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 whichInvestors Bancorp, Inc. (the "Company") operates, competitive products and pricing, fiscal and monetary policies of theU.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, the availability of and costs associated with sources of liquidity, expenses related to our proposed merger with Citizens Financial Group, Inc., unexpected delays relating to the merger, or the inability to obtain shareholder or regulatory approvals or satisfy the other closing conditions required to complete the merger. In addition, the COVID-19 pandemic is having an adverse impact on us, our customers and the communities we serve. The adverse effect of the COVID-19 pandemic on us, our customers and the communities where we operate may adversely affect our business, results of operations and financial condition for an indefinite period of time. Reference is made to Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and the additional risk factors included in Part II, Item 1A of this Quarterly Report on Form 10-Q. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events except as may be required by law. Critical Accounting Policies We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As ofJune 30, 2021 , we consider the following to be our critical accounting policies. Allowance for Credit Losses. The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through the provision for credit losses that is charged against income. The methodology for determining the allowance for credit 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 forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The allowance for loan and security losses is reported separately as contra-assets to loans and securities on the consolidated balance sheet. The expected credit loss for unfunded lending commitments and unfunded loan commitments is reported on the consolidated balance sheet in other liabilities. The provision for credit losses related to loans, unfunded commitments and debt securities is reported on the consolidated statement of income. 48 -------------------------------------------------------------------------------- Table of Contents Allowance for Credit Losses on Loans Receivable Collectively evaluated. The allowance for credit losses on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected. Expected losses are evaluated and calculated on a collective basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether the loans in a pool continue to exhibit similar risk characteristics as the other loans in the pool. If the risk characteristics of a loan change, such that they are no longer similar to other loans in the pool, the Company will evaluate the loan with a different pool of loans that share similar risk characteristics. If the loan does not share risk characteristics with other loans, the Company will evaluate the allowance on an individual basis. The Company evaluates the segmentation at least annually to determine whether loans continue to share similar risk characteristics. Loans are charged off against the allowance when the Company believes the loan balances become uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off. The Company has chosen to segment its portfolio consistent with the manner in which it manages the risk of the type of credit. The Company's segments for loans include multi-family, commercial real estate, commercial and industrial, construction, residential and consumer. The Company calculates estimated credit loss on its loan portfolio primarily using quantitative methodologies that consider a variety of factors such as historical loss experience, loan characteristics, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. The expected credit losses are the product of multiplying the Company's estimates of probability of default (PD), loss given default (LGD) and individual loan level exposure at default on an undiscounted basis. For a small portion of the loan portfolio, i.e. unsecured consumer loans, small business loans and loans to individuals, the Company utilizes a loss rate method to calculate the expected credit loss of that asset segment. Included in the Company's framework for estimating credit losses, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over a two-year reasonable and supportable forecast period, after which, the Company reverts to average historical losses on a straight line basis over a two-year period. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses and include, but are not limited to, unemployment rates, real estate prices, gross domestic product levels, corporate bond spreads and long-term interest rate forecasts. The Company evaluates the use of multiple economic scenarios and the weighting of those scenarios on a quarterly basis. The scenarios that are chosen and the amount of weighting given to each scenario consider a variety of factors including third party economists and firms, industry trends and other available published economic information. Expected credit losses are estimated over the contractual term of each loan taking into consideration expected prepayments which are developed using industry standard estimation techniques. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by the Company. Also included in the allowance for loans are qualitative reserves to cover losses that are expected but, in the Company's assessment, may not be adequately represented in the quantitative method or the economic assumptions described above. For example, factors that the Company considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and non-accrual loans, the effect of external factors such as competition, and the legal and regulatory requirements, among others. Individually evaluated. On a case-by-case basis, the Company may conclude a loan should be evaluated on an individual basis based on its disparate risk characteristics. The Company individually evaluates loans that meet the following criteria for expected credit loss, as the Company has determined that these loans generally do not share similar risk characteristics with other loans in the portfolio: •Commercial loans with an outstanding balance greater than$1.0 million and on non-accrual status; •Troubled debt restructured loans; and •Other commercial loans with greater than$1.0 million in outstanding principal, if management has specific information that it is probable they will not collect all principal amounts due under the contractual terms of the loan agreement. When the Company determines that the loan no longer shares similar risk characteristics of other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable, to ensure that the credit loss is not delayed until actual loss. If the fair value of the collateral is less than the amortized cost basis of the loan, 49 -------------------------------------------------------------------------------- Table of Contents the Company will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan. In determining the fair value for collateral-dependent loans, the Company reviews whether there has been an adverse change in the collateral value supporting the loan. As a substantial amount of the Company's loan portfolio is collateralized by real estate, appraisals of the underlying value of property are used. 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 to identify if possible deterioration 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. For 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 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. Consistent with the CARES Act, modifications that met the criteria as discussed in Note 6, Loans Receivable, Net, are not included in individually evaluated loans discussed above. Acquired assets. Subsequent to the adoption of CECL, acquired assets are included in the Company's calculation of the allowance for credit losses. How the allowance on an acquired asset is recorded depends on whether it has been classified as a Purchased Financial Asset with Credit Deterioration ("PCD"). PCD assets are assets acquired at a discount that is due, in part, to credit quality. PCD assets are accounted for in accordance with ASC Subtopic 326-20 and are initially recorded at fair value as determined by the sum of the present value of expected future cash flows and an allowance for credit losses at acquisition. The allowance for PCD assets is recorded through a gross-up effect, while the allowance for acquired non-PCD assets such as loans is recorded through provision expense, consistent with originated loans. Thus, the determination of which assets are PCD and non-PCD can have a significant effect on the accounting for these assets. Subsequent to acquisition, the allowance for PCD loans will generally follow the same estimation, provision and charge-off process as non-PCD acquired and originated loans. Additionally, TDR identification for acquired loans (PCD and non-PCD) will be consistent with the TDR identification for originated loans. Allowance for Credit Losses onDebt Securities Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Management classifies the held-to-maturity portfolio into the following major security types: mortgage-backed securities, municipal and corporate bonds, trust preferred securities ("TruPS") and other. Nearly all of the mortgage-backed securities in the Company's portfolio are issued byU.S. government agencies and are either explicitly or implicitly guaranteed by theU.S. government, are highly rated by major rating agencies and have a long history of no credit losses and therefore the expectation of non-payment is zero. At each reporting period, the Company evaluates whether the securities in a segment continue to exhibit similar risk characteristics as the other securities in the segment. If the risk characteristics of a security change, such that they are no longer similar to other securities in the segment, the Company will evaluate the security with a different segment that shares more similar risk characteristics. In estimating the net amount expected to be collected for mortgage-backed securities and municipal and corporate bonds, a range of historical losses method is utilized. In estimating the net amount expected to be collected for TruPS, the Company employs a single scenario forecast methodology. The scenario is informed by historical industry default data as well as current and near term operating conditions for the banks and other financial institutions that are the underlying issuers. In addition, expected prepayments are included in the analysis of the individually assessed TruPS applied at the collateral level. Allowance for Credit Losses on Off-Balance Sheet Credit ExposuresThe Company is required to include the unfunded commitment that is expected to be funded in the future within the allowance calculation. The Company participates in lending that results in an off-balance sheet unfunded commitment balance. The Company currently underwrites funding commitments with conditionally cancelable language. To determine the expected funding balance remaining, the Company uses a historical utilization rate for each of the segments to calculate the expected commitment balance. The reserve percentage for each respective loan portfolio is applied to the remaining unused portion of the 50 -------------------------------------------------------------------------------- Table of Contents expected commitment balance and the expected funded commitment in determining the allowance for credit loss on off-balance sheet credit exposures. Derivative Financial Instruments. As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Executive Summary During 2020 and continuing into 2021, the entire country has been negatively impacted by the COVID-19 pandemic. Beginning inMarch 2020 , the impacts of the COVID-19 pandemic, including social distancing guidelines, closure of non-essential businesses and shelter-at-home mandates, caused a global economic downturn. The economic downturn included an increase in unemployment and a decline in gross domestic product. SinceApril 2020 , the unemployment rate has declined but remains elevated above the pre-pandemic unemployment rate. Gross domestic product grew in the third and fourth quarters of 2020 and first quarter of 2021 after declining in the first and second quarters of 2020. We continue to monitor developments related to COVID-19, including, but not limited to, its impact on our employees, customers, communities and results of operations. All of our branches have normal operating hours and all lobbies have re-opened for our clients. In addition, the majority of our corporate workforce has returned to our corporate offices in some capacity while the remainder continue to work remotely in an effective manner. Proper protocols have been put in place in our branches and corporate offices to ensure the continued safety of our employees and customers. As a result of the pandemic, certain borrowers are currently unable to meet their contractual payment obligations. While we have continued to support our customers by granting payment deferrals for those experiencing continued hardship because of the pandemic, we have also worked diligently with our customers to ensure a return to current payment status for a significant portion of our clients who have ended their deferral period. AtJune 30, 2021 , loans with an aggregate outstanding balance of approximately$599 million were in COVID-19 related deferment. Citizens Financial Group, Inc. Merger Agreement OnJuly 28, 2021 , Citizens Financial Group, Inc. ("Citizens") andInvestors Bancorp, Inc. ("Investors") announced that they have entered into a definitive agreement and plan of merger under which Citizens will acquire all of the outstanding shares of Investors for a combination of stock and cash. Under the terms of the agreement and plan of merger, shareholders of Investors will receive 0.297 of a share of Citizens common stock and$1.46 in cash for each share of Investors they own. Following completion of the transaction, former shareholders of Investors will collectively own approximately 14% of the combined company. The implied total transaction value based on closing prices onJuly 27, 2021 is approximately$3.5 billion . The agreement and plan of merger has been unanimously approved by the boards of directors of each company and the transaction is expected to close in the first or second quarter of 2022, subject to approval by the shareholders of Investors, receipt of required regulatory approvals and other customary closing conditions. Second Quarter of 2021 Results Summary •We reported net income of$79.8 million , or$0.34 per diluted share, for the three months endedJune 30, 2021 as compared to$72.3 million , or$0.31 per diluted share, for the three months endedMarch 31, 2021 and$42.6 million , or$0.18 per diluted share, for the three months endedJune 30, 2020 . •Return on average assets and return on average equity were 1.22% and 11.42%, respectively, for the three months endedJune 30, 2021 . •Net interest margin increased 21 basis points to 3.11% for the three months endedJune 30, 2021 compared to the three months endedMarch 31, 2021 driven by higher prepayment penalties and the lower cost of interest-bearing liabilities. Net interest margin excluding prepayment penalties increased 8 basis points. 51 -------------------------------------------------------------------------------- Table of Contents •Provision for credit losses was a negative$9.7 million for the three months endedJune 30, 2021 compared with a negative$3.0 million for the three months endedMarch 31, 2021 . The Company recorded net recoveries of$806,000 during the quarter endedJune 30, 2021 compared to net recoveries of$1.7 million during the quarter endedMarch 31, 2021 . The allowance for loan losses as a percent of total loans was 1.26% atJune 30, 2021 compared to 1.36% atMarch 31, 2021 . •Total non-interest income was$13.1 million for the three months endedJune 30, 2021 , a decrease of$6.9 million compared to the three months endedMarch 31, 2021 and an increase of$2.9 million compared to the three months endedJune 30, 2020 . •Total non-interest expenses were$108.4 million for the three months endedJune 30, 2021 , an increase of$4.1 million compared to the three months endedMarch 31, 2021 . Included in non-interest expenses for the second quarter of 2021 were$1.7 million of acquisition-related costs. •Non-interest-bearing deposits increased$332.5 million , or 8.7%, during the three months endedJune 30, 2021 . The cost of interest-bearing deposits decreased 11 basis points to 0.43% for the three months endedJune 30, 2021 compared to the three months endedMarch 31, 2021 . •Total loans increased$494.8 million , or 2.4%, to$21.37 billion atJune 30, 2021 from$20.87 billion atMarch 31, 2021 . Multi-family loans increased$335.6 million , or 4.6%, and C&I loans increased$124.4 million , or 3.4%, during the three months endedJune 30, 2021 . •AtJune 30, 2021 , COVID-19 related loan deferrals totaled$599.0 million , or 2.8% of loans, compared to$693.0 million , or 3.3% of loans, as ofMarch 31, 2021 . Approximately 87% of borrowers with a loan payment deferral are making interest payments. •Non-accrual loans decreased to$77.6 million , or 0.36% of total loans, atJune 30, 2021 as compared to$83.3 million , or 0.40% of total loans, atMarch 31, 2021 and$126.8 million , or 0.59% of total loans, atJune 30, 2020 . •Tier 1 Leverage, Common Equity Tier 1 Risk-Based, Tier 1 Risk-Based and Total Risk-Based Capital Ratios were 10.60%, 13.17%, 13.17% and 14.48%, respectively, atJune 30, 2021 . •DuringJuly 2021 , we received approval from theFDIC for the previously announced purchase ofBerkshire Bank's New Jersey and easternPennsylvania branches. We expect to complete the transaction onAugust 27, 2021 . Comparison of Operating Results for the Three and Six Months EndedJune 30, 2021 and 2020
Net revenue. Net income for the three months ended
Net Interest Income. Net interest income increased by$12.7 million , or 7.0%, to$194.7 million for the three months endedJune 30, 2021 from$182.0 million for the three months endedJune 30, 2020 . Net interest margin increased 38 basis points to 3.11% for the three months endedJune 30, 2021 from 2.73% for the three months endedJune 30, 2020 . Net interest income increased by$20.2 million , or 5.7%, to$375.4 million for the six months endedJune 30, 2021 from$355.3 million for the six months endedJune 30, 2020 . Net interest margin increased 29 basis points to 3.01% for the six months endedJune 30, 2021 from 2.72% for the six months endedJune 30, 2020 . Total interest and dividend income decreased by$14.4 million , or 5.8%, to$231.9 million for the three months endedJune 30, 2021 . Interest income on loans decreased by$6.2 million , or 2.9%, to$211.5 million for the three months endedJune 30, 2021 , primarily attributed to the average balance of net loans which decreased$589.4 million to$20.78 billion , driven by paydowns and payoffs, partially offset by loan originations. In addition, the weighted average yield on net loans decreased 1 basis point to 4.07%. Prepayment penalties, which are included in interest income, totaled$10.8 million for the three months endedJune 30, 2021 compared to$8.1 million for the three months endedJune 30, 2020 . Interest income on all other interest-earning assets, excluding loans, decreased by$8.2 million , or 28.6%, to$20.3 million for the three months endedJune 30, 2021 which is attributed to the average balance of all other interest-earning assets, excluding loans, which decreased$1.09 billion to$4.23 billion for the three months endedJune 30, 2021 . In addition, the weighted average yield on interest-earning assets, excluding loans, decreased 22 basis points to 1.92% for the three months endedJune 30, 2021 . Total interest and dividend income decreased by$49.9 million , or 9.9%, to$452.4 million for the six months endedJune 30, 2021 . Interest income on loans decreased by$32.0 million , or 7.2%, to$410.3 million for the six months ended 52 -------------------------------------------------------------------------------- Table of ContentsJune 30, 2021 , primarily as a result of a 17 basis point decrease in the weighted average yield on net loans to 3.98%. In addition, the average balance of net loans decreased$661.7 million to$20.64 billion , mainly from paydowns and payoffs, partially offset by loan originations and$453.3 million of loans acquired fromGold Coast inApril 2020 . Prepayment penalties, which are included in interest income, totaled$13.1 million for the six months endedJune 30, 2021 compared to$15.8 million for the six months endedJune 30, 2020 . Interest income on all other interest-earning assets, excluding loans, decreased by$17.9 million , or 29.9%, to$42.1 million for the six months endedJune 30, 2021 which is attributed to the weighted average yield on interest-earning assets, excluding loans, which decreased 54 basis points to 1.94%. In addition, the average balance of all other interest-earning assets, excluding loans, decreased$499.5 million to$4.34 billion for the six months endedJune 30, 2021 . Total interest expense decreased by$27.1 million , or 42.2%, to$37.1 million for the three months endedJune 30, 2021 . Interest expense on interest-bearing deposits decreased$23.0 million , or 59.0%, to$16.0 million for the three months endedJune 30, 2021 . The weighted average cost of interest-bearing deposits decreased 50 basis points to 0.43% for the three months endedJune 30, 2021 . In addition, the average balance of total interest-bearing deposits decreased$1.98 billion , or 11.9%, to$14.71 billion for the three months endedJune 30, 2021 . Interest expense on borrowed funds decreased by$4.1 million , or 16.2%, to$21.1 million for the three months endedJune 30, 2021 . The average balance of borrowed funds decreased$1.01 billion , or 20.1%, to$4.02 billion for the three months endedJune 30, 2021 . Partially offsetting this decrease, the weighted average cost of borrowings increased 9 basis points to 2.10% for the three months endedJune 30, 2021 . Total interest expense decreased by$70.1 million , or 47.7%, to$77.0 million for the six months endedJune 30, 2021 . Interest expense on interest-bearing deposits decreased$55.0 million , or 59.7%, to$37.2 million for the six months endedJune 30, 2021 . The weighted average cost of interest-bearing deposits decreased 66 basis points to 0.49% for the six months endedJune 30, 2021 . In addition, the average balance of total interest-bearing deposits decreased$850.8 million , or 5.3%, to$15.17 billion for the six months endedJune 30, 2021 . Interest expense on borrowed funds decreased by$15.1 million , or 27.5%, to$39.8 million for the six months endedJune 30, 2021 . The average balance of borrowed funds decreased$1.63 billion , or 30.4%, to$3.73 billion for the six months endedJune 30, 2021 . Partially offsetting this decrease, the weighted average cost of borrowings increased 8 basis points to 2.13% for the six months endedJune 30, 2021 . Provision for Credit Losses. Our provision for credit losses is primarily a result of the expected credit losses on our loans, unfunded commitments and held-to-maturity debt securities over the life of these financial instruments based on historical experience, current conditions, and reasonable and supportable forecasts. Our provision for credit losses is also impacted by the inherent credit risk in these financial instruments, the composition of and changes in our portfolios of these financial instruments, and the level of charge-offs. AtJune 30, 2021 , our allowance for credit losses and related provision continued to be affected by the impact of the COVID-19 pandemic on the current and forecasted economic conditions. During the three months endedJune 30, 2021 , there was continued improvement in theU.S. and global macroeconomic consensus outlooks, which resulted in an improvement in the economic outlook used to determine the provision for credit losses when compared toJune 30, 2020 . For the three months endedJune 30, 2021 , our provision for credit losses was negative$9.7 million , compared to$33.3 million for the three months endedJune 30, 2020 . For the three months endedJune 30, 2021 , net loan recoveries were$806,000 compared to net loan charge-offs of$4.1 million for the three months endedJune 30, 2020 . For the six months endedJune 30, 2021 , our provision for credit losses was negative$12.7 million , compared to$64.5 million for the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 , net loan recoveries were$2.5 million compared to net loan charge-offs of$12.1 million for the six months endedJune 30, 2020 . Non-Interest Income. Total non-interest income increased$2.9 million to$13.1 million for the three months endedJune 30, 2021 . The increase was due primarily to an increase of$3.5 million in fees and service charges primarily related to our mortgage servicing rights valuation and an increase of$2.1 million in income from our wealth and investment products, partially offset by a decrease of$2.3 million in gain on loans due to a lower volume of mortgage banking loan sales to third parties. Total non-interest income increased$8.3 million to$33.1 million for the six months endedJune 30, 2021 . The increase in non-interest income was due primarily to an increase of$3.3 million in fees and service charges related to our mortgage servicing rights valuation, an increase of$2.8 million in income from our wealth and investment products, an increase of$1.1 million in PPP referral income and an increase of$819,000 in customer swap fee income. Non-Interest Expenses. Total non-interest expenses were$108.4 million for the three months endedJune 30, 2021 , an increase of$8.4 million , or 8.4%, compared to the three months endedJune 30, 2020 . The increase was driven by an increase of$5.6 million in compensation and fringe benefit expense primarily related to medical expenses and incentive compensation. Included in non-interest expenses for the second quarter of 2021 were$1.7 million of acquisition-related costs. 53 -------------------------------------------------------------------------------- Table of Contents Total non-interest expenses were$212.8 million for the six months endedJune 30, 2021 , an increase of$10.2 million , or 5.0%, compared to the six months endedJune 30, 2020 . This increase was driven by an increase of$7.6 million in compensation and fringe benefit expense primarily related to medical expenses and incentive compensation. Income Taxes. Income tax expense for the second quarter of 2021 was$29.2 million compared to$16.2 million for the second quarter 2020. The effective tax rate was 26.8% for the three months endedJune 30, 2021 and 27.6% for the three months endedJune 30, 2020 . Income tax expense for the six months endedJune 30, 2021 was$56.3 million compared to$30.9 million for the six months endedJune 30, 2020 . The effective tax rate was 27.0% for the six months endedJune 30, 2021 and 27.3% for the six months endedJune 30, 2020 . The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income and the level of expenses not deductible for tax purposes relative to the overall level of pre-tax income. In addition, the effective tax rate is affected by the level of income allocated to the various state and local jurisdictions where we operate, because tax rates differ among such jurisdictions. Analysis of Net Interest Income Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities. Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, however interest receivable on these loans have been fully reserved for and not included in interest income. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. 54
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Three Months Ended June 30,
2021 2020
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)Interest-earning assets: Interest-bearing deposits$ 264,693 $ 38 0.06 %$ 1,292,904 $ 294 0.09 % Equity securities 13,225 63 1.91 % 6,166 32 2.08 % Debt securities available-for-sale 2,585,131 10,587 1.64 % 2,631,028 15,627 2.38 % Debt securities held-to-maturity, net 1,171,317 7,657 2.61 % 1,145,553 8,531 2.98 % Net loans 20,777,927 211,523 4.07 % 21,367,323 217,733 4.08 % Stock in FHLB 194,845 1,983 4.07 % 247,971 3,997 6.45 % Total interest-earning assets 25,007,138 231,851 3.71 % 26,690,945 246,214 3.69 % Non-interest-earning assets 1,121,153 1,125,776 Total assets$ 26,128,291 $ 27,816,721 Interest-bearing liabilities: Savings deposits$ 2,008,855 $ 1,404 0.28 %$ 2,051,599 $ 2,907 0.57 % Interest-bearing checking 6,044,766 6,536 0.43 % 5,891,587 8,873 0.60 % Money market accounts 4,365,351 4,501 0.41 % 4,345,850 9,880 0.91 % Certificates of deposit 2,291,616 3,552 0.62 % 4,406,310 17,331 1.57 % Total interest-bearing deposits 14,710,588 15,993 0.43 % 16,695,346 38,991 0.93 % Borrowed funds 4,019,587 21,148 2.10 % 5,030,118 25,236 2.01 % Total interest-bearing liabilities 18,730,175 37,141 0.79 % 21,725,464 64,227 1.18 % Non-interest-bearing liabilities 4,603,486 3,458,409 Total liabilities 23,333,661 25,183,873 Stockholders' equity 2,794,630 2,632,848 Total liabilities and stockholders' equity$ 26,128,291 $ 27,816,721 Net interest income$ 194,710 $ 181,987 Net interest rate spread(1) 2.92 % 2.51 % Net interest-earning assets(2)$ 6,276,963 $ 4,965,481 Net interest margin(3) 3.11 % 2.73 % Ratio of interest-earning assets to total interest-bearing liabilities 1.34 1.23 (1)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (3)Net interest margin represents net interest income divided by average total interest-earning assets. 55
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Six Months Ended June 30,
2021 2020
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)Interest-earning assets: Interest-bearing deposits$ 319,342 $ 99 0.06 %$ 830,466 $ 1,134 0.27 % Equity securities 24,324 329 2.71 % 6,128 65 2.12 % Debt securities available-for-sale 2,617,290 21,855 1.67 % 2,606,451 32,898 2.52 % Debt securities held-to-maturity 1,196,793 15,656 2.62 % 1,136,836 17,525 3.08 % Net loans 20,635,564 410,273 3.98 % 21,297,309 442,262 4.15 % Stock in FHLB 182,170 4,183 4.59 % 259,507 8,429 6.50 % Total interest-earning assets 24,975,483 452,395 3.62 % 26,136,697 502,313 3.84 % Non-interest-earning assets 1,130,432 1,041,099 Total assets$ 26,105,915 $ 27,177,796 Interest-bearing liabilities: Savings deposits$ 2,011,367 $ 2,884 0.29 %$ 2,042,680 $ 6,815 0.67 % Interest-bearing checking 6,160,437 13,564 0.44 % 5,728,476 25,533 0.89 % Money market accounts 4,529,517 11,661 0.51 % 4,082,474 24,104 1.18 % Certificates of deposit 2,463,766 9,076 0.74 % 4,162,221 35,718 1.72 % Total interest-bearing deposits 15,165,087 37,185 0.49 % 16,015,851 92,170 1.15 % Borrowed funds 3,729,050 39,765 2.13 % 5,355,731 54,873 2.05 % Total interest-bearing liabilities 18,894,137 76,950 0.81 % 21,371,582 147,043 1.38 % Non-interest-bearing liabilities 4,445,327 3,173,754 Total liabilities 23,339,464 24,545,336 Stockholders' equity 2,766,451 2,632,460 Total liabilities and stockholders' equity$ 26,105,915 $ 27,177,796 Net interest income$ 375,445 $ 355,270 Net interest rate spread(1) 2.81 % 2.46 % Net interest-earning assets(2)$ 6,081,346 $ 4,765,115 Net interest margin(3) 3.01 % 2.72 % Ratio of interest-earning assets to total interest-bearing liabilities 1.32 1.22 (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. 56 -------------------------------------------------------------------------------- Table of Contents Comparison of Financial Condition atJune 30, 2021 andDecember 31, 2020 Total Assets. Total assets increased by$779.0 million , or 3.0%, to$26.80 billion atJune 30, 2021 fromDecember 31, 2020 . Cash and cash equivalents increased by$600.0 million to$770.4 million atJune 30, 2021 fromDecember 31, 2020 . Net loans increased by$502.1 million , or 2.4%, to$21.08 billion atJune 30, 2021 fromDecember 31, 2020 . Securities decreased by$309.4 million , or 7.7%, to$3.73 billion atJune 30, 2021 fromDecember 31, 2020 . Net Loans. Net loans increased by$502.1 million to$21.08 billion atJune 30, 2021 from$20.58 billion atDecember 31, 2020 . The detail of the loan portfolio is below: June 30, 2021 December 31, 2020 (Dollars in thousands) Commercial loans: Multi-family loans$ 7,566,131 7,122,840 Commercial real estate loans 4,968,393
4 947 212
Commercial and industrial loans 3,766,551 3,575,641
Construction loans 464,887 404,367
Total commercial loans 16,765,962 16,050,060
Residential mortgage loans 3,887,917 4,119,894
Consumer and other 712,147 702,801
Total loans 21,366,026 20,872,755
Deferred fees, premiums and other, net (13,391) (9,318)
Allowance for loan losses (270,114) (282,986)
Net loans $ 21,082,521 20,580,451
During the six months ended June 30, 2021 , we originated or funded $1.25
billion in multi-family loans, $658.8 million in residential loans, $572.4
million in commercial and industrial loans, $412.5 million in commercial real
estate loans, $47.2 million in construction loans and $33.4 million in consumer
and other loans. Our originations reflect our continued focus on diversifying
our loan portfolio. A significant portion of our commercial loan portfolio,
including commercial and industrial loans, are secured by commercial real estate
and are primarily on properties and businesses located in New Jersey and New
York .
One of our key operating objectives has been, and continues to be, maintaining
a high level of asset quality. We maintain sound credit standards for new loan
originations and purchases. We do not originate or purchase sub-prime loans,
negative amortization loans or option ARM loans. Our portfolio contains
interest-only and no income verification residential mortgage loans. We have not
originated residential mortgage loans without verifying income in recent years.
As of June 30, 2021 , these loans totaled $94.1 million . As of June 30, 2021 ,
interest-only residential and consumer loans totaled $21.9 million , which
represented less than 1% of the residential and consumer portfolio. Although it
is not a standard product offering for commercial real estate and multi-family
loans, we originate interest-only in addition to amortizing loans in these
segments. As of June 30, 2021 , these loans totaled $1.91 billion . As part of our
underwriting, these loans are evaluated as fully amortizing for risk
classification purposes, with the interest-only period ranging from one to ten
years. In addition, we evaluate our policy limits on a regular basis. We believe
these criteria adequately control the potential risks of such loans and that
adequate provisions for loan losses are provided for all known and inherent
risks. Since April 2020 , we have, at the request of commercial borrowers
experiencing financial difficulty resulting from the pandemic, temporarily
deferred the payment of principal and/or interest for an agreed-upon period of
time. Although a significant portion of these loans are paying interest-only
during the deferral period, they are not included in the amount of interest-only
loans disclosed in this section.
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Loan Deferrals. While we have continued to support our customers by granting
payment deferrals for those experiencing continued hardship because of the
pandemic, we have also worked diligently with our customers to ensure a return
to current payment status for a significant portion of our clients who have
ended their initial deferral period. At May 4, 2020 , loans with an aggregated
outstanding balance of $4.3 billion , or 20.1% of total loans, were in COVID-19
related deferment. Since then, customers representing over $3.7 billion have
ended their COVID-19 related deferrals and as of June 30, 2021 , loans with an
aggregate outstanding balance of approximately $599.0 million , or 2.8% of total
loans, were in COVID-19 related deferment.
The following table presents the balance of deferred loans in the Company's loan
portfolio by loan segment, industry sector and type of deferral as of June 30,
2021 .
Principal and Principal Deferred Loan % of
Segment and industry sector Interest Deferral Deferral Total Total Loans (1)
(Dollars in millions)
Commercial and industrial
Accommodation and food service $ 2 173 175 0.8 %
Arts, entertainment and recreation - 32 32 0.2 %
Real estate and rental - 1 1 - %
Total deferred commercial and industrial 2 206 208 1.0 %
Commercial real estate
Office - 40 40 0.2 %
Accommodation and food service 2 70 72 0.3 %
Other - 3 3 - %
Total deferred commercial real estate 2 113 115 0.5 %
Construction - - - - %
Multi-family - 201 201 0.9 %
Total deferred commercial loans 4 520 524 2.4 %
Residential and consumer 75 - 75 0.4 %
Total deferred loans (2) $ 79 520 599 2.8 %
(1) Percentage calculated using total loan balance as of June 30, 2021 .
(2) Of the total deferred loans, approximately 23% of the deferments expire in
the third quarter of 2021, 35% in the fourth quarter of 2021 with the remainder
expiring in January 2022 .
Given the unprecedented uncertainty and continually evolving economic effects
and social impacts of the COVID-19 pandemic, the future direct and indirect
impact on our business, results of operations and financial condition are highly
uncertain. Should economic conditions deteriorate the macroeconomic environment
may have an adverse effect on our business and results of operations, including
additional borrower deferral requests, delinquent loans and non-accrual loans.
For more information on how the risks related to COVID-19 may adversely affect
our business, results of operations and financial condition, reference is made
to Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2020 .
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The following table presents the Company's loan portfolio at June 30, 2021 by
industry sector:
Loan Balance
Segment/Industry (in millions) % of Total Segment
Commercial and industrial:
Accommodation and food service $ 290 8 %
Administrative and support and waste management 149 4 %
Agriculture, forestry, fishing and hunting 23 1 %
Arts, entertainment, and recreation 70 2 %
Construction 298 8 %
Educational service 126 3 %
Finance and insurance 251 7 %
Health care and social assistance 636 17 %
Information 132 4 %
Management of companies and enterprises 5 0 %
Manufacturing 196 5 %
Mining, quarrying, and oil and gas extraction 49 1 %
Professional, scientific, and technical services 115 3 %
Public administration 1 0 %
Real estate and rental 605 16 %
Retail trade - clothing, home, gasoline, health 149 4 %
Retail trade - sporting, hobby, vending, e-commerce 9 0 %
Transportation - air, rail, truck, water, pipeline 215 6 %
Utilities 2 0 %
Wholesale trade 218 6 %
Other 228 6 %
Total commercial and industrial $ 3,767 100 %
Commercial real estate:
Accommodation and food service $ 105 2 %
Arts, entertainment, and recreation 14 0 %
Health care and social assistance 144 3 %
Mixed use property 503 10 %
Office 1,216 24 %
Retail store 900 18 %
Shopping center 987 20 %
Warehouse 690 14 %
Other 409 8 %
Total commercial real estate $ 4,968 100 %
Multi-family 7,566 100 %
Construction 465 100 %
Residential and consumer 4,600 100 %
Total loans $ 21,366 100 %
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Non-Performing Loans. The following table sets forth non-accrual loans
(excluding loans held-for-sale) and accruing troubled debt restructured loans on
the dates indicated as well as certain asset quality ratios:
June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020
# of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount
(dollars in millions)
Multi-family 11 $ 16.6 13 $ 19.2 15 $ 35.6 13$ 51.1 14$ 48.3 Commercial real estate 24 13.0 25 14.0 29 15.9 28 17.8 22 12.3 Commercial and industrial 13 5.2 15 4.4 21 9.2 19 10.9 29 15.6
Construction - - - - - - - - - - Total commercial loans 48 34.8 53 37.6 65 60.7
60 79.8 65 76.2 Residential and consumer 232 42.8 239 45.7 246 46.4 250 52.2 255 50.6 Total non-accrual loans 280$ 77.6 292$ 83.3 311$ 107.1 310$ 132.0 320$ 126.8 Accruing troubled debt restructured loans 49$ 9.3 45$ 9.1 47$ 9.2 51$ 9.8 52$ 12.2 Non-accrual loans to total loans 0.36 % 0.40 % 0.51 % 0.63 % 0.59 % Allowance for loan losses as a percent of non-accrual loans 348.05 % 340.60 % 264.17 % 217.75 % 215.48 % Allowance for loan losses as a percent of total loans 1.26 % 1.36 % 1.36 % 1.37 % 1.28 % Total non-accrual loans were$77.6 million atJune 30, 2021 compared to$83.3 million atMarch 31, 2021 and$126.8 million atJune 30, 2020 . AtJune 30, 2021 , there were$2.2 million of multi-family loans,$2.1 million of commercial and industrial loans and$1.9 million of commercial real estate loans that were classified as non-accrual which were performing in accordance with their contractual terms. Criticized and classified loans as a percent of total loans decreased to 7.66% atJune 30, 2021 from 7.99% atDecember 31, 2020 . We continue to proactively and diligently work to resolve our troubled loans. During the six months endedJune 30, 2021 , we sold three non-performing multi-family loans totaling$19.9 million and recognized a recovery of$1.4 million in the allowance for credit losses on the sale of one of the loans. Also during the six months endedJune 30, 2021 , we sold a$762,000 non-performing commercial real estate loan. AtJune 30, 2021 , there were$28.3 million of loans deemed as TDRs, of which$23.4 million were residential and consumer loans,$4.5 million were commercial real estate loans and$430,000 were commercial and industrial loans. TDRs of$9.3 million were classified as accruing and$19.0 million were classified as non-accrual atJune 30, 2021 . Included were$1.4 million of residential loans deemed to be TDRs as the borrower was granted a payment deferral related to COVID-19 but did not meet the criteria to be excluded from TDR as described in Note 6, Loans Receivable, Net. 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 ofJune 30, 2021 , we have deemed potential problem loans totaling$81.7 million , which is comprised of 13 multi-family loans totaling$64.1 million , 5 commercial and industrial loans totaling$15.5 million and 4 commercial real estate loans totaling$2.1 million . In addition, we continue to support our customers by deferring payments for borrowers experiencing hardship because of the COVID-19 pandemic. As ofJune 30, 2021 ,$599 million , or 2.8%, of loans were deferring principal and/or interest payments. For further information, please refer to the Loan Deferrals disclosure above. Management is actively monitoring all of these loans.
The ratio of unrecorded loans to total loans was 0.36% at
against 0.51% at
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Allowance for Credit Losses on Loans. The allowance for loan losses decreased by$12.9 million to$270.1 million atJune 30, 2021 from$283.0 million atDecember 31, 2020 . The decrease reflects a negative provision for loan losses of$15.4 million , partially offset by an increase of$2.5 million resulting from net loan recoveries. Our allowance for loan losses atJune 30, 2021 was affected by the improving current and forecasted economic conditions. Future increases in the allowance for loan losses may be necessary based on the composition of and change in the loan portfolio, the level of loan delinquency and the current and forecasted economic condition over the life of our loans. The following table sets forth the allowance for credit losses on loans allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is the estimated amount considered necessary to cover lifetime expected credit losses inherent in any particular category as of the balance sheet date and does not restrict the use of the allowance to absorb losses in other categories. June 30, 2021 December 31, 2020 Percent of Loans Percent of Loans Allowance for in Each Category Allowance for in Each Category Loan Losses to Total Loans Loan Losses to Total Loans (Dollars in thousands) End of period allocated to: Multi-family loans$ 61,711 35.4 % $ 56,731 34.1 % Commercial real estate loans 93,453 23.3 % 115,918 23.7 % Commercial and industrial loans 82,841 17.6 % 79,327 17.1 % Construction loans 12,820 2.2 % 7,267 2.0 % Residential mortgage loans 16,189 18.2 % 19,941 19.7 % Consumer and other loans 3,100 3.3 % 3,802 3.4 % Total allowance$ 270,114 100.0 %$ 282,986 100.0 % Securities. Securities are held primarily for liquidity, interest rate risk management and yield enhancement. Our Investment Policy requires that investment transactions conform to Federal and 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, corporate debt instruments, and mutual funds. In addition, we may invest in equity securities subject to certain limitations. Purchase and sale decisions are based upon a thorough pre-transaction analysis of each instrument 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. AtJune 30, 2021 , our securities portfolio represented 13.9% of our total assets. Securities, in the aggregate, decreased by$309.4 million , or 7.7%, to$3.73 billion atJune 30, 2021 fromDecember 31, 2020 . This decrease was primarily a result of paydowns and sales, partially offset by purchases. AtJune 30, 2021 , our allowance for credit losses on held-to-maturity debt securities was$2.1 million . Stock in theFederal Home Loan Bank , Bank Owned Life Insurance and Other Assets. The amount of stock we own in the FHLB increased by$40.0 million , or 25.0%, to$199.8 million atJune 30, 2021 from$159.8 million atDecember 31, 2020 . 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$226.3 million atJune 30, 2021 and$223.7 million atDecember 31, 2020 . Other assets were$145.2 million atJune 30, 2021 and$163.2 million atDecember 31, 2020 . The decrease in other assets was primarily driven by hedge-related assets. Deposits. AtJune 30, 2021 , deposits totaled$19.44 billion , representing 81.0% 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 are committed to our plan of attracting more core deposits because they 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 and treasury management products, designed to appeal to small and mid-sized businesses and non-profit organizations including electronic deposit services such as mobile and remote deposit capture. Interest rates, maturity terms, service fees and withdrawal penalties are all reviewed on a periodic basis. Deposit rates and terms are based primarily on our current operating strategies, market rates, liquidity requirements and competitive forces. We 61 -------------------------------------------------------------------------------- Table of Contents also rely on personalized customer service, long-standing relationships with customers and an active marketing program to attract and retain deposits. Deposits decreased by$86.5 million , or 0.4%, to$19.44 billion atJune 30, 2021 from$19.53 billion atDecember 31, 2020 primarily driven by decreases in money market and time deposits, offset by an increase in checking account deposits. Checking accounts increased$817.7 million to$10.52 billion atJune 30, 2021 from$9.71 billion atDecember 31, 2020 . Core deposits represented approximately 88% of our total deposit portfolio atJune 30, 2021 compared to 86% atDecember 31, 2020 . The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated: June 30, 2021 December 31, 2020 Percent of Total Percent of Total Balance Deposits Balance Deposits (Dollars in thousands) Non-interest bearing: Checking accounts$ 4,169,816 21.4 %$ 3,663,073 18.8 % Interest-bearing: Checking accounts 6,354,368 32.7 % 6,043,393 30.9 % Money market deposits 4,551,806 23.4 % 5,037,327 25.8 % Savings 2,076,711 10.7 % 2,063,447 10.6 % Certificates of deposit 2,286,265 11.8 % 2,718,179 13.9 % Total Deposits$ 19,438,966 100.0 %$ 19,525,419 100.0 % Borrowed Funds. Borrowings are primarily with the FHLB and are collateralized by our residential and commercial mortgage portfolios. Borrowed funds increased by$738.1 million , or 22.4%, to$4.03 billion atJune 30, 2021 from$3.30 billion atDecember 31, 2020 to support balance sheet growth. Stockholders' Equity. Stockholders' equity increased by$104.0 million to$2.81 billion atJune 30, 2021 from$2.71 billion atDecember 31, 2020 . The increase was primarily attributed to net income of$152.1 million , other comprehensive income of$17.7 million and share-based plan activity of$15.5 million for the six months endedJune 30, 2021 . These increases were partially offset by cash dividends paid of$0.28 per share totaling$69.2 million and the repurchase of 1.0 million shares of common stock for$12.0 million during the six months endedJune 30, 2021 . Liquidity and Capital Resources The Company's primary sources of funds are deposits, principal and interest payments on loans and securities, FHLB advances and other borrowings and, to a lesser extent, proceeds from the sale of loans and investment maturities. While scheduled amortization of loans is usually a predictable source of funds, deposit flows and mortgage and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity, including unsecured overnight lines of credit, brokered deposits and other types of borrowings. The Company's total borrowing capacity from the FHLB and other borrowing sources was approximately$22.69 billion , which includes outstanding borrowings atJune 30, 2021 . Excluding outstanding borrowings, available borrowing capacity and other available liquidity sources totaled approximately$12.57 billion atJune 30, 2021 . 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. These liquidity risk management practices have allowed us to effectively manage the market stress related to the COVID-19 pandemic that began in the first quarter of 2020. AtJune 30, 2021 , the Company had no overnight borrowings outstanding. The Company had$188.0 million of overnight borrowings outstanding atDecember 31, 2020 . The Company borrows directly from the FHLB and various financial institutions. The Company had total borrowings of$4.03 billion atJune 30, 2021 , an increase of$738.1 million from$3.30 billion atDecember 31, 2020 . In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. AtJune 30, 2021 , commitments to originate loans totaled$259.1 million ; unused home equity lines of credit and undisbursed business and construction loans totaled approximately$2.29 billion ; and outstanding standby letters of credit totaled$47.9 million . There were no outstanding commitments to sell loans. The Company expects to have sufficient funds available to meet current commitments in the normal course of business. Time deposits scheduled to mature in one year or less totaled$2.01 billion atJune 30, 2021 . Based upon historical experience, management estimates that a significant portion of such deposits will remain with the Company. 62
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Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities. OnMay 24, 2021 S&P revised our rating outlook to stable from negative to reflect decreasing economic risks and onJuly 30, 2021 our rating was placed on positive after the acquisition agreement with Citizens Financial Group was announced. InMay 2020 , S&P had revised our rating outlook to negative due to economic downturn from COVID-19.Regulatory Capital and Developments. Capital Requirements. Federal regulations requireFDIC insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. Common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income ("AOCI"), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). The Bank exercised its AOCI opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash andU.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four- family residential real estate loans, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginningJanuary 1, 2016 until fully implemented at 2.5% onJanuary 1, 2019 . CECL Capital Implications. OnJanuary 1, 2020 , the Company adopted the new accounting standard that requires the measurement of the allowance for credit loss to be based on the best estimate of lifetime expected credit losses inherent in the Company's relevant financial asset. OnMarch 27, 2020 , in response to the COVID-19 pandemic,U.S. banking regulators issued an interim final rule that the Company adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e. a five-year transition period). During the two-year delay, the Company will add back to common equity tier 1 capital ("CET1") 100% of the initial adoption impact of CECL plus 25% of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting onJanuary 1, 2022 , the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period. Paycheck Protection Program. OnApril 9, 2020 , in response to the economic impact of the COVID-19 pandemic, theFederal Reserve , OCC andFDIC issued an interim final rule that excludes loans pledged as collateral to theFederal Reserve's PPP Lending Facility from supplemental leverage ratio exposure, average total consolidated assets and Advanced and Standardized risk-weighted assets. Additionally, PPP loans, which are guaranteed by theSmall Business Administration , will receive a zero percent risk weight under theBasel 3 Advanced and Standardized approaches regardless of whether they are pledged as collateral to the PPP Lending Facility. OnDecember 27, 2020 , the Consolidated Appropriations Act, 2021, was enacted and included a reopening of the PPP. The Company does not have a material concentration of PPP loans for which risk-weighted assets will be impacted. 63 -------------------------------------------------------------------------------- Table of Contents As ofJune 30, 2021 , the Bank and the Company were considered "well capitalized" under applicable regulations and exceeded all regulatory capital requirements as follows: As of June 30, 2021 (1) Actual Minimum Capital Requirement with To be Well Capitalized
under Prompt
Conservation Buffer Corrective Action Provisions (2)
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Bank:
Tier 1 Leverage Ratio$ 2,440,375 9.39 %$ 1,039,813 4.00 %$ 1,299,766 5.00 % Common Equity Tier 1 Risk-Based Capital 2,440,375 11.67 % 1,463,983 7.00 % 1,359,412 6.50 % Tier 1 Risk Based Capital 2,440,375 11.67 % 1,777,693 8.50 % 1,673,123 8.00 %Total Risk-Based Capital 2,701,929 12.92 % 2,195,974 10.50 % 2,091,404 10.00 %Investors Bancorp, Inc. : Tier 1 Leverage Ratio$ 2,759,117 10.60 %$ 1,041,652 4.00 % n/a n/a Common Equity Tier 1 Risk-Based Capital 2,759,117 13.17 % 1,466,857 7.00 % n/a n/a Tier 1 Risk Based Capital 2,759,117 13.17 % 1,781,184 8.50 % n/a n/aTotal Risk-Based Capital 3,034,679 14.48 % 2,200,286 10.50 % n/a n/a
(1) For the purpose of calculating the Tier 1 leverage ratio, assets are based on adjusted total average assets. In calculating Tier 1 Venture Capital and Total Venture Capital, assets are based on Total Risk Weighted Assets. (2) The provisions for quick corrective actions do not apply to the bank holding company. Contractual obligations and off-balance sheet arrangements
Contractual Obligations and Commitments. In the ordinary course of business, we routinely enter into various financial obligations, including contractual obligations that may require future cash payments. As a financial provider, we routinely enter into commitments to extend credit, including loan commitments, standby and commercial letters of credit as well as unused lines of credit as discussed above in Liquidity and Capital Resources. 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. The following table shows the contractual obligations of the Company by expected payment period as ofJune 30, 2021 : Contractual Obligations Total Less than One Year One-Two Years Two-Three Years More
only three years
(In thousands) Debt obligations (excluding finance leases)$ 4,033,864 2,549,830 648,813 547,899 287,322 Commitments to originate and purchase loans$ 259,087 259,087 - - - Commitments to sell loans $ - - - - - Debt obligations include borrowings from the FHLB and other borrowings. The borrowings have defined terms, and none of the borrowings were callable at the option of the lender as ofJune 30, 2021 . Additionally, atJune 30, 2021 , the Company's commitments to fund unused lines of credit totaled$2.29 billion . Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In addition to the contractual obligations previously discussed, we have other liabilities which include$213.1 million of operating lease liabilities of which$3.6 million was acquired fromGold Coast during the year endedDecember 31, 2020 . We have$1.6 million of finance lease liabilities. These contractual obligations as ofJune 30, 2021 have not changed significantly fromDecember 31, 2020 . 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. 64 -------------------------------------------------------------------------------- Table of Contents Derivative Instruments and Hedging Activities. The Company has entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's borrowings and loans. During the three and six months endedJune 30, 2021 , 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 rate assets. These derivatives had an aggregate notional amount of$3.58 billion as ofJune 30, 2021 . During the year endedDecember 31, 2020 , the Company terminated two interest rate swaps with an aggregate notional amount of$475.0 million that had been used to hedge changes in the fair value of certain pools of prepayable fixed- and adjustable-rate assets. Also during the year endedDecember 31, 2020 , the Company terminated four interest rate swaps with an aggregate notional of$400.0 million that had been designated as cash flow hedges on wholesale funding. The Company has credit derivatives resulting from participation in interest rate swaps provided to external lenders as part of loan participation arrangements which are, therefore, not used to manage interest rate risk in the Company's assets or liabilities. Additionally, the Company provides interest rate risk management services to commercial customers, primarily interest rate swaps. The Company's market risk from unfavorable movements in interest rates related to these derivative contracts is minimized by concurrently entering into offsetting derivative contracts that have identical notional values, terms and indices.
For more information on 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
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