OCEANFIRST FINANCIAL CORP 10-K

Item 1. Business General OceanFirst Financial Corp. (the “Company”) is incorporated under Delaware law and serves as the holding company for OceanFirst Bank N.A. (the “Bank”). At December 31, 2022, the Company had consolidated total assets of $13.1 billion and total stockholders’ equity of $1.6 billion. The Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “FRB”) and the Securities and Exchange Commission (the “SEC”). The Bank is primarily subject to regulation and supervision by the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB”). Currently, the Company transacts the vast majority of its business through the Bank, its subsidiary. The Company has been the holding company for the Bank since the Bank’s conversion from a federally-chartered mutual savings bank to a federally-chartered capital stock savings bank in 1996 (the “Conversion”). Effective January 31, 2018, the Bank converted to a national bank charter and the Company became a bank holding company. The conversion on January 31, 2018 did not change the entities which regulate and supervise the Bank and Company. The Bank’s principal business is originating loans, consisting of commercial real estate and other commercial loans, which have become a key focus of the Bank, and single-family, owner-occupied residential mortgage loans. The Bank also invests in other types of loans, including residential construction and consumer loans. The Bank primarily funds these loans by attracting retail and commercial deposits. In addition, the Bank invests in mortgage-backed securities (“MBS”), securities issued by the U.S. Government and agencies thereof, corporate securities and other investments permitted by applicable law and regulations. The Bank’s revenues are derived principally from interest on its loans, and to a lesser extent, interest on its debt and equity securities. The Bank also receives 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, securities and equity investments, other fees and service charges. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, Federal Home Loan Bank (“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 discount window. The Company’s website address is www.oceanfirst.com . The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through its website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. Forward-Looking Statements In addition to historical information, this Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those items discussed under Item 1A. Risk Factors herein and the following: implications arising from the termination of the proposed merger with Partners Bancorp, including reputational risks and potential adverse effects on the ability to attract other merger partners; the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers, changes in interest rates, inflation, general economic conditions, potential recessionary conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters, potential increases to flood insurance premiums, the current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in consumer spending, borrowing and savings habits, changes in accounting principles, a failure in or breach of the Company’s 3 operational or security systems or infrastructure, including cyberattacks, the failure to maintain current technologies, failure to retain or attract employees and the Bank’s ability to successfully integrate acquired operations. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Market Area and Competition The Bank is a regional community bank offering a wide variety of financial services to meet the needs of the communities it serves. At December 31, 2022, the Bank operated its business through 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 Bank is one of the largest and oldest financial institutions in New Jersey, with headquarters approximately midway between New York City and Philadelphia. The economy in the Bank’s primary market area, which represents central and southern New Jersey, is based on a mixture of service and retail trade, with other empl oyment provided by a variety of wholesale trade, manufacturing, federal, state and local government, hospitals and utilities. The area is home to commuters working in and around New York City and Philadelphia and also includes a significant number of vacation and second homes in the communities along the New Jersey shore. In addition, the Bank provides banking services through teams located in the major metropolitan markets of Philadelphia, New York, Baltimore, and Boston. The Bank’s future growth opportunities will be influenced by the growth and stability of its geographic marketplace and the competitive environment. The Bank faces significant competition both in making loans and in attracting deposits. In addition, rapid technological changes and consumer preferences may result in increased competition for the Bank’s other services as a number of well-funded technology-focused companies are innovating in the payments, distributed ledger, and cryptocurrency networks to disintermediate portions of the traditional banking model. The state of New Jersey, New York City, Philadelphia, Baltimore, and Boston are also attractive markets to many financial institu tions. Many of the Bank’s competitors are significantly larger institutions that have greater financial resources than the Bank. The Bank’s competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, internet-based providers, and insurance companies. Its most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations, and credit unions. The Bank also faces competition for deposits from short-term money market funds, other corporate and government securities funds, internet-only providers, and from other financial service institutions such as brokerage firms and insurance companies. The Bank distinguishes itself from large bank competitors with teams of local financial experts in each market providing personalized accounts and extraordinary customer service. Community Involvement The Bank promotes efforts to enhance the quality of life in the communities it serves through employee volunteer efforts and the work of OceanFirst Foundation (the “Foundation”). Employees are encouraged to help their neighbors in many ways and receive up to eight hours of Bank-paid volunteer time each year. The Company’s employees, known as the WaveMakers when helping in the community, collectively spend thousands of hours volunteering and serving in leadership roles with local nonprofit organizations, along with participating in other activities that contribute to improving the quality of life for others. In 2022, the WaveMakers spent more than 6,400 hours volunteering their time and talents to help neighbors in need and the first Bank-wide volunteering event was held in October 2022 with more than 700 employees completing over 100 projects for non-profit organization partners in the five states served by the Bank. The Foundation, established in 1996 during the Company’s initial public offering, has granted over $45.7 million to enrich the lives of local citizens by supporting initiatives in health and human services, education, affordab le housing, youth development, and the arts. 4 Lending Activities Loan Portfolio Composition . At December 31, 2022, the Bank had total loans outstanding of $9.92 billion, of which $6.17 billion, or 62.2% of total loans, were commercial real estate, multi-family, and land loans (collectively, “commercial real estate”). The remainder of the portfolio consisted of $2.86 billion of residential real estate loans, or 28.9% of total loans; $622.4 million of commercial and industrial loans, or 6.3% of total loans; and $264.4 million of consumer loans, primarily home equity loans and lines of credit, or 2.7% of total loans. At December 31, 2022, the Bank had $690,000 loans held-for-sale and 41.9% of the Bank’s total loans had adjustable interest rates. The types of loans that the Bank may originate are subject to federal and state laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the FRB, and legislative and tax policies. The following table sets forth the composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated: At December 31, 2022 2021 2020 Amount Percent of Total Amount Percent of Total Amount Percent of Total (dollars in thousands) Commercial real estate $ 6,169,319 62.20 % $ 5,433,126 63.01 % $ 4,636,529 59.43 % Commercial and industrial 622,372 6.27 449,224 5.21 470,656 6.03 Residential real estate 2,862,681 28.86 2,479,701 28.76 2,354,983 30.19 Consumer (1) 264,372 2.67 260,819 3.02 339,462 4.35 Total loans 9,918,744 100.00 % 8,622,870 100.00 % 7,801,630 100.00 % Deferred origination costs (fees), net 7,488 9,332 9,486 Allowance for loan credit losses (56,824) (48,850) (60,735) Loans receivable, net 9,869,408 8,583,352 7,750,381 Less: Loans held for sale 690 — 45,524 Total loans receivable, net $ 9,868,718 $ 8,583,352 $ 7,704,857 Total loans: Fixed rate $ 5,760,562 58.08 % $ 5,459,920 63.32 % $ 4,810,309 61.66 % Adjustable rate 4,158,182 41.92 3,162,950 36.68 2,991,321 38.34 $ 9,918,744 100.00 % $ 8,622,870 100.00 % $ 7,801,630 100.00 % (1) Consists primarily of home equity loans, home equity lines of credit, student loans, and, to a lesser extent, loans on savings accounts and overdraft lines of credit. 5 Loan Maturity . The following table shows the contractual maturity of the Bank’s total loans at December 31, 2022. The table does not include principal prepayments: At December 31, 2022 Commercial Real Estate Commercial and Industrial Residential Real Estate Consumer Total Loans Receivable (in thousands) One year or less $ 334,221 $ 326,126 $ 2,252 $ 2,737 $ 665,336 After one year: More than one year to five years 2,854,685 198,542 26,281 71,172 3,150,680 More than five years to fifteen years 2,903,914 74,683 322,972 128,414 3,429,983 More than fifteen years 76,499 23,021 2,511,176 62,049 2,672,745 Total due after December 31, 2023 5,835,098 296,246 2,860,429 261,635 9,253,408 Total amount due $ 6,169,319 $ 622,372 $ 2,862,681 $ 264,372 9,918,744 Deferred origination costs (fees), net 7,488 Allowance for loan credit losses (56,824) Loans receivable, net $ 9,869,408 Less: loans held-for-sale 690 Total loans receivable, net $ 9,868,718 The following table sets forth at December 31, 2022, the dollar amount of total loans receivable, contractually due after December 31, 2023, and whether such loans have fixed interest rates or adjustable interest rates: Due After December 31, 2023 Fixed Adjustable Total (in thousands) Commercial real estate $ 2,611,392 $ 3,223,706 $ 5,835,098 Commercial and industrial 137,039 159,207 296,246 Residential real estate 2,610,499 249,930 2,860,429 Consumer 130,438 131,197 261,635 Total loans receivable $ 5,489,368 $ 3,764,040 $ 9,253,408 Commercial Real Estate . Th e Bank originates commercial real estate loans that are secured by properties, or properties under construction, that are generally used for business purposes such as office, industrial, or retail facilities. A substantial majority of the Bank’s commercial real estate loans are located in its primary market area. The Bank generally originates commercial real estate loans with terms of up to ten years and amortization schedules up to 30 years with fixed or adjustable rates. Fixed-rate loans typically contain prepayment penalties over an initial term. Additionally, the B ank offers an interest rate swap program that allows commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. In reaching its decision on whether to make a commercial real estate loan, the Bank considers the net operating income of the property and the borrower’s expertise, credit history, and profitability, among other factors. At December 31, 2022, the Bank’s total commercial real estate loans outstanding were $6.17 billion, or 62.2% of total loans, as compared to $5.43 billion, or 63.0% of total loans at December 31, 2021. The Bank continues to grow this market segment primarily through additional business and referrals from existing clients, and the addition of experienced commercial lenders i n various New Jersey counties as well as teams in New York City, Philadelphia, Baltimore, and Boston. Of the total commercial real estate portfolio, 16.2% is considered owner-occupied, whereby the underlying business owner occupies a majority of the property. The commercial real estate portfolio also includes loans for the construction of commercial properties. In certain cases, these loans are underwritten based upon commercial leases in place prior to funding. At December 31, 2022 and 2021, the Bank had an outstanding balance in commercial construction loa ns of approximately 4% and 3% o f total loans, respectively . 6 The Bank originates mu lti-family mortgage loans and, to a lesser extent, land loans, which are included in commercial real estate. At December 31, 2022 and 2021, the Bank’s multi-family loans were $1.12 billion and $1.05 billion, respectively, and land loans were $31.1 million and $4.2 million , respectively. Commercial and Industrial . At December 31, 2022, commercial and industrial (“C&I”) loans totale d $622.4 million, or 6.3% of the Bank’s total loans outstanding. The Bank originates C&I loans and lines of credit (including for working capital, fixed asset purchases, and acquisition, receivable, and inventory financing) primarily in the Bank’s market are a. In underwriting C&I loans and credit lines, the Bank reviews and analyzes the financial history and capacity of the borrower, collateral value, financial strength and character of the principal borrowers, and general payment history of the principal borrowers in coming to a credit decision. The Bank generally originates C&I loans secured by the assets of the business including accounts receivable, inventory, and fixtures. The Bank generally requires the personal guarantee of the principal borrowers for all C&I loans. Risk of loss on a C&I business loan is dependent largely on the borrower’s ability to remain financially able to repay the loan from the ongoing operations of the business. In addition, any collateral securing such loans may depreciate over time, may be difficult to appraise, and may fluctuate in value. Consumer: Residential Real Estate . The Bank offers both fixed-rate and adjustable-rate mortgage (“ARM”) loans secured by one-to-four family residences with maturities up to 30 years. The majority of such loans are secured by property located in the Bank’s primary market area. Loan originations are typically generated by the Bank’s commissioned loan representatives and are largely derived from contacts within the local real estate industry, members of the local communities, and the Bank’s existing or past customers. Additionally, for the year ended December 31, 2022, the Bank purchased $171.6 million of residential real estate loan pools originated by others. At December 31, 2022, $2.86 billion, or 28.9% of total loans, were residential real estate loans, primarily single family and owner occupied. To a lesser extent and included in this activity are residential mortgage loans secured by seasonal second homes, non-owner occupied investment properties and construction loans. The average size of the Bank’s residential real estate loans, excluding purchased loan pools, was approximately $309,000 at December 31, 2022. The Bank currently offers several ARM loan programs with interest rates that adjust every one, three, five, or ten years. The Bank’s ARM loans generally provide for periodic caps of 2% or 3% and an overall cap of 6% on the increase or decrease in the interest rate at any adjustment date and over the life of the loan. The interest rate on these loans is indexed to the applicable three-, five- or ten-year U.S. Treasury constant maturity yield, with a repricing margin which ranges generally from 2.75% to 3.50% above the index. The Bank also offers three-, five-, seven- and ten-year ARM loans which operate as fixed-rate loans for the first three, five, seven, or ten years and then convert to one-year ARM loans for the remainder of the term. The ARM loans are then indexed to a margin of generally 2.75% to 3.50% above the one-year U.S. Treasury constant maturity yield. Generally, ARM loans pose credit risks different than the risks inherent in fixed-rate loans, primarily because as interest rates rise, the payments of the borrower rise, thereby increasing the potential for delinquency and default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In order to minimize risks, borrowers of ARM loans with an initial fixed period of five years or less must qualify based on the greater of the note rate plus 2% or the fully-indexed rate. Seven- to ten-year ARM loans must qualify based on the note rate. The Bank does not originate ARM loans that can result in negative amortization. The Bank’s fixed-rate mortgage loans are currently made for terms from ten to 30 years. The Bank generally holds its residential loans for its portfolio, but from time to time may sell a portion of its longer-term, fixed-rate loans after reviewing volume and yield, and after evaluating interest rate risk and capital management considerations. Servicing rights are generally sold as part of the loan sale. The retention of fixed-rate mortgage loans may increase the level of interest rate risk exposure of the Bank, as the rates on these loans will not adjust during periods of rising interest rates and the loans can be subject to substantial increases in prepayments during periods of falling interest rates. The Bank’s policy is to originate residential real estate loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan, up to 95% of the appraised value or selling price if private mortgage insurance is obtained, and up to 97% of the lower of the appraised value or selling price if the borrower qualifies for the NeighborFirst or special purpose credit program available to certain census tracts. Appraisals are obtained for loans secured by real estate properties. The weighted average loan-to-value ratio of the Bank’s residential real estate loans, excluding purchased loan pools, was 58% at December 31, 2022 based on appraisal values at the time of origination. Title insurance is typically required for first mortgage loans. Residential mortgage loans originated by the Bank include due-on-sale clauses which provide the Bank with the contractual right to declare the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank’s consent. Due-on-sale clauses are an important means of adjusting the rates on the Bank’s fixed-rate residential mortgage loan portfolio and the Bank has generally exercised its rights under these clauses. 7 The Bank has made, and may continue to make, residential mortgage loans that will not qualify as Qualified Mortgage Loans under the Dodd-Frank Act and the CFPB regulations. See Risk Factors – Risks Related to Lending Activities – The Dodd-Frank Act imposes obligations on originators of residential mortgage loans . Included in the Bank’s residential real estate loan balance at December 31, 2022 were residential construction loans which totaled $182.9 million. The Bank originates residential construction loans primarily on a construction to permanent basis with such loans converting to an amortizing loan following the completion of the construction phase. All of the Bank’s residential construction loans are made to individuals building a residence. Construction lending, by its nature, entails additional risks compared to residential real estate lending, attributable primarily to the fact that funds are advanced based upon a security interest in a project which is not yet complete. Risk of loss on a construction loan depends largely upon whether the initial estimate of the property's value at completion of construction equals or exceeds the cost of the property construction. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed. The Bank addresses these risks through its underwriting policies and procedures and its experienced staff. Other Consumer: Home Equity Lines and Loans, Student Loans and Other Consumer . At December 31, 2022, th e Bank’s other consumer loans totaled $264.4 million, or 2.7% of the Bank’s total loan portfolio. Of the total consumer loan portfolio, home equity loans comprised $102.8 million; home equity lines of credit comprised $101.2 million; and student loans comprised $22.7 million. The Bank originates home equity loans typically as fixed-rate loans with terms ranging from five to 20 years. The Bank also offers variable-rate home equity lines of credit. Home equity loans and lines of credit are originated based on the applicant’s income and their ability to repay and are secured by a mortgage on the underlying real estate, typically owner-occupied, one-to-four family residences. Generally, the loan when combined with the balance of any applicable first mortgage lien, may not exceed 80% of the appraised value of the property at the time of the loan commitment. The Bank charges an early termination fee should a home equity loan or line of credit be closed within two or three years of origination. A borrower is required to make monthly payments of principal and interest, at a minimum of $50, based upon a 10-, 15- or 20-year amortization period. Certain home equity lines of credit require the payment of interest-only during the first five years with fully-amortizing payments thereafter. At December 31, 2022, these loans totaled $7.8 million , as compared to $12.1 million at December 31, 2021. Generally, the adjustable rate of interest charged is based upon the prime rate of interest (as published in the Wall Street Journal ), although the range of interest rates charged may vary from 1.0% below prime to 1.5% over prime. The loans have an 18% lifetime cap on interest rate adjustments. Other consumer loans may entail greater risk than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy, and insolvency laws may limit the amount that can be recovered on such loans. The Bank also originates lines of credit that are fully secured by the cash surrender value of whole life insurance policies. Underlying insurance companies must have a Moody’s rating of A1 or higher and/or an S&P Rating of A or higher. These lines are originated based on the value of the collateral and secured by an assignment of the whole life policy. Borrowers are subject to minimum credit scores and maximum debt to income ratios but the guidelines are less stringent than a mortgage or home equity loan/line as the line is fully secured by the underlying insurance policy. Interest rates charged are set at the time of origination and payments are interest-only based on the amount of the outstanding balance. Loan to values are limited to 95% of the cash surrender value of the whole life policy. Each line matures in 36 months and is subject to renewal at current rates and terms. The program was implemented in February 2022. At December 31, 2022, these loans totaled $35.2 million. Loan Approval Procedures and Authority . The Loan Committee of the Board of Directors (“Board”) establishes the loan approval policies of the Bank based on total exposure to the individual borrower. The Board has authorized the approval of loans by a minimum of two officers of the Bank or the Management Credit Committee, on a scale which requires approval by personnel with progressively higher levels of credit approval authority as the loan amount increases. Pursuant to applicable regulations, loans to one borrower generally cannot exceed 15% of the Bank’s unimpaired capital. 8 Due to the Bank’s acquisition activity, significant portions of the acquired loan portfolios were underwritten according to the underwriting standards and guidelines of the acquired banks. Acquired loans are evaluated under OceanFirst’s credit risk management policies during pre-closing due diligence and during post-closing risk rating reviews. In addition to internal credit reviews, the Bank has engaged an independent firm specializing in commercial loan reviews to examine a selection of commercial real estate and commercial and industrial loans, and provide management with objective analysis regarding the quality of these loans throughout the year. The independent firm reviewed at least 60% of the outstanding loan balances for the Bank’s commercial real estate and commercial and industrial loans during 2022. Their conclusion was that the Bank’s internal credit reviews are consistent with both Bank policy and general industry practice. Loan Servicing . Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections as required of mortgaged premises, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of defaults, making certain insurance and tax payments on behalf of the borrowers, and generally administering the loans. The Bank also services mortgage loans for others. All of the loans currently being serviced for others are loans which were originated by the Bank. At December 31, 2022, the Bank was servicing $51.7 million of loans for others. Delinquencies and Classified Assets . The steps taken by the Bank with respect to delinquencies vary depending on the nature of the loan and period of delinquency. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank sends the borrower a written notice of non-payment after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. The Bank may offer to modify the terms or take other forbearance actions which afford the borrower an opportunity to satisfy the loan terms. If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent at least 120 days or more, the Bank will either: (i) commence litigation to acquire the collateral, including foreclosure proceedings against any real property that secures the loan; or (ii) sell non-performing loans where foreclosure proceedings may or may not have been initiated. If a foreclosure action is instituted and the loan is not brought current, paid in full, or an acceptable workout accommodation is not agreed upon before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Foreclosure timelines in New Jersey are among the longest in the nation and have remained protracted over the past several years. The Bank classifies assets in accordance with its Classification of Assets and Allowance for Credit Losses Policy (“ACL Policy”), which considers certain regulatory guidelines and definitions. As part of this ACL Policy, the Senior Credit Officer of the Special Asset Group reviews and confirms the criticized and classified commercial loans report on a monthly basis. At December 31, 2022, the Bank h ad $50.8 million of assets classified as Substandard. At December 31, 2021, the Bank had $148.6 million of assets, including all other real estate owned (“OREO”), classified as Substandard. During 2022, the Company sold its remaining OREO and has no OREO at December 31, 2022. Assets which do not currently expose the Bank to sufficient risk to warrant classification but possess potential weaknesses, such as past delinquencies, are designated Special Mention. Special Mention assets totaled $48.2 million at December 31, 2022, as compared to $91.6 million at December 31, 2021. The decrease in Special Mention and Substandard assets were primarily due to the improved profitability of borrowers and their ability to service their loans. The decrease in special mention also included one commercial loan of $14.1 million, which was repaid in full during 2022. The decrease in substandard also included one commercial loan of $19.7 million, which was upgraded due to improved profitability in 2022. Non-Performing Loans and OREO. The following table sets forth information regarding non-accrual loans (“non-performing loans”) and OREO, including loans p urchased with credit deterioration (“PCD”) loans. The Bank obtained purchased credit impaired loans as part of i ts acquisitions of Colonial American Bank (“Colonial American”), Cape Bancorp, Inc. (“Cape”), Ocean Shore Holding Co. (“Ocean Shore”), Sun Bancorp, Inc. (“Sun”), and Capital Bank. These were reclassified as PCD loans as of January 1, 2020. Further, the Bank obtained PCD loans from Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”). PCD loans are accounted for at the purchase price or acquisition date fair value, with an estimate of expected credit losse s for groups of PCD loans with similar risk characteristics and individual PCD loans without similar characteristics, to arrive at an initial amortized cost basis. It is the policy of the Bank to cease accruing interest on loans 90 days or more past due or in the process of foreclosure. This table includes c ertain amounts and metrics previously reported that have been reclassified to conform to the current year’s presentation. 9 At December 31, 2022 2021 2020 (dollars in thousands) Non-performing loans (1) $ 23,265 $ 25,494 $ 46,863 OREO — 106 106 Non-performing assets (1) $ 23,265 $ 25,600 $ 46,969 Allowance for loan credit losses as a percent of total loans receivable (2) 0.57 % 0.57 % 0.78 % Allowance for loan credit losses as a percent of total non-performing loans (1) (2) 244.25 191.61 129.60 Non-performing loans as a percent of total loans receivable (1) 0.23 0.30 0.60 Non-performing assets as a percent of total assets (1) 0.18 0.22 0.41 (1) Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. Non-performing assets consist of non-performing loans and OREO. Amounts and ratios reported in the prior periods have been revised to conform with the current year’s presentation. (2) Loans acquired from prior bank acquisitions were recorded at fair value. The net unamortized credit and PCD marks on these loans, not reflected in the allowance for loan credit losses, were $11.4 million, $18.9 million, and $28.0 million at December 31, 2022, 2021, and 2020, respectively. Non-performing loans totaled $23.3 million at December 31, 2022, a decrease of $2.2 million as compared to December 31, 2021, primarily due to loans that were paid off and partly due to loans that returned to accrual status. The Company sold its remaining OREO during 2022 and has OREO assets of $0 and $106,000 at December 31, 2022, and 2021, respectively. Allowance for Credit Losses (“ACL”): Under the current expected credit loss (“CECL”) model, the ACL on financial assets is a valuation allowance estimated at each balance sheet date in accordance with generally accepted accounting principles (“GAAP”) that is deducted from the financial assets’ amortized cost basis to present the net amount expected to be collected on the financial assets. The CECL model also applies to certain off-balance sheet credit exposures. The Company estimates the loan ACL 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 loan ACL. A description of the methodology used in establishing the ACL is set forth in the section Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies, Allowance for Credit Losses . At December 31, 2022 and 2021, the Bank’s loan ACL as a percentage of total loans was 0.57%. The net unamortized credit and PCD marks on all acquired loans, not reflected in the allowance, was $11.4 million and $18.9 million at December 31, 2022 and 2021, respectively. The loan ACL as a percent of total non-performing loans was 244.25% at December 31, 2022, an increase from 191.61% in the prior year. The Bank will continue to monitor its allowance for loan credit losses as conditions dictate. 10 The following table sets forth activity in the Bank’s loan ACL for the periods set forth in the table: At or for the Year Ended December 31, 2022 2021 2020 (dollars in thousands) Balance at beginning of year $ 48,850 $ 60,735 $ 16,852 Charge-offs: Commercial real estate 70 410 14,850 Commercial and industrial 60 154 890 Residential real estate 56 254 3,200 Other consumer 387 213 1,244 Total charge-offs 573 1,031 20,184 Recoveries 913 1,492 1,325 Net (recoveries) charge-offs (340) (461) 18,859 Credit loss expense (benefit) 7,634 (12,346) 57,402 Impact of CECL adoption — — 2,701 Initial allowance for credit losses on PCD loans — — 2,639 Balance at end of year $ 56,824 $ 48,850 $ 60,735 The following table sets forth the net charge-offs/recoveries and the percent of net charge-offs/recoveries by loan category to average net loans outstanding for the periods indicated (dollars in thousands): At or for the Year Ended December 31, 2022 2021 2020 Net (Recoveries) Charge-offs Ratio of Net (Recoveries) Charge-offs to Average Loans Net (Recoveries)Charge-offs Ratio of Net (Recoveries) Charge-offs to Average Loans Net Charge-offs (Recoveries) Ratio of Net Charge-offs (Recoveries) to Average Loans Net (recoveries) charge-offs: Commercial real estate $ (155) — % $ 205 — % $ 14,743 0.18 % Commercial and industrial (95) — 30 — 744 0.01 Residential real estate (100) — (98) — 2,317 0.03 Other consumer 10 — (598) (0.01) 1,055 0.01 Total net (recoveries) charge-offs (340) — % (461) (0.01) % 18,859 0.23 % Average net loans outstanding during the year $ 9,323,619 $ 7,921,611 $ 8,122,631 The net recoveries for the year ended December 31, 2022 and 2021 was primarily due to improved credit quality and successful recovery of previously charged-off balances. The net charge-offs for the year ended December 31, 2020 was primarily due to charge-offs of $14.6 million related to the sale of higher risk commercial real estate loans and $3.3 million of charge-offs related to the sale of under-performing residential and consumer loans. The Company executed these loan sales during the COVID-19 pandemic as part of its strategy to limit exposure to credit risk, accelerate the resolution of potential credit losses on higher risk credit exposures, and minimize the operational impact associated with potential litigation and foreclosure proceedings. 11 The following table sets forth the Bank’s percent of loan ACL by category to the total loan ACL at December 31, 2022, 2021 and 2020, and the percent of loans to total loans in each of the categories listed at the dates indicated (dollars in thousands): At December 31, 2022 2021 2020 Amount Percent of ACL to Total ACL Percent of Loans to Total Loans Amount Percent of ACL to Total ACL Percent of Loans to Total Loans Amount Percent of ACL to Total ACL Percent of Loans to Total Loans Commercial real estate $ 25,493 44.86 % 62.20 % $ 31,388 64.24 % 63.01 % $ 41,757 68.76 % 59.43 % Commercial and industrial 5,695 10.02 6.27 5,039 10.32 5.21 5,390 8.87 6.03 Residential real estate 24,530 43.17 28.86 11,155 22.84 28.76 11,818 19.46 30.19 Other consumer 1,106 1.95 2.67 1,268 2.60 3.02 1,770 2.91 4.35 Total $ 56,824 100.00 % 100.00 % $ 48,850 100.00 % 100.00 % $ 60,735 100.00 % 100.00 % Investment Activities The Bank views its securities portfolio primarily as a source of income and liquidity. Interest and principal payments generated from securities provide a source of liquidity to fund loans and meet short-term cash needs. In times of reduced loan demand, the securities portfolio can provide an alternative source of income. The portfolio is also used to provide collateral for qualified deposits and borrowings and to manage interest rate risk. The investment policy is overseen by the Board of Directors and generally limits investments to government and federal agency obligations, agency and non-agency mortgage-backed securities, municipal, corporate, and asset-backed securities. The Company’s investment policy mirrors that of the Bank except that it allows for the purchase of certain other debt, preferred stock, and equity securities in limited amounts. The Board of Directors has delegated authority to implement the investment policy to the Company and Bank’s Investment Committees under the oversight of the Asset Liability Committee. Day-to-day management of the portfolio rests with the Treasurer. Classification of securities are determined by management at the time of purchase. If the Bank has the intent and the ability at the time of purchase to hold debt securities until maturity, they may be classified as held-to-maturity. Debt securities identified as held-to-maturity are carried at cost, adjusted for amortization of premium and accretion of discount, which are recognized as adjustments to interest income. Debt securities to be held for indefinite periods of time, but not necessarily to maturity are classified as available-for-sale. Such debt securities are carried at an estimated fair value and unrealized gains and losses, net of tax effect, are included as a separate component of stockholders’ equity. Refer to Note 4 Securities, to the Consolidated Financial Statements. The majority of the Bank’s residential and commercial mortgage-backed securities are issued or guaranteed by an agency of the U.S. government including Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), and Government National Mortgage Association (“GNMA”). Agency mortgage-backed securities along with obligations issued directly by the U.S. government and its agencies entail a lesser degree of risk than loans made by the Bank and most other securities by virtue of the guarantees that back them, that they require less capital under risk-based capital rules, are generally more liquid, and are more easily used to collateralize borrowings or other obligations of the Bank. Each of the U.S. government, agency, and agency guaranteed obligations are rated AA+ by Standard and Poor’s and Aaa by Moody’s. The municipal portfolio provides tax-advantaged yield and diversification of risk and is generally comprised of general obligation and revenue bonds issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways, sewer systems, hospitals, or other critical infrastructure. The asset-backed securities portfolio provides attractive yields and diversification of risk and is largely comprised of senior classes of collateralized loan obligations that invest in U.S. based broadly syndicated and middle market loans. The corporate debt securities portfolio is comprised of U.S. financial services and industrial companies that exhibit strong credit characteristics and provide attractive returns. The Bank may occasionally invest in non-agency residential or commercial mortgage-backed securities that are rated investment grade depending on credit and return on investment profiles. The vast majority of municipal, asset-backed, corporate, and other mortgage-backed securities are issued by entities with current credit ratings by one of the nationally recognized statistical rating organizations that are considered investment grade. See Note 4 Securities, to the Consolidated Financial Statements. 12 The ta ble below sets forth certain information regarding the amortized cost, weighted average yield, and contractual maturities, excluding scheduled principal amortization, of the Bank’s debt securities as of December 31, 2022. The weighted average yield is calculated based on the yield to maturity weighted for the size of each debt security over the entire portfolio of debt securities. The weighted average yields on tax-exempt obligations have been computed on a tax-equivalent basis. Other investments consist of mutual funds that do not have a contractual maturity date and are excluded from the table. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2022 Total One Year or Less Amortized Cost Weighted Average Yield More than One Year to Five Years Amortized Cost Weighted Average Yield More than Five Years to Ten Years Amortized Cost Weighted Average Yield More than Ten Years Amortized Cost Weighted Average Yield Amortized Cost Estimated Fair Value (dollars in thousands) U.S. government and agency obligations $ 21,591 1.62 % $ 38,680 1.53 % $ 27,377 1.41 % $ — — % $ 87,648 $ 80,014 State, municipal, and sovereign debt obligations 18,497 1.76 110,725 1.57 60,734 1.97 70,293 2.34 260,249 235,355 Corporate debt securities (1) 1,000 3.10 17,721 2.88 38,043 3.26 9,057 2.91 65,821 61,667 Asset-backed securities (2) — — — — 98,800 6.42 197,422 6.54 296,222 276,873 Mortgage-backed securities: Agency residential 346 2.03 23,144 2.03 103,999 2.62 722,496 2.44 849,985 767,194 Agency commercial — — 3,195 0.78 108,896 1.65 30,642 3.59 142,733 123,550 Non-agency commercial — — 18,459 2.87 — — 6,851 4.02 25,310 23,036 Total mortgage-backed securities $ 346 2.03 % $ 44,798 2.29 % $ 212,895 2.12 % $ 759,989 2.50 % $ 1,018,028 $ 913,780 Total debt securities $ 41,434 1.72 % $ 211,924 1.82 % $ 437,849 3.12 % $ 1,036,761 3.26 % $ 1,727,968 $ 1,567,689 (1) $50.6 million of the Bank’s corporate debt securities carry interest rates which adjust to a spread over London Inter-Bank Offered Rate (“LIBOR”) on a quarterly basis and are expected to convert to a spread over Secured Overnight Financing Rate (“SOFR”) upon LIBOR cessation. (2) All of the Bank’s asset-backed securities carry interest rates which adjust to a spread over LIBOR or SOFR on a quarterly basis. Those referencing LIBOR are expected to convert to a spread over SOFR upon LIBOR cessation. Equity Investments . At December 31, 2022, and 2021, the Company held equity investments of $102.0 million and $101.2 million, respectively. The equity investments are primarily comprised of select financial services institutions’ preferred and common stocks and funds investing in those securities. Sources of Funds General . 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 discount window. Deposits . The Bank offers a variety of deposit accounts with a range of interest rates and terms to retail, government, and business customers. The Bank’s deposits consist of money market accounts, savings accounts, interest-bearing checking accounts, non-interest-bearing accounts, and time deposits, including brokered deposits. The flow of deposits is influenced significantly by general economic conditions, prevailing interest rates, and competition. The Bank’s deposits are obtained predominantly from the areas in which its branch offices are located. The Bank relies on its community-banking focus, stressing customer service and long-standing relationships with its customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions could significantly affect the Bank’s ability to attract and retain deposits. 13 At December 31, 2022 and 2021, the Bank had $6.28 billion and $5.14 billion, respectively, of total uninsured deposits (in excess of the Federal Deposit Insurance Corporation limit). At those dates, the Bank had no deposits that were otherwise uninsured. At December 31, 2022, the Bank had $117.7 million in time deposits in amounts of $250,000 or more maturing as follows: Maturity Period Time Deposits Weighted Average Rate (dollars in thousands) Three months or less $ 11,285 0.99 % Over three through six months 9,420 0.53 Over six through twelve months 51,931 2.92 Over twelve months 45,112 1.87 Total $ 117,748 2.14 % The following table sets forth the distribution of the Bank’s average deposit accounts and the average rate paid on those deposits for the periods indicated: For the Year Ended December 31, 2022 2021 2020 Average Balance Percent of Total Average Deposits Average Rate Paid Average Balance Percent of Total Average Deposits Average Rate Paid Average Balance Percent of Total Average Deposits Average Rate Paid (dollars in thousands) Interest-bearing checking accounts $ 4,063,716 40.98 % 0.28 % $ 3,878,465 40.21 % 0.35 % $ 3,168,889 35.76 % 0.61 % Non-interest-bearing accounts 2,319,657 23.40 — 2,429,547 25.19 — 2,031,100 22.93 — Money market deposit accounts 764,837 7.72 0.29 769,157 7.98 0.14 677,554 7.65 0.43 Savings accounts 1,597,648 16.12 0.05 1,581,472 16.40 0.04 1,449,982 16.37 0.17 Time deposits 1,167,499 11.78 1.43 985,328 10.22 1.02 1,531,857 17.29 1.53 Total average deposits $ 9,913,357 100.00 % 0.31 % $ 9,643,969 100.00 % 0.26 % $ 8,859,382 100.00 % 0.55 % Borrowings . The Bank also obtains advances from the FHLB and other sources for cash management and interest rate risk management purposes or as an alternative to deposits. Advances are collateralized primarily by certain of the Bank’s mortgage loans and debt securities and secondarily by the Bank’s investment in capital stock of the FHLB. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time-to-time in accordance with the policies of the FHLB. At December 31, 2022, the Bank had $1.21 billion of outstanding advances from the FHLB. The Bank also had outstanding municipal letters of credit issued by the FHLB used to secure government deposits. At December 31, 2022, these municipal letters of credit totaled $2.00 billion. The Bank also borrows funds using securities sold under agreements to repurchase with customers. Under this form of borrowing specific securities are pledged as collateral to secure the borrowing. These pledged securities are held by a third-party custodian. At December 31, 2022, the Bank had borrowed $69.1 million through securities sold under agreements to repurchase with customers. The Bank can also borrow from the Federal Reserve Bank of Philadelphia under its primary credit program. Primary credit is available on a short-term basis, typically overnight, at a rate above the Federal Open Market Committee’s Federal funds target rate. All extensions of credit by the Federal Reserve Bank of Philadelphia must be secured. At December 31, 2022, the Bank had no borrowings outstanding with the Federal Reserve Bank of Philadelphia. 14 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 the Bank’s position as the premier community banking franchise in central and southern New Jersey, strengthened its presence in the major metropolitan areas of Philadelphia and New York, grown business lines, expanded its geographic footprint, and improved financial performance. The Company will continue to evaluate potential acquisition opportunities to further create stockholder value. Subsidiary Activities At December 31, 2022, the Bank owned all or a majority interest in three direct subsidiaries: • OceanFirst REIT Holdings, Inc., a Delaware corporation, was established in 2007 as a wholly-owned subsidiary of the Bank and now acts as the holding company for OceanFirst Management Corp, a New York corporation, which was organized in 2016 for the purpose of holding and managing investment securities, including the stock of OceanFirst Realty Corp. OceanFirst Realty Corp., a Delaware corporation, was established in 1997 and invests in qualifying mortgage loans and is intended to qualify as a real estate investment trust, which may, among other things, be utilized by the Company to raise capital in the future. • Casaba Real Estate Holding Corporation, a New Jersey corporation, was acquired by the Bank as a wholly-owned subsidiary as part of its acquisition of Cape in 2016. This subsidiary is maintained for the purpose of taking legal possession of certain repossessed collateral for resale to third parties. • Country Property Holdings Inc., a New York corporation, was acquired by the Bank as a wholly-owned subsidiary as part of its acquisition of Country Bank in 2020. This subsidiary is maintained for the purpose of taking legal possession of certain repossessed collateral for resale to third parties. In addition to the Bank, the Company holds OceanFirst Risk Management, Inc. as a direct subsidiary. OceanFirst Risk Management Inc. is a Nevada captive insurance company that insures certain risks relating to the business of the Bank and the Company. The Company also holds a 60% majority controlling interest in Trident Abstract Title Agency, LLC, a New Jersey corporation, which was acquired in 2022. This subsidiary provides commercial and residential title services throughout New Jersey, and through strategic alliances can also service clients’ title insurance needs outside of New Jersey. Furthermore, the Company holds the following statutory business trusts: OceanFirst Capital Trust I, OceanFirst Capital Trust II, OceanFirst Capital Trust III, Sun Statutory Trust VII, Sun Capital Trust VII, Sun Capital Trust VIII, and Country Bank Statutory Trust I, collectively known as the “Trusts”. All of the Trusts are incorporated in Delaware and were formed for the issuance of trust preferred securities. Human Capital OceanFirst’s long-term growth and success depends on its ability to attract, develop and retain a high-performing and diverse workforce. The Company strives to provide a work environment that promotes collaboration, productivity, and employee engagement, which in turn drives both employee and customer success, as well as benefits the communities. The Company’s Board of Directors and Executive Team oversee the strategic management of the Company’s human capital resources and the Human Resources department manages the day-to-day of those resources. Employee profile As of December 31, 2022, the Bank had 896 full-time employees, 43 part-time employees, and 19 commissioned employees, for a total of 958 employees. In addition, approximately 68% of the Bank’s employees are female and 32% are male, and the average tenure was 7.6 years as of December 31, 2022. Total rewards As part of the Bank’s compensation philosophy, market competitive total rewards programs are maintained for employees to attract and retain superior talent. In addition to competitive base wages, additional programs include annual bonus compensation opportunities, a Bank Employee Stock Ownership Plan (“ESOP”), a Bank matched 401(k) Plan, health and welfare benefits, flexible spending accounts, paid time off, family leave, and employee assistance programs. Some employees also receive grants of equity awards in the Company’s stock and non-equity awards that mirror the Company’s stock performance. 15 In addition, the Bank promotes health and wellness by encouraging work-life balance, offering flexible work schedules and sponsoring various programs, focusing on mental, emotional, social, intellectual, and spiritual health. Talent and Promoting Diversity A core tenet of the Bank’s talent philosophy is to both develop talent from within and supplement with external hires. Whenever possible, the Bank seeks to fill positions by promotion and transfer from within the organization. The Bank’s talent acquisition team uses internal and external resources to recruit highly skilled and talented candidates; employee referrals are also encouraged. The Company is dedicated to recruitment and career development practices that support its employees and promotes diversity in its workforce at all levels of the Company. The Company is committed to having a workforce that reflects the communities in which it serves. Partnerships are in place with several sources to assist in attracting diverse talent from a broad population, including African American, Asian American, and Latino chamber affiliations. In addition, career opportunities are shared with colleges and universities with diverse student bodies. The Internship program and the EDGE program (an entry level development program) also serve as a pipeline of diverse talent for full time employment. Other available tools are also utilized to connect with prospective new hires. As of December 31, 2022, 19.2% of the Bank’s employees were persons of color. Following a multi-pronged recruiting strategy, which includes sourcing diverse candidate pools, new hires participate in an onboarding program which includes an introduction to the Bank’s culture, policies, and procedures. New employees are assigned an ambassador, who extends the integration process beyond the typical orientation experience. Retention strategies include espousing a culture that inspires loyalty and trust through ongoing communication of strategic initiatives and executive roundtable conversations, in addition to the benefits mentioned above in Total rewards . The Bank’s leadership development programs and opportunities offered through OceanFirst Bank University help ensure that motivated individuals have the opportunity for continuous improvement. Employees each maintain a professional development action plan and participate in regular evaluation and growth opportunities. The Bank’s peer recognition program provides the space for ongoing recognition and celebration of accomplishments. This approach has yielded loyalty and commitment from employees which in turn grows the business, products, and customers. This approach has also added new employees and ideas, which support a continuous improvement mindset and the goals of a diverse and inclusive workforce. The Bank strives to promote inclusion through defined Company values and behaviors. With the support from the Board of Directors, the Bank continues to explore additional diversity, equity, inclusion, and belonging efforts through multiple approaches to inclusion: candidates, employees, and the marketplace. The ongoing diversity and inclusion initiatives support a goal that everyone throughout the Company is engaged in creating an inclusive workplace. The Bank is focused on sourcing and hiring with fairness and equitable approaches, creating an environment where all employees can develop and thrive. REGULATION AND SUPERVISION General The Company is a bank holding company (“BHC”) under Section 3 of the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As a bank holding company, the Company is subject to the requirements of the BHC Act, including required approvals for investments in or acquisitions of banking organizations, or entities involved in activities that are deemed closely related to banking, capital adequacy standards, and limitations on nonbanking activities. The Company is registered with the FRB and is required by Federal law to file reports with, and comply with the rules and regulations of the FRB. The Bank is a member of the FHLB System and, with respect to deposit insurance, of the Deposit Insurance Fund (“DIF”) managed by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to extensive regulation, examination, and supervision by the OCC, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to consummating certain transactions such as mergers with, or acquisitions of, other insured depository institutions. The OCC conducts periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors and to ensure the safe and sound operation of the Bank. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate allowance for credit losses for regulatory purposes. 16 In addition, the Company elected to become a financial holding company under the Gramm-Leach Bliley Act (the “GLBA”) amendments to the BHC Act. Financial holding companies, and the nonbank companies under their control, are permitted to engage in activities considered financial in nature or incidental to financial activities and, if the FRB determines that they pose no risk to the safety or soundness of depository institutions or the financial system in general, activities that are considered complementary to financial activities. The banking industry is highly regulated. Both the scope of the laws and regulations and the intensity of supervision to which the Company and the Bank are subject to have increased in recent years, in response to the financial crisis as well as other factors such as technological and market changes. Many of these changes have occurred as a result of the Dodd-Frank Act and its implementing regulations. In addition, in 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) was enacted. This legislation includes targeted amendments to the Dodd-Frank Act and other financial services laws. Statutory and regulatory controls increase a BHC’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Company or the Bank. It is intended only to briefly summarize some material provisions. The description of statutory provisions and regulations applicable to national banks and BHCs set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company, is subject to change and is qualified in its entirety by reference to the actual laws and regulations involved. The Dodd-Frank Act . The Dodd-Frank Act significantly changed the bank regulatory structure and affects the lending, deposit, investment, compliance, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act created the CFPB with broad p owers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. At December 31, 2022, the Bank’s total assets were $13.10 billion and, therefore, the Bank is subject to CFPB supervision and examination of compliance with Federal consumer protection laws. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments. The Dodd-Frank Act requires originators to make a reasonable and good faith determination based on documented information that a borrower has a reasonable ability to repay a particular mortgage loan over the long term and establishes certain protections from liability under this requirement for “qualified mortgages”. The Ability-To-Repay/Qualified Mortgage Rule defines several categories of “qualified mortgage” loans, which obtain certain protections from liability. For further discussion, refer to Risk Factors – Risks Related to Lending Activities – The Dodd-Frank Act imposes obligations on originators of residential mortgage loans . The Dodd-Frank Act also requires that the amount of any interchange fee received by a debit card issuer with respect to debit card transactions be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Rules adopted by the FRB to implement these requirements limit interchange fees per debit card transaction collected by banks with assets of $10 billion or mor e. Under the temporary relief provisions of a joint rule published by the OCC, the FDIC, and the FRB, the Bank received relief from Dodd-Frank limitations on debit card interchange fees collected by banks with assets of $10 billion or more. However, the Bank was subject to reduced interchange fees beginning in July 2022. In addition, market forces may result in reduced fees charged by all issuers, regardless of asset size, which may result in reduced revenues for the Bank. For the year ended December 31, 2022, the Bank’s revenues from interchange fees were $8.3 million, a decrease of $4.4 million from 2021, due to limitation on debit card interchange fees and the 2022 average interchange fee per transaction was twenty-nine cents ($0.29). The Dodd-Frank Act mandates that institutions with more than $10 billion in assets clear all eligible dealer swaps through a futures commission merchant to a central counterparty clearing house. The Bank has entered into relationships with a futures commission merchant and two central counterparty clearing houses. Economic Growth, Regulatory Relief and Consumer Protection Act . EGRRCPA was intended to provide regulatory relief to midsized and regional banks. While many of its provisions are aimed at larger institutions, such as raising the threshold to be considered a systemically important financial institution to $250 billion in assets from $50 billion in assets, many of its provisions provide regulatory relief to those institutions with $10 billion or more in assets. Among other things, the EGRRCPA increased the asset threshold for depository institutions and holding companies to perform stress tests required under Dodd Frank from $10 billion to $250 billion in total consolidated assets, and raised the threshold for the requirement that publicly 17 traded holding companies have a risk committee from $10 billion in consolidated assets to $50 billion in consolidated assets. In addition, the EGRRCPA limited the definition of loans that would be subject to the higher risk weighting applicable to high volatility commercial real estate. Volcker Rule . Under the provisions of the Volcker Rule, insured depository institutions and companies affiliated with insured depository institutions (collectively, “banking entities”) are prohibited from: (i) engaging in short-term proprietary trading for their own account; and (ii) having certain investments in, and relationships with, hedge funds, private equity funds and similar funds, subject to certain exemptions, in each case as the applicable terms are defined in the Volcker Rule and the implementing regulations. The implementing regulations also require banking entities to establish and maintain a compliance program to ensure adherence with the Volcker Rule requirements. Bank Holding Company Regulation The Company is a BHC and is supervised by the FRB and is required to file reports with the FRB and provide such additional information as the FRB may require. The Company and its subsidiaries are subject to examination by the FRB. FRB regulations provide that a BHC is expected to act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent those regulations. Holding Company Consolidated Capital Requirements . The Dodd-Frank Act requires capital rules and the application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. In addition to making bank holding companies subject to the same capital requirements as their bank subsidiaries, these provisions (often referred to as the Collins Amendment to the Dodd-Frank Act) were also intended to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. At December 31, 2022 , the Company exceeded all regulatory capital requirements currently applicable. The following table presents the Company’s capital position at December 31, 2022 : Capital As of December 31, 2022 Actual Capital Required Capital Excess Amount Actual Percent Required Percent OceanFirst Financial Corp: (dollars in thousands) Tier 1 capital (to average assets) $ 1,150,690 $ 488,297 $ 662,393 9.43 % 4.00 % Common equity Tier 1 (to risk-weighted assets) 1,021,774 720,641 301,133 9.93 7.00 (1) Tier 1 capital (to risk-weighted assets) 1,150,690 875,064 275,626 11.18 8.50 (1) Total capital (to risk-weighted assets) 1,336,652 1,080,961 255,691 12.98 10.50 (1) (1) Includes the Capital Conservation Buffer of 2.50%. Dividends . The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality, and overall financial condition. Regulatory pressures to reclassify and charge off loans and to establish additional credit loss reserves can have the effect of reducing current operating earnings and thus impacting an institution’s ability to pay dividends. Further, regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the Company’s net income for the past four quarters, net of dividends previously paid over that period is insufficient to fully fund the dividend, the proposed dividend exceeds earnings for the period for which it is being paid, or the Company’s overall rate of earnings retention is inconsistent with the Company’s capital needs and overall financial condition. The guidance also provides for prior consultation with supervisory staff for material increases in the amount of a banking holding company’s common stock dividend. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the FRB supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction in the amount of such instruments outstanding from the beginning of the quarter in which the redemption or repurchase occurred compared with the end of such quarter. These regulatory policies may affect the ability of the Company to pay dividends, repurchase shares of common stock, or otherwise engage in capital distributions. 18 Acquisition of the Company . Under the Change in Bank Control Act, no person may acquire control of a bank holding company, such as the Company, unless the FRB has been given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquiror and the competitive effects of the acquisition. Control, as defined for this purpose, means ownership, control of power to vote 25% or more of any class of voting stock. There is a rebuttable presumption of control upon the acquisition of 10% or more of a class of voting stock if the holding company involved has its shares registered under the Securities Exchange Act of 1934, or if no other persons will own, control or hold the power to vote a greater percentage of that class of voting security after the acquisition. Financial Holding Company Status When the Bank converted to a national bank charter and the Company became a BHC, the Company elected to become a financial holding company. Financial holding companies may engage in a broader scope of activities than a BHC. In addition, financial holding companies may undertake certain activities without prior FRB approval. A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. Financial in nature activities include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and insurance agency activities; merchant banking; and activities that the FRB determines to be financial in nature or incidental to a financial activity or which are complementary to a financial activity and do not pose a safety and soundness risk. A financial holding company that engages in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity. Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system. A financial holding company generally may acquire a company (other than a BHC, bank, or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature without prior approval from the FRB. Prior FRB approval is required, however, before the financial holding company may acquire control of more than 5% of the voting shares or substantially all of the assets of a BHC, bank, or savings association. In addition, under the FRB's merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company's controlled depository institutions. If any subsidiary bank of a financial holding company ceases to be “well-capitalized” or “well-managed” and fails to correct its condition within the time period that the FRB specifies, the FRB has authority to order the financial holding company to divest its subsidiary banks. Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company. If any subsidiary bank of a financial holding company receives a rating under the Community Reinvestment Act (the “CRA”) of less than “satisfactory,” then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks, or savings associations until the rating is raised to “satisfactory” or better. Regulation of Bank Subsidiary Business Activities . The operations of the Bank are subject to requirements and restrictions under federal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted, and limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. Approval of the OCC is required for branching, bank mergers in which the continuing bank is a national bank, and in connection with certain fundamental corporate changes affecting the Bank. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, as implemented by Regulation W, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries. Capital Requirements . Federal regulations require banks to maintain minimum levels of capital including: a common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a Tier 1 capital to risk-weighted assets ratio of 6.0%, a total capital to risk-weighted assets of 8.0%, and a Tier 1 capital to total assets leverage ratio of 4.0%. 19 In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets. Unrealized gains and losses on certain available-for-sale securities are included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The Bank has exercised the opt-out. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, federal regulators take into consideration, not only these numeric factors, but qualitative factors as well, and have the authority to establish higher capital requirements for individual banks where necessary. In addition to establishing the minimum regulatory capital requirements, regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.50% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. Both the Bank and the Company are in compliance with the capital conservation buffer requirements applicable to them. The federal banking agencies, including the OCC, have also adopted regulations to require an assessment of an institution’s exposure to declines in the ec onomic value of a bank’s capital due to changes in interest rates when assessing the bank’s capital adequacy. Under such a risk assessment, examiners evaluate a bank’s capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. Institutions with significant interest rate risk may be required to hold additional capital. According to the federal banking agencies, applicable considerations include: quality of the bank’s interest rate risk management process; the overall financial condition of the bank; and the level of other risks at the bank for which capital is needed. At December 31, 2022, the Bank exceeded all regulatory capital requirements currently applicable . The following table presents the Bank’s capital position at December 31, 2022: Capital As of December 31, 2022 Actual Capital Required Capital Excess Amount Actual Percent Required Percent Bank: (dollars in thousands) Tier 1 capital (to average assets) $ 1,122,946 $ 488,033 $ 634,913 9.20 % 4.00 % Common equity Tier 1 (to risk-weighted assets) 1,122,946 713,194 409,752 11.02 7.00 (1) Tier 1 capital (to risk-weighted assets) 1,122,946 866,021 256,925 11.02 8.50 (1) Total capital (to risk-weighted assets) 1,183,705 1,069,791 113,914 11.62 10.50 (1) (1) Includes the Capital Conservation Buffer of 2.50%. Prompt Corrective Action. Federal law requires, among other things, that the federal bank regulatory authorities take prompt corrective action with respect to insured depository institutions that do not meet minimum capital requirements. For these purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The FDIC’s regulations define the five categories as follows: An institution is classified as well capitalized if: • its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet a specific capital level; and • its ratio of common equity tier 1 capital to risk-weighted assets is at least 6.5%; and • its ratio to Tier 1 capital to risk-weighted assets is at least 8%; and • its ratio of total capital to risk-weighted assets is at least 10%. 20 An institution is classified as adequately capitalized if: • its ratio of Tier 1 capital to total assets is at least 4%; and • its ratio of common equity tier 1 capital to risk-weighted assets is at least 4.5%; and • its ratio to Tier 1 capital to risk-weighted assets is at least 6%; and • its ratio of total capital to risk-weighted assets is at least 8%. An institution is classified as undercapitalized if: • its leverage ratio is less than 4%; and • its ratio of common equity tier 1 capital to risk-weighted assets is less than 4.5%; and • its ratio to Tier 1 risk based capital is at less than 6%; and • its ratio of total capital to risk-weighted assets is at least 8%. An institution is classified as significantly undercapitalized if: • its leverage ratio is less than 3%; or • its ratio of common equity tier 1 capital to risk-weighted assets is less than 3%; or • its ratio to Tier 1 risk based capital is at less than 4%; or • its total risk-based capital is less than 6%. An institution that has a tangible capital to total assets ratio equal to or less than 2% is deemed to be critically undercapitalized. The regulations provide that a capital restoration plan must be filed with the OCC within 45 days of the date a national bank receives notice that it is “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Any holding company for the bank required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5.0% of the bank’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the bank to adequately capitalized status. Various restrictions, including as to growth and capital distributions, also apply to “undercapitalized” institutions. If an “undercapitalized” institution fails to submit an acceptable capital plan, it is treated as “significantly undercapitalized.” “Significantly undercapitalized” institutions must comply with one or more additional restrictions including, but not limited to, an order by the OCC to sell sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cease receipt of deposits from correspondent banks, or dismiss officers or directors and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive. Based on the regulatory guidelines, the Bank satisfies the criteria to be well-capitalized at December 31, 2022. Insurance of Deposit Accounts . Deposit accounts at the Bank are insured by the DIF of the FDIC up to a maximum of $250,000 per separately insured depositor. The FDIC charges insured depository institutions premiums to maintain the DIF. Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower FDIC assessments. Assessments for institutions with $10 billion or more of assets are primarily based on a scorecard approach by the FDIC, including factors such as examination ratings and modeling measuring the institution’s ability to withstand asset-related and funding-related stress and potential loss to the DIF should the bank fail. As a result of the increase in assessment rates, described below, the assessment range (inclusive of possible adjustments specified by the regulations) for institutions with greater than $10 billion of total assets is 3.5 to 42 basis points. The FDIC has authority to increase insurance assessments. The FDIC adopted a final rule in October 2022 to increase initial base deposit insurance assessment rates by two basis points beginning in the first quarterly assessment period of 2023. Any significant increases would have an adverse effect on the Bank’s operating expenses and results of operations. The Bank cannot predict what assessment rates will be in the future. The FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition, or violation that might lead to termination of deposit insurance. The total deposit insurance assessment expenses incurred in 2022 and 2021 were $5.9 million and $4.8 million, respectively. Loans to One Borrower . Subject to certain exceptions, a national bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 21 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral, which generally does not include real estate. As of December 31, 2022, the Bank was in compliance with the loans-to-one borrower limitations. Limitation on Capital Distributions . Applicable regulations impose limitations upon all capital distributions by a banking institution, including cash dividends, payments to repurchase its shares and payments to stockholders of another institution in a cash-out merger. Under the regulations, an application to and the approval of the OCC, is required prior to any capital distribution if the total capital distributions for the calendar year exceeds net income for that year plus the amount of retained net income for the preceding two years. A national bank may not pay a dividend if it would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OCC. A national bank may be further limited in payment of cash dividends if it does not maintain the capital conservation buffer. In the event the Bank’s capital fell below its regulatory requirements or the OCC notified that it was in need of more than normal supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the OCC could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OCC determines that such distribution would constitute an unsafe or unsound practice. If the Bank is unable for any reason to pay a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future, pay a dividend at the same rate as historically paid, be able to repurchase stock, or to meet current debt obligations. In addition, capital requirements made applicable to the Company as a result of the Dodd-Frank Act and Basel III may limit the Company’s ability to pay dividends or repurchase stock in the future. The Company may also be required to receive non-objection letters prior to performing any actions that may impact the Company’s capital. Assessments . Banking institutions are required to pay assessments to fund regulatory operations. The assessments, paid on a semi-annual basis, are based upon the institution’s total assets, including consolidated subsidiaries as reported in the Bank’s latest quarterly regulatory report, as well as the institution’s regulatory rating and complexity component. The assessments paid by the Bank totaled $1.4 million for the years ended December 31, 2022 and 2021. Transactions with Related Parties . The Bank’s authority to engage in transactions with affiliates (e.g., any company that controls or is under common control with an institution, including the Company and its non-bank subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the bank. The aggregate amount of covered transactions with all affiliates is limited to 20% of the bank’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, banks are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no bank may purchase the securities of any affiliate other than a subsidiary. Community Reinvestment Act and Fair Lending Laws. All national banks have a responsibility under the CRA and related federal regulations to help meet the credit needs of their communities, including low- and moderate- income neighborhoods. In connection with its examination of a national bank, the OCC is required to evaluate and rate the bank’s record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices based on the characteristics specified in those statutes. A national bank’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on certain of its activities such as branching or mergers. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. On May 5, 2022, the OCC, FRB and FDIC released a notice of proposed rule making to strengthen and modernize the CRA regulations and framework. Federal Home Loan Bank System The Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional FHLBs. Each FHLB provides member institutions with a central credit facility. The Bank, as a member of the FHLB New York is required to acquire and hold shares of capital stock in that FHLB in a specified amount. The Bank was in compliance with this requirement with an investment in FHLB New York stock at December 31, 2022 and 2021 of $69.4 million and $13.5 million, respectively. Federal Reserve System The FRB regulations require depository institutions to maintain reserves against their transaction accounts (primarily interest-bearing checking and regular checking accounts). Effective March 26, 2020, the FRB reduced reserve requirement ratios to zero, effectively eliminating the requirements. The FRB indicated that it has no plans to re-impose reserve requirements but could in the future if conditions warrant. 22 In addition, as a national bank, the Bank is required to hold capital stock of the Federal Reserve Bank of Philadelphia. The required shares may be adjusted up or down based on changes to the Bank's common stock and paid-in surplus. The Bank is in compliance with these requirements, with a total investment in Federal Reserve Bank of Philadelphia stock of $39.5 million and $39.3 million at December 31, 2022 and 2021, respectively. The Federal Reserve Bank of Philadelphia pays dividends on the common stock held by the Bank. However, the level of dividends is reduced for financial institutions that exceed a certain asset size. For 2022, the asset level is $11.23 billion, and financial institutions whose assets exceed that level receive dividends generally equal to the rate of the 10-year Treasury note, as opposed to 6% for smaller financial institutions. Such reduction has significantly decreased the dividends received from the Federal Reserve Bank of Philadelphia, which totaled $1.3 million for the year ended December 31, 2022.