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EX-31.2 - EXHIBIT 31.2 - Investors Bancorp, Inc.a93018ex312.htm
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EX-31.1 - EXHIBIT 31.1 - Investors Bancorp, Inc.a93018ex311.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, 2018
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 every Interactive Data File required to be submitted 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 such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
 
 
Large accelerated filer
 
þ
 
 
  
Accelerated filer
o
 
Non-accelerated filer
 
o
 
 
  
Smaller reporting company
o
 
 
 
 
 
 
 
Emerging growth company
o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 2, 2018, the registrant had 359,070,852 shares of common stock, par value $0.01 per share, issued and 291,561,711 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 SUBSIDIARY
Consolidated Balance Sheets
September 30, 2018 (Unaudited) and December 31, 2017  
 
September 30,
2018
 
December 31,
2017
 
(In thousands)
ASSETS
 
 
 
Cash and cash equivalents
$
210,595

 
618,394

Equity securities
5,872

 
5,701

Debt securities available-for-sale, at estimated fair value
1,984,537

 
1,982,026

Debt securities held-to-maturity, net (estimated fair value of $1,601,807 and $1,820,125 at September 30, 2018 and December 31, 2017, respectively)
1,611,409

 
1,796,621

Loans receivable, net
20,728,851

 
19,852,101

Loans held-for-sale
4,270

 
5,185

Federal Home Loan Bank stock
242,403

 
231,544

Accrued interest receivable
78,283

 
72,855

Other real estate owned
7,755

 
5,830

Office properties and equipment, net
175,387

 
180,231

Net deferred tax asset
135,521

 
121,663

Bank owned life insurance
210,413

 
155,635

Goodwill and intangible assets
99,764

 
97,665

Other assets
23,435

 
3,793

Total assets
$
25,518,495

 
25,129,244

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
17,397,812

 
17,357,697

Borrowed funds
4,853,774

 
4,461,533

Advance payments by borrowers for taxes and insurance
131,038

 
104,308

Other liabilities
100,650

 
80,255

Total liabilities
22,483,274

 
22,003,793

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, 2018 and December 31, 2017; 292,124,054 and 306,126,087 outstanding at September 30, 2018 and December 31, 2017, respectively
3,591

 
3,591

Additional paid-in capital
2,800,352

 
2,784,390

Retained earnings
1,172,615

 
1,084,177

Treasury stock, at cost; 66,946,798 and 52,944,765 shares at September 30, 2018 and December 31, 2017, respectively
(818,209
)
 
(633,110
)
Unallocated common stock held by the employee stock ownership plan
(82,011
)
 
(84,258
)
Accumulated other comprehensive loss
(41,117
)
 
(29,339
)
Total stockholders’ equity
3,035,221

 
3,125,451

Total liabilities and stockholders’ equity
$
25,518,495

 
25,129,244

See accompanying notes to consolidated financial statements.

1


INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
Loans receivable and loans held-for-sale
$
216,516

 
201,069

 
633,029

 
579,921

Securities:
 
 
 
 
 
 
 
Equity
32

 
30

 
100

 
108

Government-sponsored enterprise obligations
266

 
175

 
813

 
211

Mortgage-backed securities
19,624

 
17,829

 
59,279

 
51,812

Municipal bonds and other debt
2,615

 
2,229

 
7,305

 
8,433

Interest-bearing deposits
677

 
875

 
1,541

 
1,159

Federal Home Loan Bank stock
4,296

 
3,557

 
11,928

 
9,722

Total interest and dividend income
244,026

 
225,764

 
713,995

 
651,366

Interest expense:
 
 
 
 
 
 
 
Deposits
51,923

 
32,300

 
130,366

 
79,820

Borrowed funds
25,177

 
22,553

 
72,918

 
66,460

Total interest expense
77,100

 
54,853

 
203,284

 
146,280

Net interest income
166,926

 
170,911

 
510,711

 
505,086

Provision for loan losses
2,000

 
1,750

 
8,500

 
11,750

Net interest income after provision for loan losses
164,926

 
169,161

 
502,211

 
493,336

Non-interest income
 
 
 
 
 
 
 
Fees and service charges
5,506

 
5,076

 
16,194

 
14,966

Income on bank owned life insurance
1,596

 
935

 
4,425

 
2,826

Gain on loans, net
478

 
726

 
1,398

 
2,924

Gain on securities, net
97

 

 
1,198

 
1,275

Gain on sale of other real estate owned, net
13

 
446

 
350

 
871

Other income
2,597

 
1,212

 
7,310

 
4,556

Total non-interest income
10,287

 
8,395

 
30,875

 
27,418

Non-interest expense
 
 
 
 
 
 
 
Compensation and fringe benefits
59,279

 
57,052

 
179,139

 
168,207

Advertising and promotional expense
3,229

 
4,355

 
9,123

 
10,956

Office occupancy and equipment expense
15,151

 
14,589

 
46,446

 
43,769

Federal deposit insurance premiums
4,935

 
4,500

 
13,960

 
12,110

General and administrative
509

 
691

 
1,702

 
2,267

Professional fees
3,578

 
8,140

 
11,781

 
30,141

Data processing and communication
7,090

 
5,719

 
20,319

 
17,493

Other operating expenses
8,017

 
8,228

 
22,987

 
24,157

Total non-interest expenses
101,788

 
103,274

 
305,457

 
309,100

Income before income tax expense
73,425

 
74,282

 
227,629

 
211,654

Income tax expense
19,201

 
28,437

 
58,383

 
80,156

Net income
$
54,224

 
45,845

 
169,246

 
131,498

Basic earnings per share
$
0.19

 
0.16

 
0.60

 
0.45

Diluted earnings per share
$
0.19

 
0.16

 
0.59

 
0.45

Weighted average shares outstanding

 
 
 
 
 
 
Basic
280,755,898

 
289,715,414

 
284,289,363

 
290,670,601

Diluted
281,172,921

 
290,890,307

 
285,376,003

 
292,489,906

See accompanying notes to consolidated financial statements.

2


INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
54,224

 
45,845

 
169,246

 
131,498

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in funded status of retirement obligations
102

 
82

 
308

 
249

Unrealized (losses) gains on debt securities available-for-sale
(7,310
)
 
525

 
(36,330
)
 
5,205

Accretion of loss on debt securities reclassified to held to maturity
149

 
180

 
475

 
580

Reclassification adjustment for security gains included in net income

 

 

 
(765
)
Other-than-temporary impairment accretion on debt securities
216

 
186

 
647

 
770

Net gains (losses) on derivatives arising during the period
5,266

 
560

 
23,728

 
(1,324
)
Total other comprehensive (loss) income
(1,577
)
 
1,533

 
(11,172
)
 
4,715

Total comprehensive income
$
52,647

 
47,378

 
158,074

 
136,213



See accompanying notes to consolidated financial statements.

3


INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2018 and 2017
(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, 2016
$
3,591

 
2,765,732

 
1,053,750

 
(587,974
)
 
(87,254
)
 
(24,600
)
 
3,123,245

Net income

 

 
131,498

 

 

 

 
131,498

Other comprehensive income, net of tax

 

 

 

 

 
4,715

 
4,715

Purchase of treasury stock (4,371,647 shares)

 

 

 
(57,842
)
 

 

 
(57,842
)
Treasury stock allocated to restricted stock plan (430,000 shares)

 
(6,186
)
 
1,008

 
5,178

 

 

 

Compensation cost for stock options and restricted stock

 
14,967

 

 

 

 

 
14,967

Option exercises

 
(3,533
)
 

 
11,254

 

 

 
7,721

Restricted stock forfeitures (268,163 shares)

 
3,352

 
(342
)
 
(3,010
)
 

 

 

Cash dividend paid ($0.24 per common share)

 

 
(74,058
)
 

 

 

 
(74,058
)
ESOP shares allocated or committed to be released

 
2,639

 

 

 
2,247

 

 
4,886

Balance at September 30, 2017
$
3,591

 
2,776,971

 
1,111,856

 
(632,394
)
 
(85,007
)
 
(19,885
)
 
3,155,132

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
3,591

 
2,784,390

 
1,084,177

 
(633,110
)
 
(84,258
)
 
(29,339
)
 
3,125,451

Net income

 

 
169,246

 

 

 

 
169,246

Other comprehensive loss, net of tax

 

 

 

 

 
(11,172
)
 
(11,172
)
Reclassification due to the adoption of ASU No. 2016-01

 

 
606

 

 

 
(606
)
 

Purchase of treasury stock (14,477,965 shares)

 

 

 
(191,003
)
 

 

 
(191,003
)
Treasury stock allocated to restricted stock plan (71,982 shares)

 
(935
)
 
58

 
877

 

 

 

Compensation cost for stock options and restricted stock

 
13,798

 

 

 

 

 
13,798

Option exercises

 
(4,023
)
 

 
9,347

 

 

 
5,324

Restricted stock forfeitures (368,946 shares)

 
4,626

 
(306
)
 
(4,320
)
 

 

 

Cash dividend paid ($0.27 per common share)

 

 
(81,166
)
 

 

 

 
(81,166
)
ESOP shares allocated or committed to be released

 
2,496

 

 

 
2,247

 

 
4,743

Balance at September 30, 2018
$
3,591

 
2,800,352

 
1,172,615

 
(818,209
)
 
(82,011
)
 
(41,117
)
 
3,035,221

See accompanying notes to consolidated financial statements.


4


INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
169,246

 
131,498

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
ESOP and stock-based compensation expense
18,541

 
19,853

Amortization of premiums and accretion of discounts on securities, net
8,712

 
11,942

Amortization of premiums and accretion of fees and costs on loans, net
(5,297
)
 
(3,248
)
Amortization of other intangible assets
1,514

 
1,854

Provision for loan losses
8,500

 
11,750

Depreciation and amortization of office properties and equipment
13,613

 
12,670

Gain on securities, net
(1,198
)
 
(1,275
)
Mortgage loans originated for sale
(44,246
)
 
(126,792
)
Proceeds from mortgage loan sales
46,112

 
160,582

Gain on sales of mortgage loans, net
(951
)
 
(2,467
)
Gain on sale of other real estate owned
(350
)
 
(871
)
Income on bank owned life insurance
(4,425
)
 
(2,826
)
Increase in accrued interest receivable
(5,428
)
 
(7,234
)
Deferred tax benefit
(7,146
)
 
(3,092
)
Decrease in other assets
15,344

 
8,868

Increase in other liabilities
20,417

 
19,248

Total adjustments
63,712

 
98,962

Net cash provided by operating activities
232,958

 
230,460

Cash flows from investing activities:
 
 
 
Purchases of loans receivable
(363,339
)
 
(345,715
)
Net originations of loans receivable
(190,805
)
 
(851,418
)
Proceeds from disposition of loans held for investment
447

 
48,556

Gain on disposition of loans held for investment
(447
)
 
(457
)
Net proceeds from sale of other real estate owned
3,149

 
4,228

Proceeds from principal repayments/calls/maturities of debt securities available-for-sale
295,651

 
252,173

Proceeds from sales of debt securities available-for-sale

 
102,120

Proceeds from principal repayments/calls/maturities of debt securities held-to-maturity
233,202

 
246,373

Purchases of equity securities
(67
)
 

Purchases of debt securities available-for-sale
(353,821
)
 
(642,165
)
Purchases of debt securities held-to-maturity
(46,805
)
 
(227,029
)
Proceeds from redemptions of Federal Home Loan Bank stock
194,201

 
175,279

Purchases of Federal Home Loan Bank stock
(205,060
)
 
(170,215
)
Purchases of office properties and equipment
(8,769
)
 
(12,822
)
Death benefit proceeds from bank owned life insurance
3,619

 
10,047

Purchases of bank owned life insurance
(125,000
)
 

Proceeds from surrender of bank owned life insurance contract
71,029

 

Cash paid for acquisition
(340,183
)
 

Net cash used in investing activities
(832,998
)
 
(1,411,045
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
40,115

 
1,595,636

Funds borrowed under other repurchase agreements
120,000

 

Net increase (decrease) in borrowed funds
272,241

 
(61,382
)
Net increase in advance payments by borrowers for taxes and insurance
26,730

 
19,654


5


Dividends paid
(81,166
)
 
(74,058
)
Exercise of stock options
5,324

 
7,721

Purchase of treasury stock
(191,003
)
 
(57,842
)
Net cash provided by financing activities
192,241

 
1,429,729

Net (decrease) increase in cash and cash equivalents
(407,799
)
 
249,144

Cash and cash equivalents at beginning of period
618,394

 
164,178

Cash and cash equivalents at end of period
$
210,595

 
413,322

Supplemental cash flow information:
 
 
 
Non-cash investing activities:
 
 
 
Real estate acquired through foreclosure
$
4,938

 
3,230

Cash paid during the year for:
 
 
 
Interest
196,000

 
143,054

Income taxes
57,861

 
70,123

Acquisitions:
 
 
 
Non-cash assets acquired:
 
 
 
Loans
330,747

 

Goodwill and other intangible assets, net
4,975

 

Total non-cash assets acquired
335,722

 

See accompanying notes to consolidated financial statements.

6


INVESTORS BANCORP, INC. AND SUBSIDIARY
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 subsidiary, 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 three and nine months ended September 30, 2018 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, 2017 Annual Report on Form 10-K. Certain reclassifications have been made in the consolidated financial statements to conform with current year classifications.

2.     Stock Transactions
Stock Repurchase Programs
On March 16, 2015, the Company announced it had received approval from the Board of Governors of the Federal Reserve System to commence its first repurchase program since completion of its second step conversion. On June 30, 2015, the Company’s second repurchase program began upon completion of the first program. On April 28, 2016, the Company announced its third share repurchase program, which authorized the purchase of 10% of its publicly-held outstanding shares of common stock, or 31,481,189 shares. The third program commenced immediately upon completion of the second program on June 17, 2016 and remains the Company’s current program as of September 30, 2018.
During the nine months ended September 30, 2018, the Company purchased 14,477,965 shares at a cost of $191.0 million, or approximately $13.19 per share. During the nine months ended September 30, 2018, shares repurchased included 392,843 shares withheld to cover income taxes related to restricted stock vesting under our 2015 Equity Incentive Plan. Shares withheld to pay income taxes are repurchased pursuant to the terms of the 2015 Equity Incentive Plan.

3.     Business Combinations
On February 2, 2018, the Company completed the acquisition of a $345.8 million equipment finance portfolio. The acquisition included a seven-person team of financing professionals to lead the Company’s Equipment Finance Group, which is a part of the Company’s business lending group and is classified within our commercial and industrial loan portfolio. The purchase price paid of $340.2 million was paid using available cash.
The acquisition was accounted for under the acquisition method of accounting as prescribed by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”, as amended. Under this method of accounting, the purchase price has been allocated to the respective assets acquired based on their estimated fair values, net of applicable income tax effects. The excess cost over fair value of assets acquired, or $5.0 million, has been recorded as goodwill.
The acquired portfolio was fair valued on the date of acquisition based on guidance from ASC 820-10 which defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The valuation methods utilized took into consideration adjustments for interest rate risk, funding cost, servicing cost, residual risk, credit and liquidity risk.
The calculation of goodwill is subject to change for up to one year after the closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available. As the Company finalizes its analysis of these assets, there may be adjustments to the recorded carrying values.


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,
 
2018
 
2017
 
(Dollars in thousands, except per share data)
Earnings for basic and diluted earnings per common share
 
 
 
Earnings applicable to common stockholders
$
54,224

 
$
45,845

 
 
 
 
Shares
 
 
 
Weighted-average common shares outstanding - basic
280,755,898

 
289,715,414

Effect of dilutive common stock equivalents (1)
417,023

 
1,174,893

Weighted-average common shares outstanding - diluted
281,172,921

 
290,890,307

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.19

 
$
0.16

Diluted
$
0.19

 
$
0.16

(1) For the three months ended September 30, 2018 and 2017, there were 10,059,247 and 10,952,744 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,
 
2018
 
2017
 
(Dollars in thousands, except per share data)
Earnings for basic and diluted earnings per common share
 
 
 
Earnings applicable to common stockholders
$
169,246

 
$
131,498

 
 
 
 
Shares
 
 
 
Weighted-average common shares outstanding - basic
284,289,363

 
290,670,601

Effect of dilutive common stock equivalents (1)
1,086,640

 
1,819,305

Weighted-average common shares outstanding - diluted
285,376,003

 
292,489,906

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.60

 
$
0.45

Diluted
$
0.59

 
$
0.45

(1) For the nine months ended September 30, 2018 and 2017, there were 9,796,551 and 11,041,315 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.

5.     Securities
Equity Securities
Equity securities are reported at fair value on the Company’s Consolidated Balance Sheets. The Company’s portfolio of equity securities had an estimated fair value of $5.9 million and $5.7 million as of September 30, 2018 and December 31, 2017, respectively. Realized gains and losses from sales of equity securities as well as changes in fair value of equity securities still held at the reporting date are recognized in the Consolidated Statements of Income. The Company adopted FASB Accounting Standards Update (“ASU”) 2016-01 on January 1, 2018 resulting in the cumulative-effect adjustment of $606,000 reflected in the consolidated statement of stockholders’ equity. The update supersedes the guidance to classify equity securities with readily determinable fair values into different categories and requires equity securities to be measured at fair value with changes in the fair value recognized through net income rather than other comprehensive income (loss).

8


The following table presents the disaggregated net gains on equity securities reported in the Consolidated Statements of Income:
 
For the Three Months Ended September 30, 2018
 
For the Nine Months Ended September 30, 2018
Net gains recognized during the period on equity securities
$
97

 
$
104

Less: Net gains recognized during the period on equity securities sold

 

Unrealized gains recognized during the period on equity securities
$
97

 
$
104

Debt Securities
The following tables present the carrying value, gross unrealized gains and losses and estimated fair value for available-for-sale debt securities and the amortized cost, net unrealized losses, carrying value, gross unrecognized gains and losses and estimated fair value for held-to-maturity debt securities as of the dates indicated:
 
At September 30, 2018
 
Carrying value
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair value
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
$
809,729

 
134

 
25,912

 
783,951

Federal National Mortgage Association
1,218,837

 

 
49,527

 
1,169,310

Government National Mortgage Association
33,256

 

 
1,980

 
31,276

Total debt securities available-for-sale
$
2,061,822

 
134

 
77,419

 
1,984,537

 
At September 30, 2018
 
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
$
41,254

 

 
41,254

 

 
2,151

 
39,103

Municipal bonds
28,757

 

 
28,757

 
962

 

 
29,719

Corporate and other debt securities
69,668

 
19,245

 
50,423

 
48,397

 
27

 
98,793

Total debt securities held-to-maturity
139,679

 
19,245

 
120,434

 
49,359

 
2,178

 
167,615

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
419,062

 
672

 
418,390

 
120

 
16,412

 
402,098

Federal National Mortgage Association
989,318

 
784

 
988,534

 
432

 
37,710

 
951,256

Government National Mortgage Association
84,051

 

 
84,051

 

 
3,213

 
80,838

Total mortgage-backed securities held-to-maturity
1,492,431

 
1,456

 
1,490,975

 
552

 
57,335

 
1,434,192

Total debt securities held-to-maturity
$
1,632,110

 
20,701

 
1,611,409

 
49,911

 
59,513

 
1,601,807


(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, 2017
 
Carrying value
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair value
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
$
649,060

 
382

 
9,200

 
640,242

Federal National Mortgage Association
1,322,255

 
700

 
19,379

 
1,303,576

Government National Mortgage Association
39,577

 

 
1,369

 
38,208

Total debt securities available-for-sale
$
2,010,892

 
1,082

 
29,948

 
1,982,026

 
At December 31, 2017
 
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
$
43,281

 

 
43,281

 

 
685

 
42,596

Municipal bonds
40,595

 

 
40,595

 
1,251

 

 
41,846

Corporate and other debt securities
68,232

 
20,145

 
48,087

 
38,207

 

 
86,294

Total debt securities held-to-maturity
152,108

 
20,145

 
131,963

 
39,458

 
685

 
170,736

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
474,314

 
969

 
473,345

 
530

 
5,439

 
468,436

Federal National Mortgage Association
1,102,242

 
1,149

 
1,101,093

 
2,787

 
12,280

 
1,091,600

Government National Mortgage Association
90,220

 

 
90,220

 

 
867

 
89,353

Total mortgage-backed securities held-to-maturity
1,666,776

 
2,118

 
1,664,658

 
3,317

 
18,586

 
1,649,389

Total debt securities held-to-maturity
$
1,818,884

 
22,263

 
1,796,621

 
42,775

 
19,271

 
1,820,125


(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, 2018, 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, 2018, the TruPS had a carrying value and estimated fair value of $45.4 million and $93.8 million, respectively. While all were investment grade at purchase, securities classified as non-investment grade at September 30, 2018 had a carrying value and estimated fair value of $43.4 million and $87.0 million, respectively. Fair value is derived from considering specific assumptions, including terms of the TruPS structure, events of deferrals, defaults and liquidations, the projected cash flow for principal and interest payments, and discounted cash flow modeling.
Investment securities with a carrying value of $775.5 million and an estimated fair value of $741.3 million are pledged to secure borrowings and municipal deposits. 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 other than mortgage-backed securities at September 30, 2018, by contractual maturity, are shown below. 

10


 
September 30, 2018
 
Carrying
value
 
Estimated
fair value
 
(In thousands)
Due in one year or less
$
24,457

 
24,457

Due after one year through five years

 

Due after five years through ten years
50,554

 
49,339

Due after ten years
45,423

 
93,819

Total
$
120,434

 
167,615


Gross unrealized losses on debt 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, 2018 and December 31, 2017, was as follows:
 
September 30, 2018
 
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
$
466,408

 
11,460

 
275,929

 
14,452

 
742,337

 
25,912

Federal National Mortgage Association
522,746

 
14,030

 
646,565

 
35,497

 
1,169,311

 
49,527

Government National Mortgage Association

 

 
31,276

 
1,980

 
31,276

 
1,980

Total debt securities available-for-sale
989,154

 
25,490

 
953,770

 
51,929

 
1,942,924

 
77,419

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises

 

 
39,103

 
2,151

 
39,103

 
2,151

Corporate and other debt securities
4,973

 
27

 

 

 
4,973

 
27

Total debt securities held-to-maturity
4,973

 
27

 
39,103

 
2,151

 
44,076

 
2,178

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
202,875

 
7,079

 
197,409

 
9,333

 
400,284

 
16,412

Federal National Mortgage Association
430,968

 
12,211

 
502,096

 
25,499

 
933,064

 
37,710

Government National Mortgage Association
45,329

 
1,601

 
35,509

 
1,612

 
80,838

 
3,213

Total mortgage-backed securities held-to-maturity
679,172

 
20,891

 
735,014

 
36,444

 
1,414,186

 
57,335

Total debt securities held-to-maturity
684,145

 
20,918

 
774,117

 
38,595

 
1,458,262

 
59,513

Total
$
1,673,299

 
46,408

 
1,727,887

 
90,524

 
3,401,186

 
136,932



11


 
December 31, 2017
 
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
$
365,078

 
3,115

 
220,744

 
6,085

 
585,822

 
9,200

Federal National Mortgage Association
684,327

 
6,276

 
447,310

 
13,103

 
1,131,637

 
19,379

Government National Mortgage Association
14,981

 
283

 
23,227

 
1,086

 
38,208

 
1,369

Total debt securities available-for-sale
1,064,386

 
9,674

 
691,281

 
20,274

 
1,755,667

 
29,948

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
42,596

 
685

 

 

 
42,596

 
685

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
290,340

 
2,946

 
111,849

 
2,493

 
402,189

 
5,439

Federal National Mortgage Association
369,484

 
2,380

 
430,955

 
9,900

 
800,439

 
12,280

Government National Mortgage Association
51,126

 
867

 

 

 
51,126

 
867

Total mortgage-backed securities held-to-maturity
710,950

 
6,193

 
542,804

 
12,393

 
1,253,754

 
18,586

Total debt securities held-to-maturity
753,546

 
6,878

 
542,804

 
12,393

 
1,296,350

 
19,271

Total
$
1,817,932

 
16,552

 
1,234,085

 
32,667

 
3,052,017

 
49,219

At September 30, 2018, the majority of gross unrealized losses primarily relate to our mortgage-backed-security portfolio which is comprised of debt securities issued by U.S. Government Sponsored Enterprises. The fair values of these securities have been negatively impacted by the 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 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. 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 forecasted using assumptions for defaults, recoveries, pre-payments and amortization. At September 30, 2018 and 2017, 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 three and nine months ended September 30, 2018 and 2017. At September 30, 2018, non-credit related OTTI recorded on the previously impaired TruPS was $19.2 million ($13.8 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,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Balance of credit related OTTI, beginning of period
$
83,923

 
87,921

 
85,768

 
95,743

Additions:
 
 
 
 
 
 
 
Initial credit impairments

 

 

 

Subsequent credit impairments

 

 

 

Reductions:
 
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
(923
)
 
(1,077
)
 
(2,768
)
 
(5,088
)
Reductions for securities sold or paid off during the period

 

 

 
(3,811
)
Balance of credit related OTTI, end of period
$
83,000

 
86,844

 
83,000

 
86,844


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 OTTI occurred prior to the period presented. If OTTI 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 and nine months ended September 30, 2018, there were no sales of equity or debt securities; however, in the second quarter of 2018, the Company received proceeds of $1.5 million from the payoff of a TruP security which resulted in a gain of $1.1 million. In addition, in accordance with ASU 2016-01, the Company recognized unrealized gains on equity securities of $97,000 and $104,000 for the three and nine months ended September 30, 2018.
For the three months ended September 30, 2017, there were no sales of equity or debt securities. For the nine months ended September 30, 2017, the Company received proceeds of $102.1 million on pools of mortgage-backed securities sold from the debt securities available-for-sale portfolio resulting in gross realized gains of $1.3 million. There were no sales of equity or held-to-maturity debt securities for the nine months ended September 30, 2017; however, the Company received proceeds of $3.1 million from the liquidation of a TruP security in the first quarter of 2017. As a result, $1.9 million was recognized as interest income from securities in the Consolidated Statements of Income.


13


6.    Loans Receivable, Net
The detail of the loan portfolio as of September 30, 2018 and December 31, 2017 was as follows:

 
September 30,
2018
 
December 31,
2017
 
(In thousands)
Multi-family loans
$
7,985,847

 
7,802,835

Commercial real estate loans
4,601,567

 
4,541,347

Commercial and industrial loans
2,198,905

 
1,625,375

Construction loans
234,078

 
416,883

Total commercial loans
15,020,397

 
14,386,440

Residential mortgage loans
5,264,682

 
5,025,266

Consumer and other loans
686,293

 
670,820

Total loans excluding PCI loans
20,971,372

 
20,082,526

PCI loans
4,704

 
8,322

Deferred fees, premiums and other, net (1)
(16,407
)
 
(7,778
)
Allowance for loan losses
(230,818
)
 
(230,969
)
Net loans
$
20,728,851

 
19,852,101

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

Allowance for Loan Losses
An analysis of the allowance for loan losses is summarized as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Balance at beginning of the period
$
230,838

 
230,028

 
230,969

 
228,373

Loans charged off
(6,014
)
 
(3,022
)
 
(20,157
)
 
(14,519
)
Recoveries
3,994

 
1,315

 
11,506

 
4,467

Net charge-offs
(2,020
)
 
(1,707
)
 
(8,651
)
 
(10,052
)
Provision for loan losses
2,000

 
1,750

 
8,500

 
11,750

Balance at end of the period
$
230,818

 
230,071

 
230,818

 
230,071

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 losses, the Company performs an analysis on acquired loans to determine whether or not an allowance should be ascribed to those 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

14


in the allowance for loan losses. For the nine months ended September 30, 2018 and 2017, the Company recorded charge-offs of $343,000 and $92,000, respectively, 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. Reserves for each loan segment or the loss factors are generally determined 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, credit concentrations, industry trends and lending and credit management policies and procedures, 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. The appraised value for real property is then reduced to reflect estimated liquidation expenses.
The allowance contains reserves identified as unallocated. These reserves reflect management’s attempt to provide for the imprecision and the uncertainty that is inherent in estimates of probable credit losses.
Our lending emphasis has been the origination of multi-family loans, commercial real estate loans, commercial and industrial loans, one- to four-family residential mortgage loans secured by one- to four-family residential real estate, construction loans and consumer loans, the majority of which are home equity loans, home equity lines of credit and cash surrender value lending on life insurance contracts. 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.
The Company obtains an appraisal for all commercial loans that are collateral dependent 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 losses process, the Company reviews each collateral dependent commercial 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 special assets 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.

15


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, 2018 and December 31, 2017:

 
September 30, 2018
 
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, 2017
$
81,469

 
56,137

 
54,563

 
11,609

 
21,835

 
3,099

 
2,257

 
230,969

Charge-offs
(454
)
 
(7,155
)
 
(6,127
)
 

 
(4,624
)
 
(1,797
)
 

 
(20,157
)
Recoveries
17

 
1,038

 
9,366

 

 
1,056

 
29

 

 
11,506

Provision
(9,293
)
 
5,929

 
8,455

 
(2,555
)
 
4,490

 
1,730

 
(256
)
 
8,500

Ending balance-September 30, 2018
$
71,739

 
55,949

 
66,257

 
9,054

 
22,757

 
3,061

 
2,001

 
230,818

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 

 

 

 
2,114

 
63

 

 
2,177

Collectively evaluated for impairment
71,739

 
55,949

 
66,257

 
9,054

 
20,643

 
2,998

 
2,001

 
228,641

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

 

Balance at September 30, 2018
$
71,739

 
55,949

 
66,257

 
9,054

 
22,757

 
3,061

 
2,001

 
230,818

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,334

 
8,671

 
18,310

 

 
27,148

 
431

 

 
56,894

Collectively evaluated for impairment
7,983,513

 
4,592,896

 
2,180,595

 
234,078

 
5,237,534

 
685,862

 

 
20,914,478

Loans acquired with deteriorated credit quality

 
3,785

 

 

 
758

 
161

 

 
4,704

Balance at September 30, 2018
$
7,985,847

 
4,605,352

 
2,198,905

 
234,078

 
5,265,440

 
686,454

 

 
20,976,076


17


 
December 31, 2017
 
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, 2016
$
95,561

 
52,796

 
43,492

 
11,653

 
19,831

 
2,850

 
2,190

 
228,373

Charge-offs
(6
)
 
(8,072
)
 
(5,656
)
 
(100
)
 
(4,875
)
 
(500
)
 

 
(19,209
)
Recoveries
1,677

 
549

 
200

 

 
2,816

 
313

 

 
5,555

Provision
(15,763
)
 
10,864

 
16,527

 
56

 
4,063

 
436

 
67

 
16,250

Ending balance-December 31, 2017
$
81,469

 
56,137

 
54,563

 
11,609

 
21,835


3,099

 
2,257

 
230,969

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 

 

 

 
1,678

 
97

 

 
1,775

Collectively evaluated for impairment
81,469

 
56,137

 
54,563

 
11,609

 
20,157

 
3,002

 
2,257

 
229,194

Loans acquired with deteriorated credit quality

 

 

 

 

 

 

 

Balance at December 31, 2017
$
81,469

 
56,137

 
54,563

 
11,609

 
21,835


3,099

 
2,257

 
230,969

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
14,776

 
29,736

 
8,989

 

 
26,376

 
879

 

 
80,756

Collectively evaluated for impairment
7,788,059

 
4,511,611

 
1,616,386

 
416,883

 
4,998,890

 
669,941

 

 
20,001,770

Loans acquired with deteriorated credit quality

 
6,754

 

 

 
1,251

 
317

 

 
8,322

Balance at December 31, 2017
$
7,802,835

 
4,548,101

 
1,625,375

 
416,883

 
5,026,517


671,137

 

 
20,090,848

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 warrants 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 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 and consumer 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

18


warrant adverse classification. Residential and consumer 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 and consumer 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, 2018 and December 31, 2017 by class of loans, excluding PCI loans:

 
September 30, 2018
 
Pass
 
Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
6,689,777

 
913,620

 
193,314

 
189,136

 

 

 
7,985,847

Commercial real estate
3,773,219

 
535,106

 
117,806

 
175,436

 

 

 
4,601,567

Commercial and industrial
1,538,625

 
486,856

 
58,396

 
115,028

 

 

 
2,198,905

Construction
146,450

 
42,880

 
26,193

 
18,555

 

 

 
234,078

Total commercial loans
12,148,071

 
1,978,462

 
395,709

 
498,155

 

 

 
15,020,397

Residential mortgage
5,173,116

 
16,717

 
5,013

 
69,836

 

 

 
5,264,682

Consumer and other
677,006

 
4,853

 
464

 
3,970

 

 

 
686,293

Total
$
17,998,193

 
2,000,032

 
401,186

 
571,961

 

 

 
20,971,372


 
December 31, 2017
 
Pass
 
Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
6,791,999

 
702,384

 
154,125

 
154,327

 

 

 
7,802,835

Commercial real estate
3,751,790

 
528,179

 
105,089

 
156,289

 

 

 
4,541,347

Commercial and industrial
1,102,304

 
443,669

 
37,944

 
41,458

 

 

 
1,625,375

Construction
272,882

 
109,252

 
34,454

 
295

 

 

 
416,883

Total commercial loans
11,918,975

 
1,783,484

 
331,612

 
352,369

 

 

 
14,386,440

Residential mortgage
4,926,002

 
14,272

 
7,749

 
77,243

 

 

 
5,025,266

Consumer and other
657,515

 
6,270

 
521

 
6,514

 

 

 
670,820

Total
$
17,502,492

 
1,804,026

 
339,882

 
436,126

 

 

 
20,082,526

    

19


The following tables present the payment status of the recorded investment in past due loans as of September 30, 2018 and December 31, 2017 by class of loans, excluding PCI loans:
 
 
September 30, 2018
 
30-59 Days
 
60-89 Days
 
Greater
than 90
Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
12,346

 
36,670

 
2,334

 
51,350

 
7,934,497

 
7,985,847

Commercial real estate
15,646

 
4,378

 
8,005

 
28,029

 
4,573,538

 
4,601,567

Commercial and industrial
5,425

 
5,400

 
4,912

 
15,737

 
2,183,168

 
2,198,905

Construction

 
9,300

 
244

 
9,544

 
224,534

 
234,078

Total commercial loans
33,417

 
55,748

 
15,495

 
104,660

 
14,915,737

 
15,020,397

Residential mortgage
17,433

 
5,246

 
47,264

 
69,943

 
5,194,739

 
5,264,682

Consumer and other
4,853

 
464

 
3,560

 
8,877

 
677,416

 
686,293

Total
$
55,703

 
61,458

 
66,319

 
183,480

 
20,787,892

 
20,971,372

 
 
December 31, 2017
 
30-59 Days
 
60-89 Days
 
Greater
than 90
Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
7,263

 
7,652

 
203

 
15,118

 
7,787,717

 
7,802,835

Commercial real estate
19,355

 
778

 
11,519

 
31,652

 
4,509,695

 
4,541,347

Commercial and industrial
4,855

 

 
75

 
4,930

 
1,620,445

 
1,625,375

Construction

 
295

 

 
295

 
416,588

 
416,883

Total commercial loans
31,473

 
8,725

 
11,797

 
51,995

 
14,334,445

 
14,386,440

Residential mortgage
15,191

 
8,739

 
54,900

 
78,830

 
4,946,436

 
5,025,266

Consumer and other
6,357

 
521

 
5,755

 
12,633

 
658,187

 
670,820

Total
$
53,021

 
17,985

 
72,452

 
143,458

 
19,939,068

 
20,082,526

The following table presents non-accrual loans, excluding PCI loans, at the dates indicated:
 
 
September 30, 2018
 
December 31, 2017
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Non-accrual:
 
Multi-family
3

 
$
2,618

 
5

 
$
14,978

Commercial real estate
39

 
15,522

 
37

 
34,043

Commercial and industrial
14

 
19,778

 
11

 
9,989

Construction
1

 
244

 
1

 
295

Total commercial loans
57

 
38,162

 
54

 
59,305

Residential mortgage and consumer
347

 
66,250

 
427

 
76,422

Total non-accrual loans
404

 
$
104,412

 
481

 
$
135,727


20


Included in the non-accrual table above are 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, 2018 and December 31, 2017, these loans are comprised of the following:
 
September 30, 2018
 
December 31, 2017
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
TDR with payment status current classified as non-accrual:
 
 
 
 
 
 
 
Commercial real estate

 
$

 
1

 
$
10

Commercial and industrial
2

 
10,543

 

 

Residential mortgage and consumer
26

 
4,199

 
24

 
4,103

Total TDR with payment status current classified as non-accrual
28

 
$
14,742

 
25

 
$
4,113

The following table presents TDR loans which were also 30-89 days delinquent and classified as non-accrual at the dates indicated:
 
September 30, 2018
 
December 31, 2017
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
TDR 30-89 days delinquent classified as non-accrual:
 
 
 
 
 
 
 
Multi-family

 
$

 
1

 
$
918

Commercial real estate

 

 
2

 
14,321

Commercial and industrial
1

 
477

 

 

Total commercial loans
1

 
477

 
3

 
15,239

Residential mortgage and consumer
5

 
948

 
13

 
1,995

Total TDR 30-89 days delinquent classified as non-accrual
6

 
$
1,425

 
16

 
$
17,234

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, 2018, PCI loans with a carrying value of $4.7 million included $4.2 million of which were current, $7,000 of which were 30-89 days delinquent and $453,000 of which were 90 days or more delinquent. As of December 31, 2017, PCI loans with a carrying value of $8.3 million included $7.1 million of which were current, $203,000 of which were 30-89 days delinquent and $1.0 million of which were 90 days or more delinquent.
At September 30, 2018 and December 31, 2017, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans which totaled $56.9 million and $80.8 million, respectively, with allocations of the allowance for loan losses of $2.2 million and $1.8 million for the periods ending September 30, 2018 and December 31, 2017, respectively. During the nine months ended September 30, 2018 and 2017, interest income received and recognized on these loans totaled $513,000 and $1.2 million, respectively.


21


The following tables present loans individually evaluated for impairment by portfolio segment as of September 30, 2018 and December 31, 2017:

 
September 30, 2018
 
Recorded
Investment
 
Unpaid Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In thousands)
With no related allowance:
 
 
 
 
 
 
 
 
 
Multi-family
$
2,334

 
2,338

 

 
2,397

 
41

Commercial real estate
8,671

 
17,625

 

 
9,003

 
77

Commercial and industrial
18,310

 
24,851

 

 
18,363

 
118

Construction

 

 

 

 

Total commercial loans
29,315

 
44,814

 

 
29,763

 
236

Residential mortgage and consumer
11,483

 
15,441

 

 
11,958

 
71

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Multi-family

 

 

 

 

Commercial real estate

 

 

 

 

Commercial and industrial

 

 

 

 

Construction

 

 

 

 

Total commercial loans

 

 

 

 

Residential mortgage and consumer
16,096

 
16,750

 
2,177

 
15,423

 
206

Total:
 
 
 
 
 
 
 
 
 
Multi-family
2,334

 
2,338

 

 
2,397

 
41

Commercial real estate
8,671

 
17,625

 

 
9,003

 
77

Commercial and industrial
18,310

 
24,851

 

 
18,363

 
118

Construction

 

 

 

 

Total commercial loans
29,315

 
44,814

 

 
29,763

 
236

Residential mortgage and consumer
27,579

 
32,191

 
2,177

 
27,381

 
277

Total impaired loans
$
56,894

 
77,005

 
2,177

 
57,144

 
513


22


 
December 31, 2017
 
Recorded
Investment
 
Unpaid Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In thousands)
With no related allowance:
 
 
 
 
 
 
 
 
 
Multi-family
$
14,776

 
14,819

 

 
14,365

 
249

Commercial real estate
29,736

 
37,288

 

 
29,974

 
404

Commercial and industrial
8,989

 
12,008

 

 
8,681

 
28

Construction

 

 

 

 

Total commercial loans
53,501

 
64,115

 

 
53,020

 
681

Residential mortgage and consumer
12,357

 
16,236

 

 
12,100

 
430

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Multi-family

 

 

 

 

Commercial real estate

 

 

 

 

Commercial and industrial

 

 

 

 

Construction

 

 

 

 

Total commercial loans

 

 

 

 

Residential mortgage and consumer
14,898

 
15,461

 
1,775

 
14,767

 
386

Total:
 
 
 
 
 
 
 
 
 
Multi-family
14,776

 
14,819

 

 
14,365

 
249

Commercial real estate
29,736

 
37,288

 

 
29,974

 
404

Commercial and industrial
8,989

 
12,008

 

 
8,681

 
28

Construction

 

 

 

 

Total commercial loans
53,501

 
64,115

 

 
53,020

 
681

Residential mortgage and consumer
27,255

 
31,697

 
1,775

 
26,867

 
816

Total impaired loans
$
80,756

 
95,812

 
1,775

 
79,887

 
1,497

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 tables present the total TDR loans at September 30, 2018 and December 31, 2017. There were five residential PCI loans that were classified as TDRs for the period ended September 30, 2018. There were four residential PCI loans that were classified as TDRs for the period ended December 31, 2017.
 
 
September 30, 2018
 
Accrual
 
Non-accrual
 
Total
 
# of loans
 
Amount
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family

 
$

 
1

 
$
898

 
1

 
$
898

Commercial real estate

 

 
3

 
614

 
3

 
614

Commercial and industrial
1

 
570

 
4

 
14,528

 
5

 
15,098

Total commercial loans
1

 
570

 
8

 
16,040

 
9

 
16,610

Residential mortgage and consumer
58

 
12,653

 
69

 
14,927

 
127

 
27,580

Total
59

 
$
13,223

 
77

 
$
30,967

 
136

 
$
44,190


 
December 31, 2017
 
Accrual
 
Non-accrual
 
Total
 
# of loans
 
Amount
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family

 
$

 
1

 
$
918

 
1

 
$
918

Commercial real estate

 

 
4

 
14,489

 
4

 
14,489

Commercial and industrial

 

 
1

 
1,287

 
1

 
1,287

Total commercial loans

 

 
6

 
16,694

 
6

 
16,694

Residential mortgage and consumer
49

 
10,957

 
71

 
16,298

 
120

 
27,255

Total
49

 
$
10,957

 
77

 
$
32,992

 
126

 
$
43,949


The following tables present information about TDRs that occurred during the three and nine months ended September 30, 2018 and 2017:

 
Three Months Ended September 30,
 
2018
 
2017
 
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)
Commercial and industrial
1

 
3,711

 
3,711

 

 

 

Residential mortgage and consumer
3

 
1,215

 
1,215

 
6

 
1,673

 
1,673


24


    
 
Nine Months Ended September 30,
 
2018
 
2017
 
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)
Commercial real estate
2

 
$
788

 
$
616

 
3

 
$
20,225

 
$
15,787

Commercial and industrial
4

 
13,682

 
13,682

 

 

 

Residential mortgage and consumer
15

 
2,715

 
2,715

 
23

 
4,924

 
4,824

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 dependent TDRs during the three months ended September 30, 2018 and $214,000 in charge-offs for collateral dependent TDRs during the nine months ended September 30, 2018. There were no charge-offs for collateral dependent TDRs during the three months ended September 30, 2017 and $4.5 million in charge-offs for collateral dependent TDRs during the nine months ended September 30, 2017. The allowance for loan losses associated with the TDRs presented in the above tables totaled $2.2 million and $1.8 million at September 30, 2018 and December 31, 2017, respectively.
Loan modifications generally involve the reduction in loan interest rate and extension of loan maturity dates and also may include step up interest rates in their modified terms which will impact their weighted average yield in the future. All residential loans deemed to be TDRs were modified to reflect a reduction in interest rates to current market rates. The commercial loan modifications which qualified as TDRs had their maturity extended.
The following tables present information about pre and post modification interest yield for TDRs which occurred during the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
2018
 
2017
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
Commercial and industrial
1

 
5.75
%
 
5.75
%
 

 
%
 
%
Residential mortgage and consumer
3

 
4.37
%
 
4.45
%
 
6

 
3.75
%
 
2.98
%
 
Nine Months Ended September 30,
 
2018
 
2017
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
Commercial real estate
2

 
4.68
%
 
4.68
%
 
3

 
4.67
%
 
4.67
%
Commercial and industrial
4

 
5.94
%
 
5.94
%
 

 

 

Residential mortgage and consumer
15

 
4.60
%
 
3.78
%
 
23

 
4.15
%
 
3.39
%
Payment defaults for loans modified as a TDR in the previous 12 months to September 30, 2018 consisted of 9 residential loans, 2 commercial real estate loans and 1 multi-family loan with a recorded investment of $651,000, $568,000 and $898,000, respectively, at September 30, 2018. Payment defaults for loans modified as a TDR in the previous 12 months to September 30, 2017 consisted of 8 residential loans and 1 commercial real estate loan with a recorded investment of $1.0 million and $160,000, respectively, at September 30, 2017.
Non-Performing Loan Sales
For the nine months ended September 30, 2018, there were no sales of non-performing loans. For the nine months ended September 30, 2017, the Company sold $48.1 million of non-performing commercial real estate and multi-family loans, resulting in no charge-off recorded through the allowance.


25


7.     Deposits
Deposits are summarized as follows:

 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Non-interest bearing:
 
 
 
Checking accounts
$
2,356,275

 
2,424,608

Interest bearing:
 
 
 
Checking accounts
4,636,971

 
4,909,054

Money market deposits
3,616,032

 
4,243,545

Savings
2,089,646

 
2,320,228

Certificates of deposit
4,698,888

 
3,460,262

Total deposits
$
17,397,812

 
17,357,697


8.    Goodwill and Other Intangible Assets
The following table summarizes goodwill and intangible assets at September 30, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
 
 
(In thousands)
Mortgage servicing rights
 
$
11,932

 
13,228

Core deposit premiums
 
4,510

 
6,024

Other
 
776

 
842

Total other intangible assets
 
17,218

 
20,094

Goodwill
 
82,546

 
77,571

Goodwill and intangible assets
 
$
99,764

 
97,665


For the period ending September 30, 2018, the increase in goodwill reflects the acquisition of the equipment finance portfolio.

The following table summarizes other intangible assets as of September 30, 2018 and December 31, 2017:
 
 
Gross Intangible Asset
 
Accumulated Amortization
 
Valuation Allowance
 
Net Intangible Assets
 
 
(In thousands)
September 30, 2018
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
18,949

 
(6,843
)
 
(174
)
 
11,932

Core deposit premiums
 
25,058

 
(20,548
)
 

 
4,510

Other
 
1,150

 
(374
)
 

 
776

Total other intangible assets
 
$
45,157

 
(27,765
)
 
(174
)
 
17,218

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
20,236

 
(6,886
)
 
(122
)
 
13,228

Core deposit premiums
 
25,058

 
(19,034
)
 

 
6,024

Other
 
1,150

 
(308
)
 

 
842

Total other intangible assets
 
$
46,444

 
(26,228
)
 
(122
)
 
20,094

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 $1.65 billion and $1.77 billion at September 30, 2018 and December 31, 2017, respectively, all of which relate to residential mortgage loans. At September 30, 2018 and December 31, 2017, the servicing asset, included in other intangible assets, had an estimated fair value of $15.1 million

26


and $15.0 million, respectively. At September 30, 2018, fair value was based on expected future cash flows considering a weighted average discount rate of 12.50%, a weighted average constant prepayment rate on mortgages of 8.52% and a weighted average life of 7.4 years. See Note 13 for additional details.
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 determines 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, 2018 and September 30, 2017, the Company granted 71,982 and 430,000 shares of restricted stock awards under the 2015 Plan, respectively. During the first quarter of 2018, it was determined that the performance-based stock awards granted during 2015 were achieved at 70% of target based upon the performance criteria. This resulted in 70% of these performance-based stock awards being deemed earned and converted to time-based stock awards that vest over a service period and the balance being forfeited.
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, 2018 and September 30, 2017, the Company granted 50,000 and 83,800 stock options under the 2015 Plan, respectively.
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,
 
2018
 
2017
Weighted average expected life (in years)
6.50

 
6.50

Weighted average risk-free rate of return
2.80
%
 
2.04
%
Weighted average volatility
17.71
%
 
24.73
%
Dividend yield
2.78
%
 
2.44
%
Weighted average fair value of options granted
$
1.94

 
$
3.00

Total stock options granted
50,000

 
83,800

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. Upon exercise of vested options, management expects to draw on treasury stock as the source for shares.

27


The following table presents the share based compensation expense for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Stock option expense
$
1,326

 
1,469

 
4,226

 
4,373

Restricted stock expense
3,338

 
3,471

 
9,488

 
10,594

Total share based compensation expense
$
4,664

 
4,940

 
13,714

 
14,967


The following is a summary of the Company’s stock option activity and related information for the nine months ended September 30, 2018:
 
 
Number of
Stock
Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual
Life (in years)
 
Aggregate
Intrinsic Value
Outstanding at December 31, 2017
 
11,469,417

 

$12.00

 
7.0
 

$21,587

Granted
 
50,000

 
12.95

 
9.8
 
 
Exercised
 
(772,898
)
 
6.89

 
1.1
 
 
Forfeited
 
(184,875
)
 
12.54

 
 
 
 
Expired
 
(98,925
)
 
7.75

 
 
 
 
Outstanding at September 30, 2018
 
10,462,719

 

$12.41

 
6.7
 

$1,320

Exercisable at September 30, 2018
 
5,318,157

 

$12.29

 
6.6
 

$1,234

Expected future expense relating to the non-vested options outstanding as of September 30, 2018 is $16.6 million over a weighted average period of 3.06 years.
The following is a summary of the status of the Company’s restricted shares as of September 30, 2018 and changes therein during the nine months ended:
 
 
Number of Shares Awarded
 
Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017
 
4,940,335

 
$
12.67

Granted
 
71,982

 
12.99

Vested
 
(1,154,624
)
 
12.66

Forfeited
 
(368,946
)
 
12.54

Outstanding and non vested at September 30, 2018
 
3,488,747

 
$
12.70

Expected future expense relating to the non-vested restricted shares outstanding as of September 30, 2018 is $38.7 million over a weighted average period of 3.34 years.

10.     Net Periodic Benefit Plan Expense
The Company has an Executive Supplemental Retirement Wage Replacement Plan (“Wage Replacement Plan”) and the Supplemental Retirement Plan (“SERP I”) (collectively, the “SERPs”). The Wage Replacement Plan is a nonqualified, defined benefit plan which provides benefits to certain executives as designated by the Compensation and Benefits Committee of the Board of Directors. More specifically, the Wage Replacement Plan was 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 incentive (over a consecutive 36-month period within the participant’s credited service period) reduced by the sum of the benefits provided under the Pentegra Defined Benefit Plan for Financial Institutions (“Pentegra DB Plan”) and SERP I.
Effective as of the close of business of December 31, 2016, the Wage Replacement Plan was amended to freeze future benefit accruals, and for certain participants, structure the benefits payable attributable solely to the participants’ 2016 year of service to vest over a two-year period such that the participants had a right to 50% of their accrued benefits attributable to their 2016 year of service as of December 31, 2016, which became 100% vested as of December 31, 2017.

28


The Supplemental ESOP compensates certain executives (as designated by the Compensation and Benefits Committee of the Board of Directors) participating in 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. The Directors’ 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 for the Directors’ Plan and the Wage Replacement Plan are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Service cost
$

 
371

 

 
1,114

Interest cost
355

 
379

 
1,064

 
1,135

Amortization of:
 
 
 
 
 
 
 
Net loss
126

 
115

 
379

 
344

Total net periodic benefit cost
$
481

 
865

 
1,443

 
2,593

Due to the unfunded nature of the SERPs and the Directors’ Plan, no contributions have been made or were expected to be made during the nine months ended September 30, 2018.
The Company also maintains the Pentegra DB Plan. Since it is a multi-employer plan, costs of the pension plan are based on contributions required to be made to the pension plan. As of December 31, 2016, the annual benefit provided under the Pentegra DB plan was frozen by an amendment to the plan. Freezing the plan eliminates all future benefit accruals and each participant’s frozen accrued benefit was determined as of December 31, 2016 and no further benefits will accrue beyond such date. The Company contributed $3.8 million during the nine months ended September 30, 2018 to meet the minimum required contribution. We anticipate contributing funds to the plan to meet any minimum funding requirements for the remainder of 2018.

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). As of September 30, 2018 and December 31, 2017, the Company had cash flow hedges with aggregate notional amounts of $1.40 billion and $900.0 million, respectively. In August 2018, the Company entered into an asset swap transaction where fixed rate loan payments were exchanged for variable rate payments. This transaction was executed in an effort to reduce the Company’s interest rate exposure to rising rates. As of September 30, 2018, the Company’s fair value hedges had an aggregate notional amount of $1.00 billion.

Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are primarily to 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 caused 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.  Changes in the fair value of derivatives designated and that qualify as cash flow hedges are initially recorded in other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and nine months ended September 30, 2018 and 2017, such derivatives were used to hedge the variability in cash flows associated with borrowings.
Amounts reported in accumulated other comprehensive income (loss) 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 $8.7 million will be reclassified as a decrease to interest expense.

Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

29


For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

Fair Values of Derivative Instruments on the Balance Sheet
The following table presents the fair value of the Company’s derivative financial instruments in cash flow and fair value hedges as well as their classification on the Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017:
 
Asset Derivatives
 
Liability Derivatives
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
 
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
 
$
404

 
Other liabilities
 
$
613

Total derivatives designated as hedging instruments
 
 
$

 
 
 
$

 
 
 
$
404

 
 
 
$
613


Effective January 3, 2017, the Chicago Mercantile Exchange (“CME”) amended their rules to legally characterize the variation margin posted between counterparties to be classified as settlements of the outstanding derivative contracts instead of cash collateral. The Company adopted the new rule on a prospective basis to include the accrued interest and variation margin posted by the CME in the fair value.

Effect of Derivative Instruments on Accumulated Other Comprehensive Income (Loss)
The following table presents the effect of the Company’s derivative financial instruments on Accumulated Other Comprehensive Income (Loss) as of September 30, 2018 and 2017.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Cash Flow Hedges - Interest rate swaps
(In thousands)
Amount of gain (loss) recognized in other comprehensive income (loss)
$
8,147

 
(201
)
 
34,065

 
(5,472
)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) to interest expense
822

 
(1,147
)
 
1,059

 
(3,233
)



30


Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
The following table presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income as of September 30, 2018 and 2017.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
Interest Income (Expense)
Other Income (Expense)
 
Interest Income (Expense)
Other Income (Expense)
 
Interest Income (Expense)
Other Income (Expense)
 
Interest Income (Expense)
Other Income (Expense)
 
(In thousands)
 
Total amounts of income and expense line items presented in the income statement in which the effects of fair value are recorded
$
759


 
(1,147
)

 
996


 
(3,233
)

The effects of fair value and cash flow hedging:
 
 
 
 
 
 
 
 
 
 
 
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
 
 
 
 
 
 
 
 
 
 
 
Interest contracts
 
 
 
 
 
 
 
 
 
 
 
Hedged items
(1,581
)

 


 
(1,581
)

 


Derivatives designated as hedging instruments
1,518


 


 
1,518


 


Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
 
 
 
 
 
 
 
 
 
 
 
Interest contracts
 
 
 
 
 
 
 
 
 
 
 
Amount of gain or (loss) reclassified from accumulated other comprehensive income
822


 
(1,147
)

 
1,059


 
(3,233
)

Amount of gain or (loss) reclassified from accumulated other comprehensive income as a result that a forecasted transaction is no longer probable of occurring


 


 


 




31


As of September 30, 2018, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
Line Item in the Statement of Financial Position in Which the Hedged Item is Included
Carrying Amount of the Hedged Assets/(Liabilities)
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
 
September 30, 2018
December 31, 2017
 
September 30, 2018
December 31, 2017
 
(In thousands)
Loans receivable, net (1)
1,003,419


 
(1,581
)

(1) In August 2018, the Company entered into an asset swap transaction where fixed rate loan payments were exchanged for variable rate payments. This transaction was executed in an effort to reduce the Company’s interest rate exposure to rising rates. These amounts include the amortized cost basis of closed portfolios used to designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2018, the amortized cost basis of the closed portfolios used in these hedging relationships was $2.29 billion; the cumulative basis adjustments associated with these hedging relationships was $1.6 million; and the amounts of the designated hedged items were $1.00 billion.

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, 2018 and December 31, 2017. The net amounts of derivative liabilities and assets can be reconciled to the tabular disclosure of the fair value hierarchy, see Note 13, Fair Value Measurements. 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, 2018
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
404

 

 
404

 

 

 
404

Total
$
404

 

 
404

 

 

 
404

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
613

 

 
613

 

 

 
613

Total
$
613

 

 
613

 

 

 
613




32


12.    Comprehensive Income

 The components of comprehensive income, gross and net of tax, are as follows:
 
Three Months Ended September 30,
 
2018
 
2017
 
Gross
 
Tax
 
Net
 
Gross
 
Tax
 
Net
 
(Dollars in thousands)
Net income
$
73,425

 
(19,201
)
 
54,224

 
74,282

 
(28,437
)
 
45,845

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Change in funded status of retirement obligations
142

 
(40
)
 
102

 
140

 
(58
)
 
82

Unrealized (losses) gains on debt securities available-for-sale
(9,725
)
 
2,415

 
(7,310
)
 
869

 
(344
)
 
525

Accretion of loss on debt securities reclassified to held-to-maturity from available-for-sale
208

 
(59
)
 
149

 
305

 
(125
)
 
180

Reclassification adjustment for security gains included in net income

 

 

 

 

 

Other-than-temporary impairment accretion on debt securities
300

 
(84
)
 
216

 
315

 
(129
)
 
186

Net gains on derivatives arising during the period
7,325

 
(2,059
)
 
5,266

 
946

 
(386
)
 
560

Total other comprehensive (loss) income
(1,750
)
 
173

 
(1,577
)
 
2,575

 
(1,042
)
 
1,533

Total comprehensive income
$
71,675

 
(19,028
)
 
52,647

 
76,857

 
(29,479
)
 
47,378

 
Nine Months Ended September 30,
 
2018
 
2017
 
Gross
 
Tax
 
Net
 
Gross
 
Tax
 
Net
 
(Dollars in thousands)
Net income
$
227,629

 
(58,383
)
 
169,246

 
211,654

 
(80,156
)
 
131,498

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Change in funded status of retirement obligations
428

 
(120
)
 
308

 
422

 
(173
)
 
249

Unrealized (losses) gains on debt securities available-for-sale
(48,419
)
 
12,089

 
(36,330
)
 
8,320

 
(3,115
)
 
5,205

Accretion of loss on securities reclassified to held-to-maturity from available-for-sale
662

 
(187
)
 
475

 
981

 
(401
)
 
580

Reclassification adjustment for security gains included in net income

 

 

 
(1,275
)
 
510

 
(765
)
Other-than-temporary impairment accretion on debt securities
900

 
(253
)
 
647

 
1,302

 
(532
)
 
770

Net gains (losses) on derivatives arising during the period
33,006

 
(9,278
)
 
23,728

 
(2,239
)
 
915

 
(1,324
)
Total other comprehensive (loss) income
(13,423
)
 
2,251

 
(11,172
)
 
7,511

 
(2,796
)
 
4,715

Total comprehensive income
$
214,206

 
(56,132
)
 
158,074

 
219,165

 
(82,952
)
 
136,213


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, 2018 and 2017:

 
Change in
funded status of
retirement
obligations
 
Accretion of loss on debt securities reclassified to held-to-maturity
 
Unrealized (losses) gains
on debt securities
available-for-sale and gains included in net income
 
Other-than-
temporary
impairment
accretion on  debt
securities
 
Unrealized gains (losses) on derivatives
 
Total
accumulated
other
comprehensive
loss
 
(Dollars in thousands)
Balance - December 31, 2017
$
(5,640
)
 
(1,520
)
 
(21,184
)
 
(14,482
)
 
13,487

 
(29,339
)
Net change
308

 
475

 
(36,330
)
 
647

 
23,728

 
(11,172
)
Reclassification due to the adoption of ASU No. 2016-01

 

 
(606
)
 

 

 
(606
)
Balance - September 30, 2018
$
(5,332
)
 
(1,045
)
 
(58,120
)
 
(13,835
)
 
37,215

 
(41,117
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2016
$
(4,895
)
 
(1,988
)
 
(12,271
)
 
(12,870
)
 
7,424

 
(24,600
)
Net change
249

 
580

 
4,440

 
770

 
(1,324
)
 
4,715

Balance - September 30, 2017
$
(4,646
)
 
(1,408
)
 
(7,831
)
 
(12,100
)
 
6,100

 
(19,885
)

The following table presents information about amounts reclassified from accumulated other comprehensive loss to the consolidated statements 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,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Reclassification adjustment for gains included in net income
 
 
 
 
 
 
 
Gain on securities transactions, net
$

 

 

 
(1,275
)
Change in funded status of retirement obligations
 
 
 
 
 
 
 
Amortization of net loss
129

 
120

 
388

 
359

Interest expense
 
 
 
 
 
 
 
Reclassification adjustment for unrealized (gains) losses on derivatives
(822
)
 
1,147

 
(1,059
)
 
3,233

Total before tax
(693
)
 
1,267

 
(671
)
 
2,317

Income tax benefit (expense)
181

 
(497
)
 
172

 
(887
)
Net of tax
$
(512
)
 
770

 
(499
)
 
1,430


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 and derivatives 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 other real estate owned. These non-recurring fair value adjustments 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.

34


In accordance with 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
Equity securities
Our equity securities portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses recognized in the Consolidated Statements of Income. The fair values of equity securities are based on quoted market prices (Level 1). The Company adopted FASB ASU 2016-01 on January 1, 2018.
Debt 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 debt securities available-for-sale are based upon quoted prices for similar instruments in active markets (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.

35


Derivatives
Derivatives are reported at fair value utilizing Level 2 inputs. 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.
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, 2018 and December 31, 2017.
 
Carrying Value at September 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Equity securities
$
5,872

 
5,872

 

 

Debt securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
783,951

 

 
783,951

 

Federal National Mortgage Association
1,169,310

 

 
1,169,310

 

Government National Mortgage Association
31,276

 

 
31,276

 

Total debt securities available-for-sale
$
1,984,537

 

 
1,984,537

 

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
$
404

 

 
404

 

 
Carrying Value at December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Equity securities
$
5,701

 
5,701

 

 

Debt securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
640,242

 

 
640,242

 

Federal National Mortgage Association
1,303,576

 

 
1,303,576

 

Government National Mortgage Association
38,208

 

 
38,208

 

Total debt securities available-for-sale
$
1,982,026

 

 
1,982,026

 

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments
$
613

 

 
613

 

There have been no changes in the methodologies used at September 30, 2018 from December 31, 2017, and there were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2018.
There were no Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2018 and December 31, 2017.

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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, 2018, the fair value model used prepayment speeds ranging from 4.80% to 33.00% and a discount rate of 12.50% for the valuation of the mortgage servicing rights. At December 31, 2017, the fair value model used prepayment speeds ranging from 5.56% to 23.22% and a discount rate of 13.20% 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. Estimated fair value is calculated using an independent third-party appraiser for collateral-dependent loans. 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. Appraisals were discounted in a range of 0% to 25%. For non collateral-dependent loans, management estimates the fair value using discounted cash flows based on inputs that are largely unobservable and instead reflect management’s own estimates of the assumptions as a market participant would in pricing such loans.
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% to 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 further declines in the estimated fair value of the asset occur, 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.
Loans Held For Sale
Residential mortgage loans held for sale are recorded at the lower of cost or fair value and are therefore measured at fair value on a non-recurring basis. When available, the Company uses observable secondary market data, including pricing on recent closed market transactions for loans with similar characteristics.

37


The following tables provide 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, 2018 and December 31, 2017. For the three months ended September 30, 2018 there was no change to the carrying value of MSR or loans held for sale. At December 31, 2017 there was no change to carrying value of MSR or loans held for sale measured at fair value on a non-recurring basis.
 
 
 
 
 
 
Carrying Value at September 30, 2018
 Security Type
Valuation Technique
Unobservable Input
Range
Weighted Average
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
(In thousands)
Impaired loans
Market comparable and estimated cash flow
Lack of marketability and probability of default
1.0% - 83.0%
69.50%
 
$
2,705

 

 

 
2,705

Other real estate owned
Market comparable
Lack of marketability
0.0% - 36.0%
31.75%
 
124

 

 

 
124

 
 
 
 
 
 
$
2,829

 

 

 
2,829

 

 
 
 
 
 
Carrying Value at December 31, 2017
 Security Type
Valuation Technique
Unobservable Input
Range
Weighted Average
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
(In thousands)
Impaired loans
Market comparable and estimated cash flow
Lack of marketability and probability of default
1.0% - 45.0%
21.00%
 
$
30,445

 

 

 
30,445

Other real estate owned
Market comparable
Lack of marketability
0.0% - 25.0%
21.65%
 
263

 

 

 
263

 
 
 
 
 
 
$
30,708

 

 

 
30,708

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.
Debt Securities Held-to-Maturity
Our debt securities 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.

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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 and or FHLB advances outstanding.
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 estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision.
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.

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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, 2018
 
Carrying
 
Estimated Fair Value
 
value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
210,595

 
210,595

 
210,595

 

 

Equity securities
5,872

 
5,872

 
5,872

 

 

Debt securities available-for-sale
1,984,537

 
1,984,537

 

 
1,984,537

 

Debt securities held-to-maturity
1,611,409

 
1,601,807

 

 
1,507,987

 
93,820

FHLB stock
242,403

 
242,403

 
242,403

 

 

Loans held for sale
4,270

 
4,270

 

 
4,270

 

Net loans
20,728,851

 
20,390,620

 

 

 
20,390,620

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits, other than time deposits
$
12,698,924

 
12,698,924

 
12,698,924

 

 

Time deposits
4,698,888

 
4,667,014

 

 
4,667,014

 

Borrowed funds
4,853,774

 
4,797,139

 

 
4,797,139

 

Derivative financial instruments
404

 
404

 

 
404

 

 
December 31, 2017
 
Carrying
 
Estimated Fair Value
 
value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
618,394

 
618,394

 
618,394

 

 

Equity securities
5,701

 
5,701

 
5,701

 

 

Debt securities available-for-sale
1,982,026

 
1,982,026

 

 
1,982,026

 

Debt securities held-to-maturity
1,796,621

 
1,820,125

 

 
1,738,906

 
81,219

FHLB stock
231,544

 
231,544

 
231,544

 

 

Loans held for sale
5,185

 
5,185

 

 
5,185

 

Net loans
19,852,101

 
20,003,717

 

 

 
20,003,717

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits, other than time deposits
$
13,897,435

 
13,897,435

 
13,897,435

 

 

Time deposits
3,460,262

 
3,438,673

 

 
3,438,673

 

Borrowed funds
4,461,533

 
4,437,346

 

 
4,437,346

 

Derivative financial instruments
613

 
613

 

 
613

 

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

40


involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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.    Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).”  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 non-financial assets unless those contracts are in the scope of other standards.  Revenue associated with financial instruments, including loans, leases, securities and derivatives, that are accounted for under other U.S. GAAP are specifically excluded from Topic 606.
The Company’s contracts with customers in the scope of Topic 606 are contracts for deposit accounts and contracts for non-deposit investment accounts through a third party service provider.  Both types of contracts result in non-interest income being recognized.  The revenue resulting from deposit accounts, which includes fees such as insufficient funds fees, wire transfer fees and out-of-network ATM transaction fees, is included as a component of fees and service charges on the consolidated statements of income.  The revenue resulting from non-deposit investment accounts is included as a component of other income on the consolidated statements of income. 
Revenue from contracts with customers included in fees and service charges was $3.4 million and $3.3 million for the three months ended September 30, 2018 and September 30, 2017, respectively, and $9.9 million and $9.5 million for the nine months ended September 30, 2018 and September 30, 2017, respectively.  Revenue from contracts with customers included in other income was $1.9 million and $1.1 million for the three months ended September 30, 2018 and September 30, 2017, respectively, and $6.1 million and $3.9 million for the nine months ended September 30, 2018 and September 30, 2017, respectively.
For our contracts with customers, we satisfy our performance obligations each day as services are rendered.  For our deposit account revenue, we receive payment on a daily basis as services are rendered and for our non-deposit investment account revenue, we receive payment on a monthly basis from our third party service provider as services are rendered.

15.    Recent Accounting Pronouncements
Accounting Pronouncements Adopted
In May 2018, the FASB issued ASU 2018-06, “Codification Improvements to Topic 942, Financial Services-Depository and Lending”, which supersedes the guidance within Subtopic 942-740 that has been rescinded by the Office of the Comptroller of the Currency and is no longer relevant. ASU 2018-06 is effective on its date of issuance of May 7, 2018 and did not have any impact on the Company’s consolidated financial position, results of operations or cash flows.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. The purpose of this guidance is to better align a company’s financial reporting for hedging relationships with the company’s risk management activities by expanding strategies that qualify for hedge accounting, modifying the presentation of certain hedging relationships in the financial statements and simplifying the application of hedge accounting in certain situations. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any interim or annual period before the effective date. ASU 2017-12 will be applied using a modified retrospective approach through a cumulative-effect adjustment related to the elimination of the separate measurement of ineffectiveness to the balance of accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year in which the amendments in this update are adopted. The amended presentation and disclosure guidance is required only prospectively. The Company early adopted ASU 2017-12 on January 1, 2018, which did not have any impact on the Company’s consolidated financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”. This update provides guidance about changes to terms or conditions of a share-based payment award which would require modification accounting. In particular, an entity is required to account for the effects of a modification if the fair value, vesting condition or the equity/liability classification of the modified award is not the same immediately before and after a change

41


to the terms and conditions of the award. The update is to be applied prospectively for awards modified on or after the adoption date. The Company adopted ASU 2017-09 on January 1, 2018, which did not have any impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires that companies disaggregate the service cost component from other components of net benefit cost. This update calls for companies that offer postretirement benefits to present the service cost, which is the amount an employer has to set aside each quarter or fiscal year to cover the benefits, in the same line item with other current employee compensation costs. Other components of net benefit cost will be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. The Company adopted ASU 2017-07 on January 1, 2018, which did not have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this ASU provide a practical way to determine when a set of assets and activities is not a business. The screen provided in this ASU requires that when all or substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. The amendments also provide other considerations to determine whether a set is a business if the screen is not met. The update is to be applied prospectively. The Company adopted ASU 2017-01 on January 1, 2018. The adoption of this new guidance is not expected to have a material impact on the determination of whether future acquisitions are considered a business combination and the resulting impact on the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This ASU addresses the recognition of current and deferred taxes for an intra-entity asset transfer and amends current U.S. GAAP by eliminating the exception for intra-entity transfers of assets other than inventory to defer such recognition until sale to an outside party. The Company adopted ASU 2016-16 on January 1, 2018, which did not have an impact on the Company’s Consolidated Financial Statements.
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. 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 adopted ASU 2016-15 on January 1, 2018, which did not have a material impact 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. 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. Subsequently, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which targets specific areas of improvement such as discontinuation of and adjustments to equity securities without a readily determinable fair value, forward contracts and purchased options. Similarly, the FASB issued ASU 2018-04, “Investments-Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273”, which supersedes and adds various SEC

42


paragraphs pursuant to the issuance of SAB 117. The Company adopted ASU 2016-01, 2018-03 and 2018-04 on January 1, 2018, which did not have a material impact on the Company’s 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 was 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”; ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”; and ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” 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 adopted ASU 2014-09 on January 1, 2018. As the guidance does not apply to revenue associated with financial instruments, including loans, leases, securities and derivatives that are accounted for under other U.S. GAAP, the new revenue recognition standard did not have a material impact on the Company’s Consolidated Financial Statements. See Footnote 14, Revenue Recognition, for further details.
In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)”, which amends certain paragraphs in the ASC to give effect to announcements made by the SEC observer at two recent Emerging Issues Task Force meetings. SEC registrants are required to reasonably estimate the impact that adoption of the standards on revenue recognition, leases, and measurement of credit losses on financial instruments is expected to have on financial statements. If such estimate is indeterminate, registrants should consider providing additional qualitative disclosures to assess the effect on financial statements as a result of adopting of these new standards. There are no effective date or transition requirements for this standard.
Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15: “Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)”. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Specifically, where a cloud computing arrangement includes a license to internal-use software, the software license is accounted for by the customer in accordance with Subtopic 350-40, “Intangibles-Goodwill and Other-Internal-Use Software”. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments in this Update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company does not expect ASU No. 2018-15 to have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14: “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans”. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures, and adding disclosure requirements identified as relevant. Among other changes, the ASU adds disclosure requirements to Topic 715-20 for the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments remove disclosure requirements for the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, and the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020, including interim reporting periods within that reporting period, with early adoption permitted. The update is to be applied on a retrospective basis. The Company will evaluate the effect of ASU 2018-14 on disclosures in the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments remove the requirement to disclose the amount

43


of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of such transfers and the valuation processes for Level 3 fair value measurements. The ASU modifies the disclosure requirements for investments in certain entities that calculate net asset value and clarify the purpose of the measurement uncertainty disclosure. The ASU adds disclosure requirements about the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted to any removed or modified disclosures and delay adoption of additional disclosures until the effective date. Changes should be applied retrospectively to all periods presented upon the effective date with the exception of the following, which should be applied prospectively: disclosures relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the disclosures for uncertainty measurement. The adoption of ASU 2018-13 will not have a material impact on the Company’s Consolidated Financial Statements.
    In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and to apply the guidance therein except for specific guidance on inputs to an option pricing model and the attribution of cost; i.e., the period of time over which share-based payment awards vest and the pattern of cost recognition over that period. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods and services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted if the entity has already adopted Topic 606. Upon adoption, an entity should remeasure liability-classified awards that have not been settled at date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the first day of the fiscal year of adoption. Upon transition, an entity should measure these nonemployee awards at fair value as of the adoption date but must not remeasure assets that are completed. The Company currently applies the guidance of Topic 718 to its accounting for share-based payment awards to its Board of Directors, and, therefore, does not expect ASU 2018-07 to have an impact on the Company’s consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. The amendments in this update require the premium on callable debt securities to be amortized to the earliest call date rather than the maturity date; however, securities held at a discount continue to be amortized to maturity. The amendments apply only to debt securities purchased at a premium that are callable at fixed prices and on preset dates. The amendments more closely align interest income recorded on debt securities held at a premium or discount with the economics of the underlying instrument. ASU No. 2017-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating its provisions to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU simplifies subsequent measurement of goodwill by eliminating Step 2 of the impairment test while retaining the option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment testing dates beginning after January 1, 2017. The update is to be applied prospectively. The Company does not expect ASU No. 2017-04 to have a material impact 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

44


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). While early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of the amended guidance including the potential impact on its Consolidated Financial Statements. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Upon adoption, any impact to the allowance for credit losses - currently allowance for loan and lease losses - will have an offsetting impact on retained earnings.
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 for leases classified as operating leases as well as finance leases. The update also requires new quantitative disclosures related to leases in the Consolidated Financial Statements. There are practical expedients in this update that relate to leases that commenced before the effective date, initial direct costs and the use of hindsight to extend or terminate a lease or purchase the leased asset. Lessor accounting remains largely unchanged under the new guidance. In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842) - Land Easement Practical Expedient for Transition to Topic 842”, which provides an optional practical expedient to not evaluate land easements which were existing or expired before the adoption of Topic 842 that were not accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842) - Targeted Improvements”, which provides an optional transition method under which comparative periods presented in the financial statements will continue to be in accordance with current Topic 840, Leases, and a practical expedient to not separate non-lease components from the associated lease component. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. The Company continues to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope. As such, no conclusions have yet been reached regarding the potential impact on adoption on the Company’s Consolidated Financial Statements and regulatory capital and risk-weighted assets; however, the Company does not expect the amendment to have a material impact on its results of operations.

16.    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 U.S. GAAP.
On October 25, 2018, the Company announced its fourth share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or approximately 29 million shares. The new repurchase program will commence immediately upon completion of the third share repurchase program. In addition, the Company declared a cash dividend of $0.11 per share. The $0.11 dividend per share will be paid to stockholders on November 23, 2018, with a record date of November 9, 2018.

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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, 2017.
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. generally accepted accounting principles, 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 losses, the Company performs an analysis on acquired loans to determine whether or not an allowance has been ascribed to those loans.
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 it 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. Reserves for each loan segment or the loss factors are generally determined 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

46


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, credit concentrations, industry trends and lending and credit management policies and procedures, 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.
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 Accounting Standards Codification (“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 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.
The allowance contains reserves identified as unallocated. These reserves reflect management’s attempt to provide for the imprecision and the uncertainty that is inherent in estimates of probable credit losses.
Our lending emphasis has been the origination of multi-family loans; commercial real estate loans; commercial and industrial loans; one- to four-family residential mortgage loans secured by one- to four-family residential real estate; construction loans; and consumer loans, the majority of which are home equity loans, home equity lines of credit and cash surrender value lending on life insurance contracts. 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.
The Company obtains an appraisal for all commercial loans that are collateral dependent 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 losses process, the Company reviews each collateral dependent commercial 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 special assets 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

47


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.
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.
Investment 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 debt securities available-for-sale are 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 debt securities held-to-maturity, 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.
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 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

48


yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.
Derivative Financial Instruments. As part of our interest rate risk management, we may utilize, from time-to-time, derivative financial instruments which are recorded as either assets or liabilities in the Consolidated Balance Sheets at fair value. Changes in the fair value of a derivative are recorded each period in current period earnings or other comprehensive income, depending on the type of hedge transaction.
In order to qualify as an accounting hedge, a derivative must be designated as such at inception and meet certain criteria. At inception and on a recurring basis, we must assess whether the derivative used in the hedging transaction has been and is expected to be highly effective in reducing the risk associated with that item. If, based on the assessment, a derivative is not expected to be a highly effective hedge or has ceased to be a highly effective hedge, hedge accounting would be discontinued.
Changes in the fair value of derivatives designated and that qualify as cash flow hedges are initially recorded in Accumulated Other Comprehensive Income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. For derivatives designated and that qualify as fair value hedges, the gains or losses on the derivatives that do not offset the gains or losses on the hedged item attributable to the hedged risk - i.e., ineffectiveness - are recognized currently in interest income. The gain or loss on the hedged item attributable to the hedged risk is adjusted to the carrying amount within the Consolidated Balance Sheets.  
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 branch openings, bank and branch acquisitions, as well as product expansion. 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 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 and direction 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 rate of prepayments on our mortgage-related assets.
A flattening of the yield curve, caused primarily by rising short-term interest rates, combined with competitive pricing in both the loan and deposit markets, continues to create a challenging net interest margin environment.  We continue to actively manage our interest rate risk against a backdrop of a relatively flat yield curve.  If short-term interest rates increase further, we may be subject to near-term net interest margin compression.  Should the yield curve steepen, we may experience an improvement in net interest income, particularly if short-term interest rates do not increase further. In August 2018, we entered into a $1.0 billion asset swap transaction where fixed rate loan payments were exchanged for variable rate payments. This transaction was executed in an effort to reduce the Company’s exposure to rising rates.
Our results of operations are also significantly affected by general economic conditions.  While the consumer continues to benefit from improved housing and employment metrics, the velocity of economic growth, domestically and internationally, while recently improving, may be negatively impacted by rising interest rates. In addition, in December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted which reduced our federal tax rate from 35% to 21%, effective for tax years beginning after December 31, 2017.  On July 1, 2018, the State of New Jersey enacted new legislation that created a temporary surtax effective for tax years 2018 through 2021 and will require companies to file combined tax returns beginning in 2019. The new state legislation did not result in a material change to our net deferred tax asset or state tax expense for 2018. We continue to evaluate the effect of this new legislation on our future tax expense.
Total assets increased by $389.3 million, or 1.5%, to $25.52 billion at September 30, 2018 from $25.13 billion at December 31, 2017. Net loans increased by $876.8 million, or 4.4%, to $20.73 billion at September 30, 2018 from $19.85 billion at December 31, 2017. Securities decreased by $182.5 million, or 4.8%, to $3.60 billion at September 30, 2018 from $3.78 billion at December 31, 2017 and cash and cash equivalents decreased by $407.8 million to $210.6 million at September 30, 2018 from $618.4 million at December 31, 2017. In February 2018, we completed the acquisition of a $345.8 million equipment finance portfolio, comprised of both loans and leases, which is classified within our commercial and industrial loan portfolio. Our ongoing strategy is to continue to work towards becoming more commercial bank-like and maintain a well-diversified loan portfolio. We

49


understand the heightened regulatory sensitivity around commercial real estate and multi-family concentrations, and continue to be diligent in our underwriting and credit risk monitoring of these portfolios.  The overall level of non-performing loans remains low compared to our national and regional peers; however, our commercial real estate concentration is above 300% of regulatory capital and therefore subjects us to heightened regulatory scrutiny.
Capital management is a key component of our business strategy. We continue to manage our capital through a combination of organic growth, stock repurchases and cash dividends. Effective capital management and prudent growth allows 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 11.89% at September 30, 2018 from 12.44% at December 31, 2017. Since the commencement of our first stock repurchase plan in March 2015 through September 30, 2018, the Company has repurchased a total of 81.9 million shares at an average cost of $12.17 per share, totaling $996.4 million. For the nine months ended September 30, 2018, stockholders’ equity was impacted by the repurchase of 14.5 million shares of common stock for $191.0 million and cash dividends of $0.27 per share totaling $81.2 million. These reductions to stockholders’ equity were partially offset by net income of $169.2 million and $23.9 million of share-based plan activity. On October 25, 2018, the Company announced its fourth share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or approximately 29 million shares. The new repurchase program will commence immediately upon completion of the third share repurchase program.
We will continue to execute our business strategies with a focus on prudent and opportunistic growth while striving to produce financial results that will create value for our stockholders. We intend to continue to grow our business by successfully attracting deposits, identifying favorable loan and investment opportunities, acquiring other banks and non-bank entities, enhancing our market presence and product offerings as well as continuing to invest in our people. We continue to enhance our employee training and development programs, build additional risk management and operational infrastructure and add personnel as our Company grows and our business changes. In August 2016, we entered into an informal agreement with the Federal Deposit Insurance Corporation and New Jersey Department of Banking and Insurance with regard to Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) compliance matters. Our BSA/AML team has worked diligently to enhance the risk infrastructure procedures and technology, while ensuring its long term sustainability for the Company.
Comparison of Financial Condition at September 30, 2018 and December 31, 2017
Total Assets. Total assets increased by $389.3 million, or 1.5%, to $25.52 billion at September 30, 2018 from $25.13 billion at December 31, 2017. Net loans increased by $876.8 million, or 4.4%, to $20.73 billion at September 30, 2018 from $19.85 billion at December 31, 2017. Total securities decreased by $182.5 million, or 4.8%, to $3.60 billion at September 30, 2018 from $3.78 billion at December 31, 2017 and cash and cash equivalents decreased by $407.8 million to $210.6 million at September 30, 2018 from $618.4 million at December 31, 2017.
Net Loans. Net loans increased by $876.8 million, or 4.4%, to $20.73 billion at September 30, 2018 from $19.85 billion at December 31, 2017. The detail of the loan portfolio (including PCI loans) is below:

 
September 30, 2018
 
December 31, 2017
 
(Dollars in thousands)
Commercial loans:
 
 
 
Multi-family loans
$
7,985,847

 
7,802,835

Commercial real estate loans
4,605,352

 
4,548,101

Commercial and industrial loans
2,198,905

 
1,625,375

Construction loans
234,078

 
416,883

Total commercial loans
15,024,182

 
14,393,194

Residential mortgage loans
5,265,440

 
5,026,517

Consumer and other
686,454

 
671,137

Total loans
20,976,076

 
20,090,848

Deferred fees, premiums and other, net
(16,407
)
 
(7,778
)
Allowance for loan losses
(230,818
)
 
(230,969
)
Net loans
$
20,728,851

 
19,852,101

During the nine months ended September 30, 2018, we originated $1.18 billion in multi-family loans, $607.5 million in commercial and industrial loans, $456.6 million in residential loans, $397.4 million in commercial real estate loans, $83.2 million

50


in construction loans and $80.8 million in consumer and other loans, which was partially offset by pay downs and payoffs of loans, resulting in net loans increasing $876.8 million. Our focus is to continue generating multi-family loans, commercial real estate loans and commercial and industrial loans, In February 2018, we completed the acquisition of a $345.8 million equipment finance portfolio, comprised of both loans and leases, which is classified within our C&I loan portfolio. A significant portion of our commercial loan portfolio, including commercial and industrial loans, are secured by commercial real estate and are primarily on properties and businesses located in New Jersey and New York.
Our loan portfolio contains interest-only residential and consumer 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. At September 30, 2018, interest-only residential and consumer loans represented less than 1% of the residential and consumer portfolio. From time to time and for competitive purposes, we originate interest-only commercial real estate and multi-family loans. As of September 30, 2018, these loans represented less than 10% of the total commercial loan portfolio. We maintain 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.
We also purchased mortgage loans from correspondent entities including other banks and mortgage bankers. During the nine months ended September 30, 2018, we purchased loans totaling $333.7 million from these entities. In addition to the loans originated for our portfolio, our mortgage subsidiary, Investors Home Mortgage Co., originated residential mortgage loans for sale to third parties totaling $44.2 million during the nine months ended September 30, 2018.
    The following table sets forth non-accrual loans (excluding PCI loans and loans held-for-sale) on the dates indicated as well as certain asset quality ratios:

 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
# of Loans
 
Amount
 
# of Loans
 
Amount
 
# of Loans
 
Amount
 
# of Loans
 
Amount
 
# of Loans
 
Amount
 
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
3

 
$
2.6

 
9

 
$
19.5

 
8

 
$
20.2

 
5

 
$
15.0

 
4

 
$
14.2

Commercial real estate
39

 
15.5

 
36

 
16.7

 
38

 
19.7

 
37

 
34.0

 
31

 
35.3

Commercial and industrial
14

 
19.8

 
13

 
28.9

 
19

 
23.3

 
11

 
10.0

 
6

 
1.9

Construction
1

 
0.2

 
1

 
0.3

 
1

 
0.3

 
1

 
0.3

 

 

Total commercial loans
57

 
38.1

 
59

 
65.4

 
66

 
63.5

 
54

 
59.3

 
41

 
51.4

Residential and consumer
347

 
66.3

 
375

 
69.2

 
390

 
72.5

 
427

 
76.4

 
417

 
74.3

Total non-accrual loans
404

 
$
104.4

 
434

 
$
134.6

 
456

 
$
136.0

 
481

 
$
135.7

 
458

 
$
125.7

Accruing troubled debt restructured loans
59

 
$
13.2

 
56

 
$
12.8

 
54

 
$
12.4

 
49

 
$
11.0

 
58

 
$
13.4

Non-accrual loans to total loans
 
 
0.50
%
 
 
 
0.65
%
 
 
 
0.66
%
 
 
 
0.68
%
 
 
 
0.63
%
Allowance for loan losses as a percent of non-accrual loans
 
 
221.06
%
 
 
 
171.46
%
 
 
 
169.97
%
 
 
 
170.17
%
 
 
 
183.09
%
Allowance for loan losses as a percent of total loans
 
 
1.10
%
 
 
 
1.11
%
 
 
 
1.12
%
 
 
 
1.15
%
 
 
 
1.15
%
Total non-accrual loans were $104.4 million at September 30, 2018 compared to $134.6 million at June 30, 2018 and $135.7 million at December 31, 2017. Included in non-accrual loans at September 30, 2018 were $10.3 million of loans that were

51


classified as non-accrual which were performing in accordance with their contractual terms. Classified loans as a percent of total loans increased to 2.73% at September 30, 2018 from 2.17% at December 31, 2017. We continue to proactively and diligently work to resolve our troubled loans.
At September 30, 2018, there were $44.2 million of loans deemed as TDRs, of which $27.6 million were residential and consumer loans, $15.1 million were commercial and industrial loans, $898,000 were multi-family loans and $614,000 were commercial real estate loans. TDRs of $13.2 million were classified as accruing and $31.0 million were classified as non-accrual at September 30, 2018.
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, 2018, the Company has deemed potential problem loans, excluding PCI loans, totaling $100.3 million, which is comprised of 21 multi-family loans totaling $49.0 million, 4 construction loans totaling $21.4 million, 12 commercial real estate loans totaling $19.5 million and 18 commercial and industrial loans totaling $10.3 million. Management is actively monitoring all of these loans.
The ratio of non-accrual loans to total loans was 0.50% at September 30, 2018 compared to 0.68% at December 31, 2017. The allowance for loan losses as a percentage of non-accrual loans was 221.06% at September 30, 2018 compared to 170.17% at December 31, 2017. At September 30, 2018, our allowance for loan losses as a percentage of total loans was 1.10% compared to 1.15% at December 31, 2017.
At September 30, 2018, loans meeting the Company’s definition of an impaired loan totaled $56.9 million, of which $16.1 million had a specific allowance for credit losses of $2.2 million and $40.8 million had no specific allowance for credit losses. At December 31, 2017, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans totaling $80.8 million, of which $14.9 million had a related allowance for credit losses of $1.8 million and $65.9 million had no related allowance for credit losses.
The allowance for loan losses decreased slightly by $151,000 to $230.8 million at September 30, 2018 from $231.0 million at December 31, 2017. While our allowance for loan losses is impacted by the inherent credit risk and the growth and composition of our overall portfolio, during the year we have successfully resolved a number of credit issues which has resulted in a reduction in net charge-offs and improvement in our ratio of non-accrual loans to total 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.
The following table sets forth the allowance for loan losses at September 30, 2018 and December 31, 2017 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, 2018
 
December 31, 2017
 
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
$
71,739

 
38.1
%
 
$
81,469

 
38.9
%
Commercial real estate loans
55,949

 
21.9
%
 
56,137

 
22.6
%
Commercial and industrial loans
66,257

 
10.5
%
 
54,563

 
8.1
%
Construction loans
9,054

 
1.1
%
 
11,609

 
2.1
%
Residential mortgage loans
22,757

 
25.1
%
 
21,835

 
25.0
%
Consumer and other loans
3,061

 
3.3
%
 
3,099

 
3.3
%
Unallocated
2,001

 

 
2,257

 

Total allowance
$
230,818

 
100.0
%
 
$
230,969

 
100.0
%
Securities. Securities are held primarily for liquidity, interest rate risk management and 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

52


short-term loans to other banks, investment grade corporate debt instruments, and mutual funds. In addition, the Company may invest in equity securities subject to certain limitations. Purchase and sale decisions are based upon a thorough analysis of each security to determine if 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. Debt securities are classified as held-to-maturity or available-for-sale when purchased.
At September 30, 2018, our securities portfolio represented 14.1% of our total assets. Securities, in the aggregate, decreased by $182.5 million, or 4.8%, to $3.60 billion at September 30, 2018 from $3.78 billion at December 31, 2017. This decrease was a result of paydowns, partially offset by purchases.
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 $10.9 million, or 4.7%, to $242.4 million at September 30, 2018 from $231.5 million at December 31, 2017. The amount of stock we own in the FHLB is primarily related to the balance of our outstanding borrowings from the FHLB. Bank owned life insurance was $210.4 million at September 30, 2018 and $155.6 million at December 31, 2017. During the nine months ended September 30, 2018, we purchased $125.0 million of bank owned life insurance and surrendered $71.1 million of an older policy. Other assets were $23.4 million at September 30, 2018 and $3.8 million at December 31, 2017.
Deposits.  At September 30, 2018, deposits totaled $17.40 billion, representing 77.4% 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.
We have a suite of commercial deposit products, designed to appeal to small and mid-sized 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 and an active marketing program to attract and retain deposits.
Deposits increased by $40.1 million, or 0.2%, from $17.36 billion at December 31, 2017 to $17.40 billion at September 30, 2018 primarily driven by an increase in time deposits, partially offset by decreases in money market, checking and savings accounts. Checking accounts decreased $340.4 million to $6.99 billion at September 30, 2018 from $7.33 billion at December 31, 2017. Core deposits represented approximately 73% of our total deposit portfolio at September 30, 2018 compared to 80% of our total deposit portfolio at December 31, 2017.
The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated:
 
September 30, 2018
 
December 31, 2017
 
Balance
 
Percent of Total Deposit
 
Balance
 
Percent of Total Deposit
 
(Dollars in thousands)
Non-interest bearing:
 
 
 
 
 
 
 
Checking accounts
$
2,356,275

 
13.5
%
 
$
2,424,608

 
14.0
%
Interest-bearing:
 
 
 
 
 
 
 
Checking accounts
4,636,971

 
26.7
%
 
4,909,054

 
28.3
%
Money market deposits
3,616,032

 
20.8
%
 
4,243,545

 
24.4
%
Savings
2,089,646

 
12.0
%
 
2,320,228

 
13.4
%
Certificates of deposit
4,698,888

 
27.0
%
 
3,460,262

 
19.9
%
Total Deposits
$
17,397,812

 
100.0
%
 
$
17,357,697

 
100.0
%
Borrowed Funds.  Our FHLB advance borrowings are collateralized by our residential and commercial mortgage portfolios. Borrowed funds increased by $392.2 million, or 8.8%, to $4.85 billion at September 30, 2018 from $4.46 billion at December 31, 2017 to help fund the growth of the loan portfolio.
Stockholders’ Equity. Stockholders’ equity decreased by $90.2 million to $3.04 billion at September 30, 2018 from $3.13 billion at December 31, 2017. The decrease was primarily attributed to the repurchase of 14.5 million shares of common stock for $191.0 million and cash dividends of $0.27 per share totaling $81.2 million during the nine months ended September 30, 2018. These reductions to stockholders’ equity were partially offset by net income of $169.2 million and share-based plan activity of $23.9 million for the nine months ended September 30, 2018.

53


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 table sets 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.

 
 
Three Months Ended September 30,
 
 
2018
 
2017
 
 
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
 
$
227,346

 
$
677

 
1.19
%
 
$
379,670

 
$
875

 
0.92
%
Equity securities
 
5,802

 
32

 
2.21
%
 
5,592

 
30

 
2.15
%
Debt securities available-for-sale
 
2,015,096

 
11,122

 
2.21
%
 
1,896,034

 
9,644

 
2.03
%
Debt securities held-to-maturity
 
1,638,722

 
11,383

 
2.78
%
 
1,672,675

 
10,589

 
2.53
%
Net loans
 
20,644,566

 
216,516

 
4.20
%
 
19,633,388

 
201,069

 
4.10
%
Stock in FHLB
 
246,037

 
4,296

 
6.98
%
 
241,033

 
3,557

 
5.90
%
Total interest-earning assets
 
24,777,569

 
244,026

 
3.94
%
 
23,828,392

 
225,764

 
3.79
%
Non-interest-earning assets
 
708,904

 
 
 
 
 
759,203

 
 
 
 
Total assets
 
$
25,486,473

 
 
 
 
 
$
24,587,595

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
2,142,642

 
$
3,462

 
0.65
%
 
$
2,076,769

 
$
2,174

 
0.42
%
Interest-bearing checking
 
4,449,767

 
15,736

 
1.41
%
 
4,422,930

 
10,883

 
0.98
%
Money market accounts
 
3,747,501

 
13,043

 
1.39
%
 
4,320,547

 
9,478

 
0.88
%
Certificates of deposit
 
4,562,549

 
19,682

 
1.73
%
 
3,481,135

 
9,765

 
1.12
%
Total interest-bearing deposits
 
14,902,459

 
51,923

 
1.39
%
 
14,301,381

 
32,300

 
0.90
%
Borrowed funds
 
4,897,119

 
25,177

 
2.06
%
 
4,633,628

 
22,553

 
1.95
%
Total interest-bearing liabilities
 
19,799,578

 
77,100

 
1.56
%
 
18,935,009

 
54,853

 
1.16
%
Non-interest-bearing liabilities
 
2,610,074

 
 
 
 
 
2,485,667

 
 
 
 
Total liabilities
 
22,409,652

 
 
 
 
 
21,420,676

 
 
 
 
Stockholders’ equity
 
3,076,821

 
 
 
 
 
3,166,919

 
 
 
 
Total liabilities and stockholders’ equity
 
$
25,486,473

 
 
 
 
 
$
24,587,595

 
 
 
 
Net interest income
 
 
 
$
166,926

 
 
 
 
 
$
170,911

 
 
Net interest rate spread(1)
 
 
 
 
 
2.38
%
 
 
 
 
 
2.63
%
Net interest-earning assets(2)
 
$
4,977,991

 
 
 
 
 
$
4,893,383

 
 
 
 
Net interest margin(3)
 
 
 
 
 
2.69
%
 
 
 
 
 
2.87
%
Ratio of interest-earning assets to total interest-bearing liabilities
 
1.25

 
 
 
 
 
1.26

 
 
 
 

(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.

54


 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
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
 
$
201,743

 
$
1,541

 
1.02
%
 
$
229,729

 
$
1,159

 
0.67
%
Equity securities
 
5,740

 
100

 
2.32
%
 
5,709

 
108

 
2.52
%
Debt securities available-for-sale
 
2,008,724

 
32,803

 
2.18
%
 
1,802,253

 
26,851

 
1.99
%
Debt securities held-to-maturity
 
1,696,718

 
34,594

 
2.72
%
 
1,689,790

 
33,605

 
2.65
%
Net loans
 
20,337,264

 
633,029

 
4.15
%
 
19,291,939

 
579,921

 
4.01
%
Stock in FHLB
 
246,858

 
11,928

 
6.44
%
 
247,228

 
9,722

 
5.24
%
Total interest-earning assets
 
24,497,047

 
713,995

 
3.89
%
 
23,266,648

 
651,366

 
3.73
%
Non-interest-earning assets
 
716,163

 
 
 
 
 
758,616

 
 
 
 
Total assets
 
$
25,213,210

 
 
 
 
 
$
24,025,264

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
2,206,307

 
$
9,705

 
0.59
%
 
$
2,100,918

 
$
6,053

 
0.38
%
Interest-bearing checking
 
4,581,974

 
43,372

 
1.26
%
 
4,265,758

 
25,712

 
0.80
%
Money market accounts
 
3,897,632

 
32,832

 
1.12
%
 
4,225,519

 
24,772

 
0.78
%
Certificates of deposit
 
3,997,059

 
44,457

 
1.48
%
 
3,086,739

 
23,283

 
1.01
%
Total interest-bearing deposits
 
14,682,972

 
130,366

 
1.18
%
 
13,678,934

 
79,820

 
0.78
%
Borrowed funds
 
4,875,857

 
72,918

 
1.99
%
 
4,744,701

 
66,460

 
1.87
%
Total interest-bearing liabilities
 
19,558,829

 
203,284

 
1.39
%
 
18,423,635

 
146,280

 
1.06
%
Non-interest-bearing liabilities
 
2,551,722

 
 
 
 
 
2,436,893

 
 
 
 
Total liabilities
 
22,110,551

 
 
 
 
 
20,860,528

 
 
 
 
Stockholders’ equity
 
3,102,659

 
 
 
 
 
3,164,736

 
 
 
 
Total liabilities and stockholders’ equity
 
$
25,213,210

 
 
 
 
 
$
24,025,264

 
 
 
 
Net interest income
 
 
 
$
510,711

 
 
 
 
 
$
505,086

 
 
Net interest rate spread(1)
 
 
 
 
 
2.50
%
 
 
 
 
 
2.67
%
Net interest-earning assets(2)
 
$
4,938,218

 
 
 
 
 
$
4,843,013

 
 
 
 
Net interest margin(3)
 
 
 
 
 
2.78
%
 
 
 
 
 
2.89
%
Ratio of interest-earning assets to total interest-bearing liabilities
 
1.25

 
 
 
 
 
1.26

 
 
 
 

(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.


55


Comparison of Operating Results for the Three and Nine Months Ended September 30, 2018 and 2017
Net Income. Net income for the three months ended September 30, 2018 was $54.2 million compared to net income of $45.8 million for the three months ended September 30, 2017. Net income for the nine months ended September 30, 2018 was $169.2 million compared to net income of $131.5 million for the nine months ended September 30, 2017.
Net Interest Income. Net interest income decreased by $4.0 million, or 2.3%, to $166.9 million for the three months ended September 30, 2018 from $170.9 million for the three months ended September 30, 2017. The net interest margin decreased 18 basis points to 2.69% for the three months ended September 30, 2018 from 2.87% for the three months ended September 30, 2017.
Net interest income increased by $5.6 million, or 1.1%, to $510.7 million for the nine months ended September 30, 2018 from $505.1 million for the nine months ended September 30, 2017. The net interest margin decreased 11 basis points to 2.78% for the nine months ended September 30, 2018 from 2.89% for the nine months ended September 30, 2017.
Total interest and dividend income increased by $18.3 million, or 8.1%, to $244.0 million for the three months ended September 30, 2018. Interest income on loans increased by $15.4 million, or 7.7%, to $216.5 million for the three months ended September 30, 2018 as a result of a $1.01 billion increase in the average balance of net loans to $20.64 billion, primarily attributed to organic loan growth and the acquired equipment finance portfolio, offset by paydowns and payoffs. The weighted average yield on net loans increased 10 basis points to 4.20%. Prepayment penalties, which are included in interest income, totaled $4.6 million for the three months ended September 30, 2018 compared to $5.4 million for the three months ended September 30, 2017. Interest income on all other interest-earning assets, excluding loans, increased by $2.8 million, or 11.4%, to $27.5 million for the three months ended September 30, 2018 which is attributed to an increase in the weighted average yield on interest-earning assets, excluding loans, of 31 basis points to 2.66%. The average balance of all other interest-earning assets, excluding loans, decreased $62.0 million to $4.13 billion for the three months ended September 30, 2018.
Total interest and dividend income increased by $62.6 million, or 9.6%, to $714.0 million for the nine months ended September 30, 2018. Interest income on loans increased by $53.1 million, or 9.2%, to $633.0 million for the nine months ended September 30, 2018 as a result of a $1.05 billion increase in the average balance of net loans to $20.34 billion, primarily attributed to organic loan growth and the acquired equipment finance portfolio, offset by paydowns and payoffs. The weighted average yield on net loans increased 14 basis points to 4.15%. Prepayment penalties, which are included in interest income, totaled $15.4 million for the nine months ended September 30, 2018 compared to $11.6 million for the nine months ended September 30, 2017. Interest income on all other interest-earning assets, excluding loans, increased by $9.5 million, or 13.3%, to $81.0 million for the nine months ended September 30, 2018, attributed to the weighted average yield on interest-earning assets, excluding loans, which increased 20 basis points to 2.60%. In addition, there was a $185.1 million increase in the average balance of all other interest-earning assets, excluding loans, to $4.16 billion for the nine months ended September 30, 2018.
Total interest expense increased by $22.2 million, or 40.6%, to $77.1 million for the three months ended September 30, 2018. Interest expense on interest-bearing deposits increased $19.6 million, or 60.8%, to $51.9 million for the three months ended September 30, 2018. The weighted average cost of interest-bearing deposits increased 49 basis points to 1.39% for the three months ended September 30, 2018. In addition, the average balance of total interest-bearing deposits increased $601.1 million, or 4.2%, to $14.90 billion for the three months ended September 30, 2018. Interest expense on borrowed funds increased by $2.6 million, or 11.6%, to $25.2 million for the three months ended September 30, 2018. The average balance of borrowed funds increased $263.5 million, or 5.7%, to $4.90 billion for the three months ended September 30, 2018. In addition, the weighted average cost of borrowings increased 11 basis points to 2.06% for the three months ended September 30, 2018.
Total interest expense increased by $57.0 million, or 39.0%, to $203.3 million for the nine months ended September 30, 2018. Interest expense on interest-bearing deposits increased $50.5 million, or 63.3%, to $130.4 million for the nine months ended September 30, 2018. The weighted average cost of interest-bearing deposits increased 40 basis points to 1.18% for the nine months ended September 30, 2018. In addition, the average balance of total interest-bearing deposits increased $1.00 billion, or 7.3%, to $14.68 billion for the nine months ended September 30, 2018. Interest expense on borrowed funds increased $6.5 million, or 9.7%, to $72.9 million for the nine months ended September 30, 2018. The weighted average cost of borrowings increased 12 basis points to 1.99% for the nine months ended September 30, 2018. In addition, the average balance of borrowed funds increased $131.2 million, or 2.8%, to $4.88 billion for the nine months ended September 30, 2018.
Provision for Loan Losses. Our provision is primarily a result of the inherent credit risk in our overall portfolio, the growth and composition of the loan portfolio, and the level of non-accrual loans and charge-offs. For the three months ended September 30, 2018, our provision for loan losses was $2.0 million, compared to $1.8 million for the three months ended September 30, 2017. For the three months ended September 30, 2018, net charge-offs were $2.0 million, compared to $1.7 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018, our provision for loan losses

56


was $8.5 million, compared to $11.8 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, net charge-offs were $8.7 million, compared to $10.1 million for the nine months ended September 30, 2017.
Non-Interest Income. Total non-interest income increased $1.9 million, or 22.5%, to $10.3 million for the three months ended September 30, 2018. Other income attributed to non-depository investment products increased $1.4 million for the three months ended September 30, 2018.
Total non-interest income increased $3.5 million, or 12.6%, to $30.9 million for the nine months ended September 30, 2018. Other income attributed to non-depository investment products increased $2.8 million, income on bank owned life insurance increased $1.6 million and fees and service charges increased $1.2 million for the nine months ended September 30, 2018. These increases were partially offset by gain on loans, net, which decreased $1.5 million.
Non-Interest Expenses. Total non-interest expenses were $101.8 million for the three months ended September 30, 2018, a decrease of $1.5 million, or 1.4%, compared to the three months ended September 30, 2017. For the three months ended September 30, 2018, professional fees decreased $4.6 million largely due to lower consulting fees associated with risk management and compliance efforts. Partially offsetting this decrease, compensation and fringe benefits increased $2.2 million as a result of additions to our staff to support the growth and build out of our risk management and operating infrastructure, as well as normal merit and benefit increases.
Total non-interest expenses were $305.5 million for the nine months ended September 30, 2018, a decrease of $3.6 million, or 1.2%, compared to the nine months ended September 30, 2017. For the nine months ended September 30, 2018, professional fees decreased $18.4 million largely due to lower consulting fees associated with risk management and compliance efforts. Partially offsetting this decrease, compensation and fringe benefits increased $10.9 million as a result of additions to our staff to support the growth and build out of our risk management and operating infrastructure, as well as normal merit and benefit increases. Data processing and communication expense increased $2.8 million and office occupancy and equipment expense increased $2.7 million.
Income Taxes. Income tax expense for the third quarter of 2018 was $19.2 million compared to $28.4 million for the third quarter 2017.  The effective tax rate was 26.2% for the three months ended September 30, 2018 and 38.3% for the three months ended September 30, 2017. The decrease in effective tax rate is primarily driven by the enactment of the Tax Act.
Income tax expense for the nine months ended September 30, 2018 was $58.4 million compared to $80.2 million for the nine months ended September 30, 2017.  The effective tax rate was 25.6% for the nine months ended September 30, 2018 and 37.9% for the nine months ended September 30, 2017. The decrease in effective tax rate is primarily driven by the enactment of the Tax Act. Additionally, income tax expense includes the excess tax benefits related to our stock plans of $1.1 million for the nine months ended September 30, 2018 and $1.6 million for the nine months ended September 30, 2017.
On July 1, 2018, the State of New Jersey enacted new legislation that created a temporary surtax effective for tax years 2018 through 2021 and will require companies to file combined tax returns beginning in 2019. The new legislation did not result in a material change to our net deferred tax asset or state tax expense for the three or nine months ended September 30, 2018. We continue to evaluate the effect of this new legislation on our future tax expense.
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 and the level of expenses not deductible for tax purposes relative to the overall level of pre-tax income. The effective tax rate is also affected by 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.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB and other borrowings and, to a lesser extent, proceeds from the sale of loans and 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. Our Asset Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies to ensure that sufficient liquidity exists for meeting the needs of our customers as well as unanticipated contingencies. 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, 2018, the Company had $123.0 million of overnight borrowings outstanding. The Company had no overnight borrowings outstanding at December 31, 2017. The Company borrows directly from the FHLB and various financial institutions. The Company had total borrowings of $4.85 billion at September 30, 2018, an increase of $392.2 million from $4.46 billion at December 31, 2017.

57


In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. At September 30, 2018, outstanding commitments to originate loans totaled $706.9 million; outstanding unused lines of credit totaled $1.47 billion; standby letters of credit totaled $31.9 million and outstanding commitments to sell loans totaled $10.5 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 $3.73 billion at September 30, 2018. 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 was phased in incrementally, starting at 0.625% on January 1, 2016, increased to 1.25% on January 1, 2017 and further increased to 1.875% on January 1, 2018. The Conservation Buffer will increase to 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, 2018 the Company and the Bank met the currently applicable Conservation Buffer of 1.875%.
As of September 30, 2018, the Bank and the Company were considered “well capitalized” under applicable regulations and exceeded all regulatory capital requirements as follows:
 
As of September 30, 2018 (1)
 
Actual
 
Minimum Capital Requirement
 
To be Well Capitalized under Prompt Corrective Action Provisions (2)
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
Bank:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Leverage Ratio
$
2,676,103

 
10.51
%
 
$
1,018,264

 
4.000
%
 
$
1,272,830

 
5.00
%
Common Equity Tier 1 Risk-Based Capital
2,676,103

 
13.60
%
 
1,254,843

 
6.375
%
 
1,279,448

 
6.50
%
Tier 1 Risk Based Capital
2,676,103

 
13.60
%
 
1,550,100

 
7.875
%
 
1,574,705

 
8.00
%
Total Risk-Based Capital
2,907,897

 
14.77
%
 
1,943,777

 
9.875
%
 
1,968,381

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
Investors Bancorp, Inc.:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Leverage Ratio
$
2,985,723

 
11.72
%
 
$
1,018,894

 
4.000
%
 
n/a
 
n/a
Common Equity Tier 1 Risk-Based Capital
2,985,723

 
15.15
%
 
1,256,197

 
6.375
%
 
n/a
 
n/a
Tier 1 Risk Based Capital
2,985,723

 
15.15
%
 
1,551,772

 
7.875
%
 
n/a
 
n/a
Total Risk-Based Capital
3,217,516

 
16.33
%
 
1,945,873

 
9.875
%
 
n/a
 
n/a

58


(1) For purposes of calculating Tier 1 leverage ratio, assets are based on adjusted total average assets. In calculating Tier 1 risk-based capital and Total risk-based capital, assets are based on total risk-weighted assets.
(2) Prompt corrective action provisions do not apply to the bank holding company.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the ordinary course of its 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, 2018:
Contractual Obligations
 
Total
 
Less than One Year
 
One-Two Years
 
Two-Three Years
 
More than Three Years
 
 
(In thousands)
Debt obligations (excluding capitalized leases)
 
$
4,853,774

 
898,184

 
1,275,000

 
850,000

 
1,830,590

Commitments to originate and purchase loans
 
$
706,852

 
706,852

 

 

 

Commitments to sell loans
 
$
10,500

 
10,500

 

 

 


Debt obligations include borrowings from the FHLB and other borrowings. The borrowings have defined terms and, under certain circumstances, $5.0 million of the borrowings are callable at the option of the lender. Additionally, at September 30, 2018, the Company’s commitments to fund unused lines of credit totaled $1.47 billion. Commitments to originate loans, commitments to fund unused lines of credit and standby letters 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, 2018 have not changed significantly from December 31, 2017.
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 and loans. During the three and nine months ended September 30, 2018, such derivatives were used (i) to hedge the variability in cash flows associated with borrowings and (ii) in an effort to reduce the Company’s exposure to rising interest rates associated with its loans receivable. These derivatives had an aggregate notional amount of $2.40 billion as of September 30, 2018. The fair value of the derivatives as of September 30, 2018 was a liability of $404,000, inclusive of accrued interest and variation margin posted in accordance with the Chicago Mercantile Exchange.
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, 2017 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 cash flow or re-pricing of our assets, liabilities and off-balance sheet contracts (i.e., loan commitments); the effect of loan prepayments, deposit activity; the difference in the behavior of lending and funding rates arising from the use of different indices; and “yield curve risk” arising from changing interest rate relationships across the term structure of interest rates. Changes in market interest rates can affect net interest income by influencing the amount and rate of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and the mix and flow of deposits.

59


The general objective of our interest rate risk management process 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 our balance sheet, our operating environment and capital and liquidity requirements and may modify 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.
Our tactics and strategies may include the use of various financial instruments, including derivatives, to manage our exposure to interest rate risk. Certain derivatives are designated as hedging instruments in a qualifying hedge accounting relationship (fair value or cash flow hedge). Hedged instruments can be either assets or liabilities. As of September 30, 2018 and December 31, 2017, the Company has cash flow and fair value hedges with aggregate notional amounts of $2.40 billion and $900.0 million, respectively.
We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. At September 30, 2018, 25.1% of our total loan portfolio was comprised of residential mortgages, of which approximately 32.2% was in variable rate products, while 67.8% was in fixed rate products. Our variable rate and short term fixed rate mortgage related assets have helped to reduce our exposure to interest rate fluctuations. Long term fixed-rate products may adversely impact our net interest income 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 in recent years, generally help reduce our interest rate risk due to their shorter term compared to fixed rate residential mortgage loans. In addition, we primarily invest in securities which display relatively conservative interest rate risk characteristics.
We use an internally managed and implemented industry standard asset/liability model to complete our quarterly interest rate risk reports. The model projects net interest income based on various interest rate scenarios and horizons. We use a combination of analyses to monitor our exposure to changes in interest rates.
Our net interest income sensitivity analysis determines the relative balance between the repricing of assets and liabilities over various horizons. This asset and liability analysis includes expected cash flows from loans and securities, using forecasted prepayment rates, reinvestment rates, as well as contractual and forecasted liability cash flows. This analysis identifies mismatches in the timing of asset and liability cash flows but does not necessarily provide an accurate indicator of interest rate risk because the rate forecasts and assumptions used in the analysis may not reflect actual experience. The economic value of equity (“EVE”) analysis estimates the change in the net present value (“NPV”) of assets and liabilities and off-balance sheet contracts over a range of immediate rate shock interest rate scenarios. In calculating changes in EVE, for the various scenarios we forecast loan and securities prepayment rates, reinvestment rates and deposit decay rates.
Quantitative Analysis. The table below sets forth, as of September 30, 2018, the estimated changes in our EVE 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 EVE 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 EVE and net interest income for an interest rate decrease of 100 basis points and increase of 200 basis points.
 
 
EVE (1) (2)
 
Net Interest Income (3)
Change in
Interest Rates
(basis points)
 
Estimated
EVE
 
Estimated Increase (Decrease)
 
Estimated
Net
Interest
Income
 
Estimated Increase (Decrease)
Amount
 
Percent
 
Amount
 
Percent
 
 
(Dollars in thousands)
+ 200bp
 
$
3,831,129

 
(503,067
)
 
(11.6
)%
 
$
602,522

 
(32,376
)
 
(5.1
)%
0bp
 
$
4,334,196

 

 

 
$
634,898

 

 

-100bp
 
$
4,576,255

 
242,059

 
5.6
 %
 
$
652,555

 
17,657

 
2.8
 %
(1)
Assumes an instantaneous and parallel shift in interest rates at all maturities.
(2)
EVE 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, 2018, in the event of a 200 basis points increase in interest rates, we would be expected to experience an 11.6% decrease in EVE and a $32.4 million, or 5.1%, decrease in net interest income. In the event of a 100 basis points decrease in interest rates, we would be expected to experience a 5.6% increase in EVE and a $17.7

60


million, or 2.8%, 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 EVE and net interest income calculations.
As mentioned above, we use an internally developed asset liability model 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 EVE 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 EVE and net interest income table presented above assumes no growth and that generally 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. Accordingly, although the EVE 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 EVE 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, 2018 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, the Bank 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.

ITEM 1A.
RISK FACTORS
There have been no material changes in the “Risk Factors” disclosed in the Company’s December 31, 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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, 2018 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)
July 1, 2018 through July 31, 2018
750,000

 
$
12.91

 
750,000

 
9,418,872

August 1, 2018 through August 31, 2018
3,350,651

 
12.79

 
3,350,000

 
6,068,872

September 1, 2018 through September 30, 2018
2,791,078

 
12.70

 
2,788,818

 
3,280,054

Total
6,891,729

 
$
12.77

 
6,888,818

 
3,280,054


61


(1) On April 28, 2016, the Company announced its third share repurchase program, which authorized the purchase of 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 3,280,054 shares yet to be repurchased as of September 30, 2018.
(2) 2,911 shares were withheld to cover income taxes related to restricted stock vesting under our 2015 Equity Incentive Plan. Shares withheld to pay income taxes are repurchased pursuant to the terms of the 2015 Equity Incentive Plan and not under our share repurchase program.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5.
OTHER INFORMATION
Not applicable.


62



ITEM 6.
EXHIBITS
The following exhibits are either filed as part of this report or are incorporated herein by reference:
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
101.INS
  
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
 
 
 
(1)
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.
 
 
(2)
Incorporated by reference to Exhibits 10.1 and 10.2 to the Current Report on Form 8-K of Investors Bancorp, Inc. (Commission File no. 001-36441), originally filed with the Securities and Exchange Commission on July 10, 2018.


63


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, 2018
 
By:
 
/s/  Kevin Cummings
 
 
 
 
Kevin Cummings
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
By:
 
/s/  Sean Burke
 
 
 
 
Sean Burke
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)



64