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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2019
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: __________ to ___________
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common
 
ISBC
 
The NASDAQ Stock Market

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  ☑    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  ☑    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
 
☑
 
 
  
Accelerated filer
☐
 
Non-accelerated filer
 
☐
 
 
  
Smaller reporting company
☐
 
 
 
 
 
 
 
Emerging growth company
☐
 
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  ☑
As of August 2, 2019, the registrant had 359,070,852 shares of common stock, par value $0.01 per share, issued and 276,732,219 outstanding. 

Table of Contents

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.
 


Table of Contents


Part I Financial Information
ITEM 1.
FINANCIAL STATEMENTS

INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 2019 (Unaudited) and December 31, 2018  
 
June 30,
2019
 
December 31,
2018
 
(In thousands)
ASSETS
 
 
 
Cash and cash equivalents
$
254,382

 
196,891

Equity securities
5,975

 
5,793

Debt securities available-for-sale, at estimated fair value
2,679,708

 
2,122,162

Debt securities held-to-maturity, net (estimated fair value of $1,174,483 and $1,558,564 at June 30, 2019 and December 31, 2018, respectively)
1,132,018

 
1,555,137

Loans receivable, net
21,764,880

 
21,378,136

Loans held-for-sale
16,411

 
4,074

Federal Home Loan Bank stock
294,155

 
260,234

Accrued interest receivable
83,015

 
77,501

Other real estate owned
7,097

 
6,911

Office properties and equipment, net
174,663

 
177,432

Operating lease right-of-use assets
184,215

 
—

Net deferred tax asset
106,208

 
104,411

Bank owned life insurance
215,032

 
211,914

Goodwill and intangible assets
97,997

 
99,063

Other assets
48,360

 
29,349

Total assets
$
27,064,116

 
26,229,008

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
17,644,471

 
17,580,269

Borrowed funds
6,083,737

 
5,435,681

Advance payments by borrowers for taxes and insurance
125,521

 
129,891

Operating lease liabilities
194,233

 
—

Other liabilities
89,279

 
77,837

Total liabilities
24,137,241

 
23,223,678

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 June 30, 2019 and December 31, 2018; 276,820,541 and 286,273,114 outstanding at June 30, 2019 and December 31, 2018, respectively
3,591

 
3,591

Additional paid-in capital
2,809,851

 
2,805,423

Retained earnings
1,206,873

 
1,173,897

Treasury stock, at cost; 82,250,311 and 72,797,738 shares at June 30, 2019 and December 31, 2018, respectively
(995,265
)
 
(884,750
)
Unallocated common stock held by the employee stock ownership plan
(79,764
)
 
(81,262
)
Accumulated other comprehensive loss
(18,411
)
 
(11,569
)
Total stockholders’ equity
2,926,875

 
3,005,330

Total liabilities and stockholders’ equity
$
27,064,116

 
26,229,008

See accompanying notes to consolidated financial statements.

1
Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
Loans receivable and loans held-for-sale
$
227,462

 
211,791

 
452,352

 
416,513

Securities:
 
 
 
 
 
 
 
Equity
35

 
33

 
72

 
68

Government-sponsored enterprise obligations
267

 
273

 
533

 
547

Mortgage-backed securities
23,883

 
19,633

 
47,513

 
39,655

Municipal bonds and other debt
2,734

 
2,432

 
5,256

 
4,690

Interest-bearing deposits
609

 
409

 
1,144

 
864

Federal Home Loan Bank stock
4,078

 
3,831

 
8,415

 
7,632

Total interest and dividend income
259,068

 
238,402

 
515,285

 
469,969

Interest expense:
 
 
 
 
 
 
 
Deposits
67,828

 
42,067

 
133,250

 
78,443

Borrowed funds
32,072

 
25,034

 
60,189

 
47,741

Total interest expense
99,900

 
67,101

 
193,439

 
126,184

Net interest income
159,168

 
171,301

 
321,846

 
343,785

Provision for loan losses
(3,000
)
 
4,000

 
—

 
6,500

Net interest income after provision for loan losses
162,168

 
167,301

 
321,846

 
337,285

Non-interest income
 
 
 
 
 
 
 
Fees and service charges
5,654

 
5,230

 
10,989

 
10,688

Income on bank owned life insurance
1,540

 
1,543

 
3,117

 
2,829

Gain on loans, net
1,015

 
663

 
1,448

 
920

(Loss) gain on securities, net
(5,617
)
 
1,147

 
(5,553
)
 
1,101

Gain on sale of other real estate owned, net
281

 
184

 
505

 
337

Other income
4,108

 
2,711

 
7,669

 
4,713

Total non-interest income
6,981

 
11,478

 
18,175

 
20,588

Non-interest expense
 
 
 
 
 
 
 
Compensation and fringe benefits
59,854

 
60,799

 
120,852

 
119,860

Advertising and promotional expense
4,282

 
3,807

 
7,894

 
5,894

Office occupancy and equipment expense
15,423

 
14,717

 
31,594

 
31,295

Federal deposit insurance premiums
3,300

 
4,525

 
6,600

 
9,025

General and administrative
692

 
693

 
1,176

 
1,193

Professional fees
3,461

 
3,801

 
6,401

 
8,203

Data processing and communication
7,642

 
7,106

 
15,641

 
13,229

Other operating expenses
9,150

 
7,136

 
17,055

 
14,970

Total non-interest expenses
103,804

 
102,584

 
207,213

 
203,669

Income before income tax expense
65,345

 
76,195

 
132,808

 
154,204

Income tax expense
18,721

 
19,098

 
38,026

 
39,182

Net income
$
46,624

 
57,097

 
94,782

 
115,022

Basic earnings per share
$
0.18

 
0.20

 
0.36

 
0.40

Diluted earnings per share
$
0.18

 
0.20

 
0.36

 
0.40

Weighted average shares outstanding

 
 
 
 
 
 
Basic
263,035,892

 
284,502,818

 
265,337,191

 
286,085,380

Diluted
263,477,477

 
285,733,542

 
265,831,421

 
287,413,166

See accompanying notes to consolidated financial statements.

2
Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net income
$
46,624

 
57,097

 
94,782

 
115,022

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in funded status of retirement obligations
14

 
103

 
27

 
206

Unrealized gains (losses) on debt securities available-for-sale
16,568

 
(6,297
)
 
32,807

 
(29,020
)
Accretion of loss on debt securities reclassified to held to maturity
318

 
159

 
431

 
326

Reclassification adjustment for security losses included in net income
4,221

 
—

 
4,221

 
—

Other-than-temporary impairment accretion on debt securities
181

 
215

 
361

 
431

Net (losses) gains on derivatives
(29,038
)
 
6,020

 
(44,689
)
 
18,462

Total other comprehensive (loss) income
(7,736
)
 
200

 
(6,842
)
 
(9,595
)
Total comprehensive income
$
38,888

 
57,297

 
87,940

 
105,427



See accompanying notes to consolidated financial statements.

3
Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
Six Months Ended June 30, 2019 and 2018
(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, 2017
$
3,591

 
2,784,390

 
1,084,177

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

Net income
—

 
—

 
115,022

 
—

 
—

 
—

 
115,022

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
(9,595
)
 
(9,595
)
Reclassification due to the adoption of ASU No. 2016-01
—

 
—

 
606

 
—

 
—

 
(606
)
 
—

Purchase of treasury stock (7,586,236 shares)
—

 
—

 
—

 
(103,020
)
 
—

 
—

 
(103,020
)
Treasury stock allocated to restricted stock plan (25,106 shares)
—

 
(341
)
 
36

 
305

 
—

 
—

 
—

Compensation cost for stock options and restricted stock
—

 
9,133

 
—

 
—

 
—

 
—

 
9,133

Exercise of stock options
—

 
(4,000
)
 
—

 
9,221

 
—

 
—

 
5,221

Restricted stock forfeitures (286,000 shares)
—

 
3,586

 
(246
)
 
(3,340
)
 
—

 
—

 
—

Cash dividend paid ($0.18 per common share)
—

 
—

 
(54,466
)
 
—

 
—

 
—

 
(54,466
)
ESOP shares allocated or committed to be released
—

 
1,739

 
—

 
—

 
1,498

 
—

 
3,237

Balance at June 30, 2018
$
3,591

 
2,794,507

 
1,145,129

 
(729,944
)
 
(82,760
)
 
(39,540
)
 
3,090,983

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
3,591

 
2,805,423

 
1,173,897

 
(884,750
)
 
(81,262
)
 
(11,569
)
 
3,005,330

Net income
—

 
—

 
94,782

 
—

 
—

 
—

 
94,782

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
(6,842
)
 
(6,842
)
Purchase of treasury stock (10,038,159 shares)
—

 
—

 
—

 
(117,755
)
 
—

 
—

 
(117,755
)
Treasury stock allocated to restricted stock plan (658,419 shares)
—

 
(8,011
)
 
(68
)
 
8,079

 
—

 
—

 
—

Compensation cost for stock options and restricted stock
—

 
9,566

 
—

 
—

 
—

 
—

 
9,566

Exercise of stock options
—

 
(286
)
 
—

 
945

 
—

 
—

 
659

Restricted stock forfeitures (149,333 shares)
—

 
1,885

 
(101
)
 
(1,784
)
 
—

 
—

 
—

Cash dividend paid ($0.22 per common share)
—

 
—

 
(61,637
)
 
—

 
—

 
—

 
(61,637
)
ESOP shares allocated or committed to be released
—

 
1,274

 
—

 
—

 
1,498

 
—

 
2,772

Balance at June 30, 2019
$
3,591

 
2,809,851

 
1,206,873

 
(995,265
)
 
(79,764
)
 
(18,411
)
 
2,926,875

See accompanying notes to consolidated financial statements.


4
Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
94,782

 
115,022

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
ESOP and stock-based compensation expense
12,338

 
12,370

Amortization of premiums and accretion of discounts on securities, net
3,953

 
5,832

Amortization of premiums and accretion of fees and costs on loans, net
(2,983
)
 
(4,212
)
Amortization of other intangible assets
792

 
1,020

Provision for loan losses
—

 
6,500

Depreciation and amortization of office properties and equipment
9,356

 
9,055

Loss (gain) on securities, net
5,553

 
(1,101
)
Mortgage loans originated for sale
(77,732
)
 
(19,308
)
Proceeds from mortgage loan sales
66,624

 
19,085

Gain on sales of mortgage loans, net
(1,229
)
 
(541
)
Gain on sale of other real estate owned
(505
)
 
(337
)
Income on bank owned life insurance
(3,117
)
 
(2,829
)
Amortization of operating lease right-of-use assets
8,001

 
—

Increase in accrued interest receivable
(5,514
)
 
(1,089
)
Deferred tax expense (benefit)
3,414

 
(3,560
)
(Increase) decrease in other assets
(18,176
)
 
1,756

(Decrease) increase in other liabilities
(48,707
)
 
15,332

Total adjustments
(47,932
)
 
37,973

Net cash provided by operating activities
46,850

 
152,995

Cash flows from investing activities:
 
 
 
Purchases of loans receivable
(216,419
)
 
(184,754
)
Net originations of loans receivable
(195,937
)
 
(173,851
)
Proceeds from disposition of loans receivable
25,857

 
379

Gain on disposition of loans receivable
(219
)
 
(379
)
Net proceeds from sale of other real estate owned
2,754

 
2,947

Proceeds from principal repayments/calls/maturities of debt securities available for sale
162,787

 
177,154

Proceeds from sales of debt securities available for sale
399,435

 
—

Proceeds from principal repayments/calls/maturities of debt securities held to maturity
137,035

 
163,983

Purchases of equity securities
(47
)
 
(45
)
Purchases of debt securities available for sale
(686,504
)
 
(153,887
)
Purchases of debt securities held to maturity
(106,748
)
 
(27,212
)
Proceeds from redemptions of Federal Home Loan Bank stock
157,325

 
137,858

Purchases of Federal Home Loan Bank stock
(191,246
)
 
(153,724
)
Purchases of office properties and equipment
(6,587
)
 
(5,370
)
Death benefit proceeds from bank owned life insurance
—

 
3,619

Purchases of bank owned life insurance
—

 
(125,000
)
Cash paid for acquisition
—

 
(340,183
)
Net cash used in investing activities
(518,514
)
 
(678,465
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
64,202

 
(440,292
)
Funds borrowed under other repurchase agreements
197,606

 
150,000

Net increase in borrowed funds
450,450

 
533,454

Net (decrease) increase in advance payments by borrowers for taxes and insurance
(4,370
)
 
12,174


5
Table of Contents

Dividends paid
(61,637
)
 
(54,466
)
Exercise of stock options
659

 
5,221

Purchase of treasury stock
(117,755
)
 
(103,020
)
Net cash provided by financing activities
529,155

 
103,071

Net increase (decrease) in cash and cash equivalents
57,491

 
(422,399
)
Cash and cash equivalents at beginning of period
196,891

 
618,394

Cash and cash equivalents at end of period
$
254,382

 
195,995

Supplemental cash flow information:
 
 
 
Non-cash investing activities:
 
 
 
Real estate acquired through foreclosure
$
2,957

 
2,078

Cash paid during the year for:
 
 
 
Interest
193,071

 
122,513

Income taxes
13,824

 
31,036

Significant non-cash transactions:
 
 
 
Debt securities transferred from held-to-maturity to available-for-sale
393,067

 
—

Right-of-use assets obtained in exchange for new lease liabilities
1,791

 
—

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
Table of Contents

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 six months ended June 30, 2019 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, 2018 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 Program
On October 25, 2018, the Company announced its fourth share repurchase program, which authorized the purchase of 10% of its publicly-held outstanding shares of common stock, or 28,886,780 shares. The fourth program commenced immediately upon completion of the third program on December 10, 2018 and remains the Company’s current program as of June 30, 2019.
During the six months ended June 30, 2019, the Company purchased 10,038,159 shares at a cost of $117.8 million, or approximately $11.73 per share. During the six months ended June 30, 2019, shares repurchased included 379,119 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 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 accounting for the acquisition of the equipment finance portfolio is complete and is reflected in our Consolidated Financial Statements.
    

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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 June 30,
 
2019
 
2018
 
(Dollars in thousands, except per share data)
Earnings for basic and diluted earnings per common share
 
 
 
Earnings applicable to common stockholders
$
46,624

 
$
57,097

 
 
 
 
Shares
 
 
 
Weighted-average common shares outstanding - basic
263,035,892

 
284,502,818

Effect of dilutive common stock equivalents (1)
441,585

 
1,230,724

Weighted-average common shares outstanding - diluted
263,477,477

 
285,733,542

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.18

 
$
0.20

Diluted
$
0.18

 
$
0.20


(1) For the three months ended June 30, 2019 and 2018, there were 10,749,549 and 9,971,644 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 Six Months Ended June 30,
 
2019
 
2018
 
(Dollars in thousands, except per share data)
Earnings for basic and diluted earnings per common share
 
 
 
Earnings applicable to common stockholders
$
94,782

 
$
115,022

 
 
 
 
Shares
 
 
 
Weighted-average common shares outstanding - basic
265,337,191

 
286,085,380

Effect of dilutive common stock equivalents (1)
494,230

 
1,327,786

Weighted-average common shares outstanding - diluted
265,831,421

 
287,413,166

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.36

 
$
0.40

Diluted
$
0.36

 
$
0.40


(1) For the six months ended June 30, 2019 and 2018, there were 10,705,374 and 9,758,591 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 $6.0 million and $5.8 million as of June 30, 2019 and December 31, 2018, 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.

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The following table presents the disaggregated net gains on equity securities reported in the Consolidated Statements of Income:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net gains recognized on equity securities
$
71

 
53

 
$
135

 
7

Less: Net gains recognized on equity securities sold
—

 
—

 
—

 
—

Unrealized gains recognized on equity securities
$
71

 
53

 
$
135

 
$
7


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. During the second quarter of 2019, the Company early adopted ASU 2019-04 and reclassified $393.1 million of debt securities held-to-maturity to debt securities available-for-sale. See Note 17, Recent Accounting Pronouncements, for further details regarding the adoption of ASU 2019-04.
 
At June 30, 2019
 
Carrying value
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair value
 
(In thousands)
Available-for-sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
$
1,191,501

 
19,182

 
382

 
1,210,301

Federal National Mortgage Association
1,156,418

 
15,156

 
949

 
1,170,625

Government National Mortgage Association
294,761

 
4,025

 
4

 
298,782

Total debt securities available-for-sale
$
2,642,680

 
38,363

 
1,335

 
2,679,708

 
At June 30, 2019
 
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
$
41,266

 
—

 
41,266

 
134

 
2

 
41,398

Municipal bonds
83,756

 
—

 
83,756

 
2,474

 
—

 
86,230

Corporate and other debt securities
66,669

 
15,352

 
51,317

 
32,243

 
—

 
83,560

Total debt securities held-to-maturity
191,691

 
15,352

 
176,339

 
34,851

 
2

 
211,188

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
300,915

 
176

 
300,739

 
2,760

 
222

 
303,277

Federal National Mortgage Association
579,035

 
508

 
578,527

 
5,377

 
1,038

 
582,866

Government National Mortgage Association
76,413

 
—

 
76,413

 
739

 
—

 
77,152

Total mortgage-backed securities held-to-maturity
956,363

 
684

 
955,679

 
8,876

 
1,260

 
963,295

Total debt securities held-to-maturity
$
1,148,054

 
16,036

 
1,132,018

 
43,727

 
1,262

 
1,174,483


(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 debt 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 debt 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.

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At December 31, 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
$
988,348

 
6,492

 
8,190

 
986,650

Federal National Mortgage Association
980,546

 
3,560

 
15,550

 
968,556

Government National Mortgage Association
165,211

 
1,745

 
—

 
166,956

Total debt securities available-for-sale
$
2,134,105

 
11,797

 
23,740

 
2,122,162


 
At December 31, 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
$
41,258

 
—

 
41,258

 
—

 
1,236

 
40,022

Municipal bonds
25,513

 
—

 
25,513

 
942

 
—

 
26,455

Corporate and other debt securities
66,295

 
15,854

 
50,441

 
36,592

 
—

 
87,033

Total debt securities held-to-maturity
133,066

 
15,854

 
117,212

 
37,534

 
1,236

 
153,510

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
402,231

 
595

 
401,636

 
112

 
9,413

 
392,335

Federal National Mortgage Association
955,237

 
689

 
954,548

 
535

 
22,687

 
932,396

Government National Mortgage Association
81,741

 
—

 
81,741

 
—

 
1,418

 
80,323

Total mortgage-backed securities held-to-maturity
1,439,209

 
1,284

 
1,437,925

 
647

 
33,518

 
1,405,054

Total debt securities held-to-maturity
$
1,572,275

 
17,138

 
1,555,137

 
38,181

 
34,754

 
1,558,564



(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 debt 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 debt 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 June 30, 2019, 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 and real estate investment trusts. At June 30, 2019, the TruPS had a carrying value and estimated fair value of $46.3 million and $78.5 million, respectively. While all were investment grade at purchase, securities classified as non-investment grade at June 30, 2019 had a carrying value and estimated fair value of $44.5 million and $73.9 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.
Debt securities with a carrying value of $930.6 million and an estimated fair value of $941.3 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 June 30, 2019, by contractual maturity, are shown below. 

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June 30, 2019
 
Carrying
value
 
Estimated
fair value
 
(In thousands)
Due in one year or less
$
2,676

 
2,676

Due after one year through five years
—

 
—

Due after five years through ten years
50,286

 
51,577

Due after ten years
123,377

 
156,935

Total
$
176,339

 
211,188



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 June 30, 2019 and December 31, 2018, were as follows:
 
June 30, 2019
 
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
$
—

 
—

 
76,517

 
382

 
76,517

 
382

Federal National Mortgage Association
—

 
—

 
267,534

 
949

 
267,534

 
949

Government National Mortgage Association
25,281

 
4

 
—

 
—

 
25,281

 
4

Total debt securities available-for-sale
25,281

 
4

 
344,051

 
1,331

 
369,332

 
1,335

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
24,999

 
2

 
—

 
—

 
24,999

 
2

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
—

 
—

 
44,120

 
222

 
44,120

 
222

Federal National Mortgage Association
—

 
—

 
120,851

 
1,038

 
120,851

 
1,038

Total mortgage-backed securities held-to-maturity
—

 
—

 
164,971

 
1,260

 
164,971

 
1,260

Total debt securities held-to-maturity
24,999

 
2

 
164,971

 
1,260

 
189,970

 
1,262

Total
$
50,280

 
6

 
509,022

 
2,591

 
559,302

 
2,597



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Table of Contents

 
December 31, 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
$
97,137

 
994

 
288,916

 
7,196

 
386,053

 
8,190

Federal National Mortgage Association
125,389

 
2,098

 
489,337

 
13,452

 
614,726

 
15,550

Total debt securities available-for-sale
222,526

 
3,092

 
778,253

 
20,648

 
1,000,779

 
23,740

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

 
—

 
40,022

 
1,236

 
40,022

 
1,236

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
51,045

 
553

 
339,534

 
8,860

 
390,579

 
9,413

Federal National Mortgage Association
214,400

 
2,449

 
663,671

 
20,238

 
878,071

 
22,687

Government National Mortgage Association
35,499

 
492

 
44,824

 
926

 
80,323

 
1,418

Total mortgage-backed securities held-to-maturity
300,944

 
3,494

 
1,048,029

 
30,024

 
1,348,973

 
33,518

Total debt securities held-to-maturity
300,944

 
3,494

 
1,088,051

 
31,260

 
1,388,995

 
34,754

Total
$
523,470

 
6,586

 
1,866,304

 
51,908

 
2,389,774

 
58,494


At June 30, 2019, the majority of gross unrealized losses 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 positively impacted by changes in 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 TruPS. Cash flows for each security are forecasted using assumptions for defaults, recoveries, pre-payments and amortization. At June 30, 2019 and 2018, 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 six months ended June 30, 2019 and 2018. At June 30, 2019, non-credit related OTTI recorded on the previously impaired TruPS was $15.4 million ($11.0 million after-tax). This amount is being accreted into income over the estimated remaining life of the securities.

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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 June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Balance of credit related OTTI, beginning of period
$
79,713

 
84,845

 
80,595

 
85,768

Additions:
 
 
 
 
 
 
 
Initial credit impairments
—

 
—

 
—

 
—

Subsequent credit impairments
—

 
—

 
—

 
—

Reductions:
 
 
 
 
 
 
 
Accretion of credit loss impairment due to an increase in expected cash flows
(882
)
 
(922
)
 
(1,764
)
 
(1,845
)
Reductions for securities sold or paid off during the period
—

 
—

 
—

 
—

Balance of credit related OTTI, end of period
$
78,831

 
83,923

 
78,831

 
83,923



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 six months ended June 30, 2019, the Company received proceeds of $399.4 million on securities sold from the debt securities available-for-sale portfolio resulting in a loss of $5.7 million recognized in non-interest income. Proceeds from the sale were reinvested in higher yielding debt securities. There were no sales of equity securities or debt securities held-to-maturity for the three and six months ended June 30, 2019. The Company recognized unrealized gains on equity securities of $71,000 and $135,000, respectively, for the three and six months ended June 30, 2019.
For the three and six months ended June 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. The Company recognized net unrealized gains on equity securities of $53,000 and $7,000, respectively, for the three and six months ended June 30, 2018.


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6.    Loans Receivable, Net
The detail of the loan portfolio as of June 30, 2019 and December 31, 2018 was as follows:

 
June 30,
2019
 
December 31,
2018
 
(In thousands)
Multi-family loans
$
8,156,766

 
8,165,187

Commercial real estate loans
4,893,850

 
4,783,095

Commercial and industrial loans
2,585,069

 
2,389,756

Construction loans
252,628

 
227,015

Total commercial loans
15,888,313

 
15,565,053

Residential mortgage loans
5,408,178

 
5,350,504

Consumer and other loans
699,887

 
707,746

Total loans excluding PCI loans
21,996,378

 
21,623,303

PCI loans
4,209

 
4,461

Deferred fees, premiums and other, net (1)
(3,770
)
 
(13,811
)
Allowance for loan losses
(231,937
)
 
(235,817
)
Net loans
$
21,764,880

 
21,378,136


(1) Included in deferred fees and premiums are accretable purchase accounting adjustments in connection with loans acquired and an adjustment to the carrying amount of the residential loans hedged.

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Balance at beginning of the period
$
234,717

 
231,144

 
235,817

 
230,969

Loans charged off
(2,181
)
 
(7,036
)
 
(7,626
)
 
(14,143
)
Recoveries
2,401

 
2,730

 
3,746

 
7,512

Net charge-offs
220

 
(4,306
)
 
(3,880
)
 
(6,631
)
Provision for loan losses
(3,000
)
 
4,000

 
—

 
6,500

Balance at end of the period
$
231,937

 
230,838

 
231,937

 
230,838


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

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in the allowance for loan losses. For the six months ended June 30, 2019 and 2018, the Company recorded charge-offs of $7,000 and $257,000, 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: collectively evaluated for impairment and individually evaluated for impairment. 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 allowance for loans collectively evaluated for impairment is determined by applying quantitative loss factors to the loans collectively evaluated for impairment segregated 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. Quantitative loss factors for each loan segment are generally determined based on the Company’s historical loss experience over an appropriate look-back period. Additionally, management assesses the loss emergence period for the expected losses of each loan segment and adjusts each quantitative 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 quantitative loss factors may also be adjusted to account for qualitative factors, both internal and external to the Company, 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. Updated appraisals are generally obtained for substandard loans $1.0 million or greater and special mention loans $2.0 million or greater in the process of collection by the Company’s special assets department. 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
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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 based on the growth and composition of the loan portfolio, the level of loan delinquency and the economic conditions in our lending area. 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
Table of Contents

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 June 30, 2019 and December 31, 2018:

 
June 30, 2019
 
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, 2018
$
82,876

 
48,449

 
71,084

 
7,486

 
20,776

 
3,102

 
2,044

 
235,817

Charge-offs
(1,463
)
 
(59
)
 
(4,006
)
 
—

 
(1,588
)
 
(510
)
 
—

 
(7,626
)
Recoveries
—

 
1,991

 
902

 
—

 
799

 
54

 
—

 
3,746

Provision
(7,620
)
 
(267
)
 
9,555

 
(247
)
 
(1,270
)
 
(350
)
 
199

 
—

Ending balance-June 30, 2019
$
73,793

 
50,114

 
77,535

 
7,239

 
18,717

 
2,296

 
2,243

 
231,937

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
—

 
—

 
—

 
1,890

 
55

 
—

 
1,945

Collectively evaluated for impairment
73,793

 
50,114

 
77,535

 
7,239

 
16,827

 
2,241

 
2,243

 
229,992

Loans acquired with deteriorated credit quality
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at June 30, 2019
$
73,793

 
50,114

 
77,535

 
7,239

 
18,717

 
2,296

 
2,243

 
231,937

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
32,346

 
3,850

 
17,578

 
—

 
27,518

 
920

 
—

 
82,212

Collectively evaluated for impairment
8,124,420

 
4,890,000

 
2,567,491

 
252,628

 
5,380,660

 
698,967

 
—

 
21,914,166

Loans acquired with deteriorated credit quality
—

 
3,616

 
—

 
—

 
508

 
85

 
—

 
4,209

Balance at June 30, 2019
$
8,156,766

 
4,897,466

 
2,585,069

 
252,628

 
5,408,686

 
699,972

 
—

 
22,000,587


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Table of Contents

 
December 31, 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
(2,603
)
 
(7,200
)
 
(7,078
)
 
—

 
(5,246
)
 
(1,963
)
 
—

 
(24,090
)
Recoveries
17

 
5,213

 
9,478

 
—

 
2,193

 
37

 
—

 
16,938

Provision
3,993

 
(5,701
)
 
14,121

 
(4,123
)
 
1,994

 
1,929

 
(213
)
 
12,000

Ending balance-December 31, 2018
$
82,876

 
48,449

 
71,084

 
7,486

 
20,776


3,102

 
2,044

 
235,817

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
—

 
—

 
—

 
2,082

 
72

 
—

 
2,154

Collectively evaluated for impairment
82,876

 
48,449

 
71,084

 
7,486

 
18,694

 
3,030

 
2,044

 
233,663

Loans acquired with deteriorated credit quality
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at December 31, 2018
$
82,876

 
48,449

 
71,084

 
7,486

 
20,776


3,102

 
2,044

 
235,817

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
32,046

 
6,623

 
19,624

 
—

 
27,884

 
570

 
—

 
86,747

Collectively evaluated for impairment
8,133,141

 
4,776,472

 
2,370,132

 
227,015

 
5,322,620

 
707,176

 
—

 
21,536,556

Loans acquired with deteriorated credit quality
—

 
3,730

 
—

 
—

 
611

 
120

 
—

 
4,461

Balance at December 31, 2018
$
8,165,187

 
4,786,825

 
2,389,756

 
227,015

 
5,351,115


707,866

 
—

 
21,627,764


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. In assessing and classifying our commercial loan portfolio, the Company places significant emphasis on the borrower’s ability to service its debt. 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

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Table of Contents

position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Residential 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 June 30, 2019 and December 31, 2018 by class of loans, excluding PCI loans:

 
June 30, 2019
 
Pass
 
Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
6,748,907

 
883,921

 
242,502

 
281,436

 
—

 
—

 
8,156,766

Commercial real estate
4,170,760

 
444,562

 
69,881

 
208,647

 
—

 
—

 
4,893,850

Commercial and industrial
1,779,684

 
615,205

 
51,381

 
138,799

 
—

 
—

 
2,585,069

Construction
166,396

 
67,324

 
399

 
18,509

 
—

 
—

 
252,628

Total commercial loans
12,865,747

 
2,011,012

 
364,163

 
647,391

 
—

 
—

 
15,888,313

Residential mortgage
5,351,618

 
11,654

 
3,649

 
41,257

 
—

 
—

 
5,408,178

Consumer and other
692,330

 
4,156

 
785

 
2,616

 
—

 
—

 
699,887

Total
$
18,909,695

 
2,026,822

 
368,597

 
691,264

 
—

 
—

 
21,996,378


 
December 31, 2018
 
Pass
 
Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
6,462,056

 
1,061,168

 
313,498

 
328,465

 
—

 
—

 
8,165,187

Commercial real estate
3,910,282

 
552,080

 
162,488

 
158,245

 
—

 
—

 
4,783,095

Commercial and industrial
1,647,130

 
571,620

 
53,861

 
117,145

 
—

 
—

 
2,389,756

Construction
163,503

 
35,774

 
9,200

 
18,538

 
—

 
—

 
227,015

Total commercial loans
12,182,971

 
2,220,642

 
539,047

 
622,393

 
—

 
—

 
15,565,053

Residential mortgage
5,268,234

 
12,082

 
7,712

 
62,476

 
—

 
—

 
5,350,504

Consumer and other
694,432

 
8,443

 
1,650

 
3,221

 
—

 
—

 
707,746

Total
$
18,145,637

 
2,241,167

 
548,409

 
688,090

 
—

 
—

 
21,623,303


    

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Table of Contents

The following tables present the payment status of the recorded investment in past due loans as of June 30, 2019 and December 31, 2018 by class of loans, excluding PCI loans:
 
 
June 30, 2019
 
30-59 Days
 
60-89 Days
 
Greater
than 90
Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
11,998

 
17,207

 
33,975

 
63,180

 
8,093,586

 
8,156,766

Commercial real estate
26,858

 
9,486

 
569

 
36,913

 
4,856,937

 
4,893,850

Commercial and industrial
1,059

 
4,337

 
11,053

 
16,449

 
2,568,620

 
2,585,069

Construction
—

 
—

 
199

 
199

 
252,429

 
252,628

Total commercial loans
39,915

 
31,030

 
45,796

 
116,741

 
15,771,572

 
15,888,313

Residential mortgage
17,313

 
6,514

 
30,227

 
54,054

 
5,354,124

 
5,408,178

Consumer and other
4,156

 
866

 
1,717

 
6,739

 
693,148

 
699,887

Total
$
61,384

 
38,410

 
77,740

 
177,534

 
21,818,844

 
21,996,378

 
 
December 31, 2018
 
30-59 Days
 
60-89 Days
 
Greater
than 90
Days
 
Total Past
Due
 
Current
 
Total
Loans
Receivable
 
(In thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
23,098

 
2,572

 
33,683

 
59,353

 
8,105,834

 
8,165,187

Commercial real estate
5,491

 
3,511

 
2,415

 
11,417

 
4,771,678

 
4,783,095

Commercial and industrial
2,988

 
867

 
4,560

 
8,415

 
2,381,341

 
2,389,756

Construction
9,200

 
—

 
227

 
9,427

 
217,588

 
227,015

Total commercial loans
40,777

 
6,950

 
40,885

 
88,612

 
15,476,441

 
15,565,053

Residential mortgage
13,811

 
7,712

 
39,255

 
60,778

 
5,289,726

 
5,350,504

Consumer and other
8,524

 
1,650

 
2,830

 
13,004

 
694,742

 
707,746

Total
$
63,112

 
16,312

 
82,970

 
162,394

 
21,460,909

 
21,623,303


The following table presents non-accrual loans, excluding PCI loans, at the dates indicated:
 
 
June 30, 2019
 
December 31, 2018
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Non-accrual:
 
Multi-family
14

 
$
34,049

 
15

 
$
33,940

Commercial real estate
27

 
8,142

 
35

 
12,391

Commercial and industrial
13

 
18,023

 
14

 
19,394

Construction
1

 
199

 
1

 
227

Total commercial loans
55

 
60,413

 
65

 
65,952

Residential mortgage and consumer
275

 
51,188

 
320

 
58,961

Total non-accrual loans
330

 
$
111,601

 
385

 
$
124,913



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Table of Contents

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 June 30, 2019 and December 31, 2018, these loans are comprised of the following:
 
June 30, 2019
 
December 31, 2018
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
TDR with payment status current classified as non-accrual:
 
 
 
 
 
 
 
Commercial real estate
—

 
$
—

 
2

 
$
2,817

Commercial and industrial
—

 
—

 
2

 
9,762

Total commercial loans
—

 
—

 
4

 
12,579

Residential mortgage and consumer
34

 
5,827

 
26

 
4,006

Total TDR with payment status current classified as non-accrual
34

 
$
5,827

 
30

 
$
16,585

The following table presents TDR loans which were also 30-89 days delinquent and classified as non-accrual at the dates indicated. Not included in the table is a TDR loan in the amount of $1.4 million which was 30-89 days delinquent at June 30, 2019, classified as accruing while the Company underwrites an extension of the borrower’s credit facilities:
 
June 30, 2019
 
December 31, 2018
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
TDR 30-89 days delinquent classified as non-accrual:
 
 
 
 
 
 
 
Commercial real estate
1

 
$
2,463

 
—

 
$
—

Total commercial loans
1

 
2,463

 
—

 
—

Residential mortgage and consumer
9

 
1,711

 
11

 
1,810

Total TDR 30-89 days delinquent classified as non-accrual
10

 
$
4,174

 
11

 
$
1,810


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 June 30, 2019, PCI loans with a carrying value of $4.2 million included $4.0 million of which were current, $48,000 of which were 30-89 days delinquent and $138,000 of which were 90 days or more delinquent. As of December 31, 2018, PCI loans with a carrying value of $4.5 million included $4.1 million of which were current, $229,000 of which were 30-89 days delinquent and $248,000 of which were 90 days or more delinquent.
At June 30, 2019 and December 31, 2018, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans which totaled $82.2 million and $86.7 million, respectively, with allocations of the allowance for loan losses of $1.9 million and $2.2 million as of June 30, 2019 and December 31, 2018, respectively. During the six months ended June 30, 2019 and 2018, interest income received and recognized on these loans totaled $498,000 and $602,000, respectively.


21
Table of Contents

The following tables present loans individually evaluated for impairment by portfolio segment as of June 30, 2019 and December 31, 2018:

 
June 30, 2019
 
Recorded
Investment
 
Unpaid Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In thousands)
With no related allowance:
 
 
 
 
 
 
 
 
 
Multi-family
$
32,346

 
35,851

 
—

 
32,352

 
21

Commercial real estate
3,850

 
6,958

 
—

 
4,186

 
115

Commercial and industrial
17,578

 
26,355

 
—

 
18,094

 
160

Construction
—

 
—

 
—

 
—

 
—

Total commercial loans
53,774

 
69,164

 
—

 
54,632

 
296

Residential mortgage and consumer
13,793

 
18,629

 
—

 
13,810

 
104

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Multi-family
—

 
—

 
—

 
—

 
—

Commercial real estate
—

 
—

 
—

 
—

 
—

Commercial and industrial
—

 
—

 
—

 
—

 
—

Construction
—

 
—

 
—

 
—

 
—

Total commercial loans
—

 
—

 
—

 
—

 
—

Residential mortgage and consumer
14,645

 
15,347

 
1,945

 
14,749

 
98

Total:
 
 
 
 
 
 
 
 
 
Multi-family
32,346

 
35,851

 
—

 
32,352

 
21

Commercial real estate
3,850

 
6,958

 
—

 
4,186

 
115

Commercial and industrial
17,578

 
26,355

 
—

 
18,094

 
160

Construction
—

 
—

 
—

 
—

 
—

Total commercial loans
53,774

 
69,164

 
—

 
54,632

 
296

Residential mortgage and consumer
28,438

 
33,976

 
1,945

 
28,559

 
202

Total impaired loans
$
82,212

 
103,140

 
1,945

 
83,191

 
498


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Table of Contents

 
December 31, 2018
 
Recorded
Investment
 
Unpaid Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In thousands)
With no related allowance:
 
 
 
 
 
 
 
 
 
Multi-family
$
32,046

 
34,199

 
—

 
33,656

 
146

Commercial real estate
6,623

 
11,896

 
—

 
6,611

 
79

Commercial and industrial
19,624

 
26,323

 
—

 
20,218

 
232

Construction
—

 
—

 
—

 
—

 
—

Total commercial loans
58,293

 
72,418

 
—

 
60,485

 
457

Residential mortgage and consumer
12,626

 
17,130

 
—

 
11,907

 
167

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Multi-family
—

 
—

 
—

 
—

 
—

Commercial real estate
—

 
—

 
—

 
—

 
—

Commercial and industrial
—

 
—

 
—

 
—

 
—

Construction
—

 
—

 
—

 
—

 
—

Total commercial loans
—

 
—

 
—

 
—

 
—

Residential mortgage and consumer
15,828

 
16,498

 
2,154

 
15,627

 
280

Total:
 
 
 
 
 
 
 
 
 
Multi-family
32,046

 
34,199

 
—

 
33,656

 
146

Commercial real estate
6,623

 
11,896

 
—

 
6,611

 
79

Commercial and industrial
19,624

 
26,323

 
—

 
20,218

 
232

Construction
—

 
—

 
—

 
—

 
—

Total commercial loans
58,293

 
72,418

 
—

 
60,485

 
457

Residential mortgage and consumer
28,454

 
33,628

 
2,154

 
27,534

 
447

Total impaired loans
$
86,747

 
106,046

 
2,154

 
88,019

 
904


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
Table of Contents

The following tables present the total TDR loans at June 30, 2019 and December 31, 2018. There were five residential loans that were previously designated as PCI classified as TDRs for the periods ended June 30, 2019 and December 31, 2018.
 
 
June 30, 2019
 
Accrual
 
Non-accrual
 
Total
 
# of loans
 
Amount
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1

 
$
21

 
2

 
$
2,472

 
3

 
$
2,493

Commercial and industrial
2

 
1,830

 
2

 
5,844

 
4

 
7,674

Total commercial loans
3

 
1,851

 
4

 
8,316

 
7

 
10,167

Residential mortgage and consumer
53

 
10,358

 
82

 
18,096

 
135

 
28,454

Total
56

 
$
12,209

 
86

 
$
26,412

 
142

 
$
38,621



 
December 31, 2018
 
Accrual
 
Non-accrual
 
Total
 
# of loans
 
Amount
 
# of loans
 
Amount
 
# of loans
 
Amount
 
(Dollars in thousands)
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Multi-family
—

 
$
—

 
1

 
$
892

 
1

 
$
892

Commercial real estate
—

 
—

 
3

 
2,859

 
3

 
2,859

Commercial and industrial
2

 
2,070

 
4

 
13,479

 
6

 
15,549

Total commercial loans
2

 
2,070

 
8

 
17,230

 
10

 
19,300

Residential mortgage and consumer
52

 
11,550

 
79

 
16,908

 
131

 
28,458

Total
54

 
$
13,620

 
87

 
$
34,138

 
141

 
$
47,758



The following tables present information about TDRs that occurred during the three and six months ended June 30, 2019 and 2018:

 
Three Months Ended June 30,
 
2019
 
2018
 
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
—

 
$
—

 
$
—

 
2

 
$
9,536

 
$
9,536

Residential mortgage and consumer
4

 
732

 
732

 
6

 
788

 
788



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Six Months Ended June 30,
 
2019
 
2018
 
Number of
Loans
 
Pre-modification
Recorded
Investment
 
Post-
modification
Recorded
Investment
 
Number of
Loans
 
Pre-modification
Recorded
Investment
 
Post-
modification
Recorded
Investment
 
(Dollars in thousands)
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
$
—

 
$
—

 
2

 
$
788

 
$
616

Commercial and industrial
—

 
—

 
—

 
3

 
9,971

 
9,971

Residential mortgage and consumer
10

 
2,396

 
2,396

 
12

 
1,500

 
1,500


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 $96,000 and $573,000 in charge-offs for TDRs of unsecured commercial and industrial loans during the three and six months ended June 30, 2019, respectively. There were $42,000 and $214,000 in charge-offs for collateral dependent TDRs during the three and six months ended June 30, 2018, respectively. Of the amount charged off in the first six months of 2018, one borrower subsequently repaid the full amount of outstanding loan principal which resulted in a recovery of $172,000. The allowance for loan losses associated with the TDRs presented in the above tables totaled $1.9 million and $2.2 million as of June 30, 2019 and December 31, 2018, respectively.
Loan modifications generally involve the reduction in loan interest rate and/or 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 in the six months ended June 30, 2018 had their maturity extended.
The following tables present information about pre and post modification interest yield for TDRs which occurred during the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30,
 
2019
 
2018
 
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
—

 
—
%
 
—
%
 
2

 
6.07
%
 
6.07
%
Residential mortgage and consumer
4

 
5.22
%
 
4.96
%
 
6

 
4.85
%
 
3.17
%

 
Six Months Ended June 30,
 
2019
 
2018
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
 
Number of
Loans
 
Pre-modification
Interest Yield
 
Post-
modification
Interest Yield
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—
%
 
—
%
 
2

 
4.68
%
 
4.68
%
Commercial and industrial
—

 
—
%
 
—
%
 
3

 
6.01
%
 
6.01
%
Residential mortgage and consumer
10

 
5.25
%
 
4.92
%
 
12

 
4.78
%
 
3.22
%

Payment defaults for loans modified as a TDR in the previous 12 months to June 30, 2019 consisted of 1 residential loan and 1 commercial real estate loan with a recorded investment of $270,000 and $2.5 million, respectively, at June 30, 2019. Payment defaults for loans modified as a TDR in the previous 12 months to June 30, 2018 consisted of 7 residential loans, 1 commercial real estate loan and 1 multi-family loan with a recorded investment of $560,000, $203,000 and $918,000, respectively, at June 30, 2018.


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7.     Deposits
Deposits are summarized as follows:

 
June 30, 2019
 
December 31, 2018
 
(In thousands)
Non-interest bearing:
 
 
 
Checking accounts
$
2,455,293

 
2,535,848

Interest bearing:
 
 
 
Checking accounts
4,697,470

 
4,783,563

Money market deposits
3,791,080

 
3,641,070

Savings
1,877,082

 
2,048,941

Certificates of deposit
4,823,546

 
4,570,847

Total deposits
$
17,644,471

 
17,580,269



8.    Goodwill and Other Intangible Assets
The following table summarizes goodwill and intangible assets at June 30, 2019 and December 31, 2018:
 
 
June 30, 2019
 
December 31, 2018
 
 
(In thousands)
Mortgage servicing rights
 
$
11,482

 
11,712

Core deposit premiums
 
3,258

 
4,050

Other
 
711

 
755

Total other intangible assets
 
15,451

 
16,517

Goodwill
 
82,546

 
82,546

Goodwill and intangible assets
 
$
97,997

 
99,063



The following table summarizes other intangible assets as of June 30, 2019 and December 31, 2018:
 
 
Gross Intangible Asset
 
Accumulated Amortization
 
Valuation Allowance
 
Net Intangible Assets
 
 
(In thousands)
June 30, 2019
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
18,489

 
(6,784
)
 
(223
)
 
11,482

Core deposit premiums
 
21,139

 
(17,881
)
 
—

 
3,258

Other
 
1,150

 
(439
)
 
—

 
711

Total other intangible assets
 
$
40,778

 
(25,104
)
 
(223
)
 
15,451

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
19,808

 
(7,921
)
 
(175
)
 
11,712

Core deposit premiums
 
25,058

 
(21,008
)
 
—

 
4,050

Other
 
1,150

 
(395
)
 
—

 
755

Total other intangible assets
 
$
46,016

 
(29,324
)
 
(175
)
 
16,517


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 $1.59 billion and $1.62 billion at June 30, 2019 and December 31, 2018, respectively, all of which relate to mortgage loans. At June 30, 2019 and December 31, 2018, the servicing asset, included in other intangible assets, had an estimated fair value of $13.4 million and $14.9 million, respectively. At June 30, 2019, fair value was based on expected future cash flows considering a weighted average discount rate

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of 12.06%, a weighted average constant prepayment rate on mortgages of 11.58% and a weighted average life of 6.2 years. See Note 15 for additional details.
Core deposit premiums are amortized using an accelerated method and having a weighted average amortization period of 10 years.

9.     Leases
The Company adopted ASU 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842 on January 1, 2019.  Topic 842 requires 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. We have operating leases for corporate offices, branch locations and certain equipment. Our leases have remaining lease terms of up to 17 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. Certain of our operating leases for branch locations contain variable lease payments related to consumer price index adjustments.
The following table presents the balance sheet information related to our leases:
 
June 30, 2019
 
(Dollars in thousands)
Operating lease right-of-use assets
$
184,215

Operating lease liabilities
194,233

Weighted average remaining lease term
10.1 years

Weighted average discount rate
2.75
%

The discount rate used in determining the lease liability for each individual lease was the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered into.
The following table presents the components of total lease cost recognized in the Consolidated Statements of Income:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2019
 
(In thousands)
Included in office occupancy and equipment expense:
 
 
 
Operating lease cost
$
6,323

 
12,643

Short-term lease cost
72

 
155

Variable lease cost
—

 
—

Included in other income:
 
 
 
Sublease income
67

 
134

The following table presents supplemental cash flow information related to leases:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2019
 
(In thousands)
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases
$
6,158

 
12,296

Operating lease liabilities arising from obtaining right-of-use assets (non-cash):
Operating leases
1,773

 
1,791



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Future minimum operating lease payments and reconciliation to operating lease liabilities at June 30, 2019:
 
June 30, 2019
 
(In thousands)
Remainder of 2019
$
12,214

2020
24,002

2021
23,699

2022
21,958

2023
20,912

Thereafter
121,362

Total lease payments
224,147

Less: Imputed interest
(29,914
)
Total operating lease liabilities
$
194,233



At December 31, 2018, the Company’s minimum operating lease payments for non-cancelable operating leases were $24.4 million, $23.8 million, $23.4 million, $21.7 million and $20.7 million for 2019 through 2023, respectively, and $119.9 million in the aggregate for all years thereafter.

10.     Equity Incentive Plan
At the annual meeting held on June 9, 2015, stockholders of the Company approved the Investors Bancorp, Inc. 2015 Equity Incentive Plan (“2015 Plan”) which provides for the issuance or delivery of up to 30,881,296 shares (13,234,841 restricted stock awards and 17,646,455 stock options) of Investors Bancorp, Inc. common stock.
Restricted shares granted under the 2015 Plan vest in equal installments, over the service period generally ranging from 5 to 7 years beginning one year from the date of grant. Additionally, certain restricted shares awarded are performance vesting awards, which may or may not vest depending upon the attainment of certain corporate financial targets. The vesting of restricted stock may accelerate in accordance with the terms of the 2015 Plan. The product of the number of shares granted and the grant date closing market price of the Company’s common stock determine the fair value of restricted shares under the 2015 Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period. For the six months ended June 30, 2019 and June 30, 2018, the Company granted 658,419 and 25,106 shares of restricted stock awards under the 2015 Plan, respectively.
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 six months ended June 30, 2019 and June 30, 2018, the Company granted 50,000 and 15,000 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 periods presented below:
 
Six Months Ended June 30,
 
2019
 
2018
Weighted average expected life (in years)
6.50

 
6.50

Weighted average risk-free rate of return
2.50
%
 
2.74
%
Weighted average volatility
18.70
%
 
18.29
%
Dividend yield
3.57
%
 
2.64
%
Weighted average fair value of options granted
$
1.60

 
$
2.15

Total stock options granted
50,000

 
15,000


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.

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The following table presents the share based compensation expense for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Stock option expense
$
1,350

 
1,470

 
2,652

 
2,900

Restricted stock expense
3,636

 
4,210

 
6,907

 
6,150

Total share based compensation expense
$
4,986

 
5,680

 
9,559

 
9,050



The following is a summary of the Company’s stock option activity and related information for the six months ended June 30, 2019:
 
 
Number of
Stock
Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual
Life (in years)
 
Aggregate
Intrinsic Value
Outstanding at December 31, 2018
 
10,216,047

 
$
12.43

 
6.5
 
$
522

Granted
 
50,000

 
12.35

 
9.7
 
 
Exercised
 
(76,500
)
 
8.62

 
4.3
 
 
Forfeited
 
(213,429
)
 
12.33

 
 
 
 
Expired
 
(145,286
)
 
12.40

 
 
 
 
Outstanding at June 30, 2019
 
9,830,832

 
12.47

 
6.0
 
501

Exercisable at June 30, 2019
 
6,323,542

 
$
12.43

 
5.9
 
$
500


Expected future expense relating to the non-vested options outstanding as of June 30, 2019 is $12.7 million over a weighted average period of 2.31 years.
The following is a summary of the status of the Company’s restricted shares as of June 30, 2019 and changes therein during the six months ended:
 
 
Number of Shares Awarded
 
Weighted Average Grant Date Fair Value
Outstanding at December 31, 2018
 
3,477,747

 
$
12.69

Granted
 
658,419

 
12.17

Vested
 
(999,149
)
 
12.68

Forfeited
 
(149,333
)
 
12.62

Outstanding and non vested at June 30, 2019
 
2,987,684

 
$
12.58


Expected future expense relating to the non-vested restricted shares outstanding as of June 30, 2019 is $34.8 million over a weighted average period of 3.13 years.

11.     Net Periodic Benefit Plan Expense
The Company has an Executive Supplemental Retirement Wage Replacement Plan (“SERP II”) and the Supplemental ESOP and Retirement Plan (“SERP I”) (collectively, the “SERPs”). The SERP II 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 SERP II 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 the SERP I.
Effective as of the close of business of December 31, 2016, the SERP II 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.

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Table of Contents

The SERP I 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 SERPs 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 SERP II are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Interest cost
$
397

 
354

 
794

 
709

Amortization of:
 
 
 
 
 
 
 
Net loss
—

 
127

 
—

 
253

Total net periodic benefit cost
$
397

 
481

 
794

 
962


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 six months ended June 30, 2019.
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 eliminated all future benefit accruals and each participant’s frozen accrued benefit was determined as of December 31, 2016 with no further benefits accrued subsequent to December 31, 2016. There was no contribution required during the six months ended June 30, 2019. We anticipate contributing funds to the plan to meet any minimum funding requirements for the remainder of 2019.

12.    Derivatives and Hedging Activities
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters 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 floating rate borrowings and pools of fixed-rate assets.

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. 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 $5.4 million will be reclassified as an increase 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- and adjustable-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

30
Table of Contents

the agreements without the exchange of the underlying notional amount. Such derivatives were used to hedge the changes in fair value of certain of its pools of prepayable fixed- and adjustable-rate assets.
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.
Derivatives Not Designated as Hedges
The Company has credit derivatives resulting from participations in interest rate swaps provided to external lenders as part of loan participation arrangements which are, therefore, not used to manage interest rate risk in the Company’s assets or liabilities. Additionally, the Company provides interest rate risk management services to commercial customers, primarily interest rate swaps. The Company’s market risk from unfavorable movements in interest rates related to these derivative contracts is economically hedged by concurrently entering into offsetting derivative contracts that have identical notional values, terms and indices.
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans and commercial customers.

Fair Values of Derivative Instruments on the Balance Sheet
 
 
Asset Derivatives
 
Liability Derivatives
 
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
 
Notional Amount
Balance
Sheet
Location
Fair Value
 
Notional Amount
Balance
Sheet
Location
Fair Value
 
Notional Amount
Balance
Sheet
Location
Fair Value
 
Notional Amount
Balance
Sheet
Location
Fair Value
 
(in millions)
 
(In thousands)
 
(in millions)
 
(In thousands)
 
(in millions)
 
(In thousands)
 
(in millions)
 
(In thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
3,480

Other assets
$
1,028

 
$
—

Other assets
$
—

 
$
—

Other liabilities
$
—

 
$
2,605

Other liabilities
$
432

Total derivatives designated as hedging instruments

 
$
1,028

 

 
$
—

 
 
 
$
—

 
 
 
$
432

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$
109

Other assets
$
3,256

 
$
—

Other assets
$
—

 
$
—

Other liabilities
$
—

 
$
—

Other liabilities
$
—

Other Contracts
—

Other assets
—

 
—

Other assets
—

 
22

Other liabilities
130

 
18

Other liabilities
66

Total derivatives not designated as hedging instruments

 
$
3,256

 

 
$
—

 
 
 
$
130

 
 
 
$
66



The Chicago Mercantile Exchange (“CME”) legally characterizes the variation margin posted between counterparties as settlements of the outstanding derivative contracts instead of cash collateral.

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) for the three months ended June 30, 2019 and 2018.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Cash Flow Hedges - Interest rate swaps
 
 
 
 
 
 
 
Amount of (loss) gain recognized in other comprehensive income (loss)
$
(38,664
)
 
8,980

 
(58,345
)
 
25,918

Amount of gain reclassified from accumulated other comprehensive income (loss) to interest expense
1,728

 
606

 
3,818

 
237



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Table of Contents

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 June 30, 2019 and 2018.
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
The effects of fair value and cash flow hedging:
Income statement location
(In thousands)
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
 
 
 
 
 
 
 
 
Interest contracts
 
 
 
 
 
 
 
 
Hedged items
Interest income on loans
$
5,297

 
—

 
6,219

 
—

Derivatives designated as hedging instruments
Interest income on loans
(5,261
)
 
—

 
(6,282
)
 
—

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
Interest expense on borrowings
1,728

 
606

 
3,818

 
237

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

 
—

 
—

 
—

Total amounts of income and expense line items presented in the income statement in which the effects of fair value are recorded
 
$
1,764

 
606

 
3,755

 
237



As of June 30, 2019 and December 31, 2018, the following amounts were recorded on the Consolidated Balance Sheets related to cumulative basis adjustment for fair value hedges:
Balance sheet location
Carrying Amount of the Hedged Assets/(Liabilities)
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
 
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
 
(In thousands)
Loans receivable, net (1)
$
1,486,512

 
1,005,294

 
$
6,512

 
294

(1) At June 30, 2019, the amortized cost basis of the closed portfolios used in these hedging relationships was $2.85 billion; the cumulative basis adjustments associated with these hedging relationships was $6.5 million; and the amounts of the designated hedged items were $1.49 billion.

Location and Amount of Gain or (Loss) Recognized in Income on Derivatives Not Designated as Hedging Instruments
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Consolidated Statements of Income for the three and six months ended June 30, 2019. There were no derivative financial instruments that are not designated as hedging instruments for the three and six months ended June 30, 2018.
 
Consolidated Statements of Income location
Amount of Gain or (Loss) Recognized in Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivative
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(In thousands)
Other Contracts
Other income / (expense)
$
(40
)
 
—

 
$
(11
)
 
—

Total
 
$
(40
)
 
—

 
$
(11
)
 
—



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Table of Contents

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 June 30, 2019 and December 31, 2018. The net amounts of derivative assets and liabilities can be reconciled to the tabular disclosure of the fair value hierarchy, see Note 15, 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)
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
$
1,045

 
—

 
1,045

 
—

 
—

 
1,045

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
130

 
—

 
130

 
—

 
—

 
130

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
$
498

 
—

 
498

 
—

 
—

 
498



13.    Comprehensive Income

 The components of comprehensive income, gross and net of tax, are as follows:
 
Three Months Ended June 30,
 
2019
 
2018
 
Gross
 
Tax
 
Net
 
Gross
 
Tax
 
Net
 
(Dollars in thousands)
Net income
$
65,345

 
(18,721
)
 
46,624

 
76,195

 
(19,098
)
 
57,097

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Change in funded status of retirement obligations
19

 
(5
)
 
14

 
143

 
(40
)
 
103

Unrealized gains (losses) on debt securities available-for-sale
21,767

 
(5,199
)
 
16,568

 
(8,159
)
 
1,862

 
(6,297
)
Accretion of loss on debt securities reclassified to held-to-maturity from available-for-sale
443

 
(125
)
 
318

 
221

 
(62
)
 
159

Reclassification adjustment for security losses included in net income
5,690

 
(1,469
)
 
4,221

 
—

 
—

 
—

Other-than-temporary impairment accretion on debt securities
251

 
(70
)
 
181

 
300

 
(85
)
 
215

Net (losses) gains on derivatives
(40,392
)
 
11,354

 
(29,038
)
 
8,374

 
(2,354
)
 
6,020

Total other comprehensive (loss) income
(12,222
)
 
4,486

 
(7,736
)
 
879

 
(679
)
 
200

Total comprehensive income
$
53,123

 
(14,235
)
 
38,888

 
77,074

 
(19,777
)
 
57,297



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Six Months Ended June 30,
 
2019
 
2018
 
Gross
 
Tax
 
Net
 
Gross
 
Tax
 
Net
 
(Dollars in thousands)
Net income
$
132,808

 
(38,026
)
 
94,782

 
154,204

 
(39,182
)
 
115,022

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Change in funded status of retirement obligations
37

 
(10
)
 
27

 
286

 
(80
)
 
206

Unrealized gains (losses) on debt securities available-for-sale
43,281

 
(10,474
)
 
32,807

 
(38,694
)
 
9,674

 
(29,020
)
Accretion of loss on securities reclassified to held-to-maturity from available-for-sale
600

 
(169
)
 
431

 
454

 
(128
)
 
326

Reclassification adjustment for security losses included in net income
5,690

 
(1,469
)
 
4,221

 
—

 
—

 
—

Other-than-temporary impairment accretion on debt securities
502

 
(141
)
 
361

 
600

 
(169
)
 
431

Net gains (losses) on derivatives
(62,163
)
 
17,474

 
(44,689
)
 
25,681

 
(7,219
)
 
18,462

Total other comprehensive (loss) income
(12,053
)
 
5,211

 
(6,842
)
 
(11,673
)
 
2,078

 
(9,595
)
Total comprehensive income
$
120,755

 
(32,815
)
 
87,940

 
142,531

 
(37,104
)
 
105,427



The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the six months ended June 30, 2019 and 2018:

 
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, 2018
$
(3,018
)
 
(921
)
 
(8,884
)
 
(11,397
)
 
12,651

 
(11,569
)
Net change
27

 
431

 
37,028

 
361

 
(44,689
)
 
(6,842
)
Balance - June 30, 2019
$
(2,991
)
 
(490
)
 
28,144

 
(11,036
)
 
(32,038
)
 
(18,411
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2017
$
(5,640
)
 
(1,520
)
 
(21,184
)
 
(14,482
)
 
13,487

 
(29,339
)
Net change
206

 
326

 
(29,020
)
 
431

 
18,462

 
(9,595
)
Reclassification due to the adoption of ASU No. 2016-01
—

 
—

 
(606
)
 
—

 
—

 
(606
)
Balance - June 30, 2018
$
(5,434
)
 
(1,194
)
 
(50,810
)
 
(14,051
)
 
31,949

 
(39,540
)


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Table of Contents

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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Reclassification adjustment for losses included in net income
 
 
 
 
 
 
 
Loss on securities, net
$
5,690

 
—

 
5,690

 
—

Change in funded status of retirement obligations
 
 
 
 
 
 
 
Amortization of net (gain) loss
(2
)
 
129

 
(4
)
 
259

Interest expense
 
 
 
 
 
 
 
Reclassification adjustment for unrealized gains on derivatives
(1,728
)
 
(606
)
 
(3,818
)
 
(237
)
Total before tax
3,960

 
(477
)
 
1,868

 
22

Income tax (expense) benefit
(973
)
 
120

 
(375
)
 
(6
)
Net of tax
$
2,987

 
(357
)
 
1,493

 
16



14.    Stockholders’ Equity

 The changes in the components of stockholders’ equity for the three months ended June 30, 2019 and 2018 are as follows:
 
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 March 31, 2018
$
3,591

 
2,789,102

 
1,115,153

 
(692,516
)
 
(83,509
)
 
(39,740
)
 
3,092,081

Net income
—

 
—

 
57,097

 
—

 
—

 
—

 
57,097

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
200

 
200

Purchase of treasury stock (3,061,213 shares)
—

 
—

 
—

 
(41,161
)
 
—

 
—

 
(41,161
)
Treasury stock allocated to restricted stock plan (6,159 shares)
—

 
(84
)
 
9

 
75

 
—

 
—

 
—

Compensation cost for stock options and restricted stock
—

 
5,763

 
—

 
—

 
—

 
—

 
5,763

Exercise of stock options
—

 
(1,572
)
 
—

 
4,079

 
—

 
—

 
2,507

Restricted stock forfeitures (36,000 shares)
—

 
451

 
(30
)
 
(421
)
 
—

 
—

 
—

Cash dividend paid ($0.09 per common share)
—

 
—

 
(27,100
)
 
—

 
—

 
—

 
(27,100
)
ESOP shares allocated or committed to be released
—

 
847

 
—

 
—

 
749

 
—

 
1,596

Balance at June 30, 2018
$
3,591

 
2,794,507

 
1,145,129

 
(729,944
)
 
(82,760
)
 
(39,540
)
 
3,090,983

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
$
3,591

 
2,810,832

 
1,191,020

 
(958,425
)
 
(80,513
)
 
(10,675
)
 
2,955,830

Net income
—

 
—

 
46,624

 
—

 
—

 
—

 
46,624

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
(7,736
)
 
(7,736
)
Purchase of treasury stock (3,829,780 shares)
—

 
—

 
—

 
(44,023
)
 
—

 
—

 
(44,023
)
Treasury stock allocated to restricted stock plan (538,756 shares)
—

 
(6,500
)
 
(118
)
 
6,618

 
—

 
—

 
—

Compensation cost for stock options and restricted stock
—

 
4,993

 
—

 
—

 
—

 
—

 
4,993

Exercise of stock options
—

 
(221
)
 
—

 
712

 
—

 
—

 
491

Restricted stock forfeitures (12,267 shares)
—

 
154

 
(7
)
 
(147
)
 
—

 
—

 
—

Cash dividend paid ($0.11 per common share)
—

 
—

 
(30,646
)
 
—

 
—

 
—

 
(30,646
)
ESOP shares allocated or committed to be released
—

 
593

 
—

 
—

 
749

 
—

 
1,342

Balance at June 30, 2019
$
3,591

 
2,809,851

 
1,206,873

 
(995,265
)
 
(79,764
)
 
(18,411
)
 
2,926,875



35
Table of Contents


15.    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 debt 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 debt 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.
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).
Debt securities available-for-sale
Our debt securities 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.

36
Table of Contents

Derivatives
Derivatives are reported at fair value utilizing Level 2 inputs. The fair values of interest rate swap and risk participation 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 June 30, 2019 and December 31, 2018.
 
Carrying Value at June 30, 2019
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Equity securities
$
5,975

 
5,975

 
—

 
—

Debt securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
$
1,210,301

 
—

 
1,210,301

 
—

Federal National Mortgage Association
1,170,625

 
—

 
1,170,625

 
—

Government National Mortgage Association
298,782

 
—

 
298,782

 
—

Total debt securities available-for-sale
$
2,679,708

 
—

 
2,679,708

 
—

Interest rate swaps
$
4,284

 
—

 
4,284

 
—

Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Other contracts
$
130

 
—

 
130

 
—

 
Carrying Value at December 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Equity securities
$
5,793

 
5,793

 
—

 
—

Debt securities available for sale:
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Federal Home Loan Mortgage Corporation
$
986,650

 
—

 
986,650

 
—

Federal National Mortgage Association
968,556

 
—

 
968,556

 
—

Government National Mortgage Association
166,956

 
—

 
166,956

 
—

Total debt securities available-for-sale
$
2,122,162

 
—

 
2,122,162

 
—

Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps
$
432

 
—

 
432

 
—

Other contracts
66

 
—

 
66

 
—

Total derivatives
$
498

 
—

 
498

 
—


There have been no changes in the methodologies used at June 30, 2019 from December 31, 2018, and there were no transfers between Level 1 and Level 2 during the six months ended June 30, 2019.
There were no Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2019 and December 31, 2018.

37
Table of Contents

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 June 30, 2019, the fair value model used prepayment speeds ranging from 6.96% to 39.00% and a discount rate of 12.06% for the valuation of the mortgage servicing rights. At December 31, 2018, the fair value model used prepayment speeds ranging from 4.98% to 27.30% and a discount rate of 12.50% 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 generally 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.

38
Table of Contents

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 June 30, 2019 and December 31, 2018. For the three months ended June 30, 2019 there was no change to the carrying value of loans held for sale. For the three months ended December 31, 2018 there was no change to the carrying value of MSR or loans held for sale.
 Security Type
Valuation Technique
Unobservable Input
Range
Weighted Average Input
 
Carrying Value at June 30, 2019
 
 
 
Minimum
Maximum
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
(In thousands)
MSR, net
Estimated cash flow
Prepayment speeds
6.96%
39.00%
11.58%
 
$
10,366

 
—

 
—

 
10,366

Impaired loans
Estimated cash flow
Probability of default
2.0%
83.0%
3.10%
 
3,009

 
—

 
—

 
3,009

Other real estate owned
Market comparable
Lack of marketability
0.0%
25.0%
15.23%
 
1,721

 
—

 
—

 
1,721

 
 
 
 
 
 
 
$
15,096

 
—

 
—

 
15,096

 
 Security Type
Valuation Technique
Unobservable Input
Range
Weighted Average Input
 
Carrying Value at December 31, 2018
 
 
 
Minimum
Maximum
 
 
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%
11.20%
 
$
15,148

 
—

 
—

 
15,148

Other real estate owned
Market comparable
Lack of marketability
0.0%
25.0%
10.50%
 
241

 
—

 
—

 
241

 
 
 
 
 
 
 
$
15,389

 
—

 
—

 
15,389


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

39
Table of Contents

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.
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.

40
Table of Contents

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.
 
June 30, 2019
 
Carrying
 
Estimated Fair Value
 
value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
254,382

 
254,382

 
254,382

 
—

 
—

Equities
5,975

 
5,975

 
5,975

 
—

 
—

Debt securities available-for-sale
2,679,708

 
2,679,708

 
—

 
2,679,708

 
—

Debt securities held-to-maturity
1,132,018

 
1,174,483

 
—

 
1,095,996

 
78,487

FHLB stock
294,155

 
294,155

 
294,155

 
—

 
—

Loans held for sale
16,411

 
16,411

 
—

 
16,411

 
—

Net loans
21,764,880

 
21,790,770

 
—

 
—

 
21,790,770

Derivative financial instruments
4,284

 
4,284

 
—

 
4,284

 
—

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits, other than time deposits
$
12,820,925

 
12,820,925

 
12,820,925

 
—

 
—

Time deposits
4,823,546

 
4,820,772

 
—

 
4,820,772

 
—

Borrowed funds
6,083,737

 
6,083,253

 
—

 
6,083,253

 
—

Derivative financial instruments
130

 
130

 
—

 
130

 
—

 
December 31, 2018
 
Carrying
 
Estimated Fair Value
 
value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
196,891

 
196,891

 
196,891

 
—

 
—

Equities
5,793

 
5,793

 
5,793

 
—

 
—

Debt securities available-for-sale
2,122,162

 
2,122,162

 
—

 
2,122,162

 
—

Debt securities held-to-maturity
1,555,137

 
1,558,564

 
—

 
1,476,565

 
81,999

FHLB stock
260,234

 
260,234

 
260,234

 
—

 
—

Loans held for sale
4,074

 
4,074

 
—

 
4,074

 
—

Net loans
21,378,136

 
21,085,185

 
—

 
—

 
21,085,185

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits, other than time deposits
$
13,009,422

 
13,009,422

 
13,009,422

 
—

 
—

Time deposits
4,570,847

 
4,546,991

 
—

 
4,546,991

 
—

Borrowed funds
5,435,681

 
5,398,553

 
—

 
5,398,553

 
—

Derivative financial instruments
498

 
498

 
—

 
498

 
—


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

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conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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.

16.    Revenue Recognition
The Company’s contracts with customers in the scope of Topic 606, Revenue from Contracts with Customers, 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 and other income was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
(Dollars in thousands)
Revenue from contracts with customers included in:
 
 
 
 
 
 
 
Fees and service charges
$
3,730

 
3,331

 
7,013

 
6,452

Other income
2,508

 
2,437

 
4,731

 
4,206

Total revenue from contracts with customers
$
6,238

 
5,768

 
11,744

 
10,658


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.



























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17.    Recent Accounting Pronouncements
Standard
Description
Required date of adoption
Effect on Consolidated Financial Statements
Standards Adopted in 2019
Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
This ASU makes clarifications and corrections to the application of the guidance contained in each of the amended topics. Regarding Topic 815, ASU 2019-04 amends guidance pertaining to partial-term fair value hedges of interest rate risk, disclosure of fair value hedge basis adjustments, and scope for not-for-profit entities. For Topic 825, the amendments provide scope clarifications for Subtopics 320-10, Investments-Debt and Equity Securities-Overall, and 321-10, Investments-Equity Securities-Overall, held-to-maturity debt securities fair value disclosures, and remeasurement of equity securities at historical exchange rates. Improvements to Topic 326 include, among others, conforming amendments to Subtopics 310-40, Receivables-Troubled Debt Restructurings by Creditors, and 323-10, Investments-Equity Method and Joint Ventures-Overall, clarification that reinsurance recoverables are within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, and consideration of estimated costs to sell when foreclosure is probable.
January 1, 2020

Early adoption permitted
The Company early adopted ASU 2019-04 on June 13, 2019. Since the Company has already adopted ASUs 2016-01 and 2017-12, the related amendments are effective as of June 13, 2019. As part of the adoption, the Company reclassified $393.1 million of debt securities held-to-maturity to debt securities available-for-sale. The Company did not reclassify debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12. Entities that did not reclassify debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12 and elect to reclassify debt securities upon adoption of the amendments in this update are required to reflect the reclassification as of the date of adoption of this update. Entities that reclassified debt securities from held to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12 are not permitted to make any additional reclassifications.
Leases (Topic 842)
The amendment 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. ASU 2018-01 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. ASU 2018-10 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. ASU 2018-20 provides an accounting policy election for lessors related to sales and other similar taxes collected from lessees and addresses lessor accounting for variable payments. ASU 2019-01 addresses three issues related to (i) determination of the fair value of the underlying assets by lessors, (ii) presentation of sales-type and direct financing leases in the statement of cash flows and (iii) transition disclosures related to accounting changes and error corrections.
January 1, 2019
Upon adoption, the Company recognized operating lease right-of-use assets and related operating lease liabilities totaling $193.3 million and $200.7 million, respectively. The Company adopted this amendment utilizing a modified retrospective approach and the optional transition method under which we use the effective date as the date of initial application of the amendments. The modified retrospective approach includes practical expedients such that we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. See Note 9 for expanded disclosures.
Derivatives and Hedging (Topic 815)-Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
 The amendment permits the use of the Overnight Index Swap (OIS) Rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes.
January 1, 2019
The Company is applying the amendments in this update prospectively for qualifying new or redesignated hedging relationships entered into on or after the effective date.


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Standard
Description
Required date of adoption
Effect on Consolidated Financial Statements
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. 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.
January 1, 2019
The Company had applied the guidance of Topic 718 to its accounting for share-based payment awards to its Board of Directors prior to adoption of the amendments, and, therefore, this update did not have an impact on the Company’s Consolidated Financial Statements.
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.
January 1, 2019
The adoption of the amendments did not have an impact on the Company’s Consolidated Financial Statements.
Standards Not Yet Adopted
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”.
January 1, 2020

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.
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.
January 1, 2021

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 with regard to employee benefit plans but does not expect a material impact on the Company’s Consolidated Financial Statements.


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Standard
Description
Required date of adoption
Effect on Consolidated Financial Statements
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 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.
January 1, 2020

Early adoption permitted to any removed or modified disclosures and delay of 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.
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.
January 1, 2020

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.


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Standard
Description
Required date of adoption
Effect on Consolidated Financial Statements
Measurement of Credit Losses on Financial Instruments
This ASU changes how entities will report credit losses for financial assets held at amortized cost and available-for-sale debt securities. The amendments replace today’s “incurred loss” approach with a methodology that incorporates macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the portfolios based on relevant information about past events, including historical loss experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. The amendments will apply to financial assets such as loans, leases and held-to-maturity investments; and certain off-balance sheet credit exposures. The amendments expand credit quality disclosure requirements. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which clarifies the scope of the guidance in the amendments in ASU 2016-13 with respect to operating lease receivables. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, which clarifies and corrects certain unintended applications of the guidance contained in each of the amended Topics. Among other amendments, ASU 2019-04 provides measurement alternatives for the allowance on the accrued interest component of amortized cost and clarifies the process to transfer loans or debt securities between measurement categories. The update also provides guidance on the inclusion of expected recoveries in the determination of the allowance, the disclosure of line of credit arrangements in the vintage disclosure table and the effect of extension or renewal options on expected credit losses. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326): TargetedTransition Relief.” The amendments provide an option to irrevocable elect the fair value option for certain financial assets previously measured at amortized cost. The election does not apply to held-to-maturity securities.
January 1, 2020

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 been evaluating 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 losses - will have an offsetting impact on retained earnings.

18.    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.
Dividend
On July 24, 2019, the Company declared a cash dividend of $0.11 per share. The $0.11 dividend per share will be paid to stockholders on August 23, 2019, with a record date of August 9, 2019.

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Gold Coast Merger Agreement
On July 24, 2019, the Company announced the signing of a definitive merger agreement under which the Company will acquire Gold Coast Bancorp, Inc. (“Gold Coast”). Under the terms of the merger agreement, 50% of the common shares of Gold Coast will be converted into Investors Bancorp common stock and the remaining 50% will be exchanged for cash. Gold Coast shareholders will have the option to receive either 1.422 shares of Investors Bancorp common stock or $15.75 in cash for each share of Gold Coast, subject to proration to ensure that, in the aggregate, 50% of Gold Coast’s shares will be converted into Investors Bancorp common stock. As of June 30, 2019, Gold Coast had assets of $572.3 million, loans of $467.4 million and deposits of $486.8 million and operated six branches in Nassau and Suffolk counties in suburban Long Island and one branch in Brooklyn, NY. The merger agreement has been approved by the boards of directors of each company. Required approvals to complete this transaction include Gold Coast shareholder approval, regulatory approvals, the effectiveness of the registration statement to be filed by Investors Bancorp with respect to the stock exchanged to be issued in the transaction and other customary closing conditions. The Merger is expected to be completed in the first quarter of 2020. As the merger has not been completed, the transaction is not reflected in the consolidated financial statements for the periods presented in this document.
Settlement
On March 6, 2019, a Stipulation and Agreement of Compromise, Settlement and Release was filed in the Court of Chancery of the State of Delaware (the “Court”) in relation to a lawsuit involving the Company and certain of its current and former directors entitled In re Investors Bancorp Inc. Stockholder Litigation, C.A. No. 12327-VCS (the “Settlement”). The Settlement resolves a lawsuit challenging the equity compensation granted on or about June 23, 2015 to persons who were then-directors of the Company.
The Compensation and Benefits Committee, with the assistance of its independent legal advisor and compensation consultant, considered the issuance of equity grants to Kevin Cummings and Domenick A. Cama to replace those being surrendered pursuant to the Settlement. On May 20, 2019, the Compensation and Benefits Committee authorized and approved, and recommended to the Board of Directors (the “Board”), the issuance of (i) 925,000 shares of restricted stock and 525,120 stock options to Mr. Cummings, and (ii) 740,000 shares of restricted stock and 420,096 stock options to Mr. Cama (the “Replacement Awards”). The Board, excluding Messrs. Cummings and Cama, determined that it was advisable and in the best interests of the Company to approve and issue the Replacement Awards, subject to the surrender of awards pursuant to the Settlement.
On June 21, 2019, the Court entered an order approving the Settlement. Following the expiration of a thirty-day appeal period, the Settlement became effective. Accordingly, pursuant to the Settlement (i) all of the stock options granted to non-employee directors (excluding Brendan J. Dugan who is deceased) and stock options granted to Paul Stathoulopoulos (who was not a director of the Company at the time of the equity grant on or about June 23, 2015), have been surrendered; (ii) a total of 95,694 shares of the restricted stock granted to the then non-employee directors of the Company (excluding Brendan J. Dugan) and to then non-director Paul Stathoulopoulos scheduled to vest in 2020 have been surrendered; and (iii) all of the stock options and restricted stock granted to Messrs. Cummings and Cama have been surrendered.
The Replacement Awards were subsequently issued to Messrs. Cummings and Cama on July 22, 2019. The Replacement Awards were issued from the 2015 Equity Incentive Plan. The stock options have an exercise price of $12.54 per share and vested 25% on July 22, 2019 with the remaining to vest ratably over a three-year period. Approximately 59% of the restricted shares vested on July 22, 2019 with the remainder to vest on the same vesting schedule as applicable to the June 23, 2015 award.


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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, 2018.
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. As of June 30, 2019, 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 should be 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: collectively evaluated for impairment and individually evaluated for impairment. 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 allowance for loans collectively evaluated for impairment is determined by applying quantitative loss factors to the loans collectively evaluated for impairment segregated 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. Quantitative loss factors for each loan segment are generally determined based on the Company’s historical loss experience over an appropriate look-back period. Additionally, management assesses the

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loss emergence period for the expected losses of each loan segment and adjusts each quantitative 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 quantitative loss factors may also be adjusted to account for qualitative factors, both internal and external to the Company, 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. 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. Updated appraisals are generally obtained for substandard loans $1.0 million or greater and special mention loans $2.0 million or greater in the process of collection by the Company’s special assets department. 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

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is significant enough to warrant ordering a new appraisal, an estimate of the downward adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated appraisal is received.
For homogeneous residential mortgage loans, the Company’s policy is to obtain an appraisal upon the origination of the loan and an updated appraisal in the event a loan becomes 90 days delinquent. Thereafter, the appraisal is updated every two years if the loan remains in non-performing status and the foreclosure process has not been completed. Management adjusts the appraised value of residential loans to reflect estimated selling costs and declines in the real estate market.
Management believes the potential risk for outdated appraisals for impaired and other non-performing loans has been mitigated due to the fact that the loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral. Loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt.
Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary based on the growth and composition of the loan portfolio, the level of loan delinquency and the economic conditions in our lending area. 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.
Derivative Financial Instruments. As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.  
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 a decline in intermediate-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 manage our interest rate risk against a backdrop of interest rate uncertainty.  If short-term interest rates and related deposit competition increase further, we may be subject to additional 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.
Our results of operations are also significantly affected by general economic conditions.  While the domestic consumer continues to generally benefit from improved housing and employment metrics, the velocity of economic growth, domestically and internationally, is challenged by global trade discord and pockets of socioeconomic and political unrest. In addition, our tax rate was negatively impacted by the enacted State of New Jersey tax legislation.

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Total assets increased by $835.1 million, or 3.2%, to $27.06 billion at June 30, 2019 from $26.23 billion at December 31, 2018. Effective January 1, 2019, we adopted new accounting guidance that requires leases to be recognized on our Consolidated Balance Sheets as a right-of-use asset and a lease liability. Our operating lease right-of-use assets and operating lease liabilities were $184.2 million and $194.2 million, respectively, at June 30, 2019. Net loans increased by $386.7 million, or 1.8%, to $21.76 billion at June 30, 2019 from $21.38 billion at December 31, 2018. Our ongoing strategy is to continue to maintain a well-diversified loan portfolio and offer enhanced commercial products to continue to be competitive in our markets. We 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.
On July 24, 2019, we announced the signing of a definitive merger agreement with Gold Coast Bancorp, Inc. As of June 30, 2019, Gold Coast had assets of $572.3 million, loans of $467.4 million and deposits of $486.8 million and operated six branches in Nassau and Suffolk counties in suburban Long Island as well as one branch in Brooklyn NY. The transaction is subject to customary closing conditions.
Capital management is a key component of our business strategy. We continue to manage our capital through a combination of organic growth, acquisitions, stock repurchases and cash dividends. Effective capital management and prudent growth allows us to effectively leverage the Company’s capital, while being mindful of tangible book value for stockholders. Our capital to total assets ratio has decreased to 10.81% at June 30, 2019 from 11.46% at December 31, 2018. Since the commencement of our first stock repurchase plan in March 2015 through June 30, 2019, the Company has repurchased a total of 97.8 million shares at an average cost of $12.08 per share, totaling $1.18 billion. For the six months ended June 30, 2019, stockholders’ equity was impacted by the repurchase of 10.0 million shares of common stock for $117.8 million and cash dividends paid of $0.22 per share totaling $61.6 million. These reductions to stockholders’ equity were partially offset by net income of $94.8 million and $13.0 million of share-based plan activity.
During 2019 we have made investments in our digital and technology platforms which will enhance sales practices and improve efficiencies in our business. We continue to enhance our employee training and development programs, as well as our risk management and operational infrastructure as our Company grows and our business evolves. 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.
Comparison of Financial Condition at June 30, 2019 and December 31, 2018
Total Assets. Total assets increased by $835.1 million, or 3.2%, to $27.06 billion at June 30, 2019 from $26.23 billion at December 31, 2018. Net loans increased by $386.7 million, or 1.8%, to $21.76 billion at June 30, 2019 from $21.38 billion at December 31, 2018. Total securities increased by $134.6 million, or 3.7%, to $3.82 billion at June 30, 2019 from December 31, 2018. Operating lease right-of-use assets were $184.2 million at June 30, 2019.

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Net Loans. Net loans increased by $386.7 million, or 1.8%, to $21.76 billion at June 30, 2019 from $21.38 billion at December 31, 2018. The detail of the loan portfolio (including PCI loans) is below:

 
June 30, 2019
 
December 31, 2018
 
(Dollars in thousands)
Commercial loans:
 
 
 
Multi-family loans
$
8,156,766

 
8,165,187

Commercial real estate loans
4,897,466

 
4,786,825

Commercial and industrial loans
2,585,069

 
2,389,756

Construction loans
252,628

 
227,015

Total commercial loans
15,891,929

 
15,568,783

Residential mortgage loans
5,408,686

 
5,351,115

Consumer and other
699,972

 
707,866

Total loans
22,000,587

 
21,627,764

Deferred fees, premiums and other, net
(3,770
)
 
(13,811
)
Allowance for loan losses
(231,937
)
 
(235,817
)
Net loans
$
21,764,880

 
21,378,136

During the six months ended June 30, 2019, we originated $420.1 million in commercial and industrial loans, $412.1 million in multi-family loans, $369.9 million in commercial real estate loans, $226.9 million in residential loans, $38.3 million in consumer and other loans and $14.3 million in construction loans. The growth in the loan portfolio reflects our continued focus on growing and diversifying our 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.
One of the Bank’s key operating objectives has been, and continues to be, maintaining a high level of asset quality. The Bank maintains sound credit standards for new loan originations and purchases. We do not originate or purchase sub-prime loans, negative amortization loans or option ARM loans. Our portfolio contains interest-only and no income verification residential mortgage loans. At June 30, 2019, interest-only residential and consumer loans totaled $37.9 million, which represented less than 1% of the residential and consumer portfolio. We no longer originate residential mortgage loans without verifying income. At June 30, 2019 these loans totaled $158.8 million. From time to time and for competitive purposes, we originate interest-only commercial real estate and multi-family loans. At June 30, 2019, these loans totaled $1.2 billion. As part of its underwriting, these loans are evaluated as fully amortizing for risk classification purposes, with the interest-only period ranging from one to ten years. In addition, the Company evaluates its policy limits on a regular basis. We believe these criteria adequately control the potential risks of such loans and that adequate provisions for loan losses are provided for all known and inherent risks.
We also purchase mortgage loans from correspondent entities including other banks and mortgage bankers. During the six months ended June 30, 2019, we purchased loans totaling $175.3 million from these entities. In addition to the loans originated for our portfolio, we originated residential mortgage loans for sale to third parties totaling $77.7 million during the six months ended June 30, 2019.

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    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:

 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
# of Loans
 
Amount
 
# of Loans
 
Amount
 
# of Loans
 
Amount
 
# of Loans
 
Amount
 
# of Loans
 
Amount
 
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
14

 
$
34.1

 
14

 
$
34.1

 
15

 
$
33.9

 
3

 
$
2.6

 
9

 
$
19.5

Commercial real estate
27

 
8.1

 
32

 
9.8

 
35

 
12.4

 
39

 
15.5

 
36

 
16.7

Commercial and industrial
13

 
18.0

 
14

 
17.2

 
14

 
19.4

 
14

 
19.8

 
13

 
28.9

Construction
1

 
0.2

 
1

 
0.2

 
1

 
0.2

 
1

 
0.2

 
1

 
0.3

Total commercial loans
55

 
60.4

 
61

 
61.3

 
65

 
65.9

 
57

 
38.1

 
59

 
65.4

Residential and consumer
275

 
51.2

 
296

 
56.4

 
320

 
59.0

 
347

 
66.3

 
375

 
69.2

Total non-accrual loans
330

 
$
111.6

 
357

 
$
117.7

 
385

 
$
124.9

 
404

 
$
104.4

 
434

 
$
134.6

Accruing troubled debt restructured loans
56

 
$
12.2

 
54

 
$
13.6

 
54

 
$
13.6

 
59

 
$
13.2

 
56

 
$
12.8

Non-accrual loans to total loans
 
 
0.51
%
 
 
 
0.54
%
 
 
 
0.58
%
 
 
 
0.50
%
 
 
 
0.65
%
Allowance for loan losses as a percent of non-accrual loans
 
 
207.83
%
 
 
 
199.44
%
 
 
 
188.78
%
 
 
 
221.06
%
 
 
 
171.46
%
Allowance for loan losses as a percent of total loans
 
 
1.05
%
 
 
 
1.08
%
 
 
 
1.09
%
 
 
 
1.10
%
 
 
 
1.11
%
Total non-accrual loans were $111.6 million at June 30, 2019 compared to $117.7 million at March 31, 2019 and $134.6 million at June 30, 2018. Included in non-accrual loans at June 30, 2019 were $8.3 million of loans that were classified as non-accrual which were performing in accordance with their contractual terms. Classified (substandard) loans as a percent of total loans decreased to 3.14% at June 30, 2019 from 3.18% at December 31, 2018. We continue to proactively and diligently work to resolve our troubled loans.
At June 30, 2019, there were $38.6 million of loans deemed as TDRs, of which $28.4 million were residential and consumer loans, $7.7 million were commercial and industrial loans and $2.5 million were commercial real estate loans. TDRs of $12.2 million were classified as accruing and $26.4 million were classified as non-accrual at June 30, 2019.
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 June 30, 2019, the Company has deemed potential problem loans, excluding PCI loans, totaling $76.0 million, which is comprised of 10 commercial real estate loans totaling $37.6 million, 9 multi-family loans totaling $29.2 million and 11 commercial and industrial loans totaling $9.2 million. Management is actively monitoring all of these loans.
The ratio of non-accrual loans to total loans was 0.51% at June 30, 2019 compared to 0.58% at December 31, 2018. The allowance for loan losses as a percentage of non-accrual loans was 207.83% at June 30, 2019 compared to 188.78% at December 31, 2018. At June 30, 2019, our allowance for loan losses as a percentage of total loans was 1.05% compared to 1.09% at December 31, 2018.
At June 30, 2019, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans totaling $82.2 million, of which $14.6 million had a specific allowance for credit losses of $1.9 million and $67.6 million had no specific allowance for credit losses. At December 31, 2018, loans meeting the Company’s definition of an impaired loan were

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primarily collateral dependent loans totaling $86.7 million, of which $15.8 million had a related allowance for credit losses of $2.2 million and $70.9 million had no related allowance for credit losses.
The allowance for loan losses decreased by $3.9 million to $231.9 million at June 30, 2019 from $235.8 million at December 31, 2018. Our allowance for loan losses at June 30, 2019 was positively impacted by improved credit quality, including the level of non-accrual loans and charge-offs/recoveries, and modest loan growth. 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 June 30, 2019 and December 31, 2018 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.
 
 
June 30, 2019
 
December 31, 2018
 
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
$
73,793

 
37.1
%
 
$
82,876

 
37.7
%
Commercial real estate loans
50,114

 
22.3
%
 
48,449

 
22.1
%
Commercial and industrial loans
77,535

 
11.7
%
 
71,084

 
11.1
%
Construction loans
7,239

 
1.1
%
 
7,486

 
1.1
%
Residential mortgage loans
18,717

 
24.6
%
 
20,776

 
24.7
%
Consumer and other loans
2,296

 
3.2
%
 
3,102

 
3.3
%
Unallocated
2,243

 
—

 
2,044

 
—

Total allowance
$
231,937

 
100.0
%
 
$
235,817

 
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 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 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 June 30, 2019, our securities portfolio represented 14.1% of our total assets. Securities, in the aggregate, increased by $134.6 million, or 3.7%, to $3.82 billion at June 30, 2019 from December 31, 2018. This increase was primarily a result of purchases, partially offset by sales and paydowns. During the three months ended June 30, 2019, the Company reclassified $393.1 million of debt securities held-to-maturity to debt securities available-for-sale. We subsequently sold approximately $405 million of debt securities available-for-sale for a loss of $5.7 million. Proceeds from the sale were reinvested in debt securities yielding on average 79 basis points higher than the securities sold.
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 $33.9 million, or 13.0%, to $294.2 million at June 30, 2019 from $260.2 million at December 31, 2018. 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 $215.0 million at June 30, 2019 and $211.9 million at December 31, 2018. Other assets were $48.4 million at June 30, 2019 and $29.3 million at December 31, 2018.
Deposits.  At June 30, 2019, deposits totaled $17.64 billion, representing 73.1% 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. Although recent increases in interest rates has resulted in consumer preference for and growth in time deposits, 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.

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We have a suite of commercial deposit products, designed to appeal to small and mid-sized businesses and non-profit organizations. Interest rates, 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, competitive forces 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 $64.2 million, or 0.4%, from $17.58 billion at December 31, 2018 to $17.64 billion at June 30, 2019 primarily driven by increases in time deposits and money market accounts, partially offset by decreases in savings and checking accounts. Checking accounts decreased $166.6 million to $7.15 billion at June 30, 2019 from $7.32 billion at December 31, 2018. Core deposits represented approximately 73% of our total deposit portfolio at June 30, 2019 compared to 74% at December 31, 2018.
The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated:
 
June 30, 2019
 
December 31, 2018
 
Balance
 
Percent of Total Deposit
 
Balance
 
Percent of Total Deposit
 
(Dollars in thousands)
Non-interest bearing:
 
 
 
 
 
 
 
Checking accounts
$
2,455,293

 
13.9
%
 
$
2,535,848

 
14.4
%
Interest-bearing:
 
 
 
 
 
 
 
Checking accounts
4,697,470

 
26.6
%
 
4,783,563

 
27.2
%
Money market deposits
3,791,080

 
21.5
%
 
3,641,070

 
20.7
%
Savings
1,877,082

 
10.7
%
 
2,048,941

 
11.7
%
Certificates of deposit
4,823,546

 
27.3
%
 
4,570,847

 
26.0
%
Total Deposits
$
17,644,471

 
100.0
%
 
$
17,580,269

 
100.0
%
Borrowed Funds.  Borrowings are primarily with the FHLB and are collateralized by our residential and commercial mortgage portfolios. Borrowed funds increased by $648.1 million, or 11.9%, to $6.08 billion at June 30, 2019 from $5.44 billion at December 31, 2018 to help fund the growth of the loan portfolio. During the three months ended June 30, 2019, the Company modified $350 million of borrowings. The modification resulted in interest cost savings of 45 basis points, net of modification costs.
Stockholders’ Equity. Stockholders’ equity decreased by $78.5 million to $2.93 billion at June 30, 2019 from $3.01 billion at December 31, 2018. The decrease was primarily attributed to the repurchase of 10.0 million shares of common stock for $117.8 million and cash dividends paid of $0.22 per share totaling $61.6 million during the six months ended June 30, 2019. These reductions to stockholders’ equity were partially offset by net income of $94.8 million and share-based plan activity of $13.0 million for the six months ended June 30, 2019.
Analysis of Net Interest Income
Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities.
Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, however interest receivable on these loans have been fully reserved for and not included in interest income. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


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Table of Contents

 
 
Three Months Ended June 30,
 
 
2019
 
2018
 
 
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
 
$
179,572

 
$
609

 
1.36
%
 
$
178,293

 
$
409

 
0.92
%
Equity securities
 
5,902

 
35

 
2.37
%
 
5,714

 
33

 
2.31
%
Debt securities available-for-sale
 
2,244,900

 
16,218

 
2.89
%
 
1,990,306

 
10,829

 
2.18
%
Debt securities held-to-maturity
 
1,480,400

 
10,666

 
2.88
%
 
1,693,025

 
11,509

 
2.72
%
Net loans
 
21,609,361

 
227,462

 
4.21
%
 
20,348,913

 
211,791

 
4.16
%
Stock in FHLB
 
281,548

 
4,078

 
5.79
%
 
255,362

 
3,831

 
6.00
%
Total interest-earning assets
 
25,801,683

 
259,068

 
4.02
%
 
24,471,613

 
238,402

 
3.90
%
Non-interest-earning assets
 
956,909

 
 
 
 
 
741,974

 
 
 
 
Total assets
 
$
26,758,592

 
 
 
 
 
$
25,213,587

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
1,901,506

 
$
3,809

 
0.80
%
 
$
2,146,880

 
$
2,953

 
0.55
%
Interest-bearing checking
 
4,867,288

 
22,119

 
1.82
%
 
4,487,247

 
14,057

 
1.25
%
Money market accounts
 
3,691,258

 
15,815

 
1.71
%
 
3,858,022

 
10,497

 
1.09
%
Certificates of deposit
 
4,763,516

 
26,085

 
2.19
%
 
4,017,105

 
14,560

 
1.45
%
Total interest-bearing deposits
 
15,223,568

 
67,828

 
1.78
%
 
14,509,254

 
42,067

 
1.16
%
Borrowed funds
 
5,707,174

 
32,072

 
2.25
%
 
5,060,767

 
25,034

 
1.98
%
Total interest-bearing liabilities
 
20,930,742

 
99,900

 
1.91
%
 
19,570,021

 
67,101

 
1.37
%
Non-interest-bearing liabilities
 
2,883,230

 
 
 
 
 
2,535,093

 
 
 
 
Total liabilities
 
23,813,972

 
 
 
 
 
22,105,114

 
 
 
 
Stockholders’ equity
 
2,944,620

 
 
 
 
 
3,108,473

 
 
 
 
Total liabilities and stockholders’ equity
 
$
26,758,592

 
 
 
 
 
$
25,213,587

 
 
 
 
Net interest income
 
 
 
$
159,168

 
 
 
 
 
$
171,301

 
 
Net interest rate spread(1)
 
 
 
 
 
2.11
%
 
 
 
 
 
2.53
%
Net interest-earning assets(2)
 
$
4,870,941

 
 
 
 
 
$
4,901,592

 
 
 
 
Net interest margin(3)
 
 
 
 
 
2.47
%
 
 
 
 
 
2.80
%
Ratio of interest-earning assets to total interest-bearing liabilities
 
1.23

 
 
 
 
 
1.25

 
 
 
 

(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.

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Table of Contents

 
 
Six Months Ended June 30,
 
 
2019
 
2018
 
 
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
 
$
177,438

 
$
1,144

 
1.29
%
 
$
188,730

 
$
864

 
0.92
%
Equity securities
 
5,857

 
72

 
2.46
%
 
5,708

 
68

 
2.38
%
Debt securities available-for-sale
 
2,178,734

 
31,634

 
2.90
%
 
2,005,485

 
21,681

 
2.16
%
Debt securities held-to-maturity
 
1,506,437

 
21,668

 
2.88
%
 
1,726,197

 
23,211

 
2.69
%
Net loans
 
21,531,574

 
452,352

 
4.20
%
 
20,181,066

 
416,513

 
4.13
%
Stock in FHLB
 
271,104

 
8,415

 
6.21
%
 
247,276

 
7,632

 
6.17
%
Total interest-earning assets
 
25,671,144

 
515,285

 
4.01
%
 
24,354,462

 
469,969

 
3.86
%
Non-interest-earning assets
 
949,756

 
 
 
 
 
719,852

 
 
 
 
Total assets
 
$
26,620,900

 
 
 
 
 
$
25,074,314

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
1,970,330

 
$
8,179

 
0.83
%
 
$
2,238,667

 
$
6,243

 
0.56
%
Interest-bearing checking
 
4,920,950

 
44,201

 
1.80
%
 
4,649,173

 
27,636

 
1.19
%
Money market accounts
 
3,661,150

 
30,061

 
1.64
%
 
3,973,942

 
19,789

 
1.00
%
Certificates of deposit
 
4,758,138

 
50,809

 
2.14
%
 
3,709,627

 
24,775

 
1.34
%
Total interest-bearing deposits
 
15,310,568

 
133,250

 
1.74
%
 
14,571,409

 
78,443

 
1.08
%
Borrowed funds
 
5,469,737

 
60,189

 
2.20
%
 
4,865,051

 
47,741

 
1.96
%
Total interest-bearing liabilities
 
20,780,305

 
193,439

 
1.86
%
 
19,436,460

 
126,184

 
1.30
%
Non-interest-bearing liabilities
 
2,875,741

 
 
 
 
 
2,522,062

 
 
 
 
Total liabilities
 
23,656,046

 
 
 
 
 
21,958,522

 
 
 
 
Stockholders’ equity
 
2,964,854

 
 
 
 
 
3,115,792

 
 
 
 
Total liabilities and stockholders’ equity
 
$
26,620,900

 
 
 
 
 
$
25,074,314

 
 
 
 
Net interest income
 
 
 
$
321,846

 
 
 
 
 
$
343,785

 
 
Net interest rate spread(1)
 
 
 
 
 
2.15
%
 
 
 
 
 
2.56
%
Net interest-earning assets(2)
 
$
4,890,839

 
 
 
 
 
$
4,918,002

 
 
 
 
Net interest margin(3)
 
 
 
 
 
2.51
%
 
 
 
 
 
2.82
%
Ratio of interest-earning assets to total interest-bearing liabilities
 
1.24

 
 
 
 
 
1.25

 
 
 
 

(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.


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Comparison of Operating Results for the Three and Six Months Ended June 30, 2019 and 2018
Net Income. Net income for the three months ended June 30, 2019 was $46.6 million compared to net income of $57.1 million for the three months ended June 30, 2018. Net income for the six months ended June 30, 2019 was $94.8 million compared to net income of $115.0 million for the six months ended June 30, 2018.
Net Interest Income. Net interest income decreased by $12.1 million, or 7.1%, to $159.2 million for the three months ended June 30, 2019 from $171.3 million for the three months ended June 30, 2018. The net interest margin decreased 33 basis points to 2.47% for the three months ended June 30, 2019 from 2.80% for the three months ended June 30, 2018.
Net interest income decreased by $21.9 million, or 6.4%, to $321.8 million for the six months ended June 30, 2019 from $343.8 million for the six months ended June 30, 2018. The net interest margin decreased 31 basis points to 2.51% for the six months ended June 30, 2019 from 2.82% for the six months ended June 30, 2018.
Total interest and dividend income increased by $20.7 million, or 8.7%, to $259.1 million for the three months ended June 30, 2019. Interest income on loans increased by $15.7 million, or 7.4%, to $227.5 million for the three months ended June 30, 2019 as a result of a $1.26 billion increase in the average balance of net loans to $21.61 billion, primarily attributed to loan originations, partially offset by paydowns and payoffs. The weighted average yield on net loans increased 5 basis points to 4.21%. Prepayment penalties, which are included in interest income, totaled $2.6 million for the three months ended June 30, 2019 compared to $5.6 million for the three months ended June 30, 2018. Interest income on all other interest-earning assets, excluding loans, increased by $5.0 million, or 18.8%, to $31.6 million for the three months ended June 30, 2019 which is attributed to an increase in the weighted average yield on interest-earning assets, excluding loans, of 44 basis points to 3.02%. The average balance of all other interest-earning assets, excluding loans, increased $69.6 million to $4.19 billion for the three months ended June 30, 2019.
Total interest and dividend income increased by $45.3 million, or 9.6%, to $515.3 million for the six months ended June 30, 2019. Interest income on loans increased by $35.8 million, or 8.6%, to $452.4 million for the six months ended June 30, 2019 as a result of a $1.35 billion increase in the average balance of net loans to $21.53 billion, primarily attributed to loan originations, partially offset by paydowns and payoffs. The weighted average yield on net loans increased 7 basis points to 4.20%. Prepayment penalties, which are included in interest income, totaled $6.3 million for the six months ended June 30, 2019 compared to $10.9 million for the six months ended June 30, 2018. Interest income on all other interest-earning assets, excluding loans, increased by $9.5 million, or 17.7%, to $62.9 million for the six months ended June 30, 2019 which is attributed to an increase in the weighted average yield on interest-earning assets, excluding loans, of 48 basis points to 3.04%. The average balance of all other interest-earning assets, excluding loans, decreased $33.8 million to $4.14 billion for the six months ended June 30, 2019.
Total interest expense increased by $32.8 million, or 48.9%, to $99.9 million for the three months ended June 30, 2019. Interest expense on interest-bearing deposits increased $25.8 million, or 61.2%, to $67.8 million for the three months ended June 30, 2019. The weighted average cost of interest-bearing deposits increased 62 basis points to 1.78% for the three months ended June 30, 2019. In addition, the average balance of total interest-bearing deposits increased $714.3 million, or 4.9%, to $15.22 billion for the three months ended June 30, 2019. Interest expense on borrowed funds increased by $7.0 million, or 28.1%, to $32.1 million for the three months ended June 30, 2019. The average balance of borrowed funds increased $646.4 million, or 12.8%, to $5.71 billion for the three months ended June 30, 2019. In addition, the weighted average cost of borrowings increased 27 basis points to 2.25% for the three months ended June 30, 2019.
Total interest expense increased by $67.3 million, or 53.3%, to $193.4 million for the six months ended June 30, 2019. Interest expense on interest-bearing deposits increased $54.8 million, or 69.9%, to $133.3 million for the six months ended June 30, 2019. The weighted average cost of interest-bearing deposits increased 66 basis points to 1.74% for the six months ended June 30, 2019. In addition, the average balance of total interest-bearing deposits increased $739.2 million, or 5.1%, to $15.31 billion for the six months ended June 30, 2019. Interest expense on borrowed funds increased by $12.4 million, or 26.1%, to $60.2 million for the six months ended June 30, 2019. The average balance of borrowed funds increased $604.7 million, or 12.4%, to $5.47 billion for the six months ended June 30, 2019. In addition, the weighted average cost of borrowings increased 24 basis points to 2.20% for the six months ended June 30, 2019.
Provision for Loan Losses. Our provision for loan losses 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/recoveries. At June 30, 2019, our allowance for loan losses and related provision were positively impacted by improved credit quality, including the level of non-accrual loans and charge-offs/recoveries, and modest loan growth. For the three months ended June 30, 2019, our provision for loan losses was a $3.0 million reduction to the allowance for loan losses, compared to an addition to the allowance for loan losses of $4.0 million for the three months ended June 30, 2018. For the three months ended June 30, 2019, net recoveries were $220,000, compared to net charge-offs of $4.3 million for the three months ended June 30, 2018. We recorded no provision

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for loan losses for the six months ended June 30, 2019 and $6.5 million for the six months ended June 30, 2018. For the six months ended June 30, 2019, net charge-offs were $3.9 million, compared to $6.6 million for the six months ended June 30, 2018.
Non-Interest Income. Total non-interest income decreased $4.5 million, or 39.2%, to $7.0 million for the three months ended June 30, 2019. This decrease was primarily due to a previously disclosed $5.7 million loss on the sale of securities resulting from our repositioning of securities, partially offset by an increase of $1.4 million in other income primarily attributed to the gain on a sale-leaseback transaction of one of our branches.
Total non-interest income decreased $2.4 million, or 11.7%, to $18.2 million for the six months ended June 30, 2019. The decrease is due to a decrease of $6.7 million in non-interest income on securities primarily resulting from a $5.7 million loss on the sale of securities, partially offset by an increase of $3.0 million in other income primarily attributed to customer swaps, a sale-leaseback transaction and non-depository investment products.
Non-Interest Expenses. Total non-interest expenses were $103.8 million for the three months ended June 30, 2019, an increase of $1.2 million, or 1.2%, compared to the three months ended June 30, 2018. The increase is due to an increase of $2.1 million in other non-interest expense, partially offset by a decrease of $1.2 million in federal insurance premiums.
Total non-interest expenses were $207.2 million for the six months ended June 30, 2019, an increase of $3.5 million, or 1.7%, as compared to the six months ended June 30, 2018. This increase is due to an increase of $2.4 million in data processing and communication expense, an increase of $2.3 million in other non-interest expense, an increase of $2.0 million in advertising and promotional expense and an increase of $1.0 million in compensation and fringe benefit expense. These increases were partially offset by a decrease of $2.4 million in federal insurance premiums and a decrease of $1.8 million in professional fees.
Income Taxes. Income tax expense for the second quarter of 2019 was $18.7 million compared to $19.1 million for the second quarter 2018.  The effective tax rate was 28.6% for the three months ended June 30, 2019 and 25.1% for the three months ended June 30, 2018. Income tax expense for the six months ended June 30, 2019 was $38.0 million compared to $39.2 million for the six months ended June 30, 2018.  The effective tax rate was 28.6% for the six months ended June 30, 2019 and 25.4% for the six months ended June 30, 2018. The increase in the tax rate is primarily related to the change in New Jersey tax law. The effective tax rate is also 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. In addition, the effective tax rate is 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.
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, including unsecured overnight lines of credit, brokered deposits and other borrowings from correspondent banks.
At June 30, 2019, the Company had $910.0 million of overnight borrowings outstanding. The Company had $686.0 million of overnight borrowings outstanding at December 31, 2018. The Company borrows directly from the FHLB and various financial institutions. The Company had total borrowings of $6.08 billion at June 30, 2019, an increase of $648.1 million from $5.44 billion at December 31, 2018.
In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. At June 30, 2019, outstanding commitments to originate loans totaled $520.2 million; outstanding unused lines of credit totaled $2.03 billion; standby letters of credit totaled $30.5 million and outstanding commitments to sell loans totaled $32.0 million. The Company expects to have sufficient funds available to meet current commitments in the normal course of business. Time deposits scheduled to mature in one year or less totaled $4.20 billion at June 30, 2019. 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:

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•
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 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 commenced on January 1, 2016 at 0.625% and increased in annual increments 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 June 30, 2019 the Company and the Bank met the currently applicable Conservation Buffer of 2.5%.
As of June 30, 2019, the Bank and the Company were considered “well capitalized” under applicable regulations and exceeded all regulatory capital requirements as follows:
 
As of June 30, 2019 (1)
 
Actual
 
Minimum Capital Requirement with Conservation Buffer
 
To be Well Capitalized under Prompt Corrective Action Provisions (2)
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
Bank:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Leverage Ratio
$
2,571,901

 
9.70
%
 
$
1,060,182

 
4.00
%
 
$
1,325,228

 
5.00
%
Common Equity Tier 1 Risk-Based Capital
2,571,901

 
12.69
%
 
1,418,962

 
7.00
%
 
1,317,607

 
6.50
%
Tier 1 Risk Based Capital
2,571,901

 
12.69
%
 
1,723,025

 
8.50
%
 
1,621,671

 
8.00
%
Total Risk-Based Capital
2,804,677

 
13.84
%
 
2,128,443

 
10.50
%
 
2,027,088

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
Investors Bancorp, Inc.:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Leverage Ratio
$
2,856,008

 
10.68
%
 
$
1,069,547

 
4.00
%
 
n/a
 
n/a
Common Equity Tier 1 Risk-Based Capital
2,856,008

 
14.05
%
 
1,422,534

 
7.00
%
 
n/a
 
n/a
Tier 1 Risk Based Capital
2,856,008

 
14.05
%
 
1,727,363

 
8.50
%
 
n/a
 
n/a
Total Risk-Based Capital
3,088,785

 
15.20
%
 
2,133,801

 
10.50
%
 
n/a
 
n/a
(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.

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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.
The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2019:
Contractual Obligations
 
Total
 
Less than One Year
 
One-Two Years
 
Two-Three Years
 
More than Three Years
 
 
(In thousands)
Debt obligations (excluding capitalized leases)
 
$
6,083,737

 
2,135,000

 
675,000

 
1,024,946

 
2,248,791

Commitments to originate and purchase loans
 
$
520,234

 
520,234

 
—

 
—

 
—

Commitments to sell loans
 
$
32,000

 
32,000

 
—

 
—

 
—


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 June 30, 2019, the Company’s commitments to fund unused lines of credit totaled $2.03 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 includes $194.2 million of operating lease liabilities. While the contractual obligations as of June 30, 2019 have not changed significantly from December 31, 2018, the accounting for such obligations required changes effective January 1, 2019 in accordance with the Company’s adoption of Topic 842 which requires these liabilities to be recorded.
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 six months ended June 30, 2019, such derivatives were used (i) to hedge the variability in cash flows associated with borrowings and (ii) to hedge changes in the fair value of certain pools of prepayable fixed- and adjustable-rate assets. These derivatives had an aggregate notional amount of $3.48 billion as of June 30, 2019. The fair value of derivatives designated as hedging activities as of June 30, 2019 was an asset of $1.0 million, inclusive of accrued interest and variation margin posted in accordance with the Chicago Mercantile Exchange.
The Company has credit derivatives resulting from participations in interest rate swaps provided to external lenders as part of loan participation arrangements which are, therefore, not used to manage interest rate risk in the Company’s assets or liabilities. Additionally, the Company provides interest rate risk management services to commercial customers, primarily interest rate swaps. The Company’s market risk from unfavorable movements in interest rates related to these derivative contracts is economically hedged by concurrently entering into offsetting derivative contracts that have identical notional values, terms and indices.
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, 2018 Annual Report on Form 10-K.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Qualitative Analysis. 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; potential differences in the behavior of lending and funding rates arising from the use of different indices; and “yield curve risk” arising from changes in 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.

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Table of Contents

The general objective of our interest rate risk management process is to determine the appropriate level of risk given our business model and then to manage that risk in a manner consistent with that risk appetite. Our Asset Liability Committee, which consists of senior management and executives, evaluates the interest rate risk inherent in our balance sheet, the 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 various Asset Liability Committee reports that estimate the sensitivity of the economic value of equity and net interest income under various interest rate scenarios.
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 items can be either assets or liabilities. As of June 30, 2019 and December 31, 2018, the Company had cash flow and fair value hedges with aggregate notional amounts of $3.48 billion and $2.61 billion, respectively. Included in the fair value hedges are $1.48 billion in asset swap transactions where fixed rate loan payments are exchanged for variable rate payments. These transactions were executed in an effort to reduce the Company’s exposure to rising rates.
We actively evaluate interest rate risk in connection with our lending, investing and deposit activities and our off-balance sheet positions. At June 30, 2019, 24.6% of our total loan portfolio was comprised of residential mortgages, of which approximately 30.1% was in variable rate products, while 69.9% 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, liabilities and off-balance sheet positions 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.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. The ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has material contracts that are indexed to USD-LIBOR and is monitoring this activity and evaluating the related risks.
Quantitative Analysis. The table below sets forth, as of June 30, 2019, 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.

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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
 
$
3,524,141

 
(476,707
)
 
(11.9
)%
 
$
590,962

 
(46,895
)
 
(7.4
)%
0bp
 
$
4,000,848

 
—

 
—

 
$
637,857

 
—

 
—

-100bp
 
$
4,167,758

 
166,910

 
4.2
 %
 
$
659,694

 
21,837

 
3.4
 %
(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 above indicates that at June 30, 2019, in the event of a 200 basis point increase in interest rates, we would be expected to experience an 11.9% decrease in EVE and a $46.9 million, or 7.4%, decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would be expected to experience a 4.2% increase in EVE and a $21.8 million, or 3.4%, 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 EVE and net interest income sensitivity requires 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 balance sheet growth and that generally the composition of our interest-rate sensitive assets and liabilities existing at the beginning of the analysis 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 June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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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
The following additional risk factor supplements the risk factors disclosed in Item 1A., Risk Factors, in our December 31, 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The performance of our multi-family loan portfolio could be adversely impacted by regulation.
On June 14, 2019, the State of New York enacted legislation increasing restrictions on rent increases in a rent-regulated apartment building, including, among other provisions, (i) repealing the “vacancy bonus” and “longevity bonus”, which allowed a property owner to raise rents as much as 20% each time a rental unit became vacant, (ii) eliminating high rent vacancy deregulation and high-income deregulation, which allowed a rental unit to be removed from rent stabilization once it crossed a statutory high-rent threshold and became vacant, or the tenant’s income exceeded the statutory amount in the preceding two years, and (iii) eliminating an exception that allowed a property owner who offered preferential rents to tenants to raise the rent to the full legal rent upon renewal.  As a result of this new legislation as well as previously existing laws and regulations, which are outside the control of the borrower or the Bank, the value of the collateral for our multi-family loans or the future cash flow of such properties could be impaired. It is possible that rental income might not rise sufficiently over time to satisfy increases in the loan rate at repricing or increases in overhead expenses (e.g., utilities, taxes, etc.).  In addition, if the cash flow from a collateral property is reduced or constrained, the borrower’s ability to repay the loan and the value of the collateral for the loan may be impaired.  Approximately half of our multi-family loans are to borrowers with underlying property collateral based in the State of New York.

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 June 30, 2019 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)
April 1, 2019 through April 30, 2019
1,682,490

 
$
12.18

 
1,679,040

 
18,507,794

May 1, 2019 through May 31, 2019
1,500,000

 
11.01

 
1,500,000

 
17,007,794

June 1, 2019 through June 30, 2019
647,290

 
10.84

 
400,000

 
16,607,794

Total
3,829,780

 
$
11.49

 
3,579,040

 
16,607,794

(1) On October 25, 2018, the Company announced its fourth share repurchase program, which authorized the purchase of 10% of its publicly-held outstanding shares of common stock, or approximately 28,886,780 shares. The plan commenced upon the completion of the third repurchase plan on December 10, 2018. This program has no expiration date and has 16,607,794 shares yet to be repurchased as of June 30, 2019.
(2) 250,740 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.


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ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5.
OTHER INFORMATION
Not applicable.


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

 
 
 
 

  
 
 
 

  
 
 
 

  
 
 
 

  
 
 
 

  
 
 
 
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Inline XBRL Cover Page Interactive Data File
 
(1)
Incorporated by reference to Exhibit 2.1 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 30, 2019.
 
 
(2)
Incorporated by reference to the Registration Statement on Form S-1 of Investors Bancorp, Inc. (Commission File no. 333-192966), originally filed with the Securities and Exchange Commission on December 20, 2013.


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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
INVESTORS BANCORP, INC.
 
 
 
Date: August 8, 2019
 
By:
 
/s/  Kevin Cummings
 
 
 
 
Kevin Cummings
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
By:
 
/s/  Sean Burke
 
 
 
 
Sean Burke
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)



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