Investors Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Investors Bancorp, Inc.	a6302015-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Investors Bancorp, Inc.	a6302015-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Investors Bancorp, Inc.	a6302015-ex311.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended: June 30, 2015

Commission file number: 001-36441

Investors Bancorp, Inc.

(Exact name of registrant as specified in its charter)




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

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

(973) 924-5100

(Registrant’s telephone number)

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

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

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




Large accelerated filer	þ		Accelerated filer
Non-accelerated filer		(Do not check if a smaller reporting company)	Smaller reporting company

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

As of August 3, 2015, the registrant had 359,070,852 shares of common stock, par value $0.01 per share, issued and 345,503,955 outstanding.

Table of Contents

INVESTORS BANCORP, INC.

FORM 10-Q

Index



	Part I. Financial Information
		Page
Item 1. Financial Statements
	Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	1
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	3
	Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)	6
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4.	Controls and Procedures	59
Part II. Other Information
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61
	Signature Page	62

Table of Contents

Part I Financial Information



ITEM 1.	FINANCIAL STATEMENTS

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 2015 (Unaudited) and December 31, 2014



	June 30, 2015			December 31, 2014
	(In thousands)
ASSETS
Cash and cash equivalents	$	228,967		230,961
Securities available-for-sale, at estimated fair value	1,276,766			1,197,924
Securities held-to-maturity, net (estimated fair value of $1,812,785 and $1,609,365 at June 30, 2015 and December 31, 2014, respectively)	1,760,558			1,564,479
Loans receivable, net	15,475,787			14,887,570
Loans held-for-sale	363,048			6,868
Stock in the Federal Home Loan Bank	186,412			151,287
Accrued interest receivable	57,817			55,267
Other real estate owned	9,212			7,839
Office properties and equipment, net	167,588			160,899
Net deferred tax asset	239,411			231,898
Bank owned life insurance	157,215			161,609
Goodwill and Intangible assets	105,263			106,705
Other assets	9,372			10,333
Total assets	$	20,037,416		18,773,639
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	12,872,829		12,172,326
Borrowed funds	3,446,121			2,766,104
Advance payments by borrowers for taxes and insurance	86,643			69,893
Other liabilities	223,369			187,461
Total liabilities	16,628,962			15,195,784
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 100,000,000 authorized shares; none issued	—			—
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 359,070,852 issued at June 30, 2015 and December 31, 2014; 347,752,205 and 358,012,895 outstanding at June 30, 2015 and December 31, 2014, respectively	3,591			3,591
Additional paid-in capital	2,775,479			2,863,108
Retained earnings	877,211			836,639
Treasury stock, at cost; 11,318,647 and 1,057,957 shares at June 30, 2015 and December 31, 2014, respectively	(136,872		)	(11,131	)
Unallocated common stock held by the employee stock ownership plan	(89,580		)	(91,948	)
Accumulated other comprehensive loss	(21,375		)	(22,404	)
Total stockholders’ equity	3,408,454			3,577,855
Total liabilities and stockholders’ equity	$	20,037,416		18,773,639

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
	(Dollars in thousands, except per share data)
Interest and dividend income:
Loans receivable and loans held-for-sale	$	165,515	$	149,531	$	324,567	$	295,501
Securities:
Equity	24		21		48		65
Government-sponsored enterprise obligations	12		12		23		24
Mortgage-backed securities	13,385		10,992		26,202		20,105
Municipal bonds and other debt	1,024		1,548		2,616		2,802
Interest-bearing deposits	27		274		56		309
Federal Home Loan Bank stock	1,542		1,711		3,176		3,908
Total interest and dividend income	181,529		164,089		356,688		322,714
Interest expense:
Deposits	16,429		14,385		32,448		28,757
Borrowed Funds	16,548		14,941		31,247		30,004
Total interest expense	32,977		29,326		63,695		58,761
Net interest income	148,552		134,763		292,993		263,953
Provision for loan losses	7,000		8,000		16,000		17,000
Net interest income after provision for loan losses	141,552		126,763		276,993		246,953
Non-interest income
Fees and service charges	4,578		5,325		8,602		10,157
Income on bank owned life insurance	975		1,034		2,012		1,965
Gain on loan transactions, net	3,104		1,263		4,323		2,909
Gain on securities transactions	42		108		84		639
Gain on sale of other real estate owned, net	238		333		310		464
Other income	2,648		2,110		4,787		5,981
Total non-interest income	11,585		10,173		20,118		22,115
Non-interest expense
Compensation and fringe benefits	45,344		53,213		88,676		93,029
Advertising and promotional expense	2,737		3,385		5,272		5,954
Office occupancy and equipment expense	11,996		12,232		24,542		24,983
Federal deposit insurance premiums	2,400		4,000		4,600		8,800
Stationery, printing, supplies and telephone	786		1,183		1,637		2,396
Professional fees	4,442		3,774		7,713		7,564
Data processing service fees	5,346		7,141		10,796		13,305
Contribution to charitable foundation	—		20,000		—		20,000
Other operating expenses	6,785		7,226		13,508		13,322
Total non-interest expenses	79,836		112,154		156,744		189,353
Income before income tax expense	73,301		24,782		140,367		79,715
Income tax expense	26,939		9,596		52,058		30,111
Net income	$	46,362	$	15,186	$	88,309	$	49,604
Basic and Diluted earnings per share	$	0.14	$	0.04	$	0.26	$	0.14
Weighted average shares outstanding
Basic	333,277,572		344,455,224		338,727,198		345,003,202
Diluted	336,452,548		347,980,539		341,869,777		349,116,256

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(In thousands)
Net income	$	46,362		$	15,186		$	88,309		$	49,604
Other comprehensive (loss) income, net of tax:
Change in funded status of retirement obligations	208			109			414			218
Unrealized (loss) gain on securities available-for-sale	(5,624		)	3,155			(528		)	5,885
Accretion of loss on securities reclassified to held to maturity	380			436			761			869
Reclassification adjustment for security gains included in net income	—			(4		)	—			(138		)
Other-than-temporary impairment accretion on debt securities	189			199			382			397
Total other comprehensive (loss) income	(4,847		)	3,895			1,029			7,231
Total comprehensive income	$	41,515		$	19,081		$	89,338		$	56,835

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. & SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Six Months Ended June 30, 2015 and 2014

(Unaudited)



	Common stock		Additional paid-in capital		Retained earnings		Treasury stock		Unallocated Common Stock Held by ESOP		Accumulated other comprehensive loss		Total stockholders’ equity
	(In thousands)
Balance at December 31, 2013	1,519		720,766		734,563		(67,046	)	(29,779	)	(25,696	)	1,334,327
Net income	—		—		49,604		—		—		—		49,604
Other comprehensive income, net of tax	—		—		—		—		—		7,231		7,231
Corporate Reorganization
Conversion of Investors Bancorp, MHC (213,963,274 shares)	2,140		2,091,579		—		—		—		—		2,093,719
Purchase by ESOP (6,617,421 shares)	66		66,108		—		—		(66,174	)	—		—
Treasury stock retired (14,293,439 shares)	(143	)	(64,126	)	—		64,269		—		—		—
Contribution of MHC	—		—		12,652		—		—		—		12,652
Equity from Gateway acquisition	—		22,000		—		—		—		—		22,000
Purchase of treasury stock (1,295,193 shares)	—				—		(13,524	)	—		—		(13,524	)
Treasury stock allocated to restricted stock plan	—		(390	)	258		132		—		—		—
Compensation cost for stock options and restricted stock	—		13,682		—		—		—		—		13,682
Net tax benefit from stock-based compensation	—		2,636		—		—		—		—		2,636
Option Exercise	—		3,811		—		4,577		—		—		8,388
Cash dividend paid ($0.04 per common share)	—		—		(13,954	)	—		—		—		(13,954	)
ESOP shares allocated or committed to be released	—		836		—		—		1,356		—		2,192
Balance at June 30, 2014	3,582		2,856,902		783,123		(11,592	)	(94,597	)	(18,465	)	3,518,953

Balance at December 31, 2014	3,591		2,863,108		836,639		(11,131	)	(91,948	)	(22,404	)	3,577,855
Net income	—		—		88,309		—		—		—		88,309
Other comprehensive income, net of tax	—		—		—		—		—		1,029		1,029
Purchase of treasury stock (17,951,462 shares)	—		—		—		(215,070	)	—		—		(215,070	)
Treasury stock allocated to restricted stock plan	—		(85,897	)	5,473		80,424		—		—		—
Compensation cost for stock options and restricted stock	—		355		—		—		—		—		355
Net tax benefit from stock-based compensation	—		1,453		—		—		—		—		1,453
Option exercise	—		(3,945	)	—		8,905		—		—		4,960
Cash dividend paid ($0.15 per common share)	—		—		(53,210	)	—		—		—		(53,210	)

Table of Contents



ESOP shares allocated or committed to be released	—		405	—	—		2,368		—		2,773
Balance at June 30, 2015	$	3,591	2,775,479	877,211	(136,872	)	(89,580	)	(21,375	)	3,408,454

See accompanying notes to consolidated financial statements

Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended June 30,
	2015			2014
	(In thousands)
Cash flows from operating activities:
Net income	$	88,309		49,604
Adjustments to reconcile net income to net cash provided by operating activities:
Contribution of stock to charitable foundation	—			10,000
ESOP and stock-based compensation expense	3,128			15,874
Amortization of premiums and accretion of discounts on securities, net	6,950			3,531
Amortization of premiums and accretion of fees and costs on loans, net	(2,744		)	2,062
Amortization of intangible assets	1,708			1,935
Provision for loan losses	16,000			17,000
Depreciation and amortization of office properties and equipment	6,210			5,756
Gain on securities, net	(84		)	(639	)
Mortgage loans originated for sale	(131,793		)	(62,771	)
Proceeds from mortgage loan sales	125,209			91,643
Gain on sales of mortgage loans, net	(2,264		)	(1,238	)
Gain on sale of other real estate owned	(310		)	(464	)
Gain on bargain purchase	—			(1,482	)
Income on bank owned life insurance	(2,012		)	(1,965	)
Increase in accrued interest receivable	(2,550		)	(5,071	)
Deferred tax benefit	(8,076		)	115
Decrease in other assets	1,030			8,036
Increase in other liabilities	36,613			47,768
Total adjustments	47,015			130,090
Net cash provided by operating activities	135,324			179,694
Cash flows from investing activities:
Purchases of loans receivable	(23,841		)	(149,404	)
Net originations of loans receivable	(954,848		)	(564,397	)
Proceeds from sale of loans held for investment	28,561			1,670
Gain on disposition of loans held for investment	(2,059		)	(1,670	)
Net proceeds from sale of foreclosed real estate	1,985			4,025
Purchases of mortgage-backed securities held to maturity	(319,848		)	(679,906	)
Purchases of debt securities held-to-maturity	(20,209		)	(2,990	)
Purchases of mortgage-backed securities available-for-sale	(200,736		)	(388,798	)
Proceeds from paydowns/maturities on mortgage-backed securities held-to-maturity	118,678			62,231
Proceeds from paydowns on equity securities available for sale	254			293
Proceeds from paydowns/maturities on debt securities held-to-maturity	1,203			8,317
Proceeds from calls/maturities on debt securities held-to-maturity	23,367			—
Proceeds from paydowns/maturities on mortgage-backed securities available-for-sale	116,376			70,865

Table of Contents



Proceeds from sales of mortgage-backed securities available-for-sale	—			37,682
Proceeds from maturity of US Government and Agency Obligations available-for-sale	14			3,000
Proceeds from sale of equity securities available for sale	—			13,411
Redemption of equity securities available-for-sale	—			164
Proceeds from redemptions of Federal Home Loan Bank stock	93,596			104,080
Purchases of Federal Home Loan Bank stock	(128,721		)	(68,749	)
Purchases of office properties and equipment	(12,899		)	(15,083	)
Death benefit proceeds from bank owned life insurance	6,406			1,188
Cash received from MHC for merger	—			11,307
Cash received, net of cash consideration paid for acquisitions	—			17,917
Net cash used in investing activities	(1,272,721		)	(1,534,847	)
Cash flows from financing activities:
Net increase in deposits	700,503			272,953
Net proceeds from sale of common stock	—			2,149,893
Loan to ESOP for purchase of common stock	—			(66,174	)
(Repayments) proceeds of funds borrowed under other repurchase agreements	—			(98,205	)
Net increase (decrease) in other borrowings	680,017			(845,169	)
Net increase in advance payments by borrowers for taxes and insurance	16,750			9,011
Dividends paid	(53,210		)	(13,954	)
Exercise of stock options	4,960			8,388
Purchase of treasury stock	(215,070		)	(13,524	)
Net tax benefit from stock-based compensation	1,453			2,636
Net cash provided by financing activities	1,135,403			1,405,855
Net (increase) decrease in cash and cash equivalents	(1,994		)	50,702
Cash and cash equivalents at beginning of period	230,961			250,689
Cash and cash equivalents at end of period	$	228,967		301,391
Supplemental cash flow information:
Non-cash investing activities:
Real estate acquired through foreclosure	$	3,383		2,679
Cash paid during the year for:
Interest	63,498			58,600
Income taxes	48,140			46,850
Acquisitions:
Non-cash assets acquired:
Investment securities available for sale	$	—		50,347
Loans	—			195,062
Goodwill and other intangible assets, net	—			1,853
Other assets	—			21,343
Total non-cash assets acquired	—			268,605
Liabilities assumed:
Deposits	—			254,672
Borrowings	—			5,185
Other liabilities	—			3,184
Total liabilities assumed	—			263,041

Table of Contents

See accompanying notes to consolidated financial statements.

Table of Contents

INVESTORS BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Basis of Presentation

Investors Bancorp, Inc. (the “Company”) is a Delaware corporation that was incorporated in December 2013 to be the successor to Investors Bancorp, Inc. (“Old Investors Bancorp”) upon completion of the mutual-to-stock conversion of Investors Bancorp, MHC, the top tier holding company of Old Investors Bancorp. Old Investors Bancorp was the former mid tier holding company for Investors Bank. Prior to completion of the second step conversion, approximately 62% of the shares of common stock of Old Investors Bancorp was owned by Investors Bancorp, MHC. In conjunction with the second step conversion, Investors Bancorp, MHC merged into Old Investors Bancorp (and ceased to exist), and Old Investors Bancorp merged into the Company and the Company became its successor under the name Investors Bancorp, Inc. The second step conversion was completed May 7, 2014. The Company raised net proceeds of $2.15 billion by selling a total of 219,580,695 shares of common stock at $10.00 per share in the second step stock offering and issued 1,000,000 shares of common stock to the Investors Charitable Foundation. Concurrent with the completion of the stock offering, each share of Old Investors Bancorp common stock owned by public stockholders (stockholders other than Investors Bancorp, MHC) was exchanged for 2.55 shares of Company common stock, as such all share information prior to May 7, 2014 has been adjusted to reflect the ratio. A total of 137,560,968 shares of Company common stock were issued in the exchange. The conversion was accounted for as a capital raising transaction by entities under common control. The historical financial results of Investors Bancorp, MHC were immaterial to the results of the Company and therefore upon completion of the conversion, the net assets of Investors Bancorp, MHC were merged into the Company and are reflected as an increase to stockholders' equity. In addition, the second step conversion resulted in the accelerated vesting of all outstanding stock awards as of the conversion date. The withholding of shares for payment of taxes with respect to these awards resulted in treasury stock of 1,101,694 shares.

In the opinion of management, all the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the six months ended June 30, 2015 are not necessarily indicative of the results of operations that may be expected for subsequent periods or the full year results.

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of the Form 10-Q. The consolidated financial statements presented should be read in conjunction with the Company’s audited consolidated financial statements and notes to the audited consolidated financial statements included in the Company’s December 31, 2014 Annual Report on Form 10-K. Certain reclassifications have been made to prior year amounts to conform to current year presentation.

2. Stock Transactions

Stock Repurchase Programs

In connection with the second step conversion completed on May 7, 2014, the existing stock repurchase plan was terminated. Under applicable federal regulations, the Company was not permitted to implement a stock repurchase program during the first year following completion of the second-step conversion without prior notice to, and the receipt of a non-objection from the Federal Reserve Board. On March 16, 2015, the Company announced it had received approval from the Board of Governors of the Federal Reserve System to commence a 5% buyback program prior to the one-year anniversary of the completion of its second step conversion. Accordingly, the Board of Directors authorized the repurchase of 17,911,561 shares.

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

During the six months ended June 30, 2015, the Company purchased 17,951,462 shares at a cost of $215.1 million, or approximately $11.98 per share.

3. Business Combinations

On January 10, 2014, the Company completed its acquisition of Gateway Community Financial Corp., the federally-chartered holding company for GCF Bank ("Gateway"), which operated 4 branches in Gloucester County, New Jersey. After the purchase accounting adjustments, the Company added $254.7 million in customer deposits and acquired $195.1 million in loans. This transaction generated $1.9 million in core deposit premium. The acquisition was accounted for under the acquisition method

Table of Contents

of accounting as prescribed by Financial Accounting Standards Board ("FASB") ASC 805 “Business Combinations”, as amended. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The acquisition resulted in a bargain purchase gain of $1.5 million, net of tax. In conjunction with the acquisition, Investors Bancorp issued 1,945,079 shares to Investors Bancorp, MHC which was determined using the closing average twenty day stock price of Investors Bancorp's common stock. GCF Bank was merged into the Bank as of the acquisition date.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for Gateway Financial, net of cash consideration paid:



	At January 10, 2014
	(In millions)
Cash and cash equivalents, net	$	17.9
Securities available-for-sale	50.3
Loans receivable	195.1
Accrued interest receivable	0.7
Other real estate owned	0.4
Office properties and equipment, net	4.3
Intangible assets	1.9
Other assets	15.9
Total assets acquired	286.5
Deposits	(254.7		)
Borrowed funds	(5.2		)
Other liabilities	(3.1		)
Total liabilities assumed	(263.0		)
Net assets acquired	$	23.5

The purchase accounting for the Gateway Financial transaction is complete and reflected in the table above and in our consolidated financial statements.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the Gateway acquisition based on guidance from ASC 820-10 which defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.

Securities. The estimated fair values of the investment securities classified as available for sale were calculated utilizing Level 1 inputs. The prices for these instruments are based upon sales of the securities shortly after the acquisition date. The Company reviewed the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

Loans. Level 3 inputs were utilized to value the acquired loan portfolio and included the use of present value techniques employing cash flow estimates and the incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses we believe a market participant might employ in estimating the entire fair value adjustment required under ASC 820-10. The three separate fair valuation methodologies used are: 1) interest rate loan fair value analysis, 2) general credit fair value adjustment, and 3) specific credit fair value adjustment.

To prepare the interest rate fair value analysis, loans were assembled into groupings by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment.

The general credit fair value adjustment was calculated using a two part general credit fair value analysis; 1) expected lifetime losses and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using

Table of Contents

an average of historical losses of the Company, the acquired banks and peer banks. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of familiarity with the originator's underwriting process.

To calculate the specific credit fair value adjustment the Company reviewed the acquired loan portfolio for loans meeting the definition of an impaired loan as defined by ASC 310-30. Loans meeting this criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value will result in an accretable yield amount. The accretable yield amount will be recognized over the life of the loans on a level yield basis as an adjustment to yield.

Deposits / Core Deposit Premium. Core deposit premium represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost alternative funding sources and is valued utilizing Level 2 inputs.

Certificates of deposit (time deposits) are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of certificates of deposits represents the present value of the certificates' expected contractual payments discounted by market rates for similar CDs and is valued utilizing Level 2 inputs.

Borrowed Funds. The present value approach was used to determine the fair value of the borrowed funds acquired during 2014. The fair value of the liability represents the present value of the expected payments using the current rate of a replacement borrowing of the same type and remaining term to maturity and is valued utilizing Level 2 inputs.

Table of Contents

4. Earnings Per Share

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



	For the Three Months Ended June 30,
	2015					2014
	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
	(Dollars in thousands, except per share data)
Net Income	$	46,362				$	15,186
Basic earnings per share:
Income available to common stockholders	$	46,362	333,277,572	$	0.14	$	15,186	344,455,224	$	0.04
Effect of dilutive common stock equivalents (1)			3,174,976					3,525,315
Diluted earnings per share:
Income available to common stockholders	$	46,362	336,452,548	$	0.14	$	15,186	347,980,539	$	0.04

(1) For the three months ended June 30, 2015 and 2014, there were 18,454,239 and 114,750 equity awards, respectively, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.



	For the Six Months Ended June 30,
	2015					2014
	Income		Shares	Per Share Amount		Income		Shares	Per Share Amount
	(Dollars in thousands, except per share data)
Net Income	$	88,309				$	49,604
Basic earnings per share:
Income available to common stockholders	$	88,309	338,727,198	$	0.26	$	49,604	345,003,202	$	0.14
Effect of dilutive common stock equivalents (1)			3,142,579					4,113,054
Diluted earnings per share:
Income available to common stockholders	$	88,309	341,869,777	$	0.26	$	49,604	349,116,256	$	0.14

(1) For the six months ended June 30, 2015 and 2014, there were 18,454,239 and 114,750 equity awards, respectively, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.

5. Securities

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

Table of Contents



	At June 30, 2015
	Carrying value		Gross unrealized gains	Gross unrealized losses	Estimated fair value
	(In thousands)
Available-for-sale:
Equity securities	$	6,717	2,084	—	8,801
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	514,470		5,446	1,240	518,676
Federal National Mortgage Association	744,399		6,890	2,116	749,173
Government National Mortgage Association	115		1	—	116
Total mortgage-backed securities available-for-sale	1,258,984		12,337	3,356	1,267,965
Total available-for-sale securities	$	1,265,701	14,421	3,356	1,276,766



	At June 30, 2015
	Amortized cost		Net unrealized losses (1)		Carrying value	Gross unrecognized gains (2)	Gross unrecognized losses (2)	Estimated fair value
	(In thousands)
Held-to-maturity:
Debt securities:
Government-sponsored enterprises	$	4,311	—		4,311	28	—	4,339
Municipal bonds	21,162		—		21,162	880	—	22,042
Corporate and other debt securities	59,174		(24,402	)	34,772	43,145	—	77,917
Total debt securities held-to-maturity	84,647		(24,402	)	60,245	44,053	—	104,298
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	519,806		(3,096	)	516,710	3,756	1,701	518,765
Federal National Mortgage Association	1,162,740		(3,276	)	1,159,464	9,780	3,738	1,165,506
Government National Mortgage Association	24,058		—		24,058	77	—	24,135
Federal Housing Authorities	81		—		81	—	—	81
Total mortgage-backed securities held-to-maturity	1,706,685		(6,372	)	1,700,313	13,613	5,439	1,708,487
Total held-to-maturity securities	$	1,791,332	(30,774	)	1,760,558	57,666	5,439	1,812,785

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

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

Table of Contents



	At December 31, 2014
	Carrying value		Gross unrealized gains	Gross unrealized losses	Estimated fair value
	(In thousands)
Available-for-sale:
Equity securities	$	6,887	1,636	—	8,523
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	503,268		5,023	1,008	507,283
Federal National Mortgage Association	675,535		7,641	1,184	681,992
Government National Mortgage Association	125		1	—	126
Total mortgage-backed securities available-for-sale	1,178,928		12,665	2,192	1,189,401
Total available-for-sale securities	$	1,185,815	14,301	2,192	1,197,924



	At December 31, 2014
	Amortized cost		Net unrealized losses (1)		Carrying Value	Gross unrecognized gains (2)	Gross unrecognized losses (2)	Estimated fair value
	(In thousands)
Held-to-maturity:
Debt securities:
Government-sponsored enterprises	$	4,388	—		4,388	15	—	4,403
Municipal bonds	24,320		—		24,320	1,001	—	25,321
Corporate and other debt securities	58,487		(25,047	)	33,440	32,163	367	65,236
Total debt securities held-to-maturity	87,195		(25,047	)	62,148	33,179	367	94,960
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	504,407		(3,770	)	500,637	3,561	1,878	502,320
Federal National Mortgage Association	978,261		(3,885	)	974,376	11,629	1,218	984,787
Government National Mortgage Association	27,136		—		27,136	—	20	27,116
Federal housing authorities	182		—		182	—	—	182
Total mortgage-backed securities held-to-maturity	1,509,986		(7,655	)	1,502,331	15,190	3,116	1,514,405
Total held-to-maturity securities	$	1,597,181	(32,702	)	1,564,479	48,369	3,483	1,609,365

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

Table of Contents

Gross unrecognized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014, was as follows:



	June 30, 2015
	Less than 12 months			12 months or more		Total
	Estimated fair value		Unrealized losses	Estimated fair value	Unrealized losses	Estimated fair value	Unrealized losses
	(In thousands)
Available-for-sale:
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	$	162,028	1,238	6,344	2	168,372	1,240
Federal National Mortgage Association	203,132		1,499	32,211	617	235,343	2,116
Total mortgage-backed securities available-for-sale	365,160		2,737	38,555	619	403,715	3,356
Total available-for-sale securities	$	365,160	2,737	38,555	619	403,715	3,356
Held-to-maturity:
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	$	225,123	1,272	5,586	429	230,709	1,701
Federal National Mortgage Association	334,309		2,961	30,886	777	365,195	3,738
Total mortgage-backed securities held-to-maturity	559,432		4,233	36,472	1,206	595,904	5,439
Total held-to-maturity securities	$	559,432	4,233	36,472	1,206	595,904	5,439
Total	$	924,592	6,970	75,027	1,825	999,619	8,795

Table of Contents



	December 31, 2014
	Less than 12 months			12 months or more		Total
	Estimated fair value		Unrealized losses	Estimated fair value	Unrealized losses	Estimated fair value	Unrealized losses
	(In thousands)
Available-for-sale:
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	$	76,525	426	60,394	582	136,919	1,008
Federal National Mortgage Association	67,017		50	52,519	1,134	119,536	1,184
Total mortgage-backed securities available-for-sale	143,542		476	112,913	1,716	256,455	2,192
Total available-for-sale securities	143,542		476	112,913	1,716	256,455	2,192
Held-to-maturity:
Debt securities:
Corporate and other debt securities	$	674	40	233	327	907	367
Total debt securities held-to-maturity	674		40	233	327	907	367
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	199,962		1,043	47,892	835	247,854	1,878
Federal National Mortgage Association	145,520		371	37,517	847	183,037	1,218
Government National Mortgage Association	27,116		20	—	—	27,116	20
Total mortgage-backed securities held-to-maturity	372,598		1,434	85,409	1,682	458,007	3,116
Total held-to-maturity securities	$	373,272	1,474	85,642	2,009	458,914	3,483
Total	$	516,814	1,950	198,555	3,725	715,369	5,675

At June 30, 2015 gross unrealized losses relate to our mortgage-backed-security portfolio which are securities issued by U.S. Government Sponsored Enterprises. The fair value of these securities have been negatively impacted by the recent increase in intermediate-term market interest rates. The gross unrealized losses at December 31, 2014 also relate to our mortgage-backed-security portfolio as well as our corporate and other debt securities whose estimated fair value has been adversely impacted by the economic environment, current market interest rates, wider credit spreads and credit deterioration subsequent to the purchase of these securities.

At June 30, 2015, the portfolio of corporate and other debt securities includes trust preferred securities ("TruPS") with an amortized cost and estimated fair values of $34.8 million and $77.9 million, respectively. The following table summarizes the Company’s pooled trust preferred securities as of June 30, 2015 excluding one trust preferred security for which the Company previously recorded a net other-than-temporary impairment charge which resulted in a zero net book balance for the security. At June 30, 2015 the security had a fair value of $159,000. The Company does not own any single-issuer trust preferred securities.

Table of Contents



(Dollars in 000’s)
Description	Class	Book Value		Fair Value		Unrealized Gains		Number of Issuers Currently Performing	Current Deferrals and Defaults as a % of Total Collateral (1)		Expected Deferrals and Defaults as % of Remaining Collateral (2)		Excess Subordination as a % of Performing Collateral (3)		Moody’s/ Fitch Credit Ratings
Alesco PF II	B1	$	363	$	787	$	424	31	7.62	%	6.85	%	—	%	Caa3 / C
Alesco PF III	B1	939		2,087		1,148		29	12.35	%	7.26	%	—	%	Ca / C
Alesco PF III	B2	376		835		459		29	12.35	%	7.26	%	—	%	Ca / C
Alesco PF IV	B1	449		839		389		38	1.19	%	9.11	%	—	%	C / C
Alesco PF VI	C2	828		1,852		1,024		42	7.61	%	11.29	%	—	%	Ca / C
MM Comm III	B	172		3,159		2,987		6	30.00	%	5.72	%	12.84	%	Ba1 / BB
MMCaps XVII	C1	1,835		2,722		887		32	13.45	%	7.47	%	—	%	Caa1 / C
MMCaps XIX	C	624		1,009		384		36	22.45	%	8.40	%	—	%	C / C
Tpref I	B	1,677		2,531		855		5	54.22	%	11.07	%	—	%	Ca / WD
Tpref II	B	4,467		6,489		2,022		20	34.91	%	7.91	%	—	%	Caa3 / C
US Cap I	B2	997		1,980		983		31	10.51	%	6.68	%	—	%	B3 / C
US Cap I	B1	2,973		5,939		2,966		31	10.51	%	6.68	%	—	%	B3 / C
US Cap II	B1	1,565		3,249		1,684		35	13.42	%	9.90	%	—	%	B3 / C
US Cap III	B1	2,020		3,311		1,291		29	16.22	%	9.50	%	—	%	Caa2 / C
Trapeza XII	C1	2,040		5,059		3,019		33	20.01	%	9.61	%	—	%	C / C
Trapeza XIII	C1	2,166		5,883		3,717		48	13.46	%	9.34	%	—	%	Ca / CC
Pretsl XXII	A1	508		1,439		931		72	19.12	%	11.89	%	31.40	%	A1 / A
Pretsl XXIV	A1	1,510		4,073		2,563		62	26.55	%	12.31	%	24.85	%	A3 / BBB
Pretsl IV	Mez	154		222		68		6	18.05	%	6.72	%	19.00	%	B1 / BB
Pretsl VII	Mez	522		2,277		1,755		12	47.77	%	9.63	%	—	%	Ca / WD
Pretsl XV	B1	943		2,462		1,519		59	11.61	%	12.48	%	—	%	Caa3 / C
Pretsl XVII	C	852		2,003		1,151		36	21.14	%	16.12	%	—	%	C / CC
Pretsl XVIII	C	1,816		3,507		1,689		49	22.74	%	9.37	%	—	%	Ca / C
Pretsl XIX	C	811		1,796		983		53	5.19	%	12.61	%	—	%	C / C
Pretsl XX	C	481		1,168		687		45	20.31	%	12.18	%	—	%	Ca / C
Pretsl XXI	C1	824		3,656		2,833		52	18.55	%	11.25	%	—	%	Ca / C
Pretsl XXIII	A-FP	348		1,777		1,430		94	18.90	%	10.99	%	18.28	%	Aa2 / BBB
Pretsl XXIV	C1	772		1,356		585		62	26.55	%	12.31	%	—	%	C / C
Pretsl XXV	C1	513		1,321		809		52	23.39	%	11.11	%	—	%	C / C
Pretsl XXVI	C1	597		1,545		948		55	23.36	%	10.65	%	—	%	C / C
Pref Pretsl IX	B2	405		953		548		28	25.48	%	8.59	%	—	%	B3 / C
Pretsl X	C2	225		472		248		32	26.90	%	9.32	%	—	%	Caa1 / C
		$	34,772	$	77,758	$	42,986


(1)	At June 30, 2015, current deferrals and defaults as a percent of collateral ranged from 1.2% to 54.2%.


(2)	At June 30, 2015, expected deferrals and defaults as a percent of remaining collateral ranged from 5.7% to 16.1%.

(3)

Excess subordination represents the amount of remaining performing collateral that is in excess of the amount needed to pay off a specified class of bonds and all classes senior to the specified class. Excess subordination reduces an investor’s potential risk of loss on their investment as excess subordination absorbs principal and interest shortfalls in the event underlying issuers are not able to make their contractual payments.

Table of Contents

A portion of the Company’s securities are pledged to secure borrowings. The contractual maturities of mortgage-backed securities are generally less than 20 years with effective lives expected to be shorter due to anticipated prepayments. Expected maturities may differ from contractual maturities due to prepayment or early call privileges of the issuer, therefore, mortgage-backed securities are not included in the following table. The amortized cost and estimated fair value of debt securities at June 30, 2015, by contractual maturity, are shown below.



	June 30, 2015
	Carrying Value		Estimated fair value
	(In thousands)
Due in one year or less	$	17,990	17,992
Due after one year through five years	2,477		2,504
Due after five years through ten years	—		—
Due after ten years	39,778		83,802
Total	$	60,245	104,298

Other-Than-Temporary Impairment (“OTTI”)

We conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If a determination is made that a debt security is other-than-temporarily impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as an other-than-temporary impairment charge in non-interest income. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.

With the assistance of a valuation specialist, we evaluate the credit and performance of each underlying issuer of our trust preferred securities by deriving probabilities and assumptions for default, recovery and prepayment/amortization for the expected cash flows for each security. At June 30, 2015, management deemed that the present value of projected cash flows for each security was greater than the book value and did not recognize any additional OTTI charges for the period ended June 30, 2015. At June 30, 2015, non-credit related OTTI recorded on the previously impaired pooled trust preferred securities was $24.4 million ($14.4 million after-tax) and is being accreted into income over the estimated remaining life of the securities.

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



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2015			2014		2015			2014
	(In thousands)
Balance of credit related OTTI, beginning of period	$	107,844		111,375		$	108,817		$	112,235
Additions:
Initial credit impairments	—			—		—			—
Subsequent credit impairments	—			—		—			—
Reductions:
Accretion of credit loss impairment due to an increase in expected cash flows	(972		)	(853	)	(1,945		)	(1,713		)
Balance of credit related OTTI, end of period	$	106,872		110,522		106,872			110,522

The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the securities prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to the period presented. If other-than-temporary impairment is recognized in earnings for credit impaired debt securities, they would be presented as additions in two components based upon whether the current period is the first time a debt security was credit impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if the Company sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) the Company receives cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures or (iii) the security is fully written down.

Table of Contents

Realized Gains and Losses

Gains and losses on the sale of all securities are determined using the specific identification method. For the three and six months ended June 30, 2015, the Company recognized gains on available-for-sale securities of $42,000 and $84,000 which were related to capital distributions of equity securities from the available-for-sale portfolio. For the three and six months ended June 30, 2015 there were no losses recognized.

For the three and six months ended June 30, 2014, the Company recognized gains on available-for-sale securities of $108,000 and $639,000, of which $108,000 and $116,000 were related to capital distributions of equity securities from the available-for-sale portfolio. In December 2013, regulatory agencies adopted a rule on the treatment of certain collateralized debt obligations backed by trust preferred securities to implement sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Volcker Rule. As a result of the evaluation of the impact of the Volcker Rule, the Company reclassified one trust preferred security to available-for-sale. The Company sold the security during the six months ended June 30, 2014. Proceeds from the sale of that security was $911,000 which resulted in gross realized gains of $474,000. In addition, for the three months ended June 30, 2014, the Company recognized a gain of $50,000 on a TruP security which was entirely liquidated by its Trustee. For the three months ended June 30, 2014 there were 0 losses recognized.

6. Loans Receivable, Net

The detail of the loan portfolio as of June 30, 2015 and December 31, 2014 was as follows:



	June 30, 2015			December 31, 2014
	(In thousands)
Multi-family loans	$	5,680,879		5,048,477
Commercial real estate loans	3,395,624			3,139,824
Commercial and industrial loans	777,212			544,402
Construction loans	189,419			143,664
Total commercial loans	10,043,134			8,876,367
Residential mortgage loans	5,189,180			5,764,896
Consumer and other loans	461,311			440,500
Total loans excluding PCI loans	15,693,625			15,081,763
PCI loans	13,922			17,789
Net unamortized premiums and deferred loan costs (1)	(17,798		)	(11,698	)
Allowance for loan losses	(213,962		)	(200,284	)
Net loans	$	15,475,787		14,887,570

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

Purchased Credit-Impaired Loans

Table of Contents

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected and the estimated fair value of the PCI loans acquired in the Gateway Financial acquisition as of January 10, 2014:



	January 10, 2014
	(In thousands)
Contractually required principal and interest	$	4,172
Contractual cash flows not expected to be collected (non-accretable difference)	(1,024		)
Expected cash flows to be collected	3,148
Interest component of expected cash flows (accretable yield)	(216		)
Fair value of acquired loans	$	2,932

The following table presents changes in the accretable yield for PCI loans during the three an six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
	(In thousands)
Balance, beginning of period	855			1,678		971			4,154
Acquisitions	—			—		—			216
Accretion (1)	(115		)	(277	)	(231		)	(2,969	)
Net reclassification from non-accretable difference	—			—		—			—
Balance, end of period	$	740		1,401		$	740		1,401

(1) Includes the impact of PCI loans transferred to held for sale at lower cost or market as of March 31, 2014.

Allowance for Loan Loss

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014

Balance at beginning of the period	$	208,181		$	180,706		$	200,284		$	173,928
Loans charged off	(2,378		)	(4,007		)	(4,277		)	(7,103		)
Recoveries	1,159			1,371			1,955			2,245
Net charge-offs	(1,219		)	(2,636		)	(2,322		)	(4,858		)
Provision for loan losses	7,000			8,000			16,000			17,000
Balance at end of the period	$	213,962		$	186,070		$	213,962		$	186,070

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

The allowance for loan losses has been determined in accordance with U.S. GAAP, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. Loans acquired are

Table of Contents

marked to fair value on the date of acquisition with no valuation allowance reflected in the allowance for loan losses. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan loss, the Company performs an analysis on acquired loans to determine whether or not there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in their calculation of the allowance for loan loss. For the six months ended June 30, 2015, the Company recorded charge-offs related to PCI loans acquired of $133,000.

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

The allowance contains reserves identified as unallocated. These reserves reflect management's attempt to ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of probable credit losses.

The results of this quarterly process are reviewed and approved by management. A summary of loan loss allowances is presented to the Board of Directors on a quarterly basis.

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

For commercial real estate, multi-family and construction loans, the Company obtains an appraisal for all collateral dependent loans upon origination. An updated appraisal is obtained annually for loans rated substandard or worse with a balance of $500,000 or greater. An updated appraisal is obtained bi-annually for loans rated special mention with a balance of $1.0 million or greater. This is done in order to determine the specific reserve or charge off needed. As part of the allowance for loan loss process, the Company

Table of Contents

reviews each collateral dependent commercial real estate loan previously classified as non-accrual and/or impaired and assesses whether there has been an adverse change in the collateral value supporting the loan. The Company utilizes information from its commercial lending officers and its credit department and loan workout department’s knowledge of changes in real estate conditions in our lending area to identify if possible deterioration of collateral value has occurred. Based on the severity of the changes in market conditions, management determines if an updated appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined that the deterioration of the collateral value is significant enough to warrant ordering a new appraisal, an estimate of the downward adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated appraisal is received.

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

Our allowance for loan losses reflects probable losses considering, among other things, the weak economic conditions, the actual growth and change in composition of our loan portfolio, the level of our non-performing loans and our charge-off experience. We believe the allowance for loan losses reflects the inherent credit risk in our portfolio.

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

Table of Contents

The following tables present the balance in the allowance for loan losses and the recorded investment in loans including PCI loans, by portfolio segment and based on impairment method as of June 30, 2015 and December 31, 2014:



	June 30, 2015
	Multi- Family Loans			Commercial Real Estate Loans		Commercial and Industrial Loans		Construction Loans		Residential Mortgage Loans		Consumer and Other Loans		Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance-December 31, 2014	$	71,147		44,030		20,759		6,488		47,936		3,347		6,577		200,284
Charge-offs	(34		)	(646	)	(279	)	(307	)	(2,710	)	(301	)	—		(4,277	)
Recoveries	27			400		219		258		889		162		—		1,955
Provision	8,136			281		7,501		(77	)	73		788		(702	)	16,000
Ending balance-June 30, 2015	$	79,276		44,065		28,200		6,362		46,188		3,996		5,875		213,962

Individually evaluated for impairment	$	175		—		—		—		1,923		—		—		2,098
Collectively evaluated for impairment	79,101			44,065		28,200		6,362		44,265		3,996		5,875		211,864
Loans acquired with deteriorated credit quality	—			—		—		—		—		—		—		—
Balance at June 30, 2015	$	79,276		44,065		28,200		6,362		46,188		3,996		5,875		213,962

Loans:
Individually evaluated for impairment	$	3,762		18,434		3,137		2,402		24,523		175		—		52,433
Collectively evaluated for impairment	5,677,117			3,377,190		774,075		187,017		5,164,657		461,136		—		15,641,192
Loans acquired with deteriorated credit quality	637			7,044		56		1,786		3,961		438		—		13,922
Balance at June 30, 2015	$	5,681,516		3,402,668		777,268		191,205		5,193,141		461,749		—		15,707,547

Table of Contents



	December 31, 2014
	Multi- Family Loans			Commercial Real Estate Loans		Commercial and Industrial Loans		Construction Loans		Residential Mortgage Loans		Consumer and Other Loans		Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance-December 31, 2013	$	42,103		46,657		9,273		8,947		51,760		2,161		13,027		173,928
Charge-offs	(323		)	(6,147	)	(2,447	)	(640	)	(7,715	)	(972	)	—		(18,244	)
Recoveries	3,784			201		516		799		1,783		17		—		7,100
Provision	25,583			3,319		13,417		(2,618	)	2,108		2,141		(6,450	)	37,500
Ending balance-December 31, 2014	$	71,147		44,030		20,759		6,488		47,936		3,347		6,577		200,284

Individually evaluated for impairment	$	—		274		—		—		1,865		—		—		2,139
Collectively evaluated for impairment	71,147			43,756		20,759		6,488		46,071		3,347		6,577		198,145
Loans acquired with deteriorated credit quality	—			—		—		—		—		—		—		—
Balance at December 31, 2014	$	71,147		44,030		20,759		6,488		47,936		3,347		6,577		200,284

Loans:
Individually evaluated for impairment	$	4,111		22,995		3,310		6,798		23,285		—		—		60,499
Collectively evaluated for impairment	5,044,366			3,116,829		541,092		136,866		5,741,611		440,500		—		15,021,264
Loans acquired with deteriorated credit quality	637			7,329		56		4,732		4,581		454		—		17,789
Balance at December 31, 2014	$	5,049,114		3,147,153		544,458		148,396		5,769,477		440,954		—		15,099,552

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

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

Watch - A "Watch" asset has all the characteristics of a Pass asset but warrant more than the normal level of supervision. These loans may require more detailed reporting to management because some aspects of underwriting may not conform to policy or adverse

Table of Contents

events may have affected or could affect the cash flow or ability to continue operating profitably, provided, however, the events do not constitute an undue credit risk.

Special Mention - A “Special Mention” asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Residential loans delinquent 30-89 days are considered special mention.

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

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

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

The following tables present the risk category of loans as of June 30, 2015 and December 31, 2014 by class of loans excluding PCI loans:



	June 30, 2015
	Pass		Watch	Special Mention	Substandard	Doubtful	Loss	Total
	(In thousands)
Commercial loans:
Multi-family	$	5,296,044	290,766	66,617	27,452	—	—	5,680,879
Commercial real estate	2,989,632		311,228	25,620	69,144	—	—	3,395,624
Commercial and industrial	611,940		130,549	20,791	13,932	—	—	777,212
Construction	175,116		8,993	2,175	3,135	—	—	189,419
Total commercial loans	9,072,732		741,536	115,203	113,663	—	—	10,043,134
Residential mortgage	5,067,090		—	27,934	94,156	—	—	5,189,180
Consumer and other	453,983		—	1,806	5,522	—	—	461,311
Total	$	14,593,805	741,536	144,943	213,341	—	—	15,693,625



	December 31, 2014
	Pass		Watch	Special Mention	Substandard	Doubtful	Loss	Total
	(In thousands)
Commercial loans:
Multi-family	$	4,710,124	247,921	62,886	27,546	—	—	5,048,477
Commercial real estate	2,757,949		276,660	29,248	75,967	—	—	3,139,824
Commercial and industrial	405,021		110,374	20,321	8,686	—	—	544,402
Construction	134,356		2,228	2,075	5,005	—	—	143,664
Total commercial loans	8,007,450		637,183	114,530	117,204	—	—	8,876,367
Residential mortgage	5,641,190		—	29,710	93,996	—	—	5,764,896
Consumer and other	433,968		—	2,339	4,193	—	—	440,500
Total	$	14,082,608	637,183	146,579	215,393	—	—	15,081,763

Table of Contents

The following tables present the payment status of the recorded investment in past due loans as of June 30, 2015 and December 31, 2014 by class of loans excluding PCI loans:



	June 30, 2015
	30-59 Days		60-89 Days	Greater than 90 Days	Total Past Due	Current	Total Loans Receivable
	(In thousands)
Commercial loans:
Multi-family	$	221	—	3,534	3,755	5,677,124	5,680,879
Commercial real estate	1,397		812	10,683	12,892	3,382,732	3,395,624
Commercial and industrial	2,209		—	2,160	4,369	772,843	777,212
Construction	—		—	865	865	188,554	189,419
Total commercial loans	3,827		812	17,242	21,881	10,021,253	10,043,134
Residential mortgage	20,621		12,225	76,485	109,331	5,079,849	5,189,180
Consumer and other	1,305		500	5,347	7,152	454,159	461,311
Total	$	25,753	13,537	99,074	138,364	15,555,261	15,693,625



	December 31, 2014
	30-59 Days		60-89 Days	Greater than 90 Days	Total Past Due	Current	Total Loans Receivable
	(In thousands)
Commercial loans:
Multi-family	$	698	239	2,989	3,926	5,044,551	5,048,477
Commercial real estate	6,566		778	13,940	21,284	3,118,540	3,139,824
Commercial and industrial	792		395	2,903	4,090	540,312	544,402
Construction	—		—	4,345	4,345	139,319	143,664
Total commercial loans	8,056		1,412	24,177	33,645	8,842,722	8,876,367
Residential mortgage	23,712		8,900	75,610	108,222	5,656,674	5,764,896
Consumer and other	1,334		1,006	4,211	6,551	433,949	440,500
Total	$	33,102	11,318	103,998	148,418	14,933,345	15,081,763

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



	June 30, 2015			December 31, 2014
	# of loans	amount		# of loans	amount
	(Dollars in thousands)
Non-accrual:
Multi-family	6	$	4,090	2	$	2,989
Commercial real estate	36	12,983		36	13,940
Commercial and industrial	7	2,160		11	2,903
Construction	3	865		7	4,345
Total commercial loans	52	20,098		56	24,177
Residential mortgage and consumer	422	86,614		406	84,182
Total non-accrual loans	474	$	106,712	462	$	108,359

Included in the non-accrual table above are TDR loans whose payment status is current but the Company has classified as non-accrual as the loans have not maintained their current payment status for six consecutive months under the restructured terms and therefore do not meet the criteria for accrual status. As of June 30, 2015, these loans are comprised of 20 residential TDR loans totaling

Table of Contents

$4.8 million, 5 commercial TDR loans totaling $2.3 million and 1 multi-family TDR loan totaling $556,000. There were 5 residential TDR loans totaling $1.0 million which were also 30-89 days delinquent and classified as non-accrual. As of December 31, 2014, these loans are comprised of 5 residential TDR loans totaling $1.5 million. There were 10 residential TDR loans totaling $2.9 million which were also 30-89 days delinquent and classified as non-accrual. The Company has no loans past due 90 days or more delinquent that are still accruing interest. PCI loans are excluded from non-accrual loans, as they are recorded at fair value based on the present value of expected future cash flows. As of June 30, 2015, PCI loans with a carrying value of $13.9 million included $8.9 million of which were current and $5.0 million of which were 90 days or more delinquent. As of December 31, 2014, PCI loans with a carrying value of $17.8 million included $9.2 million of which were current and $8.6 million of which were 90 days or more delinquent.

At June 30, 2015 and December 31, 2014, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans which totaled $52.4 million and $60.5 million, respectively, with allocations of the allowance for loan losses of $2.1 million and $2.1 million, respectively. During the three months ended June 30, 2015 and 2014, interest income received and recognized on these loans totaled $1.7 million and $466,000, respectively. During the six months ended June 30, 2015 and 2014, interest income received and recognized on these loans totaled $2.3 million and $1.1 million, respectively.

The following tables present loans individually evaluated for impairment by portfolio segment as of June 30, 2015 and

December 31, 2014:



	June 30, 2015
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
	(In thousands)
With no related allowance:
Multi-family	$	1,888	5,602	—	2,701	22
Commercial real estate	18,434		23,139	—	18,958	552
Commercial and industrial	3,137		3,137	—	2,541	35
Construction	2,402		2,402	—	9,466	73
Total commercial loans	25,861		34,280	—	33,666	682
Residential mortgage and consumer	7,919		10,598	—	7,060	590
With an allowance recorded:
Multi-family	1,874		1,874	175	1,992	—
Commercial real estate	—		—	—	—	—
Commercial and industrial	—		—	—	—	—
Construction	—		—	—	—	—
Total commercial loans	1,874		1,874	175	1,992	—
Residential mortgage and consumer	16,779		17,046	1,923	16,612	1,059
Total:
Multi-family	3,762		7,476	175	4,693	22
Commercial real estate	18,434		23,139	—	18,958	552
Commercial and industrial	3,137		3,137	—	2,541	35
Construction	2,402		2,402	—	9,466	73
Total commercial loans	27,735		36,154	175	35,658	682
Residential mortgage and consumer	24,698		27,644	1,923	23,672	1,649
Total impaired loans	$	52,433	63,798	2,098	59,330	2,331

Table of Contents



	December 31, 2014
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
	(In thousands)
With no related allowance:
Multi-family	$	4,111	7,846	—	4,746	135
Commercial real estate	19,901		23,601	—	17,056	879
Commercial and industrial	3,310		3,310	—	1,985	152
Construction	6,798		9,292	—	13,609	410
Total commercial loans	34,120		44,049	—	37,396	1,576
Residential mortgage and consumer	6,755		8,830	—	6,606	370
With an allowance recorded:
Multi-family	—		—	—	—	—
Commercial real estate	3,094		4,760	274	3,106	72
Commercial and industrial	—		—	—	—	—
Construction	—		—	—	—	—
Total commercial loans	3,094		4,760	274	3,106	72
Residential mortgage and consumer	16,530		16,882	1,865	16,547	507
Total:
Multi-family	4,111		7,846	—	4,746	135
Commercial real estate	22,995		28,361	274	20,162	951
Commercial and industrial	3,310		3,310	—	1,985	152
Construction	6,798		9,292	—	13,609	410
Total commercial loans	37,214		48,809	274	40,502	1,648
Residential mortgage and consumer	23,285		25,712	1,865	23,153	877
Total impaired loans	$	60,499	74,521	2,139	63,655	2,525

The average recorded investment is the annual average calculated based upon the ending quarterly balances. The interest income recognized is the year to date interest income recognized on a cash basis.

Troubled Debt Restructurings

On a case-by-case basis, the Company may agree to modify the contractual terms of a borrower’s loan to remain competitive and assist customers who may be experiencing financial difficulty, as well as preserve the Company’s position in the loan. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a troubled debt restructured loan ("TDR").

Substantially all of our TDR loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below a market rate, an extension of the term of the loan, or a combination of these two methods. These modifications rarely result in the forgiveness of principal or accrued interest. In addition, we frequently obtain additional collateral or guarantor support when modifying commercial loans. Restructured loans remain on non accrual status until there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

Table of Contents

The following table presents the total troubled debt restructured loans at June 30, 2015 and December 31, 2014. There were two residential PCI loans that were classified as TDRs and are included in the table below at June 30, 2015. There were no PCI loans classified as a TDR for the period ended December 31, 2014.



	June 30, 2015
	Accrual			Non-accrual			Total
	# of loans	Amount		# of loans	Amount		# of loans	Amount
	(Dollars in thousands)
Commercial loans:
Multi-family	—	$	—	2	$	777	2	$	777
Commercial real estate	5	12,960		6	5,479		11	18,439
Commercial and industrial	2	1,209		—	—		2	1,209
Construction	2	1,596		1	805		3	2,401
Total commercial loans	9	15,765		9	7,061		18	22,826
Residential mortgage and consumer	39	13,871		40	10,613		79	24,484
Total	48	$	29,636	49	$	17,674	97	$	47,310



	December 31, 2014
	Accrual			Non-accrual			Total
	# of loans	Amount		# of loans	Amount		# of loans	Amount
	(Dollars in thousands)
Commercial loans:
Multi-family	2	$	1,122	—	$	—	2	$	1,122
Commercial real estate	8	15,250		1	3,197		9	18,447
Commercial and industrial	2	1,381		—	—		2	1,381
Construction	2	3,066		—	—		2	3,066
Total commercial loans	14	20,819		1	3,197		15	24,016
Residential mortgage and consumer	41	14,805		29	8,456		70	23,261
Total	55	$	35,624	30	$	11,653	85	$	47,277

Table of Contents

The following table presents information about troubled debt restructurings that occurred during the three and six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,
	2015					2014
	Number of Loans	Pre-modification Recorded Investment		Post- modification Recorded Investment		Number of Loans	Pre-modification Recorded Investment		Post- modification Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructings:
Commercial real estate	1	$	78	$	78	1	$	1,108	$	1,108
Residential mortgage and consumer	6	913		913		1	191		191



	Six Months Ended June 30,
	2015					2014
	Number of Loans	Pre-modification Recorded Investment		Post- modification Recorded Investment		Number of Loans	Pre-modification Recorded Investment		Post- modification Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructings:
Commercial real estate	1	$	78	$	78	1	$	1,108	$	1,108
Construction	1	1,326		1,326		—	—		—
Residential mortgage and consumer	13	2,454		2,454		7	2,546		2,546

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

All TDRs are impaired loans, which are individually evaluated for impairment, as discussed above. Collateral dependant impaired loans classified as TDRs were written down to the estimated fair value of the collateral. There were no charge-offs for collateral dependant TDRs during the three and six months ended June 30, 2015 and 2014. The allowance for loan losses associated with the TDRs presented in the above tables totaled $1.9 million and $1.9 million at June 30, 2015 and December 31, 2014, respectively.

Residential mortgage loan modifications primarily involved the reduction in loan interest rate and extension of loan maturity dates. All residential loans deemed to be TDRs were modified to reflect a reduction in interest rates to current market rates. Several residential TDRs include step up interest rates in their modified terms which will impact their weighted average yield in the future. For the three and six months ended June 30, 2015, the commercial and construction loans which qualified as a TDR involved the maturity and payment terms being modified. As of June 30, 2015 and 2014, the Company has no additional fundings to any borrowers classified as a troubled debt restructuring.

The following table presents information about pre and post modification interest yield for troubled debt restructurings which occurred during the three and six months ended June 30, 2015 and 2014:

Table of Contents



	Three Months Ended June 30,
	2015			2014
	Number of Loans	Pre-modification Interest Yield	Post- modification Interest Yield	Number of Loans	Pre-modification Interest Yield	Post- modification Interest Yield

Troubled Debt Restructings:
Commercial real estate	1	5.00	5.00	1	8.00	8.00
Residential mortgage and consumer	6	5.89	3.54	1	5.25	3.25



	Six Months Ended June 30,
	2015			2014
	Number of Loans	Pre-modification Interest Yield	Post- modification Interest Yield	Number of Loans	Pre-modification Interest Yield	Post- modification Interest Yield

Troubled Debt Restructings:
Commercial real estate	1	5.00	5.00	1	8.00	8.00
Construction	1	5.00	5.00	—	—	—
Residential mortgage and consumer	13	5.18	3.42	7	5.18	3.57

Loans modified as TDRs in the previous 12 months to June 30, 2015, for which there was a payment default consisted of 2 residential loans with a recorded investment of $614,000 million at June 30, 2015. Loans modified as TDRs in the previous 12 months to June 30, 2014, for which there was a payment default consisted of 3 residential loans with a recorded investment of $882,000 at June 30, 2014.

Table of Contents

7. Deposits

Deposits are summarized as follows:



	June 30, 2015		December 31, 2014
	(In thousands)
Checking accounts	$	3,978,675	$	3,892,839
Money market deposits	3,476,237		3,390,238
Savings	2,265,451		2,318,911
Total transaction accounts	9,720,363		9,601,988
Certificates of deposit	3,152,466		2,570,338
Total deposits	$	12,872,829	$	12,172,326

8. Goodwill and Other Intangible Assets

The carrying amount of goodwill at June 30, 2015 and December 31, 2014 was approximately $77.6 million.

The following table summarizes other intangible assets as of June 30, 2015 and December 31, 2014:



	Gross Intangible Asset		Accumulated Amortization		Valuation Allowance		Net Intangible Assets
	(In thousands)
June 30, 2015
Mortgage Servicing Rights	$	22,893	(8,229	)	(121	)	14,543
Core Deposit Premiums	25,058		(12,084	)	—		12,974
Other	300		(125	)	—		175
Total other intangible assets	$	48,251	(20,438	)	(121	)	27,692

December 31, 2014
Mortgage Servicing Rights	$	23,925	(9,543	)	(121	)	14,261
Core Deposit Premiums	25,058		(10,375	)	—		14,683
Other	300		(110	)	—		190
Total other intangible assets	$	49,283	(20,028	)	(121	)	29,134

Mortgage servicing rights are accounted for using the amortization method. Under this method, the Company amortizes the loan servicing asset in proportion to, and over the period of, estimated net servicing revenues. The Company sells loans on a servicing-retained basis. Loans that were sold on this basis, amounted to $1.83 billion and $1.85 billion at June 30, 2015 and December 31, 2014 respectively, all of which relate to residential mortgage loans. At June 30, 2015 and December 31, 2014, the servicing asset, included in intangible assets, had an estimated fair value of $14.5 million and $14.3 million, respectively. Fair value was based on expected future cash flows considering a weighted average discount rate of 10.17%, a weighted average constant prepayment rate on mortgages of 9.36% and a weighted average life of 6.0 years.

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

Table of Contents

9. Equity Incentive Plan

At the annual meeting held on June 9, 2015, stockholders of the Company approved the Investors Bancorp, Inc. 2015 Equity Incentive Plan ("2015 Plan.") On June 23, 2015, the Company granted to directors and employees a total of 6,849,832 restricted stock awards and 11,576,612 stock options to purchase Company stock. The restricted stock awards and stock options were issued out of the 2015 Plan, which allows the Company to grant common stock or options to purchase common stock at specific prices to directors and employees of the Company. The 2015 Plan provides for the issuance or delivery of up to 30,881,296 shares (13,234,841 restricted stock awards and 17,646,455 stock options) of Investors Bancorp, Inc. common stock.

Restricted shares granted under the 2015 Plan vest in equal installments, over the service period generally ranging from 5 to 7 years beginning one year from the date of grant. Additionally, certain restricted shares awarded are performance vesting awards, which may or may not vest depending upon the attainment of certain corporate financial targets. The vesting of restricted stock may accelerate in accordance with the terms of the 2015 Plan. The product of the number of shares granted and the grant date closing market price of the Company's common stock determine the fair value of restricted shares under the 2015 Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.

Stock options granted under the 2015 Plan vest in equal installments, over the service period generally ranging from 5 to 7 years beginning one year from the date of grant. The vesting of stock options may accelerate in accordance with the terms of the 2015 Plan. Stock options were granted at an exercise price equal to the fair value of the Company's common stock on the grant date based on the closing market price and have an expiration period of 10 years.

The fair value of stock options granted on June 23, 2015 was estimated utilizing the Black-Scholes option pricing model using the following assumptions:



	Stock Options Granted

Weighted average expected life (in years)	7.43
Weighted average risk-free rate of return	1.96		%
Weighted average volatility	25.33		%
Dividend yield	1.59		%
Weighted average fair value of options granted	$	3.12

The weighted average expected life of the stock option represents the period of time that stock options are expected to be outstanding and is estimated using historical data of stock option exercises and forfeitures. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the historical volatility of the Company's stock. The Company recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards.

The Company applied ASC, 718 “Compensation- Stock Compensation," ("ASC 718") and began to expense the fair value of all share-based compensation granted over the requisite service periods. ASC 718 requires the Company to report as a financing cash flow the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense. In accordance with SEC Staff Accounting Bulletin No. 107 (“SAB 107”), the Company classified share-based compensation for employees and outside directors within “compensation and fringe benefits” in the consolidated statements of income to correspond with the same line item as the cash compensation paid.

The following table presents the share based compensation expense for the three and six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
	(Dollars in thousands)
Stock option expense	$	111	$	1,700	$	115	$	1,800
Restricted stock expense	240		11,200		240		11,900
Total share based compensation expense	$	351	12,900		355		13,700

Table of Contents

The following is a summary of the Company’s stock option activity as of June 30, 2015:



	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at December 31, 2014	9,092,584			$6.06	2.8		$46,984
Granted	11,576,612		12.54
Exercised	(840,940	)	5.90
Forfeited	—		—
Expired	—		—
Outstanding at June 30, 2015	19,828,256			$9.85	6.8		$51,374
Exercisable at June 30, 2015	8,225,169			$6.06	2.3		$51,332

Expected future expenses relating to the non-vested options outstanding as of June 30, 2015 is $36.7 million over a weighted average period of 6.9 years.

The following is a summary of the Company’s restricted shares as of June 30, 2015:



	Number of Shares Awarded	Weighted Average Grant Date fair Value
Outstanding at December 31, 2014	—	$	—
Granted	6,849,832	12.54
Vested	—	—
Forfeited	—	—
Outstanding and non vested at June 30, 2015	6,849,832	$	12.54

Expected future expenses relating to the non-vested restricted shares outstanding as of June 30, 2015 is $85.7 million over a weighted average period of 6.7 years.

10. Net Periodic Benefit Plan Expense

The Company has a Supplemental Executive Retirement Wage Replacement Plan (SERP). The SERP is a nonqualified, defined benefit plan which provides benefits to employees as designated by the Compensation Committee of the Board of Directors if their benefits and/or contributions under the pension plan are limited by the Internal Revenue Code. The Company also has a nonqualified, defined benefit plan which provides benefits to certain directors. The SERP and the directors’ plan are unfunded and the costs of the plans are recognized over the period that services are provided.

The components of net periodic benefit cost are as follows:



	Three Months Ended June 30,			Six Months Ended June 30,
	2015		2014	2015	2014
	(In thousands)
Service cost	$	774	580	1,548	1,160
Interest cost	374		331	749	661
Amortization of:
Prior service cost	12		24	24	49
Net gain	321		158	641	316
Total net periodic benefit cost	$	1,481	1,093	2,962	2,186

Due to the unfunded nature of these plans, no contributions have been made or were expected to be made to the SERP and Directors’ plans during the six months ended June 30, 2015.

Table of Contents

The Company also maintains a defined benefit pension plan. Since it is a multiemployer plan, costs of the pension plan are based on contributions required to be made to the pension plan. We contributed $2.8 million to the defined benefit pension plan during the six months ended June 30, 2015. We anticipate contributing funds to the plan to meet any minimum funding requirements for the remainder of 2015.

11. Comprehensive Income (Loss)

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



	Three Months Ended June 30,
	2015							2014
	Gross			Tax		Net		Gross		Tax		Net
	(Dollars in thousands)
Net income	$	73,301		(26,939	)	46,362		24,782		(9,596	)	15,186
Other comprehensive (loss) income:
Change in funded status of retirement obligations	352			(144	)	208		184		(75	)	109
Unrealized (loss) gain on securities available-for-sale	(9,409		)	3,785		(5,624	)	5,323		(2,168	)	3,155
Accretion of loss on securities reclassified to held to maturity available for sale	642			(262	)	380		737		(301	)	436
Reclassification adjustment for security gains included in net income	—			—		—		(4	)	—		(4	)
Other-than-temporary impairment accretion on debt securities	319			(130	)	189		336		(137	)	199
Total other comprehensive (loss) income	(8,096		)	3,249		(4,847	)	6,576		(2,681	)	3,895
Total comprehensive income	$	65,205		(23,690	)	41,515		31,358		(12,277	)	19,081



	Six Months Ended June 30,
	2015							2014
	Gross			Tax		Net		Gross		Tax			Net
	(Dollars in thousands)
Net income	$	140,367		(52,058	)	88,309		79,715		(30,111		)	49,604
Other comprehensive (loss) income:
Change in funded status of retirement obligations	702			(288	)	414		369		(151		)	218
Unrealized (loss) gain on securities available-for-sale	(1,041		)	513		(528	)	9,848		(3,963		)	5,885
Accretion of loss on securities reclassified to held to maturity available for sale	1,285			(524	)	761		1,469		(600		)	869
Reclassification adjustment for security gains included in net income	—			—		—		(233	)	95			(138	)
Other-than-temporary impairment accretion on debt securities	646			(264	)	382		671		$	(274	)	397
Total other comprehensive (loss) income	1,592			(563	)	1,029		12,124		(4,893		)	7,231
Total comprehensive income	$	141,959		(52,621	)	89,338		91,839		(35,004		)	56,835

Table of Contents

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the six months ended June 30, 2015 and 2014:



	Change in funded status of retirement obligations			Net Unrealized gains (losses) on investment securities		Unrealized gain on securities available-for-sale		Reclassification adjustment for losses included in net income		Other-than- temporary impairment accretion on debt securities		Total accumulated other comprehensive loss
	(Dollars in thousands)
Balance - December 31, 2014	$	(10,911	)	(4,528	)	7,851		—		(14,816	)	(22,404	)
Net change	414			761		(528	)	—		382		1,029
Balance - June 30, 2015	$	(10,497	)	(3,767	)	7,323		—		(14,434	)	(21,375	)

Balance - December 31, 2013	$	(5,869	)	(6,255	)	1,900		138		(15,610	)	(25,696	)
Net change	218			869		5,885		(138	)	397		7,231
Balance - June 30, 2014	$	(5,651	)	(5,386	)	7,785		—		(15,213	)	(18,465	)

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



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015		2014
	(In thousands)
Reclassification adjustment for gains included in net income
Gain on security transactions	$	—		(4	)	—		(233	)
Change in funded status of retirement obligations (1)
Compensation and fringe benefits:
Amortization of net obligation or asset	—			6		—		13
Amortization of prior service cost	12			31		24		62
Amortization of net gain	339			147		678		294
Compensation and fringe benefits	351			184		702		369
Total before tax	351			180		702		136
Income tax	(144		)	(75	)	(288	)	(56	)
Net of tax	$	207		105		414		80

(1) These accumulated other comprehensive loss components are included in the computations of net periodic cost for our defined benefit plans and other post-retirement benefit plan. See Note 10 for additional details.

12. Fair Value Measurements

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

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

Table of Contents


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


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

•

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

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

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

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

Table of Contents

The following tables provide the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014.



	Carrying Value at June 30, 2015
	Total		Level 1	Level 2	Level 3
	(In thousands)
Securities available for sale:
Equity securities	$	8,801	—	8,801	—
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	518,676		—	518,676	—
Federal National Mortgage Association	749,173		—	749,173	—
Government National Mortgage Association	116		—	116	—
Total mortgage-backed securities available-for-sale	1,267,965		—	1,267,965	—
Total securities available-for-sale	$	1,276,766	—	1,276,766	—



	Carrying Value at December 31, 2014
	Total		Level 1	Level 2	Level 3
	(In thousands)
Securities available for sale:
Equity securities	$	8,523	—	8,523	—
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation	507,283		—	507,283	—
Federal National Mortgage Association	681,992		—	681,992	—
Government National Mortgage Association	126		—	126	—
Total mortgage-backed securities available-for-sale	1,189,401		—	1,189,401	—
Total securities available-for-sale	$	1,197,924	—	1,197,924	—

There have been no changes in the methodologies used at June 30, 2015 from December 31, 2014, and there were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2015.

The changes in Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, 2015 and 2014 are summarized below:



	Three Months Ended June 30,			Six Months Ended June 30,
	2015		2014	2015	2014
	(Dollars in thousands)
Balance beginning of period (1)	$	—	—	—	670
Transfers from held-to-maturity	—		—	—	—
Total net (losses) gains for the period included in:
Net income	—		—	—	470
Other comprehensive income (loss)	—		—	—	(229	)
Sales	—		—	—	(911	)
Settlements	—		—	—	—
Balance end of period	$	—	—	—	—

(1) Represents a trust preferred security transferred to available for sale at its fair value on December 31, 2013 due to the impact of the Volcker Rule adopted in December 2013. The Volcker Rule requires specific treatment of certain collateralized debt obligations backed by trust preferred securities. The security was subsequently sold during the six months ended June 30, 2014.

Table of Contents

Assets Measured at Fair Value on a Non-Recurring Basis

Mortgage Servicing Rights, Net

Mortgage servicing rights are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At June 30, 2015, the fair value model used prepayment speeds ranging from 6.30% to 29.40% and a discount rate of 10.17% for the valuation of the mortgage servicing rights. A significant degree of judgment is involved in valuing the mortgage servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate.

Loans Receivable

Loans which meet certain criteria are evaluated individually for impairment. A loan is deemed to be impaired if it is a commercial loan with an outstanding balance greater than $1.0 million and on non-accrual status, loans modified in a troubled debt restructuring, and other commercial loans with $1.0 million in outstanding principal if management has specific information that it is probable they will not collect all amounts due under the contractual terms of the loan agreement. Our impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling costs. In order to estimate fair value, once interest or principal payments are 90 days delinquent or when the timely collection of such income is considered doubtful an updated appraisal is obtained. Thereafter, in the event the most recent appraisal does not reflect the current market conditions due to the passage of time and other factors, management will obtain an updated appraisal or make downward adjustments to the existing appraised value based on their knowledge of the property, local real estate market conditions, recent real estate transactions, and for estimated selling costs, if applicable. At June 30, 2015, appraisals were discounted in a range of 0%-25%.

Other Real Estate Owned

Other Real Estate Owned is recorded at estimated fair value, less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are discounted an additional 0%-25% for estimated costs to sell. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If the estimated fair value of the asset declines, a writedown is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions. Operating costs after acquisition are generally expensed.

Table of Contents

The following tables provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at June 30, 2015 and December 31, 2014. For the three months ended June 30, 2015 there was no change to carrying value of impaired loans or mortgage servicing rights measured at fair value on a non-recurring basis. For the year ended December 31, 2014, there was no change to carrying value of impaired loans measured at fair value on a non-recurring basis.



Security Type	Valuation Technique	Unobservable Input	Range	Weighted Average	Carrying Value at June 30, 2015
					Total		Level 1	Level 2	Level 3
					(In thousands)
Other real estate owned	Market comparable	Lack of marketability	0.0% - 25.0%	8.29%	914		—	—	914
					$	914	—	—	914



Security Type	Valuation Technique	Unobservable Input	Range	Weighted Average	Carrying Value at December 31, 2014
					Total		Level 1	Level 2	Level 3
					(In thousands)
MSR, net	Estimated cash flow	Prepayment speeds	5.70% - 29.40%	11.22%	$	13,081	—	—	13,081
Other real estate owned	Market comparable	Lack of marketability	0.0% - 25.0%	15.87%	566		—	—	566
					$	13,647	—	—	13,647

Other Fair Value Disclosures

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

Cash and Cash Equivalents

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

Securities Held-to-Maturity

Our held-to-maturity portfolio, consisting primarily of mortgage backed securities and other debt securities for which we have a positive intent and ability to hold to maturity, is carried at amortized cost. Management utilizes various inputs to determine the fair value of the portfolio. The Company obtains one price for each security primarily from a third-party pricing service, which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and non-binding broker quotes. In the absence of quoted prices and in an illiquid market, valuation techniques, which require inputs that are both significant to the fair value measurement and unobservable, are used to determine fair value of the investment. Valuation techniques are based on various assumptions, including, but not limited to cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, and liquidation values. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services has not historically resulted in adjustment in the prices obtained from the pricing service.

Table of Contents

FHLB Stock

The fair value of FHLB stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock and the Bank is required to hold a minimum investment based upon the unpaid principal of home mortgage loans and/or FHLB advances outstanding.

Loans

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

The fair value of performing loans, except residential mortgage loans, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs, if applicable. Fair value for significant non-performing loans is based on recent external appraisals of collateral securing such loans, adjusted for the timing of anticipated cash flows. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Deposit Liabilities

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

Borrowings

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

Table of Contents

Commitments to Extend Credit

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For commitments to originate fixed rate loans, fair value also considers the difference between current levels of interest rates and the committed rates. Due to the short-term nature of our outstanding commitments, the fair values of these commitments are immaterial to our financial condition.

The carrying values and estimated fair values of the Company’s financial instruments are presented in the following table.



	June 30, 2015
	Carrying		Estimated Fair Value
	value		Total	Level 1	Level 2	Level 3
	(In thousands)
Financial assets:
Cash and cash equivalents	$	228,967	228,967	228,967	—	—
Securities available-for-sale	1,276,766		1,276,766	—	1,276,766	—
Securities held-to-maturity	1,760,558		1,812,785	—	1,734,868	77,917
Stock in FHLB	186,412		186,412	186,412	—	—
Loans held for sale	363,048		363,048	—	363,048	—
Net loans	15,475,787		15,313,752	—	—	15,313,752
Financial liabilities:
Deposits, other than time deposits	$	9,720,363	9,720,363	9,720,363	—	—
Time deposits	3,152,466		3,165,603	—	3,165,603	—
Borrowed funds	3,446,121		3,473,002	—	3,473,002	—



	December 31, 2014
	Carrying		Estimated Fair Value
	value		Total	Level 1	Level 2	Level 3
	(In thousands)
Financial assets:
Cash and cash equivalents	$	230,961	230,961	230,961	—	—
Securities available-for-sale	1,197,924		1,197,924	—	1,197,924	—
Securities held-to-maturity	1,564,479		1,609,365	—	1,544,129	65,236
Stock in FHLB	151,287		151,287	151,287	—	—
Loans held for sale	6,868		6,868	—	6,868	—
Net loans	14,887,570		14,747,319	—	—	14,747,319
Financial liabilities:
Deposits, other than time deposits	$	9,601,988	9,601,988	9,601,988	—	—
Time deposits	2,570,338		2,580,572	—	2,580,572	—
Borrowed funds	2,766,104		2,796,969	—	2,796,969	—

Limitations

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

Table of Contents

Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred tax assets, premises and equipment and bank owned life insurance. Liabilities for pension and other postretirement benefits are not considered financial liabilities. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

13. Recent Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” The ASU changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. According to the ASU’s Basis for Conclusions, debt issuance costs incurred before the associated funding is received should be reported on the balance sheet as deferred charges until that debt liability amount is recorded. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not anticipate a material impact to the consolidated financial statements related to this guidance.

In April 2015, the FASB issued ASU 2015-04, "Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets." The ASU gives an employer whose fiscal year-end does not coincide with a calendar month-end the ability, as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. The ASU also provides guidance on accounting for contributions to the plan and significant events that require a remeasurement that occur during the period between a month-end measurement date and the employer’s fiscal year-end. An entity should reflect the effects of those contributions or significant events in the measurement of the retirement benefit obligations and related plan assets. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not anticipate a material impact to the consolidated financial statements related to this guidance.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards. In April 2015, the FASB issued a proposed ASU to defer for one year the effective date of the new revenue standard. The original effective date was for annual reporting periods beginning after December 15, 2016. The Company does not anticipate a material impact to the consolidated financial statements related to this guidance.

In June 2014, the FASB issued ASU 2014-11, "Transfers and Servicing: Repurchase-to-Maturity Transaction, Repurchase Financings, and Disclosures." The amendments affect all entities that enter into repurchase-to-maturity transactions or repurchase financings. The amendments change the current accounting outcome by requiring repurchase-to-maturity transactions to be accounted for as secured borrowings. Additionally, the amendments require that in a repurchase financing arrangement the repurchase agreement be accounted for separately from the initial transfer of the financial asset. ASU 2014-11 requires a new disclosure for certain transactions that involve (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. The accounting changes in this update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. The adoption of this pronouncement did not have a material impact on the Company’s financial condition or results of operations.

14. Subsequent Events

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

On July 30, 2015, the Company declared a cash dividend of $0.05 per share. The $0.05 dividend per share will be paid to stockholders on August 25, 2015, with a record date of August 10, 2015.

On June 30, 2015, the Company transferred $347.3 million of performing residential loans to held for sale. The sale was completed on July 31, 2015 resulting in a gain of $612,000.

Table of Contents



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which Investors Bancorp, Inc. (the “Company”) operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations or interpretations of regulations affecting financial institutions, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. Reference is made to Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

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

Critical Accounting Policies

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

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

The allowance for loan losses has been determined in accordance with U.S. generally accepted accounting principles, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.

Table of Contents

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

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

On a quarterly basis, management reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. This process includes all loans, concentrating on non-accrual and classified loans. Each non-accrual or classified loan is evaluated for potential loss exposure. Any shortfall results in a recommendation of a specific allowance if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value for real property or a discounted cash flow analysis on a business. This appraised value for real property is then reduced to reflect estimated liquidation expenses. Acquired loans are marked to fair value on the date of acquisition. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan loss, the Company performs an analysis on acquired loans to determine whether or not there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in their calculation of the allowance for loan loss.

The results of this quarterly process are reviewed and approved by management. A summary of loan loss allowances is presented to the Board of Directors on a quarterly basis.

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

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

Our available-for-sale portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders' equity. While the Company does not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before their anticipated recovery of the remaining carrying value, we have the ability to sell the securities. Our held-to-maturity portfolio, consisting primarily of mortgage-

Table of Contents

backed securities and other debt securities for which we have a positive intent and ability to hold to maturity, is carried at carrying value. We conduct a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. Management utilizes various inputs to determine the fair value of the portfolio. To the extent they exist, unadjusted quoted market prices in active markets (Level 1) or quoted prices on similar assets (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of quoted prices and in an illiquid market, valuation techniques, which require inputs that are both significant to the fair value measurement and unobservable (Level 3), are used to determine fair value of the investment. Valuation techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, and liquidation values. Management is required to use a significant degree of judgment when the valuation of investments includes unobservable inputs. The use of different assumptions could have a positive or negative effect on our consolidated financial condition or results of operations.

The fair values of our securities portfolio are also affected by changes in interest rates. When significant changes in interest rates occur, we evaluate our intent and ability to hold the security to maturity or for a sufficient time to recover our recorded investment balance.

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

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

In connection with our annual impairment assessment we applied the guidance in FASB ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. For the three months ended June 30, 2015, our qualitative assessment concluded that it was not more likely than not that the fair value of the reporting unit is less than its carrying amount and, therefore, the two-step goodwill impairment test was not required.

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

The estimated fair value of the MSR is obtained through independent third party valuations through an analysis of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market's perception of future interest rate movements. The valuation allowance is then adjusted in subsequent periods to reflect changes in the measurement of impairment. All assumptions are reviewed for reasonableness on a quarterly basis to ensure they reflect current and anticipated market conditions.

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

Executive Summary

Our fundamental business strategy is to be a well-capitalized, full service community bank that provides high quality customer service and competitively priced products and services to individuals and businesses in the communities we serve.

Our results of operations depend primarily on net interest income, which is directly impacted by the market interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily

Table of Contents

mortgage loans and investment securities, and the interest we pay on our interest-bearing liabilities, primarily interest-bearing transaction accounts, time deposits, and borrowed funds. Net interest income is affected by the level of interest rates, the shape of the market yield curve, the timing of the placement and the repricing of interest-earning assets and interest-bearing liabilities on our balance sheet, and the prepayment rate on our mortgage-related assets.

The continued low interest rate environment has resulted in a significant portion of our interest-earning assets being originated or re-priced at lower yields. While an increase in intermediate-term treasury yields provided an opportunity to increase loan rates, originations continue to be added at rates lower than the overall portfolio; however, we have been able to generally offset net interest margin compression through interest earning asset growth. We continue to actively manage our interest rate risk against a backdrop of slow but positive economic growth and a potential rise in short-term interest rates beginning in the latter half of 2015. If the current interest rate and yield curve environment continues, we may be subject to near-term net interest margin compression. Should the treasury yield curve steepen, we may experience an improvement in net interest income, particularly if short-term interest rates remain unchanged.

Our results of operations are also significantly affected by general economic conditions. While the consumer has benefited from lower energy costs and national and regional unemployment rates have improved, overall economic growth remains sluggish. The overall level of non-performing loans remains low compared to our national and regional peers. We attribute this to our conservative underwriting standards, our diligence in resolving our problem loans as well as the unseasoned nature of our loan portfolio.

We continue to grow and transform the composition of our balance sheet. Total assets increased by $1.26 billion, or 6.7%, to $20.04 billion at June 30, 2015 from $18.77 billion at December 31, 2014. Net loans, including loans held for sale, increased $944.4 million to $15.84 billion at June 30, 2015, while securities increased by $274.9 million, or 10.0%, to $3.04 billion at June 30, 2015 from $2.76 billion at December 31, 2014. For the six months ended June 30, 2015, we originated $1.09 billion in multi-family loans, $429.2 million in commercial real estate loans, $309.5 million in commercial and industrial loans, $98.0 million in consumer and other loans and $18.7 million in construction loans. This increase in loans reflects our continued focus on generating multi-family loans, commercial real estate loans and commercial and industrial loans, which was partially offset by pay downs and payoffs of loans. The multi-family and commercial real estate loans we originate are secured by properties located primarily in New Jersey and New York.

Capital management is a key component of our business strategy. With the completion of the second step conversion in May 2014, we raised net proceeds of $2.15 billion in equity. Our capital to total assets ratio has decreased to 17.01% at June 30, 2015 from 20.16% at June 30, 2014. We plan to manage our capital through a combination of organic growth, acquisitions, stock repurchases and cash dividends. Effective capital management and prudent growth allowed us to effectively leverage the capital from the Company’s initial public offering, while being mindful of tangible book value for stockholders. In March 2015, we commenced the first stock repurchase plan for 5% of our outstanding shares of common stock, or approximately 18 million shares. This repurchase plan was completed in June 2015. We announced our second share repurchase program on June 9, 2015, which authorizes the repurchase of an additional 10% of outstanding shares of common stock, or approximately 34 million shares.

We will continue to execute our business strategies with a focus on prudent and opportunistic growth while producing financial results that will create value for our stockholders. We intend to continue to grow our business and strengthen our market share through planned de novo branching, additional product offerings, investments in staff and opportunistic acquisitions in our market area. We will continue to build additional operational infrastructure and add key personnel as our company grows and our business changes. We are currently preparing for the conversion of our core and item processing system, working with a major technology vendor. These technology changes, scheduled to occur in the third quarter of 2015, will provide the necessary support for a growing commercial bank. We will continue to enhance stockholder value through our strategic capital initiatives, including growth both organically and through acquisitions, stock buybacks and cash dividend payments.

Comparison of Financial Condition at June 30, 2015 and December 31, 2014

Total Assets. Total assets increased by $1.26 billion, or 6.7%, to $20.04 billion at June 30, 2015 from $18.77 billion at December 31, 2014. This increase was largely the result of an increase in net loans, including loans held for sale of $944.4 million, or 6.3%, to $15.84 billion at June 30, 2015 from $14.89 billion at December 31, 2014. In addition, securities increased by $274.9 million, or 10.0%, to $3.04 billion at June 30, 2015 from $2.76 billion at December 31, 2014.

Net Loans. Net loans, including loans held for sale, increased by $944.4 million, or 6.3%, to $15.84 billion at June 30, 2015 from $14.89 billion at December 31, 2014. At June 30, 2015, total loans were $15.71 billion which included $5.68 billion in multi-family loans, $5.19 billion in residential loans, $3.40 billion in commercial real estate loans, $777.3 million in commercial

Table of Contents

and industrial loans, $461.7 million in consumer and other loans and $191.2 million in construction loans. For the six months ended June 30, 2015, we originated $1.09 billion in multi-family loans, $429.2 million in commercial real estate loans, $309.5 million in commercial and industrial loans, $98.0 million in consumer and other loans and $18.7 million in construction loans. This increase in loans reflects our continued focus on generating multi-family loans, commercial real estate loans and commercial and industrial loans, which was partially offset by pay downs and payoffs of loans. Our loans are primarily on properties and businesses located in New Jersey and New York.

In addition to the loans originated for our portfolio, our mortgage subsidiary, Investors Home Mortgage Co., originated $131.8 million for the six months ended June 30, 2015 in residential mortgage loans that were for sale to third party investors. Included in loans held-for-sale at June 30, 2015 were $347.3 million of residential loans which the Bank was committed to sell. This sale was completed on July 31, 2015 resulting in a gain of $612,000.

We also hold in our loan portfolio interest-only one-to four-family mortgage loans in which the borrower makes only interest payments for the first five, seven or ten years of the mortgage loan term. This feature will result in future increases in the borrower’s contractually required payments due to the required amortization of the principal amount after the interest-only period. These payment increases could affect the borrower’s ability to repay the loan. The amount of interest-only one-to four family mortgage loans at June 30, 2015 and December 31, 2014 was $258.9 million, and $288.0 million, respectively. From time to time and for competitive purposes, we originate commercial loans with limited interest only periods. As of June 30, 2015, we have $935.3 million in interest only loans in our loan portfolio. We maintained stricter underwriting criteria for these interest-only loans than for amortizing loans. We believe these criteria adequately control the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks.

Our past due loans and non-accrual loans discussed below exclude certain purchased credit impaired (PCI) loans, primarily consisting of loans recorded in the acquisitions of Gateway, Roma Financial Corporation and Marathon Bank. For the period ending June 30, 2015, PCI loans totaled $13.9 million. Under U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) are not subject to delinquency classification in the same manner as loans originated by the Bank. The following table sets forth non-accrual loans and accruing past due loans (excluding PCI loans and loans held-for-sale) on the dates indicated as well as certain asset quality ratios.

Table of Contents



	June 30, 2015				March 31, 2015				December 31, 2014				September 30, 2014				June 30, 2014
	# of Loans	Amount			# of Loans	Amount			# of Loans	Amount			# of Loans	Amount			# of Loans	Amount
					(Dollars in millions)
Multi-family	6	$	4.1		5	$	3.9		2	$	3.0		1	$	1.9		1	$	1.9
Commercial real estate	36	12.9			35	11.6			36	13.9			29	14.6			26	12.6
Commercial and industrial	7	2.2			8	2.3			11	2.9			4	0.8			10	1.4
Construction	3	0.9			7	4.3			7	4.4			6	12.8			6	13.0
Total commercial loans	52	20.1			55	22.1			56	24.2			40	30.1			43	28.9
Residential and consumer	422	86.6			423	88.0			406	84.2			383	85.9			361	79.7
Total non-accrual loans	474	$	106.7		478	$	110.1		462	$	108.4		423	$	116.0		404	$	108.6
Accruing troubled debt restructured loans	48	$	29.6		50	$	31.5		55	$	35.6		55	$	35.2		51	$	32.3
Non-accrual loans to total loans		0.68		%		0.70		%		0.72		%		0.81		%		0.78		%
Allowance for loan loss as a percent of non-accrual loans		200.51		%		189.02		%		184.83		%		164.68		%		171.33		%
Allowance for loan loss as a percent of total loans		1.36		%		1.33		%		1.33		%		1.33		%		1.34		%

Total non-accrual loans decreased to $106.7 million at June 30, 2015 compared to $108.4 million at December 31, 2014. We continue to diligently resolve our troubled loans, however it takes a long period of time to resolve residential credits in our lending area. At June 30, 2015, there were $47.3 million of loans deemed as troubled debt restructurings, of which $24.5 million were residential and consumer loans, $18.4 million were commercial real estate loans, $2.4 million were construction loans, $800,000 were multi-family loans and $1.2 million were commercial and industrial loans. Troubled debt restructured loans in the amount of $29.6 million were classified as accruing and $17.7 million were classified as non-accrual at June 30, 2015. Excluded in the table above are residential PCI loans in the amount of $114,000 which are classified as troubled debt restructuring at June 30, 2015.

In addition to non-accrual loans, we continue to monitor our portfolio for potential problem loans. Potential problem loans are defined as loans about which we have concerns as to the ability of the borrower to comply with the current loan repayment terms and which may cause the loan to be placed on non-accrual status. As of June 30, 2015, the Company has deemed potential problems loans excluding PCI loans, totaling $4.3 million, which comprised of 8 commercial real estate loans totaling $2.1 million and 3 commercial and industrial loans totaling $2.2 million. Management is actively monitoring these loans.

The ratio of non-accrual loans to total loans was 0.68% at June 30, 2015 compared to 0.72% at December 31, 2014. The allowance for loan losses as a percentage of non-accrual loans was 200.51% at June 30, 2015 compared to 184.83% at December 31, 2014. At June 30, 2015 and December 31, 2014, our allowance for loan losses as a percentage of total loans was 1.36% and 1.33%, respectively.

At June 30, 2015, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans totaling $52.4 million, of which $18.7 million of impaired loans had a specific allowance for credit losses of $2.1 million and $33.7 million of impaired loans had no specific allowance for credit losses. At December 31, 2014, loans meeting the Company’s definition of an impaired loan were primarily collateral dependent loans totaling $60.5 million, of which $19.6 million had a related allowance for credit losses of $2.1 million and $40.9 million had no related allowance for credit losses.

Table of Contents

The allowance for loan losses increased by $13.7 million to $214.0 million at June 30, 2015 from $200.3 million at December 31, 2014. The increase in our allowance for loan losses is due to the growth of the loan portfolio and the credit risk in our overall loan portfolio, particularly the inherent credit risk associated with commercial real estate lending and commercial and industrial loans as these portfolios are increasing at a greater pace than the rest of the portfolio. Future increases in the allowance for loan losses may be necessary based on the growth and composition of the loan portfolio, the level of loan delinquency and the economic conditions in our lending area.

The following table sets forth the allowance for loan losses at June 30, 2015 and December 31, 2014 allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.



	June 30, 2015				December 31, 2014
	Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans		Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
End of period allocated to:
Multi-family loans	$	79,276	36.17	%	$	71,147	33.44	%
Commercial real estate loans	44,065		21.66	%	44,030		20.84	%
Commercial and industrial loans	28,200		4.95	%	20,759		3.61	%
Construction loans	6,362		1.22	%	6,488		0.98	%
Residential mortgage loans	46,188		33.06	%	47,936		38.21	%
Consumer and other loans	3,996		2.94	%	3,347		2.92	%
Unallocated	5,875		—		6,577		—
Total allowance	$	213,962	100.00	%	$	200,284	100.00	%

Securities. Securities, in the aggregate, increased by $274.9 million, or 10.0%, to $3.04 billion at June 30, 2015 from $2.76 billion at December 31, 2014. This increase was a result of purchases partially offset by paydowns.

Stock in the Federal Home Loan Bank, Bank Owned Life Insurance and Other Assets. The amount of stock we own in the FHLB increased by $35.1 million, or 23.2%, to $186.4 million at June 30, 2015 from $151.3 million at December 31, 2014. The amount of stock we own in the FHLB is related to the balance of borrowings, therefore the increase in borrowings has an impact on FHLB stock owned. Bank owned life insurance was $157.2 million at June 30, 2015 and $161.6 million at December 31, 2014. Other assets were $9.4 million at June 30, 2015 and $10.3 million at December 31, 2014.

Deposits. Deposits increased by $700.5 million, or 5.8%, from $12.17 billion at December 31, 2014 to $12.87 billion at June 30, 2015. Certificates of deposit increased $582.1 million to $3.15 billion at June 30, 2015 from $2.57 billion at December 31, 2014. Core deposits represent approximately 76% of our total deposit portfolio.

Borrowed Funds. Borrowed funds increased by $680.0 million, or 24.6%, to $3.45 billion at June 30, 2015 from $2.77 billion at December 31, 2014 to help fund the continued growth of the loan portfolio.

Stockholders’ Equity. Stockholders' equity decreased by $169.4 million to $3.41 billion at June 30, 2015 from $3.58 billion at December 31, 2014. The decrease is primarily attributed to the repurchase of 17.9 million shares of common stock for $215.1 million as well as cash dividends of $0.15 per share totaling $53.2 million for the six months ended June 30, 2015. These decreases are offset by an increase related to net income of $88.3 million for the six months ended June 30, 2015.

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.

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.



	For the Three Months Ended June 30,
	2015						2014
	Average Outstanding Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Outstanding Balance		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits	$	197,031	$	27	0.05	%	$	589,563	$	274	0.19	%
Securities available-for-sale	1,236,575		5,573		1.80	%	921,620		4,478		1.94	%
Securities held-to-maturity	1,660,688		8,872		2.14	%	1,273,410		8,095		2.54	%
Net loans	15,642,670		165,515		4.23	%	13,489,800		149,531		4.43	%
Stock in FHLB	183,116		1,542		3.37	%	149,788		1,711		4.57	%
Total interest-earning assets	18,920,080		181,529		3.84	%	16,424,181		164,089		4.00	%
Non-interest-earning assets	767,913						720,803
Total assets	$	19,687,993					$	17,144,984
Interest-bearing liabilities:
Savings deposits	$	2,283,388	$	1,608	0.28	%	$	2,222,746	$	1,664	0.30	%
Interest-bearing checking	2,716,780		2,421		0.36	%	2,262,603		2,094		0.37	%
Money market accounts	3,506,441		5,793		0.66	%	2,160,119		2,823		0.52	%
Certificates of deposit	2,685,177		6,607		0.98	%	3,301,027		7,804		0.95	%
Total interest-bearing deposits	11,191,786		16,429		0.59	%	9,946,495		14,385		0.58	%
Borrowed funds	3,379,440		16,548		1.96	%	2,599,744		14,941		2.30	%
Total interest-bearing liabilities	14,571,226		32,977		0.91	%	12,546,239		29,326		0.93	%
Non-interest-bearing liabilities	1,648,753						1,923,141
Total liabilities	16,219,979						14,469,380
Stockholders’ equity	3,468,014						2,675,604
Total liabilities and stockholders’ equity	$	19,687,993					$	17,144,984
Net interest income			$	148,552					$	134,763
Net interest rate spread(1)					2.93	%					3.07	%
Net interest-earning assets(2)	$	4,348,854					$	3,877,942
Net interest margin(3)					3.14	%					3.28	%
Ratio of interest-earning assets to total interest-bearing liabilities	1.30x						1.31x


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


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


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

Table of Contents



	For the Six Months Ended June 30,
	2015						2014
	Average Outstanding Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Outstanding Balance		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits	$	192,693	$	56	0.06	%	$	400,528	$	309	0.15	%
Securities available-for-sale	1,216,819		10,916		1.79	%	847,166		8,539		2.02	%
Securities held-to-maturity	1,616,366		17,973		2.22	%	1,126,782		14,457		2.57	%
Net loans	15,348,650		324,567		4.23	%	13,355,535		295,501		4.43	%
Stock in FHLB	167,929		3,176		3.78	%	163,795		3,908		4.77	%
Total interest-earning assets	18,542,457		356,688		3.85	%	15,893,806		322,714		4.06	%
Non-interest-earning assets	766,460						733,382
Total assets	$	19,308,917					$	16,627,188
Interest-bearing liabilities:
Savings deposits	$	2,325,314	$	3,294	0.28	%	$	2,241,784	$	3,320	0.30	%
Interest-bearing checking	2,725,337		4,855		0.36	%	2,291,449		3,910		0.34	%
Money market accounts	3,470,721		11,936		0.69	%	2,095,819		5,628		0.54	%
Certificates of deposit	2,591,285		12,363		0.95	%	3,386,598		15,899		0.94	%
Total interest-bearing deposits	11,112,657		32,448		0.58	%	10,015,650		28,757		0.57	%
Borrowed funds	3,088,673		31,247		2.02	%	2,975,855		30,004		2.02	%
Total interest-bearing liabilities	14,201,330		63,695		0.90	%	12,991,505		58,761		0.90	%
Non-interest-bearing liabilities	1,571,200						1,604,634
Total liabilities	15,772,530						14,596,139
Stockholders’ equity	3,536,387						2,031,049
Total liabilities and stockholders’ equity	$	19,308,917					$	16,627,188
Net interest income			$	292,993					$	263,953
Net interest rate spread(1)					2.95	%					3.16	%
Net interest-earning assets(2)	$	4,341,127					$	2,902,301
Net interest margin(3)					3.16	%					3.32	%
Ratio of interest-earning assets to total interest-bearing liabilities	1.31x						1.22x


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


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


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

Table of Contents

Comparison of Operating Results for the Three and Six Months Ended June 30, 2015 and 2014

Net Income. Net income for the three months ended June 30, 2015 was $46.4 million compared to net income of $15.2 million for the three months ended June 30, 2014. Net income for the six months ended June 30, 2015 was $88.3 million compared to net income of $49.6 million for the six months ended June 30, 2014. Net income for the 2014 periods include one-time expense items totaling $20.2 million, net of tax related to the Company's second step capital offering.

Net Interest Income. Net interest income increased by $13.8 million, or 10.2%, to $148.6 million for the three months ended June 30, 2015 from $134.8 million for the three months ended June 30, 2014. The increase was primarily due to the average balance of interest earning assets increasing $2.50 billion to $18.92 billion for the three months ended June 30, 2015 compared to $16.42 billion for the three months ended June 30, 2014. This was partially offset by the average balance of our interest bearing liabilities increasing $2.02 billion to $14.57 billion for the three months ended June 30, 2015 compared to $12.55 billion for the three months ended June 30, 2014. In addition, the weighted average yield on our interest-earning assets decreased 16 basis points to 3.84% for the three months ended June 30, 2015 from 4.00% for the three months ended June 30, 2014. The net interest spread decreased by 13 basis points to 2.93% for the three months ended June 30, 2015 from 3.07% for the three months ended June 30, 2014 as the weighted average yield on interest earning assets declined 16 basis points and the weighted average cost of interest bearing liabilities decreased 3 basis points.

Net interest income increased by $29.0 million, or 11.0%, to $293.0 million for the six months ended June 30, 2015 from $264.0 million for the six months ended June 30, 2014. The increase was primarily due to the average balance of interest earning assets increasing $2.65 billion to $18.54 billion for the six months ended June 30, 2015 compared to $15.89 billion for the six months ended June 30, 2014. This was partially offset by the average balance of our interest bearing liabilities increasing $1.21 billion to $14.20 billion for the six months ended June 30, 2015 compared to $12.99 billion for the six months ended June 30, 2014, as well as the weighted average yield on our interest-earning assets decreasing 21 basis points to 3.85% for the six months ended June 30, 2015 from 4.06% for the six months ended June 30, 2014. The net interest spread decreased by 21 basis points to 2.95% for the six months ended June 30, 2015 from 3.16% for the six months ended June 30, 2014 as the weighted average yield on interest earning assets declined 21 basis points and the cost of interest bearing liabilities remained flat.

Interest and Dividend Income. Total interest and dividend income increased by $17.4 million, or 10.6%, to $181.5 million for the three months ended June 30, 2015 from $164.1 million for the three months ended June 30, 2014. This increase is attributed to the average balance of interest-earning assets increasing $2.50 billion, or 15.3%, to $18.92 billion for the three months ended June 30, 2015 from $16.42 billion for the three months ended June 30, 2014 as a result of organic growth. This was partially offset by the weighted average yield on interest-earning assets decreasing 16 basis points to 3.84% for the three months ended June 30, 2015 compared to 4.00% for the three months ended June 30, 2014.

Interest income on loans increased by $16.0 million, or 10.7%, to $165.5 million for the three months ended June 30, 2015 from $149.5 million for the three months ended June 30, 2014 as a result of a $2.15 billion, or 16.0%, increase in the average balance of net loans to $15.64 billion for the three months ended June 30, 2015 from $13.49 billion for the three months ended June 30, 2014. The increase is primarily attributed to the average balance of multi-family loans, commercial real estate loans and commercial and industrial loans increasing $1.31 billion, $720.4 million and $408.0 million, respectively, partially offset by the average balance of residential loans decreasing $263.2 million for the three months ended June 30, 2015. The weighted average yield on net loans decreased 20 basis points to 4.23% for the three months ended June 30, 2015 from 4.43% for the three months ended June 30, 2014. The decrease in the weighted average yield on net loans reflects lower rates on new and refinanced loans due to the current interest rate environment. Prepayment penalties, which are included in interest income, increased to $5.6 million for the three months ended June 30, 2015 from $4.8 million for the three months ended June 30, 2014.

Interest income on all other interest-earning assets, excluding loans, increased by $1.5 million, or 10.0%, to $16.0 million for the three months ended June 30, 2015 from $14.5 million for the three months ended June 30, 2014. The increase is attributed to a $351.4 million increase in the average balance of all other interest-earning assets, excluding loans, to $3.28 billion for the three months ended June 30, 2015 from $2.93 billion for the three months ended June 30, 2014. This increase was partially offset by a 3 basis point decrease in the weighted average yield on interest-earning assets, excluding loans, to 1.95% for the three months ended June 30, 2015 compared to 1.98% for the three months ended June 30, 2014.

Total interest and dividend income increased by $34.0 million, or 10.5%, to $356.7 million for the six months ended June 30, 2015 from $322.7 million for the six months ended June 30, 2014. This increase is attributed to the average balance of interest-earning assets increasing $2.65 billion, or 16.7%, to $18.54 billion for the six months ended June 30, 2015 from $15.89 billion for the six months ended June 30, 2014. This was partially offset by the weighted average yield on interest-earning assets decreasing 21 basis points to 3.85% for the six months ended June 30, 2015 compared to 4.06% for the six months ended June 30, 2014.

Table of Contents

Interest income on loans increased by $29.1 million, or 9.8%, to $324.6 million for the six months ended June 30, 2015 from $295.5 million for the six months ended June 30, 2014, reflecting a $1.99 billion, or 14.9%, increase in the average balance of net loans to $15.35 billion for the six months ended June 30, 2015 from $13.36 billion for the six months ended June 30, 2014. The increase is primarily attributed to the average balance of multi-family loans, commercial real estate loans and commercial and industrial loans increasing $1.18 billion, $679.9 million and $359.5 million, respectively, partially offset by the average balance of residential loans decreasing $188.6 million. The weighted average yield on net loans decreased 20 basis points to 4.23% for the six months ended June 30, 2015 from 4.43% for the six months ended June 30, 2014. The decrease in the weighted average yield on net loans reflects lower rates on new and refinanced loans due to the current interest rate environment. Prepayment penalties, which are included in interest income, increased to $10.2 million for the six months ended June 30, 2015 from $8.9 million for the six months ended June 30, 2014.

Interest income on all other interest-earning assets, excluding loans, increased by $4.9 million, or 18.0%, to $32.1 million for the six months ended June 30, 2015 from $27.2 million for the six months ended June 30, 2014. The average balance of all other interest-earning assets, excluding loans, increased by $664.0 million to $3.19 billion for the six months ended June 30, 2015 from $2.53 billion for the six months ended June 30, 2014. This was partially offset by the weighted average yield on interest-earning assets, excluding loans, decreasing by 13 basis points to 2.01% for the six months ended June 30, 2015 compared to 2.14% for the six months ended June 30, 2014.

Interest Expense. Total interest expense increased by $3.7 million, or 12.5%, to $33.0 million for the three months ended June 30, 2015 from $29.3 million for the three months ended June 30, 2014. This increase is due to the average balance of total interest-bearing liabilities increasing by $2.02 billion, or 16.1%, to $14.57 billion for the three months ended June 30, 2015 from $12.55 billion for the three months ended June 30, 2014. This increase was offset by the weighted average cost of total interest-bearing liabilities decreasing 2 basis points to 0.91% for the three months ended June 30, 2015 compared to 0.93% for the three months ended June 30, 2014.

Interest expense on interest-bearing deposits increased $2.0 million, or 14.2% to $16.4 million for the three months ended June 30, 2015 from $14.4 million for the three months ended June 30, 2014. This increase is attributed to the average balance of total interest-bearing deposits increasing $1.25 billion, or 12.5%, to $11.19 billion for the three months ended June 30, 2015 from $9.95 billion for the three months ended June 30, 2014. In addition, the weighted average cost of interest-bearing deposits increased by 1 basis point to 0.59% for the three months ended June 30, 2015 from 0.58% for the three months ended June 30, 2014.

Interest expense on borrowed funds increased by $1.6 million, or 10.8%, to $16.5 million for the three months ended June 30, 2015 from $14.9 million for the three months ended June 30, 2014. The average balance of borrowed funds increased $779.7 million, or 30.0%, to $3.38 billion for the three months ended June 30, 2015 from $2.60 billion for the three months ended June 30, 2014. This increase was offset by a decrease in the weighted average cost of borrowings to 1.96% for the three months ended June 30, 2015 from 2.30% for the three months ended June 30, 2014.

Total interest expense increased by $4.9 million, or 8.4%, to $63.7 million for the six months ended June 30, 2015 from $58.8 million for the six months ended June 30, 2014. This increase is attributed to the average balance of total interest-bearing liabilities increasing by $1.21 billion, or 9.3%, to $14.20 billion for the six months ended June 30, 2015 from $12.99 billion for the six months ended June 30, 2014. The weighted average cost of total interest-bearing liabilities remained flat at 0.90% for the six months ended June 30, 2015 and June 30, 2014.

Interest expense on interest-bearing deposits increased $3.7 million, or 12.8%, to $32.4 million for the six months ended June 30, 2015 from $28.8 million for the six months ended June 30, 2014. This increase is attributed to the average balance of total interest-bearing deposits increasing $1.10 billion, or 11.0%, to $11.11 billion for the six months ended June 30, 2015 from $10.02 billion for the six months ended June 30, 2014. In addition, the average cost of interest-bearing deposits increased 1 basis point to 0.58% for the six months ended June 30, 2015 from 0.57% for the six months ended June 30, 2014.

Interest expense on borrowed funds increased by $1.2 million, or 4.1%, to $31.2 million for the the six months ended June 30, 2015 from $30.0 million for the six months ended June 30, 2014. The average balance of borrowed funds increased $112.8 million or 3.8%, to $3.09 billion for the six months ended June 30, 2015 from $2.98 billion for the six months ended June 30, 2014. The weighted average cost of borrowings remained at 2.02% for the six months ended June 30, 2015 and June 30, 2014.

Provision for Loan Losses. Our provision for loan losses was $7.0 million for the three months ended June 30, 2015 compared to $8.0 million for the three months ended June 30, 2014. For the three months ended June 30, 2015, net charge-offs were $1.2 million compared to $2.6 million for the three months ended June 30, 2014. For the six months ended June 30, 2015,

Table of Contents

our provision for loan losses was $16.0 million compared to $17.0 million for the six months ended June 30, 2014. For the six months ended June 30, 2015, net charge-offs were $2.3 million compared to $4.9 million for the six months ended June 30, 2014. Our provision for the three and six months ended June 30, 2015 were primarily a result of continued organic growth in the loan portfolio, specifically the multi-family, commercial real estate and commercial and industrial portfolios; the inherent credit risk in our overall portfolio, particularly the credit risk associated with commercial real estate lending and commercial and industrial lending; and the level of non-performing loans.

Non-Interest Income. Total non-interest income increased by $1.4 million, or 13.9% to $11.6 million for the three months ended June 30, 2015 from $10.2 million for the three months ended June 30, 2014. The increase is mainly attributed to the gain on loan transactions increasing $1.8 million primarily as a result of loan sales through our mortgage subsidiary as well as the Bank. Other income increased $538,000 attributable to income on non-deposit investment products. These increases were partially offset by a decrease in fees and service charges of $747,000 for the three months ended June 30, 2015.

Total non-interest income decreased by $2.0 million, or 9.0% to $20.1 million for the six months ended June 30, 2015 from $22.1 million for the six months ended June 30, 2014. The reduction is mainly attributable to decreases in fees and service charges, other income and gain on securities transactions of $1.6 million, $1.2 million and $555,000, respectively, for the six months ended June 30, 2015. Included in other income for the six months ended June 30, 2014 is a bargain purchase gain of $1.5 million, net of tax, relating to the acquisition of Gateway Community Financial Corp, the federally-chartered holding company for GCF Bank ("Gateway"), which was completed in January 2014. These decreases were partially offset by an increase in the gain on loan transactions to $4.3 million for the six months ended June 30, 2015 compared to $2.9 million for the six months ended June 30, 2014 as a result of loan sales through our mortgage subsidiary.

Non-Interest Expenses. Total non-interest expenses decreased by $32.3 million, or 28.8%, to $79.8 million for the three months ended June 30, 2015 from $112.2 million for the three months ended June 30, 2014. Compensation and fringe benefits decreased $7.9 million for the three months ended June 30, 2015. For the 2014 period, compensation expense includes a charge of $13.0 million related to the accelerated vesting of all stock option and restricted stock awards upon the completion of the second step capital offering in May 2014. Absent the acceleration, compensation and fringe benefits increased $5.1 million as a result of staff additions to support our continued growth as well as normal merit increases. Contribution to charitable foundation represents the Company's contribution of $20.0 million to the Investors Charitable Foundation in conjunction with the second step capital offering in May 2014. Data processing service fees decreased $1.8 million for the three months ended June 30, 2015 to $5.3 million. Included in the three months ended June 30, 2014 was $750,000 of one time items related to acquisitions. FDIC insurance premium decreased $1.6 million for the three months ended June 30, 2015 due to the continued improvement in asset quality and additional capital raised in the second step offering.

Total non-interest expenses decreased by $32.6 million, or 17.2%, to $156.7 million for the six months ended June 30, 2015 from $189.4 million for the six months ended June 30, 2014. Compensation and fringe benefits decreased $4.4 million for the six months ended June 30, 2015. The 2014 period includes $13.0 million in May 2014 related to the accelerated vesting of all stock option and restricted stock awards upon the completion of the second step capital offering. During the 2015 period compensation and fringe benefits increased $8.7 million related to staff additions to support our continued growth, and recent acquisitions, as well as normal merit increases. Contribution to charitable foundation represents the Company's contribution of $20.0 million to the Investors Charitable Foundation in conjunction with the second step capital offering in May 2014. FDIC insurance premium decreased $4.2 million for the six months ended June 30, 2015 due to the continued improvement in asset quality and additional capital raised in the second step offering. Data processing service fees decreased $2.5 million for the six months ended June 30, 2015 to $10.8 million. Included in the six months ended June 30, 2014 was $1.3 million of one time items related to acquisitions.

Income Tax Expense. Income tax expense was $26.9 million for the three months ended June 30, 2015, representing a 36.75% effective tax rate, compared to income tax expense of $9.6 million for the three months ended June 30, 2014, representing a 38.72% effective tax rate. Income tax expense was $52.1 million for the six months ended June 30, 2015, representing a 37.09% effective tax rate, compared to income tax expense of $30.1 million for the six months ended June 30, 2014, representing a 38.63% effective tax rate.

In April 2015, New York City changed their tax law to conform with that of New York State, effective as of January 1, 2015. As a result, the Company analyzed the impact of this change relative to its deferred tax positions. Based on that analysis, the Company revalued the deferred tax asset and applied the new adjusted tax rate for 2015 in the current period. This analysis resulted in a net tax benefit of $1.2 million. This change will result in the Company's effective tax rate increasing in future years.

Table of Contents

Liquidity and Capital Resources

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

At June 30, 2015, the Company had overnight borrowings outstanding of $447.0 million with FHLB as compared to $265.0 million at December 31, 2014. The Company utilizes overnight borrowings from time to time to fund short-term liquidity needs. The Company had total borrowings of $3.45 billion at June 30, 2015, an increase of $680.0 million from $2.77 billion at December 31, 2014.

In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. At June 30, 2015, outstanding commitments to originate loans totaled $854.0 million; outstanding unused lines of credit totaled $701.5 million; standby letters of credit totaled $20.8 million and outstanding commitments to sell loans totaled $373.3 million, which included a $347.3 million pool of residential loans. This sale was completed on July 31, 2015 resulting in a gain of $612,000. The Company expects to have sufficient funds available to meet current commitments in the normal course of business. Time deposits scheduled to mature in one year or less totaled $1.79 billion at June 30, 2015. Based upon historical experience management estimates that a significant portion of such deposits will remain with the Company.

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


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


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


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

•

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

•

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

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

Table of Contents

As of June 30, 2015, the Bank and the Company exceeded all regulatory capital requirements as follows:



	June 30, 2015
	Actual				Minimum Capital Requirement				To be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Bank:
Tier 1 Leverage Ratio	$	2,443,927	12.49	%	$	782,927	4.00	%	$	978,659	5.00	%
Common equity tier 1 risk-based	2,443,927		16.33	%	673,644		4.50	%	973,041		6.50	%
Tier 1 Risk Based Capital	2,443,927		16.33	%	898,192		6.00	%	1,197,589		8.00	%
Total Risk-Based Capital	2,631,382		17.58	%	1,197,589		8.00	%	1,496,986		10.00	%

Company:
Tier 1 Leverage Ratio	$	3,349,183	17.09	%	$	783,717	4.00	%	$	979,646	5.00	%
Common equity tier 1 risk-based	3,349,183		22.33	%	674,830		4.50	%	974,754		6.50	%
Tier 1 Risk Based Capital	3,349,183		22.33	%	899,773		6.00	%	1,199,698		8.00	%
Total Risk-Based Capital	3,536,973		23.59	%	1,199,698		8.00	%	1,499,622		10.00	%

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

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

The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2015:



Contractual Obligations	Total		Less than One Year	One-Two Years	Two-Three Years	More than Three Years
	(In thousands)
Debt obligations (excluding capitalized leases)	$	3,446,121	632,125	275,000	574,744	1,964,252
Commitments to originate and purchase loans	$	853,989	853,989	—	—	—
Commitments to sell loans	$	373,332	373,332	—	—	—

Debt obligations include borrowings from the FHLB and other borrowings. The borrowings have defined terms and, under certain circumstances, $28.0 million of the borrowings are callable at the option of the lender. Additionally, at June 30, 2015, the Company’s commitments to fund unused lines of credit totaled $701.5 million. Commitments to originate loans and commitments to fund unused lines of credit are agreements to lend additional funds to customers as long as there have been no violations of any of the conditions established in the agreements. Commitments generally have a fixed expiration or other termination clauses which may or may not require a payment of a fee. Since some of these loan commitments are expected to expire without being drawn upon, total commitments do not necessarily represent future cash requirements.

In addition to the contractual obligations previously discussed, we have other liabilities which include capitalized and operating lease obligations. These contractual obligations as of June 30, 2015 have not changed significantly from December 31, 2014.

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.

For further information regarding our off-balance sheet arrangements and contractual obligations, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our December 31, 2014 Annual Report on Form 10-K.

Table of Contents



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Qualitative Analysis. We believe one significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or re-pricing of our assets, liabilities and off-balance sheet contracts (i.e., loan commitments); the effect of loan prepayments, deposits and withdrawals; the difference in the behavior of lending and funding rates arising from the uses of different indices; and “yield curve risk” arising from changing interest rate relationships across the spectrum of maturities for constant or variable credit risk investments. Besides directly affecting our net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of securities classified as available for sale and the mix and flow of deposits.

The general objective of our interest rate risk management is to determine the appropriate level of risk given our business model and then manage that risk in a manner consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset Liability Committee, which consists of senior management and executives, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements and modifies our lending, investing and deposit gathering strategies accordingly. On a quarterly basis, our Board of Directors reviews the Asset Liability Committee report, the aforementioned activities and strategies, the estimated effect of those strategies on our net interest margin and the estimated effect that changes in market interest rates may have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.

We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. Historically, our lending activities have emphasized one- to four-family fixed- and variable-rate first mortgages. At June 30, 2015 approximately 37% of our residential portfolio was in variable rate products, while 63% was in fixed rate products. Our variable-rate mortgage related assets have helped to reduce our exposure to interest rate fluctuations and is expected to benefit our long-term profitability, as the rates earned on these mortgage loans will increase as prevailing market rates increase. However, the current low interest rate environment, and the preferences of our customers, has resulted in more of a demand for fixed-rate products. This may adversely impact our net interest income, particularly in a rising rate environment. To help manage our interest rate risk, the origination of commercial real estate loans, particularly multi-family loans and commercial and industrial loans have outpaced the growth in the residential portfolio, as these loan types help reduce our interest rate risk due to their shorter term compared to residential mortgage loans. In addition, we primarily invest in shorter-to-medium duration securities, which generally have shorter average lives and lower yields compared to longer term securities. Shortening the average lives of our securities, along with originating more adjustable-rate mortgages and commercial real estate mortgages, will help to reduce interest rate risk.

We retain an independent, nationally recognized consulting firm that specializes in asset and liability management to complete our quarterly interest rate risk reports. We also retain a second nationally recognized consulting firm to prepare independently comparable interest rate risk reports for the purpose of validation. Both firms use a combination of analysis to monitor our exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (“NPV”) over a range of immediately changed interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. In calculating changes in NPV, assumptions estimating loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes are used.

The net interest income analysis uses data derived from an asset and liability analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations and the U.S. Treasury yield curve as of the balance sheet date. In addition we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred gradually over a one year period. Net interest income analysis also adjusts the asset and liability repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.

Our asset and liability analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). This asset and liability analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches in the timing of asset and liability cash flows but does not necessarily provide an accurate indicator of interest rate risk because the assumptions used in the analysis may not reflect the actual response to market changes.

Quantitative Analysis. The table below sets forth, as of June 30, 2015, the estimated changes in our NPV 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 NPV 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

Table of Contents

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 NPV or net interest income for an interest rate decrease of 100 basis points or increase of 200 basis points.



	Net Portfolio Value (1) (2)							Net Interest Income (3)
Change in Interest Rates (basis points)	Estimated NPV		Estimated Increase (Decrease)					Estimated Net Interest Income		Estimated Increase (Decrease)
Change in Interest Rates (basis points)	Estimated NPV		Amount			Percent		Estimated Net Interest Income		Amount		Percent
	(Dollars in thousands)
+ 200bp	$	3,224,744		(281,581	)	(8.0	)%	$	540,169	(33,249	)	(5.8	)%
0bp	$	3,506,325		—		—		$	573,418	—		—
-100bp	$	3,318,396		(187,929	)	(5.4	)%	$	573,742	324		0.06	%


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


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


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

The table set forth above indicates at June 30, 2015, in the event of a 200 basis points increase in interest rates, we would be expected to experience a 8.0% decrease in NPV and a $33.3 million, or 5.8%, decrease in net interest income. In the event of a 100 basis points decrease in interest rates, we would be expected to experience a 5.4% decrease in NPV and a $324,000, or 0.06%, increase in net interest income. These data do not reflect any future actions we may take in response to changes in interest rates, such as changing the mix of our assets and liabilities, which could change the results of the NPV and net interest income calculations.

As mentioned above, we retain two nationally recognized firms to compute our quarterly interest rate risk reports. Certain shortcomings are inherent in any methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income require certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions we may take in response to changes in interest rates. The table also assumes a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV 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 NPV and net interest income.



ITEM 4.	CONTROLS AND PROCEDURES

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

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information



ITEM 1.	LEGAL PROCEEDINGS

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



ITEM 1A.	RISK FACTORS

Table of Contents

There have been no material changes in the “Risk Factors” disclosed in the Company’s December 31, 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission.



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

The following table reports information regarding repurchases of our common stock during the quarter ended June 30, 2015 and the stock repurchase plans approved by our Board of Directors.



Period	Total Number of Shares Purchased (1) (2)	Average Price paid Per Share		As part of Publicly Announced Plans or Programs		Yet to be Purchased under the Plans or Programs (1) (2)
April 1, 2015 through April 30, 2015	6,250,000	$	11.87	74,212,730		8,711,561
May 1, 2015 through May 31, 2015	5,450,000	12.03		65,552,605		3,261,561
June 1, 2015 through June 30, 2015	3,301,462	12.30		40,595,292		34,739,310
Total	15,001,462	12.02		$	180,360,627	34,739,310

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

(2) On June 9, 2015, the Board of Directors authorized the repurchase of an additional 10% of the Company's outstanding shares of common stock or 34,779,211 million shares which commenced upon the completion of the first repurchase plan on June 30, 2015. This program has no expiration date and has 34,739,310 shares yet to be repurchased as of June 30, 2015.



ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

Not applicable.



ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.



ITEM 5.	OTHER INFORMATION

Not applicable.

Table of Contents



ITEM 6.	EXHIBITS

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



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

3.2			Bylaws of Investors Bancorp, Inc. (1)

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

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

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

101			101.INS (1) XBRL Instance Document 101.SCH (1) XBRL Taxonomy Extension Schema Document 101.CAL (1) XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF (1) XBRL Taxonomy Extension Definition Linkbase Document 101.LAB (1) XBRL Taxonomy Extension Labels Linkbase Document 101.PRE (1) XBRL Taxonomy Presentation Linkbase Document



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

Table of Contents

SIGNATURES

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




		INVESTORS BANCORP, INC.

Date: August 7, 2015	By:	/s/ Kevin Cummings
		Kevin Cummings Chief Executive Officer and President (Principal Executive Officer)
	By:	/s/ Sean Burke
		Sean Burke Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Attached files

Stock widget

Investing forum

Investors Bancorp, Inc. Reports