Investors Bancorp, Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2017

Commission file number: 001-36441

Investors Bancorp, Inc.

(Exact name of registrant as specified in its charter)




Delaware		46-4702118
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

101 JFK Parkway, Short Hills, New Jersey		07078
(Address of Principal Executive Offices)		Zip Code

(973) 924-5100

(Registrant’s telephone number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer	þ		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o
			Emerging growth company	o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of November 3, 2017, the registrant had 359,070,852 shares of common stock, par value $0.01 per share, issued and 306,157,554 outstanding.

Table of Contents

INVESTORS BANCORP, INC.

FORM 10-Q

Index



Part I. Financial Information
		Page
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016	1
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	3
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	58
Part II. Other Information
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
	Signature Page	61

Table of Contents

Part I Financial Information



ITEM 1.	FINANCIAL STATEMENTS

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2017 (Unaudited) and December 31, 2016



	September 30, 2017			December 31, 2016
	(In thousands)
ASSETS
Cash and cash equivalents	$	413,322		164,178
Securities available-for-sale, at estimated fair value	1,949,429			1,660,433
Securities held-to-maturity, net (estimated fair value of $1,769,179 and $1,782,801 at September 30, 2017 and December 31, 2016, respectively)	1,733,751			1,755,556
Loans receivable, net	19,707,157			18,569,855
Loans held-for-sale	6,975			38,298
Federal Home Loan Bank stock	232,814			237,878
Accrued interest receivable	73,203			65,969
Other real estate owned	4,336			4,492
Office properties and equipment, net	177,569			177,417
Net deferred tax asset	222,573			222,277
Bank owned life insurance	154,719			161,940
Goodwill and intangible assets	99,567			101,839
Other assets	6,588			14,543
Total assets	$	24,782,003		23,174,675
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	16,876,469		15,280,833
Borrowed funds	4,484,869			4,546,251
Advance payments by borrowers for taxes and insurance	125,505			105,851
Other liabilities	140,028			118,495
Total liabilities	21,626,871			20,051,430
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 100,000,000 authorized shares; none issued	—			—
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 359,070,852 issued at September 30, 2017 and December 31, 2016; 306,176,459 and 309,449,388 outstanding at September 30, 2017 and December 31, 2016, respectively	3,591			3,591
Additional paid-in capital	2,776,971			2,765,732
Retained earnings	1,111,856			1,053,750
Treasury stock, at cost; 52,894,393 and 49,621,464 shares at September 30, 2017 and December 31, 2016, respectively	(632,394		)	(587,974	)
Unallocated common stock held by the employee stock ownership plan	(85,007		)	(87,254	)
Accumulated other comprehensive loss	(19,885		)	(24,600	)
Total stockholders’ equity	3,155,132			3,123,245
Total liabilities and stockholders’ equity	$	24,782,003		23,174,675

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)



	Three Months Ended September 30,			Nine Months Ended September 30,
	2017		2016	2017	2016
	(Dollars in thousands, except per share data)
Interest and dividend income:
Loans receivable and loans held-for-sale	$	201,069	179,234	579,921	527,989
Securities:
Equity	30		49	108	147
Government-sponsored enterprise obligations	175		8	211	27
Mortgage-backed securities	17,829		14,653	51,812	44,581
Municipal bonds and other debt	2,229		2,039	8,433	6,048
Interest-bearing deposits	875		76	1,159	253
Federal Home Loan Bank stock	3,557		2,315	9,722	6,396
Total interest and dividend income	225,764		198,374	651,366	585,441
Interest expense:
Deposits	32,300		20,326	79,820	61,639
Borrowed funds	22,553		18,442	66,460	52,328
Total interest expense	54,853		38,768	146,280	113,967
Net interest income	170,911		159,606	505,086	471,474
Provision for loan losses	1,750		5,000	11,750	15,000
Net interest income after provision for loan losses	169,161		154,606	493,336	456,474
Non-interest income
Fees and service charges	5,076		4,108	14,966	12,925
Income on bank owned life insurance	935		1,006	2,826	3,267
Gain on loans, net	726		1,401	2,924	3,516
Gain on securities transactions, net	—		72	1,275	3,100
Gain (loss) on sale of other real estate owned, net	446		35	871	(67	)
Other income	1,212		1,898	4,556	5,956
Total non-interest income	8,395		8,520	27,418	28,697
Non-interest expense
Compensation and fringe benefits	57,052		53,051	168,207	158,475
Advertising and promotional expense	4,355		1,495	10,956	5,640
Office occupancy and equipment expense	14,589		14,099	43,769	41,612
Federal deposit insurance premiums	4,500		3,600	12,110	8,800
General and administrative	691		641	2,267	2,407
Professional fees	8,140		5,673	30,141	14,493
Data processing and communication	5,719		5,299	17,493	15,821
Other operating expenses	8,228		7,540	24,157	22,304
Total non-interest expenses	103,274		91,398	309,100	269,552
Income before income tax expense	74,282		71,728	211,654	215,619
Income tax expense	28,437		21,878	80,156	75,958
Net income	$	45,845	49,850	131,498	139,661
Basic earnings per share	$	0.16	0.17	0.45	0.47
Diluted earnings per share	$	0.16	0.17	0.45	0.46
Weighted average shares outstanding
Basic	289,715,414		292,000,061	290,670,601	299,873,985
Diluted	290,890,307		294,673,452	292,489,906	303,297,117

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
	(In thousands)
Net income	$	45,845	49,850		131,498		139,661
Other comprehensive income (loss), net of tax:
Change in funded status of retirement obligations	82		318		249		952
Unrealized gains (losses) on securities available-for-sale	525		(1,655	)	5,205		11,966
Accretion of loss on securities reclassified to held to maturity	180		279		580		847
Reclassification adjustment for security gains included in net income	—		(43	)	(765	)	(1,358	)
Other-than-temporary impairment accretion on debt securities	186		315		770		698
Net gains (losses) on derivatives arising during the period	560		(631	)	(1,324	)	(631	)
Total other comprehensive income (loss)	1,533		(1,417	)	4,715		12,474
Total comprehensive income	$	47,378	48,433		136,213		152,135

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. & SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2017 and 2016

(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, 2015	$	3,591	2,785,503		936,040		(295,412	)	(90,250	)	(27,825	)	3,311,647
Cumulative effect of adopting ASU No. 2016-09	—		(8,051	)	8,051		—		—		—		—
Net income	—		—		139,661		—		—		—		139,661
Other comprehensive income, net of tax	—		—		—		—		—		12,474		12,474
Purchase of treasury stock (29,184,897 shares)	—		—		—		(337,487	)	—		—		(337,487	)
Treasury stock allocated to restricted stock plan (271,890 shares)	—		(3,167	)	(94	)	3,261		—		—		—
Compensation cost for stock options and restricted stock	—		15,156		—		—		—		—		15,156
Option exercise	—		(27,501	)	—		54,636		—		—		27,135
Restricted stock forfeitures (17,500 shares)	—		220		(35	)	(185	)	—		—		—
Cash dividend paid ($0.18 per common share)	—		—		(57,607	)	—		—		—		(57,607	)
ESOP shares allocated or committed to be released	—		1,863		—		—		2,247		—		4,110
Balance at September 30, 2016	$	3,591	2,764,023		1,026,016		(575,187	)	(88,003	)	(15,351	)	3,115,089

Balance at December 31, 2016	$	3,591	2,765,732		1,053,750		(587,974	)	(87,254	)	(24,600	)	3,123,245
Net income	—		—		131,498		—		—		—		131,498
Other comprehensive income, net of tax	—		—		—		—		—		4,715		4,715
Purchase of treasury stock (4,371,647 shares)	—		—		—		(57,842	)	—		—		(57,842	)
Treasury stock allocated to restricted stock plan (430,000 shares)	—		(6,186	)	1,008		5,178		—		—		—
Compensation cost for stock options and restricted stock	—		14,967		—		—		—		—		14,967
Option exercise	—		(3,533	)	—		11,254		—		—		7,721
Restricted stock forfeitures (268,163 shares)	—		3,352		(342	)	(3,010	)	—		—		—
Cash dividend paid ($0.24 per common share)	—		—		(74,058	)	—		—		—		(74,058	)
ESOP shares allocated or committed to be released	—		2,639		—		—		2,247		—		4,886
Balance at September 30, 2017	$	3,591	2,776,971		1,111,856		(632,394	)	(85,007	)	(19,885	)	3,155,132

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended September 30,
	2017			2016
	(In thousands)
Cash flows from operating activities:
Net income	$	131,498		139,661
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense	19,853			19,266
Amortization of premiums and accretion of discounts on securities, net	11,942			10,372
Amortization of premiums and accretion of fees and costs on loans, net	(3,248		)	(3,191	)
Amortization of other intangible assets	1,854			2,194
Provision for loan losses	11,750			15,000
Depreciation and amortization of office properties and equipment	12,670			11,732
Gain on securities transactions, net	(1,275		)	(3,100	)
Mortgage loans originated for sale	(126,792		)	(166,469	)
Proceeds from mortgage loan sales	160,582			152,670
Gain on sales of mortgage loans, net	(2,467		)	(3,010	)
(Gain) loss on sale of other real estate owned	(871		)	67
Income on bank owned life insurance	(2,826		)	(3,267	)
Increase in accrued interest receivable	(7,234		)	(7,485	)
Deferred tax (benefit) expense	(3,092		)	397
Decrease in other assets	8,868			1,353
Increase in other liabilities	19,248			2,346
Total adjustments	98,962			28,875
Net cash provided by operating activities	230,460			168,536
Cash flows from investing activities:
Purchases of loans receivable	(345,715		)	(92,828	)
Net originations of loans receivable	(851,418		)	(1,335,186	)
Proceeds from disposition of loans held for investment	48,556			7,583
Gain on disposition of loans held for investment	(457		)	(506	)
Net proceeds from sale of foreclosed real estate	4,228			3,395
Proceeds from principal repayments/calls/maturities of securities available for sale	252,173			216,161
Proceeds from sales of securities available for sale	102,120			57,879
Proceeds from principal repayments/calls/maturities of securities held to maturity	246,373			282,718
Proceeds from sales of securities held to maturity	—			14,348
Purchases of securities available for sale	(642,165		)	(468,168	)
Purchases of securities held to maturity	(227,029		)	(247,568	)
Proceeds from redemptions of Federal Home Loan Bank stock	175,279			161,772
Purchases of Federal Home Loan Bank stock	(170,215		)	(205,897	)
Purchases of office properties and equipment	(12,822		)	(17,836	)
Death benefit proceeds from bank owned life insurance	10,047			472
Net cash used in investing activities	(1,411,045		)	(1,623,661	)
Cash flows from financing activities:
Net increase in deposits	1,595,636			888,086
Net (decrease) increase in other borrowings	(61,382		)	940,621
Net increase in advance payments by borrowers for taxes and insurance	19,654			14,102

Table of Contents



Dividends paid	(74,058		)	(57,607	)
Exercise of stock options	7,721			27,135
Purchase of treasury stock	(57,842		)	(337,487	)
Net cash provided by financing activities	1,429,729			1,474,850
Net increase in cash and cash equivalents	249,144			19,725
Cash and cash equivalents at beginning of period	164,178			148,904
Cash and cash equivalents at end of period	$	413,322		168,629
Supplemental cash flow information:
Non-cash investing activities:
Real estate acquired through foreclosure	$	3,230		2,078
Cash paid during the year for:
Interest	143,054			114,419
Income taxes	70,123			83,876

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements are comprised of the accounts of Investors Bancorp, Inc. and its wholly owned subsidiaries, including Investors Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries (collectively, the “Company”). In the opinion of management, all the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the three and nine months ended September 30, 2017 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, 2016 Annual Report on Form 10-K. Certain reclassifications have been made in the consolidated financial statements to conform with current year classifications.

2. Stock Transactions

Stock Repurchase Programs

On March 16, 2015, the Company announced it had received approval from the Board of Governors of the Federal Reserve System to commence a 5% buyback program prior to the one-year anniversary of the completion of its second step conversion. Accordingly, the Board of Directors authorized the repurchase of 17,911,561 shares. The first program was completed on June 30, 2015.

On June 9, 2015, the Company announced its second share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or 34,779,211 shares. The second repurchase program commenced immediately upon completion of the first repurchase plan on June 30, 2015. The second program was completed on June 17, 2016.

On April 28, 2016, the Company announced its third share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or 31,481,189 shares. The new repurchase program commenced immediately upon completion of the second repurchase plan on June 17, 2016.

During the nine months ended September 30, 2017, the Company purchased (including withholding of shares for payment of taxes with respect to vesting of equity transactions) 4,371,647 shares at a cost of $57.8 million, or approximately $13.23 per share.

Table of Contents

3. Earnings Per Share

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



	For the Three Months Ended September 30,
	2017		2016
	(Dollars in thousands, except per share data)
Earnings for basic and diluted earnings per common share
Earnings applicable to common stockholders	$	45,845	$	49,850

Shares
Weighted-average common shares outstanding - basic	289,715,414		292,000,061
Effect of dilutive common stock equivalents (1)	1,174,893		2,673,391
Weighted-average common shares outstanding - diluted	290,890,307		294,673,452

Earnings per common share
Basic	$	0.16	$	0.17
Diluted	$	0.16	$	0.17

(1) For the three months ended September 30, 2017 and 2016, there were 10,952,744 and 16,372,523 equity awards, respectively, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.



	For the Nine Months Ended September 30,
	2017		2016
	(Dollars in thousands, except per share data)
Earnings for basic and diluted earnings per common share
Earnings applicable to common stockholders	$	131,498	$	139,661

Shares
Weighted-average common shares outstanding - basic	290,670,601		299,873,985
Effect of dilutive common stock equivalents (1)	1,819,305		3,423,132
Weighted-average common shares outstanding - diluted	292,489,906		303,297,117

Earnings per common share
Basic	$	0.45	$	0.47
Diluted	$	0.45	$	0.46

(1) For the nine months ended September 30, 2017 and 2016, there were 11,041,315 and 11,819,014 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.

Table of Contents

4. Securities

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



	At September 30, 2017
	Carrying value		Gross unrealized gains	Gross unrealized losses	Estimated fair value
	(In thousands)
Available-for-sale:
Equity securities	$	4,889	834	77	5,646
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	656,728		1,803	4,537	653,994
Federal National Mortgage Association	1,258,212		2,600	11,702	1,249,110
Government National Mortgage Association	41,642		—	963	40,679
Total mortgage-backed securities available-for-sale	1,956,582		4,403	17,202	1,943,783
Total available-for-sale securities	$	1,961,471	5,237	17,279	1,949,429



	At September 30, 2017
	Amortized cost		Net unrealized losses (1)	Carrying value	Gross unrecognized gains (2)	Gross unrecognized losses (2)	Estimated fair value
	(In thousands)
Held-to-maturity:
Debt securities:
Government-sponsored enterprises	$	43,300	—	43,300	2	739	42,563
Municipal bonds	30,907		—	30,907	1,415	—	32,322
Corporate and other debt securities	67,411		20,458	46,953	37,776	—	84,729
Total debt securities held-to-maturity	141,618		20,458	121,160	39,193	739	159,614
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	441,464		1,091	440,373	1,530	2,397	439,506
Federal National Mortgage Association	1,120,171		1,289	1,118,882	5,968	7,835	1,117,015
Government National Mortgage Association	53,336		—	53,336	19	311	53,044
Total mortgage-backed securities held-to-maturity	1,614,971		2,380	1,612,591	7,517	10,543	1,609,565
Total held-to-maturity securities	$	1,756,589	22,838	1,733,751	46,710	11,282	1,769,179

(1) Net unrealized losses of held-to-maturity corporate and other debt securities represent the other than temporary charge related to other non-credit factors and is being amortized through accumulated other comprehensive income over the remaining life of the securities. For mortgage-backed securities, it represents the net loss on previously designated available-for sale securities transferred to held-to-maturity at fair value and is being amortized through accumulated other comprehensive income over the remaining life of the securities.

(2) Unrecognized gains and losses of held-to-maturity securities are not reflected in the financial statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as held-to-maturity; or (ii) the date that an other than temporary impairment charge is recognized on a held-to-maturity security, through the date of the balance sheet.

Table of Contents



	At December 31, 2016
	Carrying value		Gross unrealized gains	Gross unrealized losses	Estimated fair value
	(In thousands)
Available-for-sale:
Equity securities	$	5,825	918	83	6,660
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	603,774		1,971	7,306	598,439
Federal National Mortgage Association	1,022,383		2,678	16,474	1,008,587
Government National Mortgage Association	47,538		—	791	46,747
Total mortgage-backed securities available-for-sale	1,673,695		4,649	24,571	1,653,773
Total available-for-sale securities	$	1,679,520	5,567	24,654	1,660,433



	At December 31, 2016
	Amortized cost		Net unrealized losses (1)	Carrying Value	Gross unrecognized gains (2)	Gross unrecognized losses (2)	Estimated fair value
	(In thousands)
Held-to-maturity:
Debt securities:
Government-sponsored enterprises	$	2,128	—	2,128	12	—	2,140
Municipal bonds	37,978		—	37,978	1,515	—	39,493
Corporate and other debt securities	65,852		21,760	44,092	40,153	—	84,245
Total debt securities held-to-maturity	105,958		21,760	84,198	41,680	—	125,878
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	411,692		1,559	410,133	793	3,502	407,424
Federal National Mortgage Association	1,246,635		1,802	1,244,833	3,635	15,389	1,233,079
Government National Mortgage Association	16,392		—	16,392	28	—	16,420
Total mortgage-backed securities held-to-maturity	1,674,719		3,361	1,671,358	4,456	18,891	1,656,923
Total held-to-maturity securities	$	1,780,677	25,121	1,755,556	46,136	18,891	1,782,801

At September 30, 2017, corporate and other debt securities include a portfolio of collateralized debt obligations backed by pooled trust preferred securities (“TruPS”), principally issued by banks and to a lesser extent insurance companies, real estate investment trusts, and collateralized debt obligations. At September 30, 2017, the TruPS had a carrying value and estimated fair value of $42.0 million and $79.6 million, respectively. While all were investment grade at purchase, securities classified as non-investment grade at September 30, 2017 had an amortized cost and estimated fair value of $39.9 million and $73.2 million, respectively. Fair value is derived from considering specific assumptions, including terms of the TruPS structure, events of deferrals, defaults and liquidations, the projected cashflow for principal and interest payments, and discounted cash flow modeling.

Investment securities with a carrying value of $1.14 billion and an estimated fair value of $1.13 billion are pledged to secure borrowings. The contractual maturities of the Bank’s mortgage-backed securities are generally less than 20 years with effective lives expected to be shorter due to prepayments. Expected maturities may differ from contractual maturities due to underlying loan prepayments or early call privileges of the issuer, therefore, mortgage-backed securities are not included in the following table. The amortized cost and estimated fair value of debt securities at September 30, 2017, by contractual maturity, are shown below.

Table of Contents



	September 30, 2017
	Carrying Value		Estimated fair value
	(In thousands)
Due in one year or less	$	28,337	28,339
Due after one year through five years	75		75
Due after five years through ten years	46,240		45,582
Due after ten years	46,508		85,618
Total	$	121,160	159,614

Gross unrealized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016, was as follows:



	September 30, 2017
	Less than 12 months			12 months or more		Total
	Estimated fair value		Unrealized losses	Estimated fair value	Unrealized losses	Estimated fair value	Unrealized losses
	(In thousands)
Available-for-sale:
Equity Securities	$	4,792	77	—	—	4,792	77
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	291,595		2,732	56,408	1,805	348,003	4,537
Federal National Mortgage Association	678,795		7,951	150,569	3,751	829,364	11,702
Government National Mortgage Association	40,679		963	—	—	40,679	963
Total mortgage-backed securities available-for-sale	1,011,069		11,646	206,977	5,556	1,218,046	17,202
Total available-for-sale securities	1,015,861		11,723	206,977	5,556	1,222,838	17,279
Held-to-maturity:
Debt securities:
Government-sponsored enterprises	40,517		739	—	—	40,517	739
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	243,530		2,333	2,820	64	246,350	2,397
Federal National Mortgage Association	571,368		6,294	43,891	1,541	615,259	7,835
Government National Mortgage Association	39,524		311	—	—	39,524	311
Total mortgage-backed securities held-to-maturity	854,422		8,938	46,711	1,605	901,133	10,543
Total held-to-maturity securities	894,939		9,677	46,711	1,605	941,650	11,282
Total	$	1,910,800	21,400	253,688	7,161	2,164,488	28,561

Table of Contents



	December 31, 2016
	Less than 12 months			12 months or more		Total
	Estimated fair value		Unrealized losses	Estimated fair value	Unrealized losses	Estimated fair value	Unrealized losses
	(In thousands)
Available-for-sale:
Equity Securities	$	4,722	83	—	—	4,722	83
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	406,878		7,220	12,756	86	419,634	7,306
Federal National Mortgage Association	762,272		15,977	25,089	497	787,361	16,474
Government National Mortgage Association	46,747		791	—	—	46,747	791
Total mortgage-backed securities available-for-sale	1,215,897		23,988	37,845	583	1,253,742	24,571
Total available-for-sale securities	1,220,619		24,071	37,845	583	1,258,464	24,654
Held-to-maturity:
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	339,666		3,354	3,623	148	343,289	3,502
Federal National Mortgage Association	970,194		15,389	—	—	970,194	15,389
Total held-to-maturity securities	1,309,860		18,743	3,623	148	1,313,483	18,891
Total	$	2,530,479	42,814	41,468	731	2,571,947	43,545

At September 30, 2017, the majority of gross unrealized losses primarily relate to our mortgage-backed-security portfolio which is comprised of securities issued by U.S. Government Sponsored Enterprises. The fair values of these securities have been negatively impacted by the recent increase in intermediate-term market interest rates.

Other-Than-Temporary Impairment (“OTTI”)

We conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If a determination is made that a 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 TruPS. Cash flows for each security are forecasted using assumptions for defaults, recoveries, pre-payments and amortization. At September 30, 2017 and 2016, management deemed that the present value of projected cash flows for each security was greater than the book value and did not recognize any additional OTTI charges for the three and nine months ended September 30, 2017 and 2016. At September 30, 2017, non-credit related OTTI recorded on the previously impaired TruPS was $20.5 million ($12.1 million after-tax). This amount is being accreted into income over the estimated remaining life of the securities.

Table of Contents

The following table presents the changes in the credit loss component of the impairment loss of debt securities that the Company has written down for such loss as an other-than-temporary impairment recognized in earnings.



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2017			2016		2017		2016
	(In thousands)
Balance of credit related OTTI, beginning of period	$	87,921		97,977		95,743		100,200
Additions:
Initial credit impairments	—			—		—		—
Subsequent credit impairments	—			—		—		—
Reductions:
Accretion of credit loss impairment due to an increase in expected cash flows	(1,077		)	(1,112	)	(5,088	)	(3,335	)
Reductions for securities sold or paid off during the period	—			—		(3,811	)	—
Balance of credit related OTTI, end of period	$	86,844		96,865		86,844		96,865

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 months ended September 30, 2017, there were no proceeds from sales of securities in the available-for-sale portfolio. For the nine months ended September 30, 2017, the Company received sale proceeds of $102.1 million on pools of mortgage-backed securities from the available-for-sale portfolio resulting in a gross realized gain of $1.3 million.

There were no proceeds from sales of securities in the held-to-maturity portfolio for the three and nine months ended September 30, 2017; however, for the nine months ended September 30, 2017, the Company received proceeds of $3.1 million from the liquidation of a TruP security. As a result, $1.9 million was recognized as interest income from securities in the Consolidated Statements of Income.

For the three and nine months ended September 30, 2016, the Company received proceeds of $122,200 and $57.9 million, respectively, on equity securities and pools of mortgage-backed securities sold from the available-for-sale portfolio resulting in a gross realized gain of $72,200 and $2.3 million, respectively. For the three months ended September 30, 2016, there were no sale proceeds from the held-to-maturity portfolio. For the nine months ended September 30, 2016, the Company received sale proceeds of $14.3 million on a pool of mortgage-backed securities from the held-to-maturity portfolio resulting in a gross realized gain of $836,000. These securities met the criteria of principal pay downs under 85% of the original investment amount and therefore did not result in a tainting of the held-to-maturity portfolio. The Company sells securities when, in management’s assessment, market pricing presents an economic benefit that outweighs holding such securities, and when securities with smaller balances become cost prohibitive to carry.

Table of Contents

5. Loans Receivable, Net

The detail of the loan portfolio as of September 30, 2017 and December 31, 2016 was as follows:



	September 30, 2017			December 31, 2016
	(In thousands)
Multi-family loans	$	7,854,759		7,459,131
Commercial real estate loans	4,660,268			4,445,194
Commercial and industrial loans	1,501,235			1,275,283
Construction loans	397,929			314,843
Total commercial loans	14,414,191			13,494,451
Residential mortgage loans	4,871,460			4,710,373
Consumer and other loans	654,701			596,922
Total loans excluding PCI loans	19,940,352			18,801,746
PCI loans	8,577			8,956
Net unamortized premiums and deferred loan costs (1)	(11,701		)	(12,474	)
Allowance for loan losses	(230,071		)	(228,373	)
Net loans	$	19,707,157		18,569,855

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

Allowance for Loan Losses

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
	(Dollars in thousands)
Balance at beginning of the period	$	230,028		220,316		228,373		218,505
Loans charged off	(3,022		)	(2,972	)	(14,519	)	(13,379	)
Recoveries	1,315			1,206		4,467		3,424
Net charge-offs	(1,707		)	(1,766	)	(10,052	)	(9,955	)
Provision for loan losses	1,750			5,000		11,750		15,000
Balance at end of the period	$	230,071		223,550		230,071		223,550

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 Accounting Standards Codification (“ASC”) Subtopic 310-30 and are initially recorded at fair value as determined by the present value of expected future

Table of Contents

cash flows with no valuation allowance reflected in the allowance for loan losses. For the nine months ended September 30, 2017, the Company recorded charge-offs of $92,000 related to PCI loans acquired.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans determined to be impaired. A loan is deemed to be impaired if it is a commercial loan with an outstanding balance greater than $1.0 million and on non-accrual status, loans modified in a troubled debt restructuring (“TDR”), and other commercial loans greater than $1.0 million if management has specific information that it is probable they will not collect all amounts due under the contractual terms of the loan agreement. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk rating (if applicable) and payment history. In addition, the Company’s residential portfolio is subdivided between fixed and adjustable rate loans as adjustable rate loans are deemed to be subject to more credit risk if interest rates rise. Reserves for each loan segment or the loss factors are generally determined based on the Company’s historical loss experience over a look-back period determined to provide the appropriate amount of data to accurately estimate expected losses as of period end. Additionally, management assesses the loss emergence period for the expected losses of each loan segment and adjusts each historical loss factor accordingly. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first full or partial loan charge-off), and is determined based upon a study of the Company’s past loss experience by loan segment. The loss factors may also be adjusted to account for qualitative or environmental factors that are likely to cause estimated credit losses inherent in the portfolio to differ from historical loss experience. This evaluation is based on among other things, loan and delinquency trends, general economic conditions, credit concentrations, industry trends and lending and credit management policies and procedures, but is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be different than the allowance for loan losses we have established which could have a material negative effect on our financial results.

On a quarterly basis, management reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. Loans determined to be impaired are evaluated for potential loss exposure. Any shortfall results in a recommendation of a specific allowance or charge-off if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair value of the collateral is based on the most current appraised value available for real property or a discounted cash flow analysis on a business. The appraised value for real property is then reduced to reflect estimated liquidation expenses.

The allowance contains reserves identified as unallocated. These reserves reflect management’s attempt to provide for the imprecision and the uncertainty that is inherent in estimates of probable credit losses.

Our lending emphasis has been the origination of multi-family loans, commercial real estate loans, commercial and industrial loans, one- to four-family residential mortgage loans secured by one- to four-family residential real estate, construction loans and consumer loans, the majority of which are home equity loans, home equity lines of credit and cash surrender value lending on life insurance contracts. These activities resulted in a concentration of loans secured by real estate property and businesses located in New Jersey and New York. Based on the composition of our loan portfolio, we believe the primary risks to our loan portfolio are increases in interest rates, a decline in the general economy, and declines in real estate market values in New Jersey, New York and surrounding states. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Negative changes to appraisal assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are carefully reviewed to determine that the resulting values reasonably reflect amounts realizable on the related loans.

For commercial real estate, multi-family and construction loans, the Company obtains an appraisal for all collateral dependent loans upon origination. An updated appraisal is obtained annually for loans rated substandard or worse with a balance of $500,000 or greater. An updated appraisal is obtained biennially for loans rated special mention with a balance of $2.0 million or greater. This is done in order to determine the specific reserve or charge off needed. As part of the allowance for loan losses process, the Company reviews each collateral dependent commercial real estate loan classified as non-accrual and/or impaired and assesses whether there has been an adverse change in the collateral value supporting the loan. The Company utilizes information from its commercial lending officers and its credit department and 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.

Table of Contents

For homogeneous residential mortgage loans, the Company’s policy is to obtain an appraisal upon the origination of the loan and an updated appraisal in the event a loan becomes 90 days delinquent. Thereafter, the appraisal is updated every two years if the loan remains in non-performing status and the foreclosure process has not been completed. Management adjusts the appraised value of residential loans to reflect estimated selling costs and declines in the real estate market.

Management believes the potential risk for outdated appraisals for impaired and other non-performing loans has been mitigated due to the fact that the loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral. Loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt.

Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if the current economic environment deteriorates. Management uses relevant information available; however, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

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 September 30, 2017 and December 31, 2016:



	September 30, 2017
	Multi- Family Loans			Commercial Real Estate Loans		Commercial and Industrial Loans		Construction Loans		Residential Mortgage Loans		Consumer and Other Loans		Unallocated	Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance-December 31, 2016	$	95,561		52,796		43,492		11,653		19,831		2,850		2,190	228,373
Charge-offs	(5		)	(6,818	)	(3,242	)	(100	)	(4,205	)	(149	)	—	(14,519	)
Recoveries	1,178			500		177		—		2,492		120		—	4,467
Provision	(9,795		)	13,205		6,862		(1,771	)	2,913		116		220	11,750
Ending balance-September 30, 2017	$	86,939		59,683		47,289		9,782		21,031		2,937		2,410	230,071

Individually evaluated for impairment	$	—		—		—		—		1,630		88		—	1,718
Collectively evaluated for impairment	86,939			59,683		47,289		9,782		19,401		2,849		2,410	228,353
Loans acquired with deteriorated credit quality	—			—		—		—		—		—		—	—
Balance at September 30, 2017	$	86,939		59,683		47,289		9,782		21,031		2,937		2,410	230,071

Loans:
Individually evaluated for impairment	$	13,929		32,499		1,317		—		26,827		861		—	75,433
Collectively evaluated for impairment	7,840,830			4,627,769		1,499,918		397,929		4,844,633		653,840		—	19,864,919
Loans acquired with deteriorated credit quality	—			6,845		—		—		1,412		320		—	8,577
Balance at September 30, 2017	$	7,854,759		4,667,113		1,501,235		397,929		4,872,872		655,021		—	19,948,929

Table of Contents



	December 31, 2016
	Multi- Family Loans			Commercial Real Estate Loans		Commercial and Industrial Loans		Construction Loans		Residential Mortgage Loans		Consumer and Other Loans		Unallocated	Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance-December 31, 2015	$	88,223		46,999		40,585		6,794		31,443		3,155		1,306	218,505
Charge-offs	(161		)	(455	)	(4,485	)	(52	)	(9,425	)	(419	)	—	(14,997	)
Recoveries	1,885			689		541		267		1,631		102		—	5,115
Provision	5,614			5,563		6,851		4,644		(3,818	)	12		884	19,750
Ending balance-December 31, 2016	$	95,561		52,796		43,492		11,653		19,831		2,850		2,190	228,373

Individually evaluated for impairment	$	—		—		—		—		1,581		20		—	1,601
Collectively evaluated for impairment	95,561			52,796		43,492		11,653		18,250		2,830		2,190	226,772
Loans acquired with deteriorated credit quality	—			—		—		—		—		—		—	—
Balance at December 31, 2016	$	95,561		52,796		43,492		11,653		19,831		2,850		2,190	228,373

Loans:
Individually evaluated for impairment	$	248		5,962		3,370		—		24,453		371		—	34,404
Collectively evaluated for impairment	7,458,883			4,439,232		1,271,913		314,843		4,685,920		596,551		—	18,767,342
Loans acquired with deteriorated credit quality	—			7,106		—		—		1,507		343		—	8,956
Balance at December 31, 2016	$	7,459,131		4,452,300		1,275,283		314,843		4,711,880		597,265		—	18,810,702

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. For non-homogeneous loans, such as commercial and commercial real estate loans, the Company analyzes the loans individually by classifying the loans as to credit risk and assesses the probability of collection for each type of class. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Pass - “Pass” assets are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

Watch - A “Watch” asset has all the characteristics of a Pass asset but warrants more than the normal level of supervision. These loans may require more detailed reporting to management because some aspects of underwriting may not conform to policy or adverse events may have affected or could affect the cash flow or ability to continue operating profitably, provided, however, the events do not constitute an undue credit risk. Residential loans delinquent 30-59 days are considered watch if not already identified as impaired.

Special Mention - A “Special Mention” asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to

Table of Contents

warrant adverse classification. Residential loans delinquent 60-89 days are considered special mention if not already identified as impaired.

Substandard - A “Substandard” asset is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Residential loans delinquent 90 days or greater as well as those identified as impaired are considered substandard.

Doubtful - An asset classified “Doubtful” has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions, and values.

Loss - An asset or portion thereof, classified “Loss” is considered uncollectible and of such little value that its continuance on the institution’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery will occur. As such, it is not practical or desirable to defer the write-off.

The following tables present the risk category of loans as of September 30, 2017 and December 31, 2016 by class of loans, excluding PCI loans:



	September 30, 2017
	Pass		Watch	Special Mention	Substandard	Doubtful	Loss	Total
	(In thousands)
Commercial loans:
Multi-family	$	6,884,230	678,668	158,101	133,760	—	—	7,854,759
Commercial real estate	3,828,406		528,965	135,840	167,057	—	—	4,660,268
Commercial and industrial	1,026,038		395,166	64,815	15,216	—	—	1,501,235
Construction	284,554		106,798	6,577	—	—	—	397,929
Total commercial loans	12,023,228		1,709,597	365,333	316,033	—	—	14,414,191
Residential mortgage	4,772,466		15,174	7,615	76,205	—	—	4,871,460
Consumer and other	640,416		7,048	353	6,884	—	—	654,701
Total	$	17,436,110	1,731,819	373,301	399,122	—	—	19,940,352



	December 31, 2016
	Pass		Watch	Special Mention	Substandard	Doubtful	Loss	Total
	(In thousands)
Commercial loans:
Multi-family	$	6,961,809	276,858	165,948	54,516	—	—	7,459,131
Commercial real estate	3,900,988		373,319	134,154	36,733	—	—	4,445,194
Commercial and industrial	900,190		344,628	23,588	6,877	—	—	1,275,283
Construction	230,630		76,773	3,200	4,240	—	—	314,843
Total commercial loans	11,993,617		1,071,578	326,890	102,366	—	—	13,494,451
Residential mortgage	4,600,611		21,873	10,239	77,650	—	—	4,710,373
Consumer and other	583,140		5,627	719	7,436	—	—	596,922
Total	$	17,177,368	1,099,078	337,848	187,452	—	—	18,801,746

Table of Contents

The following tables present the payment status of the recorded investment in past due loans as of September 30, 2017 and December 31, 2016 by class of loans, excluding PCI loans:



	September 30, 2017
	30-59 Days		60-89 Days	Greater than 90 Days	Total Past Due	Current	Total Loans Receivable
	(In thousands)
Commercial loans:
Multi-family	$	15,785	—	207	15,992	7,838,767	7,854,759
Commercial real estate	32,663		979	14,546	48,188	4,612,080	4,660,268
Commercial and industrial	611		1,384	336	2,331	1,498,904	1,501,235
Construction	—		—	—	—	397,929	397,929
Total commercial loans	49,059		2,363	15,089	66,511	14,347,680	14,414,191
Residential mortgage	16,851		8,386	54,101	79,338	4,792,122	4,871,460
Consumer and other	7,048		353	6,025	13,426	641,275	654,701
Total	$	72,958	11,102	75,215	159,275	19,781,077	19,940,352



	December 31, 2016
	30-59 Days		60-89 Days	Greater than 90 Days	Total Past Due	Current	Total Loans Receivable
	(In thousands)
Commercial loans:
Multi-family	$	5,272	1,099	234	6,605	7,452,526	7,459,131
Commercial real estate	6,568		31,964	6,445	44,977	4,400,217	4,445,194
Commercial and industrial	864		885	2,971	4,720	1,270,563	1,275,283
Construction	—		—	—	—	314,843	314,843
Total commercial loans	12,704		33,948	9,650	56,302	13,438,149	13,494,451
Residential mortgage	24,052		10,930	58,119	93,101	4,617,272	4,710,373
Consumer and other	5,627		719	7,065	13,411	583,511	596,922
Total	$	42,383	45,597	74,834	162,814	18,638,932	18,801,746

The following table presents non-accrual loans, excluding PCI loans, at the dates indicated:



	September 30, 2017			December 31, 2016
	# of loans	Amount		# of loans	Amount
	(Dollars in thousands)
Non-accrual:
Multi-family	4	$	14,137	2	$	482
Commercial real estate	31	35,329		24	9,205
Commercial and industrial	6	1,926		8	4,659
Total commercial loans	41	51,392		34	14,346
Residential mortgage and consumer	417	74,270		478	79,928
Total non-accrual loans	458	$	125,662	512	$	94,274

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 September 30, 2017 and December 31, 2016, these loans are comprised of the following:



	September 30, 2017			December 31, 2016
	# of loans	Amount		# of loans	Amount
	(Dollars in thousands)
Current TDR classified as non-accrual:
Multi-family	—	$	—	1	$	248
Commercial real estate	1	396		1	63
Commercial and industrial	—	—		1	286
Total commercial loans	1	396		3	597
Residential mortgage and consumer	24	4,815		23	5,721
Total current TDR classified as non-accrual	25	$	5,211	26	$	6,318

The following table presents TDR loans which were also 30-89 days delinquent and classified as non-accrual at the dates indicated:



	September 30, 2017			December 31, 2016
	# of loans	Amount		# of loans	Amount
	(Dollars in thousands)
TDR 30-89 days delinquent classified as non-accrual:
Commercial real estate	1	$	56	2	$	169
Residential mortgage and consumer	12	2,447		14	2,869
Total TDR 30-89 days delinquent classified as non-accrual	13	$	2,503	16	$	3,038

The Company has no loans past due 90 days or more delinquent that are still accruing interest.

PCI loans are excluded from non-accrual loans, as they are recorded at fair value based on the present value of expected future cash flows. As of September 30, 2017, PCI loans with a carrying value of $8.6 million included $7.4 million of which were current, $75,000 of which were 30-89 days delinquent and $1.1 million of which were 90 days or more delinquent. As of December 31, 2016, PCI loans with a carrying value of $9.0 million included $7.7 million of which were current, none of which were 30-89 days delinquent and $1.3 million of which were 90 days or more delinquent.

At September 30, 2017 and December 31, 2016, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans which totaled $75.4 million and $34.4 million, respectively, with allocations of the allowance for loan losses of $1.7 million and $1.6 million for the periods ending September 30, 2017 and December 31, 2016, respectively. During the nine months ended September 30, 2017 and 2016, interest income received and recognized on these loans totaled $1.2 million and $1.0 million, respectively.

Table of Contents

The following tables present loans individually evaluated for impairment by portfolio segment as of September 30, 2017 and December 31, 2016:



	September 30, 2017
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
	(In thousands)
With no related allowance:
Multi-family	$	13,929	13,977	—	14,318	121
Commercial real estate	32,499		42,362	—	32,910	284
Commercial and industrial	1,317		1,896	—	1,343	28
Construction	—		—	—	—	—
Total commercial loans	47,745		58,235	—	48,571	433
Residential mortgage and consumer	12,877		16,830	—	11,785	398
With an allowance recorded:
Multi-family	—		—	—	—	—
Commercial real estate	—		—	—	—	—
Commercial and industrial	—		—	—	—	—
Construction	—		—	—	—	—
Total commercial loans	—		—	—	—	—
Residential mortgage and consumer	14,811		15,422	1,718	14,338	332
Total:
Multi-family	13,929		13,977	—	14,318	121
Commercial real estate	32,499		42,362	—	32,910	284
Commercial and industrial	1,317		1,896	—	1,343	28
Construction	—		—	—	—	—
Total commercial loans	47,745		58,235	—	48,571	433
Residential mortgage and consumer	27,688		32,252	1,718	26,123	730
Total impaired loans	$	75,433	90,487	1,718	74,694	1,163

Table of Contents



	December 31, 2016
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
	(In thousands)
With no related allowance:
Multi-family	$	248	248	—	252	20
Commercial real estate	5,962		9,265	—	5,790	301
Commercial and industrial	3,370		3,972	—	3,953	169
Construction	—		—	—	—	—
Total commercial loans	9,580		13,485	—	9,995	490
Residential mortgage and consumer	11,030		14,565	—	9,899	483
With an allowance recorded:
Multi-family	—		—	—	—	—
Commercial real estate	—		—	—	—	—
Commercial and industrial	—		—	—	—	—
Construction	—		—	—	—	—
Total commercial loans	—		—	—	—	—
Residential mortgage and consumer	13,794		14,382	1,601	13,689	479
Total:
Multi-family	248		248	—	252	20
Commercial real estate	5,962		9,265	—	5,790	301
Commercial and industrial	3,370		3,972	—	3,953	169
Construction	—		—	—	—	—
Total commercial loans	9,580		13,485	—	9,995	490
Residential mortgage and consumer	24,824		28,947	1,601	23,588	962
Total impaired loans	$	34,404	42,432	1,601	33,583	1,452

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.

Table of Contents

The following tables present the total TDR loans at September 30, 2017 and December 31, 2016. There were four residential PCI loans that were classified as TDRs for the period ended September 30, 2017. There were three residential PCI loans that were classified as TDRs for the period ended December 31, 2016.



	September 30, 2017
	Accrual			Non-accrual			Total
	# of loans	Amount		# of loans	Amount		# of loans	Amount
	(Dollars in thousands)
Commercial loans:
Commercial real estate	2	$	171	4	$	17,930	6	$	18,101
Commercial and industrial	—	—		1	1,316		1	1,316
Total commercial loans	2	171		5	19,246		7	19,417
Residential mortgage and consumer	56	13,187		64	14,502		120	27,689
Total	58	$	13,358	69	$	33,748	127	$	47,106



	December 31, 2016
	Accrual			Non-accrual			Total
	# of loans	Amount		# of loans	Amount		# of loans	Amount
	(Dollars in thousands)
Commercial loans:
Multi-family	—	$	—	1	$	248	1	$	248
Commercial real estate	2	352		4	3,240		6	3,592
Commercial and industrial	—	—		2	1,688		2	1,688
Total commercial loans	2	352		7	5,176		9	5,528
Residential mortgage and consumer	40	9,093		61	15,731		101	24,824
Total	42	$	9,445	68	$	20,907	110	$	30,352

The following tables present information about TDRs that occurred during the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,
	2017					2016
	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	$	468	$	468
Residential mortgage and consumer	6	1,673		1,673		6	1,051		1,051

Table of Contents



	Nine Months Ended September 30,
	2017					2016
	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	3	$	20,225	$	15,787	5	$	1,039	$	1,039
Residential mortgage and consumer	23	4,924		4,824		20	2,600		2,600

Post-modification recorded investment represents the net book balance immediately following modification.

All TDRs are impaired loans, which are individually evaluated for impairment, as discussed above. Collateral dependent impaired loans classified as TDRs were written down to the estimated fair value of the collateral. There were no charge-offs for collateral dependent TDRs during the three months ended September 30, 2017 and 2016. There were charge-offs of $4.5 million for collateral dependent TDRs during the nine months ended September 30, 2017. There were no charge-offs for collateral dependent TDRs during the nine months ended September 30, 2016. The allowance for loan losses associated with the TDRs presented in the above tables totaled $1.7 million and $1.6 million at September 30, 2017 and December 31, 2016, respectively.

Residential mortgage loan modifications generally involve the reduction in loan interest rate and extension of loan maturity dates and also may include step up interest rates in their modified terms which will impact their weighted average yield in the future. All residential loans deemed to be TDRs were modified to reflect a reduction in interest rates to current market rates. The commercial loan modifications which qualified as TDRs had their maturity extended.

The following tables present information about pre and post modification interest yield for troubled debt restructurings which occurred during the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,
	2017					2016
	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	4.93	%	4.89	%
Residential mortgage and consumer	6	3.75	%	2.98	%	6	6.30	%	2.86	%



	Nine Months Ended September 30,
	2017					2016
	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	3	4.67	%	4.67	%	5	4.38	%	4.50	%
Residential mortgage and consumer	23	4.15	%	3.39	%	20	6.31	%	3.42	%

Payment defaults for loans modified as a TDR in the previous 12 months to September 30, 2017 consisted of 8 residential loans and 1 commercial real estate loan with a recorded investment of $1.0 million and $160,000, respectively, at September 30, 2017. Payment defaults for loans modified as a TDR in the previous 12 months to September 30, 2016 consisted of 6 residential loans, 4 commercial real estate loans and 1 construction loan with a recorded investment of $1.0 million, $588,000 and $132,000, respectively, at September 30, 2016.

Non Performing Loan Sales

For the nine months ended September 30, 2017, the Company sold $48.1 million of non-performing commercial real estate and multi-family loans, resulting in no charge-off recorded through the allowance. There were no sales of non-performing loans during the nine months ended September 30, 2016.

Table of Contents

6. Deposits

Deposits are summarized as follows:



	September 30, 2017		December 31, 2016
	(In thousands)
Non-interest bearing:
Checking accounts	$	2,263,198	2,173,493
Interest bearing:
Checking accounts	4,633,096		3,916,208
Money market deposits	4,298,171		4,150,583
Savings	2,049,509		2,092,989
Certificates of deposit	3,632,495		2,947,560
Total deposits	$	16,876,469	15,280,833

7. Goodwill and Other Intangible Assets

The following table summarizes net intangible assets and goodwill at September 30, 2017 and December 31, 2016:



	September 30, 2017		December 31, 2016
	(In thousands)
Mortgage servicing rights	$	14,536	14,889
Core deposit premiums	6,597		8,451
Other	863		928
Total other intangible assets	21,996		24,268
Goodwill	77,571		77,571
Goodwill and intangible assets	$	99,567	101,839

The following table summarizes other intangible assets as of September 30, 2017 and December 31, 2016:



	Gross Intangible Asset		Accumulated Amortization		Valuation Allowance		Net Intangible Assets
	(In thousands)
September 30, 2017
Mortgage servicing rights	$	23,237	(8,579	)	(122	)	14,536
Core deposit premiums	25,058		(18,461	)	—		6,597
Other	1,150		(287	)	—		863
Total other intangible assets	$	49,445	(27,327	)	(122	)	21,996

December 31, 2016
Mortgage servicing rights	$	24,340	(9,286	)	(165	)	14,889
Core deposit premiums	25,058		(16,607	)	—		8,451
Other	1,150		(222	)	—		928
Total other intangible assets	$	50,548	(26,115	)	(165	)	24,268

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 $1.91 billion and $1.98 billion at September 30, 2017 and December 31, 2016, respectively, all of which relate to residential mortgage loans. At September 30, 2017 and December 31, 2016, the servicing asset, included in intangible assets, had an estimated fair value of $15.6 million and $16.2 million, respectively. At September 30, 2017, fair value was based on expected future cash flows considering a weighted

Table of Contents

average discount rate of 14.24%, a weighted average constant prepayment rate on mortgages of 9.78% and a weighted average life of 6.8 years, see Note 12 for additional details.

Core deposit premiums are amortized using an accelerated method and having a weighted average amortization period of 10 years.

8. Equity Incentive Plan

At the annual meeting held on June 9, 2015, stockholders of the Company approved the Investors Bancorp, Inc. 2015 Equity Incentive Plan (“2015 Plan”) which provides for the issuance or delivery of up to 30,881,296 shares (13,234,841 restricted stock awards and 17,646,455 stock options) of Investors Bancorp, Inc. common stock.

Restricted shares granted under the 2015 Plan vest in equal installments, over the service period generally ranging from 5 to 7 years beginning one year from the date of grant. Additionally, certain restricted shares awarded are performance vesting awards, which may or may not vest depending upon the attainment of certain corporate financial targets. The vesting of restricted stock may accelerate in accordance with the terms of the 2015 Plan. The product of the number of shares granted and the grant date closing market price of the Company’s common stock determine the fair value of restricted shares under the 2015 Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period. For the nine months ended September 30, 2017 and September 30, 2016, the Company granted 430,000 and 271,890 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. Upon exercise of vested options, management expects to draw on treasury stock as the source for shares. For the nine months ended September 30, 2017 and September 30, 2016, the Company granted 83,800 and 201,440 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:



	Nine Months Ended September 30,
	2017			2016
Weighted average expected life (in years)	6.50			7.00
Weighted average risk-free rate of return	2.04		%	1.67		%
Weighted average volatility	24.73		%	24.05		%
Dividend yield	2.44		%	1.93		%
Weighted average fair value of options granted	$	3.00		$	2.80
Total stock options granted	83,800			201,440

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards in accordance with ASC 718, “Compensation-Stock Compensation”. The Company estimates the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision.

Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718), requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits are classified as an operating activity. In accordance with SEC Staff Accounting Bulletin No. 107, the Company classifies share-based compensation for employees and outside directors within “compensation and fringe benefits” in the consolidated statements of income to correspond with the same line item as the cash compensation paid.

Table of Contents

The following table presents the share based compensation expense for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2017		2016	2017	2016
	(Dollars in thousands)
Stock option expense	$	1,469	1,508	4,373	4,498
Restricted stock expense	3,471		3,954	10,594	10,658
Total share based compensation expense	$	4,940	5,462	14,967	15,156

The following is a summary of the Company’s stock option activity and related information for the nine months ended September 30, 2017:



	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2016	13,165,333			$11.74	8.2		$29,101
Granted	83,800		13.12		9.8
Exercised	(936,881	)	8.24		3.8
Forfeited	(495,248	)	12.53
Expired	(1,429	)	12.54
Outstanding at September 30, 2017	11,815,575			$11.99	7.7		$19,453
Exercisable at September 30, 2017	4,603,154			$11.16	6.9		$11,426

Expected future expense relating to the non-vested options outstanding as of September 30, 2017 is $22.3 million over a weighted average period of 4.0 years.

The following is a summary of the status of the Company’s restricted shares as of September 30, 2017 and changes therein during the nine months ended:



	Number of Shares Awarded		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016	5,876,491		$	12.51
Granted	430,000		14.39
Vested	(960,564	)	12.51
Forfeited	(268,163	)	12.50
Outstanding and non vested at September 30, 2017	5,077,764		$	12.67

Expected future expense relating to the non-vested restricted shares outstanding as of September 30, 2017 is $56.6 million over a weighted average period of 4.1 years.

9. Net Periodic Benefit Plan Expense

The Company has an Executive Supplemental Retirement Wage Replacement Plan (“Wage Replacement Plan”) and the Supplemental Retirement Plan (“SERP I”) (collectively, the “SERPs”). The Wage Replacement Plan is a nonqualified, defined benefit plan which provides benefits to certain executives as designated by the Compensation Committee of the Board of Directors. More specifically, the Wage Replacement Plan was designed to provide participants with a normal retirement benefit equal to an annual benefit of 60% of the participant’s highest annual base salary and cash incentive (over a consecutive 36-month period within the participant’s credited service period) reduced by the sum of the benefits provided under the Pentegra Defined Benefit Plan for Financial Institutions (“Pentegra DB Plan”) and SERP I.

Effective as of the close of business of December 31, 2016, the Wage Replacement Plan was amended to freeze future benefit accruals, and for certain participants, structure the benefits payable attributable solely to the participants’ 2016 year of service to vest over a two-year period such that the participants would have a right to 50% of their accrued benefits attributable to their 2016 year of service as of December 31, 2016, which will become 100% vested provided the participants remained continuously employed through and including December 31, 2017.

Table of Contents

The Supplemental ESOP compensates certain executives (as designated by the Compensation Committee of the Board of Directors) participating in the ESOP whose contributions are limited by the Internal Revenue Code. The Company also maintains the Amended and Restated Director Retirement Plan (“Directors’ Plan”) for certain directors, which is a nonqualified, defined benefit plan. The Directors’ Plan was frozen on November 21, 2006 such that no new benefits accrued under, and no new directors were eligible to participate in the plan. The Wage Replacement Plan, Supplemental ESOP and the Directors’ Plan are unfunded and the costs of the plans are recognized over the period that services are provided.

The components of net periodic benefit cost for the Directors’ Plan and the Wage Replacement Plan are as follows:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2017		2016	2017	2016
	(In thousands)
Service cost	$	371	894	1,114	2,681
Interest cost	379		474	1,135	1,422
Amortization of:
Prior service cost	—		—	—	—
Net loss	115		514	344	1,542
Total net periodic benefit cost	$	865	1,882	2,593	5,645

Due to the unfunded nature of the SERPs and the Directors’ Plan, no contributions have been made or were expected to be made during the nine months ended September 30, 2017.

The Company also maintains the Pentegra DB Plan. Since it is a multiemployer 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 has been amended to freeze the plan. Freezing the plan eliminates all future benefit accruals and each participants frozen accrued benefit will be determined as of December 31, 2016 and no further benefits will accrue beyond such date. There was no contribution required during the nine months ended September 30, 2017. We anticipate contributing funds to the plan to meet any minimum funding requirements for the remainder of 2017.

10. Derivatives and Hedging Activities

The Company uses various financial instruments, including derivatives, to manage its exposure to interest rate risk. Certain derivatives are designated as hedging instruments in a qualifying hedge accounting relationship (fair value or cash flow hedge). As of September 30, 2017 and December 31, 2016, the Company has cash flow hedges with aggregate notional amounts of $900.0 million and $400.0 million, respectively.

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. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is initially recorded in other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company did not have any derivatives outstanding prior to the third quarter of 2016.

During the three and nine months ended September 30, 2017 and the three months ended September 30, 2016, such derivatives were used to hedge the variability in cash flows associated with certain short term wholesale funding transactions. During the three and nine months ended September 30, 2017 and the three months ended September 30, 2016, the Company did not record any hedge ineffectiveness. The ineffective portion of the change in fair value of the derivatives would be recognized directly in earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $2.0 million will be reclassified as an increase to interest expense.

Table of Contents

Fair Values of Derivative Instruments on the Balance Sheet

The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016:



	Asset Derivatives						Liability Derivatives
	September 30, 2017 ⁽¹⁾			December 31, 2016			September 30, 2017 ⁽¹⁾			December 31, 2016
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)
Derivatives designated as hedging instruments:
Interest Rate Swaps	Other assets	$	—	Other assets	$	12,550	Other liabilities	$	467	Other liabilities	$	—
Total derivatives designated as hedging instruments		$	—		$	12,550		$	467		$	—

(1) In accordance with the Chicago Mercantile Exchange (“CME”) rulebook changes effective January 3, 2017, the fair value is inclusive of accrued interest and variation margin posted by the CME.

The CME amended their rules to legally characterize the variation margin posted between counterparties to be classified as settlements of the outstanding derivative contracts instead of cash collateral. The Company adopted the new rule on a prospective basis to include the accrued interest and variation margin posted by the CME in the fair value.

Effect of Derivative Instruments on the Income Statement

The following table presents the effect of the Company’s derivative financial instruments on the Consolidated Statement of Income as of September 30, 2017 and 2016.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
Cash Flow Hedges - Interest rate swaps	(In thousands)
Amount of gain (loss) recognized in other comprehensive income	$	(201	)	(1,109	)	(5,472	)	(1,109	)
Amount of gain (loss) reclassified from accumulated other comprehensive loss to interest expense	(1,147		)	(42	)	(3,233	)	(42	)
Amount of gain (loss) recognized in other non-interest income (ineffective portion)	—			—		—		—

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 September 30, 2017 and December 31, 2016. The net amounts of derivative liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Company’s Consolidated Balance Sheets.



					Gross Amounts Not Offset
	Gross Amounts Recognized		Gross Amounts Offset	Net Amounts Presented	Financial Instruments	Cash Collateral Posted	Net Amount
	(In thousands)
September 30, 2017
Liabilities:
Interest Rate Swaps ⁽¹⁾	$	467	—	467	—	—	467
Total	$	467	—	467	—	—	467

December 31, 2016
Assets:
Interest Rate Swaps	$	12,550	—	12,550	—	12,550	—
Total	$	12,550	—	12,550	—	12,550	—

(1) In accordance with the CME rulebook changes effective January 3, 2017, the gross amounts recognized are inclusive of accrued interest and variation margin posted by the CME.

Credit-risk-related Contingent Features

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

The Company has minimum collateral posting thresholds with certain of its derivative counterparties and posts collateral on a daily basis as required by the clearing house against the Company’s obligations, as required by these agreements.

Table of Contents

11. Comprehensive Income

The components of comprehensive income, both gross and net of tax, are as follows:



	Three Months Ended September 30,
	2017					2016
	Gross		Tax		Net	Gross		Tax		Net
	(Dollars in thousands)
Net income	$	74,282	(28,437	)	45,845	71,728		(21,878	)	49,850
Other comprehensive income (loss):
Change in funded status of retirement obligations	140		(58	)	82	537		(219	)	318
Unrealized gains (losses) on securities available-for-sale	869		(344	)	525	(2,708	)	1,053		(1,655	)
Accretion of loss on securities reclassified to held to maturity from available for sale	305		(125	)	180	472		(193	)	279
Reclassification adjustment for security gains included in net income	—		—		—	(72	)	29		(43	)
Other-than-temporary impairment accretion on debt securities	315		(129	)	186	533		(218	)	315
Net gains (losses) on derivatives arising during the period	946		(386	)	560	(1,067	)	436		(631	)
Total other comprehensive income (loss)	2,575		(1,042	)	1,533	(2,305	)	888		(1,417	)
Total comprehensive income	$	76,857	(29,479	)	47,378	69,423		(20,990	)	48,433



	Nine Months Ended September 30,
	2017							2016
	Gross			Tax		Net		Gross		Tax		Net
	(Dollars in thousands)
Net income	$	211,654		(80,156	)	131,498		215,619		(75,958	)	139,661
Other comprehensive income:
Change in funded status of retirement obligations	422			(173	)	249		1,610		(658	)	952
Unrealized gains on securities available-for-sale	8,320			(3,115	)	5,205		19,652		(7,686	)	11,966
Accretion of loss on securities reclassified to held to maturity from available for sale	981			(401	)	580		1,433		(586	)	847
Reclassification adjustment for security gains included in net income	(1,275		)	510		(765	)	(2,264	)	906		(1,358	)
Other-than-temporary impairment accretion on debt securities	1,302			(532	)	770		1,179		(481	)	698
Net losses on derivatives arising during the period	(2,239		)	915		(1,324	)	(1,067	)	436		(631	)
Total other comprehensive income	7,511			(2,796	)	4,715		20,543		(8,069	)	12,474
Total comprehensive income	$	219,165		(82,952	)	136,213		236,162		(84,027	)	152,135

Table of Contents

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the nine months ended September 30, 2017 and 2016:



	Change in funded status of retirement obligations			Accretion of loss on securities reclassified to held to maturity		Unrealized (losses) gains on 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, 2016	$	(4,895	)	(1,988	)	(12,271	)	(12,870	)	7,424		(24,600	)
Net change	249			580		4,440		770		(1,324	)	4,715
Balance - September 30, 2017	$	(4,646	)	(1,408	)	(7,831	)	(12,100	)	6,100		(19,885	)

Balance - December 31, 2015	$	(12,366	)	(3,080	)	1,371		(13,750	)	—		(27,825	)
Net change	952			847		10,608		698		(631	)	12,474
Balance - September 30, 2016	$	(11,414	)	(2,233	)	11,979		(13,052	)	(631	)	(15,351	)

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
	(In thousands)
Reclassification adjustment for gains included in net income
Gain on security transactions, net	$	—		(72	)	(1,275	)	(2,264	)
Change in funded status of retirement obligations
Amortization of net loss	120			537		359		1,610
Interest Expense
Reclassification adjustment for unrealized losses on derivatives	1,147			42		3,233		42
Total before tax	1,267			507		2,317		(612	)
Income tax (expense) benefit	(497		)	(190	)	(887	)	248
Net of tax	$	770		317		1,430		(364	)

12. Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights (“MSR”), loans receivable and other real estate owned. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets. Additionally, in connection with our mortgage banking activities we have commitments to fund loans held-for-sale and commitments to sell loans, which are considered free-standing derivative instruments, the fair values of which are not material to our financial condition or results of operations.

In accordance with Financial Accounting Standards Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures”, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:


•	Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.


•	Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

Table of Contents

•

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

Our available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income (loss) in stockholders’ equity. The fair values of available-for-sale securities are based on quoted market prices (Level 1), where available. The Company obtains one price for each security primarily from a third-party pricing service (pricing service), which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available observable market information. For securities not actively traded (Level 2), the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and non-binding broker quotes. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service.

Derivatives

Derivatives are reported at fair value utilizing Level 2 inputs. The fair values of interest rate swap agreements are based on a valuation model that uses primarily observable inputs, such as benchmark yield curves and interest rate spreads.

The following tables provide the level of valuation assumptions used to determine the carrying value of our assets and liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016.



	Carrying Value at September 30, 2017
	Total		Level 1	Level 2	Level 3
	(In thousands)
Assets:
Securities available for sale:
Equity securities	$	5,646	5,646	—	—
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	653,994		—	653,994	—
Federal National Mortgage Association	1,249,110		—	1,249,110	—
Government National Mortgage Association	40,679		—	40,679	—
Total mortgage-backed securities available-for-sale	1,943,783		—	1,943,783	—
Total securities available-for-sale	$	1,949,429	5,646	1,943,783	—
Liabilities:
Derivative financial instruments (1)	$	467	—	467	—

(1) In accordance with the CME rulebook changes effective January 3, 2017, the gross amounts recognized are inclusive of accrued interest and variation margin posted by the CME.

Table of Contents



	Carrying Value at December 31, 2016
	Total		Level 1	Level 2	Level 3
	(In thousands)
Assets:
Securities available for sale:
Equity securities	$	6,660	6,660	—	—
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	598,439		—	598,439	—
Federal National Mortgage Association	1,008,587		—	1,008,587	—
Government National Mortgage Association	46,747		—	46,747	—
Total mortgage-backed securities available-for-sale	1,653,773		—	1,653,773	—
Total securities available-for-sale	$	1,660,433	6,660	1,653,773	—
Derivative financial instruments	$	12,550	—	12,550	—

There have been no changes in the methodologies used at September 30, 2017 from December 31, 2016, and there were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2017.

There were no Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2017.

Assets Measured at Fair Value on a Non-Recurring Basis

Mortgage Servicing Rights, Net

Mortgage servicing rights are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At September 30, 2017, the fair value model used prepayment speeds ranging from 1.74% to 26.28% and a discount rate of 14.24% for the valuation of the mortgage servicing rights. At December 31, 2016, the fair value model used prepayment speeds ranging from 3.15% to 24.18% and a discount rate of 14.27% 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 the fair value of collateral based on independent third-party appraisals 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. At September 30, 2017, appraisals were discounted in a range of 0%-25% for estimated costs to sell. 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%-25% for estimated costs to sell. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If the estimated fair value of the asset declines, a writedown is recorded through expense. The valuation

Table of Contents

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.

The following tables provide the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2017 and December 31, 2016. For the three months ended September 30, 2017 there was no change to the carrying value of other real estate owned and loans held for sale measured at fair value on a non-recurring basis. For the year ended December 31, 2016, there was no change to carrying value of other real estate owned measured at fair value on a non-recurring basis.



					Carrying Value at September 30, 2017
Security Type	Valuation Technique	Unobservable Input	Range	Weighted Average	Total		Level 1	Level 2	Level 3
					(In thousands)
MSR, net	Estimated cash flow	Prepayment speeds	1.74% - 26.28%	9.78%	$	12,372	—	—	12,372
Impaired loans	Market comparable	Lack of marketability	1.0% - 45.0%	31.72%	4,496		—	—	4,496
					$	16,868	—	—	16,868



					Carrying Value at December 31, 2016
Security Type	Valuation Technique	Unobservable Input	Range	Weighted Average	Total		Level 1	Level 2	Level 3
					(In thousands)
MSR, net	Estimated cash flow	Prepayment speeds	3.15% - 24.18%	9.84%	$	12,877	—	—	12,877
Impaired loans	Estimated cash flow	Lack of marketability and probability of default	22.0% - 29.0%	26.00%	1,403		—	—	1,403
Loans held for sale	Market comparable	Lack of marketability	2.5% - 4.5%	3.45%	313		—	—	313
					$	14,593	—	—	14,593

Other Fair Value Disclosures

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

Cash and Cash Equivalents

For cash and due from banks, the carrying amount approximates fair value.

Securities Held-to-Maturity

Our held-to-maturity portfolio, consisting primarily of mortgage-backed securities and other debt securities for which we have a positive intent and ability to hold to maturity, is carried at amortized cost. Management utilizes various inputs to determine the fair value of the portfolio. The Company obtains one price for each security primarily from a third-party pricing service, which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and non-binding broker quotes. In the absence of quoted prices and in an illiquid market, valuation techniques, which require inputs that are both significant to the fair value measurement and

Table of Contents

unobservable, are used to determine fair value of the investment. Valuation techniques are based on various assumptions, including, but not limited to forecasted cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, and liquidation values. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service.

FHLB Stock

The fair value of the Federal Home Loan Bank of New York (“FHLB”) stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock and the Bank is required to hold a minimum investment based upon the balance of mortgage related assets held by the member.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.

The fair value of performing loans is calculated by discounting forecasted cash flows through the estimated maturity date using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. Fair value for significant non-performing loans is based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Deposit Liabilities

The fair value of deposits with no stated maturity, such as savings, checking accounts and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates which approximate currently offered for deposits of similar remaining maturities.

Borrowings

The fair value of borrowings are based on securities dealers’ estimated fair values, when available, or estimated using discounted contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.

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.



	September 30, 2017
	Carrying		Estimated Fair Value
	value		Total	Level 1	Level 2	Level 3
	(In thousands)
Financial assets:
Cash and cash equivalents	$	413,322	413,322	413,322	—	—
Securities available-for-sale	1,949,429		1,949,429	5,646	1,943,783	—
Securities held-to-maturity	1,733,751		1,769,179	—	1,689,531	79,648
Stock in FHLB	232,814		232,814	232,814	—	—
Loans held for sale	6,975		6,975	—	6,975	—
Net loans	19,707,157		19,776,775	—	—	19,776,775
Financial liabilities:
Deposits, other than time deposits	$	13,243,974	13,243,974	13,243,974	—	—
Time deposits	3,632,495		3,619,747	—	3,619,747	—
Borrowed funds	4,484,869		4,488,058	—	4,488,058	—



	December 31, 2016
	Carrying		Estimated Fair Value
	value		Total	Level 1	Level 2	Level 3
	(In thousands)
Financial assets:
Cash and cash equivalents	$	164,178	164,178	164,178	—	—
Securities available-for-sale	1,660,433		1,660,433	6,660	1,653,773	—
Securities held-to-maturity	1,755,556		1,782,801	—	1,703,559	79,242
Stock in FHLB	237,878		237,878	237,878	—	—
Loans held for sale	38,298		38,298	—	38,298	—
Net loans	18,569,855		18,391,018	—	—	18,391,018
Financial liabilities:
Deposits, other than time deposits	$	12,333,273	12,333,273	12,333,273	—	—
Time deposits	2,947,560		2,938,137	—	2,938,137	—
Borrowed funds	4,546,251		4,545,745	—	4,545,745	—

Limitations

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

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.

Table of Contents

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.

13. Recent Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 718): Targeted Improvements to Accounting for Hedging Activities”. The purpose of this guidance is to better align a company’s financial reporting for hedging relationships with the company’s risk management activities by expanding strategies that qualify for hedge accounting, modifying the presentation of certain hedging relationships in the financial statements and simplifying the application of hedge accounting in certain situations. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any interim or annual period before the effective date. ASU 2017-12 will be applied using a modified retrospective approach through a cumulative-effect adjustment related to the elimination of the separate measurement of ineffectiveness to the balance of accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year in which the amendments in this update are adopted. The amended presentation and disclosure guidance is required only prospectively. The Company is currently assessing the impact that the new guidance will have on the Company’s Consolidated Financial Statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”. This update provides guidance about changes to terms or conditions of a share-based payment award which would require modification accounting. In particular, an entity is required to account for the effects of a modification if the fair value, vesting condition or the equity/liability classification of the modified award is not the same immediately before and after a change to the terms and conditions of the award. ASU No. 2017-09 is effective on a prospective basis for fiscal years beginning after December 15, 2017, with early adoption permitted. Due to prospective application, the new guidance is not expected to have an impact on the Company’s Consolidated Financial Statements upon adoption.

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. The amendments in this update require the premium on callable debt securities to be amortized to the earliest call date rather than the maturity date; however, securities held at a discount continue to be amortized to maturity. The amendments apply only to debt securities purchased at a premium that are callable at fixed prices and on preset dates. The amendments more closely align interest income recorded on debt securities held at a premium or discount with the economics of the underlying instrument. ASU No. 2017-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires that companies disaggregate the service cost component from other components of net benefit cost. This update calls for companies that offer postretirement benefits to present the service cost, which is the amount an employer has to set aside each quarter or fiscal year to cover the benefits, in the same line item with other current employee compensation costs. Other components of net benefit cost will be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. ASU No. 2017-07 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the provisions of ASU No. 2017-07 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU simplifies subsequent measurement of goodwill by eliminating Step 2 of the impairment test while retaining the option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment testing dates beginning after January 1, 2017. The Company is currently evaluating the provisions of ASU No. 2017-04 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)”, which amends certain paragraphs in the ASC to give effect to announcements made by the SEC observer at two recent Emerging Issues Task Force meetings. SEC registrants are required to reasonably estimate the impact that adoption of the standards on revenue recognition, leases, and measurement of credit losses on financial instruments is expected to have on financial statements. If such estimate is indeterminate, registrants

Table of Contents

should consider providing additional qualitative disclosures to assess the effect on financial statements as a result of adopting of these new standards. There is no effective date or transition requirements for this standard.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this ASU provide a practical way to determine when a set of assets and activities is not a business. The screen provided in this ASU requires that when all or substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. The amendments also provide other considerations to determine whether a set is a business if the screen is not met. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the provisions of ASU No. 2017-01 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This ASU addresses the recognition of current and deferred taxes for an intra-entity asset transfer and amends current U.S. GAAP by eliminating the exception for intra-entity transfers of assets other than inventory to defer such recognition until sale to an outside party. ASU No. 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been made available for issuance. The Company is currently evaluating the provisions of ASU No. 2016-16 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, a new standard which addresses diversity in practice related to eight specific cash flow issues: debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities will apply the standard’s provisions using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the provisions of ASU No. 2016-15 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of the amended guidance including the potential impact on its Consolidated Financial Statements. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Upon adoption, any impact to the allowance for credit losses - currently allowance for loan and lease losses - will have an offsetting impact on retained earnings.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date for leases classified as operating leases as well as finance leases. The update also requires new quantitative disclosures related to leases in the Consolidated Financial Statements. There are practical expedients in this update that relate to leases that commenced

Table of Contents

before the effective date, initial direct costs and the use of hindsight to extend or terminate a lease or purchase the leased asset. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company continues to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope. As such, no conclusions have yet been reached regarding the potential impact on adoption on the Company’s Consolidated Financial Statements and regulatory capital and risk-weighted assets; however, the Company does not expect the amendment to have a material impact on its results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendment by means of a cumulative effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company intends to adopt the accounting standard during the first quarter of 2018, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity. Due to the Company’s proportionately small portfolio of equity securities, the update is not expected to have a material impact on the Company’s results of operations.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and early adoption is permitted. Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” ; ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” and ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” These amendments are intended to improve and clarify the implementation guidance of ASU 2014-09 and have the same effective date as the original standard. The Company will adopt the guidance in the first quarter of 2018. As the guidance does not apply to revenue associated with financial instruments, including loans, leases, securities and derivatives that are accounted for under other U.S. GAAP, the new revenue recognition standard does not have a material impact on the Company’s Consolidated Financial Statements. The Company’s implementation efforts have included the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts. While we have not identified any material changes related to the timing or amount of revenue recognition, the Company will continue to evaluate the need for additional disclosures.

14. Subsequent Events

As defined in FASB ASC 855, “Subsequent Events”, subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Financial statements are considered issued when they are widely distributed to stockholders and other financial statement users for general use and reliance in a form and format that complies with U.S. GAAP.

On October 26, 2017, the Company declared a cash dividend of $0.09 per share. The $0.09 dividend per share will be paid to stockholders on November 24, 2017, with a record date of November 10, 2017.

Table of Contents



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, 2016 and additional risk factors included in Part II, Item 1A of this quarterly report.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events except as may be required by law.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies.

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

The allowance for loan losses has been determined in accordance with U.S. 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.

Table of Contents

accurately estimate expected losses as of period end. Additionally, management assesses the loss emergence period for the expected losses of each loan segment and adjusts each historical loss factor accordingly. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first full or partial loan charge-off), and is determined based upon a study of the Company’s past loss experience by loan segment. The loss factors may also be adjusted to account for qualitative or environmental factors that are likely to cause estimated credit losses inherent in the portfolio to differ from historical loss experience. This evaluation is based on among other things, loan and delinquency trends, general economic conditions, credit concentrations, industry trends and lending and credit management policies and procedures, but is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be different than the allowance for loan losses we have established which could have a material negative effect on our financial results.

Purchased Credit-Impaired (“PCI”) loans, are loans acquired at a discount due, in part, to credit quality. PCI loans are accounted for in accordance with Accounting Standards Codification (“ASC”) Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses). The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loans and would result in an increase in yield on a prospective basis. The Company analyzes the actual cash flow versus the forecasts and any adjustments to credit loss expectations are made based on actual loss recognized as well as changes in the probability of default. For a period in which cash flows aren’t reforecasted, prior period’s estimated cash flows are adjusted to reflect the actual cash received and credit events that occurred during the current reporting period.

On a quarterly basis, management reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. Loans determined to be impaired are evaluated for potential loss exposure. Any shortfall results in a recommendation of a specific allowance or charge-off if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair value of the collateral is based on the most current appraised value available for real property or a discounted cash flow analysis on a business. This appraised value for real property is then reduced to reflect estimated liquidation expenses.

Table of Contents

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.

Deferred Income Taxes. The Company records income taxes in accordance with ASC 740, “Income Taxes,” as amended, using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforwards became deductible. Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.

Asset Impairment Judgments. Certain of our assets are carried on our consolidated balance sheets at cost, fair value or at the lower of cost or fair value. Valuation allowances or write-downs are established when necessary to recognize impairment of such assets. We periodically perform analyses to test for impairment of such assets. In addition to the impairment analyses related to our loans discussed above, another significant impairment analysis is the determination of whether there has been an other-than-temporary decline in the value of one or more of our securities.

Our available-for-sale portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. While the Company does not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before their anticipated recovery of the remaining carrying value, we have the ability to sell the securities. Our held-to-maturity portfolio, consisting primarily of mortgage- backed securities and other debt securities for which we have a positive intent and ability to hold to maturity, is carried at carrying value. We conduct a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. Management utilizes various inputs to determine the fair value of the portfolio. The use of different assumptions could have a positive or negative effect on our consolidated financial condition or results of operations.

If a determination is made that a debt security is other-than-temporarily impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as an other-than-temporary impairment charge in non-interest income as a component of gain (loss) on securities, net. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.

Goodwill Impairment. Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. For purposes of our goodwill impairment testing, we have identified the Bank as a single reporting unit.

In connection with our annual impairment assessment we applied the guidance in Financial Accounting Standards Board Accounting Standards Update 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The Company performed its annual impairment assessment for goodwill testing as of November 1, 2016 and concluded that it was not more likely than not that the fair value of the reporting unit is less than its carrying amount.

Table of Contents

Valuation of Mortgage Servicing Rights (“MSR”). The initial asset recognized for originated MSR is measured at fair value. The fair value of MSR is estimated by reference to current market values of similar loans sold with servicing released. MSR are amortized in proportion to and over the period of estimated net servicing income. We apply the amortization method for measurements of our MSR. MSR are assessed for impairment based on fair value at each reporting date. MSR impairment, if any, is recognized in a valuation allowance through charges to earnings as a component of fees and service charges. Subsequent increases in the fair value of impaired MSR are recognized only up to the amount of the previously recognized valuation allowance. Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected.

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 valuation allowance is then adjusted in subsequent periods to reflect changes in the measurement of impairment. All assumptions are reviewed for reasonableness on a quarterly basis to ensure they reflect current and anticipated market conditions.

The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.

Stock-Based Compensation. We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards in accordance with ASC 718, “Compensation-Stock Compensation”. We estimate the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

Derivative Financial Instruments. As part of our interest rate risk management, we may utilize, from time-to-time, derivative financial instruments which are recorded as either assets or liabilities in the consolidated balance sheets at fair value. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is initially recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives would be recognized directly in earnings.

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 market interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily loans and investment securities, and the interest we pay on our interest-bearing liabilities, primarily interest-bearing transaction accounts, time deposits, and borrowed funds. Net interest income is affected by the level 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 prepayment rates on our mortgage-related assets.

A flattening of the yield curve, caused primarily by rising short term interest rates, combined with competitive pricing in both the loan and deposit markets continue to create a challenging net interest margin environment. We continue to actively manage our interest rate risk against a backdrop of slow but positive economic growth and the potential for additional increases in short-term rates. If short-term interest rates increase, we may be subject to near-term net interest margin compression. Should

Table of Contents

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 consumer continues to benefit from lower energy costs and improved housing and employment metrics, the velocity of economic growth, domestically and internationally, remains sluggish.

Total assets increased by $1.61 billion, or 6.9%, to $24.78 billion at September 30, 2017 from $23.17 billion at December 31, 2016. Net loans increased $1.14 billion, or 6.1%, to $19.71 billion at September 30, 2017 from $18.57 billion at December 31, 2016, and securities increased by $267.2 million, or 7.8%, to $3.68 billion at September 30, 2017 from $3.42 billion at December 31, 2016. During the nine months ended September 30, 2017, we originated $999.7 million in multi-family loans, $637.3 million in commercial real estate loans, $444.2 million in commercial and industrial loans, $388.5 million in residential loans, $344.6 million in construction loans and $101.5 million in consumer and other loans. Our ongoing strategy is to continue to work towards becoming more commercial bank-like and maintain a well-diversified loan portfolio. We understand the heightened regulatory sensitivity around commercial real estate and multi-family concentration and continue to be diligent in our underwriting and credit risk monitoring of these portfolios. The overall level of non-performing loans remains low compared to our national and regional peers, however our commercial real estate concentration is above 300% of regulatory capital and therefore subjects us to heightened regulatory scrutiny.

Capital management is a key component of our business strategy. We continue to manage our capital through a combination of organic growth, stock repurchases and cash dividends. Effective capital management and prudent growth allows us to effectively leverage the capital from the Company’s public offerings, while being mindful of tangible book value for stockholders. Our capital to total assets ratio has decreased to 12.73% at September 30, 2017 from 13.48% at December 31, 2016. Since the commencement of our first stock repurchase plan in March 2015 through September 30, 2017, the Company has repurchased a total of 67.3 million shares at an average cost of $11.95 per share totaling $804.2 million. For the nine months ended September 30, 2017, stockholders’ equity was impacted by net income of $131.5 million and $27.6 million of share-based plan activity. These increases were partially offset by cash dividends of $0.24 per share totaling $74.1 million and the repurchase of 4.4 million shares of common stock for $57.8 million.

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 and strengthen our market share through planned de novo branch expansion, opportunistic acquisitions in our market area when appropriate, enhanced product offerings and investments in our people. We continue to enhance our employee training and development programs, build additional risk management and operational infrastructure and add personnel as our Company grows and our business changes. In August 2016 we entered into an informal agreement with the FDIC and NJDOBI with regard to Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) compliance matters. Our BSA/AML team continues to work diligently to enhance the risk infrastructure procedures and technology, while ensuring its long term sustainability for the Company.

Comparison of Financial Condition at September 30, 2017 and December 31, 2016

Total Assets. Total assets increased by $1.61 billion, or 6.9%, to $24.78 billion at September 30, 2017 from $23.17 billion at December 31, 2016. Net loans increased $1.14 billion, or 6.1%, to $19.71 billion at September 30, 2017 from $18.57 billion at December 31, 2016, while securities increased by $267.2 million, or 7.8%, to $3.68 billion at September 30, 2017 from $3.42 billion at December 31, 2016.

Table of Contents

Net Loans. Net loans increased by $1.14 billion, or 6.1%, to $19.71 billion at September 30, 2017 from $18.57 billion at December 31, 2016. The detail of the loan portfolio (including PCI loans) is below:



	September 30, 2017			December 31, 2016
	(Dollars in thousands)
Commercial loans:
Multi-family loans	$	7,854,759		7,459,131
Commercial real estate loans	4,667,113			4,452,300
Commercial and industrial loans	1,501,235			1,275,283
Construction loans	397,929			314,843
Total commercial loans	14,421,036			13,501,557
Residential mortgage loans	4,872,872			4,711,880
Consumer and other	655,021			597,265
Total loans	19,948,929			18,810,702
Net unamortized premiums and deferred loan costs	(11,701		)	(12,474	)
Allowance for loan losses	(230,071		)	(228,373	)
Net loans	$	19,707,157		18,569,855

During the nine months ended September 30, 2017, we originated $999.7 million in multi-family loans, $637.3 million in commercial real estate loans, $444.2 million in commercial and industrial loans, $388.5 million in residential loans, $344.6 million in construction loans and $101.5 million in consumer and other loans. This increase in loans reflects our continued focus on generating multi-family loans, commercial real estate loans and commercial and industrial loans, which was partially offset by pay downs and payoffs of loans. A significant portion of our commercial loan portfolio, including commercial and industrial loans, are secured by commercial real estate and are primarily on properties and businesses located in New Jersey and New York.

Our loan portfolio contains interest-only residential and consumer loans in which the borrower makes only interest payments for the first five, seven or ten years of the mortgage loan term. This feature will result in future increases in the borrower’s contractually required payments due to the required amortization of the principal amount after the interest-only period. These payment increases could affect the borrower’s ability to repay the loan. The amount of interest-only residential and consumer loans at September 30, 2017 and December 31, 2016 was $84.0 million and $124.2 million, respectively. From time to time and for competitive purposes, we originate commercial loans with limited interest only periods. As of September 30, 2017, we had $276.7 million commercial real estate interest only loans in our loan portfolio, of which $178.2 million have twenty-four months or less remaining on the interest only term. We maintain stricter underwriting criteria for these interest-only loans than for amortizing loans. We believe these criteria adequately control the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks.

In addition to the loans originated for our portfolio, our mortgage subsidiary, Investors Home Mortgage Co., originated residential mortgage loans for sale to third parties totaling $126.8 million during the nine months ended September 30, 2017.

Table of Contents

The following table sets forth non-accrual loans (excluding PCI loans and loans held-for-sale) on the dates indicated as well as certain asset quality ratios:



	September 30, 2017				June 30, 2017				March 31, 2017				December 31, 2016				September 30, 2016
	# of Loans	Amount			# of Loans	Amount			# of Loans	Amount			# of Loans	Amount			# of Loans	Amount
	(dollars in millions)

Multi-family	4	$	14.2		6	$	19.0		2	$	0.5		2	$	0.5		1	$	0.2
Commercial real estate	31	35.3			36	75.6			24	8.2			24	9.2			29	8.9
Commercial and industrial	6	1.9			5	1.8			4	2.2			8	4.7			6	2.3
Construction	—	—			—	—			—	—			—	—			—	—
Total commercial loans	41	51.4			47	96.4			30	10.9			34	14.4			36	11.4
Residential and consumer	417	74.3			447	81.0			470	76.2			478	79.9			481	86.1
Total non-accrual loans	458	$	125.7		494	$	177.4		500	$	87.1		512	$	94.3		517	$	97.5
Accruing troubled debt restructured loans	58	$	13.4		45	$	11.7		47	$	12.2		42	$	9.4		31	$	8.8
Non-accrual loans to total loans		0.63		%		0.89		%		0.45		%		0.50		%		0.53		%
Allowance for loan losses as a percent of non-accrual loans		183.09		%		129.68		%		265.16		%		242.24		%		229.31		%
Allowance for loan losses as a percent of total loans		1.15		%		1.16		%		1.18		%		1.21		%		1.22		%

Total non-accrual loans decreased to $125.7 million at September 30, 2017 compared to $177.4 million at June 30, 2017 and $97.5 million at September 30, 2016. Classified loans as a percent of total loans increased to 2.00% at September 30, 2017 from 1.00% at December 31, 2016. We continue to proactively and diligently work to resolve our troubled loans in light of the impact that low economic growth, rising interest rates and regional real estate market conditions may have on our portfolio. During the three months ended September 30, 2017, we sold a $48.1 million commercial loan relationship which was included in our non-accrual loans at June 30, 2017.

At September 30, 2017, there were $47.1 million of loans deemed as TDRs, of which $27.7 million were residential and consumer loans, $18.1 million were commercial real estate loans and $1.3 million were commercial and industrial loans. TDR loans of $13.4 million were classified as accruing and $33.7 million were classified as non-accrual at September 30, 2017.

In addition to non-accrual loans, we continue to monitor our portfolio for potential problem loans. Potential problem loans are defined as loans or relationships which we have concerns as to the ability of the borrower to comply with the current loan repayment terms and which may cause the loan to be placed on non-accrual status. As of September 30, 2017, the Company has deemed potential problem loans excluding PCI loans, totaling $36.2 million, which is comprised of 7 commercial real estate loans totaling $8.3 million, 10 multi-family loans totaling $15.8 million and 12 commercial and industrial loans totaling $12.1 million. Management is actively monitoring all of these loans.

The ratio of non-accrual loans to total loans was 0.63% at September 30, 2017 compared to 0.50% at December 31, 2016. The allowance for loan losses as a percentage of non-accrual loans was 183.09% at September 30, 2017 compared to 242.24% at December 31, 2016. At September 30, 2017, our allowance for loan losses as a percentage of total loans was 1.15% compared to 1.21% at December 31, 2016.

At September 30, 2017, loans meeting the Company’s definition of an impaired loan totaled $75.4 million, of which $14.8 million of impaired loans had a specific allowance for credit losses of $1.7 million and $60.6 million of impaired loans had

Table of Contents

no specific allowance for credit losses. At December 31, 2016, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans totaling $34.4 million, of which $13.8 million had a related allowance for credit losses of $1.6 million and $20.6 million had no related allowance for credit losses.

The allowance for loan losses increased by $1.7 million to $230.1 million at September 30, 2017 from $228.4 million at December 31, 2016. The increase in our allowance for loan losses from December 31, 2016 was due to the inherent credit risk in our overall portfolio, the growth of the loan portfolio, and the level of non-accrual loans and charge-offs. Future increases in the allowance for loan losses may be necessary based on the growth and composition of the loan portfolio, the level of loan delinquency and the economic conditions in our lending area.

The following table sets forth the allowance for loan losses at September 30, 2017 and December 31, 2016 allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.



	September 30, 2017				December 31, 2016
	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	$	86,939	39.4	%	$	95,561	39.6	%
Commercial real estate loans	59,683		23.4	%	52,796		23.7	%
Commercial and industrial loans	47,289		7.5	%	43,492		6.8	%
Construction loans	9,782		2.0	%	11,653		1.7	%
Residential mortgage loans	21,031		24.4	%	19,831		25.0	%
Consumer and other loans	2,937		3.3	%	2,850		3.2	%
Unallocated	2,410		—		2,190		—
Total allowance	$	230,071	100.0	%	$	228,373	100.0	%

Securities. Securities are held primarily for liquidity, interest rate risk management and long-term yield enhancement. Our Investment Policy requires that investment transactions conform to Federal and New Jersey State investment regulations. Our investments purchased may include, but are not limited to, U.S. Treasury obligations, securities issued by various Federal Agencies, State and Municipal subdivisions, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment grade corporate debt instruments, and mutual funds. In addition, the Company may invest in equity securities subject to certain limitations. Purchase decisions are based upon a thorough analysis of each security to determine it conforms to our overall asset/liability management objectives. The analysis must consider its effect on our risk-based capital measurement, prospects for yield and/or appreciation and other risk factors. Securities are classified as held-to-maturity or available-for-sale when purchased.

At September 30, 2017, our securities portfolio represented 14.9% of our total assets. Securities, in the aggregate, increased by $267.2 million, or 7.8%, to $3.68 billion at September 30, 2017 from $3.42 billion at December 31, 2016. This increase was a result of purchases partially offset by paydowns and sales.

Stock in the Federal Home Loan Bank, Bank Owned Life Insurance and Other Assets. The amount of stock we own in the FHLB decreased by $5.1 million, or 2.1%, to $232.8 million at September 30, 2017 from $237.9 million at December 31, 2016. The amount of stock we own in the FHLB is primarily related to the balance of borrowings, therefore the decrease in borrowings has an impact on FHLB stock owned. Bank owned life insurance was $154.7 million at September 30, 2017 and $161.9 million at December 31, 2016. Other assets were $6.6 million at September 30, 2017 and $14.5 million at December 31, 2016.

Deposits. At September 30, 2017, deposits totaled $16.88 billion, representing 78.0% of our total liabilities. Our deposit strategy is focused on attracting core deposits (savings, checking and money market accounts), resulting in a deposit mix of lower cost core products. We remain committed to our plan of attracting more core deposits because core deposits represent a more stable source of low cost funds and may be less sensitive to changes in market interest rates.

Table of Contents

We have a suite of commercial deposit products, designed to appeal to small and mid-sized business owners and non-profit organizations. The interest rates we pay, our maturity terms, service fees and withdrawal penalties are all reviewed on a periodic basis. Deposit rates and terms are based primarily on our current operating strategies, market rates, liquidity requirements, rates paid by competitors and growth goals. We also rely on personalized customer service, long-standing relationships with customers and an active marketing program to attract and retain deposits.

Deposits increased by $1.60 billion, or 10.4%, from $15.28 billion at December 31, 2016 to $16.88 billion at September 30, 2017. The increase is partially attributed to the deposit campaign in the third quarter. Checking accounts increased $806.6 million to $6.90 billion at September 30, 2017 from $6.09 billion at December 31, 2016. Core deposits represented approximately 78% of our total deposit portfolio at September 30, 2017 compared to 81% of our total deposit portfolio at December 31, 2016.

The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated:



	September 30, 2017				December 31, 2016
	Balance		Percent of Total Deposit		Balance		Percent of Total Deposit
	(Dollars in thousands)
Non-interest bearing:
Checking accounts	$	2,263,198	13.4	%	$	2,173,493	14.2	%
Interest-bearing:
Checking accounts	4,633,096		27.5	%	3,916,208		25.6	%
Money market deposits	4,298,171		25.5	%	4,150,583		27.2	%
Savings	2,049,509		12.1	%	2,092,989		13.7	%
Certificates of deposit	3,632,495		21.5	%	2,947,560		19.3	%
Total Deposits	$	16,876,469	100.0	%	$	15,280,833	100.0	%

Borrowed Funds. We borrow directly from the FHLB and various financial institutions. Our FHLB borrowings, frequently referred to as advances, are over collateralized by our residential and non-residential mortgage portfolios as well as qualified investment securities. Borrowed funds decreased by $61.4 million, or 1.4%, to $4.48 billion at September 30, 2017 from $4.55 billion at December 31, 2016. Short-term borrowings were reduced as a result of our deposit gathering efforts.

Stockholders’ Equity. Stockholders’ equity increased by $31.9 million to $3.16 billion at September 30, 2017 from $3.12 billion at December 31, 2016. The increase was primarily attributed to net income of $131.5 million and share-based plan activity of $27.6 million for the nine months ended September 30, 2017. These increases were partially offset by cash dividends of $0.24 per share totaling $74.1 million and the repurchase of 4.4 million shares of common stock for $57.8 million during the nine months ended September 30, 2017.

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.

Table of Contents



	Three Months Ended September 30,
	2017						2016
	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	$	379,670	$	875	0.92	%	$	129,226	$	76	0.24	%
Securities available-for-sale	1,901,626		9,674		2.03	%	1,424,338		6,315		1.77	%
Securities held-to-maturity	1,672,675		10,589		2.53	%	1,815,288		10,434		2.30	%
Net loans	19,633,388		201,069		4.10	%	17,707,883		179,234		4.05	%
Stock in FHLB	241,033		3,557		5.90	%	216,813		2,315		4.27	%
Total interest-earning assets	23,828,392		225,764		3.79	%	21,293,548		198,374		3.73	%
Non-interest-earning assets	759,203						778,244
Total assets	$	24,587,595					$	22,071,792
Interest-bearing liabilities:
Savings deposits	$	2,076,769	$	2,174	0.42	%	$	2,104,583	$	1,577	0.30	%
Interest-bearing checking	4,422,930		10,883		0.98	%	3,472,472		4,451		0.51	%
Money market accounts	4,320,547		9,478		0.88	%	3,971,339		6,605		0.67	%
Certificates of deposit	3,481,135		9,765		1.12	%	3,009,330		7,693		1.02	%
Total interest-bearing deposits	14,301,381		32,300		0.90	%	12,557,724		20,326		0.65	%
Borrowed funds	4,633,628		22,553		1.95	%	4,074,743		18,442		1.81	%
Total interest-bearing liabilities	18,935,009		54,853		1.16	%	16,632,467		38,768		0.93	%
Non-interest-bearing liabilities	2,485,667						2,316,873
Total liabilities	21,420,676						18,949,340
Stockholders’ equity	3,166,919						3,122,452
Total liabilities and stockholders’ equity	$	24,587,595					$	22,071,792
Net interest income			$	170,911					$	159,606
Net interest rate spread⁽¹⁾					2.63	%					2.80	%
Net interest-earning assets⁽²⁾	$	4,893,383					$	4,661,081
Net interest margin⁽³⁾					2.87	%					3.00	%
Ratio of interest-earning assets to total interest-bearing liabilities	1.26						1.28


(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.

Table of Contents



	Nine Months Ended September 30,
	2017						2016
	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	$	229,729	$	1,159	0.67	%	$	141,230	$	253	0.24	%
Securities available-for-sale	1,807,962		26,959		1.99	%	1,339,122		18,350		1.83	%
Securities held-to-maturity	1,689,790		33,605		2.65	%	1,856,318		32,453		2.33	%
Net loans	19,291,939		579,921		4.01	%	17,218,547		527,989		4.09	%
Stock in FHLB	247,228		9,722		5.24	%	197,958		6,396		4.31	%
Total interest-earning assets	23,266,648		651,366		3.73	%	20,753,175		585,441		3.76	%
Non-interest-earning assets	758,616						774,102
Total assets	$	24,025,264					$	21,527,277
Interest-bearing liabilities:
Savings deposits	$	2,100,918	$	6,053	0.38	%	$	2,099,960	$	4,684	0.30	%
Interest-bearing checking	4,265,758		25,712		0.80	%	3,207,413		11,198		0.47	%
Money market accounts	4,225,519		24,772		0.78	%	3,868,155		18,884		0.65	%
Certificates of deposit	3,086,739		23,283		1.01	%	3,258,702		26,873		1.10	%
Total interest-bearing deposits	13,678,934		79,820		0.78	%	12,434,230		61,639		0.66	%
Borrowed funds	4,744,701		66,460		1.87	%	3,667,473		52,328		1.90	%
Total interest-bearing liabilities	18,423,635		146,280		1.06	%	16,101,703		113,967		0.94	%
Non-interest-bearing liabilities	2,436,893						2,234,692
Total liabilities	20,860,528						18,336,395
Stockholders’ equity	3,164,736						3,190,882
Total liabilities and stockholders’ equity	$	24,025,264					$	21,527,277
Net interest income			$	505,086					$	471,474
Net interest rate spread⁽¹⁾					2.67	%					2.82	%
Net interest-earning assets⁽²⁾	$	4,843,013					$	4,651,472
Net interest margin⁽³⁾					2.89	%					3.03	%
Ratio of interest-earning assets to total interest-bearing liabilities	1.26						1.29


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


(2)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.


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

Table of Contents

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2017 and 2016

Net Income. Net income for the three months ended September 30, 2017 was $45.8 million compared to net income of $49.9 million for the three months ended September 30, 2016. Net income for the nine months ended September 30, 2017 was $131.5 million compared to net income of $139.7 million for the nine months ended September 30, 2016.

Net Interest Income. Net interest income increased by $11.3 million, or 7.1%, to $170.9 million for the three months ended September 30, 2017 from $159.6 million for the three months ended September 30, 2016. The net interest margin decreased 13 basis points to 2.87% for the three months ended September 30, 2017 from 3.00% for the three months ended September 30, 2016.

Net interest income increased by $33.6 million, or 7.1%, to $505.1 million for the nine months ended September 30, 2017 from $471.5 million for the nine months ended September 30, 2016. The net interest margin decreased 14 basis points to 2.89% for the nine months ended September 30, 2017 from 3.03% for the nine months ended September 30, 2016.

Total interest and dividend income increased by $27.4 million, or 13.8%, to $225.8 million for the three months ended September 30, 2017. Interest income on loans increased by $21.8 million, or 12.2%, to $201.1 million for the three months ended September 30, 2017 as a result of a $1.93 billion increase in the average balance of net loans to $19.63 billion, primarily attributable to growth in the commercial loan portfolio. The weighted average yield on net loans increased 5 basis points to 4.10%. Prepayment penalties, which are included in interest income, totaled $5.4 million for the three months ended September 30, 2017 compared to $4.0 million for the three months ended September 30, 2016. Interest income on all other interest-earning assets, excluding loans, increased by $5.6 million, or 29.0%, to $24.7 million for the three months ended September 30, 2017 which is attributable to a $609.3 million increase in the average balance of all other interest-earning assets, excluding loans, to $4.20 billion for the three months ended September 30, 2017. The weighted average yield on interest-earning assets, excluding loans, increased 21 basis points to 2.35%.

Total interest and dividend income increased by $65.9 million, or 11.3%, to $651.4 million for the nine months ended September 30, 2017. Interest income on loans increased by $51.9 million, or 9.8%, to $579.9 million for the nine months ended September 30, 2017 as a result of a $2.07 billion increase in the average balance of net loans to $19.29 billion, primarily attributable to growth in the commercial loan portfolio. This increase was offset by a decrease of 8 basis points in the weighted average yield on net loans to 4.01%. Prepayment penalties, which are included in interest income, totaled $11.6 million for the nine months ended September 30, 2017 compared to $14.6 million for the nine months ended September 30, 2016. Interest income on all other interest-earning assets, excluding loans, increased by $14.0 million, or 24.4%, to $71.4 million for the nine months ended September 30, 2017 which is attributable to a $440.1 million increase in the average balance of all other interest-earning assets, excluding loans, to $3.97 billion for the nine months ended September 30, 2017. The weighted average yield on interest-earning assets, excluding loans, increased 23 basis points to 2.40%.

Total interest expense increased by $16.1 million, or 41.5%, to $54.9 million for the three months ended September 30, 2017. Interest expense on interest-bearing deposits increased $12.0 million, or 58.9%, to $32.3 million for the three months ended September 30, 2017. The average balance of total interest-bearing deposits increased $1.74 billion, or 13.9%, to $14.30 billion for the three months ended September 30, 2017. In addition, the weighted average cost of interest-bearing deposits increased 25 basis points to 0.90% for the three months ended September 30, 2017. Interest expense on borrowed funds increased by $4.1 million, or 22.3%, to $22.6 million for the three months ended September 30, 2017. The average balance of borrowed funds increased $558.9 million, or 13.7%, to $4.63 billion for the three months ended September 30, 2017. In addition, the weighted average cost of borrowings increased 14 basis points to 1.95% for the three months ended September 30, 2017.

Total interest expense increased by $32.3 million, or 28.4%, to $146.3 million for the nine months ended September 30, 2017. Interest expense on interest-bearing deposits increased $18.2 million, or 29.5%, to $79.8 million for the nine months ended September 30, 2017. The average balance of total interest-bearing deposits increased $1.24 billion, or 10.0%, to $13.68 billion for the nine months ended September 30, 2017. In addition, the weighted average cost of interest-bearing deposits increased 12 basis points to 0.78% for the nine months ended September 30, 2017. Interest expense on borrowed funds increased by $14.1 million, or 27.0%, to $66.5 million for the nine months ended September 30, 2017. The average balance of borrowed funds increased $1.08 billion, or 29.4%, to $4.74 billion for the nine months ended September 30, 2017. This increase was offset by a decrease of 3 basis points in the weighted average cost of borrowings to 1.87% for the nine months ended September 30, 2017.

Provision for Loan Losses. Our provision is primarily a result of the inherent credit risk in our overall portfolio, the growth of the loan portfolio, and the level of non-accrual loans and charge-offs. For the three months ended September 30, 2017, our provision for loan losses was $1.8 million, compared to $5.0 million for the three months ended September 30, 2016. For the three months ended September 30, 2017, net charge-offs were $1.7 million, compared to $1.8 million for the three months ended September 30, 2016. Our provision for loan losses was $11.8 million for the nine months ended September 30, 2017 and $15.0

Table of Contents

million for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, net charge-offs were $10.1 million compared to $10.0 million for the nine months ended September 30, 2016.

Non-Interest Income. Total non-interest income decreased $125,000, or 1.5%, to $8.4 million for the three months ended September 30, 2017. Other income and gain on loan sales decreased $686,000 and $675,000, respectively, for the three months ended September 30, 2017. These decreases were partially offset by an increase to fees and service charges of $968,000.

Total non-interest income decreased $1.3 million, or 4.5%, to $27.4 million for the nine months ended September 30, 2017. Gain on securities transactions and other income decreased $1.8 million and $1.4 million, respectively, for the nine months ended September 30, 2017. These decreases were partially offset by an increase to fees and service charges of $2.0 million.

Non-Interest Expenses. Compared to the third quarter of 2016, total non-interest expenses increased $11.9 million, or 13.0%. For the three months ended September 30, 2017, compensation and fringe benefits increased $4.0 million due to additions to our staff to support continued growth and continued build out of our risk management and operating infrastructure. Additionally, advertising and promotional expenses increased $2.9 million due to our current advertising campaigns and professional fees increased $2.5 million largely attributable to our BSA remediation efforts. Federal insurance premiums increased $900,000 for the three months ended September 30, 2017.

Total non-interest expenses were $309.1 million for the nine months ended September 30, 2017, an increase of $39.5 million, or 14.7%, compared to the nine months ended September 30, 2016. Professional fees increased $15.6 million for the nine months ended September 30, 2017 as compared to the nine months of 2016, largely attributable to BSA remediation efforts and the continued risk management infrastructure enhancements. Compensation and fringe benefits increased $9.7 million for the nine months ended September 30, 2017 as a result of additions to our staff to support continued growth and infrastructure, especially in our risk management area, as well as normal merit increases, partially offset by lower pension costs. Advertising and promotional expenses increased $5.3 million due to our current advertising campaigns. Federal insurance premiums increased $3.3 million for the nine months ended September 30, 2017.

Income Taxes. Income tax expense for the third quarter of 2017 was $28.4 million compared to $21.9 million for the third quarter 2016. The effective tax rate was 38.3% for the three months ended September 30, 2017 and 30.5% for the three months ended September 30, 2016. Income tax expense includes the excess tax benefits related to our stock plans of $127,000 for the three months ended September 30, 2017 and $6.4 million for the three months ended September 30, 2016.

Income tax expense for the nine months ended September 30, 2017 was $80.2 million compared to $76.0 million for the nine months ended September 30, 2016. The effective tax rate was 37.9% for the nine months ended September 30, 2017 and 35.2% for the nine months ended September 30, 2016. Income tax expense includes the excess tax benefits related to our stock plans of $1.6 million for the nine months ended September 30, 2017 and $8.2 million for the nine months ended September 30, 2016.

The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income, the level of expenses not deductible for tax purposes relative to the overall level of pre-tax income, the level of income allocated to the various state and local jurisdictions where the Company operates, because tax rates differ among such jurisdictions, and the impact of any large but infrequently occurring items.

Liquidity and Capital Resources

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

At September 30, 2017, the Company had no overnight borrowings outstanding as compared to $735.0 million at December 31, 2016. The Company borrows directly from the FHLB and various financial institutions. The Company had total borrowings of $4.48 billion at September 30, 2017, a decrease of $61.4 million from $4.55 billion at December 31, 2016.

In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. At September 30, 2017, outstanding commitments to originate loans totaled $390.5 million; outstanding unused lines of credit totaled $1.15 billion; standby letters of credit totaled $25.5 million and outstanding commitments to sell loans totaled $7.0 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 $2.05 billion at September 30, 2017. Based upon historical experience management estimates that a significant portion of such deposits will remain with the Company.

Table of Contents

Regulatory Matters. In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The Final Capital Rules also revised the quantity and quality of required minimum risk-based and leverage capital requirements, consistent with the Reform Act and the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III capital standards. In doing so, the Final Capital Rules:


•	Established a new minimum Common equity tier 1 risk-based capital ratio (common equity tier 1 capital to total risk-weighted assets) of 4.5% and increased the minimum Tier 1 risk-based capital ratio from 4.0% to 6.0%, while maintaining the minimum Total risk-based capital ratio of 8.0% and the minimum Tier 1 leverage capital ratio of 4.0%.


•	Revised the rules for calculating risk-weighted assets to enhance their risk sensitivity.


•	Phased out trust preferred securities and cumulative perpetual preferred stock as Tier 1 capital.

•

Added a requirement to maintain a minimum Conservation Buffer, composed of Common equity tier 1 capital, of 2.5% of risk-weighted assets, to be applied to the new Common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio, which means that banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5% or have restrictions imposed on capital distributions and discretionary cash bonus payments.

•

Changed the definitions of capital categories for insured depository institutions for purposes of the Federal Deposit Insurance Corporation Improvement Act of 1991 prompt corrective action provisions. Under these revised definitions, to be considered well-capitalized, an insured depository institution must have a Tier 1 leverage capital ratio of at least 5.0%, a Common equity tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a Total risk-based capital ratio of at least 10.0%.

The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets became effective for the Bank and Company on January 1, 2015. The required minimum Conservation Buffer was phased in incrementally, starting at 0.625% on January 1, 2016 and increased to 1.25% on January 1, 2017. The Conservation Buffer will increase to 1.875% on January 1, 2018 and 2.5% on January 1, 2019. The rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum Conservation Buffer is not met. As of September 30, 2017 the Company and the Bank met the currently applicable Conservation Buffer of 1.25%.

As of September 30, 2017, the Bank and the Company exceeded all regulatory capital requirements as follows:



	September 30, 2017
	Actual				Minimum Capital Requirement				To be Well Capitalized under Prompt Corrective Action Provisions ⁽¹⁾
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Bank:
Tier 1 Leverage Ratio	$	2,789,460	11.38	%	$	980,717	4.00	%	$	1,225,897	5.00	%
Common equity tier 1 risk-based	2,789,460		14.29	%	1,122,734		5.75	%	1,269,177		6.50	%
Tier 1 Risk Based Capital	2,789,460		14.29	%	1,415,621		7.25	%	1,562,064		8.00	%
Total Risk-Based Capital	3,020,546		15.47	%	1,806,137		9.25	%	1,952,580		10.00	%

Company:
Tier 1 Leverage Ratio	$	3,093,359	12.61	%	$	981,113	4.00	%	n/a		n/a
Common equity tier 1 risk-based	3,093,359		15.83	%	1,123,420		5.75	%	n/a		n/a
Tier 1 Risk Based Capital	3,093,359		15.83	%	1,416,486		7.25	%	n/a		n/a
Total Risk-Based Capital	3,324,445		17.02	%	1,807,241		9.25	%	n/a		n/a

(1) Prompt corrective action provisions do not apply to the bank holding company.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

In the ordinary course of its operations, the Company engages in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in the financial statements. These transactions primarily relate to debt obligations and lending commitments.

Table of Contents

The following table shows the contractual obligations of the Company by expected payment period as of September 30, 2017:



Contractual Obligations	Total		Less than One Year	One-Two Years	Two-Three Years	More than Three Years
	(In thousands)
Debt obligations (excluding capitalized leases)	$	4,484,869	603,724	775,404	1,075,000	2,030,741
Commitments to originate and purchase loans	$	416,009	416,009	—	—	—
Commitments to sell loans	$	7,000	7,000	—	—	—

Debt obligations include borrowings from the FHLB and other borrowings. The borrowings have defined terms and, under certain circumstances, $28.1 million of the borrowings are callable at the option of the lender. Additionally, at September 30, 2017, the Company’s commitments to fund unused lines of credit totaled $1.15 billion. Commitments to originate loans, commitments to fund unused lines of credit and standby letters of credit are agreements to lend additional funds to customers as long as there have been no violations of any of the conditions established in the agreements. Commitments generally have a fixed expiration or other termination clauses which may or may not require a payment of a fee. Since some of these loan commitments are expected to expire without being drawn upon, total commitments do not necessarily represent future cash requirements.

In addition to the contractual obligations previously discussed, we have other liabilities which include capitalized and operating lease obligations. These contractual obligations as of September 30, 2017 have not changed significantly from December 31, 2016.

In the normal course of business the Company sells residential mortgage loans to third parties. These loan sales are subject to customary representations and warranties. In the event that we are found to be in breach of these representations and warranties, we may be obligated to repurchase certain of these loans.

The Company has entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. During the three months ended September 30, 2017, such derivatives were used to hedge the variability in cash flows associated with certain short term wholesale funding transactions. These derivatives had an aggregate notional amount of $900.0 million as of September 30, 2017. The fair value of the derivative as of September 30, 2017 was a liability of $467,000. In accordance with the Chicago Mercantile Exchange (“CME”) rulebook changes effective January 3, 2017, the fair value is inclusive of accrued interest and variation margin posted by the CME.

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, 2016 Annual Report on Form 10-K.



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Qualitative Analysis. We believe one significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the cash flow or re-pricing of our assets, liabilities and off-balance sheet contracts (i.e., loan commitments); the effect of loan prepayments, deposit activity; the difference in the behavior of lending and funding rates arising from the uses of different indices; and “yield curve risk” arising from changing interest rate relationships across the term structure of interest rates. Changes in market interest rates can affect net interest income by influencing the amount and rate of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and the mix and flow of deposits.

The general objective of our interest rate risk management process is to determine the appropriate level of risk given our business model and then manage that risk in a manner consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset Liability Committee, which consists of senior management and executives, evaluates the interest rate risk inherent in our balance sheet, our operating environment and capital and liquidity requirements and may modify our lending, investing and deposit gathering strategies accordingly. On a quarterly basis, our Board

Table of Contents

of Directors reviews the Asset Liability Committee report, the aforementioned activities and strategies, the estimated effect of those strategies on our net interest margin and the estimated effect that changes in market interest rates may have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.

We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. At September 30, 2017, 24% of our total loan portfolio was comprised of residential mortgages, of which approximately 35% was in variable rate products, while 65% 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. 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 relatively low risk securities, which generally have shorter average lives and lower yields compared to longer term securities.

We use an internally managed and implemented industry standard asset/liability model to complete our quarterly interest rate risk reports. The model projects net interest income based on various interest rate scenarios and horizons. We use a combination of analyses to monitor our exposure to changes in interest rates.

Our net interest income sensitivity analysis determines the relative balance between the repricing of assets and liabilities over various horizons. This asset and liability analysis includes expected cash flows from loans and securities, using forecasted prepayment rates, reinvestment rates, as well as contractual and forecasted liability cash flows. This analysis identifies mismatches in the timing of asset and liability cash flows but does not necessarily provide an accurate indicator of interest rate risk because the assumptions used in the analysis may not reflect the actual response of cash flows to market interest rate changes. 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 immediately changed interest rate scenarios. In calculating changes in EVE, for the various scenarios we forecast loan and securities prepayment rates, reinvestment rates and deposit decay rates.

Quantitative Analysis. The table below sets forth, as of September 30, 2017, the estimated changes in our EVE and our net interest income that would result from the designated changes in interest rates. Such changes to interest rates are calculated as an immediate and permanent change for the purposes of computing EVE and a gradual change over a one year period for the purposes of computing net interest income. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. The following table reflects management’s expectations of the changes in EVE and net interest income for an interest rate decrease of 100 basis points and increase of 200 basis points.



	EVE (1) (2)						Net Interest Income (3)
Change in Interest Rates (basis points)	Estimated EVE		Estimated Increase (Decrease)				Estimated Net Interest Income		Estimated Increase (Decrease)
Change in Interest Rates (basis points)	Estimated EVE		Amount		Percent		Estimated Net Interest Income		Amount		Percent
	(Dollars in thousands)
+ 200bp	$	3,993,494	(433,633	)	(9.8	)%	$	630,750	(42,169	)	(6.3	)%
0bp	$	4,427,127	—		—		$	672,919	—		—
-100bp	$	4,441,774	14,647		0.3	%	$	685,454	12,535		1.9	%


(1)	Assumes an instantaneous and parallel shift in interest rates at all maturities.


(2)	EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.


(3)	Assumes a gradual change in interest rates over a one year period at all maturities.

The table set forth above indicates at September 30, 2017, in the event of a 200 basis points increase in interest rates, we would be expected to experience a 9.8% decrease in EVE and a $42.2 million, or 6.3%, decrease in net interest income. In the event of a 100 basis points decrease in interest rates, we would be expected to experience a 0.3% increase in EVE and a $12.5 million, or 1.9%, increase in net interest income. This data does not reflect any future actions we may take in response to changes in interest rates, such as changing the mix in or growth of our assets and liabilities, which could change the results of the EVE and net interest income calculations.

As mentioned above, we use an internally developed asset liability model to compute our quarterly interest rate risk reports. Certain shortcomings are inherent in any methodology used in the above interest rate risk measurements. Modeling changes in EVE and net interest income require certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The EVE and net interest income table presented above assumes no growth and that generally the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions we may take in response to changes in interest rates. The table also assumes a particular change in interest rates is reflected uniformly across the yield curve.

Table of Contents

Accordingly, although the EVE and net interest income table provide an indication of our sensitivity to interest rate changes at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effects of changes in market interest rates on our EVE and net interest income.



ITEM 4.	CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information



ITEM 1.	LEGAL PROCEEDINGS

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



ITEM 1A.	RISK FACTORS

There have been no material changes in the “Risk Factors” disclosed in the Company’s December 31, 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission.



ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

(c) The following table reports information regarding repurchases of our common stock during the quarter ended September 30, 2017 and the stock repurchase plans approved by our Board of Directors.



Period	Total Number of Shares Purchased ⁽¹⁾⁽²⁾	Average Price paid Per Share		As part of Publicly Announced Plans or Programs	Yet to be Purchased under the Plans or Programs ⁽¹⁾
July 1, 2017 through July 31, 2017	953,100	$	13.21	953,100	19,002,476
August 1, 2017 through August 31, 2017	520,000	13.01		520,000	18,482,476
September 1, 2017 through September 30, 2017	1,045,454	13.26		1,043,000	17,439,476
Total	2,518,554	$	13.19	2,516,100	17,439,476

(1) On April 28, 2016, the Company announced its third share repurchase program, which authorized the purchase of 10% of its publicly-held outstanding shares of common stock, or approximately 31,481,189 million shares. The plan commenced upon the completion of the second repurchase plan on June 17, 2016. This program has no expiration date and has 17,439,476 shares yet to be repurchased as of September 30, 2017.

(2) 2,454 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.

Table of Contents



ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.



ITEM 5.	OTHER INFORMATION

Not applicable.

Table of Contents



ITEM 6.	EXHIBITS

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



3.1		Certificate of Incorporation of Investors Bancorp, Inc. ⁽¹⁾

3.2		Bylaws of Investors Bancorp, Inc. ⁽¹⁾

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

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

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

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document



(1)	Incorporated by reference to the Registration Statement on Form S-1 of Investors Bancorp, Inc. (Commission File no. 333-192966), originally filed with the Securities and Exchange Commission on December 20, 2013.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




		INVESTORS BANCORP, INC.

Date: November 9, 2017	By:	/s/ Kevin Cummings
		Kevin Cummings Chief Executive Officer and President (Principal Executive Officer)
	By:	/s/ Sean Burke
		Sean Burke Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)