What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-28 · 177 added, 213 removed, 336 unchanged (54% of the section changed)

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

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

The Company conducts business primarily through its ownership of the Bank, which, at December 31, 2022, operated its branch office and headquarters located in Toms River, New Jersey, its administrative office located in Red Bank, New Jersey, and an administrative office located in Mount Laurel, New Jersey.

The Bank also conducts its business at 37 additional branch offices and deposit production facilities located throughout central and southern New Jersey and the greater metropolitan area of New York City and Philadelphia.

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

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

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

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

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

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

Impact of COVID-19

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

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

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

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

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

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

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

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

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

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

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

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

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

On January 1, 2020, the Company completed its acquisition of Two River, which added $1.1 billion to assets, $940.1 million to loans, and $941.8 million to deposits.

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

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

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

On January 31, 2019, the Company completed its acquisition of Capital Bank, which added $494.4 million to assets, $307.3 million to loans, and $449.0 million to deposits.

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

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

Recent Acquisitions

On April 1, 2022, the Company completed its acquisition of a majority controlling interest of 60% in Trident Abstract Title Agency, LLC (“Trident”), which provides commercial and residential title services.

Total consideration paid was $7.1 million and goodwill from the transaction amounted to $5.8 million.

Trident’s results of operations are included in the consolidated results for the period beginning on April 1, 2022.

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

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

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

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

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

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To accomplish these objectives, the Bank has sought to:

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

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

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

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

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

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

The growth in these areas has occurred both organic ally and through acquisitions and equity investments.

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

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

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

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

At December 31, 2022, commercial loans (which includes multi-family and commercial real estate loans, commercial construction loans, and commercial and industrial loans) represented 68.5% of the Bank’s total loans, as compared to 65.8% at December 31, 2020.

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

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

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

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

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

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

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

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

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

Ongoing product development and design to deepen market penetration will allow the Bank to rely on competencies in commercial lending and the retail branch network to drive core deposit growth while the Bank is marketing non-core time deposit products as a short-term funding resource.

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

Enhancing Non-Interest Income

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The Bank is focused on growth opportunities in areas such as derivative contracts, trust and asset management, digital product o fferings, and equity investments in non-bank finance companies.

The Bank also offers investment products for sale through its retail branch network.

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

The Bank also offers investment products for sale through its retail branch network and a hybrid robo-advisor product offered by the Bank’s partner, Nest Egg, a registered investment adviser.

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

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

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

At December 31, 2022, the Company had an ownership interest of less than 20% in Nest Egg and a representative on the Board of Directors.

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

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

During 2021, the Company made a minority, non-controlling equity investment of $10.0 million in Auxilior Capital Partners, Inc.

(“Auxilior”), and received representation on the Auxilior Board of Directors.

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

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

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

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

On November 29, 2022, the Company invested an additional $2.8 million as part of a new round of financing by the Company and other investors.

On April 1, 2022, the Company completed its acquisition of a majority controlling interest of 60% in Trident.

Trident provides commercial and residential title services throughout New Jersey, and through strategic alliances can also service clients’ title insurance needs outside of New Jersey.

The acquisition is complimentary to the Company’s existing consumer and commercial lending business and provided an additional source of non-interest income to benefit the Company.

Branch Rationalization and Service Delivery

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

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

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

The Bank consolidated 10 branches in 2022, following the consolidation of 13 branches in 2021 and 13 branches in 2020.

The Bank has consolidated 77 branch locations since 2013.

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

The Company also analyzes the need to raise additional capital in the future, through issuance of debt or equity, to meet the commitments and business needs.

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

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

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

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

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

For the year ended December 31, 2022, the Company repurchased 373,223 shares of its common stock under this repurchase program and 2,934,438 shares remain available for repurchase.

Selected Financial Data

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Deposits 9,675,206 9,732,816 9,427,616

FHLB advances — — 519,260

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

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

Federal Home Loan Bank ("FHLB") advances 1,211,166 — —

Securities sold under agreements to repurchase with customers and other borrowings 264,500 347,910 363,925

Total stockholders’ equity 1,585,464 1,516,553 1,484,130

For the Year Ended December 31,

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Net interest income 377,477 305,338 312,951

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

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

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

Credit loss expense (benefit) 7,768 (11,832) 59,404

Net interest income after credit loss expense (benefit) 369,709 317,170 253,547

Other income (excluding net gain on equity investments and gain on sale of Paycheck Protection Program (“PPP”) loans) 49,409 44,786 47,611

Net gain on equity investments 9,685 7,145 21,214

Gain on sale of PPP loans — — 5,101

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

Operating expenses (excluding branch consolidation expense, net, merger related expenses, and FHLB advance prepayment fees) 231,433 213,020 208,604

FHLB advance prepayment fees — — 14,257

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

Branch consolidation expense, net 713 12,337 7,623

Merger related expenses 2,735 1,503 15,947

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Net income $ 147,357 $ 110,076 $ 63,309

Net income attributable to non-controlling interest 754 — —

Net income attributable to OceanFirst Financial Corp.

$ 146,603 $ 110,076 $ 63,309

Net income available to common stockholders $ 142,587 $ 106,060 $ 61,212

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0.18 0.22 0.41

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

Allowance for loan credit losses as a percent of total loans receivable (7)(9)

0.57 0.57 0.78

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

Allowance for loan credit losses as a percent of total non-performing loans (8)(9)

244.25 191.61 129.60

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

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

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

(2) Performance ratios for 2022 included a net benefit related to merger related expenses, net branch consolidation expense, and gain on equity investments of $6.2 million, or $4.6 million, net of tax expense.

Performance ratios for 2021 included a net expense related to merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $6.7 million, or $5.1 million, net of tax benefit.

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

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

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

(3) Ratios for each period are based on net income available to common stockholders.

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

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

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

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

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

Amounts and ratios reported in the prior periods have been revised to conform with the current year’s presentation.

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

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Highlights of the Company’s financial results for the year ended December 31, 2022 were as follows:

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

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

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

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

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

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

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

Total assets increased by $1.36 billion to $13.10 billion at December 31, 2022, from $11.74 billion at December 31, 2021.

Total loans increased by $1.30 billion to $9.92 billion at December 31, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations and to a lesser extent, $171.6 million of residential loan pool purchases.

Total liabilities increased by $1.30 billion to $11.52 billion at December 31, 2022, from $10.22 billion at December 31, 2021.

FHLB advances increased to $1.21 billion at December 31, 2022 from $0 at December 31, 2021 to fund liquidity needs, as deposits decreased by $57.6 million during this period from $9.73 billion to $9.68 billion.

Net income available to common stockholders for the year ended December 31, 2022 was $142.6 million, or $2.42 per diluted share, as compared to $106.1 million, or $1.78 per diluted share for the prior year.

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

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

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

Net income available to common stockholders for the year ended December 31, 2022 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $2.7 million, $713,000, and $9.7 million, respectively.

These items increased net income for the year ended December 31, 2022 by $4.6 million, net of tax.

These items increased diluted earnings per share by $0.08 for the year ended December 31, 2022.

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

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

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

These items reduced diluted earnings per share by $0.08 for the year ended December 31, 2021.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.10% at December 31, 2022.

Critical Accounting Policies and Estimates

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

Note 1 Summary of Significant Accounting Policies to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2022 contains a summary of significant accounting policies.

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

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

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

The Company incorporated unique factors in 2022 to address macro-economic uncertainty and alternative economic forecast projections.

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

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

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

For example, at December 31, 2022, if the Company had elected a contemporaneous downside scenario where it was assumed that commercial borrowers are more adversely impacted by the velocity of interest rate change, the ACL measurement would have been approximately $2.3 million higher.

Alternatively, if the Company had elected a severely adverse economic scenario consistent with the Federal Reserve’s severe recession scenario, the ACL measurement would have been approximately $11.3 million higher.

These sensitivity scenarios do not represent a change in the Company’s expectations of credit performance or the economic environment but provide hypothetical results to access the sensitivity of the ACL to changes in key inputs.

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

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

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

For the years ended December 31, 2022, 2021, and 2020, interest income included net loan fees of $3.0 million, $2.5 million, and $6.0 million, respectively.

The following table sets forth certain information relating to the Company for each of the years ended December 31, 2022, 2021 and 2020.

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Residential real estate 2,724,398 91,432 3.36 2,309,790 79,696 3.45 2,465,740 93,120 3.78

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

Home equity loans and line and other consumer (“other consumer”) 256,912 11,910 4.64 298,193 14,397 4.83 390,421 19,352 4.96

Allowance for loan credit losses, net of deferred loan costs and fees (44,446) — — (48,637) — — (33,343) — —

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389,750 10,365 2.66 — — — 413,290 7,018 1.70

Securities sold under agreements to repurchase

134,939 253 0.19 125,500 562 0.45 64,525 276 0.43

Securities sold under agreements to repurchase with customers 101,377 159 0.16 134,939 253 0.19 125,500 562 0.45

Other borrowings

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Residential real estate 13,877 (2,141) 11,736 (5,640) (7,784) (13,424)

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

Other consumer (1,937) (550) (2,487) (4,460) (495) (4,955)

Loans receivable, net (2)

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FHLB advances 5,183 5,182 10,365 (3,509) (3,509) (7,018)

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

Securities sold under agreements to repurchase with customers (57) (37) (94) 40 (349) (309)

Other borrowings (1,348) 2,210 862 1,063 (559) 504

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Comparison of Financial Condition at December 31, 2022 and December 31, 2021

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

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

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

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

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

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

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

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

Total assets increased by $1.36 billion to $13.10 billion at December 31, 2022, from $11.74 billion at December 31, 2021.

Total debt securities decreased by $28.7 million at December 31, 2022, as compared to December 31, 2021, primarily due to principal repayments and maturities, and to a lesser extent, an increase in unrealized losses driven by the rising rate environment.

This was partly offset by purchases in the second half of the year.

Other assets increased by $74.1 million to $221.1 million at December 31, 2022 from $147.0 million at December 31, 2021, primarily due to an increase in market values associated with customer interest rate swap programs.

Total liabilities increased by $1.30 billion to $11.52 billion at December 31, 2022, from $10.22 billion at December 31, 2021.

FHLB advances increased to $1.21 billion at December 31, 2022 from $0 at December 31, 2021 to fund liquidity needs, as

deposits decreased by $57.6 million during this period from $9.73 billion to $9.68 billion.

Total deposits, excluding time deposits, decreased by $824.6 million to $8.13 billion at December 31, 2022, from $8.96 billion at December 31, 2021, due to the net runoff of non-interest-bearing and interest-bearing checking balances.

Time deposits increased to $1.54 billion, or 15.9% of total deposits, at December 31, 2022, from $775.0 million, or 8.0% of total deposits, at December 31, 2021, primarily due to an increase in brokered time deposits.

The loans-to-deposit ratio at December 31, 2022 was 102.5%, as compared to 88.6% at December 31, 2021.

Other borrowings also decreased by $33.7 million to $195.4 million at December 31, 2022, from $229.1 million at December 31, 2021, primarily due to the extinguishment of $35.0 million of subordinated debt in March 2022.

Other liabilities increased by $224.1 million to $346.2 million at December 31, 2022, from $122.0 million at December 31, 2021, primarily due to an increase in the market values associated with customer interest rate swap programs and related collateral received from counterparties.

Stockholders’ equity increased to $1.59 billion at December 31, 2022, as compared to $1.52 billion at December 31, 2021.

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

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

Accumulated other comprehensive loss increased by $33.2 million to $36.0 million at December 31, 2022 from $2.8 million at December 31, 2021, primarily due to unrealized losses on debt securities available-for-sale, which were adversely impacted by the rising interest rate environment.

For the year ended December 31, 2022, the Company repurchased 373,223 shares totaling $7.4 million under its stock repurchase program at a weighted average cost of $19.82.

There were 2,934,438 shares available for repurchase at December 31, 2022 under the existing repurchase program.

Stockholders’ equity per common share increased to $26.81 at December 31, 2022, as compared to $25.63 at December 31, 2021.

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

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

These items increased net income for the year ended December 31, 2022 by $4.6 million, net of tax.

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

Interest Income

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

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

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

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

Interest income for the year ended December 31, 2022 increased to $431.2 million, as compared to $342.1 million in the prior year.

Average interest-earning assets increased by $779.9 million for the year ended December 31, 2022, as compared to the prior year, primarily due to loan growth and, to a lesser extent securities growth, funded by the redeployment of excess cash and increased FHLB advances.

Average loans receivable, net of allowance for loan credit losses, increased by $1.40 billion for the year ended December 31, 2022, as compared to the prior year, primarily in commercial loans.

The yield on average interest-earning assets increased to 3.85% for the year ended December 31, 2022, as compared to 3.29% for the prior year, primarily due to the impact of the rising rate environment on interest-earning assets.

Interest Expense

Interest expense for the year ended December 31, 2022 was $53.7 million, as compared to $36.8 million in the prior year.

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

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

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

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

For the year ended December 31, 2022, the cost of average interest-bearing liabilities increased to 0.65%, from 0.49% in the prior year, as a result of higher costs associated with FHLB advances and interest-bearing deposits, including time deposits issued in an elevated rate environment in 2022.

The total cost of deposits (including non-interest bearing deposits) increased to 0.31% for the year ended December 31, 2022, as compared to 0.26% for the prior year.

Net Interest Income and Margin

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

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

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

Benefit/Provision for Credit Loss Expense

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

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

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

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

Net interest income for the year ended December 31, 2022 increased to $377.5 million, as compared to $305.3 million for the prior year, reflecting an increase in average interest-earning assets and net interest margin.

Net interest margin increased to 3.37% for the year ended December 31, 2022, from 2.93% for the prior year.

The net interest margin expansion was enhanced by the impact of the rising rate environment on interest-earning assets and the redeployment of excess cash into loans, partly offset by an increased cost of funds and the growth of interest-bearing liabilities.

Credit Loss Expense (Benefit)

Credit loss expense for the year ended December 31, 2022 was $7.8 million, as compared to credit loss benefit of $11.8 million for the prior year.

The credit loss expense for the year ended December 31, 2022 was primarily influenced by loan growth, slowing prepayment assumptions, and increasingly uncertain macro-economic forecasts due to persistent inflation, interest rate increases, and global economic headwinds, partly offset by positive trends in the Company’s criticized and classified assets.

Net loan recoveries were $340,000 for the year ended December 31, 2022, as compared to $461,000 in the prior year.

Non-performing loans totaled $23.3 million at December 31, 2022, as compared to $25.5 million at December 31, 2021.

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

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

Non-interest Income

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

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

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

Other income for the year ended December 31, 2022 increased to $59.1 million, as compared to $51.9 million for the prior year.

The increase was driven by the impact of Trident, which added $10.4 million primarily related to title-related fees and service charges;

an increase in commercial loan swap income of $3.0 million;

and an increase in net gain on equity investments of $2.5 million.

Net gains on equity investments in the current year included a $17.5 million unrealized gain on the Auxilior investment.

These increases were partly offset by decreases in bankcard services of $4.1 million, primarily as a result of the Durbin amendment, net gain on sale of loans of $2.8 million, fees and service charges (excluding Trident) of $814,000, and Paycheck Protection Program loan origination referral fees of $800,000 recognized in the prior year.

Non-interest Expense

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

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

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

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

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

Operating expenses for the year ended December 31, 2022 increased to $234.9 million, as compared to $226.9 million in the prior year.

Operating expenses for the year ended December 31, 2022 and 2021 included $3.4 million and $13.8 million, respectively, of merger related and net branch consolidation expenses.

The remaining increase of $18.4 million in operating expenses for the year ended December 31, 2022, as compared to the prior year, was partly due to the impact of Trident, which added $8.5 million of expenses.

Other increases included compensation and benefits expense of $6.6 million, primarily related to higher compensation and incentive costs, professional fees of $1.9 million, data processing expense of $1.5 million, and federal deposit insurance and regulatory assessments of $1.2 million, partly offset by a decrease in amortization of core deposit intangible of $734,000.

Income Tax Expense

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

The provision for income taxes for the year ended December 31, 2022 was $46.6 million, as compared to $32.2 million for the prior year, primarily reflecting the increase in income before provision for income taxes.

The effective tax rate was 24.0% for the year ended December 31, 2022, as compared to 22.6% for the prior year.

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

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

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

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

Net income for the year ended December 31, 2019 included merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in the New Jersey tax code of $10.5 million, $9.1 million, $2.0 million, $1.3 million and $2.2 million, respectively.

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

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

Interest Income

Interest income for the year ended December 31, 2020, increased to $379.6 million, as compared to $308.8 million in the prior year.

Average interest-earning assets increased $2.82 billion for the year ended December 31, 2020, as compared to the prior year.

The average for the year ended December 31, 2020 was favorably impacted by $1.75 billion of interest-earning assets acquired from Two River and Country Bank.

Average loans receivable, net, increased by $2.15 billion for the year ended December 31, 2020, as compared to the prior year.

The increase attributable to the acquisitions of Two River and Country Bank was $1.55 billion and the increase related to PPP loans was $227.5 million.

The yield on average interest-earning assets decreased to 3.84% for the year ended December 31, 2020, as compared to 4.36% for the prior year.

Interest Expense

Interest expense for the year ended December 31, 2020, was $66.7 million, as compared to $52.8 million in the prior year, due to an increase in average-interest bearing liabilities of $2.07 billion, primarily related to the acquisitions of Two River and Country Bank and organic deposit growth.

For the year ended December 31, 2020, the cost of average interest-bearing liabilities decreased to 0.88% from 0.96% in the prior year.

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

Net Interest Income and Margin

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

The net interest margin decreased to 3.16% for the year ended December 31, 2020, from 3.62% for the prior year.

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

Provision for Credit Loss Expense

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

Credit loss expense for the year ended December 31, 2020 was significantly influenced by economic conditions related to the COVID-19 pandemic, as well as estimates of how those conditions may impact the Company’s borrowers, and the decision to sell higher risk commercial loans in the third quarter of 2020.

Net loan charge-offs were $18.9 million for the year ended December 31, 2020, as compared to net loan charge-offs of $1.4 million in the prior year.

Non-performing loans totaled $36.4 million at December 31, 2020, as compared to $17.8 million at December 31, 2019.

At December 31, 2020, the Company’s allowance for credit losses for loans was 0.78% of total loans, as compared to 0.27% at December 31, 2019.

These ratios exclude existing fair value credit marks of $28.0 million at December 31, 2020 and $30.3 million at December 31, 2019 on loans acquired from Two River, Country Bank, Capital Bank, Sun, Ocean Shore, Cape, and Colonial American.

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

Non-interest Income

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

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

The remaining increase in other income was due to increases in commercial loan swap income of $2.8 million, net gain on sales of loans of $2.5 million, net gain on real estate operations of $981,000, and bankcard services of $577,000, partly offset by a decrease in fees and service charges of $4.4 million due to the waiver of certain fees during the COVID-19 pandemic.

Non-interest Expense

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

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

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

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

Income Tax Expense

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

The effective tax was 21.9% for the year ended December 31, 2020, as compared to 17.5% for the prior year.

The higher effective tax rate for the year ended December 31, 2020 was due to the adverse impact of a New Jersey tax code change and a higher allocation of taxable income to New York due to the acquisition of Country Bank.

The lower tax rate in the prior year period was also due to the reduction in income tax expense of $2.2 million from the revaluation of state deferred tax assets as a result of the change in New Jersey tax code.

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

Refer to the Company’s 2021 Form 10-K on pages 48-49.

Liquidity and Capital Resources

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

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

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

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

For the year ended December 31, 2022, the holding company received dividend payments of $73.0 million primarily from the Bank.

At December 31, 2022, OceanFirst Financial Corp.

held $43.5 million in cash.

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

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

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

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

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

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

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

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

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

The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, other borrowings, and proceeds from the sale of loans and investments .

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

The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions and access to the Federal Reserve Bank discount window.

At December 31, 2022 the Bank had $1.21 billion of term advances and no overnight borrowings from the FHLB, as compared to $0 at December 31, 2021.

The Bank regularly utilizes overnight and short-term borrowings to fund short-term liquidity needs.

The Company’s cash needs for the year ended December 31, 2022 were primarily satisfied by the net proceeds from FHLB advances, principal repayments on debt securities and loans, and proceeds from maturities and calls of debt maturities.

The cash was principally utilized for loan originations, purchases of residential loan pools, purchases of debt securities, dividend payments, and redemption of subordinate debt.

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

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

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

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

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

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

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

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

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

Time deposits scheduled to mature in one year or less totaled $1.04 billion at December 31, 2022.

At December 31, 2022, the Company also had various contractual obligations, which included debt obligations of $1.48 billion, including finance lease obligations of $1.9 million and an additional $20.1 million in operating lease obligations included in other liabilities, and purchase obligations of $111.2 million.

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

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

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

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

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

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

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

The Company and Bank continue to maintain adequate liquidity under all stress scenarios.

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

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

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

For the year ended December 31, 2022, the Company repurchased 373,223 shares of its common stock at a total cost of $7.4 million.

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

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

At December 31, 2022, there were 2,934,438 shares available to be repurchased under the authorized stock repurchase program.

Cash dividends on common stock declared and paid during the year ended December 31, 2022 were $43.5 million, as compared to $40.5 million for the prior year.

The increase in dividends was a result of an increase in the dividend rate from $0.17 to $0.20 per common share.

On January 19, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per common share.

The dividend was paid on February 17, 2023 to common stockholders of record at the close of business on February 6, 2023.

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

Cash dividends on preferred stock declared and paid during the years ended December 31, 2022 and 2021 were $4.0 million for both periods.

The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, paid on February 15, 2023 to preferred stockholders of record on January 31, 2023.

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

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

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

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

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

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

Additionally,

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

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

See Regulation and Supervision—Bank Regulation – Capital Requirements .

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

At December 31, 2022, the Company maintained stockholders’ equity to total assets ratio of 12.10%.

Impact of New Accounting Pronouncements

Accounting Pronouncements Adopted in 2022

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

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

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

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

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

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

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

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

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

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

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

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

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

This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021.

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

In December 2022, Financial Accounting Standards Board issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848”, which was effective upon issuance.

The amendments in this ASU defer the sunset date of Topic 848 (Reference Rate Reform) from December 31, 2022 to December 31, 2024.

Topic 848, originally issued in 2020 and later amended in 2021, provides optional accounting expedients and exceptions for certain loan agreements, derivatives and other transactions affected by the transition away from LIBOR towards alternative reference rates.

As of December 31, 2021, the Company adopted certain of these practical expedients in Topic 848 and will continue to apply prospectively until December 31, 2024.

The Company does not expect this update to have a material impact on its financial statements.

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

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

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

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

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

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

The Company’s LIBOR transition plan is organized around key work streams, including continued engagement with regulators, industry working groups, counterparties, and clients;

comprehensive review of legacy documentation, internal operational and technological readiness;

and risk management, among other things.

For the tenors of U.S.

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

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

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

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

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

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

Other contracts will automatically convert to an Alternative Rate with no action required.

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

The Company has approximately $1.2 billion of loans that reference LIBOR, a majority of which have related swaps that also reference LIBOR.

In addition, the Company has approximately $250 million of securities, and has issued approximately $80 million of other borrowings that reference LIBOR.

The Company expects them all to be converted to the Alternative Rates before LIBOR cessation except for certain contracts, such as a loan in bankruptcy or workout, and may be unable to completely remove exposure to LIBOR prior to the cessation date.

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

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

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

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

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

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

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

Recent Accounting Pronouncements

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

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

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

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

Recent Accounting Pronouncements Not Yet Adopted

In June 2022, FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction.

In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restricti on.

This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023.

Early adoption is permitted.

The Company does not expect this standard to have a material impact to the consolidated financial statements.

In March 2022, FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures”.

The amendments in this ASU were issued to (1) eliminate accounting guidance for troubled debt restructurings (“TDRs”) by creditors, while enhancing disclosure requirements for loan refinancings and restructurings when a borrower is experiencing financial difficulty;

(2) require disclosures of current period gross write-offs by year of origination for financing receivables and net investments in leases.

For entities that have adopted the amendments in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, this update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022.

Early adoption is permitted.

The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where there is an option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

The Company plans to adopt this standard on January 1, 2023.

The adoption of this update will not have a material impact on the Company’s consolidated financial statements.

In March 2022, FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815):

Fair Value Hedging – Portfolio Layer Method”, which made targeted improvements to the optional hedge accounting model with the objective of improving hedge accounting to better portray the economic results of an entity’s risk management activities in its financial statements.

This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022.

Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period.

The Company does not expect this standard to have a material impact to the consolidated financial statement s.

Impact of Inflation and Changing Prices

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What changed 10-K

Item 7. Management’s Discussion and Analysis