PROVIDENT FINANCIAL SERVICES INC (PFS) FY 2021 MD&A

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

General

On January 15, 2003, the Company became the holding company for the Bank, following the completion of the conversion of the Bank to a New Jersey-chartered capital stock savings bank. The Company issued an aggregate of 59,618,300 shares of its common stock in a subscription offering to eligible depositors. Concurrent with the conversion, the Company contributed an additional 1,920,000 shares of its common stock and $4.8 million in cash to The Provident Bank Foundation, a charitable foundation established by the Bank.

The Company conducts business through its subsidiary, the Bank, a community- and customer-oriented bank currently operating full-service branches and loan production offices throughout northern and central New Jersey, as well as Bucks, Lehigh and Northampton counties in Pennsylvania and Queens County, New York. The Bank also provides fiduciary and wealth management services through its wholly owned subsidiary, Beacon Trust Company and insurance services through its wholly owned subsidiary, SB One Insurance Agency, Inc.

Strategy

Established in 1839, the Bank is the oldest New Jersey-chartered bank in the state. The Bank offers a full range of commercial and retail loan and deposit products, and emphasizes personal service and convenience.

The Bank’s strategy is to grow profitably through a commitment to credit quality and expanding market share by acquiring, retaining and expanding customer relationships, while carefully managing interest rate risk.

The Bank continues to maintain a diversified loan portfolio with an emphasis on commercial mortgage, multi-family, construction and commercial loans in its efforts to reduce interest rate risk. These types of loans generally have adjustable rates that initially are higher than residential mortgage loans and generally have a higher rate of credit risk. The Bank’s lending policy focuses on quality underwriting standards and close monitoring of the loan portfolio. At December 31, 2021, these commercial loan types accounted for 84.1% of the loan portfolio and retail loans accounted for 15.9%. The Company intends to continue to focus on commercial mortgage, multi-family, construction and commercial lending relationships.

The Company’s relationship banking strategy focuses on increasing core accounts and expanding relationships through its branch network, mobile banking, online banking and other digital services. The Company continues to evaluate opportunities to increase market share by expanding within existing and contiguous markets. Core deposits, consisting of savings and

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demand deposit accounts, are generally a stable, relatively inexpensive source of funds. At December 31, 2021, core deposits were 93.8% of total deposits.

The Company’s results of operations are primarily dependent upon net interest income, the difference between interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. Changes in interest rates could have an adverse effect on net interest income to the extent the Company’s interest-bearing assets and interest-bearing liabilities reprice or mature at different times or relative interest rates. The Company believes based upon its current balance sheet mix that assets may reprice more quickly than liabilities. Therefore, due to the current historically low interest environment, and with deposit rates at or near zero, a decrease in interest rates may result in a decrease in the Company’s average interest rate spread and net income, which could have a negative effect on profitability. The Company generates non-interest income such as income from retail and business account fees, loan servicing fees, loan origination fees, loan level swap fees, appreciation in the cash surrender value of Bank-owned life insurance, income from loan or securities sales, fees from wealth management services, investment product sales, insurance brokerage fees and other fees. The Company’s operating expenses consist primarily of compensation and benefits expense, occupancy and equipment expense, data processing expense, the amortization of intangible assets, marketing and advertising expense and other general and administrative expenses. The Company’s results of operations are also affected by general economic conditions, changes in market interest rates, changes in asset quality, changes in asset values, actions of regulatory agencies and government policies.

Acquisitions

SB One Bancorp

On July 31, 2020, the Company completed its acquisition of SB One Bancorp ("SB One"), which added $2.20 billion to total assets, $1.77 billion to total loans, which included PCD loans totaling $294.2 million, and $1.76 billion to total deposits, and added 18 full-service banking offices in New Jersey and New York. As part of the acquisition, the addition of SB One Insurance Agency, Inc. allows the Company to expand its products offerings to its customers to include an array of commercial and personal insurance products.

Under the merger agreement, each share of SB One common stock was exchanged for 1.357 shares of the Company's common stock. The Company issued 12.8 million shares of common stock from treasury stock, plus cash in lieu of fractional shares in the acquisition of SB One. The total consideration paid in the acquisition of SB One was $180.8 million. In connection with the acquisition, SB One Bank, a wholly owned subsidiary of SB One, was merged with and into Provident Bank, a wholly owned subsidiary of the Company.

The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired was recorded as goodwill and initially totaled $22.4 million. The calculation of goodwill was subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available.

The Company updated certain estimates used in the purchase price allocation, primarily with respect to the marginal tax rate of deferred tax assets (“DTA”). As a result, the fair value of the net assets acquired decreased by $1.4 million. The impact of these measurement period adjustments increased goodwill to $23.9 million. The Company has finalized the purchase price allocation and these measurement period adjustments are recorded as current period adjustments in accordance with ASU 2015-16. Goodwill is not deductible for tax purposes and will be evaluated annually for impairment.

Acquisition of Tirschwell & Loewy, Inc.

On April 1, 2019, Beacon Trust Company ("Beacon") completed its acquisition of certain assets of Tirschwell & Loewy, Inc. ("T&L"), a New York City-based independent registered investment adviser. Beacon is a wholly owned subsidiary of Provident Bank. This acquisition expanded the Company’s wealth management business by $822.4 million of assets under management at the time of acquisition.

The acquisition was accounted for under the acquisition method of accounting. The Company recorded goodwill of $8.2 million, a customer relationship intangible of $12.6 million and $800,000 of other identifiable intangibles related to the acquisition. In addition, the Company recorded a contingent consideration liability at its fair value of $6.6 million. The contingent consideration arrangement requires the Company to pay additional cash consideration to T&L's former stakeholders over a three-year period after the closing date of the acquisition if certain financial and business retention targets are met. The acquisition agreement limits the total additional payment to a maximum of $11.0 million, to be determined based on actual future results. Total cost of the acquisition was $21.6 million, which included cash consideration of $15.0 million and

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contingent consideration with a fair value of $6.6 million. Tangible assets acquired in the transaction were nominal. No liabilities were assumed in the acquisition. The goodwill recorded in the transaction was deductible for tax purposes.

In the fourth quarter of 2019, the Company recognized a $2.8 million increase in the estimated fair value of the contingent consideration liability. In May of 2021, a $4.0 million earn out was paid as certain acquisition agreement limits were satisfied in year two of the acquisition. Additionally, in September of 2021, as a result of declining asset valuations, a $3.4 million reduction in the contingent consideration related to possible future earn-out provisions was made. As a result, the estimated fair value of the contingent consideration liability at December 31, 2021 was $2.0 million.

Critical Accounting Policies

The Company considers certain accounting policies to be critically important to the fair presentation of its financial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company’s consolidated financial statements to these critical accounting policies, and the assumptions and estimates applied, could have a significant impact on its financial condition and results of operations. These assumptions, estimates and judgments made by management can be influenced by a number of factors, including the general economic environment. The Company has identified the following as critical accounting policies:

•Adequacy of the allowance for credit losses on loans

•Valuation of deferred tax assets

On January 1, 2020, the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with the current expected credit loss (“CECL”) methodology. It also applies to off-balance sheet credit exposures, including loan commitments and lines of credit. The adoption of the new standard resulted in the Company recording a $7.9 million increase to the allowance for credit losses and a $3.2 million liability for off-balance sheet credit exposures. The adoption of the standard did not result in a change to the Company's results of operations upon adoption as it was recorded as an $8.3 million cumulative effect adjustment, net of income taxes, to retained earnings.

The allowance for credit losses is a valuation account that reflects management’s evaluation of the current expected credit losses in the loan portfolio. The Company maintains the allowance for credit losses through provisions for credit losses that are charged to income. Charge-offs against the allowance for credit losses are taken on loans where management determines that the collection of loan principal and interest is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for credit losses.

The calculation of the allowance for credit losses is a critical accounting policy of the Company. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and a reasonable and supportable forecast. Historical credit loss experience for both the Company and peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PDR”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each segment, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviate from that of the wider industry. The historical PDR curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle.

Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using an externally developed economic forecast. This forecast is applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology. The Company's current forecast period is six quarters, with a four quarter reversion period to historical average macroeconomic factors. The Company's economic forecast is approved by the Company's Asset-Liability Committee.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each loan segment is measured using an econometric, discounted PDR/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to an external economic forecast. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective

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interest rate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (“TDR”) will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

The Company considers qualitative adjustments to credit loss estimates for information not already captured in the quantitative component of the loss estimation process. Qualitative factors are based on portfolio concentration levels, model imprecision, changes in industry conditions, changes in the Company’s loan review process, changes in the Company’s loan policies and procedures, and economic forecast uncertainty.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation. The segments have been combined or sub-segmented as needed to ensure loans of similar risk profiles are appropriately pooled. As of December 31, 2021, the portfolio and class segments for the Company’s loan portfolio were:

•Mortgage Loans – Residential, Commercial Real Estate, Multi-Family and Construction

•Commercial Loans – Commercial Owner Occupied and Commercial Non-Owner Occupied

•Consumer Loans – First Lien Home Equity and Other Consumer

The allowance for credit losses on loans individually evaluated for impairment is based upon loans that have been identified through the Company’s normal loan monitoring process. This process includes the review of delinquent and problem loans at the Company’s Delinquency, Credit, Credit Risk Management and Allowance Committees; or which may be identified through the Company’s loan review process. Generally, the Company only evaluates loans individually for impairment if the loan is non-accrual, non-homogeneous and the balance is at least $1.0 million, or if the loan was modified as a TDR.

For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the fair value of the collateral less any selling costs. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate.

A loan for which the terms have been modified resulting in a concession by the Company, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit losses on a TDR is measured using the same method as all other impaired loans, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.

For loans acquired that have experienced more-than-insignificant deterioration in credit quality since their origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.

Management believes the primary risks inherent in the portfolio are a general decline in the economy, a decline in real estate market values, rising unemployment or a protracted period of elevated unemployment, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. As the impact of COVID-19 continues to unfold, the effectiveness of medical advances, government programs, and the resulting impact on consumer behavior and employment conditions will have a material bearing on future credit conditions. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, credit losses and higher levels of provisions. Management considers it important to maintain the ratio of the allowance for credit losses to total loans at an acceptable level given current and forecasted economic conditions, interest rates and the composition of the portfolio.

Although management believes that the Company has established and maintained the allowance for credit losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment and economic forecast. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to forecasted economic factors, historical loss experience and other factors. Such estimates and assumptions are adjusted when facts and circumstances dictate. In addition to the ongoing impact of COVID-19, illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy in general

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may increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for credit losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for credit losses remains an estimate that is subject to significant judgment and short-term change.

The CECL approach to calculate the allowance for credit losses on loans is significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors creates greater volatility to the allowance for credit losses, and therefore, greater volatility to the Company’s reported earnings. For the year ended December 31, 2021, the changing economic forecasts attributable to COVID-19 and the projected economic recovery led the Company to record a negative provision for credit losses, compared to an increase in the provision for the same period last year. See Note 7 to the Consolidated Financial Statements for more information on the allowance for credit losses on loans.

The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities and estimates of future taxable income. Such estimates are subject to management’s judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. The Company did not require a valuation allowance at December 31, 2021 and 2020.

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 on the relative amounts of interest-earning assets and interest-bearing liabilities and the rates of interest earned on such assets and paid on such liabilities.

Average Balance Sheet. The following table sets forth certain information for the years ended December 31, 2021, 2020 and 2019. For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities is expressed both in dollars and rates. No tax equivalent adjustments were made. Average balances are daily averages.

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(1) Average outstanding balance amounts are at amortized cost.

(2) Average outstanding balances are net of the allowance for credit losses, deferred loan fees and expenses, and loan premiums and discounts and include non-accrual loans.

(3) Net interest income divided by average interest-earning assets.

(4) The previously reported average balances of the interest bearing cash and non-interest bearing cash for the years ended December 31, 2020 and December 31, 2019 were recalculated. These recalculations resulted in the previously reported net interest margin of 2020 changing from 3.09% to 3.05%, while there was no change to the previously reported net interest margin of 2019.

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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 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. 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.

There were no out-of-period items and/or adjustments that had a material impact on the rate/volume analysis for the periods aforementioned in the table above.

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

Total assets at December 31, 2021 were $13.78 billion, an $861.5 million increase from December 31, 2020. The increase in total assets was primarily due to a $912.7 million increase in total investments and a $180.1 million increase in cash and cash equivalents, partially offset by a $241.3 million decrease in total loans.

The Company’s loan portfolio decreased $241.3 million to $9.58 billion at December 31, 2021, from $9.82 billion at December 31, 2020, despite strong originations, as prepayments, including Paycheck Protection Program ("PPP") loan forgiveness, were elevated. Total PPP loans outstanding decreased $378.3 million to $94.9 million at December 31, 2021, from $473.2 million at December 31, 2020. Excluding the net decrease in PPP loans, loans increased $137.0 million to $9.49 billion at December 31, 2021, from $9.35 billion at December 31, 2020. For the year ended December 31, 2021, loan fundings, including advances on lines of credit, totaled $3.52 billion, compared with $3.50 billion for 2020. Originations under PPP programs totaled $208.7 million and $397.8 million for the years ended December 31, 2021 and 2020, respectively. Excluding the net decrease in PPP loans, during the year ended December 31, 2021, the loan portfolio had net increases of $368.7 million in commercial mortgage loans and $141.2 million in construction loans, partially offset by net decreases of $165.1 million in consumer loans, $120.1 million in multi-family mortgage loans, $92.1 million in residential mortgage loans and $304,000 in commercial loans. Commercial real estate, commercial and construction loans represented 84.1% of the total loan portfolio at December 31, 2021, compared to 81.8% at December 31, 2020.

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Commercial loans, consisting of commercial real estate, multi-family, construction and commercial loans, totaled $8.06 billion, accounting for 84.1% of the loan portfolio at December 31, 2021, compared to $8.05 billion, or 81.8% of the loan portfolio at December 31, 2020. The Company intends to continue to focus on the origination of commercially-oriented loans. Retail loans, which consist of one- to four-family residential mortgage and consumer loans, such as fixed-rate home equity loans and lines of credit, totaled $1.53 billion and accounted for 15.9% of the loan portfolio at December 31, 2021, compared to $1.79 billion, or 18.2%, of the loan portfolio at December 31, 2020.

The Company participates in loans originated by other banks, including participations designated as Shared National Credits (“SNC”). The Company’s gross commitments and outstanding balances as a participant in SNCs were $167.1 million and $78.5 million, respectively, at December 31, 2021. At December 31, 2021, no SNC relationships were classified as substandard or worse.

The Company had outstanding junior lien mortgages totaling $139.4 million at December 31, 2021. Of this total, nine loans totaling $376,900 were 90 days or more delinquent, and were allocated total loss reserves of $5,415.

At December 31, 2021, the Company’s allowance for credit losses related to the loan portfolio was 0.84% of total loans, compared to 1.03% of total loans at December 31, 2020. For the year ended December 31, 2021, the Company recorded a negative provision of $24.3 million for credit losses related to loans, compared to a $29.7 million provision for year ended December 31, 2020. The Company had net recoveries of $3.6 million for the year ended December 31, 2021, compared to net charge-offs of $5.3 million in 2020. The reduction in provision for credit losses for the year ended December 31, 2021, compared to the same period in the prior year, was primarily the result of an improved economic forecast and improved asset quality. The net recoveries realized for the year ended December 31, 2021 further contributed to the negative provision for credit losses in the period.

Total non-performing loans at December 31, 2021 were $48.0 million, or 0.50% of total loans, compared with $87.1 million, or 0.89% of total loans at December 31, 2020. The decrease in non-performing loans in 2021 reflects the ongoing economic recovery from the depths of the pandemic recession as improving economic conditions and historically low interest rates positively affected borrowers’ ability to repay contractually due principal and interest payments. At December 31, 2021, impaired loans totaled $52.3 million with related specific reserves of $4.3 million, compared with impaired loans totaling $86.0 million with related specific reserves of $9.0 million at December 31, 2020. Within total impaired loans, there were $34.2 million of loans for which the present value of expected future cash flows or current collateral valuations exceeded the carrying amounts of the loans and for which no specific reserves were required in accordance with GAAP.

Non-performing commercial mortgage loans decreased $15.1 million to $16.9 million at December 31, 2021, from $32.0 million at December 31, 2020. At December 31, 2021, non-performing commercial mortgage loans consisted of 14 loans at December 31, 2021. Of these 14 loans, 7 loans totaling $9.0 million were PCD loans. The largest non-performing commercial mortgage loan was a $6.7 million loan secured by a first mortgage on a property located in Woodside, New York. This loan is currently paying in accordance with its restructured terms.

Non-performing commercial loans decreased $21.5 million to $20.6 million at December 31, 2021, from $42.1 million at December 31, 2020. Non-performing commercial loans at December 31, 2021 consisted of 51 loans, of which 31 loans were under 90 days accruing. Of these non-performing commercial loans, 21 were PCD loans totaling $6.4 million. The largest non-performing commercial loan relationship consisted of four loans with total outstanding balances of $3.2 million at December 31, 2021. All of these loans are unsecured/non-real estate secured. These loans are currently paying in accordance with their restructured terms.

Non-performing construction loans increased $973,000 to $2.4 million at December 31, 2021. Non-performing construction loans at December 31, 2021 consisted of two PCD loans. There were $1.4 million non-performing construction loans at December 31, 2020.

Non-performing multi-family mortgage loans totaled $439,000 at December 31, 2021. There were no non-performing multi-family mortgage loans at December 31, 2020.

At December 31, 2021, the Company held $8.7 million of foreclosed assets, compared with $4.5 million at December 31, 2020. Foreclosed assets are carried at the lower of the outstanding loan balance at the time of foreclosure or fair value, less estimated costs to sell. During the year ended December 31, 2021, there were four additions to foreclosed assets with an aggregate carrying value of $8.0 million and ten properties sold with an aggregate carrying value of $2.6 million and valuation charges of $1.2 million.

Non-performing assets totaled $56.8 million, or 0.41% of total assets at December 31, 2021, compared to $91.6 million, or 0.71% of total assets at December 31, 2020. If the non-accrual loans had performed in accordance with their original terms,

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interest income would have increased by $1.2 million during the year ended December 31, 2021. The amount of cash basis interest income that was recognized on impaired loans during the year ended December 31, 2021 was not material.

Total deposits increased $1.40 billion for the year ended December 31, 2021 to $11.23 billion. Total savings and demand deposit accounts increased $1.80 billion to $10.54 billion at December 31, 2021, while total time deposits decreased $401.7 million to $692.5 million at December 31, 2021. The increase in total savings and demand deposit accounts for the year ended December 31, 2021 was largely attributable to a $913.6 million increase in interest bearing demand deposits, as the Company shifted $450.0 million of maturing Federal Home Loan Bank of New York ("FHLB") borrowings into lower-costing brokered demand deposits, a $424.8 million increase in non-interest bearing demand deposits, which partially benefited from deposits retained from activity associated with PPP loans and stimulus funding, a $347.1 million increase in money market deposits and a $112.4 million increase in savings deposits. The decrease in time deposits was primarily due to the outflow of brokered time deposits, combined with additional maturities of longer-term retail time deposits.

Borrowed funds decreased $549.2 million for the year ended December 31, 2021, to $626.8 million. The decrease for the period was largely due to the maturity and replacement of FHLB borrowings with lower-costing brokered deposits and the net inflow of retail deposits. Borrowed funds represented 4.5% of total assets at December 31, 2021, a decrease from 9.1% at December 31, 2020.

Stockholders’ equity increased $77.3 million during the year ended December 31, 2021 to $1.70 billion, primarily due to net income earned for the year, partially offset by dividends paid to stockholders, common stock repurchases and a decrease in unrealized gains on available for sale debt securities. For the year ended December 31, 2021, common stock repurchases totaled 965,223 shares at an average price per share of $22.43, of which 44,078 shares, at an average price per share of $21.81, were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. At December 31, 2021, 3.2 million shares remained eligible for repurchase under the current authorization.

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

General. Net income for the year ended December 31, 2021 was $167.9 million, compared to $97.0 million for the year ended December 31, 2020. Basic and diluted earnings per share were $2.20 and $2.19 per share, respectively, compared to basic and diluted earnings per share of $1.39 for the year ended December 31, 2020.

Earnings for the year ended December 31, 2021 were favorably impacted by growth in average interest earning assets, including assets acquired in the July 31, 2020 merger with SB One Bancorp ("SB One") and the deployment of liquidity arising from increased deposits, into earning assets. Earnings for the year ended December 31, 2021 further benefited from a negative provision for credit losses attributable to an improved economic forecast and improved asset quality. The Company recorded a $24.3 million negative provision for the year ended December 31, 2021, compared to a $29.7 million provision for credit losses for 2020.

Net Interest Income. Net interest income increased $53.5 million to $366.0 million for 2021, from $312.6 million for 2020. The interest rate spread increased one basis point to 2.89% for 2021, from 2.88% for 2020. The net interest margin decreased five basis points to 3.00% for 2021, compared to 3.05% for 2020. For the year ended December 31, 2021, the decrease in net interest margin was primarily attributable to increases in the average balance of both lower-yielding cash and available for sale debt securities portfolios, combined with the downward repricing of certain adjustable rate loans. This decrease was partially offset by the inflow of lower-costing core deposits, along with an increase in the accelerated recognition of fees related to the forgiveness of PPP loans in 2021. For the year ended December 31, 2021, fees related to the forgiveness of PPP loans totaled $11.3 million, which was recognized in interest income, compared to $3.8 million for the year ended December 31, 2020.

Interest income increased $39.0 million to $402.3 million for 2021, compared to $363.3 million for 2020. The increase in interest income was attributable to interest income from the SB One loan portfolio, partially offset by the downward repricing of certain adjustable rate assets and lower rates on newly originated loans. Average interest-earning assets increased $1.94 billion to $12.18 billion for 2021, compared to $10.24 billion for 2020. The increase in average earning assets was largely due to a $1.19 billion increase in average outstanding loan balances to $9.56 billion for 2021, attributable to the loan portfolios acquired from SB One and PPP loan originations. The yield on interest-earning assets decreased 25 basis points to 3.30% for 2021, from 3.55% for 2020. The weighted average yield on total loans decreased five basis points to 3.82% for 2021 and the weighted average yield on available for sale debt securities decreased 68 basis points to 1.40% for 2021, from 2.08% for 2020. The weighted average yield on FHLBNY stock decreased to 5.48% for 2021, compared to 6.00% for 2020.

Interest expense decreased $14.4 million to $36.3 million for 2021, from $50.7 million for 2020. The decrease in interest expense was primarily attributable to a decrease in the cost of interest-bearing liabilities, partially offset by an increase in average interest-bearing deposits. The average rate paid on interest-bearing liabilities decreased 26 basis points to 0.41% for

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2021, compared to 2020. The average rate paid on interest-bearing deposits decreased 20 basis points to 0.33% for 2021, from 0.53% for 2020. The average rate paid on borrowings decreased 27 basis points to 1.09% for 2021, from 1.36% for 2020. The average rate paid on subordinated debentures assumed in the SB One acquisition was 4.79% for 2021. Average interest-bearing deposits increased $1.70 billion to $8.08 billion for 2021, from $6.38 billion for 2020. The average balance of interest-bearing liabilities increased $1.28 billion to $8.89 billion for 2021, compared to $7.61 billion for 2020. Within average interest-bearing deposits, average interest-bearing core deposits increased $1.70 billion to $7.21 billion for 2021, compared with 2020. Average non-interest bearing demand deposits increased $558.9 million to $2.54 billion for 2021, from $1.98 billion for 2020. Average outstanding borrowings decreased $438.1 million to $789.8 million for 2021, compared to 2020. Average outstanding subordinated debentures for 2021 was $24.8 million.

Provision for Credit Losses. Provisions for credit losses are charged to operations in order to maintain the allowance for credit losses at a level management considers necessary to absorb projected credit losses that may arise over the expected term of each loan in the portfolio. In determining the level of the allowance for credit losses, management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and a reasonable and supportable forecast. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or later events change. Management assesses the adequacy of the allowance for credit losses on a quarterly basis and makes provisions for credit losses, if necessary, in order to maintain the valuation of the allowance.

For the year ended December 31, 2021, the Company recorded a $24.3 million negative provision for credit losses on loans, compared to a $29.7 million provision for 2020. The Company, for the year ended December 31, 2021, had net loan recoveries of $3.6 million, compared to net charge-offs of $5.3 million for 2020. Total charge-offs for the year ended December 31, 2021 were $5.5 million, compared to $7.9 million for the year ended December 31, 2020. Recoveries for the year ended December 31, 2021, were $9.0 million, compared to $2.6 million for the year ended December 31, 2020. The reduction in provision for credit losses for the year ended December 31, 2021, compared to the prior year, was primarily the result of an improved economic forecast and improved asset quality. The net recoveries realized for the year ended December 31, 2021 further contributed to the negative provision for credit losses in the year.

Non-Interest Income. For the year ended December 31, 2021, non-interest income totaled $86.8 million, an increase of $14.4 million from 2020. Insurance agency income totaled $10.2 million, an increase of $6.3 million for the year ended December 31, 2021, compared to the same period in 2020, resulting from the prior year acquisition of SB One. Fee income increased $6.1 million to $30.0 million, compared to the same period in 2020, largely due to a $3.8 million increase in prepayment fees on commercial loans, a $973,000 increase in loan-related fee income, a $743,000 increase in non-deposit investment fee income and a $601,000 increase in deposit related fee income. These increases were partially offset by a $362,000 decrease in debit card revenues. The increases in fee income are partially attributable to the addition of the SB One customer base as well as a recovering economy compared to the severe negative effects that COVID-19 had on consumer and business activities in the prior year. The decrease in debit card revenue was largely due to interchange transaction fee limitations imposed by the Durbin amendment, which became effective for the Company on July 1, 2021, mitigated by an increase in transaction fees related to the SB One customer base. Wealth management income increased $5.0 million to $30.8 million for the year ended December 31, 2021, compared to $25.7 million for the same period in 2020, primarily due to an increase in the market value of assets under management as a result of strong equity market performance and new business generation. Additionally, BOLI income increased $1.4 million to $7.9 million for the year ended December 31, 2021, compared to the same period in 2020, primarily due to an increase in benefit claims, additional income related to the BOLI assets acquired from SB One and higher equity valuations. Partially offsetting these increases, other income decreased $5.1 million to $7.7 million for the year ended December 31, 2021, primarily due to an $8.2 million decrease in net fees on loan-level interest rate swap transactions, an $884,000 decrease in net gains on the sale of fixed assets and a $334,000 decrease in net gains on sale of foreclosed real estate, partially offset by income recognized from a $3.4 million reduction in the contingent consideration related to the earn-out provisions of the 2019 purchase of Tirschwell & Loewy, Inc. by Beacon Trust Company.

Non-Interest Expense. Non-interest expense for the year ended December 31, 2021 was $250.1 million, an increase of $22.3 million from 2020. Compensation and benefits expense increased $12.5 million to $143.4 million for the year ended December 31, 2021, compared to $130.9 million for the year ended December 31, 2020. This increase was primarily due to increases in salary expense and employee medical benefits associated with the addition of former SB One employees, combined with an increase in the accrual for incentive compensation, company-wide annual merit increases and an increase in stock-based compensation, partially offset by a decrease in severance expense. Net occupancy costs increased $5.8 million to $32.9 million for the year ended December 31, 2021, compared to 2020, mainly due to increases in rent, depreciation, utilities and maintenance expenses related to the facilities acquired from SB One, along with an increase in snow removal costs incurred earlier in the year. FDIC insurance expense increased $3.1 million to $6.3 million for year ended December 31, 2021, compared to $3.1 million for 2020, primarily due to an increase in the insurance assessment rate and an increase in total assets subject to assessment, including assets acquired from SB One, along with the receipt of the small bank assessment credit in the

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prior year that was not available in 2021. Other operating expenses increased $2.4 million to $38.6 million for the year ended December 31, 2021, compared to $36.2 million for the year ended December 31, 2020, largely due to a valuation adjustment on foreclosed assets and increases in debit card maintenance, insurance and business development expenses, as a result of the addition of SB One, partially offset by non-recurring merger related expenses incurred in the prior year. Partially offsetting these increases in non-interest expense, data processing costs decreased $1.0 million to $19.8 million, compared with 2020, primarily due to non-recurring core system conversion costs related to the SB One acquisition in the prior year, partially offset by increases in software subscription service expense and online banking costs. Additionally, advertising expense decreased $449,000 for the year ended December 31, 2021, compared with 2020, mainly due to the curtailment of certain product marketing campaigns in the current year.

Income Tax Expense. For the year ended December 31, 2021, the Company’s income tax expense was $59.2 million, compared with $30.6 million for 2020. The Company’s effective tax rate was 26.1% for the year ended December 31, 2021, compared with 24.0% for the year ended December 31, 2020. The increase in tax expense and the effective tax rate for the year ended December 31, 2021, compared with the same period in 2020, was partially attributable to increases in taxable income and the reduced proportion of income derived from tax exempt sources to total pre-tax income. Further, upon the filing of the 2020 state income tax returns in the fourth quarter of 2021, a discrete item resulting in additional tax expense was recorded related to the apportionment of income subject to state income taxes.

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

General. Net income for the year ended December 31, 2020 was $97.0 million, compared to $112.6 million for the year ended December 31, 2019. Basic and diluted earnings per share were $1.39 for the year ended December 31, 2020, compared to basic and diluted earnings per share of $1.74 for 2019.

The Company’s earnings for the year ended December 31, 2020 were aided by the July 31, 2020 acquisition of SB One which added $2.20 billion to total assets, $1.77 billion to loans, and $1.76 billion to deposits. Earnings for the year were also affected by the January 1, 2020 adoption of a new accounting standard requiring the current recognition of allowances for losses expected to be incurred over the life of covered assets (“CECL”). The acquisition of SB One and changing economic forecasts attributable to the COVID-19 pandemic and projected economic recovery significantly impacted provisions for credit losses and off-balance sheet credit exposures and resulted in year-over-year fluctuations. For the year ended December 31, 2020, provisions for credit losses on loans were $29.7 million and provisions for credit losses on off-balance sheet credit exposures were $1.8 million, reflecting the acquisition of SB One and the economic challenges presented by the COVID-19 pandemic.

The results of operations for the year ended December 31, 2020 included pre-tax non-recurring charges related to the acquisition and integration of SB One totaling $6.3 million and direct COVID-19 related costs such as supplemental pay for branch employees and personal protective equipment totaling $1.4 million.

Net Interest Income. Net interest income increased $14.6 million to $312.6 million for 2020, from $298.0 million for 2019. The interest rate spread decreased 18 basis points to 2.92% for 2020, from 3.10% for 2019. The net interest margin decreased 26 basis points to 3.09% for 2020, compared to 3.35% for 2019. For the year ended December 31, 2020, the net interest margin was favorably impacted by the net assets acquired from SB One, partially offset by year-over-year compression in the net interest margin as the decrease in the yield on interest-earning assets outpaced the decline in the Company's cost of interest-bearing liabilities. The degree of net interest margin compression was tempered by growth in both average loans outstanding and lower-costing average interest-bearing and non-interest bearing core deposits, which mitigated the Company's need to utilize higher-cost sources to fund average interest-earning assets. In the year ended December 31, 2019, the Company recognized the accelerated accretion of $2.2 million in interest income upon the prepayment of loans which had been non-accruing.

Interest income decreased $8.2 million to $363.3 million for 2020, compared to $371.5 million for 2019. The decrease in interest income was attributable to the downward repricing of certain adjustable rate assets and lower rates on newly originated loans, partially offset by interest income from the SB One loan portfolio. Average interest-earning assets increased $1.23 billion to $10.12 billion for 2020, compared to $8.89 billion for 2019. The increase in average earning assets was largely due to a $1.18 billion increase in average outstanding loan balances to $8.37 billion for 2020, attributable to the loan portfolios acquired from SB One and PPP loan originations. The yield on interest-earning assets decreased 59 basis points to 3.59% for 2020, from 4.18% for 2019. The weighted average yield on total loans decreased 64 basis points to 3.87% for 2020 and the weighted average yield on available for sale debt securities decreased 48 basis points to 2.08% for 2020, from 2.56% for 2019. The weighted average yield on FHLBNY stock decreased to 6.00% for 2020, compared to 6.62% for 2019.

Interest expense decreased $22.8 million to $50.7 million for 2020, from $73.5 million for 2019. The decrease in interest expense was primarily attributable to a decrease in the cost of interest-bearing liabilities, partially offset by an increase in

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average interest-bearing deposits. The average rate paid on interest-bearing liabilities decreased 41 basis points to 0.67% for 2020, compared to 2019. The average rate paid on interest-bearing deposits decreased 31 basis points to 0.53% for 2020, from 0.84% for 2019. The average rate paid on borrowings decreased 74 basis points to 1.36% for 2020, from 2.10% for 2019. The average rate paid on subordinated debentures assumed in the SB One acquisition was 4.90% for 2020. Average interest-bearing deposits increased $932.9 million to $6.38 billion for 2020, from $5.44 billion for 2019. The average balance of interest-bearing liabilities increased $834.6 million to $7.61 billion for 2020, compared to $6.78 billion for 2019. Within average interest-bearing deposits, average interest-bearing core deposits increased $866.1 million to $4.64 billion for 2020, compared with 2019, while average time deposits increased $66.8 million for 2020, compared with 2019. Average non-interest bearing demand deposits increased $481.7 million to $1.98 billion for 2020, from $1.50 billion for 2019. Average outstanding borrowings decreased $108.7 million to $1.23 billion for 2020, compared to 2019. Average outstanding subordinated debentures for 2020 was $10.4 million.

Provision for Credit Losses. The provision for loan losses was $29.7 million in 2020, compared to $13.1 million in 2019. Net charge-offs for 2020 were $5.3 million, compared to $13.1 million for 2019. Total charge-offs for the year ended December 31, 2020 were $7.9 million, compared to $15.0 million for the year ended December 31, 2019. Recoveries for the year ended December 31, 2020, were $2.6 million, compared to $1.9 million for the year ended December 31, 2019. The increase in the provision for credit losses for the year ended December 31, 2020 compared to the same period in 2019 was related to the January 1, 2020 adoption of CECL, the current weak economic forecast attributable to the COVID-19 pandemic and a $15.5 million provision for credit losses related to the acquisition of the SB One loan portfolio. Future credit loss provisions are subject to significant uncertainty given the undetermined nature of prospective changes in economic conditions, as the impact of the COVID-19 pandemic continues to unfold. The effectiveness of medical advances, government programs, and the resulting impact on consumer behavior and employment conditions will have a material bearing on future credit conditions and reserve requirements.

Non-Interest Income. For the year ended December 31, 2020, non-interest income totaled $72.4 million, an increase of $8.6 million, compared to the same period in 2019. Other income increased $6.2 million to $12.8 million for the year ended December 31, 2020, primarily due to a $4.3 million increase in net fees on loan-level interest rate swap transactions, a $931,000 increase in net gains on the sale of fixed assets, a $723,000 increase in net gains on the sale of foreclosed real estate and a $451,000 increase in net gains from the sale of loans. Insurance agency income totaled $3.5 million following the July 31, 2020 acquisition of SB One. Wealth management income increased $3.2 million to $25.7 million for the year ended December 31, 2020, compared to $22.5 million for the same period in 2019, primarily due to growth in assets under management from the April 2019 T&L acquisition, combined with an increase in the market value of assets under management. Partially offsetting these increases, fee income decreased $4.5 million to $23.8 million, compared to the same period in 2019, largely due to a $2.6 million decrease in deposit related fee income, a $1.7 million decrease in prepayment fees on commercial loans and a $400,000 decrease in other loan-related fee income, all largely due to the effects of COVID-19 on consumer and business activities.

Non-Interest Expense. Non-interest expense for the year ended December 31, 2020 was $227.7 million, an increase of $26.1 million from 2019. Non-interest expense for the year ended December 31, 2020, included $6.3 million of non-recurring costs related to the acquisition and integration of SB One and $1.4 million of COVID-19 related expenses. Compensation and benefits expense increased $14.0 million to $130.9 million for the year ended December 31, 2020, compared to $116.8 million for the year ended December 31, 2019. This increase was primarily due to an increase in salary expense associated with the addition of former SB One and T&L employees, an increase in severance expense, an increase in the accrual for incentive compensation, and COVID-19 supplemental pay for branch employees, partially offset by the increased deferral of salary expense related to PPP loan originations and a decrease in stock-based compensation. For the year ended December 31, 2020, data processing costs increased $3.9 million to $20.8 million, compared with 2019, primarily due to non-recurring core system conversion costs related to the SB One acquisition and increases in software subscription service expense and online banking costs. Other operating expenses increased $2.4 million to $36.2 million for the year ended December 31, 2020, compared to $33.8 million for the year ended December 31, 2019. This increase was largely due to increases in consulting and legal expenses primarily related to the SB One acquisition, an increase in debit card maintenance expense and a market valuation adjustment on foreclosed real estate, partially offset by a $2.8 million prior year estimated fair value adjustment of the contingent consideration related to the T&L acquisition. FDIC insurance expense increased $1.8 million to $3.1 million for year ended December 31, 2020, compared to $1.3 million for the same period in 2019, largely due to the receipt of the small bank assessment credit in the prior year, the addition of SB One and increases in both the insurance assessment rate and total assets subject to assessment. For the year ended December 31, 2020, credit loss expense for off-balance sheet credit exposures totaled $1.8 million based upon the January 1, 2020 adoption of CECL and the subsequent changes in loss factors due to changes in the economic forecast, the pipeline of loans approved awaiting closing and the availability on committed lines of credit. Additionally, net occupancy costs increased $1.2 million to $27.1 million for the year ended December 31, 2020, compared to 2019, primarily due to an increase in rent expense, a portion of which was related to the addition of SB One

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facilities, and a full year of the T&L acquisition, while the amortization of intangibles increased $685,000 for the year ended December 31, 2020, compared with 2019, mainly due to an increase in the customer relationship intangible amortization attributable to the acquisition of SB One Insurance Agency, partially offset by scheduled reductions in amortization.

Income Tax Expense. For the year ended December 31, 2020, the Company’s income tax expense was $30.6 million, compared with $34.5 million, for the same period in 2019. The Company’s effective tax rate was 24.0% for the year ended December 31, 2020, compared with 23.4% for the year ended December 31, 2019. The decrease in tax expense and the higher effective tax rate for the year ended December 31, 2020 was largely the result of corresponding changes in taxable income, while the changes in the effective tax rates for the year ended December 31, 2020 compared with the same period in 2019 were primarily due to the proportion of income derived from tax exempt sources to total pre-tax income.

Liquidity and Capital Resources

Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet financial obligations to its depositors, to fund loans and securities purchases, deposit outflows and operating expenses. Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of unpledged investments, cash flows from mortgage-backed securities and the ability to borrow funds from the FHLBNY and approved broker-dealers.

Cash flows from loan payments and maturing investment securities are fairly predictable sources of funds. Changes in interest rates, local economic conditions, the COVID-19 pandemic and related government response and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows. For each of the years ended December 31, 2021 and 2020, loan repayments totaled $3.69 billion and $2.60 billion, respectively.

In response to the COVID-19 pandemic, the Company has escalated the monitoring of deposit behavior, utilization of credit lines, and borrowing capacity with the FHLBNY and FRBNY, and is enhancing its collateral position with these funding sources.

Commercial real estate loans, multi-family loans, commercial loans, one- to four-family residential loans and consumer loans are the primary investments of the Company. Purchasing securities for the investment portfolio is a secondary use of funds and the investment portfolio is structured to complement and facilitate the Company’s lending activities and ensure adequate liquidity. Loan originations and purchases totaled $3.52 billion for the year ended December 31, 2021, compared to $3.50 billion for the year ended December 31, 2020. Purchases for the investment portfolio totaled $1.44 billion for the year ended December 31, 2021, compared to $298.1 million for the year ended December 31, 2020. At December 31, 2021, the Bank had outstanding loan commitments to borrowers of $2.05 billion, including undisbursed home equity lines and personal credit lines of $252.9 million.

Total deposits increased $1.40 billion for the year ended December 31, 2021. Deposit activity is affected by changes in interest rates, competitive pricing and product offerings in the marketplace, local economic conditions, customer confidence and other factors such as stock market volatility. Certificate of deposit accounts that are scheduled to mature within one year totaled $534.5 million at December 31, 2021. Based on its current pricing strategy and customer retention experience, the Bank expects to retain a significant share of these accounts. The Bank manages liquidity on a daily basis and expects to have sufficient cash to meet all of its funding requirements.

As of December 31, 2021, the Bank exceeded all minimum regulatory capital requirements. At December 31, 2021, the Bank’s leverage (Tier 1) capital ratio was 8.86%. FDIC regulations require banks to maintain a minimum leverage ratio of Tier 1 capital to adjusted total assets of 4.00%. At December 31, 2021, the Bank’s total risk-based capital ratio was 11.53%. Under current regulations, the minimum required ratio of total capital to risk-weighted assets is 10.50%. A bank is considered to be well-capitalized if it has a leverage (Tier 1) capital ratio of at least 5.00% and a total risk-based capital ratio of at least 10.00%.

Off-balance sheet commitments consist of unused commitments to borrowers for term loans, unused lines of credit and outstanding letters of credit. Total off-balance sheet obligations were $2.05 billion at December 31, 2021, an increase of $62.6 million, or 3.1%, from $1.99 billion at December 31, 2020.

Contractual obligations consist of certificate of deposit liabilities. Total certificate of deposits at December 31, 2021 were $692.5 million, a decrease of $401.7 million, compared to $1.09 billion at December 31, 2020. There were no security purchases in 2021 which settled in January 2022, while for 2020, there was one security purchase for $1.0 million which settled in 2021.

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