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EX-32.1 - EXHIBIT 32.1 - Investors Bancorp, Inc.a93016ex321.htm
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EX-31.1 - EXHIBIT 31.1 - Investors Bancorp, Inc.a93016ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2016
Commission file number: 001-36441
  
Investors Bancorp, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
46-4702118
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
101 JFK Parkway, Short Hills, New Jersey
 
07078
(Address of Principal Executive Offices)
 
Zip Code
(973) 924-5100
(Registrant’s telephone number)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
 
 
Large accelerated filer
 
þ
 
 
  
Accelerated filer
o
 
Non-accelerated filer
 
o
 
(Do not check if a smaller reporting company)
  
Smaller reporting company
o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of November 4, 2016, the registrant had 359,070,852 shares of common stock, par value $0.01 per share, issued and 309,294,255 outstanding. 




INVESTORS BANCORP, INC.
FORM 10-Q

Index

 
Part I. Financial Information
 
 
 
Page
Item 1. Financial Statements
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II. Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 





Part I    Financial Information
ITEM 1.
FINANCIAL STATEMENTS
INVESTORS BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2016 (Unaudited) and December 31, 2015  
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
ASSETS
 
 
 
Cash and cash equivalents
$
168,629

 
148,904

Securities available-for-sale, at estimated fair value
1,512,146

 
1,304,697

Securities held-to-maturity, net (estimated fair value of $1,868,397 and $1,888,686 at September 30, 2016 and December 31, 2015, respectively)
1,794,131

 
1,844,223

Loans receivable, net
18,068,182

 
16,661,133

Loans held-for-sale
24,240

 
7,431

Federal Home Loan Bank stock
222,562

 
178,437

Accrued interest receivable
66,048

 
58,563

Other real estate owned
4,835

 
6,283

Office properties and equipment, net
178,623

 
172,519

Net deferred tax asset
228,902

 
237,367

Bank owned life insurance
161,187

 
159,152

Goodwill and intangible assets
102,825

 
105,311

Other assets
3,667

 
4,664

Total assets
$
22,535,977

 
20,888,684

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
14,951,742

 
14,063,656

Borrowed funds
4,203,711

 
3,263,090

Advance payments by borrowers for taxes and insurance
122,823

 
108,721

Other liabilities
142,612

 
141,570

Total liabilities
19,420,888

 
17,577,037

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 100,000,000 authorized shares; none issued

 

Common stock, $0.01 par value, 1,000,000,000 shares authorized; 359,070,852 issued at September 30, 2016 and December 31, 2015; 310,528,382 and 334,894,181 outstanding at September 30, 2016 and December 31, 2015, respectively
3,591

 
3,591

Additional paid-in capital
2,780,312

 
2,785,503

Retained earnings
1,009,727

 
936,040

Treasury stock, at cost; 48,542,470 and 24,176,671 shares at September 30, 2016 and December 31, 2015, respectively
(575,187
)
 
(295,412
)
Unallocated common stock held by the employee stock ownership plan
(88,003
)
 
(90,250
)
Accumulated other comprehensive loss
(15,351
)
 
(27,825
)
Total stockholders’ equity
3,115,089

 
3,311,647

Total liabilities and stockholders’ equity
$
22,535,977

 
20,888,684

See accompanying notes to consolidated financial statements.

1


INVESTORS BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
Loans receivable and loans held-for-sale
$
179,234

 
169,216

 
527,989

 
493,783

Securities:
 
 
 
 
 
 
 
Equity
49

 
25

 
147

 
73

Government-sponsored enterprise obligations
8

 
11

 
27

 
34

Mortgage-backed securities
14,653

 
14,171

 
44,581

 
40,374

Municipal bonds and other debt
2,039

 
1,535

 
6,048

 
4,151

Interest-bearing deposits
76

 
68

 
253

 
124

Federal Home Loan Bank stock
2,315

 
1,871

 
6,396

 
5,046

Total interest and dividend income
198,374

 
186,897

 
585,441

 
543,585

Interest expense:
 
 
 
 
 
 
 
Deposits
20,326

 
18,664

 
61,639

 
51,112

Borrowed Funds
18,442

 
16,959

 
52,328

 
48,205

Total interest expense
38,768

 
35,623

 
113,967

 
99,317

Net interest income
159,606

 
151,274

 
471,474

 
444,268

Provision for loan losses
5,000

 
5,000

 
15,000

 
21,000

Net interest income after provision for loan losses
154,606

 
146,274

 
456,474

 
423,268

Non-interest income
 
 
 
 
 
 
 
Fees and service charges
4,108

 
4,347

 
12,925

 
12,949

Income on bank owned life insurance
1,006

 
949

 
3,267

 
2,961

Gain on loans, net
1,401

 
2,138

 
3,516

 
6,461

Gain on securities transactions, net
72

 
933

 
3,100

 
1,017

Gain (loss) on sale of other real estate owned, net
35

 
830

 
(67
)
 
1,141

Other income
1,898

 
2,109

 
5,956

 
6,896

Total non-interest income
8,520

 
11,306

 
28,697

 
31,425

Non-interest expense
 
 
 
 
 
 
 
Compensation and fringe benefits
53,051

 
49,024

 
158,475

 
137,700

Advertising and promotional expense
1,495

 
3,260

 
5,640

 
8,532

Office occupancy and equipment expense
14,099

 
12,856

 
41,612

 
37,398

Federal deposit insurance premiums
3,600

 
2,200

 
8,800

 
6,800

Stationery, printing, supplies and telephone
641

 
1,742

 
2,407

 
3,379

Professional fees
5,673

 
3,880

 
14,493

 
11,593

Data processing service fees
5,299

 
5,979

 
15,821

 
16,775

Other operating expenses
7,540

 
6,980

 
22,304

 
20,489

Total non-interest expenses
91,398

 
85,921

 
269,552

 
242,666

Income before income tax expense
71,728

 
71,659

 
215,619

 
212,027

Income tax expense
28,287

 
22,865

 
84,196

 
74,924

Net income
$
43,441

 
48,794

 
131,423

 
137,103

Basic earnings per share
$
0.15

 
0.15

 
0.44

 
0.41

Diluted earnings per share
$
0.15

 
0.15

 
0.43

 
0.41

Weighted average shares outstanding

 
 
 
 
 
 
Basic
292,000,061

 
324,065,364

 
299,873,985

 
333,786,211

Diluted
294,174,812

 
327,193,519

 
302,854,220

 
337,005,469

See accompanying notes to consolidated financial statements.

2


INVESTORS BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net income
$
43,441

 
48,794

 
131,423

 
137,103

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in funded status of retirement obligations
318

 
207

 
952

 
626

Unrealized (loss) gain on securities available-for-sale
(1,655
)
 
3,198

 
11,966

 
3,728

Accretion of loss on securities reclassified to held to maturity
279

 
371

 
847

 
1,130

Reclassification adjustment for security gains included in net income
(43
)
 
(1,537
)
 
(1,358
)
 
(1,537
)
Other-than-temporary impairment accretion on debt securities
315

 
189

 
698

 
571

Net losses on derivatives arising during the period
(631
)
 

 
(631
)
 

Total other comprehensive (loss) income
(1,417
)
 
2,428

 
12,474

 
4,518

Total comprehensive income
$
42,024

 
51,222

 
143,897

 
141,621



See accompanying notes to consolidated financial statements.

3


INVESTORS BANCORP, INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 2016 and 2015
(Unaudited)
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Treasury
stock
 
Unallocated
common stock
held by ESOP
 
Accumulated
other
comprehensive
loss
 
Total
stockholders’
equity
 
(In thousands)
Balance at December 31, 2014
$
3,591

 
2,864,406

 
836,639

 
(11,131
)
 
(93,246
)
 
(22,404
)
 
3,577,855

Net income

 

 
137,103

 

 

 

 
137,103

Other comprehensive income, net of tax

 

 

 

 

 
4,518

 
4,518

Purchase of treasury stock (25,312,847 shares)

 

 

 
(304,242
)
 

 

 
(304,242
)
Treasury stock allocated to restricted stock plan (6,849,832 shares)

 
(85,897
)
 
5,473

 
80,424

 

 

 

Compensation cost for stock options and restricted stock

 
4,848

 

 

 

 

 
4,848

Net tax benefit from stock-based compensation

 
1,944

 

 

 

 

 
1,944

Option exercise

 
(5,487
)
 

 
11,909

 

 

 
6,422

Cash dividend paid ($0.20 per common share)

 

 
(70,475
)
 

 

 

 
(70,475
)
ESOP shares allocated or committed to be released

 
1,964

 

 

 
2,247

 

 
4,211

Balance at September 30, 2015
$
3,591

 
2,781,778

 
908,740

 
(223,040
)
 
(90,999
)
 
(17,886
)
 
3,362,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
3,591

 
2,785,503

 
936,040

 
(295,412
)
 
(90,250
)
 
(27,825
)
 
3,311,647

Net income

 

 
131,423

 

 

 

 
131,423

Other comprehensive income, net of tax

 

 

 

 

 
12,474

 
12,474

Purchase of treasury stock (29,184,897 shares)

 

 

 
(337,487
)
 

 

 
(337,487
)
Treasury stock allocated to restricted stock plan (271,890 shares)

 
(3,167
)
 
(94
)
 
3,261

 

 

 

Compensation cost for stock options and restricted stock

 
15,156

 

 

 

 

 
15,156

Net tax benefit from stock-based compensation

 
8,238

 

 

 

 

 
8,238

Option exercise

 
(27,501
)
 

 
54,636

 

 

 
27,135

Restricted stock forfeitures (17,500 shares)

 
220

 
(35
)
 
(185
)
 

 

 

Cash dividend paid ($0.18 per common share)

 

 
(57,607
)
 

 

 

 
(57,607
)
ESOP shares allocated or committed to be released

 
1,863

 

 

 
2,247

 

 
4,110

Balance at September 30, 2016
$
3,591

 
2,780,312

 
1,009,727

 
(575,187
)
 
(88,003
)
 
(15,351
)
 
3,115,089

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

4


INVESTORS BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
131,423

 
137,103

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
ESOP and stock-based compensation expense
19,266

 
9,060

Amortization of premiums and accretion of discounts on securities, net
10,372

 
10,795

Amortization of premiums and accretion of fees and costs on loans, net
(3,191
)
 
(6,032
)
Amortization of intangible assets
2,194

 
2,547

Provision for loan losses
15,000

 
21,000

Depreciation and amortization of office properties and equipment
11,732

 
10,019

Gain on securities, net
(3,100
)
 
(1,017
)
Mortgage loans originated for sale
(166,469
)
 
(186,979
)
Proceeds from mortgage loan sales
152,670

 
537,577

Gain on sales of mortgage loans, net
(3,010
)
 
(4,308
)
Loss (gain) on sale of other real estate owned
67

 
(1,141
)
Income on bank owned life insurance
(3,267
)
 
(2,961
)
Fair value of borrowings hedged by derivative transactions
(1,067
)
 

Increase in accrued interest receivable
(7,485
)
 
(5,912
)
Deferred tax expense
397

 
58

Decrease in other assets
1,353

 
5,895

Increase (decrease) in other liabilities
3,413

 
(61,495
)
Total adjustments
28,875

 
327,106

Net cash provided by operating activities
160,298

 
464,209

Cash flows from investing activities:
 
 
 
Purchases of loans receivable
(92,828
)
 
(188,850
)
Net originations of loans receivable
(1,335,186
)
 
(1,468,831
)
Proceeds from sale of loans held for investment
7,583

 
28,655

Gain on disposition of loans held for investment
(506
)
 
(2,153
)
Net proceeds from sale of foreclosed real estate
3,395

 
5,568

Proceeds from principal repayments/calls/maturities of securities available for sale
216,161

 
188,917

Proceeds from sales of securities available for sale
57,879

 

Proceeds from principal repayments/calls/maturities of securities held to maturity
282,718

 
230,507

Proceeds from sales of securities held to maturity
14,348

 

Purchases of securities available for sale
(468,168
)
 
(289,298
)
Purchases of securities held to maturity
(247,568
)
 
(464,895
)
Proceeds from redemptions of Federal Home Loan Bank stock
161,772

 
122,867

Purchases of Federal Home Loan Bank stock
(205,897
)
 
(154,430
)
Purchases of office properties and equipment
(17,836
)
 
(17,578
)
Death benefit proceeds from bank owned life insurance
472

 
6,405

Net cash used in investing activities
(1,623,661
)
 
(2,003,116
)
Cash flows from financing activities:
 
 
 

5


Net increase in deposits
888,086

 
1,168,832

Repayments of funds borrowed under other repurchase agreements

 
(10,000
)
Net increase in other borrowings
940,621

 
602,449

Net increase in advance payments by borrowers for taxes and insurance
14,102

 
74,629

Dividends paid
(57,607
)
 
(70,475
)
Exercise of stock options
27,135

 
6,422

Purchase of treasury stock
(337,487
)
 
(304,242
)
Net tax benefit from stock-based compensation
8,238

 
1,944

Net cash provided by financing activities
1,483,088

 
1,469,559

Net increase (decrease) in cash and cash equivalents
19,725

 
(69,348
)
Cash and cash equivalents at beginning of period
148,904

 
230,961

Cash and cash equivalents at end of period
$
168,629

 
161,613

Supplemental cash flow information:
 
 
 
Non-cash investing activities:
 
 
 
    Real estate acquired through foreclosure
$
2,078

 
3,686

Cash paid during the year for:
 
 
 
    Interest
114,419

 
98,909

    Income taxes
83,876

 
82,673

See accompanying notes to consolidated financial statements.

6


INVESTORS BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 
1.     Basis of Presentation

The consolidated financial statements are comprised of the accounts of Investors Bancorp, Inc. and its wholly owned
subsidiaries, including Investors Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries (collectively, the “Company”). In the opinion of management, all the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the nine months ended September 30, 2016 are not necessarily indicative of the results of operations that may be expected for subsequent periods or the full year results.
    
Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of the Form 10-Q. The consolidated financial statements presented should be read in conjunction with the Company’s audited consolidated financial statements and notes to the audited consolidated financial statements included in the Company’s December 31, 2015 Annual Report on Form 10-K. Certain reclassifications have been made to prior year amounts to conform to current year presentation.

2.     Stock Transactions
Stock Repurchase Programs
Under applicable federal regulations, the Company was not permitted to implement a stock repurchase program during the first year following completion of the second-step conversion without prior notice to, and the receipt of a non-objection from the Federal Reserve Board. On March 16, 2015, the Company announced it had received approval from the Board of Governors of the Federal Reserve System to commence a 5% buyback program prior to the one-year anniversary of the completion of its second step conversion. Accordingly, the Board of Directors authorized the repurchase of 17,911,561 shares. The first program was completed on June 30, 2015.
On June 9, 2015, the Company announced its second share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or 34,779,211 shares. The second repurchase program commenced immediately upon completion of the first repurchase plan on June 30, 2015. The second program was completed on June 17, 2016.
On April 28, 2016, the Company announced its third share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or 31,481,189 shares. The new repurchase program commenced immediately upon completion of the second repurchase plan on June 17, 2016.
During the nine months ended September 30, 2016, the Company purchased 29,184,897 shares at a cost of $337.5 million, or approximately $11.56 per share.

3.     Business Combinations
On May 3, 2016, the Company announced the signing of a definitive merger agreement with The Bank of Princeton. Under the terms of the merger agreement, 60% of the common shares of Princeton Bank will be converted into the Company's common stock and the remaining 40% will be exchanged for cash. The Bank of Princeton shareholders will have the option to receive either 2.633 shares of the Company's common stock or $30.75 in cash for each share of The Bank of Princeton common stock, subject to proration to ensure that, in the aggregate, 60% of The Bank of Princeton's shares will be converted into the Company's common stock. As of June 30, 2016, The Bank of Princeton had assets of $1.0 billion, loans of $809 million and deposits of $812 million and operated 10 branches in New Jersey and 3 in the Philadelphia market. The merger agreement has been approved by the boards of directors of each company. Conditions required to be completed for this transaction include The Bank of Princeton shareholder approval, regulatory approvals, the effectiveness of the registration statement to be filed by the Company with respect to the stock exchanged to be issued in the transaction and other customary closing conditions. As the merger has not been completed, the transaction is not reflected in the balance sheet or results of operation for the periods presented in this document.


7


4.     Earnings Per Share
The following is a summary of our earnings per share calculations and reconciliation of basic to diluted earnings per share.

 
 
For the Three Months Ended September 30,
 
2016
 
2015
 
(Dollars in thousands, except per share data)
Earnings for basic and diluted earnings per common share
 
 
 
 
 
 
 
Earnings applicable to common stockholders
$
43,441

 
$
48,794

 
 
 
 
Shares
 
 
 
Weighted-average common shares outstanding - basic
292,000,061

 
324,065,364

Effect of dilutive common stock equivalents (1)
2,174,751

 
3,128,155

Weighted-average common shares outstanding - diluted
294,174,812

 
327,193,519

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.15

 
$
0.15

Diluted
$
0.15

 
$
0.15

(1) For the three months ended September 30, 2016 and 2015, there were 16,372,523 and 11,604,284 equity awards, respectively, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.
 
For the Nine Months Ended September 30,
 
2016
2015
 
(Dollars in thousands, except per share data)
Earnings for basic and diluted earnings per common share
 
 
 
 
 
 
 
Earnings applicable to common stockholders
$
131,423

 
$
137,103

 
 
 
 
Shares
 
 
 
Weighted-average common shares outstanding - basic
299,873,985

 
333,786,211

Effect of dilutive common stock equivalents (1)
2,980,235

 
3,219,258

Weighted-average common shares outstanding - diluted
302,854,220

 
337,005,469

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.44

 
$
0.41

Diluted
$
0.43

 
$
0.41

(1) For the nine months ended September 30, 2016 and 2015, there were 11,819,014 and 18,454,117 equity awards, respectively, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.



8


5.     Securities

The following tables present the carrying value, gross unrealized gains and losses and estimated fair value for available-for-sale securities and the amortized cost, net unrealized losses, carrying value, gross unrecognized gains and losses and estimated fair value for held-to-maturity securities as of the dates indicated:

 
At September 30, 2016
 
Carrying value
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair value
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
Equity securities
$
5,800

 
823

 

 
6,623

Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
514,305

 
7,112

 
436

 
520,981

Federal National Mortgage Association
922,200

 
12,450

 
514

 
934,136

Government National Mortgage Association
49,877

 
529

 

 
50,406

Total mortgage-backed securities available-for-sale
1,486,382

 
20,091

 
950

 
1,505,523

Total available-for-sale securities
$
1,492,182

 
20,914

 
950

 
1,512,146

 
At September 30, 2016
 
Amortized cost
 
Net unrealized losses (1)
 
Carrying value
 
Gross
unrecognized
gains (2)
 
Gross
unrecognized
losses (2)
 
Estimated
fair value
 
(In thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
$
2,151

 

 
2,151

 
23

 

 
2,174

Municipal bonds
23,244

 

 
23,244

 
1,623

 

 
24,867

Corporate and other debt securities
65,120

 
(22,070
)
 
43,050

 
37,796

 

 
80,846

Total debt securities held-to-maturity
90,515

 
(22,070
)
 
68,445

 
39,442

 

 
107,887

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
438,407

 
(1,771
)
 
436,636

 
8,265

 
119

 
444,782

Federal National Mortgage Association
1,273,514

 
(2,003
)
 
1,271,511

 
26,670

 
358

 
1,297,823

Government National Mortgage Association
17,539

 

 
17,539

 
366

 

 
17,905

Total mortgage-backed securities held-to-maturity
1,729,460

 
(3,774
)
 
1,725,686

 
35,301

 
477

 
1,760,510

Total held-to-maturity securities
$
1,819,975

 
(25,844
)
 
1,794,131

 
74,743

 
477

 
1,868,397


(1) Net unrealized losses of held-to-maturity corporate and other debt securities represent the other than temporary charge related to other non-credit factors and is being amortized through accumulated other comprehensive income over the remaining life of the securities. For mortgage-backed securities, it represents the net loss on previously designated available-for sale securities transferred to held-to-maturity at fair value and is being amortized through accumulated other comprehensive income over the remaining life of the securities.
(2) Unrecognized gains and losses of held-to-maturity securities are not reflected in the financial statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as held-to-maturity; or (ii) the date that an other than temporary impairment charge is recognized on a held-to-maturity security, through the date of the balance sheet.

9


 
At December 31, 2015
 
Carrying value
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair value
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
Equity securities
$
5,778

 
733

 
16

 
6,495

Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
546,652

 
3,242

 
2,443

 
547,451

Federal National Mortgage Association
724,851

 
4,520

 
3,299

 
726,072

Government National Mortgage Association
24,841

 
1

 
163

 
24,679

Total mortgage-backed securities available-for-sale
1,296,344

 
7,763

 
5,905

 
1,298,202

Total available-for-sale securities
$
1,302,122

 
8,496

 
5,921

 
1,304,697

 
At December 31, 2015
 
Amortized cost
 
Net unrealized losses (1)
 
Carrying Value
 
Gross
unrecognized
gains (2)
 
Gross
unrecognized
losses (2)
 
Estimated
fair value
 
(In thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
$
4,232

 

 
4,232

 
11

 

 
4,243

Municipal bonds
43,058

 

 
43,058

 
1,307

 

 
44,365

Corporate and other debt securities
58,358

 
(23,245
)
 
35,113

 
42,704

 

 
77,817

Total debt securities held-to-maturity
105,648

 
(23,245
)
 
82,403

 
44,022

 

 
126,425

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
516,841

 
(2,502
)
 
514,339

 
2,213

 
3,082

 
513,470

Federal National Mortgage Association
1,228,845

 
(2,705
)
 
1,226,140

 
7,305

 
6,120

 
1,227,325

Government National Mortgage Association
21,330

 

 
21,330

 
125

 

 
21,455

Federal housing authorities
11

 

 
11

 

 

 
11

Total mortgage-backed securities held-to-maturity
1,767,027

 
(5,207
)
 
1,761,820

 
9,643

 
9,202

 
1,762,261

Total held-to-maturity securities
$
1,872,675

 
(28,452
)
 
1,844,223

 
53,665

 
9,202

 
1,888,686


(1) Net unrealized losses of held-to-maturity corporate and other debt securities represent the other than temporary charge related to other non-credit factors and is being amortized through accumulated other comprehensive income over the remaining life of the securities. For mortgage-backed securities, it represents the net loss on previously designated available-for sale securities transferred to held-to-maturity at fair value and is being amortized through accumulated other comprehensive income over the remaining life of the securities.
(2) Unrecognized gains and losses of held-to-maturity securities are not reflected in the financial statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as held-to-maturity; or (ii) the date that an other than temporary impairment charge is recognized on a held-to-maturity security, through the date of the balance sheet.
At September 30, 2016, corporate and other debt securities include a portfolio of collateralized debt obligations backed by pooled trust preferred securities ("TruPS"), principally issued by banks and to a lesser extent insurance companies, real estate investment trusts, and collateralized debt obligations. At September 30, 2016 the TruPS had an amortized cost and estimated fair value of $38.1 million and $75.8 million, respectively. While all were investment grade at purchase, securities classified as non-investment grade at September 30, 2016 had an amortized cost and estimated fair value of $36.1 million and $69.5 million, respectively. Fair value is derived from considering specific assumptions, including terms of the TruPS structure, events of deferrals, defaults and liquidations, the projected cashflow for principal and interest payments, and discounted cash flow modeling.

10


Approximately $480.0 million of the Company’s securities are pledged to secure borrowings. The contractual maturities of the Bank's mortgage-backed securities are generally less than 20 years with effective lives expected to be shorter due to prepayments. Expected maturities may differ from contractual maturities due to underlying loan prepayments or early call privileges of the issuer, therefore, mortgage-backed securities are not included in the following table. The amortized cost and estimated fair value of debt securities at September 30, 2016, by contractual maturity, are shown below. 
 
September 30, 2016
 
Carrying Value
 
Estimated
fair value
 
(In thousands)
Due in one year or less
$
18,309

 
18,309

Due after one year through five years
2,296

 
2,319

Due after five years through ten years
5,000

 
5,000

Due after ten years
42,840

 
82,259

Total
$
68,445

 
107,887


Gross unrealized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015, was as follows:
 
 
September 30, 2016
 
Less than 12 months
 
12 months or more
 
Total
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 


Federal Home Loan Mortgage Corporation
$
77,355

 
403

 
13,648

 
33

 
91,003

 
436

Federal National Mortgage Association
207,088

 
444

 
12,578

 
70

 
219,666

 
514

Total available-for-sale securities
$
284,443

 
847

 
26,226

 
103

 
310,669

 
950

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
$

 

 
3,999

 
119

 
3,999

 
119

Federal National Mortgage Association
54,212

 
358

 

 

 
54,212

 
358

Total held-to-maturity securities
$
54,212

 
358

 
3,999

 
119

 
58,211

 
477

Total
$
338,655

 
1,205

 
30,225

 
222

 
368,880

 
1,427

 

11


 
December 31, 2015
 
Less than 12 months
 
12 months or more
 
Total
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
$
4,692

 
16

 

 

 
4,692

 
16

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
$
263,255

 
2,443

 

 

 
263,255

 
2,443

Federal National Mortgage Association
375,792

 
2,850

 
14,821

 
449

 
390,613

 
3,299

Government National Mortgage Association
24,874

 
163

 

 

 
24,874

 
163

Total mortgage-backed securities available-for-sale
663,921

 
5,456

 
14,821

 
449

 
678,742

 
5,905

Total available-for-sale securities
$
668,613

 
5,472

 
14,821

 
449

 
683,434

 
5,921

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
342,702

 
2,804

 
4,887

 
278

 
347,589

 
3,082

Federal National Mortgage Association
547,326

 
5,477

 
29,013

 
643

 
576,339

 
6,120

Total mortgage-backed securities held-to-maturity
890,028

 
8,281

 
33,900

 
921

 
923,928

 
9,202

Total held-to-maturity securities
$
890,028

 
8,281

 
33,900

 
921

 
923,928

 
9,202

Total
$
1,558,641

 
13,753

 
48,721

 
1,370

 
1,607,362

 
15,123

At September 30, 2016, gross unrealized losses relate to our mortgage-backed-security portfolio which is comprised of securities issued by U.S. Government Sponsored Enterprises. The fair values of these securities have been negatively impacted by the recent increase in intermediate-term market interest rates.
Other-Than-Temporary Impairment (“OTTI”)
We conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If a determination is made that a security is other-than-temporarily impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as an other-than-temporary impairment charge in non-interest income. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.
With the assistance of a valuation specialist, we evaluate the credit and performance of each issuer underlying our pooled trust preferred securities. Cash flows for each security are forecast using assumptions for defaults, recoveries, pre-payments and amortization. At September 30, 2016 and 2015, management deemed that the present value of projected cash flows for each security was greater than the book value and did not recognize any additional OTTI charges for the periods ended September 30, 2016 and 2015. At September 30, 2016, non-credit related OTTI recorded on the previously impaired pooled trust preferred securities was $22.1 million ($13.1 million after-tax.) This amount is being accreted into income over the estimated remaining life of the securities.

12


The following table presents the changes in the credit loss component of the impairment loss of debt securities that the Company has written down for such loss as an other-than-temporary impairment recognized in earnings.
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
Balance of credit related OTTI, beginning of period
$
97,977

 
106,872

 
100,200

 
108,817

Additions:
 
 
 
 
 
 
 
Initial credit impairments

 

 

 

Subsequent credit impairments

 

 

 

Reductions:
 
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
(1,112
)
 
(962
)
 
(3,335
)
 
(2,907
)
Reductions for securities sold or paid off during the period

 
(4,770
)
 

 
(4,770
)
Balance of credit related OTTI, end of period
$
96,865

 
101,140

 
96,865

 
101,140


The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the securities prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to the period presented. If other-than-temporary impairment is recognized in earnings for credit impaired debt securities, they would be presented as additions based upon whether the current period is the first time a debt security was credit impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if the Company sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) the Company receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures or (iii) the security is fully written down.
Realized Gains and Losses
    
Gains and losses on the sale of all securities are determined using the specific identification method. For the three months ended September 30, 2016, the Company received sale proceeds of $122,200 on an equity security from the available-for-sale portfolio resulting in a gross realized gain of $72,200. For the nine months ended September 30, 2016, the Company received sale proceeds of $57.9 million on equity securities and pools of mortgage-backed securities sold from the available-for-sale portfolio resulting in a gross realized gain of $2.3 million.

There were no proceeds from sales from this portfolio for the three months ended September 30, 2016. For the nine months ended September 30, 2016, the Company received sale proceeds of $14.3 million on a pool of mortgage-backed securities from the held-to-maturity portfolio resulting in a gross realized gain of $836,000. These securities met the criteria of principal pay downs under 85% of the original investment amount and therefore did not result in a tainting of the held-to-maturity portfolio. The Company sells securities when, in management’s assessment market pricing presents an economic benefit that outweighs holding such securities, and when securities with smaller balance become cost prohibitive to carry.

For the three and nine months ended September 30, 2015, the Company received proceeds of $2.6 million on an equity security from the available-for-sale portfolio resulting in a gross realized gain of $1.5 million. For the three and nine months ended September 30, 2015, the Company recognized gains on available-for-sale securities of $42,000 and $126,000, respectively, which were related to capital distributions of equity securities held in the available-for-sale portfolio. For the three and nine months ended September 30, 2015, there were no sales of securities from the held-to-maturity portfolio; however, the Company recognized a loss of $646,000 on a TruP security which was liquidated by its Trustee.
    

13


6.    Loans Receivable, Net
The detail of the loan portfolio as of September 30, 2016 and December 31, 2015 was as follows:
 
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Multi-family loans
$
7,360,733

 
6,255,904

Commercial real estate loans
4,095,903

 
3,821,950

Commercial and industrial loans
1,191,178

 
1,044,329

Construction loans
275,969

 
224,057

Total commercial loans
12,923,783

 
11,346,240

Residential mortgage loans
4,796,852

 
5,037,898

Consumer and other loans
576,049

 
496,103

Total loans excluding PCI loans
18,296,684

 
16,880,241

PCI loans
10,476

 
11,089

Net unamortized premiums and deferred loan costs (1)
(15,428
)
 
(11,692
)
Allowance for loan losses
(223,550
)
 
(218,505
)
Net loans
$
18,068,182

 
16,661,133

(1) Included in unamortized premiums and deferred loan costs are accretable purchase accounting adjustments in connection with loans acquired.

Purchased Credit-Impaired Loans
Purchased Credit-Impaired ("PCI") loans, are loans acquired at a discount that is due, in part, to credit quality. PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value as determined by the present value of expected future cash flows with no valuation allowance reflected in the allowance for loan losses.

The following table presents changes in the accretable yield for PCI loans during the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Balance, beginning of period
$
1,549

 
$
740

 
$
449

 
$
971

Accretion
(52
)
 
(232
)
 
(173
)
 
(463
)
Net reclassification from non-accretable difference (1)  

 

 
1,221

 

Balance, end of period
$
1,497

 
$
508

 
$
1,497

 
$
508

(1) Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loans

14


An analysis of the allowance for loan losses is summarized as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Balance at beginning of the period
$
220,316

 
$
213,962

 
$
218,505

 
$
200,284

Loans charged off
(2,972
)
 
(1,390
)
 
(13,379
)
 
(5,667
)
Recoveries
1,206

 
886

 
3,424

 
2,841

Net charge-offs
(1,766
)
 
(504
)
 
(9,955
)
 
(2,826
)
Provision for loan losses
5,000

 
5,000

 
15,000

 
21,000

Balance at end of the period
$
223,550

 
$
218,458

 
$
223,550

 
$
218,458

The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. In determining the allowance for loan losses, we make significant estimates and therefore, have identified the allowance as a critical accounting policy. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
The allowance for loan losses has been determined in accordance with U.S. GAAP, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. Loans acquired are marked to fair value on the date of acquisition with no valuation allowance reflected in the allowance for loan losses. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan loss, the Company performs an analysis on acquired loans to determine whether or not there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in their calculation of the allowance for loan loss. For the nine months ended September 30, 2016, the Company recorded charge-offs of $48,000 related to PCI loans acquired.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans determined to be impaired. A loan is deemed to be impaired if it is a commercial loan with an outstanding balance greater than $1.0 million and on non-accrual status, loans modified in a troubled debt restructuring (“TDR”), and other commercial loans greater than $1.0 million if management has specific information that it is probable they will not collect all amounts due under the contractual terms of the loan agreement. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk rating (if applicable) and payment history. In addition, the Company's residential portfolio is subdivided between fixed and adjustable rate loans as adjustable rate loans are deemed to be subject to more credit risk if interest rates rise. The loss factors used are based on the Company's historical loss experience over a look-back period determined to provide the appropriate amount of data to accurately estimate expected losses as of period end. Additionally, management assesses the loss emergence period for the expected losses of each loan segment and adjusts each historical loss factor accordingly. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first full or partial loan charge-off), and is determined based upon a study of the Company's past loss experience by loan segment. The loss factors may also be adjusted to account for qualitative or environmental factors that are likely to cause estimated credit losses inherent in the portfolio to differ from historical loss experience. This evaluation is based on among other things, loan and delinquency trends, general economic conditions, geographic concentrations, lending policies and procedures and industry and peer comparisons, but is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be different than the allowance for loan losses we have established which could have a material negative effect on our financial results.
On a quarterly basis, management reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. Loans determined to be impaired are evaluated for potential loss exposure. Any shortfall results in a recommendation of a specific allowance or charge-off if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair value of the collateral is based on the most current appraised value available for real property or a discounted cash flow analysis on a business. This appraised value for real property is then reduced to reflect estimated liquidation expenses.

15


The allowance contains reserves identified as unallocated. These reserves reflect management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of probable credit losses.
Our lending emphasis has been the origination of commercial real estate loans, multi-family loans, commercial and industrial loans and the origination and purchase of residential mortgage loans. We also originate home equity loans and home equity lines of credit. These activities resulted in a concentration of loans secured by real estate property and businesses located in New Jersey and New York. Based on the composition of our loan portfolio, we believe the primary risks to our loan portfolio are increases in interest rates, a decline in the general economy, and declines in real estate market values in New Jersey, New York and surrounding states. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Negative changes to appraisal assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are carefully reviewed to determine that the resulting values reasonably reflect amounts realizable on the related loans.
For commercial real estate, multi-family and construction loans, the Company obtains an appraisal for all collateral dependent loans upon origination. An updated appraisal is obtained annually for loans rated substandard or worse with a balance of $500,000 or greater. An updated appraisal is obtained biennially for loans rated special mention with a balance of $2.0 million or greater. This is done in order to determine the specific reserve or charge off needed. As part of the allowance for loan loss process, the Company reviews each collateral dependent commercial real estate loan classified as non-accrual and/or impaired and assesses whether there has been an adverse change in the collateral value supporting the loan. The Company utilizes information from its commercial lending officers and its credit department and loan workout department’s knowledge of changes in real estate conditions in our lending area to identify if possible deterioration of collateral value has occurred. Based on the severity of the changes in market conditions, management determines if an updated appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined that the deterioration of the collateral value is significant enough to warrant ordering a new appraisal, an estimate of the downward adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated appraisal is received.
For homogeneous residential mortgage loans, the Company’s policy is to obtain an appraisal upon the origination of the loan and an updated appraisal in the event a loan becomes 90 days delinquent. Thereafter, the appraisal is updated every two years if the loan remains in non-performing status and the foreclosure process has not been completed. Management adjusts the appraised value of residential loans to reflect estimated selling costs and declines in the real estate market.
Management believes the potential risk for outdated appraisals for impaired and other non-performing loans has been mitigated due to the fact that the loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral. Loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt.
Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if the current economic environment deteriorates. Management uses relevant information available; however, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.


16


The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2016 and December 31, 2015:
 
 
September 30, 2016
 
Multi-
Family Loans
 
Commercial
Real Estate Loans
 
Commercial
and Industrial
Loans
 
Construction
Loans
 
Residential
Mortgage Loans
 
Consumer
and Other
Loans
 
Unallocated
 
Total
 
(Dollars in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance-December 31, 2015
$
88,223

 
46,999

 
40,585

 
6,794

 
31,443

 
3,155

 
1,306

 
218,505

Charge-offs
(161
)
 
(324
)
 
(3,981
)
 
(52
)
 
(8,598
)
 
(263
)
 

 
(13,379
)
Recoveries
1,570

 
373

 
219

 
259

 
904

 
99

 

 
3,424

Provision
3,788

 
2,933

 
7,285

 
2,987

 
(2,391
)
 
(114
)
 
512

 
15,000

Ending balance-September 30, 2016
$
93,420

 
49,981

 
44,108

 
9,988

 
21,358

 
2,877

 
1,818

 
223,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 

 

 

 
1,448

 
11

 

 
1,459

Collectively evaluated for impairment
93,420

 
49,981

 
44,108

 
9,988

 
19,910

 
2,866

 
1,818

 
222,091

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

 

Balance at September 30, 2016
$
93,420

 
49,981

 
44,108

 
9,988

 
21,358

 
2,877

 
1,818

 
223,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
5,417

 
4,069

 

 
23,246

 
286

 

 
33,018

Collectively evaluated for impairment
7,360,733

 
4,090,486

 
1,187,109

 
275,969

 
4,773,606

 
575,763

 

 
18,263,666

Loans acquired with deteriorated credit quality

 
7,347

 
56

 
1,186

 
1,534

 
353

 

 
10,476

Balance at September 30, 2016
$
7,360,733

 
4,103,250

 
1,191,234

 
277,155

 
4,798,386

 
576,402

 

 
18,307,160


17


 
December 31, 2015
 
Multi-
Family Loans
 
Commercial
Real Estate Loans
 
Commercial
and Industrial
Loans
 
Construction
Loans
 
Residential
Mortgage Loans
 
Consumer
and Other
Loans
 
Unallocated
 
Total
 
(Dollars in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance-December 31, 2014
$
71,147

 
44,030

 
20,759

 
6,488

 
47,936

 
3,347

 
6,577

 
200,284

Charge-offs
(284
)
 
(1,021
)
 
(516
)
 
(466
)
 
(9,526
)
 
(403
)
 

 
(12,216
)
Recoveries
445

 
807

 
295

 
317

 
2,295

 
278

 

 
4,437

Provision
16,915

 
3,183

 
20,047

 
455

 
(9,262
)
 
(67
)
 
(5,271
)
 
26,000

Ending balance-December 31, 2015
$
88,223

 
46,999

 
40,585

 
6,794

 
31,443


3,155

 
1,306

 
218,505

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 

 
2,409

 

 
1,773

 
9

 

 
4,191

Collectively evaluated for impairment
88,223

 
46,999

 
38,176

 
6,794

 
29,670

 
3,146

 
1,306

 
214,314

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

 

Balance at December 31, 2015
$
88,223

 
46,999

 
40,585

 
6,794

 
31,443


3,155

 
1,306

 
218,505

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,219

 
18,941

 
9,395

 
2,504

 
22,539

 
389

 

 
56,987

Collectively evaluated for impairment
6,252,685

 
3,803,009

 
1,034,934

 
221,553

 
5,015,359

 
495,714

 

 
16,823,254

Loans acquired with deteriorated credit quality

 
7,149

 
56

 
1,786

 
1,645

 
453

 

 
11,089

Balance at December 31, 2015
$
6,255,904

 
3,829,099

 
1,044,385

 
225,843

 
5,039,543


496,556

 

 
16,891,330

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. For non-homogeneous loans, such as commercial and commercial real estate loans the Company analyzes the loans individually by classifying the loans as to credit risk and assesses the probability of collection for each type of class. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Pass - “Pass” assets are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.
Watch - A "Watch" asset has all the characteristics of a Pass asset but warrant more than the normal level of supervision. These loans may require more detailed reporting to management because some aspects of underwriting may not conform to policy or adverse

18


events may have affected or could affect the cash flow or ability to continue operating profitably, provided, however, the events do not constitute an undue credit risk. Residential loans delinquent 30-59 days are considered watch if not already identified as impaired.
Special Mention - A “Special Mention” asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Residential loans delinquent 60-89 days are considered special mention if not already identified as impaired.
Substandard - A “Substandard” asset is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Residential loans delinquent 90 days or greater as well as those identified as impaired are considered substandard.
Doubtful - An asset classified “Doubtful” has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions, and values.
Loss - An asset or portion thereof, classified “Loss” is considered uncollectible and of such little value that its continuance on the institution’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery will occur. As such, it is not practical or desirable to defer the write-off.
The following tables present the risk category of loans as of September 30, 2016 and December 31, 2015 by class of loans, excluding PCI loans:
 
 
September 30, 2016
 
Pass
 
Watch
 
Special  Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
6,906,097

 
268,857

 
149,535

 
36,244

 

 

 
7,360,733

Commercial real estate
3,646,611

 
346,115

 
80,956

 
22,221

 

 

 
4,095,903

Commercial and industrial
870,745

 
291,261

 
13,432

 
15,740

 

 

 
1,191,178

Construction
206,314

 
62,438

 
3,200

 
4,017

 

 

 
275,969

Total commercial loans
11,629,767

 
968,671

 
247,123

 
78,222

 

 

 
12,923,783

Residential mortgage
4,688,054

 
17,346

 
10,522

 
80,930

 

 

 
4,796,852

Consumer and other
565,087

 
2,585

 
966

 
7,411

 

 

 
576,049

Total
$
16,882,908

 
988,602

 
258,611

 
166,563

 

 

 
18,296,684


 
December 31, 2015
 
Pass
 
Watch
 
Special  Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
5,876,425

 
325,414

 
17,033

 
37,032

 

 

 
6,255,904

Commercial real estate
3,411,876

 
331,429

 
38,265

 
40,380

 

 

 
3,821,950

Commercial and industrial
793,527

 
223,474

 
13,782

 
13,546

 

 

 
1,044,329

Construction
207,499

 
12,833

 

 
3,725

 

 

 
224,057

Total commercial loans
10,289,327

 
893,150

 
69,080

 
94,683

 

 

 
11,346,240

Residential mortgage
4,930,961

 
24,584

 
13,796

 
68,557

 

 

 
5,037,898

Consumer and other
482,715

 
3,987

 
427

 
8,974

 

 

 
496,103

Total
$
15,703,003

 
921,721

 
83,303

 
172,214

 

 

 
16,880,241

    

19


The following tables present the payment status of the recorded investment in past due loans as of September 30, 2016 and December 31, 2015 by class of loans, excluding PCI loans:
 
 
September 30, 2016
 
30-59 Days
 
60-89 Days
 
Greater
than 90
Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
4,132

 
1,089

 
239

 
5,460

 
7,355,273

 
7,360,733

Commercial real estate
24,391

 
16,351

 
5,505

 
46,247

 
4,049,656

 
4,095,903

Commercial and industrial
1,387

 
377

 
2,066

 
3,830

 
1,187,348

 
1,191,178

Construction

 

 

 

 
275,969

 
275,969

Total commercial loans
29,910

 
17,817

 
7,810

 
55,537

 
12,868,246

 
12,923,783

Residential mortgage
18,873

 
11,061

 
63,634

 
93,568

 
4,703,284

 
4,796,852

Consumer and other
2,585

 
966

 
7,126

 
10,677

 
565,372

 
576,049

Total
$
51,368

 
29,844

 
78,570

 
159,782

 
18,136,902

 
18,296,684

 

 
December 31, 2015
 
30-59 Days
 
60-89 Days
 
Greater
than 90
Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
14,236

 

 
1,886

 
16,122

 
6,239,782

 
6,255,904

Commercial real estate
4,171

 
352

 
6,429

 
10,952

 
3,810,998

 
3,821,950

Commercial and industrial
957

 

 
4,386

 
5,343

 
1,038,986

 
1,044,329

Construction

 

 
792

 
792

 
223,265

 
224,057

Total commercial loans
19,364

 
352

 
13,493

 
33,209

 
11,313,031

 
11,346,240

Residential mortgage
27,092

 
14,956

 
68,560

 
110,608

 
4,927,290

 
5,037,898

Consumer and other
3,987

 
427

 
8,976

 
13,390

 
482,713

 
496,103

Total
$
50,443

 
15,735

 
91,029

 
157,207

 
16,723,034

 
16,880,241

The following table presents non-accrual loans, excluding PCI loans, at the dates indicated:
 
 
September 30, 2016
 
December 31, 2015
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Non-accrual:
 
Multi-family
1

 
$
240

 
4

 
$
3,467

Commercial real estate
29

 
8,875

 
37

 
10,820

Commercial and industrial
6

 
2,248

 
17

 
9,225

Construction

 

 
4

 
792

Total commercial loans
36

 
11,363

 
62

 
24,304

Residential mortgage and consumer
481

 
86,127

 
500

 
91,122

Total non-accrual loans
517

 
$
97,490

 
562

 
$
115,426



20


Included in the non-accrual table above are troubled debt restructured ("TDR") loans whose payment status is current but the Company has classified as non-accrual as the loans have not maintained their current payment status for six consecutive months under the restructured terms and therefore do not meet the criteria for accrual status. As of September 30, 2016 and December 31, 2015, these loans are comprised of the following:
 
September 30, 2016
 
December 31, 2015
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Current TDR classified as non-accrual:
 
 
 
 
 
 
 
Multi-family

 
$

 
1

 
$
1,032

Commercial real estate
3

 
329

 
2

 
240

Commercial and industrial
1

 
183

 
2

 
2,226

Total commercial loans
4

 
512

 
5

 
3,498

Residential mortgage and consumer
31

 
6,611

 
15

 
3,378

Total current TDR classified as non-accrual
35

 
$
7,123

 
20

 
$
6,876

The following table presents TDR loans which were also 30-89 days delinquent and classified as non-accrual at the dates indicated:
 
September 30, 2016
 
December 31, 2015
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
TDR 30-89 days delinquent classified as non-accrual:
 
 
 
 
 
 
 
Multi-family

 
$

 
1

 
$
548

Commercial real estate
1

 
391

 
5

 
2,309

Commercial and industrial

 

 
1

 
360

Total commercial loans
1

 
391

 
7

 
3,217

Residential mortgage and consumer
9

 
2,066

 
11

 
3,338

Total current TDR classified as non-accrual
10

 
$
2,457

 
18

 
$
6,555

The Company has no loans past due 90 days or more delinquent that are still accruing interest.
PCI loans are excluded from non-accrual loans, as they are recorded at fair value based on the present value of expected future cash flows. As of September 30, 2016, PCI loans with a carrying value of $10.5 million included $9.0 million of which were current, $71,000 of which were 30-89 days delinquent and $1.4 million of which were 90 days or more delinquent. As of December 31, 2015, PCI loans with a carrying value of $11.1 million included $9.0 million of which were current and $2.1 million of which were 90 days or more delinquent.
At September 30, 2016 and December 31, 2015, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans which totaled $33.0 million and $57.0 million, respectively, with allocations of the allowance for loan losses of $1.5 million and $4.2 million for the periods ending September 30, 2016 and December 31, 2015, respectively. During the nine months ended September 30, 2016 and 2015, interest income received and recognized on these loans totaled $1.0 million and $2.1 million, respectively.


21


The following tables present loans individually evaluated for impairment by portfolio segment as of September 30, 2016 and
December 31, 2015:
 
 
September 30, 2016
 
Recorded
Investment
 
Unpaid Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In thousands)
With no related allowance:
 
 
 
 
 
 
 
 
 
Multi-family
$

 

 

 

 

Commercial real estate
5,417

 
8,749

 

 
4,656

 
228

Commercial and industrial
4,069

 
4,158

 

 
3,982

 
146

Construction

 

 

 

 

Total commercial loans
9,486

 
12,907

 

 
8,638

 
374

Residential mortgage and consumer
10,785

 
14,425

 

 
9,275

 
377

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Multi-family

 

 

 

 

Commercial real estate

 

 

 

 

Commercial and industrial

 

 

 

 

Construction

 

 

 

 

Total commercial loans

 

 

 

 

Residential mortgage and consumer
12,747

 
13,093

 
1,459

 
14,237

 
294

Total:
 
 
 
 
 
 
 
 
 
Multi-family

 

 

 

 

Commercial real estate
5,417

 
8,749

 

 
4,656

 
228

Commercial and industrial
4,069

 
4,158

 

 
3,982

 
146

Construction

 

 

 

 

Total commercial loans
9,486

 
12,907

 

 
8,638

 
374

Residential mortgage and consumer
23,532

 
27,518

 
1,459

 
23,512

 
671

Total impaired loans
$
33,018

 
40,425

 
1,459

 
32,150

 
1,045


22


 
December 31, 2015
 
Recorded
Investment
 
Unpaid Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In thousands)
With no related allowance:
 
 
 
 
 
 
 
 
 
Multi-family
$
3,219

 
6,806

 

 
2,872

 
119

Commercial real estate
18,941

 
27,961

 

 
19,025

 
1,136

Commercial and industrial
5,155

 
5,160

 

 
3,575

 
200

Construction
2,504

 
6,412

 

 
4,288

 
226

Total commercial loans
29,819

 
46,339

 

 
29,760

 
1,681

Residential mortgage and consumer
8,020

 
12,433

 

 
7,611

 
463

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Multi-family

 

 

 

 

Commercial real estate

 

 

 

 

Commercial and industrial
4,240

 
4,271

 
2,409

 
4,389

 
194

Construction

 

 

 

 

Total commercial loans
4,240

 
4,271

 
2,409

 
4,389

 
194

Residential mortgage and consumer
14,908

 
13,695

 
1,782

 
16,424

 
476

Total:
 
 
 
 
 
 
 
 
 
Multi-family
3,219

 
6,806

 

 
2,872

 
119

Commercial real estate
18,941

 
27,961

 

 
19,025

 
1,136

Commercial and industrial
9,395

 
9,431

 
2,409

 
7,964

 
394

Construction
2,504

 
6,412

 

 
4,288

 
226

Total commercial loans
34,059

 
50,610

 
2,409

 
34,149

 
1,875

Residential mortgage and consumer
22,928

 
26,128

 
1,782

 
24,035

 
939

Total impaired loans
$
56,987

 
$
76,738

 
$
4,191

 
$
58,184

 
$
2,814

The average recorded investment is the annual average calculated based upon the ending quarterly balances. The interest income recognized is the year to date interest income recognized on a cash basis.
Troubled Debt Restructurings
On a case-by-case basis, the Company may agree to modify the contractual terms of a borrower’s loan to remain competitive and assist customers who may be experiencing financial difficulty, as well as preserve the Company’s position in the loan. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a TDR.
Substantially all of our TDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan, or a combination of these two methods. These modifications rarely result in the forgiveness of principal or accrued interest. In addition, we frequently obtain additional collateral or guarantor support when modifying commercial loans. Restructured loans remain on non-accrual status until there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.


23


The following table presents the total TDR loans at September 30, 2016 and December 31, 2015. There were three residential PCI loans that were classified as TDRs and are included in the table below at September 30, 2016. There were three residential PCI loans that were classified as TDRs for the period ended December 31, 2015.
 
 
September 30, 2016
 
Accrual
 
Non-accrual
 
Total
 
# of loans
 
Amount
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family

 
$

 

 
$

 

 
$

Commercial real estate
2

 
280

 
6

 
3,802

 
8

 
4,082

Commercial and industrial
1

 
1,911

 
2

 
476

 
3

 
2,387

Construction

 

 

 

 

 

Total commercial loans
3

 
2,191

 
8

 
4,278

 
11

 
6,469

Residential mortgage and consumer
28

 
6,601

 
67

 
16,931

 
95

 
23,532

Total
31

 
$
8,792

 
75

 
$
21,209

 
106

 
$
30,001


 
December 31, 2015
 
Accrual
 
Non-accrual
 
Total
 
# of loans
 
Amount
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family

 
$

 
2

 
$
1,580

 
2

 
$
1,580

Commercial real estate
5

 
13,161

 
9

 
5,826

 
14

 
18,987

Commercial and industrial
1

 
640

 
3

 
2,586

 
4

 
3,226

Construction
1

 
313

 
2

 
405

 
3

 
718

Total commercial loans
7

 
14,114

 
16

 
10,397

 
23

 
24,511

Residential mortgage and consumer
32

 
8,375

 
49

 
14,553

 
81

 
22,928

Total
39

 
$
22,489

 
65

 
$
24,950

 
104

 
$
47,439




24


The following table presents information about troubled debt restructurings that occurred during the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30,
 
2016
 
2015
 
Number of
Loans
 
Pre-modification
Recorded
Investment
 
Post-
modification
Recorded
Investment
 
Number of
Loans
 
Pre-modification
Recorded
Investment
 
Post-
modification
Recorded
Investment
 
(Dollars in thousands)
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Multi-family

 
$

 
$

 
1

 
$
1,115

 
$
1,115

Commercial real estate
2

 
468

 
468

 
2

 
699

 
699

Construction

 

 

 
1

 
182

 
182

Residential mortgage and consumer
6

 
1,051

 
1,051

 
3

 
376

 
376

    
 
Nine Months Ended September 30,
 
2016
 
2015
 
Number of
Loans
 
Pre-modification
Recorded
Investment
 
Post-
modification
Recorded
Investment
 
Number of
Loans
 
Pre-modification
Recorded
Investment
 
Post-
modification
Recorded
Investment
 
(Dollars in thousands)
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Multi-family

 
$

 
$

 
1

 
$
1,115

 
$
1,115

Commercial real estate
5

 
1,039

 
1,039

 
3

 
777

 
777

Construction

 

 

 
2

 
1,508

 
1,508

Residential mortgage and consumer
20

 
2,600

 
2,600

 
16

 
2,830

 
2,830


Post-modification recorded investment represents the net book balance immediately following modification.
All TDRs are impaired loans, which are individually evaluated for impairment, as discussed above. Collateral dependent impaired loans classified as TDRs were written down to the estimated fair value of the collateral. There were no charge-offs for collateral dependant TDRs during the nine months ended September 30, 2016 and 2015. The allowance for loan losses associated with the TDRs presented in the above tables totaled $1.5 million and $1.8 million at September 30, 2016 and December 31, 2015, respectively.
Residential mortgage loan modifications primarily involved the reduction in loan interest rate and extension of loan maturity dates. All residential loans deemed to be TDRs were modified to reflect a reduction in interest rates to current market rates. Several residential TDRs include step up interest rates in their modified terms which will impact their weighted average yield in the future. Commercial loan modifications which qualified as a TDR comprised of terms of maturity being extended and reduction in interest rates to current market terms. For the nine months ended September 30, 2016, the Company had an existing TDR commercial loan for which the Company extended an existing working capital line of credit, however that loan subsequently was paid off during the same time period.

25


The following table presents information about pre and post modification interest yield for troubled debt restructurings which occurred during the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30,
 
2016
 
2015
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
 
 
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Multi-family

 
%
 
%
 
1

 
3.88
%
 
3.88
%
Commercial real estate
2

 
4.93
%
 
4.89
%
 
2

 
4.73
%
 
5.78
%
Construction

 
%
 
%
 
1

 
4.75
%
 
4.75
%
Residential mortgage and consumer
6

 
6.30
%
 
2.86
%
 
3

 
5.28
%
 
3.19
%
 
Nine Months Ended September 30,
 
2016
 
2015
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
 
 
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Multi-family

 
%
 
%
 
1

 
3.88
%
 
3.88
%
Commercial real estate
5

 
4.38
%
 
4.50
%
 
3

 
4.78
%
 
5.64
%
Construction

 
%
 
%
 
2

 
4.97
%
 
4.97
%
Residential mortgage and consumer
20

 
6.31
%
 
3.42
%
 
16

 
5.19
%
 
3.39
%
Payment defaults for loans modified as a TDR in the previous 12 months to September 30, 2016 consisted of 6 residential loans, 4 commercial real estate loans and 1 construction loan with a recorded investment of $1.0 million, $588,000 and $132,000, respectively, at September 30, 2016. Payment defaults for loans modified as TDRs in the previous 12 months to September 30, 2015 consisted of 1 residential loan with a recorded investment of $478,000 at September 30, 2015.

26


7.     Deposits
Deposits are summarized as follows:
 
 
September 30, 2016
 
December 31, 2015
 
(In thousands)
Checking accounts
$
5,875,559

 
4,636,025

Money market deposits
4,038,561

 
3,861,317

Savings
2,093,421

 
2,150,004

    Total transaction accounts
12,007,541

 
10,647,346

Certificates of deposit
2,944,201

 
3,416,310

    Total deposits
$
14,951,742

 
14,063,656





8.    Goodwill and Other Intangible Assets
The following table summarizes net intangible assets and goodwill at September 30, 2016 and December 31, 2015:
 
 
September 30,
2016
 
December 31,
2015
 
 
(In thousands)
Mortgage servicing rights
 
$
15,166

 
16,248

Core deposit premiums
 
9,138

 
11,332

Other
 
950

 
160

Total other intangible assets
 
25,254

 
27,740

Goodwill
 
77,571

 
77,571

Goodwill and intangible assets
 
$
102,825

 
105,311

 
The following table summarizes other intangible assets as of September 30, 2016 and December 31, 2015:
    
 
 
Gross Intangible Asset
 
Accumulated Amortization
 
Valuation Allowance
 
Net Intangible Assets
 
 
(In thousands)
September 30, 2016
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
26,386

 
(10,989
)
 
(231
)
 
15,166

Core deposit premiums
 
25,058

 
(15,920
)
 

 
9,138

Other
 
1,150

 
(200
)
 

 
950

Total other intangible assets
 
$
52,594

 
(27,109
)
 
(231
)
 
25,254

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
23,411

 
(7,042
)
 
(121
)
 
16,248

Core deposit premiums
 
25,058

 
(13,726
)
 

 
11,332

Other
 
300

 
(140
)
 

 
160

Total other intangible assets
 
$
48,769

 
(20,908
)
 
(121
)
 
27,740


27


Mortgage servicing rights are accounted for using the amortization method. Under this method, the Company amortizes the loan servicing asset in proportion to, and over the period of, estimated net servicing revenues. The Company sells loans on a servicing-retained basis. Loans that were sold on this basis had an unpaid principal balance of $2.01 billion and $2.12 billion at September 30, 2016 and December 31, 2015 respectively, all of which relate to residential mortgage loans. At September 30, 2016 and December 31, 2015, the servicing asset, included in intangible assets, had an estimated fair value of $15.2 million and $16.2 million, respectively. For the nine months ended September 30, 2016, fair value was based on expected future cash flows considering a weighted average discount rate of 13.00%, a weighted average constant prepayment rate on mortgages of 13.32% and a weighted average life of 5.8 years. Core deposit premiums are amortized using an accelerated method and having a weighted average amortization period of 10 years.

9.     Equity Incentive Plan

At the annual meeting held on June 9, 2015, stockholders of the Company approved the Investors Bancorp, Inc. 2015 Equity Incentive Plan ("2015 Plan") which provides for the issuance or delivery of up to 30,881,296 shares (13,234,841 restricted stock awards and 17,646,455 stock options) of Investors Bancorp, Inc. common stock.
    
Restricted shares granted under the 2015 Plan vest in equal installments, over the service period generally ranging from 5 to 7 years beginning one year from the date of grant. Additionally, certain restricted shares awarded are performance vesting awards, which may or may not vest depending upon the attainment of certain corporate financial targets. The vesting of restricted stock may accelerate in accordance with the terms of the 2015 Plan. The product of the number of shares granted and the grant date closing market price of the Company's common stock determine the fair value of restricted shares under the 2015 Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period. For the nine months ended September 30, 2016, the Company granted 271,890 shares of restricted stock awards under the 2015 Plan.

Stock options granted under the 2015 Plan vest in equal installments, over the service period generally ranging from 5 to 7 years beginning one year from the date of grant. The vesting of stock options may accelerate in accordance with the terms of the 2015 Plan. Stock options were granted at an exercise price equal to the fair value of the Company's common stock on the grant date based on the closing market price and have an expiration period of 10 years. For the nine months ended September 30, 2016, the Company granted 201,440 stock options under the 2015 Plan.

The fair value of stock options granted as part of the 2015 Plan was estimated utilizing the Black-Scholes option pricing model using the following assumptions for the period presented below.

 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
 
 
 
Weighted average expected life (in years)
 
7.00

 
7.43

Weighted average risk-free rate of return
 
1.67
%
 
1.96
%
Weighted average volatility
 
24.05
%
 
25.33
%
Dividend yield
 
1.93
%
 
1.59
%
Weighted average fair value of options granted
 
$
2.80

 
$
3.12

Total stock options granted
 
201,440

 
11,576,612


The weighted average expected life of the stock option represents the period of time that stock options are expected to be outstanding and is estimated using historical data of stock option exercises and forfeitures. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the historical volatility of the Company's stock. The Company recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards.


28


The Company applies ASC 718 "Compensation- Stock Compensation," ("ASC 718") and expenses the fair value of all share-based compensation granted over the requisite service periods. ASC 718 requires the Company to report as a financing cash flow the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense. In accordance with SEC Staff Accounting Bulletin No. 107 (“SAB 107”), the Company classified share-based compensation for employees and outside directors within “compensation and fringe benefits” in the consolidated statements of income to correspond with the same line item as the cash compensation paid.

The following table presents the share based compensation expense for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Stock option expense
$
1,508

 
1,499

 
4,498

 
1,513

Restricted stock expense
3,954

 
2,994

 
10,658

 
3,335

Total share based compensation expense
$
5,462

 
4,493

 
15,156

 
4,848


The following is a summary of the Company’s stock option activity and related information for its option plan for the nine months ended September 30, 2016:
 
 
 
Number of
Stock
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (in years)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2015
 
18,804,816

 

$10.00

 
6.8
 

$46,996

Granted
 
201,440

 
11.60

 
9.6
 
 
Exercised
 
(4,564,707
)
 
5.94

 
0.3
 
 
Forfeited
 
(65,360
)
 
12.54

 
 
 
 
Expired
 
(102
)
 
8.08

 
 
 
 
Outstanding at September 30, 2016
 
14,376,087

 

$11.30

 
7.9
 

$16,204

Exercisable at September 30, 2016
 
4,681,871

 

$8.78

 
5.1
 

$16,122

Expected future expense relating to the non-vested options outstanding as of September 30, 2016 is $28.5 million over a weighted average period of 5.0 years.

The following is a summary of the status of the Company’s restricted shares as of September 30, 2016 and changes therein during the nine months ended:
 
 
Number of Shares Awarded
 
Weighted Average Grant Date fair Value
Outstanding at December 31, 2015
 
6,759,832

 
$
12.54

Granted
 
271,890

 
11.52

Vested
 
(971,571
)
 
12.54

Forfeited
 
(17,500
)
 
12.54

Outstanding and non vested at September 30, 2016
 
6,042,651

 
$
12.50

Expected future expense relating to the non-vested restricted shares outstanding as of September 30, 2016 is $65.9 million over a weighted average period of 5.0 years.

10.     Net Periodic Benefit Plan Expense
The Company has an Executive Supplemental Retirement Wage Replacement Plan ("Wage Replacement Plan") and the Supplemental ESOP and Retirement Plan ("Supplemental ESOP") (collectively, the "SERPs"). The Wage Replacement Plan is a

29


nonqualified, defined benefit plan which provides benefits to certain executives as designated by the Compensation Committee of the Board of Directors. More specifically, the Wage Replacement Plan is designed to provide participants with a normal retirement benefit equal to an annual benefit of 60% of the participant's highest annual base salary and cash inventive (over a consecutive 36-month period within the last 120 consecutive calendar months of employment) reduced by the sum of the benefits provided under the Pentagra DB Plan and the annualized value of their benefits payable under the defined benefit portion of the Supplemental ESOP.
The Supplemental ESOP compensates certain executives (as designated by the Compensation Committee of the Board of Directors) participating in the Pentegra DB Plan and the ESOP whose contributions are limited by the Internal Revenue Code. The Company also maintains the Amended and Restated Director Retirement Plan ("Directors' Plan") for certain directors, which is a nonqualified, defined benefit plan. This plan was frozen on November 21, 2006 such that no new benefits accrued under, and no new directors were eligible to participate in the plan. The Wage Replacement Plan, Supplemental ESOP and the Directors’ Plan are unfunded and the costs of the plans are recognized over the period that services are provided.
The components of net periodic benefit cost are as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Service cost
$
894

 
774

 
2,681

 
2,322

Interest cost
474

 
374

 
1,422

 
1,123

Amortization of:
 
 
 
 
 
 
 
Prior service cost

 
12

 

 
37

Net gain
514

 
321

 
1,542

 
962

Total net periodic benefit cost
$
1,882

 
1,481

 
5,645

 
4,444

Due to the unfunded nature of these plans, no contributions have been made or were expected to be made to the SERPs and Directors’ Plan during the nine months ended September 30, 2016.
The Company also maintains a defined benefit pension plan. Since it is a multiemployer plan, costs of the pension plan are based on contributions required to be made to the pension plan. There was no contribution to the defined benefit pension plan during the nine months ended September 30, 2016. We anticipate contributing funds to the plan to meet any minimum funding requirements for the remainder of 2016.
    
11.    Derivatives and Hedging Activities

The Company uses various financial instruments, including derivatives, to manage its exposure to interest rate risk. Certain derivatives are designated as hedging instruments in a qualifying hedge accounting relationship (fair value or cash flow hedge.)

Cash Flow Hedges of Interest Rate Risk

The Company’s objective in using interest rate derivatives are to primarily reduce cost and add stability to interest expense in an effort to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of amounts subject to variability cuased by changes in interest rates from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is initially recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended September 30, 2016, such derivatives were used to hedge the variability in cash flows associated with certain short term wholesale funding transactions. During the three months ended September 30, 2016, the Company did not record any hedge ineffectiveness. The ineffective portion of the change in fair value of the derivatives would be recognized directly in earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $845,000 will be reclassified as an increase to interest expense.

30



Fair Values of Derivative Instruments on the Balance Sheet

The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015:
 
Asset Derivatives
 
Liability Derivatives
 
At September 30, 2016
 
At December 31, 2015
 
At September 30, 2016
 
At December 31, 2015
 
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
 
(In thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
Other assets
$

 
Other assets
$

 
Other liabilities
$
1,067

 
Other liabilities
$

Total derivatives designated as hedging instruments
 
$

 
 
$

 
 
$
1,067

 
 
$

 
 
 
 
 
 
 
 
 
 
 
 

Effect of Derivative Instruments on the Income Statement

The following table presents the effect of the Company’s derivative financial instruments on the Consolidated Statement of Income as of September 30, 2016 and 2015. The Company did not any have derivatives outstanding prior to the quarter ended September 30, 2016.
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
 
Three Months Ended September 30,
 
 
Three Months Ended September 30,
 
 
Three Months Ended September 30,
 
2016
 
2015
 
 
2016
 
2015
 
 
2016
 
2015
 
(In thousands)
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
(1,109
)
 
$

 
Interest expense
 
$
(42
)
 
$

 
Other non-interest income
 
$

 
$

Total
$
(1,109
)
 
$

 
 
 
$
(42
)
 
$

 
 
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




31


Offsetting Derivatives
The following table presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives in the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015. The net amounts of derivative liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Company's Consolidated Balance Sheets.
 
 
 
 
 
 
 
Gross Amounts Not Offset
 
 
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Financial Instruments
 
Cash Collateral Posted
 
Net Amount
 
(In thousands)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
1,067

 
$

 
$
1,067

 
$

 
$
(1,067
)
 
$

Total
$
1,067

 
$

 
$
1,067

 
$

 
$
(1,067
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$

 
$

 
$

 
$

 
$

 
$

Total
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty.
 
The Company has agreements with certain of its derivative counterparties that contain a provision where if the company fails to maintain its status as a well capitalized institution, then the Company could be required to terminate its derivative positions with the counterparty.

As of September 30, 2016, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1.1 million. As of September 30, 2016, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $6.0 million against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2016, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.


32


12.    Comprehensive Income

 The components of comprehensive income, both gross and net of tax, are as follows:
 
Three Months Ended September 30,
 
2016
 
2015
 
Gross
 
Tax
 
Net
 
Gross
 
Tax
 
Net
 
(Dollars in thousands)
Net income
$
71,728

 
(28,287
)
 
43,441

 
71,659

 
(22,865
)
 
48,794

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Change in funded status of retirement obligations
537

 
(219
)
 
318

 
351

 
(144
)
 
207

Unrealized (loss) gain on securities available-for-sale
(2,708
)
 
1,053

 
(1,655
)
 
6,357

 
(3,159
)
 
3,198

Accretion of loss on securities reclassified to held to maturity from available for sale
472

 
(193
)
 
279

 
627

 
(256
)
 
371

Reclassification adjustment for security gains included in net income
(72
)
 
29

 
(43
)
 
(1,537
)
 

 
(1,537
)
Other-than-temporary impairment accretion on debt securities
533

 
(218
)
 
315

 
319

 
(130
)
 
189

Net losses on derivatives arising during the period
(1,067
)
 
436

 
(631
)
 

 

 

Total other comprehensive (loss) income
(2,305
)
 
888

 
(1,417
)
 
6,117

 
(3,689
)
 
2,428

Total comprehensive income
$
69,423

 
(27,399
)
 
42,024

 
77,776

 
(26,554
)
 
51,222


 
Nine Months Ended September 30,
 
2016
 
2015
 
Gross
 
Tax
 
Net
 
Gross
 
Tax
 
Net
 
(Dollars in thousands)
Net income
$
215,619

 
(84,196
)
 
131,423

 
212,027

 
(74,924
)
 
137,103

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Change in funded status of retirement obligations
1,610

 
(658
)
 
952

 
1,058

 
(432
)
 
626

Unrealized gain on securities available-for-sale
19,652

 
(7,686
)
 
11,966

 
6,372

 
(2,644
)
 
3,728

Accretion of loss on securities reclassified to held to maturity from available for sale
1,433

 
(586
)
 
847

 
1,910

 
(780
)
 
1,130

Reclassification adjustment for security gains included in net income
(2,264
)
 
906

 
(1,358
)
 
(1,537
)
 

 
(1,537
)
Other-than-temporary impairment accretion on debt securities
1,179

 
(481
)
 
698

 
965

 
(394
)
 
571

Net losses on derivatives arising during the period
(1,067
)
 
436

 
(631
)
 

 

 

Total other comprehensive income
20,543

 
(8,069
)
 
12,474

 
8,768

 
(4,250
)
 
4,518

Total comprehensive income
$
236,162

 
(92,265
)
 
143,897

 
220,795

 
(79,174
)
 
141,621



33


The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the nine months ended September 30, 2016 and 2015:
 
 
Change in
funded status of
retirement
obligations
 
Accretion of loss on securities reclassified to held to maturity
 
Unrealized gains
on securities
available-for-sale and gains included in net income
 
Other-than-
temporary
impairment
accretion on  debt
securities
 
Unrealized Losses on Derivatives
 
Total
accumulated
other
comprehensive
loss
 
(Dollars in thousands)
Balance - December 31, 2015
$
(12,366
)
 
(3,080
)
 
1,371

 
(13,750
)
 

 
(27,825
)
Net change
952

 
847

 
10,608

 
698

 
(631
)
 
12,474

Balance - September 30, 2016
$
(11,414
)
 
(2,233
)
 
11,979

 
(13,052
)
 
(631
)
 
(15,351
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2014
$
(10,911
)
 
(4,528
)
 
7,851

 
(14,816
)
 

 
(22,404
)
Net change
626

 
1,130

 
2,191

 
571

 

 
4,518

Balance - September 30, 2015
$
(10,285
)
 
(3,398
)
 
10,042

 
(14,245
)
 

 
(17,886
)
 
The following table presents information about amounts reclassified from accumulated other comprehensive loss to the consolidated statement of income and the affected line item in the statement where net income is presented.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Reclassification adjustment for gains included in net income
 
 
 
 
 
 
 
Gain on security transactions, net
$
(72
)
 
(1,537
)
 
(2,264
)
 
(1,537
)
Change in funded status of retirement obligations (1)
 
 
 
 
 
 
 
Compensation and fringe benefits:
 
 
 
 
 
 
 
Amortization of prior service cost

 
12

 

 
40

Amortization of net gain
537

 
339

 
1,610

 
1,018

Compensation and fringe benefits
537

 
351

 
1,610

 
1,058

Reclassification adjustment for unrealized losses on derivatives
 
 
 
 
 
 
 
Unrealized losses on derivatives
42

 

 
42

 

Total before tax
507

 
(1,186
)
 
(612
)
 
(479
)
Income tax (expense) benefit
(190
)
 
(144
)
 
248

 
(432
)
Net of tax
$
317

 
(1,330
)
 
(364
)
 
(911
)

 (1) These accumulated other comprehensive loss components are included in the computations of net periodic cost for our defined benefit plans and other post-retirement benefit plan. See Note 10 for additional details.

13.    Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights (“MSR”), loans receivable and real estate owned (“REO”). These non-recurring fair value adjustments

34


involve the application of lower-of-cost-or-market accounting or write-downs of individual assets. Additionally, in connection with our mortgage banking activities we have commitments to fund loans held-for-sale and commitments to sell loans, which are considered free-standing derivative instruments, the fair values of which are not material to our financial condition or results of operations.
In accordance with Financial Accounting Standards Board ("FASB") ASC 820, “Fair Value Measurements and Disclosures”, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.
We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Assets Measured at Fair Value on a Recurring Basis
Securities available-for-sale
Our available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. The fair values of available-for-sale securities are based on quoted market prices (Level 1), where available. The Company obtains one price for each security primarily from a third-party pricing service (pricing service), which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available observable market information. For securities not actively traded (Level 2), the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and non-binding broker quotes. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service.

Derivatives
The fair values of interest rate swap agreements are based on a valuation model that uses primarily observable inputs, such as benchmark yield curves and interest rate spreads.

35


The following tables provide the level of valuation assumptions used to determine the carrying value of our assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015.
 
 
Carrying Value at September 30, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Equity securities
$
6,623

 
6,623

 

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
520,981

 

 
520,981

 

Federal National Mortgage Association
934,136

 

 
934,136

 

Government National Mortgage Association
50,406

 

 
50,406

 

Total mortgage-backed securities available-for-sale
1,505,523

 

 
1,505,523

 

Total securities available-for-sale
$
1,512,146

 
6,623

 
1,505,523

 

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
$
1,067

 

 
1,067

 

 
 
Carrying Value at December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Equity securities
$
6,495

 
6,495

 

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
547,451

 

 
547,451

 

Federal National Mortgage Association
726,072

 

 
726,072

 

Government National Mortgage Association
24,679

 

 
24,679

 

Total mortgage-backed securities available-for-sale
1,298,202

 

 
1,298,202

 

Total securities available-for-sale
$
1,304,697

 
6,495

 
1,298,202

 

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
$

 

 

 

There have been no changes in the methodologies used at September 30, 2016 from December 31, 2015, and there were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2016.


36


Assets Measured at Fair Value on a Non-Recurring Basis
Mortgage Servicing Rights, Net
Mortgage servicing rights are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At September 30, 2016, the fair value model used prepayment speeds ranging from 2.59% to 27.96% and a discount rate of 13.00% for the valuation of the mortgage servicing rights. At December 31, 2015, the fair value model used prepayment speeds ranging from 6.30% to 26.28% and a discount rate of 10.20% for the valuation of the mortgage servicing rights. A significant degree of judgment is involved in valuing the mortgage servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate.

Impaired Loans Receivable
Loans which meet certain criteria are evaluated individually for impairment. A loan is deemed to be impaired if it is a commercial loan with an outstanding balance greater than $1.0 million and on non-accrual status, loans modified in a troubled debt restructuring, and other commercial loans with $1.0 million in outstanding principal if management has specific information that it is probable they will not collect all amounts due under the contractual terms of the loan agreement. Our impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling costs. In order to estimate fair value, once interest or principal payments are 90 days delinquent or when the timely collection of such income is considered doubtful an updated appraisal is obtained. Thereafter, in the event the most recent appraisal does not reflect the current market conditions due to the passage of time and other factors, management will obtain an updated appraisal or make downward adjustments to the existing appraised value based on their knowledge of the property, local real estate market conditions, recent real estate transactions, and for estimated selling costs, if applicable. At September 30, 2016, appraisals were discounted in a range of 0%-25% for estimated costs to sell.
Other Real Estate Owned
Other Real Estate Owned is recorded at estimated fair value, less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are discounted an additional 0%-25% for estimated costs to sell. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If the estimated fair value of the asset declines, a writedown is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions. Operating costs after acquisition are generally expensed.

37


The following tables provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2016 and December 31, 2015. For the three months ended September 30, 2016 there was no change to the carrying value of impaired loans measured at fair value on a non-recurring basis. For the year ended December 31, 2015, there was no change to carrying value of impaired loans or mortgage servicing rights measured at fair value on a non-recurring basis.
 
 
 
 
 
 
Carrying Value at September 30, 2016
 Security Type
Valuation Technique
Unobservable Input
Range
Weighted Average
Total
Level 1
Level 2
Level 3
 
 
 
 
 
(In thousands)
MSR, net
Estimated cash flow
Prepayment speeds
2.59% - 27.96%
13.32%
$
12,874



12,874

Other real estate owned
Market comparable
Lack of marketability
0.0% - 25.0%
6.12%
97



97

 
 
 
 
 
$
12,971



12,971

 

 
 
 
 
Carrying Value at December 31, 2015
 Security Type
Valuation Technique
Unobservable Input
Range
Weighted Average
Total
Level 1
Level 2
Level 3
 
 
 
 
 
(In thousands)
Other real estate owned
Market comparable
Lack of marketability
0.0% - 25.0%
8.90%
$
510



510

 
 
 
 
 
$
510



510

Other Fair Value Disclosures
Fair value estimates, methods and assumptions for the Company’s financial instruments not recorded at fair value on a recurring or non-recurring basis are set forth below.

Cash and Cash Equivalents
For cash and due from banks, the carrying amount approximates fair value.
Securities Held-to-Maturity
Our held-to-maturity portfolio, consisting primarily of mortgage backed securities and other debt securities for which we have a positive intent and ability to hold to maturity, is carried at amortized cost. Management utilizes various inputs to determine the fair value of the portfolio. The Company obtains one price for each security primarily from a third-party pricing service, which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and non-binding broker quotes. In the absence of quoted prices and in an illiquid market, valuation techniques, which require inputs that are both significant to the fair value measurement and unobservable, are used to determine fair value of the investment. Valuation techniques are based on various assumptions, including, but not limited to forecasted cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, and liquidation values. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service.

38


FHLB Stock
The fair value of the Federal Home Loan Bank of New York ("FHLB") stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock and the Bank is required to hold a minimum investment based upon the balance of mortgage related assets held by the member.
Loans Held For Sale
The fair value of loans held for sale is its carrying value, since this is the amount for which the Company intends to sell it for. The fair value is determined based on quoted prices for similar instruments in active markets.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.
The fair value of performing loans, except residential mortgage loans, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs, if applicable. Fair value for significant non-performing loans is based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as savings, checking accounts and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates which approximate currently offered for deposits of similar remaining maturities.
Borrowings
The fair value of borrowings are based on securities dealers’ estimated fair values, when available, or estimated using discounted contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.

39


Commitments to Extend Credit
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For commitments to originate fixed rate loans, fair value also considers the difference between current levels of interest rates and the committed rates. Due to the short-term nature of our outstanding commitments, the fair values of these commitments are immaterial to our financial condition.
The carrying values and estimated fair values of the Company’s financial instruments are presented in the following table.
 
 
September 30, 2016
 
Carrying
 
Estimated Fair Value
 
value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
168,629

 
168,629

 
168,629

 

 

Securities available-for-sale
1,512,146

 
1,512,146

 
6,623

 
1,505,523

 

Securities held-to-maturity
1,794,131

 
1,868,397

 

 
1,792,551

 
75,846

Stock in FHLB
222,562

 
222,562

 
222,562

 

 

Loans held for sale
24,240

 
24,240

 

 
24,240

 

Net loans
18,068,182

 
18,081,383

 

 

 
18,081,383

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits, other than time deposits
$
12,007,541

 
12,007,541

 
12,007,541

 

 

Time deposits
2,944,201

 
2,944,208

 

 
2,944,208

 

Borrowed funds
4,203,711

 
4,261,340

 

 
4,261,340

 


 
December 31, 2015
 
Carrying
 
Estimated Fair Value
 
value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
148,904

 
148,904

 
148,904

 

 

Securities available-for-sale
1,304,697

 
1,304,697

 
6,495

 
1,298,202

 

Securities held-to-maturity
1,844,223

 
1,888,686

 

 
1,810,869

 
77,817

Stock in FHLB
178,437

 
178,437

 
178,437

 

 

Loans held for sale
7,431

 
7,431

 

 
7,431

 

Net loans
16,661,133

 
16,650,529

 

 

 
16,650,529

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits, other than time deposits
$
10,647,346

 
10,647,346

 
10,647,346

 

 

Time deposits
3,416,310

 
3,414,528

 

 
3,414,528

 

Borrowed funds
3,263,090

 
3,277,983

 

 
3,277,983

 

Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

40


Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred tax assets, premises and equipment and bank owned life insurance. Liabilities for pension and other postretirement benefits are not considered financial liabilities. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

14.    Recent Accounting Pronouncements
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", a new standard which addresses diversity in practice related to eight specific cash flow issues: debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities will apply the standard’s provisions using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the provisions of ASU No. 2016-15 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting", a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows entities to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on its cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period

41


presented in the financial statements. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company intends to adopt the accounting standard during the first quarter of 2018, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and early adoption is permitted. Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” ; ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”; ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”; and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”. These amendments are intended to improve and clarify the implementation guidance of ASU 2014-09 and have the same effective date as the original standard. The Company is currently evaluating the impact on its results of operations, financial position, and liquidity.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations- Simplifying the Accounting for Measurement-Period Adjustments." Under the new rules, acquirers no longer have to retrospectively adjust provisional amounts included in acquisition-date financial statements, when final facts and circumstances are not known on the acquisition date, and later become known in the measurement period. Instead, adjustments that are made in a later period are to be reported in that period. However, acquirers must disclose the amount of adjustments to current period income relating to amounts that would have been recognized in previous periods if the adjustments were recognized as of the acquisition date. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This guidance did not have a material impact to the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” The ASU changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. According to the ASU’s Basis for Conclusions, debt issuance costs incurred before the associated funding is received should be reported on the balance sheet as deferred charges until that debt liability amount is recorded. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This guidance did not have a material impact to the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-04, "Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets." The ASU gives an employer whose fiscal year-end does not coincide with a calendar month-end the ability, as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. The ASU also provides guidance on accounting for contributions to the plan and significant events that require a remeasurement that occur during the period between a month-end measurement date and the employer’s fiscal year-end. An entity should reflect the effects of those contributions or significant events in the measurement of the retirement benefit obligations and related plan assets. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. This guidance did not have a material impact to the Company's consolidated financial statements.

42



15.    Subsequent Events
As defined in FASB ASC 855, "Subsequent Events", subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Financial statements are considered issued when they are widely distributed to stockholders and other financial statement users for general use and reliance in a form and format that complies with GAAP.
On October 27, 2016, the Company declared a cash dividend of $0.08 per share. The $0.08 dividend per share will be paid to stockholders on November 23, 2016, with a record date of November 10, 2016.


43



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which Investors Bancorp, Inc. (the “Company”) operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations or interpretations of regulations affecting financial institutions, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. Reference is made to Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 and additional risk factors included in Part II, Item 1A of this quarterly report.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events except as may be required by law.

Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies.
Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
The allowance for loan losses has been determined in accordance with U.S. GAAP, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. Loans acquired are marked to fair value on the date of acquisition with no valuation allowance reflected in the allowance for loan losses. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan loss, the Company performs an analysis on acquired loans to determine whether or not there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in their calculation of the allowance for loan loss.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans determined to be impaired. A loan is deemed to be impaired if it is a commercial loan with an outstanding balance greater than $1.0 million and on non-accrual status, loans modified in a troubled debt restructuring ("TDR"), and other commercial loans greater than $1.0 million if management has specific information that it is probable we will not collect all amounts due under the contractual terms of the loan agreement. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk rating (if applicable) and payment history. In addition, the Company's residential portfolio is subdivided between fixed and adjustable rate loans as adjustable rate loans are deemed to be subject to more credit risk if interest rates rise. We also analyze historical loss experience using the appropriate look-back and loss emergence period. The loss factors used are based on the Company's historical loss experience over a look-back period determined to provide

44


the appropriate amount of data to accurately estimate expected losses as of period end. Additionally, management assesses the loss emergence period for the expected losses of each loan segment and adjusts each historical loss factor accordingly. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first full or partial loan charge-off), and is determined based upon a study of the Company's past loss experience by loan segment. The loss factors may also be adjusted to account for qualitative or environmental factors that are likely to cause estimated credit losses inherent in the portfolio to differ from historical loss experience. This evaluation is based on among other things, loan and delinquency trends, general economic conditions, geographic concentrations, lending policies and procedures and industry and peer comparisons, but is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
Purchased Credit-Impaired ("PCI") loans, are loans acquired at a discount due, in part, to credit quality. PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses). The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loans and would result in an increase in yield on a prospective basis. The Company analyzes the actual cash flow versus the forecasts and any adjustments to credit loss expectations are made based on actual loss recognized as well as changes in the probability of default. For a period in which cash flows aren't reforecasted, prior period's estimated cash flows are adjusted to reflect the actual cash received and credit events that occurred during the current reporting period.
On a quarterly basis, management reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. Loans determined to be impaired are evaluated for potential loss. Any shortfall results in a recommendation of a charge-off or specific allowance if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value for real property or a discounted cash flow analysis on a business. This appraised value for real property is then reduced to reflect estimated liquidation expenses. Acquired loans are marked to fair value on the date of acquisition.
The allowance contains reserves identified as unallocated. These reserves reflect management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of probable credit losses.
Our lending emphasis has been the origination of commercial real estate loans, multi-family loans, commercial and industrial loans and the origination and purchase of residential mortgage loans. We also originate home equity loans and home equity lines of credit. These activities resulted in a concentration of loans secured by real estate property and businesses located in New Jersey and New York. Based on the composition of our loan portfolio, we believe the primary risks to our loan portfolio are increases in interest rates, a decline in the general economy, and declines in real estate market values in New Jersey, New York and surrounding states. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. We consider it important to maintain the ratio of our allowance for loan losses to total loans at an adequate level given current economic conditions and the composition of the portfolio. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Negative changes to appraisal assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are carefully reviewed to determine that the resulting values reasonably reflect amounts realizable on the related loans.
For commercial real estate, multi-family and construction loans, the Company obtains an appraisal for all collateral dependent loans upon origination. An updated appraisal is obtained annually for loans rated substandard or worse with a balance of $500,000 or greater. An updated appraisal is obtained biennially for loans rated special mention with a balance of $2.0 million or greater. This is done in order to determine the specific reserve or charge off needed. As part of the allowance for loan loss process, the Company reviews each collateral dependent commercial real estate loan classified as non-accrual and/or impaired and assesses whether there has been an adverse change in the collateral value supporting the loan. The Company utilizes information from its commercial lending officers and its credit department and loan workout department's knowledge of changes in real estate conditions in our lending area to identify if possible deterioration of collateral value has occurred. Based on the severity of the changes in market conditions, management determines if an updated appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined that the deterioration of the collateral value is significant enough to warrant ordering

45


a new appraisal, an estimate of the downward adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated appraisal is received.
For homogeneous residential mortgage loans, the Company's policy is to obtain an appraisal upon the origination of the loan and an updated appraisal in the event a loan becomes 90 days delinquent. Thereafter, the appraisal is updated every two years if the loan remains in non-performing status and the foreclosure process has not been completed. Management adjusts the appraised value of residential loans to reflect estimated selling costs and estimated declines in the real estate market.
Management believes the potential risk for outdated appraisals for impaired and other non-performing loans has been mitigated due to the fact that the loans are individually assessed to determine that the loan's carrying value is not in excess of the fair value of the collateral. Loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt.
Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if the current economic environment deteriorates. Management uses relevant information available; however, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Deferred Income Taxes. The Company records income taxes in accordance with ASC 740, “Income Taxes,” as amended, using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforwards became deductible. Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.
Asset Impairment Judgments. Certain of our assets are carried on our consolidated balance sheets at cost, fair value or at the lower of cost or fair value. Valuation allowances or write-downs are established when necessary to recognize impairment of such assets. We periodically perform analyses to test for impairment of such assets. In addition to the impairment analyses related to our loans discussed above, another significant impairment analysis is the determination of whether there has been an other-than-temporary decline in the value of one or more of our securities.
Our available-for-sale portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders' equity. While the Company does not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before their anticipated recovery of the remaining carrying value, we have the ability to sell the securities. Our held-to-maturity portfolio, consisting primarily of mortgage- backed securities and other debt securities for which we have a positive intent and ability to hold to maturity, is carried at carrying value. We conduct a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. Management utilizes various inputs to determine the fair value of the portfolio.  The use of different assumptions could have a positive or negative effect on our consolidated financial condition or results of operations.
If a determination is made that a debt security is other-than-temporarily impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as an other-than-temporary impairment charge in non-interest income as a component of gain (loss) on securities, net. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.
Goodwill Impairment. Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. Goodwill was last evaluated on November 1, 2015. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. For purposes of our goodwill impairment testing, we have identified a single reporting unit.
In connection with our annual impairment assessment we applied the guidance in FASB ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill

46


impairment test. At September 30, 2016, our qualitative assessment concluded that it was not more likely than not that the fair value of the reporting unit is less than its carrying amount and, therefore, the two-step goodwill impairment test was not required.
Valuation of Mortgage Servicing Rights ("MSR"). The initial asset recognized for originated MSR is measured at fair value. The fair value of MSR is estimated by reference to current market values of similar loans sold with servicing released. MSR are amortized in proportion to and over the period of estimated net servicing income. We apply the amortization method for measurements of our MSR. MSR are assessed for impairment based on fair value at each reporting date. MSR impairment, if any, is recognized in a valuation allowance through charges to earnings as a component of fees and service charges. Subsequent increases in the fair value of impaired MSR are recognized only up to the amount of the previously recognized valuation allowance.
The estimated fair value of the MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market's perception of future interest rate movements. The valuation allowance is then adjusted in subsequent periods to reflect changes in the measurement of impairment. All assumptions are reviewed for reasonableness on a quarterly basis to ensure they reflect current and anticipated market conditions.
The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.
Stock-Based Compensation. We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards in accordance with ASC 718, “Compensation-Stock Compensation”. We estimate the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black- Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets. The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

Executive Summary
Since the Company's initial public offering in 2005, we have transitioned from a wholesale thrift business to a retail commercial bank. This transition has been primarily accomplished by increasing the amount of our commercial loans and core deposits (savings, checking and money market accounts.) Our transformation can be attributed to a number of factors, including organic growth, de novo branches, bank and branch acquisitions, as well as expanding our product offerings. We believe the attractive markets we operate in, namely, New Jersey and the greater New York metropolitan area, will continue to provide us with growth opportunities. Our primary focus is to build and develop profitable customer relationships across all lines of business, both consumer and commercial.
Our results of operations depend primarily on net interest income, which is directly impacted by the market interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily loans and investment securities, and the interest we pay on our interest-bearing liabilities, primarily interest-bearing transaction accounts, time deposits, and borrowed funds. Net interest income is affected by the level of interest rates, the shape of the market yield curve, the timing of the placement and the repricing of interest-earning assets and interest-bearing liabilities on our balance sheet, and the prepayment rate on our mortgage-related assets.
The persistent low interest rate environment over the past several years and a flattening of the yield curve have resulted in sustained pressure on our net interest margin.  Interest-earning assets continue to be originated or re-priced at yields lower than the overall portfolio, and competitive pricing remains strong in both the loan and deposit markets.  But despite the overall flattening of the treasury yield curve, we have been able to generally offset net interest margin compression through interest earning asset growth. We continue to actively manage our interest rate risk against a backdrop of slow but positive economic growth and the

47


potential for additional increases in short-term rates before the end of 2016.  If short-term interest rates increase, and the yield curve flattens further, we may be subject to near-term net interest margin compression.  Should the treasury yield curve steepen, we may experience an improvement in net interest income, particularly if short-term interest rates remain unchanged.
Our results of operations are also significantly affected by general economic conditions. While the consumer continues to benefit from lower energy costs and improved housing and employment metrics, the velocity of economic growth, domestically and internationally, remains sluggish. The overall level of non-performing loans remains low compared to our national and regional peers. We attribute this to our conservative underwriting standards, our diligence in resolving our problem loans as well as the unseasoned nature of our loan portfolio.
We continue to grow and transform the composition of our balance sheet. Total assets increased by $1.65 billion, or 7.9%, to $22.54 billion at September 30, 2016, from $20.89 billion at December 31, 2015. Net loans increased $1.41 billion, or 8.4%, to $18.07 billion at September 30, 2016 from $16.66 billion at December 31, 2015, and securities increased by $157.4 million, or 5.0%, to $3.31 billion at September 30, 2016 from $3.15 billion at December 31, 2015. During the nine months ended September 30, 2016, we originated $1.74 billion in multi-family loans, $670.0 million in commercial and industrial loans, $442.0 million in commercial real estate loans, $395.0 million in residential loans, $335.7 million in construction loans and $235.7 million in consumer and other loans. Our strategic objective is to become more commercial bank like and maintain a well-diversified loan portfolio. We understand the heightened regulatory sensitivity around commercial real estate and multi-family concentration and continue to be diligent in our underwriting and credit risk monitoring of these portfolios. 
On May 3, 2016, we announced the signing of a definitive merger agreement with The Bank of Princeton. As of June 30, 2016, The Bank of Princeton had assets of $1.0 billion, loans of $809 million and deposits of $812 million and operated 10 branches in New Jersey and 3 in the Philadelphia market. The transaction is subject to regulatory approvals and customary closing conditions.
Capital management is a key component of our business strategy. We continue to manage our capital through a combination of organic growth, acquisitions, stock repurchases and cash dividends. Effective capital management and prudent growth allowed us to effectively leverage the capital from the Company’s public offerings, while being mindful of tangible book value for stockholders. Our capital to total assets ratio has decreased to 13.82% at September 30, 2016 from 15.85% at December 31, 2015. In March 2015, we commenced the first stock repurchase plan since our second step for 5% of our outstanding shares of common stock, or approximately 17.9 million shares. This repurchase plan was completed in June 2015 when we announced our second share repurchase program which authorizes the repurchase of an additional 10% of outstanding shares of common stock, or approximately 34.8 million shares. On April 28, 2016, the Company announced its third share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or approximately 31.5 million shares. This plan commenced immediately upon the completion of the second repurchase plan in June 2016. Stockholders' equity was impacted for the nine months ended September 30, 2016 by the repurchase of 29.2 million shares of common stock for $337.5 million as well as cash dividends of $0.18 per share totaling $57.6 million. On October 27, 2016, our Board of Directors declared a cash dividend of $0.08 per share, an increase of $0.02 from the prior quarter. The dividend increase reinforces the Company's confidence in its business model and its plan to evolve into a more commercial focused bank.
We will continue to execute our business strategies with a focus on prudent and opportunistic growth while producing financial results that will create value for our stockholders. We intend to continue to grow our business and strengthen our market share through planned de novo branching, enhanced product offerings, investments in our people and opportunistic acquisitions in our market area. During 2016, we continue to enhance our employee training and development programs, build additional risk management and operational infrastructure and add key personnel as our company grows and our business changes. We will continue to enhance stockholder value through our strategic capital initiatives, including growth both organically and through acquisitions, stock buybacks and dividend payments.

Comparison of Financial Condition at September 30, 2016 and December 31, 2015

Total Assets. Total assets increased by $1.65 billion, or 7.9%, to $22.54 billion at September 30, 2016 from $20.89 billion at December 31, 2015. Net loans increased $1.41 billion, or 8.4% to $18.07 billion at September 30, 2016 from $16.66 billion at December 31, 2015, while securities increased by $157.4 million, or 5.0%, to $3.31 billion at September 30, 2016 from $3.15 billion at December 31, 2015.


48


Net Loans. Net loans increased by $1.41 billion, or 8.4%, to $18.07 billion at September 30, 2016 from $16.66 billion at December 31, 2015. The detail of the loan portfolio (including PCI loans) is below:
    
 
September 30, 2016
 
December 31, 2015
 
(Dollars in thousands)
Commercial Loans:
 
 
 
Multi-family loans
$
7,360,733

 
$
6,255,903

Commercial real estate loans
4,103,250

 
3,829,099

Commercial and industrial loans
1,191,234

 
1,044,386

Construction loans
277,155

 
225,843

Total commercial loans
12,932,372

 
11,355,231

Residential mortgage loans
4,798,386

 
5,039,543

Consumer and other
576,402

 
496,556

Total Loans
18,307,160

 
16,891,330

Net unamortized premiums and deferred loan costs
(15,428
)
 
(11,692
)
Allowance for loan losses
(223,550
)
 
(218,505
)
Net loans
$
18,068,182

 
$
16,661,133


During the nine months ended September 30, 2016, we originated $1.74 billion in multi-family loans, $670.0 million in commercial and industrial loans, $442.0 million in commercial real estate loans, $395.0 million in residential loans, $335.7 million in construction loans and $235.7 million in consumer and other loans. This increase in loans reflects our continued focus on generating multi-family loans, commercial real estate loans and commercial and industrial loans, which was partially offset by pay downs and payoffs of loans. Our loans are primarily on properties and businesses located in New Jersey and New York.
    
Our loan portfolio contains interest-only one-to four-family mortgage loans in which the borrower makes only interest payments for the first five, seven or ten years of the mortgage loan term. This feature will result in future increases in the borrower’s contractually required payments due to the required amortization of the principal amount after the interest-only period. These payment increases could affect the borrower’s ability to repay the loan. The amount of interest-only one-to four-family mortgage loans at September 30, 2016 and December 31, 2015 was $136.8 million and $172.3 million, respectively. From time to time and for competitive purposes, we originate commercial loans with limited interest only periods. As of September 30, 2016, we had $631.3 million commercial real estate interest only loans in our loan portfolio, of which $498.7 million have twenty-four months or less remaining on the interest only term. We maintained stricter underwriting criteria for these interest-only loans than for amortizing loans. We believe these criteria adequately control the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks.
    
In addition to the loans originated for our portfolio, our mortgage subsidiary, Investors Home Mortgage Co., originated $166.5 million during the nine months ended September 30, 2016 in residential mortgage loans that were sold to third party investors.


49


    The following table sets forth non-accrual loans and accruing past due loans (excluding PCI loans and loans held-for-sale) on the dates indicated as well as certain asset quality ratios:
 
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
# of Loans
Amount
 
# of Loans
Amount
 
# of Loans
Amount
 
# of Loans
Amount
 
# of Loans
Amount
 
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
1

$
0.2

 
2

$
1.2

 
3

$
2.9

 
4

$
3.5

 
4

$
3.0

Commercial real estate
29

8.9

 
33

11.7

 
35

10.3

 
37

10.8

 
40

13.8

Commercial and industrial
6

2.3

 
6

0.7

 
10

5.6

 
17

9.2

 
9

6.5

Construction


 
1

0.2

 
3

0.5

 
4

0.8

 
5

1.0

Total commercial loans
36

11.4

 
42

13.8

 
51

19.3

 
62

24.3

 
58

24.3

Residential and consumer
481

86.1

 
471

86.5

 
488

85.9

 
500

91.1

 
506

99.8

Total non-accrual loans
517

$
97.5

 
513

$
100.3

 
539

$
105.2

 
562

$
115.4

 
564

$
124.1

Accruing troubled debt restructured loans
31

$
8.8

 
29

$
12.1

 
30

$
10.7

 
39

$
22.5

 
38

$
25.2

Non-accrual loans to total loans
 
0.53
%
 
 
0.57
%
 
 
0.61
%
 
 
0.68
%
 
 
0.76
%
Allowance for loan loss as a percent of non-accrual loans
 
229.31
%
 
 
219.60
%
 
 
205.83
%
 
 
189.30
%
 
 
175.97
%
Allowance for loan loss as a percent of total loans
 
1.22
%
 
 
1.25
%
 
 
1.26
%
 
 
1.29
%
 
 
1.33
%
Total non-accrual loans decreased to $97.5 million at September 30, 2016 compared to $100.3 million at June 30, 2016 and $124.1 million at September 30, 2015. We continue to diligently resolve our troubled loans, however it takes a long period of time to resolve residential credits in our lending area. At September 30, 2016, there were $30.0 million of loans deemed as troubled debt restructurings, of which $23.5 million were residential and consumer loans, $4.1 million were commercial real estate loans, and $2.4 million were commercial and industrial loans. Troubled debt restructured loans in the amount of $8.8 million were classified as accruing and $21.2 million were classified as non-accrual at September 30, 2016.
In addition to non-accrual loans, we continue to monitor our portfolio for potential problem loans. Potential problem loans are defined as loans about which we have concerns as to the ability of the borrower to comply with the current loan repayment terms and which may cause the loan to be placed on non-accrual status. As of September 30, 2016, the Company has deemed potential problem loans excluding PCI loans, totaling $47.7 million, which comprised of 16 commercial real estate loans totaling $40.7 million, 4 multi-family loans totaling $5.2 million and 11 commercial and industrial loans totaling $1.8 million. Included in potential problem loans is a single relationship totaling $21.0 million. The properties are single tenant and well-collateralized with strong loan to value ratios. Management is actively monitoring all these loans.
The ratio of non-accrual loans to total loans was 0.53% at September 30, 2016 compared to 0.68% at December 31, 2015. The allowance for loan losses as a percentage of non-accrual loans was 229.31% at September 30, 2016 compared to 189.30% at December 31, 2015. At September 30, 2016, our allowance for loan losses as a percentage of total loans was 1.22% compared to 1.29% at December 31, 2015.
At September 30, 2016, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans totaling $33.0 million, of which $12.7 million of impaired loans had a specific allowance for credit losses of $1.5 million and $20.3 million of impaired loans had no specific allowance for credit losses. At December 31, 2015, loans meeting the Company’s

50


definition of an impaired loan were primarily collateral dependent loans totaling $57.0 million, of which $19.1 million had a related allowance for credit losses of $4.2 million and $37.8 million had no related allowance for credit losses.
The allowance for loan losses increased by $5.1 million to $223.6 million at September 30, 2016 from $218.5 million at December 31, 2015. The increase in our allowance for loan losses is due to the growth of the loan portfolio particularly the inherent credit risk associated with commercial real estate lending as well as commercial and industrial loans. Future increases in the allowance for loan losses may be necessary based on the growth and composition of the loan portfolio, the level of loan delinquency and the economic conditions in our lending area. At September 30, 2016, our allowance for loan loss as a percent of total loans was 1.22%.
The following table sets forth the allowance for loan losses at September 30, 2016 and December 31, 2015 allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
September 30, 2016
 
December 31, 2015
 
Allowance for
Loan Losses
 
Percent of Loans
in Each Category
to Total Loans
 
Allowance for
Loan Losses
 
Percent of Loans
in Each Category
to Total Loans
 
(Dollars in thousands)
End of period allocated to:
 
 
 
 
 
 
 
Multi-family loans
$
93,420

 
40.21
%
 
$
88,223

 
37.04
%
Commercial real estate loans
49,981

 
22.41
%
 
46,999

 
22.67
%
Commercial and industrial loans
44,108

 
6.51
%
 
40,585

 
6.18
%
Construction loans
9,988

 
1.51
%
 
6,794

 
1.34
%
Residential mortgage loans
21,358

 
26.21
%
 
31,443

 
29.83
%
Consumer and other loans
2,877

 
3.15
%
 
3,155

 
2.94
%
Unallocated
1,818

 

 
1,306

 

Total allowance
$
223,550

 
100.00
%
 
$
218,505

 
100.00
%

Securities. Securities are held primarily for liquidity, interest rate risk management and long-term yield enhancement. Our Investment Policy requires that investment transactions conform to Federal and New Jersey State investment regulations. Our investments purchased may include, but are not limited to, U.S. Treasury obligations, securities issued by various Federal Agencies, State and Municipal subdivisions, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment grade corporate debt instruments, and mutual funds. In addition, Investors Bancorp may invest in equity securities subject to certain limitations. Purchase decisions are based upon a thorough analysis of each security to determine it conforms to our overall asset/liability management objectives. The analysis must consider its effect on our risk-based capital measurement, prospects for yield and/or appreciation and other risk factors. Securities are classified as held-to-maturity or available-for-sale when purchased.
        
At September 30, 2016, our securities portfolio represented 14.7% of our total assets. Securities, in the aggregate, increased by $157.4 million, or 5.0%, to $3.31 billion at September 30, 2016 from $3.15 billion at December 31, 2015. This increase was a result of purchases partially offset by paydowns and sales.
Stock in the Federal Home Loan Bank, Bank Owned Life Insurance and Other Assets. The amount of stock we own in the FHLB increased by $44.1 million, or 24.7%, to $222.6 million at September 30, 2016 from $178.4 million at December 31, 2015. The amount of stock we own in the FHLB is primarily related to the balance of borrowings, therefore the increase in borrowings has an impact on FHLB stock owned. Bank owned life insurance was $161.2 million at September 30, 2016 and $159.2 million at December 31, 2015. Other assets were $3.7 million at September 30, 2016 and $4.7 million at December 31, 2015.
Deposits.  At September 30, 2016, deposits totaled $14.95 billion, representing 77.0% of our total liabilities. Our deposit strategy is focused on attracting core deposits (savings, checking and money market accounts), resulting in a deposit mix of lower cost core products. We remain committed to our plan of attracting more core deposits because core deposits represent a more stable source of low cost funds and may be less sensitive to changes in market interest rates.

51


We have a suite of commercial deposit products, designed to appeal to small business owners and non-profit organizations. The interest rates we pay, our maturity terms, service fees and withdrawal penalties are all reviewed on a periodic basis. Deposit
rates and terms are based primarily on our current operating strategies, market rates, liquidity requirements, rates paid by competitors and growth goals. We also rely on personalized customer service, long-standing relationships with customers, involvement in the communities we serve and an active marketing program to attract and retain deposits.
Deposits increased by $888.1 million, or 6.3%, from $14.06 billion at December 31, 2015 to $14.95 billion at September 30, 2016. Checking accounts increased $1.24 billion to $5.88 billion at September 30, 2016 from $4.64 billion at December 31, 2015. Core deposits represented approximately 80% of our total deposit portfolio at September 30, 2016, compared to 76% of our total deposit portfolio at December 31, 2015.

The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated:
 
September 30, 2016
 
December 31, 2015
 
Balance
Percent of Total Deposit
 
Balance
Percent of Total Deposit
 
(Dollars in thousands)
Checking accounts
$
5,875,559

39
%
 
$
4,636,025

33
%
Money market deposits
4,038,561

27
%
 
3,861,317

27
%
Savings
2,093,421

14
%
 
2,150,004

15
%
Total core deposits
12,007,541

80
%
 
10,647,346

76
%
Certificates of deposit
2,944,201

20
%
 
3,416,310

24
%
Total Deposits
$
14,951,742

100
%
 
$
14,063,656

100
%
Borrowed Funds.  We borrow directly from the FHLB and various financial institutions. Our FHLB borrowings, frequently referred to as advances, are over collateralized by our residential and non-residential mortgage portfolios as well as qualified investment securities. Borrowed funds increased by $940.6 million, or 28.8%, to $4.20 billion at September 30, 2016 from $3.26 billion at December 31, 2015 to help fund the continued growth of the loan portfolio.
Stockholders’ Equity. Stockholders' equity decreased by $196.6 million to $3.12 billion at September 30, 2016 from $3.31 billion at December 31, 2015. The decrease is primarily attributed to the repurchase of 29.2 million shares of common stock for $337.5 million as well as cash dividends of $0.18 per share totaling $57.6 million for the nine months ended September 30, 2016. These decreases were offset by net income of $131.4 million for the nine months ended September 30, 2016.
Analysis of Net Interest Income
Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, however interest receivable on these loans have been fully reserved for and not included in interest income. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


52


 
 
Three Months Ended September 30,
 
 
2016
 
2015
 
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
129,226

 
$
76

 
0.24
%
 
$
224,276

 
$
68

 
0.12
%
Securities available-for-sale
 
1,424,338

 
6,315

 
1.77
%
 
1,274,256

 
5,759

 
1.81
%
Securities held-to-maturity
 
1,815,288

 
10,434

 
2.30
%
 
1,772,043

 
9,983

 
2.25
%
Net loans
 
17,707,883

 
179,234

 
4.05
%
 
15,843,434

 
169,216

 
4.27
%
Stock in FHLB
 
216,813

 
2,315

 
4.27
%
 
177,616

 
1,871

 
4.21
%
Total interest-earning assets
 
21,293,548

 
198,374

 
3.73
%
 
19,291,625

 
186,897

 
3.88
%
Non-interest-earning assets
 
778,244

 
 
 
 
 
773,225

 
 
 
 
Total assets
 
$
22,071,792

 
 
 
 
 
$
20,064,850

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
2,104,583

 
$
2,463

 
0.47
%
 
$
2,178,877

 
$
1,732

 
0.32
%
Interest-bearing checking
 
3,472,472

 
4,451

 
0.51
%
 
2,632,445

 
2,255

 
0.34
%
Money market accounts
 
3,971,339

 
5,719

 
0.58
%
 
3,571,504

 
5,602

 
0.63
%
Certificates of deposit
 
3,009,330

 
7,693

 
1.02
%
 
3,283,262

 
9,075

 
1.11
%
Total interest-bearing deposits
 
12,557,724

 
20,326

 
0.65
%
 
11,666,088

 
18,664

 
0.64
%
Borrowed funds
 
4,074,743

 
18,442

 
1.81
%
 
3,245,751

 
16,959

 
2.09
%
Total interest-bearing liabilities
 
16,632,467

 
38,768

 
0.93
%
 
14,911,839

 
35,623

 
0.96
%
Non-interest-bearing liabilities
 
2,316,873

 
 
 
 
 
1,766,491

 
 
 
 
Total liabilities
 
18,949,340

 
 
 
 
 
16,678,330

 
 
 
 
Stockholders’ equity
 
3,122,452

 
 
 
 
 
3,386,520

 
 
 
 
Total liabilities and stockholders’ equity
 
$
22,071,792

 
 
 
 
 
$
20,064,850

 
 
 
 
Net interest income
 
 
 
$
159,606

 
 
 
 
 
$
151,274

 
 
Net interest rate spread(1)
 
 
 
 
 
2.80
%
 
 
 
 
 
2.92
%
Net interest-earning assets(2)
 
$
4,661,081

 
 
 
 
 
$
4,379,786

 
 
 
 
Net interest margin(3)
 
 
 
 
 
3.00
%
 
 
 
 
 
3.14
%
Ratio of interest-earning assets to total interest-bearing liabilities
 
1.28

 
 
 
 
 
1.29

 
 
 
 

(1)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest margin represents net interest income divided by average total interest-earning assets.

53


 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
141,230

 
$
253

 
0.24
%
 
$
203,336

 
$
124

 
0.08
%
Securities available-for-sale
 
1,339,122

 
18,350

 
1.83
%
 
1,236,175

 
16,676

 
1.80
%
Securities held-to-maturity
 
1,856,318

 
32,453

 
2.33
%
 
1,668,829

 
27,956

 
2.23
%
Net loans
 
17,218,547

 
527,989

 
4.09
%
 
15,515,391

 
493,783

 
4.24
%
Stock in FHLB
 
197,958

 
6,396

 
4.31
%
 
171,194

 
5,046

 
3.93
%
Total interest-earning assets
 
20,753,175

 
585,441

 
3.76
%
 
18,794,925

 
543,585

 
3.86
%
Non-interest-earning assets
 
774,102

 
 
 
 
 
768,739

 
 
 
 
Total assets
 
$
21,527,277

 
 
 
 
 
$
19,563,664

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
2,099,960

 
$
7,184

 
0.46
%
 
$
2,275,965

 
$
5,026

 
0.29
%
Interest-bearing checking
 
3,207,413

 
11,198

 
0.47
%
 
2,694,033

 
7,110

 
0.35
%
Money market accounts
 
3,868,155

 
16,384

 
0.56
%
 
3,504,684

 
17,538

 
0.67
%
Certificates of deposit
 
3,258,702

 
26,873

 
1.10
%
 
2,824,479

 
21,438

 
1.01
%
Total interest-bearing deposits
 
12,434,230

 
61,639

 
0.66
%
 
11,299,161

 
51,112

 
0.60
%
Borrowed funds
 
3,667,473

 
52,328

 
1.90
%
 
3,141,608

 
48,205

 
2.05
%
Total interest-bearing liabilities
 
16,101,703

 
113,967

 
0.94
%
 
14,440,769

 
99,317

 
0.92
%
Non-interest-bearing liabilities
 
2,234,692

 
 
 
 
 
1,637,013

 
 
 
 
Total liabilities
 
18,336,395

 
 
 
 
 
16,077,782

 
 
 
 
Stockholders’ equity
 
3,190,882

 
 
 
 
 
3,485,882

 
 
 
 
Total liabilities and stockholders’ equity
 
$
21,527,277

 
 
 
 
 
$
19,563,664

 
 
 
 
Net interest income
 
 
 
$
471,474

 
 
 
 
 
$
444,268

 
 
Net interest rate spread(1)
 
 
 
 
 
2.82
%
 
 
 
 
 
2.94
%
Net interest-earning assets(2)
 
$
4,651,472

 
 
 
 
 
$
4,354,156

 
 
 
 
Net interest margin(3)
 
 
 
 
 
3.03
%
 
 
 
 
 
3.15
%
Ratio of interest-earning assets to total interest-bearing liabilities
 
1.29

 
 
 
 
 
1.30

 
 
 
 

54


Comparison of Operating Results for the Three and Nine Months Ended September 30, 2016 and 2015
Net Income. Net income for the three months ended September 30, 2016 was $43.4 million compared to net income of $48.8 million for the three months ended September 30, 2015. Net income for the nine months ended September 30, 2016 was $131.4 million compared to net income of $137.1 million for the nine months ended September 30, 2015.
Net Interest Income. Net interest income increased by $8.3 million, or 5.5% to $159.6 million for the three months ended September 30, 2016 from $151.3 million for the three months ended September 30, 2015. The net interest margin decreased 14 basis points to 3.00% for the three months ended September 30, 2016 from 3.14% for the three months ended September 30, 2015.
Net interest income increased by $27.2 million, or 6.1% to $471.5 million for the nine months ended September 30, 2016 from $444.3 million for the nine months ended September 30, 2015. The net interest margin decreased 12 basis points to 3.03% for the nine months ended September 30, 2016 from 3.15% for the nine months ended September 30, 2015.

Total interest and dividend income increased by $11.5 million, or 6.1%, to $198.4 million for the three months ended September 30, 2016. Interest income on loans increased by $10.0 million, or 5.9%, to $179.2 million for the three months ended September 30, 2016 as a result of a $1.86 billion increase in the average balance of net loans to $17.71 billion, primarily attributable to growth in the commercial loan portfolio. This increase was offset by a decrease of 22 basis points in the weighted average yield on net loans to 4.05%. Prepayment penalties, which are included in interest income, totaled $4.0 million for the three months ended September 30, 2016 compared to $6.4 million for the three months ended September 30, 2015. Interest income on all other interest-earning assets, excluding loans, increased by $1.5 million, or 8.3% year over year, to $19.1 million for the three months ended September 30, 2016 which is attributable to a $137.5 million increase in the average balance of all other interest-earning assets, excluding loans, to $3.59 billion for the three months ended September 30, 2016. The weighted average yield on interest-earning assets, excluding loans, increased 9 basis points to 2.14%.

Total interest and dividend income increased by $41.9 million, or 7.7%, to $585.4 million for the nine months ended September 30, 2016. Interest income on loans increased by $34.2 million, or 6.9%, to $528.0 million for the nine months ended September 30, 2016 as a result of a $1.70 billion increase in the average balance of net loans to $17.22 billion primarily attributed to growth in the commercial loan portfolio. This increase was offset by a decrease of 15 basis points in the weighted average yield on net loans to 4.09%. Prepayment penalties, which are included in interest income, totaled $14.6 million for the nine months ended September 30, 2016 compared to $16.6 million for the nine months ended September 30, 2015. Interest income on all other interest-earning assets, excluding loans, increased by $7.7 million, or 15.4%, to $57.5 million for the nine months ended September 30, 2016 which is attributed to a $255.1 million increase in the average balance of all other interest-earning assets, excluding loans, to $3.53 billion for the nine months ended September 30, 2016. The weighted average yield on interest-earning assets, excluding loans, increased 15 basis points to 2.17%.

Total interest expense increased by $3.1 million, or 8.8% year over year, to $38.8 million for the three months ended September 30, 2016. Interest expense on interest-bearing deposits increased $1.7 million, or 8.9% year over year, to $20.3 million for the three months ended September 30, 2016. The average balance of total interest-bearing deposits increased $891.6 million, or 7.6% year over year, to $12.56 billion for the three months ended September 30, 2016. In addition, the weighted average cost of interest-bearing deposits increased by 1 basis point to 0.65% for the three months ended September 30, 2016. Interest expense on borrowed funds increased by $1.5 million, or 8.7% year over year to $18.4 million for the three months ended September 30, 2016. The average balance of borrowed funds increased $829.0 million, or 25.5%, to $4.07 billion for the three months ended September 30, 2016. This increase was offset by a decrease of 28 basis points in the weighted average cost of borrowings to 1.81% for the three months ended September 30, 2016.

Total interest expense increased by $14.7 million, or 14.8% year over year, to $114.0 million for the nine months ended September 30, 2016. Interest expense on interest-bearing deposits increased $10.5 million, or 20.6% year over year, to $61.6 million for the nine months ended September 30, 2016. The average balance of total interest-bearing deposits increased $1.14 billion, or 10.0% year over year, to $12.43 billion for the nine months ended September 30, 2016. In addition, the weighted average cost of interest-bearing deposits increased by 6 basis points to 0.66% for the nine months ended September 30, 2016. Interest expense on borrowed funds increased by $4.1 million, or 8.6% year over year to $52.3 million for the nine months ended September 30, 2016. The average balance of borrowed funds increased $525.9 million, or 16.7%, to $3.67 billion for the nine months ended September 30, 2016. This increase was offset by a decrease of 15 basis points in the weighted average cost of borrowings to 1.90% for the nine months ended September 30, 2016.

Non-Interest Income. Total non-interest income decreased $2.8 million, or 24.6% year over year, to $8.5 million for the three months ended September 30, 2016. Gain on loans, net decreased $737,000 for the three months ended September 30, 2016

55


primarily as a result of lower loan sales through our mortgage subsidiary as well as the Bank. In addition security transactions and gain on other real estate owned decreased $861,000 and $795,000, respectively, from the three months ended September 30, 2015.

Total non-interest income decreased $2.7 million, or 8.7%, to $28.7 million for the nine months ended September 30, 2016. Gain on loans, net decreased $2.9 million for the nine months ended September 30, 2016 primarily as a result of lower loan sales through our mortgage subsidiary as well as the Bank. In addition, gain on sale of other real estate owned decreased $1.2 million for the nine months ended September 30, 2016 as compared to the nine months of September 30, 2015. These decreases were offset by an increase of $2.1 million in gain on securities transactions for the nine months ended September 30, 2016 primarily due to the sale of securities totaling $69.1 million, resulting in a gain of $3.1 million.

Non-Interest Expenses. Compared to the third quarter of 2015, total non-interest expenses increased $5.5 million, or 6.4% year over year. Compensation and fringe benefits increased $4.0 million for the three months ended September 30, 2016 primarily due to additions to our staff to support continued growth and infrastructure and normal merit increases. In addition, professional fees increased $1.8 million as we build additional risk management and operational infrastructure. Federal insurance premiums and office occupancy and equipment expense increased $1.4 million and $1.2 million, respectively, for the three months ended September 30, 2016.

Total non-interest expense was $269.6 million for the nine months ended September 30, 2016, an increase of $26.9 million, or 11.1% as compared to the nine months of 2015. Compensation and fringe benefits increased $20.8 million for the nine months ended September 30, 2016. The increase was primarily due to an increase of $10.3 million in equity incentive expense for the nine months ended September 30, 2016 resulting from the restricted stock and stock option grants on June 23, 2015 to certain employees, officers and directors of the Company, pursuant to the Investors Bancorp, Inc. 2015 Equity Incentive Plan; additions to our staff to support continued growth; and normal merit increases. Office occupancy and equipment expense increased $4.2 million for the nine months ended September 30, 2016 primarily due to new branch openings. Professional fees and other operating expenses increased $2.9 million and $1.8 million, respectively for the nine months ended September 30, 2016 as we continue to build additional risk management and operational infrastructure as our company grows and we enhance our employee training and development programs.

Income Taxes. Income tax expense for the third quarter of 2016 was $28.3 million compared with $22.9 million for the third quarter 2015.  The effective tax rates were 39.4% and 31.9% for the quarters ended September 30, 2016 and September 30, 2015, respectively.  For the nine-month periods ended September 30, 2016 and 2015, income tax expense was $84.2 million and $74.9 million, respectively, and the effective tax rates were 39.1% and 35.3%, respectively. The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income, the level of expenses not deductible for tax purposes relative to the overall level of pre-tax income, the level of income allocated to the various state and local jurisdictions where the Company operates, because tax rates differ among such jurisdictions, and the impact of any large but infrequently occurring items.

In the third quarter 2015, the Company realized the benefit of a Net Operating Loss carryforward from a previous acquisition.  Additionally, in April 2015, New York City changed their tax law to conform with that of New York State.  As a result, the company revalued its deferred tax positions which lowered the effective tax rate for the 2015 nine month period; however, it has the impact of increasing the rate in future periods.

Provision for Loan Losses. Our provision for loan losses was $5.0 million for the three months ended September 30, 2016 and the three months ended September 30, 2015. For the three months ended September 30, 2016, net charge-offs were $1.8 million compared to $504,000 for the three months ended September 30, 2015. For the nine months ended September 30, 2016 our provision for loan loss was $15.0 million compared with $21.0 million for the nine months ended September 30, 2015. For the nine months ended September 30, 2016, net charge-offs were $10.0 million compared to $2.8 million for the nine months September 30, 2015.

Our provision for the three and nine months ended September 30, 2016 is primarily a result of continued organic growth in the loan portfolio, specifically the multi-family, commercial real estate and commercial and industrial portfolios; the inherent credit risk in our overall portfolio, particularly the credit risk associated with commercial real estate lending and commercial and industrial lending; and the improvement in the level of non-performing loans.


56


Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, proceeds from the sale of loans, FHLB and other borrowings and, to a lesser extent, investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including unsecured overnight lines of credit, brokered deposits and other borrowings from the FHLB and other correspondent banks.

At September 30, 2016, the Company had overnight borrowings outstanding of $492.0 million with FHLB as compared to $175.0 million at December 31, 2015. The Company utilizes overnight borrowings from time to time to fund short-term liquidity needs. The Company had total borrowings of $4.20 billion at September 30, 2016, an increase of $940.0 million from $3.26 billion at December 31, 2015.

In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. At September 30, 2016, outstanding commitments to originate loans totaled $682.0 million; outstanding unused lines of credit totaled $1.08 billion; standby letters of credit totaled $20.5 million and outstanding commitments to sell loans totaled $36.0 million. The Company expects to have sufficient funds available to meet current commitments in the normal course of business. Time deposits scheduled to mature in one year or less totaled $1.96 billion at September 30, 2016. Based upon historical experience management estimates that a significant portion of such deposits will remain with the Company.
Regulatory Matters. In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The Final Capital Rules also revised the quantity and quality of required minimum risk-based and leverage capital requirements, consistent with the Reform Act and the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III capital standards. In doing so, the Final Capital Rules:
Established a new minimum Common equity tier 1 risk-based capital ratio (common equity tier 1 capital to total risk-weighted assets) of 4.5% and increased the minimum Tier 1 risk-based capital ratio from 4.0% to 6.0%, while maintaining the minimum Total risk-based capital ratio of 8.0% and the minimum Tier 1 leverage capital ratio of 4.0%.
Revised the rules for calculating risk-weighted assets to enhance their risk sensitivity.
Phased out trust preferred securities and cumulative perpetual preferred stock as Tier 1 capital.
Added a requirement to maintain a minimum Conservation Buffer, composed of Common equity tier 1 capital, of 2.5% of risk-weighted assets, to be applied to the new Common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio, which means that banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5% or have restrictions imposed on capital distributions and discretionary cash bonus payments.
Changed the definitions of capital categories for insured depository institutions for purposes of the Federal Deposit Insurance Corporation Improvement Act of 1991 prompt corrective action provisions. Under these revised definitions, to be considered well-capitalized, an insured depository institution must have a Tier 1 leverage capital ratio of at least 5.0%, a Common equity tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a Total risk-based capital ratio of at least 10.0%.
The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets became effective for the Bank and Company on January 1, 2015. The required minimum Conservation Buffer will be phased in incrementally, starting at 0.625% on January 1, 2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019. The rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum Conservation Buffer is not met. As of September 30, 2016 the Company and the Bank met the currently applicable Conservation Buffer of 0.625%.

57


As of September 30, 2016, the Bank and the Company exceeded all regulatory capital requirements as follows:
 
September 30, 2016
 
Actual
 
Minimum Capital Requirement
 
To be Well Capitalized under Prompt Corrective Action Provisions (1)
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
Bank:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Leverage Ratio
$
2,708,967

 
12.25
%
 
$
884,483

 
4.000
%
 
$
1,105,604

 
5.00
%
Common equity tier 1 risk-based
2,708,967

 
15.09
%
 
920,211

 
5.125
%
 
1,167,097

 
6.50
%
Tier 1 Risk Based Capital
2,708,967

 
15.09
%
 
1,189,541

 
6.625
%
 
1,436,427

 
8.00
%
Total Risk-Based Capital
2,932,517

 
16.33
%
 
1,548,648

 
8.625
%
 
1,795,534

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
Company:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Leverage Ratio
$
3,048,637

 
13.78
%
 
$
884,746

 
4.000
%
 
n/a
 
n/a
Common equity tier 1 risk-based
3,048,637

 
16.96
%
 
921,079

 
5.125
%
 
n/a
 
n/a
Tier 1 Risk Based Capital
3,048,637

 
16.96
%
 
1,190,664

 
6.625
%
 
n/a
 
n/a
Total Risk-Based Capital
3,272,187

 
18.21
%
 
1,550,109

 
8.625
%
 
n/a
 
n/a
(1) Prompt corrective action provisions do not apply to the bank holding company.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in the financial statements. These transactions primarily relate to debt obligations and lending commitments.
The following table shows the contractual obligations of the Company by expected payment period as of September 30, 2016:
Contractual Obligations
 
Total
 
Less than One Year
 
One-Two Years
 
Two-Three Years
 
More than Three Years
 
 
(In thousands)
Debt obligations (excluding capitalized leases)
 
$
4,203,711

 
1,017,000

 
605,199

 
675,621

 
1,905,891

Commitments to originate and purchase loans
 
$
682,010

 
682,010

 

 

 

Commitments to sell loans
 
$
36,000

 
36,000

 

 

 


Debt obligations include borrowings from the FHLB and other borrowings. The borrowings have defined terms and, under certain circumstances, $28.8 million of the borrowings are callable at the option of the lender. Additionally, at September 30, 2016, the Company’s commitments to fund unused lines of credit totaled $1.08 billion. Commitments to originate loans and commitments to fund unused lines of credit are agreements to lend additional funds to customers as long as there have been no violations of any of the conditions established in the agreements. Commitments generally have a fixed expiration or other termination clauses which may or may not require a payment of a fee. Since some of these loan commitments are expected to expire without being drawn upon, total commitments do not necessarily represent future cash requirements.
In addition to the contractual obligations previously discussed, we have other liabilities which include capitalized and operating lease obligations. These contractual obligations as of September 30, 2016 have not changed significantly from December 31, 2015.
In the normal course of business the Company sells residential mortgage loans to third parties. These loan sales are subject to customary representations and warranties. In the event that we are found to be in breach of these representations and warranties, we may be obligated to repurchase certain of these loans.
The Company has entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. During the three months ended September 30, 2016, such derivatives were used to hedge the variability in cash flows

58


associated with certain short term wholesale funding transactions. The fair value of the derivative as of September 30, 2016 was a liability of $1.1 million.
For further information regarding our off-balance sheet arrangements and contractual obligations, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our December 31, 2015 Annual Report on Form 10-K.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Qualitative Analysis. We believe one significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or re-pricing of our assets, liabilities and off-balance sheet contracts (i.e., loan commitments); the effect of loan prepayments, deposits and withdrawals; the difference in the behavior of lending and funding rates arising from the uses of different indices; and “yield curve risk” arising from changing interest rate relationships across the spectrum of maturities for constant or variable credit risk investments. Besides directly affecting our net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of securities classified as available for sale and the mix and flow of deposits.
The general objective of our interest rate risk management is to determine the appropriate level of risk given our business model and then manage that risk in a manner consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset Liability Committee, which consists of senior management and executives, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements and modifies our lending, investing and deposit gathering strategies accordingly. On a quarterly basis, our Board of Directors reviews the Asset Liability Committee report, the aforementioned activities and strategies, the estimated effect of those strategies on our net interest margin and the estimated effect that changes in market interest rates may have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. Historically, our lending activities have emphasized one- to four-family fixed- and variable-rate first mortgages. At September 30, 2016, approximately 36% of our residential portfolio was in variable rate products, while 64% was in fixed rate products. Our variable-rate mortgage related assets have helped to reduce our exposure to interest rate fluctuations and is expected to benefit our long-term profitability, as the rates earned on these mortgage loans will increase as prevailing market rates increase. However, the current low interest rate environment, and the preferences of our customers, has resulted in more of a demand for fixed-rate products. This may adversely impact our net interest income, particularly in a rising rate environment. The origination of commercial real estate loans, particularly multi-family loans and commercial and industrial loans, which have outpaced the growth in the residential portfolio, help reduce our interest rate risk due to their shorter term compared to residential mortgage loans. In addition, we primarily invest in shorter-to-medium duration securities, which generally have shorter average lives and lower yields compared to longer term securities. Shortening the average lives of our securities, along with originating more adjustable-rate mortgages and commercial real estate mortgages, will help to manage interest rate risk.
We retain an independent, nationally recognized consulting firm that specializes in asset and liability management to complete our quarterly interest rate risk reports. We also retain a second nationally recognized consulting firm to prepare independently comparable interest rate risk reports for the purpose of validation. Both firms use a combination of analyses to monitor our exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (“NPV”) over a range of immediately changed interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. In calculating changes in NPV, assumptions estimating loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes are used.
The net interest income analysis uses data derived from an asset and liability analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations and the U.S. Treasury yield curve as of the balance sheet date. In addition we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred gradually over a one year period. Net interest income analysis also adjusts the asset and liability repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.
Our asset and liability analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). This asset and liability analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches in the timing of asset and liability cash

59


flows but does not necessarily provide an accurate indicator of interest rate risk because the assumptions used in the analysis may not reflect the actual response to market changes.
Quantitative Analysis. The table below sets forth, as of September 30, 2016, the estimated changes in our NPV and our net interest income that would result from the designated changes in interest rates. Such changes to interest rates are calculated as an immediate and permanent change for the purposes of computing NPV and a gradual change over a one year period for the purposes of computing net interest income. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. The following table reflects management's expectations of the changes in NPV or net interest income for an interest rate decrease of 100 basis points or increase of 200 basis points.
 
 
Net Portfolio Value (1) (2)
 
Net Interest Income (3)
Change in
Interest Rates
(basis points)
 
Estimated
NPV
 
Estimated Increase (Decrease)
 
Estimated  Net
Interest
Income
 
Estimated Increase (Decrease)
Amount
 
Percent
 
Amount
 
Percent
 
 
(Dollars in thousands)
+ 200bp
 
$
3,611,832

 
 
(562,006
)
 
(13.5
)%
 
$
599,454

 
(34,492
)
 
(5.4
)%
0bp
 
$
4,173,838

 
 

 

 
$
633,946

 

 

-100bp
 
$
3,901,858

 
 
(271,980
)
 
(6.5
)%
 
$
639,001

 
5,055

 
0.80
 %
(1)
Assumes an instantaneous and parallel shift in interest rates at all maturities.
(2)
NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Assumes a gradual change in interest rates over a one year period at all maturities.
The table set forth above indicates at September 30, 2016, in the event of a 200 basis points increase in interest rates, we would be expected to experience a 13.5% decrease in NPV and a $34.5 million, or 5.4%, decrease in net interest income. In the event of a 100 basis points decrease in interest rates, we would be expected to experience a 6.5% decrease in NPV and a $5.1 million, or 0.80%, increase in net interest income. This data does not reflect any future actions we may take in response to changes in interest rates, such as changing the mix in or growth of our assets and liabilities, which could change the results of the NPV and net interest income calculations.
As mentioned above, we retain two nationally recognized firms to compute our quarterly interest rate risk reports. Certain shortcomings are inherent in any methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income require certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions we may take in response to changes in interest rates. The table also assumes a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provide an indication of our sensitivity to interest rate changes at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effects of changes in market interest rates on our NPV and net interest income.
ITEM 4.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II         Other Information

ITEM 1.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.


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ITEM 1A.
RISK FACTORS
The following additional risk factors supplements the risk factors disclosed in Item 1A., Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2015.

Investors Bank Entered Into an Informal Agreement with the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance, Which May Adversely Affect Its Ability to Receive Regulatory Approval for The Bank of Princeton Acquisition

On August 12, 2016, Investors Bank agreed to enter into an informal agreement (“Informal Agreement”) with the FDIC and the New Jersey Department of Banking and Insurance (“NJDOBI”) with regard to Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) compliance matters. Investors Bank agreed to 1) develop, adopt and implement a system of internal controls designed to ensure full compliance with BSA, 2) conduct a comprehensive validation of Investors Bank’s BSA/AML automated compliance system, and 3) develop, adopt and implement effective training programs relating to BSA. Investors Bank also agreed to review certain transactions and accounts for BSA and AML compliance and to establish a Compliance Committee of the Board.

Numerous actions have been taken or commenced by Investors Bank to strengthen its BSA and AML compliance practices, policies, procedures and controls. Investors Bank has enhanced its risk management and compliance programs through restructured reporting lines, improved technology and increased staff, including hiring senior personnel. The application filed by Investors Bank to acquire The Bank of Princeton remains under processing by the FDIC. Investors Bank believes that it will be able to demonstrate substantial compliance with the terms of the Informal Agreement and that, notwithstanding the Informal Agreement, regulatory approvals of The Bank of Princeton acquisition will be obtained, although no assurances can be provided that such approvals will be received or as to the timing of such approvals. The failure to achieve compliance with the requirements of the Informal Agreement could also lead to further action by the FDIC and NJDOBI, which could adversely affect Investors Bank.


If The Bank Regulators Impose Limitations On Our Commercial Real Estate Lending Activities, Our Earnings Could Be Adversely Affected

In 2006, the FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System (collectively, the “Agencies”) issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure may receive increased supervisory scrutiny where total non-owner occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate and construction and land loans, represent 300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our level of non-owner occupied commercial real estate equaled 380% of Bank total risk-based capital at September 30, 2016.

In December 2015, the Agencies released a new statement on prudent risk management for commercial real estate lending (the “2015 Statement”). In the 2015 Statement, the Agencies express concerns about easing commercial real estate underwriting standards, direct financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that the Agencies will continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, or require higher capital ratios as a result of the level of commercial real estate loans we hold, our earnings would be adversely affected.


ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) The following table reports information regarding repurchases of our common stock during the quarter ended September 30, 2016 and the stock repurchase plans approved by our Board of Directors.
Period
Total Number of Shares Purchased (1) (2)
 
Average Price paid Per Share
 
As part of Publicly Announced Plans or Programs
 
Yet to be Purchased under the Plans or Programs (1) (2)
July 1, 2016 through July 31, 2016
3,096,787

 
$
11.30

 
$
35,001,903

 
26,675,643

August 1, 2016 through August 31, 2016
1,450,000

 
11.71

 
16,983,895

 
25,225,643

September 1, 2016 through September 30, 2016
1,815,000

 
11.97

 
21,717,669

 
23,410,643

Total
6,361,787

 
$
11.59

 
$
73,703,467

 
23,410,643

(1) On June 9, 2015, the Board of Directors announced its second share repurchase plan, which authorized the repurchase of an additional 10% of the Company's outstanding shares of common stock or 34,779,211 million shares. The plan commenced upon the completion of the first repurchase plan on June 30, 2015.
(2) On April 28, 2016, the Company announced its third share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or approximately 31,481,189 million shares. The plan commenced upon the completion of the second repurchase plan on June 17, 2016. This program has no expiration date and has 23,410,643 shares yet to be repurchased as of September 30, 2016.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.


ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.


ITEM 5.
OTHER INFORMATION
Not applicable.



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ITEM 6.
EXHIBITS
The following exhibits are either filed as part of this report or are incorporated herein by reference:
 
2.1

 
Agreement and Plan of Merger by and among Investors Bancorp, Inc., Investors Bank and The Bank of Princeton, dated May 3, 2016 (1)
 
 
 
3.1

  
Certificate of Incorporation of Investors Bancorp, Inc. (2)
 
 
 
3.2

  
Bylaws of Investors Bancorp, Inc. (2)
 
 
 
31.1

  
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2

  
Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1

  
Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101

  
101.INS (1) XBRL Instance Document
 
 
101.SCH (1) XBRL Taxonomy Extension Schema Document
 
 
101.CAL (1) XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF (1) XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB (1) XBRL Taxonomy Extension Labels Linkbase Document
 
 
101.PRE (1) XBRL Taxonomy Presentation Linkbase Document
 
 
 
 
(1)
Incorporated by reference to Investors Bancorp Inc. 8-K (Commission File no. 001-36441), originally filed with the Securities and Exchange Commission on May 4, 2016.
(2)
Incorporated by reference to the Registration Statement on Form S-1 of Investors Bancorp, Inc. (Commission File no. 333-192966), originally filed with the Securities and Exchange Commission on December 20, 2013.


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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
INVESTORS BANCORP, INC.
 
 
 
Date: November 9, 2016
 
By:
 
/s/  Kevin Cummings
 
 
 
 
Kevin Cummings
Chief Executive Officer and President
(Principal Executive Officer)
 
 
By:
 
/s/  Sean Burke
 
 
 
 
Sean Burke Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)



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