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 greaterNew York metropolitan area, will continue to provide us with growth opportunities. In addition, we have national exposure through our Investors eAccess online deposit platform and our equipment finance, healthcare and leveraged lending portfolios. Our primary focus is to build and develop profitable customer relationships across all lines of business, both consumer and commercial. Our results of operations depend primarily on net interest income, which is directly impacted by the interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily loans and investment securities, and the interest we pay on our interest-bearing liabilities, primarily interest-bearing transaction accounts, time deposits, and borrowed funds. Net interest income is affected by the level and direction of interest rates, the shape of the market yield curve, the timing of the placement and the repricing of interest-earning assets and interest-bearing liabilities on our balance sheet, and the rate of prepayments on our loans and mortgage-related assets. A flat yield curve, caused primarily by rising short-term interest rates and lower long-term interest rates, combined with competitive pricing in both the loan and deposit markets, continues to create a challenging net interest margin environment. We continue to manage our interest rate risk against a backdrop of interest rate uncertainty. Should the yield curve steepen, we may experience an improvement in net interest income, particularly if short-term interest rates do not increase. If the yield curve stays flat, inverts or deposit competition increases, we may be subject to net interest margin compression. Our results of operations are also significantly affected by general economic conditions. While the domestic consumer continues to generally benefit from improved housing and employment metrics, the velocity of economic growth, domestically and internationally, is challenged by global trade discord and pockets of socioeconomic and political unrest. In addition, our tax rate was negatively impacted by theState of New Jersey tax legislation enacted onJuly 1, 2018 . InDecember 2019 , theState of New Jersey provided clarification in regard to the previously enacted tax law changes and as a result, we expect that our state tax rate will be lower going forward. Total assets increased$469.8 million , or 1.8%, to$26.70 billion atDecember 31, 2019 from$26.23 billion atDecember 31, 2018 . Net loans increased$97.9 million , or 0.5%, to$21.48 billion atDecember 31, 2019 from$21.38 billion atDecember 31, 2018 . Securities increased$167.2 million , or 4.5%, to$3.85 billion atDecember 31, 2019 from$3.68 billion atDecember 31, 2018 . During the year endedDecember 31, 2019 , we originated or funded$1.27 billion in commercial and industrial loans,$861.0 million in commercial real estate loans,$793.6 million in multi-family loans,$462.6 million in residential loans,$76.2 million in consumer and other loans and$69.8 million in construction loans. Our ongoing strategy is to continue to enhance our commercial banking capabilities and maintain a well-diversified loan portfolio. We have shifted focus to C&I originations while maintaining our commercial real estate and multi-family portfolio 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. 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 9.82% atDecember 31, 2019 from 11.46% atDecember 31, 2018 . Since the commencement of our first stock repurchase plan post second step stock offering, the Company has repurchased a total of 127.1 million shares at an average cost of$12.11 per share totaling$1.54 billion . Stockholders' equity was impacted for the year endedDecember 31, 2019 by the repurchase of 39.4 million shares of common stock for$475.9 million as well as cash dividends of$0.44 per share totaling$122.2 million . InDecember 2019 , we entered into a purchase and sale agreement with Blue Harbour, pursuant to which we repurchased from Blue Harbour the 27,318,628 shares of our common stock beneficially owned by Blue Harbour, at a purchase price of$12.29 per share, representing aggregate cost of approximately$335.7 million . In addition to its branch network, the Bank offers online banking capabilities for consumers as well as small business, working to provide more robust treasury capabilities to its customers. During 2019, the company launched Investors eAccess, a secure online channel to attract deposits nationwide. Mobile and online banking services allow the Bank to serve our customers' needs and adapt to a changing environment. In addition to our deposit-related digital capabilities, the Bank continues to enhance 46
——————————————————————————–
Table of Contents
its digital capabilities related to originating and servicing loans. The Bank has partnered with ODX, a leading digital small business originations platform, to streamline its small business lending process. We continue to enhance our digital capabilities as a way to enhance the customer experience and deliver our services in a safe and secure manner. We will continue to execute our business strategies with a focus on prudent and opportunistic growth while striving to produce financial results that will create value for our stockholders. We intend to continue to grow our business by successfully attracting deposits, identifying favorable loan and investment opportunities, acquiring other banks and non-bank entities, enhancing our market presence and product offerings as well as continuing to invest in our people. Critical Accounting Policies We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As ofDecember 31, 2019 , we consider the following to be our critical accounting policies. Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses. The allowance for loan losses has been determined in accordance withU.S. generally accepted accounting principles, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. Loans acquired are marked to fair value on the date of acquisition with no valuation allowance reflected in the allowance for loan losses. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether or not an allowance should be ascribed to those loans. Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two elements: loans collectively evaluated for impairment and loans individually evaluated for impairment. Specific allocations are made for loans determined to be impaired. A loan is deemed to be impaired if it is a commercial loan with an outstanding balance greater than$1.0 million and on non-accrual status, loans modified in a troubled debt restructuring ("TDR"), and other commercial loans greater than$1.0 million if management has specific information that it is probable it will not collect all amounts due under the contractual terms of the loan agreement. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The allowance for loans collectively evaluated for impairment consists of both quantitative and qualitative loss components. The Company determines the quantitative component by applying quantitative loss factors to the loans collectively evaluated for impairment segregated by type of loan, risk rating (if applicable) and payment history. In addition, the Company's residential portfolio is subdivided between fixed and adjustable rate loans as adjustable rate loans are deemed to be subject to more credit risk if interest rates rise. Quantitative loss factors for each loan segment are generally determined based on the Company's historical loss experience over a look-back period. Additionally, management assesses the loss emergence period for the expected losses of each loan segment and adjusts each quantitative loss factor accordingly. The loss emergence period is the estimated time from the date of a loss event (such as a personal bankruptcy) to the actual recognition of the loss (typically via the first full or partial loan charge-off), and is determined based upon a study of the Company's past loss experience by loan segment. The quantitative loss factors may also be adjusted to account for qualitative factors, both internal and external to the Company, which are made to reflect risks inherent in the portfolio not captured by the quantitative component. 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 47
——————————————————————————–
Table of Contents
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 consumer loans are cash surrender value lending on life insurance contracts, 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 inNew Jersey andNew 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 inNew 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 impaired loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Negative changes to appraisal assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are carefully reviewed to determine that the resulting values reasonably reflect amounts realizable on the related loans. The Company obtains an appraisal for all commercial loans that are collateral dependent upon origination. Updated appraisals are generally obtained for substandard loans$1.0 million or greater and special mention loans with a balance of$2.0 million or greater in the process of collection by the Company's special assets department. This is done in order to determine the specific reserve or charge off needed. As part of the allowance for loan losses process, the Company reviews each collateral dependent commercial loan classified as non-accrual and/or impaired and assesses whether there has been an adverse change in the collateral value supporting the loan. The Company utilizes information from its commercial lending officers and its credit department and special assets department's knowledge of changes in real estate conditions in our lending area to identify if possible deterioration of collateral value has occurred. Based on the severity of the changes in market conditions, management determines if an updated appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined that the deterioration of the collateral value is significant enough to warrant ordering a new appraisal, an estimate of the downward adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated appraisal is received. For homogeneous residential mortgage loans, the Company's policy is to obtain an appraisal upon the origination of the loan and an updated appraisal in the event a loan becomes 90 days delinquent. Thereafter, the appraisal is updated every two years if the loan remains in non-performing status and the foreclosure process has not been completed. Management adjusts the appraised value of residential loans to reflect estimated selling costs and declines in the real estate market. Management believes the potential risk for outdated appraisals for impaired and other non-performing loans has been mitigated due to the fact that the loans are individually assessed to determine that the loan's carrying value is not in excess of the fair value of the collateral. Loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt. Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary based on the growth and composition of the loan portfolio, the level of loan delinquency and the economic conditions in our lending area. Management uses relevant information available; however, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, theFederal Deposit Insurance Corporation and theNew Jersey Department of Banking and Insurance , as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. Derivative Financial Instruments. As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended 48
——————————————————————————–
Table of Contents
to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Comparison of Financial Condition atDecember 31, 2019 andDecember 31, 2018 Total Assets. Total assets increased by$469.8 million , or 1.8%, to$26.70 billion atDecember 31, 2019 from$26.23 billion atDecember 31, 2018 . Net loans increased by$97.9 million , or 0.5%, to$21.48 billion atDecember 31, 2019 . Securities increased by$167.2 million , or 4.5%, to$3.85 billion atDecember 31, 2019 from$3.68 billion atDecember 31, 2018 . Net Loans. Net loans increased by$97.9 million , or 0.5%, to$21.48 billion atDecember 31, 2019 from$21.38 billion atDecember 31, 2018 . The detail of the loan portfolio (including PCI loans) is below: December 31, 2019 December 31, 2018 (Dollars in thousands) Commercial Loans: Multi-family loans$ 7,813,236 8,165,187 Commercial real estate loans 4,831,347
4,786,825
Commercial and industrial loans 2,951,306 2,389,756 Construction loans 262,866 227,015 Total commercial loans 15,858,755 15,568,783 Residential mortgage loans 5,144,718 5,351,115 Consumer and other 699,796 707,866 Total Loans 21,703,269 21,627,764 Deferred fees, premiums and other, net 907 (13,811 ) Allowance for loan losses (228,120 ) (235,817 ) Net loans$ 21,476,056 $ 21,378,136 During the year endedDecember 31, 2019 , we originated or funded$1.27 billion in commercial and industrial loans,$861.0 million in commercial real estate loans,$793.6 million in multi-family loans,$462.6 million in residential loans,$76.2 million in consumer and other loans and$69.8 million in construction loans. The growth in the loan portfolio reflects our continued focus on growing and diversifying our loan portfolio. A significant portion of our commercial loan portfolio, including commercial and industrial loans, are secured by commercial real estate and are primarily on properties and businesses located inNew Jersey andNew York . In addition to the loans originated for our portfolio, we originated residential mortgage loans for sale to third parties totaling$269.8 million for the year endedDecember 31, 2019 . We also purchased mortgage loans from correspondent entities including other banks and mortgage bankers. During the year endedDecember 31, 2019 , we purchased loans totaling$294.1 million from these entities but no longer purchase such loans. 49
——————————————————————————–
Table of Contents
The following table sets forth non-accrual loans (excluding PCI loans and loans
held-for-sale) on the dates indicated as well as certain asset quality ratios:
December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 December 31, 2018
# of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount
(Dollars in millions)
Multi-family 8$ 23.3 6$ 19.6 14$ 34.1 14$ 34.1 15$ 33.9 Commercial real estate 22 12.0 30 12.3 27 8.1 32 9.8 35 12.4 Commercial and industrial 18 12.5 16 12.0 13 18.0 14 17.2 14 19.4 Construction - - - - 1 0.2 1 0.2 1 0.2 Total commercial loans 48 47.8 52 43.9 55 60.4 61 61.3 65 65.9 Residential and consumer 255 47.4 261 48.2 275 51.2 296 56.4 320 59.0 Total non-accrual loans 303$ 95.2 313$ 92.1 330$ 111.6 357$ 117.7 385$ 124.9 Accruing troubled debt restructured loans 57$ 13.1 58$ 12.5 56$ 12.2 54$ 13.6 54$ 13.6 Non-accrual loans to total loans 0.44 % 0.42 % 0.51 % 0.54 % 0.58 % Allowance for loan losses as a percent of non-accrual loans 239.66 % 247.62 % 207.83 % 199.44 % 188.78 % Allowance for loan losses as a percent of total loans 1.05 % 1.05 % 1.05 % 1.08 % 1.09 % Total non-accrual loans decreased to$95.2 million atDecember 31, 2019 compared to$124.9 million atDecember 31, 2018 . AtDecember 31, 2019 , there were$3.9 million of commercial real estate loans and$3.8 million of commercial and industrial loans that were classified as non-accrual which were performing in accordance with their contractual terms. During the year endedDecember 31, 2019 , we sold$173,000 of non-performing commercial real estate loans. There were no sales of non-performing loans during the year endedDecember 31, 2018 . Criticized and classified loans as a percent of total loans decreased to 5.36% atDecember 31, 2019 from 5.72% atDecember 31, 2018 . In assessing and classifying our commercial loan portfolio, the Company places significant emphasis on the borrower's ability to service its debt. AtDecember 31, 2019 , our allowance for loan losses as a percent of total loans was 1.05%. AtDecember 31, 2019 , there were$36.6 million of loans deemed as TDRs, of which$27.0 million were residential and consumer loans,$7.2 million were commercial and industrial loans and$2.4 million were commercial real estate loans. TDRs of$13.1 million were classified as accruing and$23.5 million were classified as non-accrual atDecember 31, 2019 . We continue to proactively and diligently work to resolve our troubled loans. 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 ofDecember 31, 2019 , the Company has deemed potential problem loans totaling$68.1 million , which is comprised of 6 multi-family loans totaling$47.6 million , 24 commercial and industrial loans totaling$13.7 million and 9 commercial real estate loans totaling$6.8 million . Management is actively monitoring all of these loans. The allowance for loan losses decreased by$7.7 million to$228.1 million atDecember 31, 2019 from$235.8 million atDecember 31, 2018 . Our allowance for loan losses was positively impacted by improved credit quality, including the level of non-accrual loans and charge-offs/recoveries, and modest loan growth. Future increases in the allowance for loan losses may be necessary based on the growth and composition of the loan portfolio, the level of loan delinquency and the economic conditions in our lending area. AtDecember 31, 2019 , our allowance for loan losses as a percent of total loans was 1.05%. Securities. Securities are held primarily for liquidity, interest rate risk management and yield enhancement. Our Investment Policy requires that investment transactions conform to Federal and State investment regulations. Our investments purchased 50
——————————————————————————–
Table of Contents
may include, but are not limited to,U.S. Treasury obligations, securities issued by various Federal Agencies, State and Municipal subdivisions, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment grade corporate debt instruments, and mutual funds. In addition, the Company may invest in equity securities subject to certain limitations. Purchase decisions are based upon a thorough analysis of each security to determine if it conforms to our overall asset/liability management objectives. The analysis must consider its effect on our risk-based capital measurement, prospects for yield and/or appreciation and other risk factors. Debt securities are classified as held-to-maturity or available-for-sale when purchased. AtDecember 31, 2019 , our securities portfolio represented 14.4% of our total assets. Securities, in the aggregate, increased by$167.2 million , or 4.5%, to$3.85 billion atDecember 31, 2019 from$3.68 billion atDecember 31, 2018 . This increase was a result of purchases, partially offset by sales and paydowns. Stock in theFederal Home Loan Bank , Bank Owned Life Insurance and Other Assets. The amount of stock we own in the FHLB increased by$7.0 million , or 2.7% to$267.2 million atDecember 31, 2019 from$260.2 million atDecember 31, 2018 . The amount of stock we own in the FHLB is primarily related to the balance of our outstanding borrowings from the FHLB. Bank owned life insurance was$218.5 million atDecember 31, 2019 and$211.9 million atDecember 31, 2018 . Other assets were$82.3 million atDecember 31, 2019 and$29.3 million atDecember 31, 2018 . Deposits. AtDecember 31, 2019 , deposits totaled$17.86 billion , representing 74.2% 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. Deposits increased by$280.1 million , or 1.6%, from$17.58 billion atDecember 31, 2018 to$17.86 billion atDecember 31, 2019 . Total checking accounts increased$665.8 million to$7.99 billion atDecember 31, 2019 from$7.32 billion atDecember 31, 2018 . AtDecember 31, 2019 , we held$13.85 billion in core deposits, representing 77.6% of total deposits, of which$266.4 million are brokered money market deposits. AtDecember 31, 2019 ,$4.01 billion , or 22.4%, of our total deposit balances were certificates of deposit, of which included$1.31 billion of brokered certificates of deposit. AtDecember 31, 2019 ,$4.89 billion , or 27.4%, of our total deposits consisted of public fund deposits from local government entities, predominately domiciled in the state ofNew Jersey . Core deposits are an attractive funding alternative because they are generally a more stable source of low cost funding and are less sensitive to changes in market interest rates. Borrowed Funds. Borrowings are primarily with the FHLB which are collateralized by our residential and commercial mortgage portfolios. Borrowed funds increased by$391.4 million , or 7.2%, to$5.83 billion atDecember 31, 2019 from$5.44 billion atDecember 31, 2018 to help fund the growth of the security and loan portfolios and our share repurchases. InJune 2019 , we prepaid$200.0 million of FHLB advances and a$150.0 million repurchase agreement with a total average interest rate of 3.00% and maturity dates in 2020 and 2021. The prepaid borrowings were replaced with$200.0 million of FHLB advances and a$150.0 million repurchase agreement with a total average interest rate of 2.55% and maturity dates averaging 4 years. Included in the interest rate is a prepayment penalty of 0.47%. InAugust 2019 , we prepaid$275.0 million of FHLB advances with a total average interest rate of 2.46% and maturity dates in 2021. The prepaid borrowings were replaced with$275.0 million of FHLB advances with a total average interest rate of 2.16% and maturity dates of 5 years. Included in the interest rate is a prepayment penalty of 0.27%. The prepayment penalties are amortized over the life of the new debt instruments in accordance with ASC 470-50, Debt - Modifications and Extinguishments. Stockholders' Equity. Stockholders' equity decreased by$383.4 million to$2.62 billion atDecember 31, 2019 from$3.01 billion atDecember 31, 2018 . The decrease was primarily attributed to the repurchase of 39.4 million shares of common stock for$475.9 million and cash dividends of$0.44 per share totaling$122.2 million for the year endedDecember 31, 2019 . As previously noted, inDecember 2019 , we repurchased 27,318,628 shares beneficially owned by Blue Harbour for approximately$335.7 million . These decreases were partially offset by net income of$195.5 million and share-based plan activity of$26.3 million for the year endedDecember 31, 2019 . Analysis of Net Interest Income Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities. 51
——————————————————————————–
Table of Contents
Average Balances and Yields. The following tables set forth average balance
sheets, average yields and costs, and certain other information for the periods
indicated. No tax-equivalent yield adjustments were made, as the effect thereof
was not material. All average balances are daily average balances. Non-accrual
loans were included in the computation of average balances, however interest
receivable on these loans have been fully reserved for and not included in
interest income. The yields set forth below include the effect of deferred fees,
discounts and premiums that are amortized or accreted to interest income or
expense.
52
——————————————————————————–
Table of Contents
For the Year Ended
2019 2018 2017
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits $ 215,447 $ 2,805 1.30 % $ 212,980 $ 2,435 1.14 % 272,382 $ 2,164 0.79 %
Equity securities 5,938 143 2.41 5,754 134 2.33 5,699 139 2.44
Debt securities
available-for-sale 2,395,047 67,822 2.83 2,042,129 46,057 2.26 1,844,887 37,152 2.01
Debt securities
held-to-maturity 1,317,322 40,017 3.04 1,668,106 48,989 2.94 1,704,333 44,923 2.64
Net loans 21,576,829 912,091 4.23 20,498,857 854,595 4.17 19,414,842 783,938 4.04
Stock in FHLB 274,661 17,341 6.31 247,513 16,206 6.55 243,409 13,367 5.49
Total interest-earning
assets 25,785,244 1,040,219 4.03
24,675,339 968,416 3.92 23,485,552 881,683 3.75
Non-interest-earning assets 975,585
707,370 758,134 Total assets$ 26,760,829 $ 25,382,709 $ 24,243,686 Interest-bearing liabilities: Savings deposits$ 1,985,142 $ 17,148 0.86 %$ 2,170,510 $ 13,240 0.61 %$ 2,107,363 $ 8,395 0.40 % Interest-bearing checking 5,020,991 84,698 1.69 4,651,313 62,447 1.34 4,383,110 37,091 0.85 Money market accounts 3,703,413 60,896 1.64 3,837,174 46,394 1.21 4,240,775 34,366 0.81 Certificates of deposit 4,609,274 99,115 2.15 4,149,438 66,564 1.60 3,202,312 33,691 1.05 Total interest-bearing deposits 15,318,820 261,857 1.71 14,808,435 188,645 1.27 13,933,560 113,543 0.81 Borrowed funds 5,611,206 123,289 2.20 4,898,867 99,754 2.04 4,675,626 88,364 1.89 Total interest-bearing liabilities 20,930,026 385,146 1.84 19,707,302 288,399 1.46 18,609,186 201,907 1.08 Non-interest-bearing liabilities 2,887,601 2,590,675 2,468,005 Total liabilities 23,817,627 22,297,977 21,077,191 Stockholders' equity 2,943,202 3,084,732 3,166,495 Total liabilities and stockholders' equity$ 26,760,829 $ 25,382,709 $ 24,243,686 Net interest income$ 655,073 $ 680,017 $ 679,776 Net interest rate spread (1) 2.19 % 2.46 % 2.67 % Net interest-earning assets (2)$ 4,855,218 $ 4,968,037 $ 4,876,366 Net interest margin (3) 2.54 % 2.76 % 2.89 % Ratio of interest-earning assets to total interest-bearing liabilities 1.23 1.25 1.26 (1) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
53
——————————————————————————–
Table of Contents
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately, based
on the changes due to rate and the changes due to volume.
Years Ended December 31, Years Ended December 31,
2019 vs. 2018 2018 vs. 2017
Increase (Decrease) Due to Net Increase (Decrease) Due to Net
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In
thousands)
Interest-earning assets: Interest-earning cash accounts $ 28 342 370$ (471 ) 742 271 Equities 4 5 9 1 (6 ) (5 ) Debt securities available-for-sale 8,027 13,738 21,765 3,892 5,013 8,905 Debt securities held-to-maturity (5,724 ) (3,248 ) (8,972 ) (28 ) 4,094 4,066 Net loans 46,098 11,398 57,496 44,129 26,528 70,657Federal Home Loan Bank stock 1,790 (655 ) 1,135 225 2,614 2,839 Total interest-earning assets 50,223 21,580 71,803 47,748 38,985 86,733 Interest-bearing liabilities: Savings (1,117 ) 5,025 3,908 254 4,591 4,845 Interest-bearing checking 4,893 17,358 22,251 2,306 23,050 25,356 Money market accounts (1,600 ) 16,102 14,502 (3,278 ) 15,306 12,028 Certificates of deposit 7,322 25,229 32,551 9,977 22,896 32,873 Total deposits 9,498 63,714 73,212 9,259 65,843 75,102 Borrowed funds 15,450 8,085 23,535 4,257 7,133 11,390 Total interest-bearing liabilities 24,948 71,799 96,747 13,516 72,976 86,492 (Decrease) increase in net interest income$ 25,275 (50,219 ) (24,944 )$ 34,232 (33,991 ) 241 Comparison of Operating Results for the Year EndedDecember 31, 2019 and 2018 Net Income. Net income for the year endedDecember 31, 2019 was$195.5 million compared to net income of$202.6 million for the year endedDecember 31, 2018 . Included for the year endedDecember 31, 2019 is$7.8 million of additional income tax expense resulting from the revaluation of our net deferred tax asset as theState of New Jersey provided clarification inDecember 2019 relating to previously enacted tax law changes. Included in net income for the year endedDecember 31, 2018 was a$32.8 million loss on the sale of debt securities available-for-sale. Net Interest Income. Net interest income decreased by$24.9 million to$655.1 million for the year endedDecember 31, 2019 from$680.0 million for the year endedDecember 31, 2018 . The net interest margin decreased 22 basis points to 2.54% for the year endedDecember 31, 2019 from 2.76% for the year endedDecember 31, 2018 . Interest and Dividend Income. Total interest and dividend income increased by$71.8 million , or 7.4%, to$1.04 billion for the year endedDecember 31, 2019 . Interest income on loans increased by$57.5 million , or 6.7%, to$912.1 million for the year endedDecember 31, 2019 , as a result of a$1.08 billion , or 5.3%, increase in the average balance of net loans to$21.58 billion for the year endedDecember 31, 2019 , primarily attributed to loan originations, offset by paydowns and payoffs. In addition, the weighted average yield on net loans increased 6 basis points to 4.23%. Prepayment penalties, which are included in interest income, totaled$16.8 million for the year endedDecember 31, 2019 compared to$20.6 million for the year endedDecember 31, 2018 . Interest income on all other interest-earning assets, excluding loans, increased by$14.3 million , or 12.6%, to$128.1 million for the year endedDecember 31, 2019 which is attributable to an increase of 31 basis points to 3.04% in the weighted average yield on interest-earning assets, excluding loans. In addition, the average balance of all other interest earning assets, excluding loans, increased$31.9 million to$4.21 billion for the year endedDecember 31, 2019 . 54
——————————————————————————–
Table of Contents
Interest Expense. Total interest expense increased by$96.7 million , or 33.5%, to$385.1 million for the year endedDecember 31, 2019 . Interest expense on interest-bearing deposits increased$73.2 million , or 38.8%, to$261.9 million for the year endedDecember 31, 2019 . The weighted average cost of interest-bearing deposits increased 44 basis points to 1.71% for the year endedDecember 31, 2019 . In addition, the average balance of total interest-bearing deposits increased$510.4 million , or 3.5%, to$15.32 billion for the year endedDecember 31, 2019 . Interest expense on borrowed funds increased by$23.5 million , or 23.6%, to$123.3 million for the year endedDecember 31, 2019 . The weighted average cost of borrowings increased 16 basis points to 2.20% for the year endedDecember 31, 2019 . In addition, the average balance of borrowed funds increased$712.3 million , or 14.5%, to$5.61 billion for the year endedDecember 31, 2019 . Non-Interest Income. Total non-interest income increased by$43.3 million to$53.4 million for the year endedDecember 31, 2019 . The increase was primarily due to an increase of$26.1 million in non-interest income on securities predominately resulting from a$5.7 million loss on the sale of securities during 2019 as compared to a$32.8 million loss on the sale of securities during 2018. In addition, other income increased$11.8 million primarily attributed to customer swap fee income, gains on our equipment finance portfolio, non-depository investment products and a sale-leaseback transaction. Non-Interest Expense. Total non-interest expenses were$422.8 million for the year endedDecember 31, 2019 , an increase of$15.1 million , or 3.7%, as compared to the year endedDecember 31, 2018 . This increase was due to an increase of$7.9 million in compensation and fringe benefit expense, an increase of$4.8 million in other non-interest expense, an increase of$4.2 million in data processing and communication expense, and an increase of$2.0 million in professional fees for the year endedDecember 31, 2019 . These increases were partially offset by a decrease of$4.6 million in federal insurance premiums. Income Taxes. Income tax expense was$91.2 million and$67.8 million for the years endedDecember 31, 2019 andDecember 31, 2018 , respectively. The effective tax rate was 31.8% for the year endedDecember 31, 2019 and 25.1% for the year endedDecember 31, 2018 . The increase in the tax rate primarily resulted from theState of New Jersey providing clarification on mandatory combined reporting, causing a remeasurement of the Company's deferred tax balances. Comparison of Operating Results for the Year EndedDecember 31, 2018 and 2017 Refer to "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2018 for a discussion of 2018 results as compared to 2017 results. Management of Market Risk Qualitative Analysis. One significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the cash flow or re-pricing of our assets, liabilities and off-balance sheet contracts (i.e., loan commitments); the effect of loan prepayments, deposit activity; potential differences in the behavior of lending and funding rates arising from the use of different indices; and "yield curve risk" arising from changes in the term structure of interest rates. Changes in market interest rates can affect net interest income by influencing the amount and rate of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and the mix and flow of deposits. The general objective of our interest rate risk management process is to determine the appropriate level of risk given our business model and then to manage that risk in a manner consistent with that risk appetite. Our Asset Liability Committee, which consists of senior management and executives, evaluates the interest rate risk inherent in our balance sheet, the operating environment and capital and liquidity requirements and may modify our lending, investing and deposit gathering strategies accordingly. On a quarterly basis, our Board of Directors reviews various Asset Liability Committee reports that estimate the sensitivity of the economic value of equity and net interest income under various interest rate scenarios. Our tactics and strategies may include the use of various financial instruments, including derivatives, to manage our exposure to interest rate risk. Certain derivatives are designated as hedging instruments in a qualifying hedge accounting relationship (fair value or cash flow hedge). Hedged items can be either assets or liabilities. As ofDecember 31, 2019 andDecember 31, 2018 , the Company had cash flow and fair value hedges with aggregate notional amounts of$2.68 billion and$2.61 billion , respectively. Included in the fair value hedges are$475.0 million in asset swap transactions where fixed rate loan payments are exchanged for variable rate payments. These transactions were executed in an effort to reduce the Company's exposure to rising rates. During the year endedDecember 31, 2019 , the Company terminated three interest rate swaps with an aggregate notional amount of$1.00 billion which had been included in asset swap transactions. We actively evaluate interest rate risk in connection with our lending, investing and deposit activities and our off-balance sheet positions. AtDecember 31, 2019 , 23.7% of our total loan portfolio was comprised of residential mortgages, of which approximately 28.5% was in variable rate products, while 71.5% was in fixed rate products. Our variable rate and short term fixed rate mortgage related assets have helped to reduce our exposure to interest rate fluctuations. Long term fixed-rate products may adversely impact our net interest income in a rising rate environment. The origination of commercial loans, particularly commercial 55
——————————————————————————–
Table of Contents
and industrial loans, commercial real estate loans and multi-family loans, which
have outpaced the growth in the residential portfolio in recent years, generally
help reduce our interest rate risk due to their shorter term compared to fixed
rate residential mortgage loans. In addition, we primarily invest in securities
which display relatively conservative interest rate risk characteristics.
We use an internally managed and implemented industry standard asset/liability
model to complete our quarterly interest rate risk reports. The model projects
net interest income based on various interest rate scenarios and horizons. We
use a combination of analyses to monitor our exposure to changes in interest
rates.
Our net interest income sensitivity analysis determines the relative balance
between the repricing of assets, liabilities and off-balance sheet positions
over various horizons. This asset and liability analysis includes expected cash
flows from loans and securities, using forecasted prepayment rates, reinvestment
rates, as well as contractual and forecasted liability cash flows. This analysis
identifies mismatches in the timing of asset and liability cash flows but does
not necessarily provide an accurate indicator of interest rate risk because the
rate forecasts and assumptions used in the analysis may not reflect actual
experience. The economic value of equity ("EVE") analysis estimates the change
in the net present value ("NPV") of assets and liabilities and off-balance sheet
contracts over a range of immediate rate shock interest rate scenarios. In
calculating changes in EVE, for the various scenarios we forecast loan and
securities prepayment rates, reinvestment rates and deposit decay rates.
In July 2017 , the Financial Conduct Authority (the authority that regulates
LIBOR) announced it intends to stop compelling banks to submit rates for the
calculation of LIBOR after 2021. The Alternative Reference Rates Committee
("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the
rate that represents best practice as the alternative to USD-LIBOR for use in
derivatives and other financial contracts that are currently indexed to
USD-LIBOR. The ARRC has proposed a paced market transition plan to SOFR from
USD-LIBOR and organizations are currently working on industry wide and company
specific transition plans as it relates to derivatives and cash markets exposed
to USD-LIBOR. The Company has approximately $5.00 billion in financial
instruments which are indexed to USD-LIBOR for which it is monitoring the
activity and evaluating the related risks.
Quantitative Analysis. The table below sets forth, as of December 31, 2019 , the
estimated changes in our EVE and our net interest income that would result from
the designated changes in interest rates. Such changes to interest rates are
calculated as an immediate and permanent change for the purposes of computing
EVE and a gradual change over a one-year period for the purposes of computing
net interest income. Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions including relative
levels of market interest rates, loan prepayments and deposit decay, and should
not be relied upon as indicative of actual results. The following table reflects
management's expectations of the changes in EVE and net interest income for an
interest rate decrease of 100 basis points and increase of 200 basis points.
EVE (1) (2)
Net Interest Income (3)
Estimated Increase
Change in Estimated Increase (Decrease) Estimated Net (Decrease)
Interest Rates Estimated Interest
(basis points) EVE Amount Percent Income Amount Percent
(Dollars in thousands)
+ 200bp $ 3,300,884 (400,120 ) (10.8 )% $ 639,962 (34,198 ) (5.1 )%
0bp $ 3,701,004 - - $ 674,160 - -
-100bp $ 3,915,477 214,473 5.8 % $ 690,721 16,561 2.5 %
(1) Assumes an instantaneous and parallel shift in interest rates at all
maturities.
(2) EVE is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3) Assumes a gradual change in interest rates over a one year period at all
maturities.
The table above indicates that at December 31, 2019 , in the event of a 200 basis
point increase in interest rates, we would be expected to experience a 10.8%
decrease in EVE and a $34.2 million , or 5.1%, decrease in net interest income.
In the event of a 100 basis point decrease in interest rates, we would be
expected to experience a 5.8% increase in EVE and a $16.6 million , or 2.5%,
increase in net interest income. This data does not reflect any future actions
we may take in response to changes in interest rates, such as changing the mix
in or growth of our assets and liabilities, which could change the results of
the EVE and net interest income calculations.
As mentioned above, we use an internally developed asset liability model to
compute our quarterly interest rate risk reports. Certain shortcomings are
inherent in any methodology used in the above interest rate risk measurements.
Modeling EVE and net interest income sensitivity requires certain assumptions
that may or may not reflect the manner in which actual yields and costs respond
to changes in market interest rates. The EVE and net interest income table
presented above assumes no balance sheet growth and that generally the
composition of our interest-rate sensitive assets and liabilities existing at
the beginning of the analysis remains constant over the period being measured
and, accordingly, the data does not reflect any actions we may take in
56
——————————————————————————–
Table of Contents
response to changes in interest rates. The table also assumes a particular change in interest rates is reflected uniformly across the yield curve. Accordingly, although the EVE and net interest income table provide an indication of our sensitivity to interest rate changes at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effects of changes in market interest rates on our EVE and net interest income. Liquidity and Capital Resources Liquidity is the ability to economically meet current and future financial obligations. The Company's primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB and other borrowings and, to a lesser extent, proceeds from the sale of loans and investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies to ensure that sufficient liquidity exists for meeting the needs of our customers as well as unanticipated contingencies. The Company has other sources of liquidity, including unsecured overnight lines of credit, brokered deposits and other borrowings from correspondent banks. A primary source of funds is cash provided by cash flows on loans and securities. Principal repayments on loans for the years endedDecember 31, 2019 , 2018 and 2017 were$3.66 billion ,$3.47 billion and$2.81 billion , respectively. Principal repayments on securities for the years endedDecember 31, 2019 , 2018 and 2017 were$744.0 million ,$685.5 million and$660.3 million , respectively. There were sales of securities during years endedDecember 31, 2019 , 2018 and 2017 of$399.4 million ,$632.4 million and$102.1 million , respectively. There were no unusual payoffs or paydowns of TruPs for the year endedDecember 31, 2019 . For the year endedDecember 31, 2018 , the Company received proceeds of$7.3 million from the payoff and paydown of TruPs which resulted in$3.2 million of interest income from securities, as well as a gain of$1.2 million recognized as non-interest income. For the year endedDecember 31, 2017 , the Company received proceeds of$3.1 million from the liquidation of one TruP security. As a result,$1.9 million was recognized as interest income from securities. In addition to cash provided by principal and interest payments on loans and securities, our other sources of funds include cash provided by operating activities, deposits and borrowings. Net cash provided by operating activities for the years endedDecember 31, 2019 , 2018 and 2017 totaled$160.7 million ,$275.6 million and$302.4 million , respectively. For the years endedDecember 31, 2019 , 2018 and 2017 deposits increased$280.1 million ,$222.6 million and$2.08 billion , respectively. Deposit flows are affected by the overall level of and direction of changes in market interest rates, the pricing of products offered by us and our local competitors, and other factors. For the year endedDecember 31, 2019 , net borrowed funds increased$391.4 million to help fund the growth of the security and loan portfolios and our share repurchases. For the year endedDecember 31, 2018 , net borrowed funds increased$974.1 million . For the year endedDecember 31, 2017 net borrowed funds decreased$84.7 million . Our primary use of funds is for the origination and purchase of loans and the purchase of securities. During the years endedDecember 31, 2019 , 2018 and 2017, we originated loans of$3.53 billion ,$4.15 billion and$3.60 billion , respectively. During the year endedDecember 31, 2019 we purchased loans of$427.1 million . During the year endedDecember 31, 2018 , excluding loans and leases acquired in the acquisition of the equipment finance portfolio, we purchased loans of$514.0 million . During the year endedDecember 31, 2017 , we purchased loans of$540.9 million . During the year endedDecember 31, 2019 , 2018 and 2017 we purchased securities of$1.27 billion ,$1.24 billion and$1.15 billion , respectively. In addition, we utilized$475.9 million ,$258.2 million and$59.1 million during the years endedDecember 31, 2019 , 2018 and 2017, respectively, to repurchase shares of our common stock. Included in the shares repurchased during the year endedDecember 31, 2019 is the Blue Harbour transaction. AtDecember 31, 2019 , we had commitments to originate commercial loans of$407.3 million . Additionally, we had commitments to originate residential loans of approximately$36.5 million . While we purchased residential loans from correspondent banks during 2019, we no longer purchase such loans and have no purchase commitments as ofDecember 31, 2019 . Unused home equity lines of credit and undisbursed business and constructions loans totaled approximately$1.62 billion atDecember 31, 2019 . Certificates of deposit due within one year ofDecember 31, 2019 totaled$3.63 billion , or 20.3% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including but not limited to other retail and commercial deposits and wholesale funding. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay. Liquidity management is both a short and long-term function of business management. Our most liquid assets are cash and cash equivalents. The levels of these assets depend upon our operating, financing, lending and investing activities during any given period. AtDecember 31, 2019 , cash and cash equivalents totaled$174.9 million . Securities, which provide an additional source of liquidity, totaled$3.85 billion atDecember 31, 2019 , of which$920.5 million are pledged to secure borrowings and 57
——————————————————————————–
Table of Contents
municipal deposits. If we require funds beyond our ability to generate them internally, we have wholesale funding alternatives, which provide an additional source of funds. AtDecember 31, 2019 , our borrowing capacity at the FHLB was$12.45 billion , of which we had outstanding borrowings of$9.01 billion , which included letters of credit totaling$4.02 billion . In addition, the Bank had unsecured overnight borrowings (Fed Funds) with other financial institutions totaling$750.0 million , of which$400.0 million was outstanding atDecember 31, 2019 .Investors Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. AtDecember 31, 2019 ,Investors Bank exceeded all regulatory capital requirements.Investors Bank is considered "well capitalized" under regulatory guidelines. See "Item 1. Supervision and Regulation - Federal Banking Regulation - Capital Requirements." Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Off-Balance Sheet Arrangements. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of our commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval processes that we use for loans that we originate. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date atDecember 31, 2019 . The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments. Payments Due by Period Less than One to Three to More than Contractual Obligations One Year Three Years Five Years Five Years Total (In thousands) Other borrowed funds$ 1,436,000 1,724,958 1,918,243 300,000 5,379,201 Repurchase agreements 100,000 - 347,910 - 447,910 Operating leases 24,013 67,384 59,503 62,322 213,222 Total$ 1,560,013 1,792,342 2,325,656 362,322 6,040,333 During the year endedDecember 31, 2019 , the Company invested in a low income housing tax credit program that qualifies for community reinvestment tax credits. These commitments are payable on demand and are recorded in other liabilities on our Consolidated Balance Sheets. Total commitments entered into in 2019 equal$10.0 million , of which the remaining commitment outstanding equals$9.2 million as ofDecember 31, 2019 . The Company has entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's borrowings and loans. During the year endedDecember 31, 2019 , such derivatives were used (i) to hedge the variability in cash flows associated with borrowings and (ii) to hedge changes in the fair value of certain pools of prepayable fixed- and adjustable-rate assets. These derivatives had an aggregate notional amount of$2.68 billion as ofDecember 31, 2019 . The fair value of derivatives designated as hedging activities as ofDecember 31, 2019 was an asset of$559,000 , inclusive of accrued interest and variation margin posted in accordance with theChicago Mercantile Exchange . The Company has also entered into derivatives not designated as hedging activities resulting from participations in interest rate swaps provided to external lenders as part of loan participation arrangements and interest rate risk management services to commercial customers utilizing interest rate swaps. The fair value of the derivatives resulting from participations in interest rate swaps provided to lenders was a liability of$125,000 and the fair value of the derivatives resulting from customer interest rate risk management services was an asset of$5.4 million , respectively, as ofDecember 31, 2019 . Interest rate swaps with customers under interest rate risk management services are offset by interest rate swaps that the Company executes with a third party, which minimizes the Company's net risk in these transactions. 58
——————————————————————————–
Table of Contents
Impact of Inflation and Changing Prices The consolidated financial statements and related notes ofInvestors Bancorp, Inc. have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation. Recent Accounting Pronouncements See Note 22 in the notes to our Consolidated Financial Statements in "Item 15 - Exhibits and Financial Statement Schedules" for a description of recent accounting pronouncements already adopted. New Accounting Pronouncements Issued But Not Yet Adopted InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"), further amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. Topic 326 pertains to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This update will be effective for financial statements issued for fiscal years and interim periods beginning afterDecember 15, 2019 . Subsequent to year-end, the Company adopted the above mentioned ASUs related to Financial Instruments -Credit Losses (Topic 326) as ofJanuary 1, 2020 , using a modified retrospective approach. Our implementation process included scoping, segmentation and the design of a methodology appropriate for each respective financial instrument. The process also included the development of loss forecasting models as well as the incorporation of qualitative adjustments. Evaluation of technical accounting topics, updates to our allowance policy documentation, model validation, governance and reporting, processes and related internal controls, as well as overall operational readiness were significant activities completed throughout 2019 in preparation for adoption. The Company's CECL methodology for loans and leases involves the following key factors and assumptions: • an estimation method utilizing probability of default and loss given default
modeled results which are conditioned by macroeconomic scenarios;
• a reasonable and supportable forecast period determined based on management’s
current review of macroeconomic factors and economic scenarios;
• a reversion period after the reasonable and supportable forecast period;
• expected prepayment rates based on the Company’s historical experience; and
• incorporation of qualitative factors not captured within the modeled results.
Based on several analyses performed in the third and fourth quarter of 2019, as well as an implementation analysis utilizing exposures and forecasts of macroeconomic conditions as of year-end, the Company currently expects the adoption of ASU 2016-13 will result in an allowance for credit losses amount atJanuary 1, 2020 in the range of$215 million to$245 million , which includes unfunded commitments and held to maturity debt securities. The impact will be reflected as a cumulative effect adjustment, net of taxes. AtDecember 31, 2019 , the allowance for loan losses totaled$228 million . As the Company is currently finalizing the execution of its implementation controls and processes, the review of the most recent model run and assumptions including qualitative factors, the ultimate impact of the adoption of ASU 2016-13 as ofJanuary 1, 2020 could differ from our current expectation. The cumulative-effect adjustment to retained earnings for the change in the allowance for credit losses upon adoption will not have a material effect on the Company's capital and regulatory capital amounts and ratios. Federal banking regulatory agencies have provided relief for an initial capital decrease at transition by allowing a phased-in adoption which the Company will not elect. InDecember 2019 , the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The amendments simplify the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and also clarify and amend existing guidance. This update will be effective for the CompanyJanuary 1, 2021 with early 59
——————————————————————————–
Table of Contents
adoption permitted. The Company does not expect ASU No. 2019-12 to have a material impact on the Company's Consolidated Financial Statements. InAugust 2018 , the FASB issued ASU 2018-15, "Intangibles-Goodwill andOther- Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of theFASB Emerging Issues Task Force )". This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Specifically, where a cloud computing arrangement includes a license to internal-use software, the software license is accounted for by the customer in accordance with Subtopic 350-40, "Intangibles-Goodwill andOther-Internal-Use Software ". The Company adopted ASU 2018-15 onJanuary 1, 2020 . The amendments in this update will be applied prospectively to all implementation costs incurred after the date of adoption. The Company does not expect ASU No. 2018-15 to have a material impact on the Company's Consolidated Financial Statements. InAugust 2018 , the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans". The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures, and adding disclosure requirements identified as relevant. This update will be effective for the CompanyJanuary 1, 2021 with early adoption permitted. The Company does not expect ASU 2018-14 to have a material impact on the Company's Consolidated Financial Statements. This update will be applied on a retrospective basis. The Company will evaluate the effect of ASU 2018-14 on disclosures with regard to employee benefit plans but does not expect a material impact on the Company's Consolidated Financial Statements. InAugust 2018 , the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement". The amendments remove the requirement to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of such transfers and the valuation processes for Level 3 fair value measurements. The update modifies the disclosure requirements for investments in certain entities that calculate net asset value and clarify the purpose of the measurement uncertainty disclosure. The update adds disclosure requirements about the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this update onJanuary 1, 2020 . Changes will be applied retrospectively to all periods presented upon the effective date with the exception of the following, which will be applied prospectively: disclosures relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the disclosures for uncertainty measurement. The adoption of ASU 2018-13 will not have a material impact on the Company's Consolidated Financial Statements. InJanuary 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. The Company adopted this update onJanuary 1, 2020 . The update will be applied prospectively. The Company does not expect ASU No. 2017-04 to have a material impact on the Company's Consolidated Financial Statements.
© Edgar Online, source
Recent Comments