# OCEANFIRST FINANCIAL CORP (OCFC) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OCEANFIRST FINANCIAL CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1004702/000100470222000022/ocfc-20211231.htm
Accession: 0001004702-22-000022
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OCFC/
All MD&A years: /company/OCFC/mda/
Next year: /company/OCFC/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

OceanFirst Financial Corp. (the “Company”) has been the holding company for OceanFirst Bank N.A. (the “Bank”) since it acquired the stock of the Bank upon the Bank’s Conversion.

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

The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on the Company’s interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, gain on sale of loans and on equity investments, and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, federal deposit insurance and regulatory assessments, data processing, check card processing, professional fees, and other general and administrative expenses. The Company’s results of operations are significantly affected by competition, general economic conditions including levels of unemployment and real estate values as well as changes in market interest rates, government policies, and actions of regulatory agencies.

Impact of COVID-19

On March 16, 2020, the Company announced a series of actions intended to help mitigate the impact of the COVID-19 pandemic on its customers, employees and communities. The Company began offering its Borrower Relief Programs to address the needs of customers who were current on their loan payments as of either December 31, 2019 or the date of the modification. In keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, these loan deferrals were not considered troubled debt restructured (“TDR”) loans at December 31, 2021 and were not be reported as past due during the deferral period. As of December 31, 2021, 99.6% of total loans complied with pre-COVID-19 terms.

Further, due to conditions caused by COVID-19, appraisals ordered in the current environment may not be indicative of the underlying loan collateral value. As such, the Company may require multiple valuation approaches (sales comparison approach, income approach, or cost approach), as applicable. The Company will assess the individual facts and circumstances of COVID-19 related loan downgrades and, if a new appraisal is not necessary, an additional discount may be applied to an existing appraisal.

The Company also accepted and processed applications for loans under the Paycheck Protection Program (“PPP”), which was originally established under the CARES Act. At December 31, 2021, $22.9 million in PPP loans and $731,000 in deferred fees remained on the consolidated statements of financial condition. There were $73.0 million of PPP loans originated during the year ended December 31, 2021.

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations (“CRRSA”) Act of 2021 was signed into law, which contained provisions that directly impacted financial institutions. The CRRSA Act extended the PPP and provided the Company the ability to continue its Borrower Relief Programs and related TDR and past due reporting considerations.

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

Acquisitions

On January 1, 2020, the Company completed its acquisition of Two River, which added $1.1 billion to assets, $940.1 million to loans, and $941.8 million to deposits. Two River’s results of operations are included in the consolidated results for the period beginning on January 1, 2020.

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On January 1, 2020, the Company completed its acquisition of Country Bank, which added $793.7 million to assets, $618.4 million to loans, and $652.7 million to deposits. Country Bank’s results of operations are included in the consolidated results for the period beginning on January 1, 2020.

On January 31, 2019, the Company completed its acquisition of Capital Bank, which added $494.4 million to assets, $307.3 million to loans, and $449.0 million to deposits. Capital Bank’s results of operations are included in the consolidated results for the period beginning on February 1, 2019.

These transactions have enhanced the Company’s position as the premier community banking franchise in central and southern New Jersey, and metropolitan areas of Philadelphia and New York City and they have grown business lines, expanded the geographic footprint and improved financial performance. The Company will continue to evaluate potential acquisition opportunities to further create stockholder value.

Strategy

The Company operates as a full-service regional bank delivering comprehensive financial products and services, which can include commercial and consumer financing, deposit services, and wealth management products and services, throughout New Jersey and the major metropolitan markets of Philadelphia, New York, Baltimore, Washington D.C., and Boston. The Bank competes with larger, out-of-market financial service providers through its local and digital focus and the delivery of superior service. The Bank also competes with smaller in-market financial service providers by offering a broad array of products and services and by having an ability to extend larger credits.

The Company’s strategy has been to grow profitability while limiting exposure to credit, interest rate, and operational risks. To accomplish these objectives, the Bank has sought to: (1) grow commercial loans through the offering of commercial lending services to local businesses and through strategic expansions to adjacent markets; (2) grow core deposits (defined as all deposits excluding time deposits) through product offerings appealing to a broadened customer base; and (3) increase non-interest income by expanding the menu of fee-based products and services and investing additional resources in these product lines. The growth in these areas has occurred both organically and through acquisitions.

The Company focuses on prudent growth to create value for stockholders, which may include opportunistic acquisitions. The Company will also continue to build additional operational infrastructure and invest in key personnel in response to growth and changing business conditions.

Growing Commercial Loans

With industry consolidation eliminating many locally-headquartered competitors, the Company fills a void for locally-delivered commercial loan and deposit services. The Bank has strategically and steadily added experienced commercial lenders in various New Jersey counties as well as teams in New York City, the greater Philadelphia area, Baltimore, Washington D.C., and Boston. At December 31, 2021, commercial loans (which includes multi-family and commercial real estate loans, commercial construction loans, and commercial and industrial loans) represented 68.2% of the Bank’s total loans, as compared to 56.1% at December 31, 2019. Commercial loan products entail a higher degree of credit risk than residential real estate lending activity. As a consequence, management continues to employ a well-defined credit policy focusing on quality underwriting and close oversight and Board monitoring. See Risk Factors – Risks Related to Lending Activities – The Bank’s emphasis on commercial lending may expose the Bank to increased lending risks.

Increasing Core Deposits

The Bank seeks to increase core deposits in its primary market area by improving market penetration. Core account development has benefited from Bank efforts to attract business deposits in conjunction with its commercial lending operations and from an expanded mix of retail core account products. The Bank continues to invest in its digital products and customer experience with the Bank’s digital capabilities on par with national banks and fintechs. As a result of these efforts the Bank’s core deposits ratio was 92.0% and the loans-to-deposits ratio was 88.6% at December 31, 2021.

Enhancing Non-Interest Income

Management continues to diversify the Bank’s product lines and expand related resources in order to enhance non-interest income. The Bank is focused on growth opportunities in areas such as derivative contracts, trust and asset management, digital product offerings, and equity investments in non-bank finance companies.

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The Bank also offers investment products for sale through its retail branch network. In 2018, the Bank replaced its third-party broker/dealer investment sales program with a hybrid robo-advisor product offered by the Bank’s partner, Nest Egg, a registered investment adviser. Nest Egg is an investment platform that helps customers define and reach financial goals by providing access to high quality and cost-effective investments. It includes web-based tools as well as access to personal financial advisors via telephone, chat, or video. At December 31, 2021, the Company had an ownership interest of less than 20% in Nest Egg and a seat on the Board of Directors. The Company’s minority interest in Nest Egg does not require separate entity reporting.

During 2021, the Company made a minority, non-controlling equity investment in Auxilior Capital Partners (“Auxilior”) and received a seat on the Auxilior Board of Directors. Auxilior was formed in 2020 as a nationwide specialty commercial equipment finance company focused on five key business verticals: construction and infrastructure, transportation and logistics, franchise finance, healthcare, and bank outsourcing. In addition to origination, underwriting, asset management, and customer service functions within each industry vertical, Auxilior can syndicate full loans as well as participations to banks, funds, and other third-party buyers of assets.

In February 2022, the Company signed an agreement to acquire a majority interest in Trident Abstract Title Agency, LLC with the right to acquire 100%. This transaction will provide an additional source of non-interest income to benefit the Company.

Branch Rationalization and Service Delivery

Management continues to evaluate the Bank’s branch network for consolidation opportunities. The Bank consolidated 13 branches in 2021, following the consolidation of 13 branches in 2020 and seven branches in 2019. The Bank has consolidated 67 branch locations since 2013. The Bank also sold two branches in 2021 with deposits of $100.9 million. In addition to branch consolidations, the Bank is adapting to the industry wide trend of declining branch activity by transitioning to a universal banker staffing model, with a smaller branch staff handling sales and service transactions, as well as increasing the marketing of products that feature digital and mobile services. In certain locations, routine transactions are handled through video teller machines, an advanced technology with live team members in a remote location that perform transactions for multiple video teller machines. The Bank is also investing in multiple digital services to enhance the customer experience and improve security. At December 31, 2021, all of the branch staff were trained as certified Digital Bankers to better support customers use and adoption of digital services.

Capital Management

The Company conducts capital stress testing, which includes various scenarios, as one means of evaluating capital adequacy. The results of stress testing are considered in the capital planning process and strategy development. In addition to the objectives described above, the Company actively manages its capital position to ensure adequate coverage and improve return on stockholders’ equity. Over the past few years, the Company has implemented or announced six stock repurchase programs. On December 18, 2019, the Company announced the plan to repurchase up to 5% of outstanding common stock or 2.5 million shares. The Company suspended its repurchase activity on February 28, 2020 in light of the COVID-19 pandemic, and subsequently recommenced repurchases in February 2021. On June 25, 2021, the Company announced the authorization to repurchase up to an additional 5% of the Company’s outstanding common stock, or 3.0 million shares. For the year ended December 31, 2021, the Company repurchased 1,711,484 shares of its common stock under these repurchase programs and 3,307,661 shares remain available for repurchase.

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Selected Financial Data

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

[[GREPCENT_TABLE]]
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(continued)

[[GREPCENT_TABLE]]
[["","","At or for the Year Ended December 31,"],["","","2021","","2020","","2019"],["Selected Financial Ratios and Other Data (1):"],["Performance Ratios:"],["Return on average assets (2)","","0.91","%","","0.55","%","","1.10","%"],["Return on average stockholders\u2019 equity (2)","","7.02","","","4.20","","","7.84"],["Stockholders\u2019 equity to total assets","","12.92","","","12.96","","","13.98"],["Net interest rate spread (3)","","2.80","","","2.96","","","3.40"],["Net interest margin (4)","","2.93","","","3.16","","","3.62"],["Operating expenses to average assets (2)","","1.94","","","2.20","","","2.35"],["Efficiency ratio (2)(5)","","63.50","","","63.70","","","63.44"],["Loans-to-deposits ratio (6)","","88.60","","","82.27","","","98.20"],["Asset Quality Ratios:"],["Non-performing loans as a percent of total loans receivable (6)(7)","","0.22","","","0.47","","","0.29"],["Non-performing assets as a percent of total assets (7)","","0.16","","","0.32","","","0.22"],["Allowance for credit losses as a percent of total loans receivable (6)(8)","","0.57","","","0.78","","","0.27"],["Allowance for credit losses as a percent of total non-performing loans (7)(8)","","257.81","","","166.81","","","94.41"],["Wealth Management (dollars in thousands):"],["Wealth assets under administration and management (\u201cAUA/M\u201d)","","$","287,404","","","$","245,175","","","$","195,415"],["Nest Egg AUA/M","","428,558","","","398,174","","","347,606"],["Per Share Data:"],["Cash dividends per common share","","$","0.68","","","$","0.68","","","$","0.68"],["Dividend payout ratio per common share","","38.20","%","","66.73","%","","38.96","%"],["Stockholders\u2019 equity per common share at end of period","","$","25.63","","","$","24.57","","","$","22.88"],["Number of full-service customer facilities:","","47","","","62","","","56"]]
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(1)With the exception of end of year ratios, all ratios are based on average daily balances.

(2)Performance ratios for 2021 include merger related expenses, branch consolidation expenses, and a net gain on equity investments of $6.7 million or $5.1 million, net of tax benefit. Performance ratios for 2020 include a net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, merger related expenses, branch consolidation expenses, and Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”) opening credit loss expense under the CECL model of $14.3 million or $11.0 million, net of tax benefit. Performance ratios for 2019 include merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and the reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in the New Jersey tax code of $20.6 million, or $16.3 million, net of tax benefit.

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

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

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

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

(7)Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.

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

Summary

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

Total assets increased by $291.3 million to $11.74 billion at December 31, 2021, from $11.45 billion at December 31, 2020. Cash and due from banks decreased by $1.07 billion to $204.9 million at December 31, 2021, from $1.27 billion at December

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

Deposits increased by $305.2 million to $9.73 billion at December 31, 2021, from $9.43 billion at December 31, 2020. The deposits growth is net of deposits sold of $100.9 million related to the sale of two branches in December 2021. Total deposits, excluding time deposits of $775.0 million at December 31, 2021 and $1.37 billion at December 31, 2020, increased by $903.0 million to $8.96 billion at December 31, 2021, from $8.05 billion at December 31, 2020 as a result of the Company’s efforts to improve the quality of deposits.

Net income available to common stockholders for the year ended December 31, 2021 was $106.1 million, or $1.78 per diluted share, as compared to $61.2 million, or $1.02 per diluted share for the prior year. Net income available to common stockholders for the year ended December 31, 2021 included merger related expenses, branch consolidation expenses, and a net gain on equity investments of $1.5 million, $12.3 million, and $7.1 million, respectively. These items decreased net income for the year ended December 31, 2021 by $5.1 million, net of tax. Net income for the year ended December 31, 2020 included a net gain on equity investments, merger related expenses, FHLB advance prepayment fees, branch consolidation expenses, gain on sale of PPP loans, and Two River and Country Bank opening credit loss expense under the CECL model of $20.9 million, $15.9 million, $14.3 million, $7.6 million, $5.1 million, and $2.4 million, respectively. These items decreased net income for the year ended December 31, 2020 by $11.0 million, net of tax. These items reduced diluted earnings per share by $0.08 and $0.18 for the years ended December 31, 2021 and 2020, respectively.

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

Critical Accounting Policies and Estimates

Note 1. Summary of Significant Accounting Policies to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2021 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). Allowance for credit losses in accordance with ASU 2016-13 is a critical accounting policy in the preparation of the consolidated financial statements as of and for the period ended December 31, 2021.

Allowance for Credit Losses (“ACL”)

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

expected credit losses at the portfolio segment level.

The quantitative component of the ACL involves assumptions that require a significant level of estimation; these include historical losses as a predictor of future performance, and the accuracy of macro-economic forecasts over a reasonable and supportable forecast period. The Company has elected to use an open pool method and extends its look back period each quarter to capture as many data points as possible in its historical loss rate calculation. A historical data set is expected to provide the best indication of future credit performance. Alternative loss calculation methods, such as vintage and migration methodologies, limit observable data to closed pools of loans, which excludes performance data from the historical loss rate calculation.

Macro-economic forecasts used in the quantitative analysis are provided by a leader in global forecasting. The Company uses the base case macro-economic forecast to reflect the consensus view of future economic conditions. Electing scenarios that are stronger or weaker than the base case would reduce or increase, respectively, the ACL measurement. The Company measures the accuracy of the macro-economic forecasts quarterly to identify any material deviations that would be considered for a

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

Prepayment and forward interest rate projections are also assumptions used in the quantitative model subject to estimation. These assumptions are consistent with the assumptions employed by the Company’s Interest Rate Risk (“IRR”) model. Changes in these assumptions have varying implications to the ACL measurement. For example, faster prepayment rates would shorten the life of loans and reduce the lifetime expected credit loss, whereas slower prepayment rates would have the inverse effect.

The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process. Qualitative loss factors are grounded in the Company’s long-term credit losses and reflect an assumption that past behavior is a reasonable predictor of future performance. The Company considers the peak two-year net charge off rate to capture maximum potential volatility over the reasonable and supportable forecast period. Historical losses that inform the guardrails for the qualitative adjustments are anchored to 2005 and extended annually. This period is intended to represent the credit profile of the current portfolio and capture prior performance in a severe economic recession. These guardrails are updated annually to capture recent behavior that is indicative of the credit profile of the current portfolio.

Management considers subjective, objective, and unique qualitative factors at each estimation date. Subjective factors incorporate external factors, personnel, and controls, as well as portfolio composition and performances. Subjective factors include local competition; portfolio nature, volume and concentration; credit trends; lending policy, procedure and loan review; lending management and staff; regulatory changes and forecast uncertainty. Objective factors address gaps in the quantitative model, such as the limited loss history and the inherent risk of Special Mention commercial real estate loans. Unique factors will capture one-time events, such as environmental threats and model updates that are expected to impact performance over the forecast period. Unique factors are identified, assessed, and documented in the quarter they are applied. The Company incorporated unique factors in 2021 to address macro-economic variable volatility and alternative economic forecast projections.

Although management believes that it uses the best information available to establish the ACL in conformity with GAAP, future adjustments to the ACL may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. For example, if the Company had elected a contemporaneous downside scenario where the macro-economic forecasts were weaker than the base case, the ACL measurement would have been approximately $5.2 million higher. This sensitivity scenario does not represent a change in the Company’s expectations of the economic environment but provides a hypothetical result to assess the sensitivity of the ACL to changes in key inputs.

Given the level of uncertainty and the material impact on the ACL measurement, all assumptions are reviewed and updated as necessary at each estimation date. Other than discussed above, there were no changes in the estimation methodology for these assumptions in 2021.

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Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. For the years ended December 31, 2021, 2020, and 2019, interest income included net loan fees of $2.5 million and $6.0 million, and net loan costs of $672,000, respectively.

The following table sets forth certain information relating to the Company for each of the years ended December 31, 2021, 2020 and 2019. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees and costs which are considered adjustments to yields.

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["","2021","","2020","","2019"],["(dollars in thousands)","Average Balance","","Interest","","Average Yield/ Cost","","Average Balance","","Interest","","Average Yield/ Cost","","Average Balance","","Interest","","Average Yield/ Cost"],["Assets:"],["Interest-earning assets:"],["Interest-earning deposits and short-term investments","$","969,982","","$","1,258","","","0.13","%","","$","613,971","","$","1,034","","","0.17","%","","$","57,742","","$","1,299","","","2.25","%"],["Securities (1)","1,517,649","","25,597","","","1.69","","","1,159,764","","29,353","","","2.53","","","1,048,779","","27,564","","","2.63"],["Loans receivable, net (2)"],["Commercial","5,362,265","","221,144","","","4.12","","","5,299,813","","236,749","","","4.47","","","3,329,396","","168,507","","","5.06"],["Residential real estate","2,309,790","","79,696","","","3.45","","","2,465,740","","93,120","","","3.78","","","2,204,931","","87,729","","","3.98"],["Home equity loans and lines and other consumer","298,193","","14,397","","","4.83","","","390,421","","19,352","","","4.96","","","447,568","","23,695","","","5.29"],["Allowance for loan credit losses, net of deferred loan costs and fees","(48,637)","","\u2014","","","\u2014","","","(33,343)","","\u2014","","","\u2014","","","(8,880)","","\u2014","","","\u2014"],["Loans receivable, net (2)","7,921,611","","315,237","","","3.98","","","8,122,631","","349,221","","","4.30","","","5,973,015","","279,931","","","4.69"],["Total interest-earning assets","10,409,242","","342,092","","","3.29","","","9,896,366","","379,608","","","3.84","","","7,079,536","","308,794","","","4.36"],["Non-interest-earning assets","1,260,079","","","","","","1,310,474","","","","","","964,920"],["Total assets","$","11,669,321","","","","","","$","11,206,840","","","","","","","$","8,044,456"],["Liabilities and Stockholders\u2019 Equity:"],["Interest-bearing liabilities:"],["Interest-bearing checking","$","3,878,465","","13,400","","","0.35","%","","$","3,168,889","","19,395","","","0.61","%","","$","2,517,068","","16,820","","","0.67","%"],["Money market","769,157","","1,105","","","0.14","","","677,554","","2,902","","","0.43","","","605,607","","4,919","","","0.81"],["Savings","1,581,472","","631","","","0.04","","","1,449,982","","2,505","","","0.17","","","906,086","","1,195","","","0.13"],["Time deposits","985,328","","10,074","","","1.02","","","1,531,857","","23,488","","","1.53","","","929,488","","15,498","","","1.67"],["Total","7,214,422","","25,210","","","0.35","","","6,828,282","","48,290","","","0.71","","","4,958,249","","38,432","","","0.78"],["FHLB advances","\u2014","","\u2014","","","\u2014","","","413,290","","7,018","","","1.70","","","387,925","","8,441","","","2.18"],["Securities sold under agreements to repurchase","134,939","","253","","","0.19","","","125,500","","562","","","0.45","","","64,525","","276","","","0.43"],["Other borrowings","228,600","","11,291","","","4.94","","","207,386","","10,787","","","5.20","","","98,095","","5,674","","","5.78"],["Total borrowings","363,539","","11,544","","","3.18","","","746,176","","18,367","","","2.46","","","550,545","","14,391","","","2.61"],["Total interest-bearing liabilities","7,577,961","","36,754","","","0.49","","","7,574,458","","66,657","","","0.88","","","5,508,794","","52,823","","","0.96"],["Non-interest-bearing deposits","2,429,547","","","","","","2,031,100","","","","","","1,325,836"],["Non-interest-bearing liabilities","151,950","","","","","","144,571","","","","","","80,028"],["Total liabilities","10,159,458","","","","","","9,750,129","","","","","","6,914,658"],["Stockholders\u2019 equity","1,509,863","","","","","","1,456,711","","","","","","1,129,798"],["Total liabilities and equity","$","11,669,321","","","","","","","$","11,206,840","","","","","","$","8,044,456"],["Net interest income","","","$","305,338","","","","","","","$","312,951","","","","","","","$","255,971"],["Net interest rate spread (3)","","","","","2.80","%","","","","","","2.96","%","","","","","","3.40","%"],["Net interest margin (4)","","","","","2.93","%","","","","","","3.16","%","","","","","","3.62","%"],["Total cost of deposits (including non-interest-bearing deposits)","","","","","0.26","%","","","","","","0.55","%","","","","","","0.61","%"],["Ratio of interest-earning assets to interest-bearing liabilities","137.36","%","","","","","","130.65","%","","","","","","128.51","%"]]
[[/GREPCENT_TABLE]]

45

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

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

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

(4)Net interest margin represents net interest income divided by average interest-earning assets.

46

Rate Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. There were no out-of-period amounts excluded from the following table. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021","","Year Ended December 31, 2020"],["","","Compared to","","Compared to"],["","","Year Ended December 31, 2020","","Year Ended December 31, 2019"],["","","Increase (Decrease) Due to","","Increase (Decrease) Due to"],["(in thousands)","","Volume","","Rate","","Net","","Volume","","Rate","","Net"],["Interest-earning assets:"],["Interest-earning deposits and short-term investments","","$","509","","","$","(285)","","","$","224","","","$","1,950","","","$","(2,215)","","","$","(265)"],["Securities (1)","","7,576","","","(11,332)","","","(3,756)","","","2,859","","","(1,070)","","","1,789"],["Loans receivable, net (2)"],["Commercial","","2,812","","","(18,417)","","","(15,605)","","","89,831","","","(21,589)","","","68,242"],["Residential real estate","","(5,640)","","","(7,784)","","","(13,424)","","","9,974","","","(4,583)","","","5,391"],["Home equity loans and lines and other consumer","","(4,460)","","","(495)","","","(4,955)","","","(2,918)","","","(1,425)","","","(4,343)"],["Loans receivable, net (2)","","(7,288)","","","(26,696)","","","(33,984)","","","96,887","","","(27,597)","","","69,290"],["Total interest-earning assets","","797","","","(38,313)","","","(37,516)","","","101,696","","","(30,882)","","","70,814"],["Interest-bearing liabilities:"],["Interest-bearing checking","","3,611","","","(9,606)","","","(5,995)","","","4,158","","","(1,583)","","","2,575"],["Money market","","356","","","(2,153)","","","(1,797)","","","522","","","(2,539)","","","(2,017)"],["Savings","","201","","","(2,075)","","","(1,874)","","","866","","","444","","","1,310"],["Time deposits","","(6,935)","","","(6,479)","","","(13,414)","","","9,379","","","(1,389)","","","7,990"],["Total","","(2,767)","","","(20,313)","","","(23,080)","","","14,925","","","(5,067)","","","9,858"],["FHLB advances","","(3,509)","","","(3,509)","","","(7,018)","","","527","","","(1,950)","","","(1,423)"],["Securities sold under agreements to repurchase","","40","","","(349)","","","(309)","","","273","","","13","","","286"],["Other borrowings","","1,063","","","(559)","","","504","","","5,734","","","(621)","","","5,113"],["Total borrowings","","(2,406)","","","(4,417)","","","(6,823)","","","6,534","","","(2,558)","","","3,976"],["Total interest-bearing liabilities","","(5,173)","","","(24,730)","","","(29,903)","","","21,459","","","(7,625)","","","13,834"],["Net change in net interest income","","$","5,970","","","$","(13,583)","","","$","(7,613)","","","$","80,237","","","$","(23,257)","","","$","56,980"]]
[[/GREPCENT_TABLE]]

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

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

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

Total assets increased by $291.3 million to $11.74 billion at December 31, 2021, from $11.45 billion at December 31, 2020. Cash and due from banks decreased by $1.07 billion to $204.9 million at December 31, 2021, from $1.27 billion at December 31, 2020, as excess liquidity was primarily used to fund loan growth and purchase primarily mortgage- and asset-backed securities. Total debt securities increased by $586.9 million at December 31, 2021, as compared to December 31, 2020. Total loans, excluding PPP loans of $22.9 million and $95.4 million at December 31, 2021 and December 31, 2020, respectively, increased by $939.2 million, to $8.60 billion at December 31, 2021, from $7.66 billion at December 31, 2020, primarily due to loan originations, primarily in commercial loans, and $302.0 million in purchases of residential real estate loan pools.

Deposits increased by $305.2 million, to $9.73 billion at December 31, 2021, from $9.43 billion at December 31, 2020. The deposits growth is net of deposits sold of $100.9 million related to the sale of two branches in December 2021. Total deposits, excluding time deposits of $775.0 million at December 31, 2021 and $1.37 billion at December 31, 2020, increased by $903.0

47

million to $8.96 billion at December 31, 2021, from $8.05 billion at December 31, 2020 as a result of the Company’s efforts to improve the quality of deposits. The loans-to-deposit ratio at December 31, 2021 was 88.6%, as compared to 82.3% at December 31, 2020. 

Stockholders’ equity increased to $1.52 billion at December 31, 2021, as compared to $1.48 billion at December 31, 2020. On June 25, 2021, the Company announced the authorization by the Board of Directors of the 2021 Stock Repurchase Program to repurchase up to an additional 3.0 million shares, which was approximately 5% of the Company’s outstanding common stock. For the year ended December 31, 2021, the Company repurchased 1,711,484 shares under its stock repurchase program at a weighted average cost of $21.07, and there were 3,307,661 shares available for repurchase at December 31, 2021 under the existing repurchase programs. Stockholders’ equity per common share increased to $25.63 at December 31, 2021, as compared to $24.57 at December 31, 2020.

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

General

Net income available to common stockholders for the year ended December 31, 2021 was $106.1 million, or $1.78 per diluted share, as compared to $61.2 million, or $1.02 per diluted share, for the prior year. Net income available to common stockholders for the year ended December 31, 2021 included merger related expenses, branch consolidation expenses, and a net gain on equity investments of $1.5 million, $12.3 million, and $7.1 million, respectively. These items decreased net income for the year ended December 31, 2021 by $5.1 million, net of tax. Net income available to common stockholders for the year ended December 31, 2020 included a net gain on equity investments, merger related expenses, FHLB advance prepayment fees, branch consolidation expenses, gain on sale of PPP loans, and Two River and Country Bank opening credit loss expense under the CECL model of $20.9 million, $15.9 million, $14.3 million, $7.6 million, $5.1 million, and $2.4 million, respectively. These items decreased net income for the year ended December 31, 2020 by $11.0 million, net of tax.

Interest Income

Interest income for the year ended December 31, 2021 decreased to $342.1 million, as compared to $379.6 million in the prior year. Average interest-earning assets increased by $512.9 million for the year ended December 31, 2021, as compared to the prior year, primarily concentrated in excess balance sheet liquidity and increased securities. Average loans receivable, net of allowance for loan credit losses, decreased by $201.0 million for the year ended December 31, 2021, as compared to the prior year, primarily due to reductions in PPP loans. The yield on average interest-earning assets decreased to 3.29% for the year ended December 31, 2021, as compared to 3.84% for the prior year, due to decreases in market interest rates and a higher percentage of assets in lower-yielding cash and due from banks and securities.

Interest Expense

Interest expense for the year ended December 31, 2021 was $36.8 million, as compared to $66.7 million in the prior year. Average interest-bearing liabilities increased $3.5 million for the year ended December 31, 2021, as compared to the prior year. For the year ended December 31, 2021, the cost of average interest-bearing liabilities decreased to 0.49%, from 0.88% in the prior year. The decrease was primarily due to repricing of deposit costs, maturities of higher-yielding time deposits, and repayment of all FHLB advances in 2020. The total cost of deposits (including non-interest bearing deposits) decreased to 0.26% for the year ended December 31, 2021, as compared to 0.55% for the prior year, due to decreases in market interest rates.

Net Interest Income and Margin

Net interest income for the year ended December 31, 2021 decreased to $305.3 million, as compared to $313.0 million for the prior year, as a result of the lower interest rate environment. Net interest margin decreased to 2.93% for the year ended December 31, 2021, from 3.16% for the prior year. The net interest margin compression was primarily due to the excess balance sheet liquidity and the lower interest rate environment.

Benefit/Provision for Credit Loss Expense

Credit loss benefit for the year ended December 31, 2021 was $11.8 million, as compared to credit loss expense of $59.4 million for the prior year. The credit loss benefit for the year ended December 31, 2021 was influenced by positive trends in the Bank’s asset quality combined with stabilizing trends in economic forecasts, including strong employment levels and modest GDP growth, partly offset by the continuing economic uncertainty related to COVID-19 variants.

48

Net loan recoveries were $461,000 for the year ended December 31, 2021, as compared to net loan charge-offs of $18.9 million in the prior year. The year ended December 31, 2020 included $14.6 million of charge-offs related to the sale of higher risk commercial loans and $3.3 million of charge-offs related to the sale of under-performing residential and consumer loans. Non-performing loans totaled $18.9 million at December 31, 2021, as compared to $36.4 million at December 31, 2020. The decrease was primarily due to loans that returned to accrual status and partly due to loans that were paid off.

Non-interest Income

Other income for the year ended December 31, 2021 decreased to $51.9 million, as compared to $73.9 million for the prior year. Other income for the year ended December 31, 2021 included a net gain of $7.1 million on equity investments, as compared to a net gain of $20.9 million on equity investments and a $5.1 million gain on the sale of PPP loans in the prior year. The remaining decrease of $3.1 million in other income was primarily due to decreases in commercial loan swap income of $4.0 million due to lower new swaps in 2021 and fees and service charges of $2.0 million, partly offset by increases in bankcard services of $1.9 million, due to lower card activity in the prior year as a result of the pandemic, and income from bank owned life insurance of $408,000.

Non-interest Expense

Operating expenses for the year ended December 31, 2021 decreased to $226.9 million, as compared to $246.4 million in the prior year. Operating expenses for the year ended December 31, 2021 included $13.8 million of merger related and branch consolidation expenses, as compared to $37.8 million of merger related expenses, branch consolidation expenses, and FHLB advance prepayment fees in the prior year. The remaining increase of $4.4 million in operating expenses for the year ended December 31, 2021, as compared to the prior year, was primarily due to increases in compensation and benefits expense of $5.9 million, data processing expense of $4.1 million, and federal deposit insurance and regulatory assessments of $1.3 million. The expense increases were partially due to additional funding for the Company’s ESOP plan, expenses related to the Company’s core conversion, and becoming a large bank for purposes of the Bank’s FDIC insurance assessment calculator. These increases were partly offset by decreases in equipment expense of $2.3 million, professional fees of $1.2 million, other operating expense of $1.0 million, marketing expense of $948,000, and amortization of core deposit intangible of $733,000.

Income Tax Expense

The provision for income taxes for the year ended December 31, 2021 was $32.2 million, as compared to $17.7 million for the prior year. The effective tax rate was 22.6% for the year ended December 31, 2021, as compared to 21.9% for the prior year.

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

General

Net income available to common stockholders for the year ended December 31, 2020 was $61.2 million, or $1.02 per diluted share, as compared to net income of $88.6 million, or $1.75 per diluted share for the prior year. Net income for the year ended December 31, 2020 includes a net gain on equity investments, merger related expenses, FHLB advance prepayment fees, branch consolidation expenses, a gain on sale of PPP loans, and Two River and Country Bank opening credit loss expense under the CECL model of $20.9 million, $15.9 million, $14.3 million, $7.6 million, $5.1 million and $2.4 million, respectively . These items decreased net income for the year ended December 31, 2020 by $11.0 million, net of tax. Net income for the year ended December 31, 2019 included merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in the New Jersey tax code of $10.5 million, $9.1 million, $2.0 million, $1.3 million and $2.2 million, respectively. These items decreased net income for the year ended December 31, 2019 by $16.3 million, net of tax. The annual results were impacted by the COVID-19 pandemic, through higher credit losses, net interest margin compression and increased operating expenses.

Interest Income

Interest income for the year ended December 31, 2020, increased to $379.6 million, as compared to $308.8 million in the prior year. Average interest-earning assets increased $2.82 billion for the year ended December 31, 2020, as compared to the prior year. The average for the year ended December 31, 2020 was favorably impacted by $1.75 billion of interest-earning assets acquired from Two River and Country Bank. Average loans receivable, net, increased by $2.15 billion for the year ended December 31, 2020, as compared to the prior year. The increase attributable to the acquisitions of Two River and Country Bank was $1.55 billion and the increase related to PPP loans was $227.5 million. The yield on average interest-earning assets decreased to 3.84% for the year ended December 31, 2020, as compared to 4.36% for the prior year.

49

Interest Expense

Interest expense for the year ended December 31, 2020, was $66.7 million, as compared to $52.8 million in the prior year, due to an increase in average-interest bearing liabilities of $2.07 billion, primarily related to the acquisitions of Two River and Country Bank and organic deposit growth. For the year ended December 31, 2020, the cost of average interest-bearing liabilities decreased to 0.88% from 0.96% in the prior year. The total cost of deposits (including non-interest bearing deposits) was 0.55% for the year ended December 31, 2020, as compared to 0.61% for the prior year.

Net Interest Income and Margin

Net interest income for the year ended December 31, 2020 increased to $313.0 million, as compared to $256.0 million for the prior year, reflecting an increase in interest-earning assets partly offset by a reduction in net interest margin. The net interest margin decreased to 3.16% for the year ended December 31, 2020, from 3.62% for the prior year. The compression in net interest margin was primarily due to the lower interest rate environment, the origination of low-yielding PPP loans, and the excess balance sheet liquidity which the Company strategically accumulated entering the economic downturn.

Provision for Credit Loss Expense

For the year ended December 31, 2020, credit loss expense was $59.4 million, as compared to $1.6 million for the prior year. Credit loss expense for the year ended December 31, 2020 was significantly influenced by economic conditions related to the COVID-19 pandemic, as well as estimates of how those conditions may impact the Company’s borrowers, and the decision to sell higher risk commercial loans in the third quarter of 2020. Net loan charge-offs were $18.9 million for the year ended December 31, 2020, as compared to net loan charge-offs of $1.4 million in the prior year. The year ended December 31, 2020 included $14.6 million of charge-offs related to the sale of higher risk commercial loans and $3.3 million of charge-offs related to the sale of under-performing residential and consumer loans. Non-performing loans totaled $36.4 million at December 31, 2020, as compared to $17.8 million at December 31, 2019. At December 31, 2020, the Company’s allowance for credit losses for loans was 0.78% of total loans, as compared to 0.27% at December 31, 2019. These ratios exclude existing fair value credit marks of $28.0 million at December 31, 2020 and $30.3 million at December 31, 2019 on loans acquired from Two River, Country Bank, Capital Bank, Sun, Ocean Shore, Cape, and Colonial American. The allowance for credit losses for loans as a percent of total non-performing loans was 166.8% at December 31, 2020, as compared to 94.4% at December 31, 2019.

Non-interest Income

For the year ended December 31, 2020, other income increased to $73.9 million, as compared to $42.2 million in the prior year. Other income for the year ended December 31, 2020 included $20.9 million of a net gain on equity investments and $5.1 million of a gain on sale of PPP loans. The remaining increase in other income was due to increases in commercial loan swap income of $2.8 million, net gain on sales of loans of $2.5 million, net gain on real estate operations of $981,000, and bankcard services of $577,000, partly offset by a decrease in fees and service charges of $4.4 million due to the waiver of certain fees during the COVID-19 pandemic.

Non-interest Expense

Operating expenses increased to $246.4 million for the year ended December 31, 2020, as compared to $189.1 million in the prior year. Operating expenses for the year ended December 31, 2020 included $15.9 million of merger related expenses, $14.3 million of FHLB advance prepayment fees, and $7.6 million of branch consolidation expenses, as compared to $10.5 million of merger related expenses, $9.1 million of branch consolidation expenses, $2.0 million of non-recurring professional fees, and $1.3 million of compensation expense due to the retirement of an executive officer in the prior year. The remaining change in operating expenses over the prior year was primarily due to the acquisitions of Two River and Country Bank, which added $29.3 million for the year ended December 31, 2020. The remaining increase in operating expenses for the year ended December 31, 2020 was primarily due to increases in compensation and benefits expense of $7.6 million, operating expenses attributable to the COVID-19 pandemic of $4.5 million, professional fees of $3.6 million, and federal deposit insurance expense of $2.0 million, partly offset by decreases in equipment expense of $1.8 million, occupancy expense of $1.6 million, and check card processing of $680,000.

Income Tax Expense

The provision for income taxes for the year ended December 31, 2020 was $17.7 million, as compared to $18.8 million for the prior year. The effective tax was 21.9% for the year ended December 31, 2020, as compared to 17.5% for the prior year. The higher effective tax rate for the year ended December 31, 2020 was due to the adverse impact of a New Jersey tax code change and a higher allocation of taxable income to New York due to the acquisition of Country Bank. The lower tax rate in the prior year period was also due to the reduction in income tax expense of $2.2 million from the revaluation of state deferred tax assets as a result of the change in New Jersey tax code. Excluding the impact of the New Jersey tax code change, the effective tax rate for the year ended December 31, 2019 was 19.6%.

50

Liquidity and Capital Resources

The primary sources of liquidity specifically available to OceanFirst Financial Corp. are dividends from the Bank, the issuance of preferred and common stock, and debt. For the year ended December 31, 2021, the holding company received dividend payments of $40.0 million from the Bank. At December 31, 2021, OceanFirst Financial Corp. held $72.3 million in cash. The Company’s cash needs for the year ended December 31, 2020 were also satisfied by net proceeds from the issuance of subordinated notes and preferred stock.

Subsequent to December 31, 2021, the Company has provided notice to its trustee that it will redeem $35.0 million of subordinated debt due September 30, 2026 as of March 30, 2022. The debt currently carries an interest rate of 4.14% based on a floating rate of three months LIBOR plus 392 basis points.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans, FHLB advances, access to the Federal Reserve discount window, other borrowings, investment maturities, and proceeds from the sale of loans and investments. While scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, and loan and investment sales are greatly influenced by interest rates, economic conditions, and competition. The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions.

At December 31, 2021 and 2020, the Bank had no outstanding overnight borrowings from the FHLB. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. There were also no FHLB term advances at December 31, 2021 and 2020.

The Company’s cash needs for the year ended December 31, 2021 were primarily satisfied by the increase in deposits, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities. The cash was principally utilized for purchases of debt and equity securities, purchases of residential loan pools, loan originations, and payment for sale of branches. The Company’s cash needs for the year ended December 31, 2020 were primarily satisfied by the increase in deposits, net proceeds from the issuance of subordinated notes and preferred stock, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt securities, proceeds from sales of loans, and acquired cash from acquisitions. The cash was principally utilized for repayment of FHLB advances, loan originations, the repayment of short-term borrowings, and the purchase of debt and equity securities.

In the normal course of business, the Bank routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans. At December 31, 2021, outstanding commitments to originate loans totaled $671.0 million and outstanding undrawn lines of credit totaled $1.37 billion, of which $1.01 billion were commitments to commercial and commercial construction borrowers and $358.6 million were commitments to consumer borrowers and residential construction borrowers. Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the existing contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments. These commitments are further discussed in Note 13 Commitments, Contingencies and Concentrations of Credit Risk, to the Consolidated Financial Statements.

Time deposits scheduled to mature in one year or less totaled $552.7 million at December 31, 2021. Management is optimistic about its ability to retain funds from maturing time deposits and placing them in market comparable deposit products.

At December 31, 2021, the Company also had various contractual obligations, which included debt obligations of $347.9 million, purchase obligations of $69.3 million, and lease obligations of $19.9 million. Refer to Note 9 Borrowed Funds and Note 17 Leases to the Consolidated Financial Statements for further discussion of debt obligations and lease obligations, respectively. Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist primarily of contractual obligations under data processing servicing agreements. Actual amounts expended vary based on transaction volumes, number of users, and other factors. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

The Company has a detailed contingency funding plan and obtain comprehensive reporting of funding trends on a monthly and quarterly basis, which are reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Company and the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Company and Bank continues to maintain significant liquidity under all stress scenarios.

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Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. The Company suspended its repurchase activity on February 28, 2020 in light of the COVID-19 pandemic, and subsequently recommenced repurchases in February 2021. For the year ended December 31, 2021, the Company repurchased 1,711,484 shares of its common stock at a total cost of $36.1 million. For the year ended December 31, 2020, the Company repurchased 648,851 shares of its common stock at a total cost of $14.8 million. At December 31, 2021, there were 3,307,661 shares available to be repurchased under the stock repurchase programs.

Cash dividends on common stock declared and paid during the year ended December 31, 2021 were $40.5 million, as compared to $40.8 million for the prior year. On January 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per common share. The dividend was paid on February 18, 2022 to common stockholders of record at the close of business on February 7, 2022.

Cash dividends on preferred stock declared and paid during the year ended December 31, 2021 were $4.0 million, as compared to $2.1 million for the prior year. The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, paid on February 15, 2022 to preferred stockholders of record on January 31, 2022.

The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations. Additionally, regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders.

The Company and the Bank satisfy the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations. See Regulation and Supervision—Bank Regulation – Capital Requirements.

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

Impact of New Accounting Pronouncements

Accounting Pronouncements Adopted in 2021

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. These ASUs provide guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The updates provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions, that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. In addition, the updates provide optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification for contracts that are modified because of reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. These ASUs are effective for all companies as of March 31, 2020 through December 31, 2022. Once elected for a Topic or an Industry Subtopic, the amendments in these updates must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company adopted the temporary relief and optional expedients provided under these ASUs as of December 31, 2021 and will be applied prospectively until December 31 2022, except where otherwise permitted by the standard.

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

To prepare for the transition to Alternative Rates, management formed a cross-functional project team to address the LIBOR transition. The project team performed an assessment to identify the potential risks related to the transition from LIBOR to Alternative Rates. The project team provides updates to executive leadership and the Board.

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

For the tenors of U.S. dollar LIBOR utilized by the Company, the administrator of LIBOR extended publication until June 30, 2023. The Company has developed a transition plan for existing LIBOR-based products that are not expected to mature or settle prior to the cessation date. Contract language for existing loans, securities, derivatives, and borrowings is under review and certain contracts will need updated provisions for the transition. The Company has plans for impacted lines of business to remediate these contracts, train impacted teammates, and provide timely notice to clients and counterparties. The Company may not be in a position to remediate or exit certain contracts, such as certain securities owned, and may be unable to completely remove exposure to LIBOR prior to the cessation date.

Current fallback language used for recent, renewed, and modified contracts is generally consistent with ARRC recommendations and includes use of “hardwired fallback” language, where appropriate. The Company continues to manage the impact of these contracts and other financial instruments, systems implications, hedging strategies, and related operational and market risks on established project plans for business and operational readiness for the transition.

In January 2020, FASB issued ASU 2020-01, an update to Topic 321 Investments, Topic 323 Joint Ventures, and Topic 815 Derivatives and Hedging. The update clarifies the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting in accordance with Topic 321. In addition, the update clarifies scope considerations for forward contracts and purchased options on certain securities. This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2020. The adoption of this standard did not have an impact on the Company’s financial statements.

Recent Accounting Pronouncements

In December 2019, FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” As part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021 with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company’s financial statements.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.