|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Forward Looking Statements
Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which Investors Bancorp, Inc. (the “Company”) operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations or interpretations of regulations affecting financial institutions, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. Reference is made to Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2015
and additional risk factors included in Part II, Item 1A of this quarterly report.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events except as may be required by law.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies.
Allowance for Loan Losses.
The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
The allowance for loan losses has been determined in accordance with U.S. GAAP, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. Loans acquired are marked to fair value on the date of acquisition with no valuation allowance reflected in the allowance for loan losses. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan loss, the Company performs an analysis on acquired loans to determine whether or not there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in their calculation of the allowance for loan loss.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans determined to be impaired. A loan is deemed to be impaired if it is a commercial loan with an outstanding balance greater than $1.0 million and on non-accrual status, loans modified in a troubled debt restructuring ("TDR"), and other commercial loans greater than $1.0 million if management has specific information that it is probable we will not collect all amounts due under the contractual terms of the loan agreement. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk rating (if applicable) and payment history. In addition, the Company's residential portfolio is subdivided between fixed and adjustable rate loans as adjustable rate loans are deemed to be subject to more credit risk if interest rates rise. We also analyze historical loss experience using the appropriate look-back and loss emergence period. The loss factors used are based on the Company's historical loss experience over a look-back period determined to provide
the appropriate amount of data to accurately estimate expected losses as of period end. Additionally, management assesses the loss emergence period for the expected losses of each loan segment and adjusts each historical loss factor accordingly. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first full or partial loan charge-off), and is determined based upon a study of the Company's past loss experience by loan segment. The loss factors may also be adjusted to account for qualitative or environmental factors that are likely to cause estimated credit losses inherent in the portfolio to differ from historical loss experience. This evaluation is based on among other things, loan and delinquency trends, general economic conditions, geographic concentrations, lending policies and procedures and industry and peer comparisons, but is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
Purchased Credit-Impaired ("PCI") loans, are loans acquired at a discount due, in part, to credit quality. PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses). The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of the loans. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance. Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loans and would result in an increase in yield on a prospective basis. The Company analyzes the actual cash flow versus the forecasts and any adjustments to credit loss expectations are made based on actual loss recognized as well as changes in the probability of default. For a period in which cash flows aren't reforecasted, prior period's estimated cash flows are adjusted to reflect the actual cash received and credit events that occurred during the current reporting period.
On a quarterly basis, management reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. Loans determined to be impaired are evaluated for potential loss. Any shortfall results in a recommendation of a charge-off or specific allowance if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value for real property or a discounted cash flow analysis on a business. This appraised value for real property is then reduced to reflect estimated liquidation expenses. Acquired loans are marked to fair value on the date of acquisition.
The allowance contains reserves identified as unallocated. These reserves reflect management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of probable credit losses.
Our lending emphasis has been the origination of commercial real estate loans, multi-family loans, commercial and industrial loans and the origination and purchase of residential mortgage loans. We also originate home equity loans and home equity lines of credit. These activities resulted in a concentration of loans secured by real estate property and businesses located in New Jersey and New York. Based on the composition of our loan portfolio, we believe the primary risks to our loan portfolio are increases in interest rates, a decline in the general economy, and declines in real estate market values in New Jersey, New York and surrounding states. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. We consider it important to maintain the ratio of our allowance for loan losses to total loans at an adequate level given current economic conditions and the composition of the portfolio. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Negative changes to appraisal assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are carefully reviewed to determine that the resulting values reasonably reflect amounts realizable on the related loans.
For commercial real estate, multi-family and construction loans, the Company obtains an appraisal for all collateral dependent loans upon origination. An updated appraisal is obtained annually for loans rated substandard or worse with a balance of $500,000 or greater. An updated appraisal is obtained biennially for loans rated special mention with a balance of $2.0 million or greater. This is done in order to determine the specific reserve or charge off needed. As part of the allowance for loan loss process, the Company reviews each collateral dependent commercial real estate loan classified as non-accrual and/or impaired and assesses whether there has been an adverse change in the collateral value supporting the loan. The Company utilizes information from its commercial lending officers and its credit department and loan workout department's knowledge of changes in real estate conditions in our lending area to identify if possible deterioration of collateral value has occurred. Based on the severity of the changes in market conditions, management determines if an updated appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined that the deterioration of the collateral value is significant enough to warrant ordering
a new appraisal, an estimate of the downward adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated appraisal is received.
For homogeneous residential mortgage loans, the Company's policy is to obtain an appraisal upon the origination of the loan and an updated appraisal in the event a loan becomes 90 days delinquent. Thereafter, the appraisal is updated every two years if the loan remains in non-performing status and the foreclosure process has not been completed. Management adjusts the appraised value of residential loans to reflect estimated selling costs and estimated declines in the real estate market.
Management believes the potential risk for outdated appraisals for impaired and other non-performing loans has been mitigated due to the fact that the loans are individually assessed to determine that the loan's carrying value is not in excess of the fair value of the collateral. Loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt.
Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if the current economic environment deteriorates. Management uses relevant information available; however, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Deferred Income Taxes
. The Company records income taxes in accordance with ASC 740, “
Income Taxes
,” as amended, using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforwards became deductible. Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.
Asset Impairment Judgments.
Certain of our assets are carried on our consolidated balance sheets at cost, fair value or at the lower of cost or fair value. Valuation allowances or write-downs are established when necessary to recognize impairment of such assets. We periodically perform analyses to test for impairment of such assets. In addition to the impairment analyses related to our loans discussed above, another significant impairment analysis is the determination of whether there has been an other-than-temporary decline in the value of one or more of our securities.
Our available-for-sale portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders' equity. While the Company does not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before their anticipated recovery of the remaining carrying value, we have the ability to sell the securities. Our held-to-maturity portfolio, consisting primarily of mortgage- backed securities and other debt securities for which we have a positive intent and ability to hold to maturity, is carried at carrying value. We conduct a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. Management utilizes various inputs to determine the fair value of the portfolio. The use of different assumptions could have a positive or negative effect on our consolidated financial condition or results of operations.
If a determination is made that a debt security is other-than-temporarily impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as an other-than-temporary impairment charge in non-interest income as a component of gain (loss) on securities, net. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.
Goodwill Impairment.
Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. Goodwill was last evaluated on November 1, 2015. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. For purposes of our goodwill impairment testing, we have identified a single reporting unit.
In connection with our annual impairment assessment we applied the guidance in FASB ASU 2011-08,
Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment,
which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill
impairment test. At
September 30, 2016
, our qualitative assessment concluded that it was not more likely than not that the fair value of the reporting unit is less than its carrying amount and, therefore, the two-step goodwill impairment test was not required.
Valuation of Mortgage Servicing Rights ("MSR").
The initial asset recognized for originated MSR is measured at fair value. The fair value of MSR is estimated by reference to current market values of similar loans sold with servicing released. MSR are amortized in proportion to and over the period of estimated net servicing income. We apply the amortization method for measurements of our MSR. MSR are assessed for impairment based on fair value at each reporting date. MSR impairment, if any, is recognized in a valuation allowance through charges to earnings as a component of fees and service charges. Subsequent increases in the fair value of impaired MSR are recognized only up to the amount of the previously recognized valuation allowance.
The estimated fair value of the MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market's perception of future interest rate movements. The valuation allowance is then adjusted in subsequent periods to reflect changes in the measurement of impairment. All assumptions are reviewed for reasonableness on a quarterly basis to ensure they reflect current and anticipated market conditions.
The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.
Stock-Based Compensation.
We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards in accordance with ASC 718, “
Compensation-Stock Compensation
”. We estimate the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black- Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets. The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.
Executive Summary
Since the Company's initial public offering in 2005, we have transitioned from a wholesale thrift business to a retail commercial bank. This transition has been primarily accomplished by increasing the amount of our commercial loans and core deposits (savings, checking and money market accounts.) Our transformation can be attributed to a number of factors, including organic growth, de novo branches, bank and branch acquisitions, as well as expanding our product offerings. We believe the attractive markets we operate in, namely, New Jersey and the greater New York metropolitan area, will continue to provide us with growth opportunities. Our primary focus is to build and develop profitable customer relationships across all lines of business, both consumer and commercial.
Our results of operations depend primarily on net interest income, which is directly impacted by the market interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily loans and investment securities, and the interest we pay on our interest-bearing liabilities, primarily interest-bearing transaction accounts, time deposits, and borrowed funds. Net interest income is affected by the level of interest rates, the shape of the market yield curve, the timing of the placement and the repricing of interest-earning assets and interest-bearing liabilities on our balance sheet, and the prepayment rate on our mortgage-related assets.
The persistent low interest rate environment over the past several years and a flattening of the yield curve have resulted in sustained pressure on our net interest margin. Interest-earning assets continue to be originated or re-priced at yields lower than the overall portfolio, and competitive pricing remains strong in both the loan and deposit markets. But despite the overall flattening of the treasury yield curve, we have been able to generally offset net interest margin compression through interest earning asset growth. We continue to actively manage our interest rate risk against a backdrop of slow but positive economic growth and the
potential for additional increases in short-term rates before the end of 2016. If short-term interest rates increase, and the yield curve flattens further, we may be subject to near-term net interest margin compression. Should the treasury yield curve steepen, we may experience an improvement in net interest income, particularly if short-term interest rates remain unchanged.
Our results of operations are also significantly affected by general economic conditions. While the consumer continues to benefit from lower energy costs and improved housing and employment metrics, the velocity of economic growth, domestically and internationally, remains sluggish. The overall level of non-performing loans remains low compared to our national and regional peers. We attribute this to our conservative underwriting standards, our diligence in resolving our problem loans as well as the unseasoned nature of our loan portfolio.
We continue to grow and transform the composition of our balance sheet. Total assets increased by
$1.65 billion
, or
7.9%
, to
$22.54 billion
at
September 30, 2016
, from
$20.89 billion
at
December 31, 2015
. Net loans increased
$1.41 billion
, or
8.4%
, to
$18.07 billion
at
September 30, 2016
from
$16.66 billion
at
December 31, 2015
, and securities increased by
$157.4 million
, or
5.0%
, to
$3.31 billion
at
September 30, 2016
from
$3.15 billion
at
December 31, 2015
. During the
nine
months ended
September 30, 2016
, we originated
$1.74 billion
in multi-family loans,
$670.0 million
in commercial and industrial loans,
$442.0 million
in commercial real estate loans,
$395.0 million
in residential loans,
$335.7 million
in construction loans and
$235.7 million
in consumer and other loans. Our strategic objective is to become more commercial bank like and maintain a well-diversified loan portfolio. We understand the heightened regulatory sensitivity around commercial real estate and multi-family concentration and continue to be diligent in our underwriting and credit risk monitoring of these portfolios.
On May 3, 2016, we announced the signing of a definitive merger agreement with The Bank of Princeton. As of June 30, 2016, The Bank of Princeton had assets of $1.0 billion, loans of $809 million and deposits of $812 million and operated 10 branches in New Jersey and 3 in the Philadelphia market. The transaction is subject to regulatory approvals and customary closing conditions.
Capital management is a key component of our business strategy. We continue to manage our capital through a combination of organic growth, acquisitions, stock repurchases and cash dividends. Effective capital management and prudent growth allowed us to effectively leverage the capital from the Company’s public offerings, while being mindful of tangible book value for stockholders. Our capital to total assets ratio has decreased to
13.82%
at
September 30, 2016
from
15.85%
at
December 31, 2015
. In March 2015, we commenced the first stock repurchase plan since our second step for 5% of our outstanding shares of common stock, or approximately 17.9 million shares. This repurchase plan was completed in June 2015 when we announced our second share repurchase program which authorizes the repurchase of an additional 10% of outstanding shares of common stock, or approximately 34.8 million shares. On April 28, 2016, the Company announced its third share repurchase program, which authorized the purchase of an additional 10% of its publicly-held outstanding shares of common stock, or approximately 31.5 million shares. This plan commenced immediately upon the completion of the second repurchase plan in June 2016. Stockholders' equity was impacted for the
nine
months ended
September 30, 2016
by the repurchase of
29.2 million
shares of common stock for
$337.5 million
as well as cash dividends of
$0.18
per share totaling
$57.6 million
. On October 27, 2016, our Board of Directors declared a cash dividend of $0.08 per share, an increase of $0.02 from the prior quarter. The dividend increase reinforces the Company's confidence in its business model and its plan to evolve into a more commercial focused bank.
We will continue to execute our business strategies with a focus on prudent and opportunistic growth while producing financial results that will create value for our stockholders. We intend to continue to grow our business and strengthen our market share through planned de novo branching, enhanced product offerings, investments in our people and opportunistic acquisitions in our market area. During 2016, we continue to enhance our employee training and development programs, build additional risk management and operational infrastructure and add key personnel as our company grows and our business changes. We will continue to enhance stockholder value through our strategic capital initiatives, including growth both organically and through acquisitions, stock buybacks and dividend payments.
Comparison of Financial Condition at
September 30, 2016
and
December 31, 2015
Total Assets.
Total assets increased by
$1.65 billion
, or
7.9%
, to
$22.54 billion
at
September 30, 2016
from
$20.89 billion
at
December 31, 2015
. Net loans increased
$1.41 billion
, or
8.4%
to
$18.07 billion
at
September 30, 2016
from
$16.66 billion
at
December 31, 2015
, while securities increased by
$157.4 million
, or
5.0%
, to
$3.31 billion
at
September 30, 2016
from
$3.15 billion
at
December 31, 2015
.
Net Loans.
Net loans increased by
$1.41 billion
, or
8.4%
, to
$18.07 billion
at
September 30, 2016
from
$16.66 billion
at
December 31, 2015
. The detail of the loan portfolio (including PCI loans) is below:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
Commercial Loans:
|
|
|
|
Multi-family loans
|
$
|
7,360,733
|
|
|
$
|
6,255,903
|
|
Commercial real estate loans
|
4,103,250
|
|
|
3,829,099
|
|
Commercial and industrial loans
|
1,191,234
|
|
|
1,044,386
|
|
Construction loans
|
277,155
|
|
|
225,843
|
|
Total commercial loans
|
12,932,372
|
|
|
11,355,231
|
|
Residential mortgage loans
|
4,798,386
|
|
|
5,039,543
|
|
Consumer and other
|
576,402
|
|
|
496,556
|
|
Total Loans
|
18,307,160
|
|
|
16,891,330
|
|
Net unamortized premiums and deferred loan costs
|
(15,428
|
)
|
|
(11,692
|
)
|
Allowance for loan losses
|
(223,550
|
)
|
|
(218,505
|
)
|
Net loans
|
$
|
18,068,182
|
|
|
$
|
16,661,133
|
|
During the
nine
months ended
September 30, 2016
, we originated
$1.74 billion
in multi-family loans,
$670.0 million
in commercial and industrial loans,
$442.0 million
in commercial real estate loans,
$395.0 million
in residential loans,
$335.7 million
in construction loans and
$235.7 million
in consumer and other loans. This increase in loans reflects our continued focus on generating multi-family loans, commercial real estate loans and commercial and industrial loans, which was partially offset by pay downs and payoffs of loans. Our loans are primarily on properties and businesses located in New Jersey and New York.
Our loan portfolio contains interest-only one-to four-family mortgage loans in which the borrower makes only interest payments for the first five, seven or ten years of the mortgage loan term. This feature will result in future increases in the borrower’s contractually required payments due to the required amortization of the principal amount after the interest-only period. These payment increases could affect the borrower’s ability to repay the loan. The amount of interest-only one-to four-family mortgage loans at
September 30, 2016
and
December 31, 2015
was
$136.8 million
and
$172.3 million
, respectively. From time to time and for competitive purposes, we originate commercial loans with limited interest only periods. As of
September 30, 2016
, we had
$631.3 million
commercial real estate interest only loans in our loan portfolio, of which
$498.7 million
have twenty-four months or less remaining on the interest only term. We maintained stricter underwriting criteria for these interest-only loans than for amortizing loans. We believe these criteria adequately control the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks.
In addition to the loans originated for our portfolio, our mortgage subsidiary, Investors Home Mortgage Co., originated $166.5 million during the
nine
months ended
September 30, 2016
in residential mortgage loans that were sold to third party investors.
The following table sets forth non-accrual loans and accruing past due loans (excluding PCI loans and loans held-for-sale) on the dates indicated as well as certain asset quality ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
June 30, 2016
|
|
March 31, 2016
|
|
December 31, 2015
|
|
September 30, 2015
|
|
# of Loans
|
Amount
|
|
# of Loans
|
Amount
|
|
# of Loans
|
Amount
|
|
# of Loans
|
Amount
|
|
# of Loans
|
Amount
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
1
|
|
$
|
0.2
|
|
|
2
|
|
$
|
1.2
|
|
|
3
|
|
$
|
2.9
|
|
|
4
|
|
$
|
3.5
|
|
|
4
|
|
$
|
3.0
|
|
Commercial real estate
|
29
|
|
8.9
|
|
|
33
|
|
11.7
|
|
|
35
|
|
10.3
|
|
|
37
|
|
10.8
|
|
|
40
|
|
13.8
|
|
Commercial and industrial
|
6
|
|
2.3
|
|
|
6
|
|
0.7
|
|
|
10
|
|
5.6
|
|
|
17
|
|
9.2
|
|
|
9
|
|
6.5
|
|
Construction
|
—
|
|
—
|
|
|
1
|
|
0.2
|
|
|
3
|
|
0.5
|
|
|
4
|
|
0.8
|
|
|
5
|
|
1.0
|
|
Total commercial loans
|
36
|
|
11.4
|
|
|
42
|
|
13.8
|
|
|
51
|
|
19.3
|
|
|
62
|
|
24.3
|
|
|
58
|
|
24.3
|
|
Residential and consumer
|
481
|
|
86.1
|
|
|
471
|
|
86.5
|
|
|
488
|
|
85.9
|
|
|
500
|
|
91.1
|
|
|
506
|
|
99.8
|
|
Total non-accrual loans
|
517
|
|
$
|
97.5
|
|
|
513
|
|
$
|
100.3
|
|
|
539
|
|
$
|
105.2
|
|
|
562
|
|
$
|
115.4
|
|
|
564
|
|
$
|
124.1
|
|
Accruing troubled debt restructured loans
|
31
|
|
$
|
8.8
|
|
|
29
|
|
$
|
12.1
|
|
|
30
|
|
$
|
10.7
|
|
|
39
|
|
$
|
22.5
|
|
|
38
|
|
$
|
25.2
|
|
Non-accrual loans to total loans
|
|
0.53
|
%
|
|
|
0.57
|
%
|
|
|
0.61
|
%
|
|
|
0.68
|
%
|
|
|
0.76
|
%
|
Allowance for loan loss as a percent of non-accrual loans
|
|
229.31
|
%
|
|
|
219.60
|
%
|
|
|
205.83
|
%
|
|
|
189.30
|
%
|
|
|
175.97
|
%
|
Allowance for loan loss as a percent of total loans
|
|
1.22
|
%
|
|
|
1.25
|
%
|
|
|
1.26
|
%
|
|
|
1.29
|
%
|
|
|
1.33
|
%
|
Total non-accrual loans
decreased
to
$97.5 million
at
September 30, 2016
compared to
$100.3 million
at June 30, 2016 and
$124.1 million
at
September 30, 2015
. We continue to diligently resolve our troubled loans, however it takes a long period of time to resolve residential credits in our lending area. At
September 30, 2016
, there were
$30.0 million
of loans deemed as troubled debt restructurings, of which
$23.5 million
were residential and consumer loans,
$4.1 million
were commercial real estate loans, and
$2.4 million
were commercial and industrial loans. Troubled debt restructured loans in the amount of
$8.8 million
were classified as accruing and
$21.2 million
were classified as non-accrual at
September 30, 2016
.
In addition to non-accrual loans, we continue to monitor our portfolio for potential problem loans. Potential problem loans are defined as loans about which we have concerns as to the ability of the borrower to comply with the current loan repayment terms and which may cause the loan to be placed on non-accrual status. As of
September 30, 2016
, the Company has deemed potential problem loans excluding PCI loans, totaling
$47.7 million
, which comprised of
16
commercial real estate loans totaling
$40.7 million
,
4
multi-family loans totaling
$5.2 million
and
11
commercial and industrial loans totaling
$1.8 million
. Included in potential problem loans is a single relationship totaling $21.0 million. The properties are single tenant and well-collateralized with strong loan to value ratios. Management is actively monitoring all these loans.
The ratio of non-accrual loans to total loans was
0.53%
at
September 30, 2016
compared to
0.68%
at
December 31, 2015
. The allowance for loan losses as a percentage of non-accrual loans was
229.31%
at
September 30, 2016
compared to
189.30%
at
December 31, 2015
. At
September 30, 2016
, our allowance for loan losses as a percentage of total loans was
1.22%
compared to
1.29%
at
December 31, 2015
.
At
September 30, 2016
, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans totaling
$33.0 million
, of which
$12.7 million
of impaired loans had a specific allowance for credit losses of
$1.5 million
and
$20.3 million
of impaired loans had no specific allowance for credit losses. At
December 31, 2015
, loans meeting the Company’s
definition of an impaired loan were primarily collateral dependent loans totaling
$57.0 million
, of which
$19.1 million
had a related allowance for credit losses of
$4.2 million
and
$37.8 million
had no related allowance for credit losses.
The allowance for loan losses increased by
$5.1 million
to
$223.6 million
at
September 30, 2016
from
$218.5 million
at
December 31, 2015
. The increase in our allowance for loan losses is due to the growth of the loan portfolio particularly the inherent credit risk associated with commercial real estate lending as well as commercial and industrial loans. Future increases in the allowance for loan losses may be necessary based on the growth and composition of the loan portfolio, the level of loan delinquency and the economic conditions in our lending area. At
September 30, 2016
, our allowance for loan loss as a percent of total loans was
1.22%
.
The following table sets forth the allowance for loan losses at
September 30, 2016
and
December 31, 2015
allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Allowance for
Loan Losses
|
|
Percent of Loans
in Each Category
to Total Loans
|
|
Allowance for
Loan Losses
|
|
Percent of Loans
in Each Category
to Total Loans
|
|
(Dollars in thousands)
|
End of period allocated to:
|
|
|
|
|
|
|
|
Multi-family loans
|
$
|
93,420
|
|
|
40.21
|
%
|
|
$
|
88,223
|
|
|
37.04
|
%
|
Commercial real estate loans
|
49,981
|
|
|
22.41
|
%
|
|
46,999
|
|
|
22.67
|
%
|
Commercial and industrial loans
|
44,108
|
|
|
6.51
|
%
|
|
40,585
|
|
|
6.18
|
%
|
Construction loans
|
9,988
|
|
|
1.51
|
%
|
|
6,794
|
|
|
1.34
|
%
|
Residential mortgage loans
|
21,358
|
|
|
26.21
|
%
|
|
31,443
|
|
|
29.83
|
%
|
Consumer and other loans
|
2,877
|
|
|
3.15
|
%
|
|
3,155
|
|
|
2.94
|
%
|
Unallocated
|
1,818
|
|
|
—
|
|
|
1,306
|
|
|
—
|
|
Total allowance
|
$
|
223,550
|
|
|
100.00
|
%
|
|
$
|
218,505
|
|
|
100.00
|
%
|
Securities.
Securities are held primarily for liquidity, interest rate risk management and long-term yield enhancement. Our Investment Policy requires that investment transactions conform to Federal and New Jersey State investment regulations. Our investments purchased may include, but are not limited to, U.S. Treasury obligations, securities issued by various Federal Agencies, State and Municipal subdivisions, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment grade corporate debt instruments, and mutual funds. In addition, Investors Bancorp may invest in equity securities subject to certain limitations. Purchase decisions are based upon a thorough analysis of each security to determine it conforms to our overall asset/liability management objectives. The analysis must consider its effect on our risk-based capital measurement, prospects for yield and/or appreciation and other risk factors. Securities are classified as held-to-maturity or available-for-sale when purchased.
At
September 30, 2016
, our securities portfolio represented
14.7%
of our total assets. Securities, in the aggregate,
increased
by
$157.4 million
, or
5.0%
, to
$3.31 billion
at
September 30, 2016
from
$3.15 billion
at
December 31, 2015
. This increase was a result of purchases partially offset by paydowns and sales.
Stock in the Federal Home Loan Bank, Bank Owned Life Insurance and Other Assets.
The amount of stock we own in the FHLB
increase
d by
$44.1 million
, or
24.7%
, to
$222.6 million
at
September 30, 2016
from
$178.4 million
at
December 31, 2015
. The amount of stock we own in the FHLB is primarily related to the balance of borrowings, therefore the
increase
in borrowings has an impact on FHLB stock owned. Bank owned life insurance was
$161.2 million
at
September 30, 2016
and
$159.2 million
at
December 31, 2015
. Other assets were
$3.7 million
at
September 30, 2016
and
$4.7 million
at
December 31, 2015
.
Deposits.
At
September 30, 2016
, deposits totaled
$14.95 billion
, representing
77.0%
of our total liabilities. Our deposit strategy is focused on attracting core deposits (savings, checking and money market accounts), resulting in a deposit mix of lower cost core products. We remain committed to our plan of attracting more core deposits because core deposits represent a more stable source of low cost funds and may be less sensitive to changes in market interest rates.
We have a suite of commercial deposit products, designed to appeal to small business owners and non-profit organizations. The interest rates we pay, our maturity terms, service fees and withdrawal penalties are all reviewed on a periodic basis. Deposit
rates and terms are based primarily on our current operating strategies, market rates, liquidity requirements, rates paid by competitors and growth goals. We also rely on personalized customer service, long-standing relationships with customers, involvement in the communities we serve and an active marketing program to attract and retain deposits.
Deposits
increase
d by
$888.1 million
, or
6.3%
, from
$14.06 billion
at
December 31, 2015
to
$14.95 billion
at
September 30, 2016
. Checking accounts
increase
d
$1.24 billion
to
$5.88 billion
at
September 30, 2016
from
$4.64 billion
at
December 31, 2015
. Core deposits represented approximately
80%
of our total deposit portfolio at
September 30, 2016
, compared to
76%
of our total deposit portfolio at
December 31, 2015
.
The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Balance
|
Percent of Total Deposit
|
|
Balance
|
Percent of Total Deposit
|
|
(Dollars in thousands)
|
Checking accounts
|
$
|
5,875,559
|
|
39
|
%
|
|
$
|
4,636,025
|
|
33
|
%
|
Money market deposits
|
4,038,561
|
|
27
|
%
|
|
3,861,317
|
|
27
|
%
|
Savings
|
2,093,421
|
|
14
|
%
|
|
2,150,004
|
|
15
|
%
|
Total core deposits
|
12,007,541
|
|
80
|
%
|
|
10,647,346
|
|
76
|
%
|
Certificates of deposit
|
2,944,201
|
|
20
|
%
|
|
3,416,310
|
|
24
|
%
|
Total Deposits
|
$
|
14,951,742
|
|
100
|
%
|
|
$
|
14,063,656
|
|
100
|
%
|
Borrowed Funds.
We borrow directly from the FHLB and various financial institutions. Our FHLB borrowings, frequently referred to as advances, are over collateralized by our residential and non-residential mortgage portfolios as well as qualified investment securities. Borrowed funds
increase
d by
$940.6 million
, or
28.8%
, to
$4.20 billion
at
September 30, 2016
from
$3.26 billion
at
December 31, 2015
to help fund the continued growth of the loan portfolio.
Stockholders’ Equity.
Stockholders' equity
decrease
d by
$196.6 million
to
$3.12 billion
at
September 30, 2016
from
$3.31 billion
at
December 31, 2015
. The
decrease
is primarily attributed to the repurchase of
29.2 million
shares of common stock for
$337.5 million
as well as cash dividends of
$0.18
per share totaling
$57.6 million
for the
nine
months ended
September 30, 2016
. These decreases were offset by net income of
$131.4 million
for the
nine
months ended
September 30, 2016
.
Analysis of Net Interest Income
Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities.
Average Balances and Yields.
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, however interest receivable on these loans have been fully reserved for and not included in interest income. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
|
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
129,226
|
|
|
$
|
76
|
|
|
0.24
|
%
|
|
$
|
224,276
|
|
|
$
|
68
|
|
|
0.12
|
%
|
Securities available-for-sale
|
|
1,424,338
|
|
|
6,315
|
|
|
1.77
|
%
|
|
1,274,256
|
|
|
5,759
|
|
|
1.81
|
%
|
Securities held-to-maturity
|
|
1,815,288
|
|
|
10,434
|
|
|
2.30
|
%
|
|
1,772,043
|
|
|
9,983
|
|
|
2.25
|
%
|
Net loans
|
|
17,707,883
|
|
|
179,234
|
|
|
4.05
|
%
|
|
15,843,434
|
|
|
169,216
|
|
|
4.27
|
%
|
Stock in FHLB
|
|
216,813
|
|
|
2,315
|
|
|
4.27
|
%
|
|
177,616
|
|
|
1,871
|
|
|
4.21
|
%
|
Total interest-earning assets
|
|
21,293,548
|
|
|
198,374
|
|
|
3.73
|
%
|
|
19,291,625
|
|
|
186,897
|
|
|
3.88
|
%
|
Non-interest-earning assets
|
|
778,244
|
|
|
|
|
|
|
773,225
|
|
|
|
|
|
Total assets
|
|
$
|
22,071,792
|
|
|
|
|
|
|
$
|
20,064,850
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
2,104,583
|
|
|
$
|
2,463
|
|
|
0.47
|
%
|
|
$
|
2,178,877
|
|
|
$
|
1,732
|
|
|
0.32
|
%
|
Interest-bearing checking
|
|
3,472,472
|
|
|
4,451
|
|
|
0.51
|
%
|
|
2,632,445
|
|
|
2,255
|
|
|
0.34
|
%
|
Money market accounts
|
|
3,971,339
|
|
|
5,719
|
|
|
0.58
|
%
|
|
3,571,504
|
|
|
5,602
|
|
|
0.63
|
%
|
Certificates of deposit
|
|
3,009,330
|
|
|
7,693
|
|
|
1.02
|
%
|
|
3,283,262
|
|
|
9,075
|
|
|
1.11
|
%
|
Total interest-bearing deposits
|
|
12,557,724
|
|
|
20,326
|
|
|
0.65
|
%
|
|
11,666,088
|
|
|
18,664
|
|
|
0.64
|
%
|
Borrowed funds
|
|
4,074,743
|
|
|
18,442
|
|
|
1.81
|
%
|
|
3,245,751
|
|
|
16,959
|
|
|
2.09
|
%
|
Total interest-bearing liabilities
|
|
16,632,467
|
|
|
38,768
|
|
|
0.93
|
%
|
|
14,911,839
|
|
|
35,623
|
|
|
0.96
|
%
|
Non-interest-bearing liabilities
|
|
2,316,873
|
|
|
|
|
|
|
1,766,491
|
|
|
|
|
|
Total liabilities
|
|
18,949,340
|
|
|
|
|
|
|
16,678,330
|
|
|
|
|
|
Stockholders’ equity
|
|
3,122,452
|
|
|
|
|
|
|
3,386,520
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
22,071,792
|
|
|
|
|
|
|
$
|
20,064,850
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
159,606
|
|
|
|
|
|
|
$
|
151,274
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
2.80
|
%
|
|
|
|
|
|
2.92
|
%
|
Net interest-earning assets(2)
|
|
$
|
4,661,081
|
|
|
|
|
|
|
$
|
4,379,786
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
3.00
|
%
|
|
|
|
|
|
3.14
|
%
|
Ratio of interest-earning assets to total interest-bearing liabilities
|
|
1.28
|
|
|
|
|
|
|
1.29
|
|
|
|
|
|
|
|
(1)
|
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
|
(2)
|
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|
|
(3)
|
Net interest margin represents net interest income divided by average total interest-earning assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Average
Yield/
Rate
|
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
141,230
|
|
|
$
|
253
|
|
|
0.24
|
%
|
|
$
|
203,336
|
|
|
$
|
124
|
|
|
0.08
|
%
|
Securities available-for-sale
|
|
1,339,122
|
|
|
18,350
|
|
|
1.83
|
%
|
|
1,236,175
|
|
|
16,676
|
|
|
1.80
|
%
|
Securities held-to-maturity
|
|
1,856,318
|
|
|
32,453
|
|
|
2.33
|
%
|
|
1,668,829
|
|
|
27,956
|
|
|
2.23
|
%
|
Net loans
|
|
17,218,547
|
|
|
527,989
|
|
|
4.09
|
%
|
|
15,515,391
|
|
|
493,783
|
|
|
4.24
|
%
|
Stock in FHLB
|
|
197,958
|
|
|
6,396
|
|
|
4.31
|
%
|
|
171,194
|
|
|
5,046
|
|
|
3.93
|
%
|
Total interest-earning assets
|
|
20,753,175
|
|
|
585,441
|
|
|
3.76
|
%
|
|
18,794,925
|
|
|
543,585
|
|
|
3.86
|
%
|
Non-interest-earning assets
|
|
774,102
|
|
|
|
|
|
|
768,739
|
|
|
|
|
|
Total assets
|
|
$
|
21,527,277
|
|
|
|
|
|
|
$
|
19,563,664
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
2,099,960
|
|
|
$
|
7,184
|
|
|
0.46
|
%
|
|
$
|
2,275,965
|
|
|
$
|
5,026
|
|
|
0.29
|
%
|
Interest-bearing checking
|
|
3,207,413
|
|
|
11,198
|
|
|
0.47
|
%
|
|
2,694,033
|
|
|
7,110
|
|
|
0.35
|
%
|
Money market accounts
|
|
3,868,155
|
|
|
16,384
|
|
|
0.56
|
%
|
|
3,504,684
|
|
|
17,538
|
|
|
0.67
|
%
|
Certificates of deposit
|
|
3,258,702
|
|
|
26,873
|
|
|
1.10
|
%
|
|
2,824,479
|
|
|
21,438
|
|
|
1.01
|
%
|
Total interest-bearing deposits
|
|
12,434,230
|
|
|
61,639
|
|
|
0.66
|
%
|
|
11,299,161
|
|
|
51,112
|
|
|
0.60
|
%
|
Borrowed funds
|
|
3,667,473
|
|
|
52,328
|
|
|
1.90
|
%
|
|
3,141,608
|
|
|
48,205
|
|
|
2.05
|
%
|
Total interest-bearing liabilities
|
|
16,101,703
|
|
|
113,967
|
|
|
0.94
|
%
|
|
14,440,769
|
|
|
99,317
|
|
|
0.92
|
%
|
Non-interest-bearing liabilities
|
|
2,234,692
|
|
|
|
|
|
|
1,637,013
|
|
|
|
|
|
Total liabilities
|
|
18,336,395
|
|
|
|
|
|
|
16,077,782
|
|
|
|
|
|
Stockholders’ equity
|
|
3,190,882
|
|
|
|
|
|
|
3,485,882
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
21,527,277
|
|
|
|
|
|
|
$
|
19,563,664
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
471,474
|
|
|
|
|
|
|
$
|
444,268
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
2.82
|
%
|
|
|
|
|
|
2.94
|
%
|
Net interest-earning assets(2)
|
|
$
|
4,651,472
|
|
|
|
|
|
|
$
|
4,354,156
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
3.03
|
%
|
|
|
|
|
|
3.15
|
%
|
Ratio of interest-earning assets to total interest-bearing liabilities
|
|
1.29
|
|
|
|
|
|
|
1.30
|
|
|
|
|
|
Comparison of Operating Results for the
Three and Nine
Months Ended
September 30, 2016
and
2015
Net Income.
Net income for the three months ended
September 30, 2016
was
$43.4 million
compared to net income of
$48.8 million
for the three months ended
September 30, 2015
. Net income for the
nine
months ended
September 30, 2016
was
$131.4 million
compared to net income of
$137.1 million
for the
nine
months ended
September 30, 2015
.
Net Interest Income.
Net interest income increased by
$8.3 million
, or
5.5%
to
$159.6 million
for the three months ended
September 30, 2016
from
$151.3 million
for the three months ended
September 30, 2015
. The net interest margin
decrease
d
14
basis points to
3.00%
for the three months ended
September 30, 2016
from
3.14%
for the three months ended
September 30, 2015
.
Net interest income increased by
$27.2 million
, or
6.1%
to
$471.5 million
for the
nine
months ended
September 30, 2016
from
$444.3 million
for the
nine
months ended
September 30, 2015
. The net interest margin
decrease
d
12
basis points to
3.03%
for the
nine
months ended
September 30, 2016
from
3.15%
for the
nine
months ended
September 30, 2015
.
Total interest and dividend income increased by
$11.5 million
, or
6.1%
, to
$198.4 million
for the three months ended
September 30, 2016
. Interest income on loans increased by
$10.0 million
, or
5.9%
, to
$179.2 million
for the three months ended
September 30, 2016
as a result of a
$1.86 billion
increase
in the average balance of net loans to
$17.71 billion
, primarily attributable to growth in the commercial loan portfolio. This increase was offset by a
decrease
of
22
basis points in the weighted average yield on net loans to
4.05%
. Prepayment penalties, which are included in interest income, totaled
$4.0 million
for the three months ended
September 30, 2016
compared to
$6.4 million
for the three months ended
September 30, 2015
. Interest income on all other interest-earning assets, excluding loans,
increase
d by
$1.5 million
, or
8.3%
year over year, to
$19.1 million
for the three months ended
September 30, 2016
which is attributable to a
$137.5 million
increase
in the average balance of all other interest-earning assets, excluding loans, to
$3.59 billion
for the three months ended
September 30, 2016
. The weighted average yield on interest-earning assets, excluding loans,
increase
d
9
basis points to
2.14%
.
Total interest and dividend income increased by
$41.9 million
, or
7.7%
, to
$585.4 million
for the
nine
months ended
September 30, 2016
. Interest income on loans increased by
$34.2 million
, or
6.9%
, to
$528.0 million
for the
nine
months ended
September 30, 2016
as a result of a
$1.70 billion
increase
in the average balance of net loans to
$17.22 billion
primarily attributed to growth in the commercial loan portfolio. This increase was offset by a
decrease
of
15
basis points in the weighted average yield on net loans to
4.09%
. Prepayment penalties, which are included in interest income, totaled
$14.6 million
for the
nine
months ended
September 30, 2016
compared to
$16.6 million
for the
nine
months ended
September 30, 2015
. Interest income on all other interest-earning assets, excluding loans,
increase
d by
$7.7 million
, or
15.4%
, to
$57.5 million
for the
nine
months ended
September 30, 2016
which is attributed to a
$255.1 million
increase
in the average balance of all other interest-earning assets, excluding loans, to
$3.53 billion
for the
nine
months ended
September 30, 2016
. The weighted average yield on interest-earning assets, excluding loans,
increase
d
15
basis points to
2.17%
.
Total interest expense increased by
$3.1 million
, or
8.8%
year over year, to
$38.8 million
for the three months ended
September 30, 2016
. Interest expense on interest-bearing deposits increased
$1.7 million
, or
8.9%
year over year, to
$20.3 million
for the three months ended
September 30, 2016
. The average balance of total interest-bearing deposits
increase
d
$891.6 million
, or
7.6%
year over year, to
$12.56 billion
for the three months ended
September 30, 2016
. In addition, the weighted average cost of interest-bearing deposits
increase
d by
1
basis point to
0.65%
for the three months ended
September 30, 2016
. Interest expense on borrowed funds increased by
$1.5 million
, or
8.7%
year over year to
$18.4 million
for the three months ended
September 30, 2016
. The average balance of borrowed funds
increase
d
$829.0 million
, or
25.5%
, to
$4.07 billion
for the three months ended
September 30, 2016
. This
increase
was offset by a
decrease
of
28
basis points in the weighted average cost of borrowings to
1.81%
for the three months ended
September 30, 2016
.
Total interest expense increased by
$14.7 million
, or
14.8%
year over year, to
$114.0 million
for the
nine
months ended
September 30, 2016
. Interest expense on interest-bearing deposits
increase
d
$10.5 million
, or
20.6%
year over year, to
$61.6 million
for the
nine
months ended
September 30, 2016
. The average balance of total interest-bearing deposits
increase
d
$1.14 billion
, or
10.0%
year over year, to
$12.43 billion
for the
nine
months ended
September 30, 2016
. In addition, the weighted average cost of interest-bearing deposits
increase
d by
6
basis points to
0.66%
for the
nine
months ended
September 30, 2016
. Interest expense on borrowed funds
increase
d by
$4.1 million
, or
8.6%
year over year to
$52.3 million
for the
nine
months ended
September 30, 2016
. The average balance of borrowed funds
increase
d
$525.9 million
, or
16.7%
, to
$3.67 billion
for the
nine
months ended
September 30, 2016
. This increase was offset by a
decrease
of
15
basis points in the weighted average cost of borrowings to
1.90%
for the
nine
months ended
September 30, 2016
.
Non-Interest Income.
Total non-interest income decreased
$2.8 million
, or
24.6%
year over year, to
$8.5 million
for the three months ended
September 30, 2016
. Gain on loans, net decreased $737,000 for the three months ended September 30, 2016
primarily as a result of lower loan sales through our mortgage subsidiary as well as the Bank. In addition security transactions and gain on other real estate owned decreased $861,000 and $795,000, respectively, from the three months ended September 30, 2015.
Total non-interest income decreased
$2.7 million
, or
8.7%
, to
$28.7 million
for the
nine
months ended
September 30, 2016
. Gain on loans, net decreased $2.9 million for the nine months ended September 30, 2016 primarily as a result of lower loan sales through our mortgage subsidiary as well as the Bank. In addition, gain on sale of other real estate owned decreased $1.2 million for the nine months ended September 30, 2016 as compared to the nine months of September 30, 2015. These decreases were offset by an increase of $2.1 million in gain on securities transactions for the nine months ended September 30, 2016 primarily due to the sale of securities totaling $69.1 million, resulting in a gain of $3.1 million.
Non-Interest Expenses.
Compared to the
third
quarter of
2015
, total non-interest expenses increased
$5.5 million
, or
6.4%
year over year. Compensation and fringe benefits increased $4.0 million for the three months ended September 30, 2016 primarily due to additions to our staff to support continued growth and infrastructure and normal merit increases. In addition, professional fees increased $1.8 million as we build additional risk management and operational infrastructure. Federal insurance premiums and office occupancy and equipment expense increased $1.4 million and $1.2 million, respectively, for the three months ended September 30, 2016.
Total non-interest expense was
$269.6 million
for the
nine
months ended
September 30, 2016
, an increase of
$26.9 million
, or
11.1%
as compared to the
nine
months of
2015
. Compensation and fringe benefits increased $20.8 million for the nine months ended September 30, 2016. The increase was primarily due to an increase of $10.3 million in equity incentive expense for the nine months ended September 30, 2016 resulting from the restricted stock and stock option grants on June 23, 2015 to certain employees, officers and directors of the Company, pursuant to the Investors Bancorp, Inc. 2015 Equity Incentive Plan; additions to our staff to support continued growth; and normal merit increases. Office occupancy and equipment expense increased $4.2 million for the nine months ended September 30, 2016 primarily due to new branch openings. Professional fees and other operating expenses increased $2.9 million and $1.8 million, respectively for the nine months ended
September 30, 2016
as we continue to build additional risk management and operational infrastructure as our company grows and we enhance our employee training and development programs.
Income Taxes.
Income tax expense for the third quarter of 2016 was $28.3 million compared with $22.9 million for the third quarter 2015. The effective tax rates were 39.4% and 31.9% for the quarters ended September 30, 2016 and September 30, 2015, respectively. For the nine-month periods ended September 30, 2016 and 2015, income tax expense was $84.2 million and $74.9 million, respectively, and the effective tax rates were 39.1% and 35.3%, respectively. The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income, the level of expenses not deductible for tax purposes relative to the overall level of pre-tax income, the level of income allocated to the various state and local jurisdictions where the Company operates, because tax rates differ among such jurisdictions, and the impact of any large but infrequently occurring items.
In the third quarter 2015, the Company realized the benefit of a Net Operating Loss carryforward from a previous acquisition. Additionally, in April 2015, New York City changed their tax law to conform with that of New York State. As a result, the company revalued its deferred tax positions which lowered the effective tax rate for the 2015 nine month period; however, it has the impact of increasing the rate in future periods.
Provision for Loan Losses.
Our provision for loan losses was
$5.0 million
for the three months ended
September 30, 2016
and the three months ended
September 30, 2015
. For the three months ended
September 30, 2016
, net charge-offs were
$1.8 million
compared to
$504,000
for the three months ended
September 30, 2015
. For the
nine
months ended
September 30, 2016
our provision for loan loss was
$15.0 million
compared with
$21.0 million
for the
nine
months ended
September 30, 2015
. For the
nine
months ended
September 30, 2016
, net charge-offs were
$10.0 million
compared to
$2.8 million
for the
nine
months
September 30, 2015
.
Our provision for the three and
nine
months ended
September 30, 2016
is primarily a result of continued organic growth in the loan portfolio, specifically the multi-family, commercial real estate and commercial and industrial portfolios; the inherent credit risk in our overall portfolio, particularly the credit risk associated with commercial real estate lending and commercial and industrial lending; and the improvement in the level of non-performing loans.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, proceeds from the sale of loans, FHLB and other borrowings and, to a lesser extent, investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including unsecured overnight lines of credit, brokered deposits and other borrowings from the FHLB and other correspondent banks.
At
September 30, 2016
, the Company had overnight borrowings outstanding of
$492.0 million
with FHLB as compared to
$175.0 million
at
December 31, 2015
. The Company utilizes overnight borrowings from time to time to fund short-term liquidity needs. The Company had total borrowings of
$4.20 billion
at
September 30, 2016
, an increase of
$940.0 million
from
$3.26 billion
at
December 31, 2015
.
In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. At
September 30, 2016
, outstanding commitments to originate loans totaled
$682.0 million
; outstanding unused lines of credit totaled
$1.08 billion
; standby letters of credit totaled
$20.5 million
and outstanding commitments to sell loans totaled
$36.0 million
. The Company expects to have sufficient funds available to meet current commitments in the normal course of business. Time deposits scheduled to mature in one year or less totaled
$1.96 billion
at
September 30, 2016
. Based upon historical experience management estimates that a significant portion of such deposits will remain with the Company.
Regulatory Matters.
In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The Final Capital Rules also revised the quantity and quality of required minimum risk-based and leverage capital requirements, consistent with the Reform Act and the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III capital standards. In doing so, the Final Capital Rules:
|
|
•
|
Established a new minimum Common equity tier 1 risk-based capital ratio (common equity tier 1 capital to total risk-weighted assets) of 4.5% and increased the minimum Tier 1 risk-based capital ratio from 4.0% to 6.0%, while maintaining the minimum Total risk-based capital ratio of 8.0% and the minimum Tier 1 leverage capital ratio of 4.0%.
|
|
|
•
|
Revised the rules for calculating risk-weighted assets to enhance their risk sensitivity.
|
|
|
•
|
Phased out trust preferred securities and cumulative perpetual preferred stock as Tier 1 capital.
|
|
|
•
|
Added a requirement to maintain a minimum Conservation Buffer, composed of Common equity tier 1 capital, of 2.5% of risk-weighted assets, to be applied to the new Common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio, which means that banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5% or have restrictions imposed on capital distributions and discretionary cash bonus payments.
|
|
|
•
|
Changed the definitions of capital categories for insured depository institutions for purposes of the Federal Deposit Insurance Corporation Improvement Act of 1991 prompt corrective action provisions. Under these revised definitions, to be considered well-capitalized, an insured depository institution must have a Tier 1 leverage capital ratio of at least 5.0%, a Common equity tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a Total risk-based capital ratio of at least 10.0%.
|
The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets became effective for the Bank and Company on January 1, 2015. The required minimum Conservation Buffer will be phased in incrementally, starting at 0.625% on January 1, 2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019. The rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum Conservation Buffer is not met. As of
September 30, 2016
the Company and the Bank met the currently applicable Conservation Buffer of 0.625%.
As of
September 30, 2016
, the Bank and the Company exceeded all regulatory capital requirements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Actual
|
|
Minimum Capital Requirement
|
|
To be Well Capitalized under Prompt Corrective Action Provisions (1)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
(Dollars in thousands)
|
Bank:
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Ratio
|
$
|
2,708,967
|
|
|
12.25
|
%
|
|
$
|
884,483
|
|
|
4.000
|
%
|
|
$
|
1,105,604
|
|
|
5.00
|
%
|
Common equity tier 1 risk-based
|
2,708,967
|
|
|
15.09
|
%
|
|
920,211
|
|
|
5.125
|
%
|
|
1,167,097
|
|
|
6.50
|
%
|
Tier 1 Risk Based Capital
|
2,708,967
|
|
|
15.09
|
%
|
|
1,189,541
|
|
|
6.625
|
%
|
|
1,436,427
|
|
|
8.00
|
%
|
Total Risk-Based Capital
|
2,932,517
|
|
|
16.33
|
%
|
|
1,548,648
|
|
|
8.625
|
%
|
|
1,795,534
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Company:
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Ratio
|
$
|
3,048,637
|
|
|
13.78
|
%
|
|
$
|
884,746
|
|
|
4.000
|
%
|
|
n/a
|
|
n/a
|
Common equity tier 1 risk-based
|
3,048,637
|
|
|
16.96
|
%
|
|
921,079
|
|
|
5.125
|
%
|
|
n/a
|
|
n/a
|
Tier 1 Risk Based Capital
|
3,048,637
|
|
|
16.96
|
%
|
|
1,190,664
|
|
|
6.625
|
%
|
|
n/a
|
|
n/a
|
Total Risk-Based Capital
|
3,272,187
|
|
|
18.21
|
%
|
|
1,550,109
|
|
|
8.625
|
%
|
|
n/a
|
|
n/a
|
(1) Prompt corrective action provisions do not apply to the bank holding company.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in the financial statements. These transactions primarily relate to debt obligations and lending commitments.
The following table shows the contractual obligations of the Company by expected payment period as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
Less than One Year
|
|
One-Two Years
|
|
Two-Three Years
|
|
More than Three Years
|
|
|
(In thousands)
|
Debt obligations (excluding capitalized leases)
|
|
$
|
4,203,711
|
|
|
1,017,000
|
|
|
605,199
|
|
|
675,621
|
|
|
1,905,891
|
|
Commitments to originate and purchase loans
|
|
$
|
682,010
|
|
|
682,010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commitments to sell loans
|
|
$
|
36,000
|
|
|
36,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Debt obligations include borrowings from the FHLB and other borrowings. The borrowings have defined terms and, under certain circumstances,
$28.8 million
of the borrowings are callable at the option of the lender. Additionally, at
September 30, 2016
, the Company’s commitments to fund unused lines of credit totaled
$1.08 billion
. Commitments to originate loans and commitments to fund unused lines of credit are agreements to lend additional funds to customers as long as there have been no violations of any of the conditions established in the agreements. Commitments generally have a fixed expiration or other termination clauses which may or may not require a payment of a fee. Since some of these loan commitments are expected to expire without being drawn upon, total commitments do not necessarily represent future cash requirements.
In addition to the contractual obligations previously discussed, we have other liabilities which include capitalized and operating lease obligations. These contractual obligations as of
September 30, 2016
have not changed significantly from
December 31, 2015
.
In the normal course of business the Company sells residential mortgage loans to third parties. These loan sales are subject to customary representations and warranties. In the event that we are found to be in breach of these representations and warranties, we may be obligated to repurchase certain of these loans.
The Company has entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. During the three months ended
September 30, 2016
, such derivatives were used to hedge the variability in cash flows
associated with certain short term wholesale funding transactions. The fair value of the derivative as of September 30, 2016 was a liability of $1.1 million.
For further information regarding our off-balance sheet arrangements and contractual obligations, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our
December 31, 2015
Annual Report on Form 10-K.