 ) 1,039 1,655 Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $ 272 , $ 310 and $ 404 in 2021, 2020, and 2019, respectively) 395 446 587 Reclassification adjustment for gains included in net income (net of tax expense of $ 101 in 2020) — 344 — Total other comprehensive (loss) income ( 3,442 ) 1,829 2,242 Total comprehensive income 106,634 65,138 90,816 Less: Dividends on preferred shares 4,016 2,097 — Total comprehensive income available to common stockholders $ 102,618 $ 63,041 $ 90,816 See accompanying Notes to Consolidated Financial Statements. 63 OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (dollars in thousands, except per share amounts) For the Years Ended December 31, 2021, 2020 and 2019 Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Gain Employee Stock Ownership Plan Treasury Stock Total Balance at December 31, 2018 $ — $ 483 $ 757,963 $ 305,056 $ ( 3,450 ) $ ( 9,857 ) $ ( 10,837 ) $ 1,039,358 Net income — — — 88,574 — — — 88,574 Other comprehensive income, net of tax — — — — 2,242 — — 2,242 Stock awards — 2 3,859 — — — — 3,861 Allocation of ESOP stock — — 366 — — 1,209 — 1,575 Cash dividend – $ 0.68 per share — — — ( 34,241 ) — — — ( 34,241 ) Exercise of stock options — 2 2,054 ( 721 ) — — — 1,335 Acquisition of Capital Bank of New Jersey — 32 76,449 — — — — 76,481 Purchase 1,127,557 shares of common stock — — — — — — ( 26,066 ) ( 26,066 ) Balance at December 31, 2019 — 519 840,691 358,668 ( 1,208 ) ( 8,648 ) ( 36,903 ) 1,153,119 Net income — — — 63,309 — — — 63,309 Other comprehensive income, net of tax — — — — 1,829 — — 1,829 Stock awards — 2 4,256 — — — — 4,258 Effect of adopting ASU No. 2016-13 — — — ( 4 ) — — — ( 4 ) Allocation of ESOP stock — — ( 80 ) — — 1,215 — 1,135 Cash dividend – $ 0.68 per share — — — ( 40,820 ) — — — ( 40,820 ) Exercise of stock options — 2 2,027 ( 788 ) — — — 1,241 Purchase 648,851 shares of common stock — — — — — — ( 14,814 ) ( 14,814 ) Proceeds from preferred stock issuance, net of costs 1 — 55,528 — — — 55,529 Preferred stock dividend — — — ( 2,097 ) — — — ( 2,097 ) Acquisition of Two River Bancorp — 42 122,501 — — — 26,066 148,609 Acquisition of Country Bank Holding Company — 44 112,792 — — — 112,836 Balance at December 31, 2020 1 609 1,137,715 378,268 621 ( 7,433 ) ( 25,651 ) 1,484,130 Net income — — — 110,076 — — — 110,076 Other comprehensive loss, net of tax — — — — ( 3,442 ) — — ( 3,442 ) Stock awards — — 5,415 — — — — 5,415 Acquisition of common stock by ESOP — — — — — ( 3,200 ) ( 3,200 ) Allocation of ESOP stock — — 179 — — 2,018 — 2,197 Cash dividend – $ 0.68 per share — — — ( 40,494 ) — — — ( 40,494 ) Exercise of stock options — 2 3,472 ( 1,528 ) — — — 1,946 Purchase 1,711,484 shares of common stock — — — — — — ( 36,059 ) ( 36,059 ) Preferred stock dividend — — — ( 4,016 ) — — — ( 4,016 ) Balance at December 31, 2021 $ 1 $ 611 $ 1,146,781 $ 442,306 $ ( 2,821 ) $ ( 8,615 ) $ ( 61,710 ) $ 1,516,553 See accompanying Notes to Consolidated Financial Statements. 64 OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) For the Year Ended December 31, 2021 2020 2019 Cash flows from operating activities: Net income $ 110,076 $ 63,309 $ 88,574 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 9,357 8,453 8,363 Allocation of ESOP stock 2,197 1,135 1,575 Stock compensation 5,415 4,258 3,861 Net excess tax expense (benefit) on stock compensation 93 123 ( 357 ) Amortization of core deposit intangible 5,453 6,186 4,027 Net accretion of purchase accounting adjustments ( 14,484 ) ( 21,557 ) ( 14,094 ) Amortization of servicing asset 72 93 42 Net premium amortization in excess of discount accretion on securities 8,466 2,997 3,232 Net amortization of deferred costs on borrowings 824 553 216 Net amortization of deferred costs and discounts on loans 1,242 4,872 1,584 Credit loss (benefit) expense ( 11,832 ) 59,404 1,636 Deferred tax provision (benefit) 3,608 ( 4,615 ) 16,053 Net (gain) loss on sale and write-down of other real estate owned — ( 390 ) 20 Net write-down of fixed assets held-for-sale to net realizable value 7,787 3,853 7,532 Net gain on sale of fixed assets — ( 6 ) ( 27 ) Net gain on equity investments ( 7,145 ) ( 21,214 ) ( 267 ) Net gain on sales of loans ( 3,186 ) ( 8,278 ) ( 16 ) Proceeds from sales of residential loans held for sale 102,648 171,263 1,023 Residential loans originated for sale ( 53,938 ) ( 213,428 ) ( 1,007 ) Increase in value of bank owned life insurance ( 6,832 ) ( 6,424 ) ( 5,420 ) Net (gain) loss on sale of assets held for sale ( 318 ) ( 21 ) 17 Decrease (increase) in interest and dividends receivable 2,663 ( 9,434 ) ( 397 ) Decrease (increase) in other assets 33,093 17,030 ( 32,871 ) (Decrease) increase in other liabilities ( 35,287 ) 74,494 16,948 Total adjustments 49,896 69,347 11,673 Net cash provided by operating activities 159,972 132,656 100,247 Cash flows from investing activities: Net increase in loans receivable ( 556,449 ) ( 428,444 ) ( 215,881 ) Purchases of loans receivable ( 301,954 ) — ( 101,674 ) Premiums paid on purchased loan pools ( 8,874 ) — — Proceeds from sale of loans 825 449,462 5,901 Purchase of debt securities available-for-sale ( 510,070 ) ( 77,519 ) ( 60,158 ) Purchase of debt securities held-to-maturity ( 447,447 ) ( 224,073 ) ( 4,381 ) Purchase of equity investments ( 86,462 ) ( 96,519 ) ( 214 ) Proceeds from maturities and calls of debt securities available-for-sale 103,720 43,503 29,299 Proceeds from maturities and calls of debt securities held-to-maturity 38,042 53,959 43,256 Proceeds from sales of debt securities available-for-sale 3,000 10,598 — Proceeds from sales of debt securities held-to-maturity — 12,450 — Proceeds from sales of equity investments 98,777 16,978 — Principal repayments on debt securities available-for-sale — 306 503 Principal repayments on debt securities held-to-maturity 215,734 186,687 123,833 Proceeds from bank owned life insurance 12,878 1,022 870 65 OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (dollars in thousands) For the Year Ended December 31, 2021 2020 2019 Cash flows from investing activities (continued): Proceeds from the redemption of restricted equity investments 2,200 78,190 122,535 Purchases of restricted equity investments ( 3,267 ) ( 59,525 ) ( 127,794 ) Proceeds from sales of other real estate owned — 855 2,060 Proceeds from sales of assets held-for-sale 3,544 1,169 2,353 Purchases of premises and equipment ( 42,039 ) ( 14,728 ) ( 5,075 ) Cash held in escrow for acquisitions — — ( 46,950 ) Cash consideration received for acquisition — 23,460 59,395 Net cash used in investing activities ( 1,477,842 ) ( 22,169 ) ( 172,122 ) Cash flows from financing activities: Net increase in deposits 407,569 1,507,943 65,687 Net payment for sale of branches ( 86,282 ) — — (Decrease) increase in short-term borrowings ( 9,685 ) ( 226,018 ) 105,979 Proceeds from FHLB advances — 525,000 80,000 Repayments of FHLB advances — ( 840,200 ) ( 106,618 ) Net proceeds from issuance of subordinated notes — 122,180 — Proceeds from Federal Reserve Bank advances — 53,778 — Repayments from Federal Reserve Bank advances — ( 53,778 ) — Repayments of other borrowings ( 7,612 ) ( 8,109 ) ( 263 ) Increase (decrease) in advances by borrowers for taxes and insurance 3,009 ( 2,803 ) ( 182 ) Exercise of stock options 1,946 1,241 1,335 Payment of employee taxes withheld from stock awards ( 1,183 ) ( 2,084 ) ( 2,858 ) Purchase of treasury stock ( 36,059 ) ( 14,814 ) ( 26,066 ) Net proceeds from the issuance of preferred stock — 55,529 — Acquisition of common stock by ESOP ( 3,200 ) — — Dividends paid ( 44,510 ) ( 42,917 ) ( 34,241 ) Net cash provided by financing activities 223,993 1,074,948 82,773 Net (decrease) increase in cash and due from banks and restricted cash ( 1,093,877 ) 1,185,435 10,898 Cash and due from banks and restricted cash at beginning of year 1,318,661 133,226 122,328 Cash and due from banks and restricted cash at end of year $ 224,784 $ 1,318,661 $ 133,226 Supplemental disclosure of cash flow information: Cash and due from banks at beginning of year $ 1,272,134 $ 120,544 $ 120,792 Restricted cash at beginning of year 46,527 12,682 1,536 Cash and due from banks and restricted cash at beginning of year $ 1,318,661 $ 133,226 $ 122,328 Cash and due from banks at end of year $ 204,949 $ 1,272,134 $ 120,544 Restricted cash at end of year 19,835 46,527 12,682 Cash and due from banks and restricted cash at end of year $ 224,784 $ 1,318,661 $ 133,226 Cash paid during the year for: Interest $ 37,381 $ 66,454 $ 52,315 Income taxes 50,524 5,742 20,006 Non-cash activities: Accretion of unrealized loss on securities reclassified to held-to-maturity 667 756 991 Net loan (recoveries) charge-offs ( 442 ) 18,859 1,361 Transfer of premises and equipment to assets held-for-sale 4,035 3,953 2,189 Transfer of debt securities from available-for-sale to held-to-maturity 12,721 — — Transfer of loans receivable to other real estate owned — 106 963 Transfer of loans receivable to loans held-for-sale — 444,543 — 66 OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (dollars in thousands) For the Year Ended December 31, 2021 2020 2019 Supplemental disclosure of cash flow information (continued): Acquisition: Non-cash assets acquired: Securities $ — $ 208,880 $ 103,775 Restricted equity investments — 5,334 313 Loans — 1,558,480 307,778 Premises and equipment — 9,744 3,389 Accrued interest receivable — 4,161 1,390 Bank owned life insurance — 22,440 10,460 Deferred tax asset — 41 3,967 Other assets — 10,073 1,278 Goodwill and other intangible assets, net — 139,501 38,875 Total non-cash assets acquired $ — $ 1,958,654 $ 471,225 Liabilities assumed: Deposits $ — $ 1,594,403 $ 449,018 Borrowings — 92,618 — Other liabilities — 33,648 5,121 Total liabilities assumed $ — $ 1,720,669 $ 454,139 See accompanying Notes to Consolidated Financial Statements. 67 Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc., and the Bank’s direct and indirect wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Management Corp., OceanFirst Realty Corp., Casaba Real Estate Holdings Corporation, CBNJ Investments Corp., Country Property Holdings, Inc., and TRCB Investment Corp. Certain other subsidiaries were dissolved in 2020 and are included in the consolidated financial statements for prior periods. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts previously reported have been reclassified to conform to the current year’s presentation. Business The Bank provides a range of community banking services to retail and commercial customers through a network of branches and offices throughout New Jersey and the major metropolitan areas of Philadelphia, New York, Baltimore, Washington D.C., and Boston. The Bank is subject to competition from other financial institutions and certain technology companies. It is also subject to the regulations of certain regulatory agencies and undergoes periodic examinations by those regulatory authorities. Basis of Financial Statement Presentation The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of the accompanying consolidated financial statements, in conformity with these accounting principles, requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current and forecasted economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes, including in the economic environment, will be reflected in the financial statements in future periods. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, cash items in the process of collection, and interest-bearing deposits in other financial institutions. For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Securities Securities include debt securities held-to-maturity (“HTM”), and debt securities available-for-sale (“AFS”). Debt securities include U.S. government and agency obligations, state and municipal obligations, corporate debt securities, asset-backed securities, and mortgage-backed securities (“MBS”). Mortgage-backed securities include: agency residential mortgage-backed securities which are issued and guaranteed by either the Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), and Government National Mortgage Association (“GNMA”); agency commercial mortgage-backed securities which are issued and guaranteed by Small Business Administration (“SBA”), or agency commercial mortgage-backed securities (“ACMBS”); and non-agency commercial mortgage-backed securities which are issued and guaranteed by commercial mortgage-backed securities (“CMBS”), and collateralized mortgage obligations (“CMOs”). Management determines the appropriate classification at the time of purchase. If management has the positive intent not to sell a security and the Company would not be required to sell such a security prior to maturity, the securities can be classified as HTM debt securities. Such securities are stated at amortized cost. Securities in the AFS category are securities which the Company may sell prior to maturity as part of its asset/liability management strategy. Such securities are carried at estimated fair value and unrealized gains and losses, net of related tax effect, are excluded from earnings, but are included as a separate component of stockholders’ equity and as part of other comprehensive income. Discounts and premiums on securities are accreted or amortized using the level-yield method over the estimated lives of the securities, including the effect of 68 prepayments. Gains or losses on the sale of such securities are included in other income using the specific identification method. During 2021 and 2013, the Company transferred securities from AFS to HTM. Unrealized gains or losses at the time of transfer will continue to be reflected in accumulated other comprehensive income, net of subsequent amortization, which is being recognized over the remaining life of the securities. Equity investments with readily determinable fair value are reported at fair value, with changes in fair value reported in net income. Equity investments without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Credit Losses for Available-for-Sale Debt Securities As of January 1, 2020, the Company adopted ASC 326-30, Available-for-Sale Debt Securities. The adoption retained the fundamental nature of other-than-temporary impairment (“OTTI”) – that entities recognize securities credit losses only once securities become impaired. An AFS debt security is considered impaired when amounts are deemed uncollectible or when the Company intends, or more likely than not will be required to sell, the AFS debt security before recovery of the amortized cost basis. If a determination is made that an AFS debt security is impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as a securities credit loss expense through an allowance for securities credit losses. The securities credit loss expense will be limited to the difference between the security’s amortized cost basis and fair value and any future changes may be reversed, limited to the amount previously expensed, in the period they occur. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income, net of tax. The evaluation of securities for impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the estimated fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition and/or future prospects, the effects of changes in interest rates or credit spreads, and the expected recovery period. On a quarterly basis the Company evaluates the AFS debt securities for impairment. Securities that are in an unrealized loss position are reviewed to determine if a securities credit loss exists based on certain quantitative and qualitative factors. The primary factors considered in evaluating whether an impairment exists include: (a) the extent to which the fair value is less than the amortized cost basis, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, and (d) whether the Company intends to sell the security and whether it is more likely than not that the Company will not be required to sell the security. Loans Receivable Loans receivable, other than loans held-for-sale, are stated at unpaid principal balance, plus unamortized premiums less unearned discounts, net of deferred loan origination and commitment fees and costs, and the associated allowance for loan credit losses. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income using the level-yield method over the contractual life of the specifically identified loans, adjusted for actual prepayments. For each loan class, a loan is considered past due when a payment has not been received in accordance with the contractual terms. Loans which are more than 90 days past due, and other loans in the process of foreclosure, are placed on non-accrual status. Interest income previously accrued on these loans, but not yet received, is reversed in the current period. Any interest subsequently collected is credited to income in the period of recovery only after the full principal balance has been brought current and has returned to accrual status. A loan is returned to accrual status when all amounts due have been received, payments remain current for a period of six months, and the remaining principal and interest are deemed collectible. Loans are charged-off in the period the loans, or portion thereof, are deemed uncollectible. The Company will record a loan charge-off to reduce a loan to the estimated fair value of the underlying collateral, less cost to sell, if it is determined that it is probable that recovery will come primarily from the sale of the collateral. Loans Held for Sale 69 Loans held for sale are carried at the lower of unpaid principal balance, net, or estimated fair value on an aggregate basis. Estimated fair value is generally determined based on bid quotations from securities dealers. Allowance for Credit Losses (“ACL”) Under the current expected credit loss (“CECL”) model, the allowance for credit losses on financial assets is a valuation allowance estimated at each balance sheet date in accordance with 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 Coronavirus Disease 2019 (“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 related to loans at December 31, 2021 was $ 26.2 million, of which $ 4.4 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 HTM debt securities. The Company further segments the commercial loan portfolios by risk rating, and the residential and consumer loan portfolios by delinquency. The total ACL on loans measured on a collective portfolio segment basis was $ 48.6 million as of December 31, 2021. 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 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. 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, and/or cost 70 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. Troubled Debt Restructured (“TDR”) 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 Coronavirus Aid, Relief, and Economic Security (“CARES”) Act are not considered TDRs. Loan Commitments and Allowance for Loan 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 loan 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 loan credit losses on off-balance sheet credit exposures through a charge to loan 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. 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 purchased with credit deterioration (“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. 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. Allowance for Loan Losses (Prior to January 1, 2020) The allowance for loan losses (currently referred to as ACL on loans) represented a valuation account that reflected probable incurred losses in the loan portfolio. The adequacy of the allowance for loan losses was based on management’s evaluation of the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, current economic and regulatory conditions, as well as organizational changes. The allowance for loan losses was maintained at an amount management considered sufficient to provide for probable losses. Reserve for Repurchased Loans and Loss Sharing Obligations 71 The reserve for repurchased loans and loss sharing obligations relates to potential losses on loans sold which may have to be repurchased due to a violation of representations and warranties, an estimate of the Bank’s obligation under a loss sharing arrangement for loans sold to the FHLB as well as the potential repair requests for guaranteed loans sold to the SBA. Provisions for losses are charged to gain on sale of loans and credited to the reserve while actual losses are charged to the reserve. The reserve represents the Company’s estimate of the total losses expected to occur and is considered to be adequate by management based upon the Company’s evaluation of the potential exposure related to the loan sale agreements and loss sharing obligations over the period of repurchase risk. The reserve for repurchased loans and loss sharing obligations, as well as SBA repair requests, is included in other liabilities on the Company’s consolidated statement of financial condition. Other Real Estate Owned (“OREO”) Other real estate owned is carried at the lower of cost or estimated fair value, less estimated costs to sell. When a property is acquired, the excess of the loan balance over estimated fair value is charged to the allowance for credit losses for loans. Operating results from other real estate owned, including rental income, operating expenses, gains and losses realized from the sales of other real estate owned, and subsequent write-downs are recorded as incurred. Premises and Equipment Land is carried at cost and premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization or, in the case of acquired premises, the estimated fair value on the acquisition date. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or leases. Generally, depreciable lives are as follows: computer software and equipment: 3 years; furniture, fixtures and other electronic equipment: 5 years; building improvements: 10 years; and buildings: 30 years. Depreciable assets are placed in service when they are in a condition for use and available for their designated function. The Company has not developed any internal use software. Repair and maintenance items are expensed and improvements are capitalized. Gains and losses on dispositions are reflected in branch consolidation expenses and other income. Leases The Company recognizes operating lease agreements on the consolidated statements of financial condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The ROU asset and lease liability are calculated as the present value of the minimum lease payments over the lease term, discounted for the rate implicit in the lease, provided the rate is readily determinable. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Any interest and penalties on taxes payable are included as part of the provision for income taxes. Bank Owned Life Insurance (“BOLI”) Bank owned life insurance is accounted for using the cash surrender value method and is recorded at its realizable value. Part of the Company’s BOLI is invested in a separate account insurance product, which is invested in a fixed income portfolio. The separate account includes stable value protection which maintains realizable value at book value with investment gains and losses amortized over future periods. Increases in cash surrender value are included in other non-interest income, while proceeds from death benefits are generally recorded as a reduction to the carrying value. 72 Intangible Assets Intangible assets resulting from acquisitions, under the acquisition method of accounting, consists of goodwill and core deposit intangibles. Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired through purchase acquisitions. Goodwill with an indefinite useful life is not amortized, but is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company prepares a qualitative assessment, and if necessary, a quantitative assessment, in determining whether goodwill may be impaired. The factors considered in the qualitative assessment include macroeconomic conditions, industry and market conditions and overall financial performance of the Company, among other factors. Under a quantitative assessment, the Company will estimate the fair value of the Company by utilizing a weighted discounted cash flow method, guideline public company method, and transaction method. The Company completes its annual goodwill impairment test as of August 31 and evaluates triggering events during interim periods, as applicable. The Company completed its annual goodwill impairment test as of August 31, 2021. Based upon its qualitative assessment of goodwill, the Company concluded that goodwill was not impaired and no further quantitative analysis was warranted . At December 31, 2021, management performed its qualitative assessment and concluded no events or circumstances occurred subsequent to August 31, 2021 that would trigger another impairment test. Segment Reporting The Company’s operations are solely in the financial services industry and includes providing traditional banking and other financial services to its customers. The Company operates throughout New Jersey and the major metropolitan markets of Philadelphia, New York, Baltimore, Washington D.C., and Boston . Management makes operating decisions and assesses performance based on an ongoing review of the Company’s consolidated financial results. Therefore, the Company has a single operating segment for financial reporting purposes. Earnings Per Share Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding and potential common stock utilizing the treasury stock method. All share amounts exclude unallocated shares of stock held by the ESOP and by incentive plans. Accounting Pronouncements Adopted in 2021 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 provides 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. In January 2020, FASB issued Update 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. Note 2. Regulatory Matters Applicable regulations require the Bank to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2021, the Bank was required to maintain a minimum ratio of Tier 1 capital to total average assets of 4.0 %; a 73 minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0 %; a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5 %; and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 10.5 %. These ratios include the impact of the required 2.50 % capital conservation buffer. With its conversion to a bank holding company on January 31, 2018, the Company became subject to substantially similar consolidated capital requirements imposed by Federal Reserve Board (“FRB”) regulations. Under the regulatory framework for prompt corrective action, federal regulators are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements. The regulations establish a framework for the classification of banking institutions into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a Tier 1 capital rati o of 5.0 %; a common equity Tier 1 risk-based ratio of at least 6.5 %; a Tier 1 risk-based ratio of at least 8.0 %; and a total risk-based capital ratio of at least 10.0 %. At December 31, 2021 and 2020, the Company and the Bank exceeded all regulatory capital requirements currently applicable . The following is a summary of the Bank’s and the Company’s regulatory capital amounts and ratios as of December 31, 2021 and 2020 compared to the regulatory minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized institution then in effect (dollars in thousands): As of December 31, 2021 Actual For capital adequacy purposes To be well-capitalized under prompt corrective action Bank: Amount Ratio Amount Ratio Amount Ratio Tier 1 capital (to average assets) $ 1,027,660 9.08 % $ 452,669 4.00 % $ 565,836 5.00 % Common equity Tier 1 (to risk-weighted assets) 1,027,660 11.62 619,178 7.00 (1) 574,951 6.50 Tier 1 capital (to risk-weighted assets) 1,027,660 11.62 751,860 8.50 (1) 707,633 8.00 Total capital (to risk-weighted assets) 1,079,766 12.21 928,768 10.50 (1) 884,541 10.00 Company: Tier 1 capital (to average assets) $ 1,044,518 9.22 % $ 453,087 4.00 % N/A N/A Common equity Tier 1 (to risk-weighted assets) 917,088 10.26 625,801 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 1,044,518 11.68 759,902 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,257,372 14.06 938,702 10.50 (1) N/A N/A As of December 31, 2020 Actual For capital adequacy purposes To be well-capitalized under prompt corrective action Bank: Amount Ratio Amount Ratio Amount Ratio Tier 1 capital (to average assets) $ 942,122 8.48 % $ 444,648 4.00 % $ 555,810 5.00 % Common equity Tier 1 (to risk-weighted assets) 942,122 12.11 544,625 7.00 (1) 505,724 6.50 Tier 1 capital (to risk-weighted assets) 942,122 12.11 661,331 8.50 (1) 622,429 8.00 Total capital (to risk-weighted assets) 1,004,480 12.91 816,938 10.50 (1) 778,036 10.00 Company: Tier 1 capital (to average assets) $ 998,273 9.44 % $ 423,028 4.00 % N/A N/A Common equity Tier 1 (to risk-weighted assets) 871,385 11.05 552,075 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 998,273 12.66 670,377 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,230,370 15.60 828,113 10.50 (1) N/A N/A (1) Includes the Capital Conservation Buffer of 2.50 %. The Bank satisfies the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations. On January 1, 2019, the full capital conservation buffer requirement of 2.50 % became effective. Capital distributions and certain discretionary bonus payments are limited if the capital conservation buffer is not maintained. Applicable regulations also impose limitations upon capital distributions by the Company, such as dividends and payments to repurchase or otherwise acquire shares. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock if the 74 effect thereof would cause stockholders’ equity to be reduced below applicable regulatory capital minimum requirements or if such declaration and payment would otherwise violate regulatory requirements. 75 Note 3. Business Combinations The Company incurred merger related expenses of $ 1.5 million, $ 15.9 million, and $ 10.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. The following table summarizes the merger related expenses for the years ended December 31, 2021, 2020 and 2019: For the Year Ended December 31, 2021 2020 2019 (in thousands) Data processing fees $ 253 $ 3,758 $ 2,514 Professional fees 343 3,638 4,239 Employee severance payments 663 7,727 2,942 Other/miscellaneous fees 244 824 808 Merger related expenses $ 1,503 $ 15,947 $ 10,503 Two River Bancorp Acquisition On January 1, 2020, the Company completed its acquisition of Two River Bancorp (“Two River”), which after purchase accounting adjustments added $ 1.11 billion of assets, $ 940.1 million of loans, and $ 941.8 million of deposits. Total consideration paid for Two River was $ 197.1 million, including cash consideration of $ 48.4 million. Two River was merged with and into the Company on the date of acquisition. The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill. 76 The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Two River, net of total consideration paid (in thousands): At January 1, 2020 Estimated Fair Value Total purchase price: $ 197,050 Assets acquired: Cash and cash equivalents $ 51,102 Securities 64,381 Loans 940,072 Accrued interest receivable 2,382 Bank owned life insurance 22,440 Deferred tax assets, net 3,158 Other assets 15,956 Core deposit intangible 12,130 Total assets acquired 1,111,621 Liabilities assumed: Deposits ( 941,750 ) Other liabilities ( 59,026 ) Total liabilities assumed ( 1,000,776 ) Net assets acquired $ 110,845 Goodwill recorded in the merger $ 86,205 The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value. Country Bank Holding Company, Inc. Acquisition On January 1, 2020, the Company completed its acquisition of Country Bank Holding Company, Inc. (“Country Bank”), which after purchase accounting adjustments added $ 793.7 million of assets, $ 618.4 million of loans, and $ 652.7 million of deposits. Total consideration paid for Country Bank was $ 112.8 million. Country Bank was merged with and into the Company on the date of acquisition. The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill. 77 The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Country Bank, net of total consideration paid (in thousands): At January 1, 2020 Estimated Fair Value Total purchase price: $ 112,836 Assets acquired: Cash and cash equivalents $ 20,799 Securities 144,499 Loans 618,408 Accrued interest receivable 1,779 Deferred tax assets, net ( 3,117 ) Other assets 9,195 Core deposit intangible 2,117 Total assets acquired 793,680 Liabilities assumed: Deposits ( 652,653 ) Other liabilities ( 67,240 ) Total liabilities assumed ( 719,893 ) Net assets acquired $ 73,787 Goodwill recorded in the merger $ 39,049 The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value. Capital Bank of New Jersey Acquisition On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”), which after purchase accounting adjustments added $ 494.4 million to assets, $ 307.3 million to loans, and $ 449.0 million to deposits. Total consideration paid for Capital Bank was $ 76.8 million, including cash consideration of $ 353,000 . Capital Bank was merged with and into the Company on the date of acquisition. The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill. 78 The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Capital Bank, net of total consideration paid (in thousands): At January 31, 2019 Estimated Fair Value Total purchase price: $ 76,834 Assets acquired: Cash and cash equivalents $ 59,748 Securities 103,775 Loans 307,300 Accrued interest receivable 1,390 Bank owned life insurance 10,460 Deferred tax assets, net 4,101 Other assets 4,980 Core deposit intangible 2,662 Total assets acquired 494,416 Liabilities assumed: Deposits ( 449,018 ) Other liabilities ( 5,210 ) Total liabilities assumed ( 454,228 ) Net assets acquired $ 40,188 Goodwill recorded in the merger $ 36,646 The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. On January 31, 2020, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value. Supplemental Pro Forma Financial Information The following table presents financial information regarding the former Capital Bank operations included in the Consolidated Statements of Income from the date of the acquisition (January 31, 2019) through December 31, 2019; and regarding Two River and Country Bank operations included in the Consolidated Statements of Income from the date of the acquisition (January 1, 2020) through December 31, 2020. In addition, the table provides condensed pro forma financial information assuming the Two River, Country Bank, and Capital Bank acquisitions had be en completed as of January 1, 2019 for the year ended December 31, 2019. The table has been prepared for comparative purposes onl y and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of Two River’s, Country Bank’s, and Capital Bank’s operations. The pro forma information reflects adjustments related to certain purchase ac counting fair value adjustments, amortization of core deposit and other intangibles, and related income tax effects. 79 Two River Actual from January 1, 2020 to December 31, 2020 Country Bank Actual from January 1, 2020 to December 31, 2020 Capital Bank Actual from January 31, 2019 to December 31, 2019 Pro forma Year ended December 31, 2019 (in thousands, except per share amounts) (unaudited) Net interest income $ 41,978 $ 27,411 $ 17,090 $ 329,327 Credit loss expense 6,117 4,481 385 2,686 Non-interest income 2,688 45 1,456 47,484 Non-interest expense 27,431 17,993 12,482 240,913 Provision for income taxes 2,686 1,204 1,193 23,870 Net income $ 8,432 $ 3,778 $ 4,486 $ 109,342 Fully diluted earnings per share $ 1.79 Core Deposit Intangible The estimated future amortization expense for the core deposit intangible over the next five years and thereafter is as follows (in thousands): For the Year Ending December 31, Amortization Expense 2022 $ 4,718 2023 3,984 2024 3,250 2025 2,516 2026 1,784 Thereafter 1,963 Total $ 18,215 Fair Value Measurement of Assets Assumed and Liabilities Assumed The methods used to determine the fair value of the assets acquired and liabilities assumed in the Two River, Country Bank, and Capital Bank acquisitions were as follows. Refer to Note 15 Fair Value Measurements, for a discussion of the fair value hierarchy. Securities The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities. Loans The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: (1) interest rate loan fair value analysis; (2) general credit fair value adjustment; and (3) specific credit fair value adjustment. To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral, and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment. The general credit fair value adjustment was calculated using a two part general credit fair value analysis: (1) expected lifetime losses and (2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the acquired bank or historical loss experiences of peer groups where deemed appropriate. The 80 adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process. To calculate the specific credit fair value adjustment, subsequent to January 1, 2020, the Company identified loans that experienced more-than-insignificant deterioration in credit quality since origination. Loans meeting this criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield. Premises and Equipment Fair values are based upon appraisals from independent third parties. In addition to owned properties, Two River operated 14 properties, Country Bank operated five properties, and Capital Bank operated one property subject to lease agreements. Deposits and Core Deposit Premium Core deposit premium represents the value assigned to non-interest-bearing demand deposits, interest-bearing checking, money market, and savings accounts acquired as part of an acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost savings from acquiring the core deposits as part of an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs. The core deposit premium totaled $ 12.1 million, $ 2.1 million, and $ 2.7 million for the acquisitions of Two River, Country Bank, and Capital Bank, respectively, and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits and is valued utilizing Level 2 inputs. Borrowings Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. 81 Note 4. Securities The amortized cost, estimated fair value, and allowance for securities credit losses of debt securities available-for-sale and held-to-maturity at December 31, 2021 and 2020 are as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Securities Credit Losses At December 31, 2021 Debt securities available-for-sale: U.S. government and agency obligations $ 164,756 $ 1,135 $ ( 471 ) $ 165,420 $ — Corporate debt securities 5,000 42 ( 11 ) 5,031 — Asset-backed securities 298,976 41 ( 1,489 ) 297,528 — Agency commercial MBS 101,142 57 ( 923 ) 100,276 — Total debt securities available-for-sale $ 569,874 $ 1,275 $ ( 2,894 ) $ 568,255 $ — Debt securities held-to-maturity: State, municipal, and sovereign debt obligations $ 281,389 $ 10,185 $ ( 1,164 ) $ 290,410 $ ( 85 ) Corporate debt securities 68,823 1,628 ( 1,279 ) 69,172 ( 1,343 ) Mortgage-backed securities: Agency residential 756,844 6,785 ( 7,180 ) 756,449 — Agency commercial 4,385 7 ( 44 ) 4,348 — Non-agency commercial 32,107 362 ( 104 ) 32,365 ( 39 ) Total mortgage-backed securities 793,336 7,154 ( 7,328 ) 793,162 ( 39 ) Total debt securities held-to-maturity $ 1,143,548 $ 18,967 $ ( 9,771 ) $ 1,152,744 $ ( 1,467 ) Total debt securities $ 1,713,422 $ 20,242 $ ( 12,665 ) $ 1,720,999 $ ( 1,467 ) At December 31, 2020 Debt securities available-for-sale: U.S government and agency obligations $ 173,790 $ 3,152 $ ( 2 ) $ 176,940 $ — Asset-backed securities 6,174 — ( 4 ) 6,170 — Agency residential MBS 190 2 — 192 — Total debt securities available-for-sale $ 180,154 $ 3,154 $ ( 6 ) $ 183,302 $ — Debt securities held-to-maturity: State, municipal, and sovereign debt obligations $ 238,405 $ 11,500 $ ( 231 ) $ 249,674 $ ( 48 ) Corporate debt securities 72,305 1,615 ( 2,652 ) 71,268 ( 1,550 ) Mortgage-backed securities: Agency residential 593,891 15,037 ( 283 ) 608,645 — Agency commercial 5,392 — ( 60 ) 5,332 — Non-agency commercial 32,321 1,226 — 33,547 ( 117 ) Total mortgage-backed securities 631,604 16,263 ( 343 ) 647,524 ( 117 ) Total debt securities held-to-maturity $ 942,314 $ 29,378 $ ( 3,226 ) $ 968,466 $ ( 1,715 ) Total debt securities $ 1,122,468 $ 32,532 $ ( 3,232 ) $ 1,151,768 $ ( 1,715 ) There was no allowance for securities credit losses on debt securities available-for-sale at December 31, 2021 or 2020. 82 The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the year ended December 31, 2021 (in thousands): For the Year Ended December 31, 2021 2020 Allowance for credit losses Beginning balance $ ( 1,715 ) $ — Impact of CECL adoption — ( 1,268 ) Benefit (Provision) for credit loss expense 248 ( 447 ) Total ending allowance balance $ ( 1,467 ) $ ( 1,715 ) During 2021 and 2013, the Bank transferred $ 12.7 million and $ 536.0 million, respectively, of previously designated available-for-sale debt securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $ 209,000 and $ 13.3 million at the time of transfer in 2021 and 2013, respectively, which continues to be reflected in accumulated other comprehensive loss on the Consolidated Statements of Financial Condition, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the debt securities held-to-maturity at December 31, 2021 and 2020 are as follows (in thousands): December 31, 2021 2020 Amortized cost $ 1,143,548 $ 942,314 Net loss on date of transfer from available-for-sale ( 13,556 ) ( 13,347 ) Allowance for securities credit loss ( 1,467 ) ( 1,715 ) Accretion of net unrealized loss on securities reclassified as held-to-maturity 10,668 10,001 Carrying value $ 1,139,193 $ 937,253 During the year ended December 31, 2021 there were no realized gains on debt securities. There were $ 476,000 of realized gains on debt securities for the year ended December 31, 2020. The amortized cost and estimated fair value of debt securities at December 31, 2021 by contractual maturity are as follows (in thousands): At December 31, 2021 Amortized Cost Estimated Fair Value Less than one year $ 100,483 $ 101,018 Due after one year through five years 148,332 150,222 Due after five years through ten years 275,734 274,360 Due after ten years 294,395 301,961 $ 818,944 $ 827,561 Actual maturities may differ from contractual maturities in instances where issuers have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2021, corporate debt securities, state and municipal obligations, and asset-backed securities with an amortized cost of $ 66.2 million, $ 90.2 million, and $ 299.0 million, respectively, and an estimated fair value of $ 66.4 million, $ 92.5 million, and $ 297.5 million, respectively, were callable prior to the maturity date. Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments. The estimated fair value of securities pledged as required security for deposits and for other purposes required by law amounted to $ 1.14 billion and $ 435.9 million at December 31, 2021 and 2020, respectively, including $ 142.9 million and $ 152.7 million at December 31, 2021 and 2020, respectively, pledged as collateral for securities sold under agreements to repurchase. 83 The estimated fair value and unrealized losses for debt securities available-for-sale and held-to-maturity at December 31, 2021 and December 31, 2020, segregated by the duration of the unrealized losses, are as follows (in thousands): Less than 12 Months 12 Months or Longer Total Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses At December 31, 2021 Debt securities available-for-sale: U.S. government and agency obligations $ 82,395 $ ( 471 ) $ — $ — $ 82,395 $ ( 471 ) Corporate debt securities 1,989 ( 11 ) — — 1,989 ( 11 ) Asset-backed securities 279,486 ( 1,489 ) — — 279,486 ( 1,489 ) Agency commercial MBS 80,726 ( 923 ) — — 80,726 ( 923 ) Total debt securities available-for-sale 444,596 ( 2,894 ) — — 444,596 ( 2,894 ) Debt securities held-to-maturity: State, municipal, and sovereign debt obligations 75,329 ( 1,063 ) 4,383 ( 101 ) 79,712 ( 1,164 ) Corporate debt securities 38,304 ( 1,279 ) — — 38,304 ( 1,279 ) Mortgage-backed securities: Agency residential 445,399 ( 5,822 ) 50,133 ( 1,358 ) 495,532 ( 7,180 ) Agency commercial 2,255 ( 41 ) 886 ( 3 ) 3,141 ( 44 ) Non-agency commercial 10,722 ( 104 ) — — 10,722 ( 104 ) Total mortgage-backed securities 458,376 ( 5,967 ) 51,019 ( 1,361 ) 509,395 ( 7,328 ) Total debt securities held-to-maturity 572,009 ( 8,309 ) 55,402 ( 1,462 ) 627,411 ( 9,771 ) Total debt securities $ 1,016,605 $ ( 11,203 ) $ 55,402 $ ( 1,462 ) $ 1,072,007 $ ( 12,665 ) At December 31, 2020 Debt securities available-for-sale: U.S government and agency obligations $ 17,029 $ ( 2 ) $ — $ — $ 17,029 $ ( 2 ) Asset-backed securities 4,766 ( 4 ) — — 4,766 ( 4 ) Total debt securities available-for-sale 21,795 ( 6 ) — — 21,795 ( 6 ) Debt securities held-to-maturity: State, municipal, and sovereign debt obligations 2,823 ( 23 ) 7,509 ( 208 ) 10,332 ( 231 ) Corporate debt securities 10,192 ( 255 ) 35,935 ( 2,397 ) 46,127 ( 2,652 ) Mortgage-backed securities: Agency residential 69,882 ( 256 ) 1,815 ( 27 ) 71,697 ( 283 ) Agency commercial 3,626 ( 12 ) 1,706 ( 48 ) 5,332 ( 60 ) Total mortgage-backed securities 73,508 ( 268 ) 3,521 ( 75 ) 77,029 ( 343 ) Total debt securities held-to-maturity 86,523 ( 546 ) 46,965 ( 2,680 ) 133,488 ( 3,226 ) Total debt securities $ 108,318 $ ( 552 ) $ 46,965 $ ( 2,680 ) $ 155,283 $ ( 3,232 ) The Company concluded that debt securities were not impaired at December 31, 2021 based on a consideration of several factors. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments, and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the Company does not intend to sell these debt securities and it is more likely than not that the Company will not be required to sell the securities. Historically, the Company has not utilized securities sales as a source of liquidity and the Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio. The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of internal credit analyses supplemented by external credit ratings. Credit ratings of BBB- or Baa3 or higher are considered as investment grade. The amortized cost of debt securities held-to-maturity at December 31, 2021 aggregated by credit quality indicator are as follows (in thousands): 84 Investment Grade Non-Investment Grade/Non-rated Total At December 31, 2021 State, municipal, and sovereign debt obligations $ 281,389 $ — $ 281,389 Corporate debt securities 54,020 14,803 68,823 Non-agency commercial MBS 32,107 — 32,107 Total debt securities held-to-maturity $ 367,516 $ 14,803 $ 382,319 Equity Investments At December 31, 2021 and 2020, the Company held equity investments of $ 101.2 million and $ 107.1 million, respectively. The equity investments primarily comprised of select financial services institutions’ common and preferred stocks paying attractive dividends. The realized and unrealized gains on equity securities for the year ended December 31, 2021 and 2020 are as follows (in thousands): For the Year Ended December 31, 2021 2020 Net gain on equity investments $ 7,145 $ 21,214 Less: Net gains recognized on equity investments sold 8,123 5,401 Unrealized (loss) gain recognized on equity investments still held $ ( 978 ) $ 15,813 85 Note 5. Loans Receivable, Net Loans receivable, net at December 31, 2021 and 2020 consisted of the following (in thousands): December 31, 2021 2020 Commercial: Commercial and industrial (1) $ 449,224 $ 470,656 Commercial real estate - owner occupied 1,055,065 1,145,065 Commercial real estate - investor 4,378,061 3,491,464 Total commercial 5,882,350 5,107,185 Consumer: Residential real estate 2,479,701 2,309,459 Home equity loans and lines and other consumer (“other consumer”) 260,819 339,462 Total consumer 2,740,520 2,648,921 Total loans receivable 8,622,870 7,756,106 Deferred origination costs, net of fees 9,332 9,486 Allowance for loan credit losses ( 48,850 ) ( 60,735 ) Total loans receivable, net $ 8,583,352 $ 7,704,857 (1) Commercial and industrial loans at December 31, 2021 and 2020 includes Paycheck Protection Program (“PPP”) loans of $ 22.9 million and $ 95.4 million, respectively. The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. Generally, risk ratings for loans on forbearance pursuant to the CARES, extended by the Coronavirus Response and Relief Supplemental Appropriations (“CRRSA”) Act of 2021, were not re-evaluated until the initial 90-day forbearance period ended. At that time, risk ratings were updated with an emphasis on industries that were heavily impacted by the pandemic, as well as individual borrower liquidity, and other measures of resiliency as described below. The Company evaluates risk ratings on an ongoing basis and as such, adversely rated loans will be re-evaluated as government restrictions ease and businesses resume normal operations. The Company uses the following definitions for risk ratings: Pass : Loans classified as Pass are well protected by the paying capacity and net worth of the borrower. Special Mention : Loans classified as Special Mention have a potential weakness that deserves management’s close attention. This includes borrowers that have been negatively affected by the pandemic but demonstrate some degree of liquidity. This liquidity may or may not be adequate to resume operations. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Substandard : Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. This includes borrowers whose operations were negatively affected by the pandemic and whom, in the assessment, do not have adequate liquidity available to resume operations at levels sufficient to service their current debt levels. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful : Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. 86 The following tables summarize total loans by year of origination, internally assigned credit grades, and risk characteristics (in thousands): 2021 2020 2019 2018 2017 2016 and Prior Revolving Lines of Credit Total December 31, 2021 Commercial and industrial Pass $ 42,955 $ 22,573 $ 22,878 $ 16,404 $ 8,671 $ 50,887 $ 271,818 $ 436,186 Special Mention — — 231 350 85 172 3,645 4,483 Substandard — 457 2,281 813 198 2,029 2,777 8,555 Total commercial and industrial 42,955 23,030 25,390 17,567 8,954 53,088 278,240 449,224 Commercial real estate - owner occupied Pass 116,355 71,196 125,212 91,531 109,232 449,966 10,913 974,405 Special Mention — — 1,365 3,829 479 14,371 2 20,046 Substandard — — 14,166 8,549 5,606 31,576 717 60,614 Total commercial real estate - owner occupied 116,355 71,196 140,743 103,909 115,317 495,913 11,632 1,055,065 Commercial real estate - investor Pass 1,387,753 609,916 535,551 274,662 375,646 800,089 255,613 4,239,230 Special Mention — — 23,794 9,400 2,731 28,663 582 65,170 Substandard — 4,267 28,802 468 8,495 28,228 3,401 73,661 Total commercial real estate - investor 1,387,753 614,183 588,147 284,530 386,872 856,980 259,596 4,378,061 Residential real estate (1) Pass 876,135 475,134 288,699 127,756 105,385 602,331 — 2,475,440 Special Mention — 212 — 61 — 1,313 — 1,586 Substandard — — — — 351 2,324 — 2,675 Total residential real estate 876,135 475,346 288,699 127,817 105,736 605,968 — 2,479,701 Other consumer (1) Pass 26,512 19,168 18,179 51,954 17,955 123,783 — 257,551 Special Mention — — — — — 322 — 322 Substandard — — — 18 — 2,928 — 2,946 Total other consumer 26,512 19,168 18,179 51,972 17,955 127,033 — 260,819 Total loans $ 2,449,710 $ 1,202,923 $ 1,061,158 $ 585,795 $ 634,834 $ 2,138,982 $ 549,468 $ 8,622,870 (1) For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 87 2020 2019 2018 2017 2016 2015 and Prior Revolving Lines of Credit Total December 31, 2020 Commercial and industrial Pass $ 137,262 $ 40,737 $ 27,967 $ 18,845 $ 33,568 $ 59,339 $ 134,140 $ 451,858 Special Mention 150 583 826 1,422 907 118 1,429 5,435 Substandard 581 1,284 1,243 809 439 1,706 7,301 13,363 Total commercial and industrial 137,993 42,604 30,036 21,076 34,914 61,163 142,870 470,656 Commercial real estate - owner occupied Pass 96,888 114,506 122,962 124,050 104,264 428,423 18,932 1,010,025 Special Mention — 3,512 8,240 1,023 17,115 17,811 439 48,140 Substandard — 34,670 9,001 3,404 3,677 35,509 639 86,900 Total commercial real estate - owner occupied 96,888 152,688 140,203 128,477 125,056 481,743 20,010 1,145,065 Commercial real estate - investor Pass 635,930 628,435 317,104 426,268 281,876 812,062 194,913 3,296,588 Special Mention — 15,979 17,113 15,225 4,234 55,872 149 108,572 Substandard 4,311 9,217 1,931 17,222 11,474 36,326 5,823 86,304 Total commercial real estate - investor 640,241 653,631 336,148 458,715 297,584 904,260 200,885 3,491,464 Residential real estate (1) Pass 595,982 437,593 226,435 166,773 146,237 729,037 — 2,302,057 Special Mention — 532 — — 446 2,186 — 3,164 Substandard 570 — 1,489 221 — 1,958 — 4,238 Total residential real estate 596,552 438,125 227,924 166,994 146,683 733,181 — 2,309,459 Other consumer (1) Pass 24,954 26,659 83,296 25,469 16,565 156,276 2,145 335,364 Special Mention — — — — 150 382 — 532 Substandard — — — — — 3,566 — 3,566 Total other consumer 24,954 26,659 83,296 25,469 16,715 160,224 2,145 339,462 Total loans $ 1,496,628 $ 1,313,707 $ 817,607 $ 800,731 $ 620,952 $ 2,340,571 $ 365,910 $ 7,756,106 (1) For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 88 An analysis of the allowance for credit losses on loans for the years ended December 31, 2021 and 2020 is as follows (in thousands): Commercial and Industrial Commercial Real Estate - Owner Occupied Commercial Real Estate - Investor Residential Real Estate Other Consumer Unallocated Total For the Year Ended December 31, 2021 Allowance for credit losses on loans Balance at beginning of year $ 5,390 $ 15,054 $ 26,703 $ 11,818 $ 1,770 $ — $ 60,735 Credit loss benefit ( 321 ) ( 9,190 ) ( 974 ) ( 761 ) ( 1,100 ) — ( 12,346 ) Charge-offs ( 154 ) ( 65 ) ( 345 ) ( 254 ) ( 213 ) — ( 1,031 ) Recoveries 124 85 120 352 811 — 1,492 Balance at end of year $ 5,039 $ 5,884 $ 25,504 $ 11,155 $ 1,268 $ — $ 48,850 For the Year Ended December 31, 2020 Allowance for credit losses on loans Balance at beginning of year $ 1,458 $ 2,893 $ 9,883 $ 2,002 $ 591 $ 25 $ 16,852 Impact of CECL adoption 2,416 ( 1,109 ) ( 5,395 ) 3,833 2,981 ( 25 ) 2,701 Initial allowance for credit losses on PCD loans 1,221 26 260 109 1,023 — 2,639 Credit loss expense (benefit) (1) 1,039 15,007 34,935 8,191 ( 1,770 ) — 57,402 Charge-offs (1) ( 890 ) ( 1,769 ) ( 13,081 ) ( 3,200 ) ( 1,244 ) — ( 20,184 ) Recoveries 146 6 101 883 189 — 1,325 Balance at end of year $ 5,390 $ 15,054 $ 26,703 $ 11,818 $ 1,770 $ — $ 60,735 (1) The year ended December 31, 2020 was impacted by the shift in current and forward-looking economic conditions, credit migration, and borrower vulnerability related to COVID-19. The Company recorded $ 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. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At December 31, 2021 and 2020, the Company had collateral dependent loans with an amortized cost balance as follows: commercial and industrial of $ 277,000 and $ 1.9 million, respectively, commercial real estate - owner occupied of $ 11.9 million and $ 13.8 million, respectively, and commercial real estate - investor of $ 3.6 million and $ 18.3 million, respectively. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $ 438,000 and $ 1.4 million at December 31, 2021 and 2020, respectively. At both December 31, 2021 and 2020, the amount of foreclosed residential real estate property held by the Company was $ 106,000 . The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of December 31, 2021 and 2020 (in thousands). December 31, 2021 2020 Commercial and industrial $ 277 $ 1,908 Commercial real estate – owner occupied 11,904 13,751 Commercial real estate – investor 3,614 18,287 Residential real estate 6,114 8,671 Other consumer 3,585 4,246 Total non-accrual loans $ 25,494 $ 46,863 At December 31, 2021 and 2020, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At December 31, 2021, there was one loan for $ 46,000 that was 90 days or greater past due and still accruing interest that was fully paid on January 14, 2022. At December 31, 2020, there were no loans that were 90 days or greater past due and still accruing interest. 89 The following table presents the aging of the recorded investment in past due loans as of December 31, 2021 and 2020 by loan portfolio segment (in thousands). 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Not Past Due Total December 31, 2021 Commercial and industrial $ 25 $ 151 $ 277 $ 453 $ 448,771 $ 449,224 Commercial real estate – owner occupied 599 — 575 1,174 1,053,891 1,055,065 Commercial real estate – investor 1,717 102 1,709 3,528 4,374,533 4,378,061 Residential real estate 9,705 1,586 2,675 13,966 2,465,735 2,479,701 Other consumer 339 322 2,946 3,607 257,212 260,819 Total loans receivable $ 12,385 $ 2,161 $ 8,182 $ 22,728 $ 8,600,142 $ 8,622,870 December 31, 2020 Commercial and industrial $ 3,050 $ 628 $ 327 $ 4,005 $ 466,651 $ 470,656 Commercial real estate – owner occupied 1,015 — 7,871 8,886 1,136,179 1,145,065 Commercial real estate – investor 8,897 3,233 11,122 23,252 3,468,212 3,491,464 Residential real estate 15,156 3,164 4,238 22,558 2,286,901 2,309,459 Other consumer 978 533 3,568 5,079 334,383 339,462 Total loans receivable $ 29,096 $ 7,558 $ 27,126 $ 63,780 $ 7,692,326 $ 7,756,106 The Company classifies certain loans as TDR when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts, and/or the restructuring of scheduled principal payments. Residential real estate and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered TDR loans. For these loans, the Company retains its security interest in the real estate collateral. At December 31, 2021 and 2020, TDR loans totaled $ 23.6 million and $ 17.5 million, respectively. At December 31, 2021 and 2020, there were $ 11.3 million and $ 5.5 million, respectively, of TDR loans included in the non-accrual loan totals. At December 31, 2021 and 2020, the Company had no specific reserves allocated to loans that are classified as TDRs. Non-accrual loans which become TDRs are generally returned to accrual status after six months of payment performance and the ultimate collectability of the restructured transaction is not in doubt. In addition to the TDR loans included in non-accrual loans, the Company also has TDR loans classified as accruing loans, which totaled $ 12.3 million and $ 12.0 million at December 31, 2021 and 2020, respectively. The following table presents information about TDRs which occurred during the years ended December 31, 2021 and 2020 (dollars in thousands): Number of Loans Pre-modification Recorded Investment Post-modification Recorded Investment For the Year Ended December 31, 2021 Troubled debt restructurings: Commercial real estate – owner occupied 2 $ 6,406 $ 6,423 Commercial real estate – investor 1 4,903 4,903 Residential real estate 3 244 336 Other consumer 3 39 49 For the Year Ended December 31, 2020 Troubled debt restructurings: Commercial real estate – owner occupied 1 $ 1,112 $ 1,143 Commercial real estate – investor 2 1,035 1,116 Residential real estate 6 1,018 1,065 Other consumer 6 1,035 668 90 There was one TDR consumer loan and one TDR commercial real estate - investor loan for $ 15,000 and $ 923,000 , respectively, that defaulted during the year ended December 31, 2021 which were modified within the preceding year. The TDR commercial real estate - investor loan was current at December 31, 2021. There were no TDR loans that defaulted during the year ended December 31, 2020 which were modified within the preceding year. In response to the COVID-19 pandemic and its economic impact on customers, short-term modification programs that comply with the CARES Act, extended by the CRRSA Act, were implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The Commercial Borrower Relief Program allowed for the deferral of principal and interest or principal only. All payments received will first be applied to all accrued and unpaid interest and the balance, if any, on account of unpaid principal, then to fees, expenses and other amounts due to the Bank. Monthly payments will continue until the maturity date when all then unpaid principal, interest, fees, and all other charges are due and payable to the Bank. The Consumer Borrower Relief Program allowed for the deferral of principal and interest. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either December 31, 2019 or the date of the modification, these loans are not considered TDR loans at December 31, 2021 and will not be reported as past due during the deferral period. Note 6. Interest and Dividends Receivable Interest and dividends receivable at December 31, 2021 and 2020 are summarized as follows (in thousands): December 31, 2021 2020 Loans receivable $ 26,208 $ 30,893 Debt securities 5,753 4,184 Equity investments and other 645 192 Total interest and dividends receivable $ 32,606 $ 35,269 Note 7. Premises and Equipment, Net Premises and equipment, net of accumulated depreciation and amortization expense at December 31, 2021 and 2020 are summarized as follows (in thousands): December 31, 2021 2020 Land $ 18,774 $ 23,109 Buildings and improvements 94,573 99,350 Leasehold improvements 8,460 8,640 Furniture and equipment 30,314 28,707 Capitalized software 6,989 2,932 Finance lease 2,386 1,845 Other (1) 38,057 10,270 Total 199,553 174,853 Accumulated depreciation and amortization ( 73,725 ) ( 67,759 ) Total premises and equipment, net $ 125,828 $ 107,094 (1) Includes assets under construction of $ 36.2 million related to the expansion of the Company’s headquarters in Toms River, New Jersey. Depreciation and amortization expense for the years ended December 31, 2021, 2020, and 2019 amounted to $ 9.4 million, $ 8.5 million, and $ 8.2 million, respectively. Depreciation and amortization expense is presented within occupancy, equipment, and data processing expenses of the Consolidated Statement of Income. 91 Note 8. Deposits The major types of deposits at December 31, 2021 and 2020 were as follows (dollars in thousands): December 31, 2021 2020 Amount Weighted Average Cost Amount Weighted Average Cost Non-interest-bearing $ 2,412,056 — % $ 2,133,195 — % Interest-bearing checking 4,201,736 0.24 3,646,866 0.49 Money market deposit 736,090 0.06 783,521 0.19 Savings 1,607,933 0.03 1,491,251 0.05 Time deposits 775,001 0.95 1,372,783 1.51 Total deposits $ 9,732,816 0.19 % $ 9,427,616 0.43 % Accrued interest payable related to deposits was $ 244,000 and $ 367,000 at December 31, 2021 and 2020, respectively. Time deposits included $ 145.4 million and $ 409.5 million in deposits of $250,000 or more at December 31, 2021 and 2020, respectively. Time deposits at December 31, 2021 mature as follows (in thousands): For the Year Ending December 31, Time Deposit Maturities 2022 $ 552,666 2023 110,956 2024 67,097 2025 16,417 2026 13,539 Thereafter 14,326 Total $ 775,001 Interest expense on deposits for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands): For the Year Ended December 31, 2021 2020 2019 Interest-bearing checking $ 13,400 $ 19,395 $ 16,820 Money market deposit 1,105 2,902 4,919 Savings 631 2,505 1,195 Time deposits 10,074 23,488 15,498 Total interest expense on deposits $ 25,210 $ 48,290 $ 38,432 Note 9. Borrowed Funds Borrowed funds are summarized as follows (dollars in thousands): December 31, 2021 2020 Amount Weighted Average Rate Amount Weighted Average Rate Securities sold under agreements to repurchase with retail customers $ 118,769 0.16 % $ 128,454 0.33 % Other borrowings 229,141 4.47 235,471 4.58 Total borrowed funds $ 347,910 3.00 % $ 363,925 3.08 % 92 In addition to the advances that matured, the Company prepaid all of its FHLB advances in 2020. Information concerning FHLB advances and securities sold under agreements to repurchase with retail customers (“reverse repurchase agreements”) is summarized as follows (dollars in thousands): FHLB Advances Reverse Repurchase Agreements 2020 2021 2020 Average balance $ 413,290 $ 134,939 $ 125,500 Maximum amount outstanding at any month end 825,824 156,433 153,810 Average interest rate for the year 1.70 % 0.19 % 0.45 % Amortized cost of collateral: Debt and equity securities $ — $ 141,423 $ 147,445 Estimated fair value of collateral: Debt and equity securities — 142,924 152,679 The securities collateralizing the reverse repurchase agreements are delivered to the lender, with whom each transaction is executed, or to a third-party custodian. The lender, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agrees to resell to the Company substantially the same securities at the maturity of the reverse repurchase agreements. Refer to Note 4 Securities. All reverse repurchase agreements have contractual maturities during 2022. The other borrowings at December 31, 2021 include the following (in thousands): Type of Debt Stated Value Carrying Value Interest Rate Maturity Subordinated debt $ 35,000 $ 35,000 4.138 % (1) September 30, 2026 Subordinated debt 125,000 122,989 5.250 % (2) May 15, 2030 Trust preferred 10,000 7,965 3 month LIBOR plus 225 basis points December 15, 2034 Trust preferred 30,000 23,258 3 month LIBOR plus 135 basis points March 15, 2036 Trust preferred 5,000 5,000 3 month LIBOR plus 165 basis points August 1, 2036 Trust preferred 7,500 7,500 3 month LIBOR plus 166 basis points November 1, 2036 Trust preferred 10,000 7,828 3 month LIBOR plus 153 basis points June 30, 2037 Trust preferred 10,000 10,000 3 month LIBOR plus 175 basis points September 1, 2037 Trust preferred 10,000 7,697 3 month LIBOR plus 139 basis points October 1, 2037 Finance lease 1,904 1,904 5.625 % June 30, 2029 Total $ 244,404 $ 229,141 (1) Based on a floating rate of 392 basis points over 3 month London Inter-bank Offered Rate (“LIBOR”). (2) Adjusts to a floating rate of 509.5 basis points over 3 month Secured Overnight Financing Rate on May 15, 2025. All of the trust preferred debt is currently callable. Subsequent to year-end, the Company provided notice to its trustee that, as of March 30, 2022, it will redeem the $ 35.0 million of subordinated debt maturing September 30, 2026. Interest expense on borrowings for the years ended December 31, 2021, 2020, and 2019 was as follows (in thousands): For the Year Ended December 31, 2021 2020 2019 FHLB advances $ — $ 7,018 $ 8,441 Reverse repurchase agreements 253 562 276 Other borrowings 11,291 10,787 5,674 Total interest expense on borrowings $ 11,544 $ 18,367 $ 14,391 93 Note 10. Income Taxes The provision for income taxes for the years ended December 31, 2021, 2020 and 2019 consisted of the following (in thousands): For the Year Ended December 31, 2021 2020 2019 Current Federal $ 19,696 $ 15,731 $ 1,991 State 8,861 6,617 740 Total current 28,557 22,348 2,731 Deferred Federal 3,228 ( 2,746 ) 18,846 State 380 ( 1,869 ) ( 2,793 ) Total deferred 3,608 ( 4,615 ) 16,053 Total provision for income taxes $ 32,165 $ 17,733 $ 18,784 Included in other comprehensive income was income tax impact attributable to the unrealized gain/loss on debt securities and accretion of unrealized losses on debt securities reclassified to held-to-maturity arising during the year in the amount of $ 870,000 , $ 721,000 , and $ 874,000 for the years ended December 31, 2021, 2020 and 2019, respectively. The income tax provision reconciled to the income taxes that would have been computed at the statutory federal rate for the years ended December 31, 2021, 2020 and 2019 is as follows (dollars in thousands): For the Year Ended December 31, 2021 2020 2019 Income before provision for income taxes $ 142,241 $ 81,042 $ 107,358 Federal income tax, at statutory rates 21.0 % 21.0 % 21.0 % Computed “expected” federal income tax expense $ 29,871 $ 17,019 $ 22,545 Increase (decrease) in federal income tax expense resulting from State income taxes, net of federal benefit 7,223 3,751 583 Earnings on BOLI ( 1,435 ) ( 1,349 ) ( 1,138 ) Tax exempt interest ( 768 ) ( 1,161 ) ( 665 ) Merger related expenses 24 138 297 Stock compensation ( 110 ) ( 136 ) ( 386 ) Revaluation of state deferred tax asset — — ( 2,205 ) Reclassification of certain tax effect from accumulated other comprehensive income ( 173 ) ( 204 ) ( 221 ) Research and development and other credits ( 475 ) — — Dividends received deduction ( 510 ) — — Other items, net ( 1,482 ) ( 325 ) ( 26 ) Total provision for income taxes $ 32,165 $ 17,733 $ 18,784 94 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are presented in the following table (in thousands): December 31, 2021 2020 Deferred tax assets: Allowance for credit losses on loans and debt securities HTM $ 12,915 $ 16,168 Other reserves 3,115 2,485 Incentive compensation 3,546 2,919 Deferred compensation 471 533 Stock plans 2,565 2,214 Unrealized loss on assets held-for-sale 1,626 2,435 Unrealized loss on securities 1,332 272 Net operating loss carryforwards related to acquisition 28,057 33,014 Deferred fees on PPP loans 187 517 Other, net 1,680 195 Federal and state alternative minimum tax 2,295 3,705 Total gross deferred tax assets 57,789 64,457 Deferred tax liabilities: Unrealized gain on equity securities — ( 4,154 ) Premises and equipment ( 5,704 ) ( 5,871 ) Deferred loan and commitment costs, net ( 2,579 ) ( 2,968 ) Purchase accounting adjustments ( 2,056 ) ( 602 ) Investments, discount accretion ( 371 ) ( 452 ) Other, net — ( 783 ) Total gross deferred tax liabilities ( 10,710 ) ( 14,830 ) Net deferred tax assets $ 47,079 $ 49,627 The 2020 deferred tax expense does not equal the change in net deferred tax assets as a result of net deferred liabilities recorded in connection with the Two River and Country Bank acquisitions of approximately $ 4.5 million. The Company has federal net operating losses from the acquisitions of Colonial American Bank (“Colonial American”) and Sun Bancorp, Inc. (“Sun”). At December 31, 2021 and 2020, the net operating losses from Colonial American were $ 4.3 million and $ 4.6 million, respectively. These net operating losses are subject to annual limitation under Code Section 382 of approximately $ 330,000 , and will expire between 2029 and 2034. At December 31, 2021 and 2020, the net operating losses from Sun were $ 129.4 million and $ 152.6 million, respectively. These net operating losses are subject to annual limitation under Code Section 382 of approximately $ 23.3 million, which will expire in 2022 and $ 9.3 million, which will expire between 2029 and 2036. As of December 31, 2020 , the Company had $ 1.8 million of New Jersey Alternative Minimum Assessment Tax (“AMT”) Credits of which $ 1.4 million was utilized in 2020 and the remainder was utilized in 2021. At both December 31, 2021 and 2020 , the Company had $ 2.3 million of AMT Tax Credits that were part of the Sun acquisition. These credits are subject to the same Code Section 382 limitation as indicated above but do not expire. At December 31, 2021, 2020 and 2019, the Company determi ned that it is not required to establish a valuation reserve for the remaining net deferred tax assets since it is “more likely than not” that the net deferred tax assets will be realized through future reversals of existing taxable temporary differences, future taxable income and tax planning strategies. The conclusion that it is “more likely than not” that the remaining net deferred tax assets will be realized is based on the history of earnings and the prospects for continued growth. Management will continue to review the tax criteria related to the recognition of deferred tax assets. Retained earnings at December 31, 2021 included approximately $ 10.8 million for which no provision for income tax has been made. This amount represented an allocation of income to bad debt deductions for tax purposes only. Events that would result in taxation of these reserves include failure to qualify as a bank for tax purposes, distributions in complete or partial liquidation, 95 stock redemptions and excess distributions to stockholders. At December 31, 2021, the Company had an unrecognized deferred tax liability of $ 2.8 million with respect to this reserve. There were no unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019. The tax years that remain subject to examination by the federal government and the state of New York include the years ended December 31, 2018 and forward. The tax years that remain subject to examination by the state of New Jersey include the years ended December 31, 2017 and forward. On July 1, 2018, New Jersey enacted changes to the corporate business tax laws. This legislation required a combined group to file combined returns for tax years beginning in 2019. However, due to technical issues and inconsistencies with existing tax law, it was initially determined that the tax law change did not have an impact on deferred taxes. In December 2019, the State of New Jersey issued a clarifying technical bulletin related to the impact of the new tax legislation. This technical bulletin provided clarification to the combined income tax reporting for certain members of a unitary business group. Accordingly, this required a revaluation of some of the Company’s deferred tax assets. As a result of the revaluation of the state deferred tax assets, the Company recognized an additional income tax benefit of $ 2.2 million for the year ended December 31, 2019. With the enactment of the Tax Reform on December 22, 2017, the federal corporate income tax rate was reduced from 35% to 21% effective January 1, 2018. Accounting guidance required that the effect of income tax law changes on deferred taxes be recognized as a component of income tax expense related to continuing operations, but also to items initially recognized in other comprehensive income. As a result of the reduction in the U.S. federal statutory income tax rate, the Company recognized an additional income tax benefit of $ 1.9 million for the year ended December 31, 2018 and additional income tax expense of $ 3.6 million for the year ended December 31, 2017. Because accounting guidance requires the effect of income tax law changes on deferred taxes to be recognized as a component of income tax expense related to continuing operations, this additional income tax expense included $ 1.8 million related to items recognized in other comprehensive income. These amounts will continue to be reported as separate components of accumulated other comprehensive income until such time as the underlying transactions from which such amounts arose are settled through continuing operations. At such time, the reclassification from accumulated other comprehensive income will be recognized as a net tax benefit. The amount included in accumulated other comprehensive income at December 31, 2021, subject to reclassification, was $ 612,000 . Note 11. Employee Stock Ownership Plan The Bank maintains an Employee Stock Ownership Plan (“ESOP”). All full-time employees are eligible to participate in the ESOP after they attain age 21 and complete one year of service during which they work at least 1000 hours. ESOP shares are allocated among participants on the basis of compensation earned during the year. Employees are fully vested in their ESOP account after the completion of five years of credited service or completely, if service was terminated due to death, retirement, disability or change in control of the Company. ESOP participants are entitled to receive distributions from the ESOP account only upon termination of service, which includes retirement and death, except that a participant may elect to have dividends distributed as a cash payment on a quarterly basis. The ESOP originally borrowed $ 13.4 million from the Company to purchase 2,013,137 shares of common stock. In 1998, the initial loan agreement was amended to allow the ESOP to borrow an additional $ 8.2 million in order to fund the purchase of 633,750 shares of common stock. At the same time, the term of the loan was extended from the initial 12 years to 30 years. In 2018, the loan agreement was amended (“amended loan”) to allow the ESOP to borrow an additional $ 8.4 million in order to fund the purchase of 292,592 shares of common stock. At the same time, the fixed interest rate of the loan was reduced from 8.25 % to 3.25 %. On November 9, 2021, the ESOP borrowed an additional $ 3.2 million from the Company to fund the purchase of 145,693 shares of common stock (“2021 loan”), and the loan had a fixed interest rate of 0.22 % that matures on December 31, 2023. Both the amended loan and 2021 loan are to be repaid from contributions by the Bank to the ESOP trustee. The Bank is required to make contributions to the ESOP in amounts at least equal to the principal and interest requirement of both debts. The Bank’s obligation to make such contributions is reduced to the extent of any dividends paid by the Company on unallocated shares and any investment earnings realized on such dividends. As of December 31, 2021 and 2020, contributions to the ESOP, which were used to fund principal and interest payments on the ESOP loans, totaled $ 2.3 million and $ 1.5 million, respectively. During 2021 and 2020, $ 268,000 and $ 313,000 , respectively, of dividends paid on unallocated ESOP shares were used for debt service. At December 31, 2021 and 2020, the loan had an outstanding balance of $ 9.2 million and $ 8.1 million, respectively, and the ESOP had unallocated shares of 437,725 and 394,080 , respectively. At December 31, 2021, the unallocated shares had a fair value of $ 9.7 million. The unamortized balance of the ESOP is shown as unallocated common stock held by the ESOP and is reflected as a reduction of stockholders’ equity. For the years ended December 31, 2021, and 2019, the Bank recorded compensation expense related to the ESOP of $ 2.2 million and $ 1.6 million, respectively, which included $ 179,000 and $ 366,000 , respectively, of additional compensation 96 expense to reflect the increase in the average fair value of shares committed to be released and allocated shares in access of the Bank’s cost. For the year ended December 31, 2020, the Bank recorded compensation expense related to the ESOP of $ 1.1 million including $ 80,000 related to a decrease in compensation expense to reflect the decrease in the average fair value of shares committed to be released and allocated shares below the Bank’s cost. As of December 31, 2021, 2,543,294 shares had been allocated to participants and 102,048 shares were committed to be released. Note 12. Incentive Plan The OceanFirst Financial Corp. 2011 Stock Incentive Plan, which authorizes the granting of stock options or awards of common stock, was approved by stockholders in 2011. This plan was subsequently amended in 2017 to increase the number of authorized shares available for grant and to update the performance goals under which performance-based awards may be granted. In 2018, the Company implemented a performance-based stock plan for select senior management executives. On May 20, 2020, the OceanFirst Financial Corp. 2020 Stock Incentive Plan, which also authorizes the granting of stock options or awards of common stock, was approved by stockholders. On March 24, 2021, the 2020 Stock Incentive Plan was amended to increase the number of shares authorized for issuance through equity awards. The purpose of these plans is to attract and retain qualified personnel in key positions, provide officers, employees, and non-employee directors with a proprietary interest in the Company as an incentive to contribute to the success of the Company, align the interests of management with those of other stockholders and reward employees for outstanding performance. All officers, other employees, and non-employee directors of the Company and its affiliates are eligible to receive awards under the plans. Under the amended 2020 Stock Incentive Plan, the Company is authorized to issue up to 6,950,000 shares subject to option or, in lieu of options, up to 2,780,000 shares in the form of stock awards. At December 31, 2021, 5,000,294 options or 2,000,118 awards remain available for issuance. Under the amended 2011 Stock Incentive Plan, the Company is authorized to issue up to an additional 4,000,000 shares subject to option or, in lieu of options, up to 1,600,000 shares in the form of stock awards. At December 31, 2021, 149,343 options or 59,737 awards remain available for issuance. Stock awards vest ratably over the vesting period. The Company granted to senior executives performance-based awards in 2021, 2020 and 2019, which vest in equal amounts over a three - to five-year period when a specific performance metric has been attained or exceeded. Tiered performance goals for each metric are aligned with corresponding tiered vesting values and have been set using financial data from the applicable strategic plan as approved by the Board. The Company accrues expenses for the performance-based awards based on the estimated probability of achievement of the defined performance goals. Options expire 10 years from the date of grant and generally vest at the rate of 20 % per year. The exercise price of each option equals the closing market price of the Company’s stock on the grant date. The Company typically issues treasury shares or authorized but unissued shares to satisfy stock option exercises. The Company recognizes the grant-date fair value of stock options and other stock-based compensation issued to employees in the income statement. The modified prospective transition method was adopted and, as a result, the income statement includes $ 1.2 million, $ 1.5 million, and $ 973,000 , of expenses for stock option grants and $ 4.2 million, $ 2.8 million, and $ 2.9 million, of expense for stock award grants, for the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, the Company had $ 14.7 million in compensation costs related to non-vested options and stock awards not yet recognized. This cost will be recognized over the remaining vesting period of 2.79 years. The fair value of stock options granted by the Company was estimated through the use of the Black-Scholes option pricing model applying the following assumptions: 2020 2019 Risk-free interest rate 1.03 % 2.63 % Expected option life 7 years 7 years Expected volatility 23 % 21 % Expected dividend yield 3.33 % 2.70 % Weighted average fair value of an option share granted during the year $ 2.93 $ 4.47 Intrinsic value of options exercised during the year (in thousands) 2,499 2,994 For the year ended December 31, 2021, there were no stock options granted by the Company. 97 The risk-free interest rate is based on the U.S. Treasury rate with a term equal to the expected option life. The expected option life conforms to the Company’s actual experience. Expected volatility is based on actual historical results. Compensation cost is recognized on a straight line basis over the vesting period. A summary of option activity for the years ended December 31, 2021, 2020 and 2019 is as follows: 2021 2020 2019 Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Outstanding at beginning of year 2,838,867 $ 20.67 2,424,032 $ 19.80 2,340,842 $ 18.25 Granted — — 699,651 20.44 461,407 25.20 Exercised ( 264,717 ) 14.80 ( 213,506 ) 9.50 ( 227,189 ) 11.24 Forfeited ( 1,828 ) 23.78 ( 6,357 ) 21.26 ( 149,158 ) 24.71 Expired ( 114,067 ) 26.62 ( 64,953 ) 22.51 ( 1,870 ) 29.59 Outstanding at end of year 2,458,255 $ 21.02 2,838,867 $ 20.67 2,424,032 $ 19.80 Options exercisable 1,583,521 1,596,927 1,612,946 The following table summarizes information about stock options outstanding at December 31, 2021: Options Outstanding Options Exercisable Exercise Prices Number of Options Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number of Options Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 10.84 to $ 15.38 395,089 0.8 years $ 13.92 395,089 0.8 years $ 13.92 15.39 to 19.92 490,055 3.3 17.45 490,055 3.3 17.45 19.93 to 24.46 733,895 7.9 20.55 184,413 7.2 20.87 24.47 to 29.01 839,216 6.2 26.87 513,964 5.9 27.38 2,458,255 5.3 years $ 21.02 1,583,521 4.0 years $ 20.19 The aggregate intrinsic value for stock options outstanding and stock options exercisable at December 31, 2021 was $ 6.8 million and $ 5.9 million, respectively. A summary of the granted but unvested stock award activity for the years ended December 31, 2021, 2020 and 2019 is as follows: 2021 2020 2019 Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Outstanding at beginning of year: 575,996 $ 23.42 451,443 $ 25.61 330,598 $ 25.92 Granted 388,392 21.53 256,649 20.38 249,651 24.80 Vested ( 126,292 ) 24.04 ( 96,564 ) 24.41 ( 105,307 ) 24.49 Forfeited ( 59,125 ) 24.39 ( 35,532 ) 26.56 ( 23,499 ) 26.38 Outstanding at end of year 778,971 $ 22.30 575,996 $ 23.42 451,443 $ 25.61 Note 13. Commitments, Contingencies, and Concentrations of Credit Risk The Company, in the normal course of business, is party to financial instruments and commitments which involve, to varying degrees, elements of risk in excess of the amounts recognized in the consolidated financial statements. These financial instruments and commitments include unused consumer lines of credit, construction loan lines of credit, commercial lines of credit, and commitments to extend credit. 98 At December 31, 2021, the following commitments and contingent liabilities existed which are not reflected in the accompanying consolidated financial statements (in thousands): December 31, 2021 Unused consumer and residential construction loan lines of credit (primarily floating-rate) $ 358,586 Unused commercial and commercial construction loan lines of credit (primarily floating-rate) 1,011,233 Other commitments to extend credit: Fixed-rate 350,114 Adjustable-rate 1,770 Floating-rate 319,134 The Company’s fixed-rate loan commitments expire within 90 days of issuance and carried interest rates ranging from 1.43 % to 9.00 % at December 31, 2021. At December 31, 2021, the Company had $ 9.1 million of unfunded capital commitments related to investment funds. The Company’s maximum exposure to credit losses in the event of nonperformance by the other party to these financial instruments and commitments is represented by the contractual amounts. The Company uses the same credit policies in granting commitments and conditional obligations as it does for financial instruments recorded in the consolidated statements of financial condition. These commitments and obligations do not necessarily represent future cash flow requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s assessment of risk. Substantially all of the unused consumer and construction loan lines of credit are collateralized by mortgages on real estate. At December 31, 2021, the Company is obligated under noncancelable operating leases for premises and equipment. Rental and lease expense under these leases aggregated approximately $ 7.2 million, $ 7.9 million, and $ 5.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Refer to Note 17 Leases for the projected minimum lease commitments as of December 31, 2021. The Company grants residential real estate and first mortgage commercial real estate loans to borrowers primarily located throughout New Jersey and the major metropolitan markets of Philadelphia, New York, Baltimore, Washington D.C., and Boston. The ability of borrowers to repay their obligations is dependent upon various factors including the borrowers’ income, net worth, cash flows generated by the underlying collateral, value of the underlying collateral, and priority of the Company’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Company’s control. The Company is, therefore, subject to risk of loss. A decline in real estate values could cause some residential and commercial real estate loans to become inadequately collateralized, which would expose the Company to a greater risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and collateral and/or guarantees are required for most loans. The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. Management and its legal counsel are of the opinion that the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations, or liquidity. 99 Note 14. Earnings Per Share The following reconciles average shares outstanding for basic and diluted earnings per share for the years ended December 31, 2021, 2020 and 2019 (in thousands): December 31, 2021 2020 2019 Weighted average shares outstanding 59,873 60,358 50,701 Less: Unallocated ESOP shares ( 360 ) ( 426 ) ( 493 ) Unallocated incentive award shares ( 107 ) ( 13 ) ( 42 ) Average basic shares outstanding 59,406 59,919 50,166 Add: Effect of dilutive securities: Incentive awards 243 153 580 Average diluted shares outstanding 59,649 60,072 50,746 For the years ended December 31, 2021, 2020 and 2019, antidilutive stock options of 1,566,000 , 2,242,000 , and 993,000 , respectively, were excluded from the earnings per share calculations. 100 Note 15. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The Company uses valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means. Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. Assets and Liabilities Measured at Fair Value A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Debt Secur ities Available-for-Sale Debt securities classified as available-for-sale are reported at fair value. Fair value for these debt securities is determined using inputs other than quoted prices that are based on market observable information (Level 2 ) and Level 3 inputs which were utilized for certain state and municipal obligations known as bond anticipation notes (“BANs”). Level 2 debt securities are priced through third-party pricing services or s ecurity industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities. Equity Investments Equity investments with readily determinable fair value are reported at fair value. Fair value for these investments is primarily determined using a quoted price in an active market or exchange (Level 1) or using inputs other than quoted prices that are based on market observable information (Level 2). Fair value for certain securities, including convertible preferred stock, was determined using broker or dealer quotes with limited levels of activity and price transparency (Level 3). Equity investments without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. 101 Interest Rate Derivatives The Company’s interest rate swaps and cap contracts are reported at fair value utilizing discounted cash flow models provided by an independent, third-party and observable market data (Level 2). When entering into an interest rate swap or cap contract, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of the contract counterparty. Other Real Estate Owned and Loans Individually Measured for Impairment Other real estate owned and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is based on independent appraisals (Level 3). The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 2021 and 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands): Fair Value Measurements at Reporting Date Using Total Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs December 31, 2021 Items measured on a recurring basis: Debt securities available-for-sale $ 568,255 $ — $ 568,255 $ — Equity investments 90,726 14,608 73,400 2,718 Interest rate derivative assets 22,787 — 22,787 — Interest rate derivative liabilities ( 22,855 ) — ( 22,855 ) — Items measured on a non-recurring basis: Equity investments 10,429 — — 10,429 Other real estate owned 106 — — 106 Loans measured for impairment based on the fair value of the underlying collateral 16,233 — — 16,233 December 31, 2020 Items measured on a recurring basis: Debt securities available-for-sale $ 183,302 $ — $ 183,302 $ — Equity investments 107,079 104,539 — 2,540 Interest rate derivative assets 45,289 — 45,289 — Interest rate derivative liabilities ( 45,429 ) — ( 45,429 ) — Items measured on a non-recurring basis: Other real estate owned 106 — — 106 Loans measured for impairment based on the fair value of the underlying collateral 35,366 — — 35,366 102 The following table reconciles, for the year ended December 31, 2021 and 2020, the beginning and ending balances for equity investments and debt securities available-for-sale that are recognized at fair value on a recurring basis, in the Consolidated Statements of Financial Condition, using significant unobservable inputs (in thousands): For the Year Ended December 31, 2021 2020 Equity Investments Equity Investments Debt Securities Beginning balance $ 2,540 $ — $ 25 Purchases — 2,000 2,377 Total gains included in earnings 178 540 — Maturities — — ( 2,402 ) Ending balance $ 2,718 $ 2,540 $ — There were no debt securities in Level 3 for the year ended December 31, 2021. The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no transfers into or out of Level 3 assets or liabilities in the fair value hierarchy for the years ended December 31, 2021 and 2020. Assets and Liabilities Disclosed at Fair Value A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Cash and Due from Banks For cash and due from banks, the carrying amount approximates fair value. Debt Securities Held-to-Maturity Debt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 2 and, infrequently, Level 3 inputs. Most of the Company’s debt securities are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities. Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and decides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain state and municipal obligations, known as bond anticipation notes, as well as certain debt securities where management utilized Level 3 inputs, such as broker or dealer quotes with limited levels of activity and price transparency. Restricted Equity Investments The fair value for Federal Home Loan Bank of New York, Federal Reserve Bank stock, and Atlantic Community Bankers Bank is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment as stipulated by the respective entities. Loans Receivable and Loans Held-for-Sale Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential real estate, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms. Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms. The fair value of loans was measured using the exit price notion. 103 Deposits Other than Time Deposits The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts is, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported. Time Deposits The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Securities Sold Under Agreements to Repurchase with Retail Customers Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly. Borrowed Funds Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. The book value and estimated fair value of the Company’s significant financial instruments not recorded at fair value as of December 31, 2021 and 2020 are presented in the following tables (in thousands): Fair Value Measurements at Reporting Date Using Book Value Level 1 Inputs Level 2 Inputs Level 3 Inputs December 31, 2021 Financial assets: Cash and due from banks $ 204,949 $ 204,949 $ — $ — Debt securities held-to-maturity 1,139,193 — 1,138,529 14,215 Restricted equity investments 53,195 — — 53,195 Loans receivable, net and loans held-for-sale 8,583,352 — — 8,533,506 Financial liabilities: Deposits other than time deposits 8,957,815 — 8,957,815 — Time deposits 775,001 — 773,766 — Other borrowings 229,141 — 251,491 — Securities sold under agreements to repurchase with retail customers 118,769 118,769 — — December 31, 2020 Financial assets: Cash and due from banks $ 1,272,134 $ 1,272,134 $ — $ — Debt securities held-to-maturity 937,253 — 952,365 16,101 Restricted equity investments 51,705 — — 51,705 Loans receivable, net and loans held-for-sale 7,750,381 — — 7,806,743 Financial liabilities: Deposits other than time deposits 8,054,833 — 8,054,833 — Time deposits 1,372,783 — 1,383,173 — Other borrowings 235,471 — 251,798 — Securities sold under agreements to repurchase with retail customers 128,454 128,454 — — Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, 104 current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, bank owned life insurance, deferred tax assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 105 Note 16. Derivatives, Hedging Activities and Other Financial Instruments The Company enters into derivative financial instruments which involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative financial instruments entered into by the Company are an economic hedge of a derivative offering to Bank customers. The Company does not use derivative financial instruments for trading purposes. Customer Derivatives – Interest Rate Swaps and Cap Contracts The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The Company also enters into interest rate cap contracts that enable commercial loan customers to lock in a cap on a variable-rate commercial loan agreement. This feature prevents the loan from repricing to a level that exceeds the cap contract’s specified interest rate, which serves to hedge the risk from rising interest rates. The Company then enters into an offsetting interest rate cap contract with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps and cap contracts with both the customers and third parties are not designated as hedges under FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps and cap contracts are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. The Company recognized gains of $ 72,000 and $ 428,000 , and a loss of $ 478,000 in other income resulting from fair value adjustments for the period ended December 31, 2021, 2020 and 2019, respectively. The notional amount of derivatives not designated as hedging instruments was $ 938.7 million and $ 725.9 million at December 31, 2021 and 2020, respectively. The table below presents the fair value of derivatives not designated as hedging instruments as well as their location on the consolidated statements of financial condition (in thousands): Fair Value December 31, Balance Sheet Location 2021 2020 Other assets $ 22,787 $ 45,289 Other liabilities 22,855 45,429 Credit Risk-Related Contingent Features The Company is a party to International Swaps and Derivatives Association agreements with third party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $ 19.8 million and $ 46.5 million at December 31, 2021 and 2020, respectively. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $ 22.9 million and $ 45.4 million at December 31, 2021 and 2020, respectively. 106 Note 17. Leases A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s leases are comprised of real estate property for branches, automated teller machine locations and office space with terms extending through 2050. The Company has one existing finance lease, which has a lease term through 2029. The following table represents the classification of the Company’s right-of-use (“ROU”) assets and lease liabilities on the consolidated statements of financial condition (in thousands): For the Year Ended December 31, 2021 December 31, 2020 Lease ROU Assets Classification Operating lease ROU assets Other assets $ 17,442 $ 22,555 Finance lease ROU asset Premises and equipment, net 1,495 1,694 Total lease ROU assets $ 18,937 $ 24,249 Lease Liabilities Operating lease liabilities (1) Other liabilities $ 17,982 $ 22,990 Finance lease liability Other borrowings 1,904 2,100 Total lease liabilities $ 19,886 $ 25,090 (1) Operating lease liabilities excludes liabilities for future rent and lease termination payments related to closed branches of $ 8.2 million and $ 7.4 million as of December 31, 2021 and 2020, respectively. The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, Leases (Topic 842) requires the Company to use the rate implicit in the lease, provided the rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate, at lease inception, over a similar term. For operating leases existing prior to January 1, 2019, the Company used the incremental borrowing rate for the remaining lease term as of January 1, 2019. For the finance lease, the Company utilized its incremental borrowing rate at lease inception. December 31, 2021 December 31, 2020 Weighted-Average Remaining Lease Term Operating leases 8.22 years 7.77 years Finance lease 7.59 years 8.59 years Weighted-Average Discount Rate Operating leases 2.97 % 3.01 % Finance lease 5.63 % 5.63 % 107 The following table represents lease expenses and other lease information (in thousands): For the Year Ended December 31, 2021 2020 2019 Lease Expense Operating lease expense $ 5,935 $ 6,438 $ 3,904 Finance lease expense: Amortization of ROU assets 199 174 274 Interest on lease liabilities (1) 112 110 174 Total $ 6,246 $ 6,722 $ 4,352 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 5,263 $ 6,298 $ 3,625 Operating cash flows from finance leases 112 110 174 Financing cash flows from finance leases 195 187 263 (1) Included in borrowed funds interest expense on the Consolidated Statements of Income. All other costs are included in occupancy expense. During the year ended December 31, 2021, the Company sold two branches, including owned premises and equipment, all deposits associated with the branches, and selected performing loans. The Company recognized $ 2.0 million of gains related to the sale, which is presented in branch consolidation expense on the Consolidated Statements of Income. The Company also consolidated 4 branches in early 2021, 9 branches in late 2021, and expects to consolidate 10 branches and 1 deposit gathering location in early 2022. These plans have resulted in a shortened estimated useful life for premises and equipment and accelerated recognition of lease expenses associated with these locations, which the effect on income totaled $ 13.0 million and is presented in branch consolidation expense and is excluded from the table above. Other operating expenses related to these closures totaled $ 1.3 million and are presented in branch consolidation expense. Future minimum payments for the finance lease and operating leases with initial or remaining terms of one year or more as of December 31, 2021 were as follows (in thousands): Finance Lease Operating Leases For the Year Ending December 31, 2022 $ 307 $ 4,404 2023 307 3,033 2024 307 2,737 2025 307 2,307 2026 307 1,650 Thereafter 798 6,681 Total 2,333 20,812 Less: Imputed interest ( 429 ) ( 2,830 ) Total lease liabilities $ 1,904 $ 17,982 108 Note 18. Parent-Only Financial Information The following condensed statements of financial condition at December 31, 2021 and 2020 and condensed statements of operations and cash flows for the years ended December 31, 2021, 2020 and 2019 for OceanFirst Financial Corp. (parent company only) reflect the Company’s investment in its wholly-owned subsidiaries, the Bank, and OceanFirst Risk Management, Inc., using the equity method of accounting. Condensed Statement of Financial Condition (in thousands) December 31, 2021 2020 Assets: Cash and due from banks $ 8,803 $ 7,187 Advances to Bank 63,480 101,304 Equity securities 87,622 93,207 ESOP loan receivable 9,231 8,071 Investment in subsidiaries 1,575,549 1,502,867 Other assets 2,781 10,180 Total assets $ 1,747,466 $ 1,722,816 Liabilities and Stockholders’ Equity: Borrowings $ 227,237 $ 233,371 Other liabilities 3,676 5,315 Stockholders’ equity 1,516,553 1,484,130 Total liabilities and stockholders’ equity $ 1,747,466 $ 1,722,816 Condensed Statements of Operations (in thousands) For the Year Ended December 31, 2021 2020 2019 Dividend income – subsidiary Bank $ 40,000 $ 54,000 $ 79,000 Interest and dividend income – debt and equity securities 2,070 949 63 Interest income – advances to subsidiary Bank 298 403 426 Interest income – ESOP loan receivable 289 301 321 Net gain on equity investments 7,499 20,460 — Total income 50,156 76,113 79,810 Interest expense – borrowings 11,102 10,592 5,402 Operating expenses 3,307 3,382 2,686 Income before income taxes and undistributed earnings of subsidiary Bank 35,747 62,139 71,722 Benefit (Provision) for income taxes 1,018 ( 2,901 ) 924 Income before undistributed earnings of subsidiary Bank 36,765 59,238 72,646 Undistributed earnings of subsidiary Bank 73,311 4,071 15,928 Net income $ 110,076 $ 63,309 $ 88,574 109 Condensed Statements of Cash Flows (in thousands) For the Year Ended December 31, 2021 2020 2019 Cash flows from operating activities: Net income $ 110,076 $ 63,309 $ 88,574 Decrease (increase) in advances to subsidiary Bank 37,824 ( 73,426 ) ( 13,852 ) Undistributed earnings of subsidiary Bank ( 73,311 ) ( 4,071 ) ( 15,928 ) Net gain on equity investments ( 7,499 ) ( 20,460 ) — Net premium amortization in excess of discount accretion on securities 755 — — Amortization of deferred costs on borrowings 824 576 261 Net amortization of purchase accounting adjustments 542 638 453 Change in other assets and other liabilities 7,359 648 ( 184 ) Net cash provided by (used in) operating activities 76,570 ( 32,786 ) 59,324 Cash flows from investing activities: Proceeds from sales of equity investments 98,791 15,339 — Purchase of equity investments ( 86,462 ) ( 95,228 ) — Increase in ESOP loan receivable ( 3,200 ) — — Repayments on ESOP loan receivable 2,040 1,200 1,160 Net cash provided by (used in) investing activities 11,169 ( 78,689 ) 1,160 Cash flows from financing activities: Net proceeds from issuance of subordinated notes — 122,180 — Repayments of other borrowings ( 7,500 ) ( 7,999 ) — Dividends paid ( 44,510 ) ( 42,917 ) ( 34,241 ) Purchase of treasury stock ( 36,059 ) ( 14,814 ) ( 26,066 ) Net proceeds from the issuance of preferred stock — 55,529 — Exercise of stock options 1,946 1,241 1,335 Net cash provided by (used in) financing activities ( 86,123 ) 113,220 ( 58,972 ) Net increase in cash and due from banks 1,616 1,745 1,512 Cash and due from banks at beginning of year 7,187 5,442 3,930 Cash and due from banks at end of year $ 8,803 $ 7,187 $ 5,442 Note 19. Subsequent Events 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. 110 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.