INVESTORS BANCORP, INC. Forward Looking Statements
Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in whichInvestors Bancorp, Inc. (the "Company") operates, competitive products and pricing, fiscal and monetary policies of theU.S. Government , changes in government regulations or interpretations of regulations affecting financial institutions, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets, the availability of and costs associated with sources of liquidity, expenses related to our proposed merger with Citizens Financial Group, Inc., unexpected delays relating to the merger, or the inability to obtain shareholder or regulatory approvals or satisfy the other closing conditions required to complete the merger. In addition, the COVID-19 pandemic is having an adverse impact on us, our customers and the communities we serve. The adverse effect of the COVID-19 pandemic on us, our customers and the communities where we operate may adversely affect our business, results of operations and financial condition for an indefinite period of time. Reference is made to Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and subsequent additional risk factors included in Part II, Item 1A of our Quarterly Reports on Form 10-Q. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events except as may be required by law. Critical Accounting Policies We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As ofSeptember 30, 2021 , we consider the following to be our critical accounting policies. Allowance for Credit Losses. The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through the provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The allowance for loan and security losses is reported separately as contra-assets to loans and securities on the consolidated balance sheet. The expected credit loss for unfunded lending commitments and unfunded loan commitments is reported on the consolidated balance sheet in other liabilities. The provision for credit losses related to loans, unfunded commitments and debt securities is reported on the consolidated statement of income. 49 -------------------------------------------------------------------------------- Table of Contents Allowance for Credit Losses on Loans Receivable Collectively evaluated. The allowance for credit losses on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected. Expected losses are evaluated and calculated on a collective basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether the loans in a pool continue to exhibit similar risk characteristics as the other loans in the pool. If the risk characteristics of a loan change, such that they are no longer similar to other loans in the pool, the Company will evaluate the loan with a different pool of loans that share similar risk characteristics. If the loan does not share risk characteristics with other loans, the Company will evaluate the allowance on an individual basis. The Company evaluates the segmentation at least annually to determine whether loans continue to share similar risk characteristics. Loans are charged off against the allowance when the Company believes the loan balances become uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off. The Company has chosen to segment its portfolio consistent with the manner in which it manages the risk of the type of credit. The Company's segments for loans include multi-family, commercial real estate, commercial and industrial, construction, residential and consumer. The Company calculates estimated credit loss on its loan portfolio primarily using quantitative methodologies that consider a variety of factors such as historical loss experience, loan characteristics, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. The expected credit losses are the product of multiplying the Company's estimates of probability of default (PD), loss given default (LGD) and individual loan level exposure at default on an undiscounted basis. For a small portion of the loan portfolio, i.e. unsecured consumer loans, small business loans and loans to individuals, the Company utilizes a loss rate method to calculate the expected credit loss of that asset segment. Included in the Company's framework for estimating credit losses, the Company incorporates forward-looking information through the use of macroeconomic scenarios applied over a two-year reasonable and supportable forecast period, after which, the Company reverts to average historical losses on a straight line basis over a two-year period. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses and include, but are not limited to, unemployment rates, real estate prices, gross domestic product levels, corporate bond spreads and long-term interest rate forecasts. The Company evaluates the use of multiple economic scenarios and the weighting of those scenarios on a quarterly basis. The scenarios that are chosen and the amount of weighting given to each scenario consider a variety of factors including third party economists and firms, industry trends and other available published economic information. Expected credit losses are estimated over the contractual term of each loan taking into consideration expected prepayments which are developed using industry standard estimation techniques. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by the Company. Also included in the allowance for loans are qualitative reserves to cover losses that are expected but, in the Company's assessment, may not be adequately represented in the quantitative method or the economic assumptions described above. For example, factors that the Company considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and non-accrual loans, the effect of external factors such as competition, and the legal and regulatory requirements, among others. Individually evaluated. On a case-by-case basis, the Company may conclude a loan should be evaluated on an individual basis based on its disparate risk characteristics. The Company individually evaluates loans that meet the following criteria for expected credit loss, as the Company has determined that these loans generally do not share similar risk characteristics with other loans in the portfolio: •Commercial loans with an outstanding balance greater than$1.0 million and on non-accrual status; •Troubled debt restructured loans; and •Other commercial loans with greater than$1.0 million in outstanding principal, if management has specific information that it is probable they will not collect all principal amounts due under the contractual terms of the loan agreement. When the Company determines that the loan no longer shares similar risk characteristics of other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable, to ensure that the credit loss is not delayed until actual loss. If the fair value of the collateral is less than the amortized cost basis of the loan, 50 -------------------------------------------------------------------------------- Table of Contents the Company will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan. In determining the fair value for collateral-dependent loans, the Company reviews whether there has been an adverse change in the collateral value supporting the loan. As a substantial amount of the Company's loan portfolio is collateralized by real estate, appraisals of the underlying value of property are used. The Company utilizes information from its commercial lending officers and its credit department and special assets department's knowledge of changes in real estate conditions to identify if possible deterioration has occurred. Based on the severity of the changes in market conditions, management determines if an updated appraisal is warranted or if downward adjustments to the previous appraisal are warranted. For residential mortgage loans, the Company's policy is to obtain an appraisal upon the origination of the loan and an updated appraisal in the event a loan becomes 90 days delinquent. Thereafter, the appraisal is updated every two years if the loan remains in non-performing status and the foreclosure process has not been completed. Management adjusts the appraised value of residential loans to reflect estimated selling costs and declines in the real estate market. Management believes the potential risk for outdated appraisals has been mitigated due to the fact that the loans are individually assessed to determine that the loan's carrying value is not in excess of the fair value of the collateral. Loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt. Consistent with the CARES Act, modifications that met the criteria as discussed in Note 6, Loans Receivable, Net, are not included in individually evaluated loans discussed above. Acquired assets. Subsequent to the adoption of CECL, acquired assets are included in the Company's calculation of the allowance for credit losses. How the allowance on an acquired asset is recorded depends on whether it has been classified as a Purchased Financial Asset with Credit Deterioration ("PCD"). PCD assets are assets acquired at a discount that is due, in part, to credit quality. PCD assets are accounted for in accordance with ASC Subtopic 326-20 and are initially recorded at fair value as determined by the sum of the present value of expected future cash flows and an allowance for credit losses at acquisition. The allowance for PCD assets is recorded through a gross-up effect, while the allowance for acquired non-PCD assets such as loans is recorded through provision expense, consistent with originated loans. Thus, the determination of which assets are PCD and non-PCD can have a significant effect on the accounting for these assets. Subsequent to acquisition, the allowance for PCD loans will generally follow the same estimation, provision and charge-off process as non-PCD acquired and originated loans. Additionally, TDR identification for acquired loans (PCD and non-PCD) will be consistent with the TDR identification for originated loans. Allowance for Credit Losses onDebt Securities Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Management classifies the held-to-maturity portfolio into the following major security types: mortgage-backed securities, municipal and corporate bonds, trust preferred securities ("TruPS") and other. Nearly all of the mortgage-backed securities in the Company's portfolio are issued byU.S. government agencies and are either explicitly or implicitly guaranteed by theU.S. government, are highly rated by major rating agencies and have a long history of no credit losses and therefore the expectation of non-payment is zero. At each reporting period, the Company evaluates whether the securities in a segment continue to exhibit similar risk characteristics as the other securities in the segment. If the risk characteristics of a security change, such that they are no longer similar to other securities in the segment, the Company will evaluate the security with a different segment that shares more similar risk characteristics. In estimating the net amount expected to be collected for mortgage-backed securities and municipal and corporate bonds, a range of historical losses method is utilized. In estimating the net amount expected to be collected for TruPS, the Company employs a single scenario forecast methodology. The scenario is informed by historical industry default data as well as current and near term operating conditions for the banks and other financial institutions that are the underlying issuers. In addition, expected prepayments are included in the analysis of the individually assessed TruPS applied at the collateral level. Allowance for Credit Losses on Off-Balance Sheet Credit ExposuresThe Company is required to include the unfunded commitment that is expected to be funded in the future within the allowance calculation. The Company participates in lending that results in an off-balance sheet unfunded commitment balance. The Company currently underwrites funding commitments with conditionally cancelable language. To determine the expected funding balance remaining, the Company uses a historical utilization rate for each of the segments to calculate the expected commitment balance. The reserve percentage for each respective loan portfolio is applied to the remaining unused portion of the 51 -------------------------------------------------------------------------------- Table of Contents expected commitment balance and the expected funded commitment in determining the allowance for credit loss on off-balance sheet credit exposures. Derivative Financial Instruments. As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Executive Summary During 2020 and 2021, the entire country has been negatively impacted by the COVID-19 pandemic. Beginning inMarch 2020 , the impacts of the COVID-19 pandemic, including social distancing guidelines, closure of non-essential businesses and shelter-at-home mandates, caused a global economic downturn. The economic downturn included an increase in unemployment and a decline in gross domestic product. SinceApril 2020 , the unemployment rate has declined but remains elevated above the pre-pandemic unemployment rate. Gross domestic product has grown each quarter beginning with the third quarter of 2020 after declining in the first and second quarters of 2020. We continue to monitor developments related to COVID-19, including, but not limited to, its impact on our employees, customers, communities and results of operations. All of our branches have normal operating hours and all lobbies have re-opened for our clients. In addition, the majority of our corporate workforce has returned to our corporate offices in some capacity while the remainder continue to work remotely in an effective manner. Proper protocols have been put in place in our branches and corporate offices to ensure the continued safety of our employees and customers. As a result of the pandemic, certain borrowers are currently unable to meet their contractual payment obligations. While we have continued to support our customers by granting payment deferrals for those experiencing continued hardship because of the pandemic, we have also worked diligently with our customers to ensure a return to current payment status for a significant portion of our clients who have ended their deferral period. AtOctober 19, 2021 , loans with an aggregate outstanding balance of approximately$410 million , or 1.9% of loans, were in COVID-19 related deferment. Citizens Financial Group, Inc. Merger Agreement OnJuly 28, 2021 , Citizens Financial Group, Inc. ("Citizens") andInvestors Bancorp, Inc. ("Investors") announced that they entered into a definitive agreement and plan of merger under which Citizens will acquire all of the outstanding shares of Investors for a combination of stock and cash. Under the terms of the agreement and plan of merger, shareholders of Investors will receive 0.297 of a share of Citizens common stock and$1.46 in cash for each share of Investors they own. Following completion of the transaction, former shareholders of Investors will collectively own approximately 14% of the combined company. The implied total transaction value based on closing prices onJuly 27, 2021 is approximately$3.5 billion . The agreement and plan of merger has been unanimously approved by the boards of directors of each company and the transaction is expected to close in the first half of 2022, subject to approval by the shareholders of Investors, receipt of required regulatory approvals and other customary closing conditions. A special meeting of Investors shareholders is scheduled to be held onNovember 19, 2021 . Third Quarter of 2021 Results Summary •We reported net income of$66.9 million , or$0.28 per diluted share, for the three months endedSeptember 30, 2021 as compared to$79.8 million , or$0.34 per diluted share, for the three months endedJune 30, 2021 and$64.3 million , or$0.27 per diluted share, for the three months endedSeptember 30, 2020 . •Net income for the three months endedSeptember 30, 2021 included approximately$10.9 million , or$0.05 per diluted share, of after-tax costs associated with our pending merger with Citizens and completedBerkshire Bank branch acquisition and approximately$7.4 million , or$0.03 per diluted share, of after-tax costs in connection with our extinguishment of$600 million of FHLB borrowings announced inAugust 2021 . 52 -------------------------------------------------------------------------------- Table of Contents •Net interest margin decreased 12 basis points to 2.99% for the three months endedSeptember 30, 2021 compared to the three months endedJune 30, 2021 as a result of lower prepayment penalties and an elevated average cash position. •Provision for credit losses was a negative$13.0 million for the three months endedSeptember 30, 2021 compared with a negative$9.7 million for the three months endedJune 30, 2021 . We recorded net charge-offs of$251,000 during the quarter endedSeptember 30, 2021 compared to net recoveries of$807,000 during the quarter endedJune 30, 2021 . The allowance for loan losses as a percent of total loans was 1.20% atSeptember 30, 2021 compared to 1.26% atJune 30, 2021 . •Total non-interest income was$16.0 million for the three months endedSeptember 30, 2021 , an increase of$2.9 million compared to the three months endedJune 30, 2021 and a decrease of$4.0 million compared to the three months endedSeptember 30, 2020 . •Total non-interest expenses were$132.0 million for the three months endedSeptember 30, 2021 , an increase of$23.6 million compared to the three months endedJune 30, 2021 and an increase of$28.0 million compared to the three months endedSeptember 30, 2020 . Included in non-interest expenses for the third quarter of 2021 were$10.2 million of costs associated with our extinguishment of$600 million of FHLB borrowings and$14.9 million of merger and acquisition related costs resulting from theBerkshire Bank branch acquisition and Citizens proposed merger transaction, inclusive of$6.6 million of occupancy costs resulting from anticipated branch closures related to branch rationalization plans connected with theBerkshire Bank branch acquisition. •Non-interest-bearing deposits increased$176.1 million , or 4.2%, during the three months endedSeptember 30, 2021 . The cost of interest-bearing deposits decreased 3 basis points to 0.40% for the three months endedSeptember 30, 2021 compared to the three months endedJune 30, 2021 . •Total loans increased$539.3 million , or 2.5%, to$21.91 billion during the three months endedSeptember 30, 2021 . C&I loans increased$167.4 million , or 4.4%, during the three months endedSeptember 30, 2021 . •Non-accrual loans decreased to$76.5 million , or 0.35% of total loans, atSeptember 30, 2021 as compared to$77.6 million , or 0.36% of total loans, atJune 30, 2021 and$132.0 million , or 0.63% of total loans, atSeptember 30, 2020 . •AtSeptember 30, 2021 , COVID-19 related loan deferrals totaled$496 million , or 2.3% of loans, compared to$599 million , or 2.8% of loans, as ofJune 30, 2021 . Approximately 90% of borrowers with a loan payment deferral are making interest payments as ofSeptember 30, 2021 . As ofOctober 19, 2021 , COVID-19 related loan deferrals totaled$410 million , or 1.9% of loans. •Tier 1 Leverage, Common Equity Tier 1 Risk-Based, Tier 1 Risk-Based and Total Risk-Based Capital Ratios were 10.24%, 12.83%, 12.83% and 14.11%, respectively, atSeptember 30, 2021 . •OnJuly 28, 2021 , Citizens and the Company announced that they entered into a definitive agreement and plan of merger under which Citizens will acquire all of the outstanding shares of the Company. The agreement and plan of merger has been unanimously approved by the boards of directors of each company and the transaction is expected to close in the first half of 2022, subject to approval by the shareholders of the Company, receipt of required regulatory approvals and other customary closing conditions. •OnAugust 27, 2021 , we completed the acquisition ofBerkshire Bank's New Jersey and easternPennsylvania branches including$219 million of loans and$632 million of deposits. Comparison of Operating Results for the Three and Nine Months EndedSeptember 30, 2021 and 2020 Net Income. Net income for the three months endedSeptember 30, 2021 was$66.9 million compared to net income of$64.3 million for the three months endedSeptember 30, 2020 . Net income for the nine months endedSeptember 30, 2021 was$219.0 million compared to net income of$146.4 million for the nine months endedSeptember 30, 2020 . Net Interest Income. Net interest income increased by$13.0 million , or 7.1%, to$194.6 million for the three months endedSeptember 30, 2021 from$181.6 million for the three months endedSeptember 30, 2020 . Net interest margin increased 20 basis points to 2.99% for the three months endedSeptember 30, 2021 from 2.79% for the three months endedSeptember 30, 2020 . Net interest income increased by$33.2 million , or 6.2%, to$570.0 million for the nine months endedSeptember 30, 2021 from$536.9 million for the nine months endedSeptember 30, 2020 . Net interest margin increased 26 basis points to 3.00% for the nine months endedSeptember 30, 2021 from 2.74% for the nine months endedSeptember 30, 2020 . 53 -------------------------------------------------------------------------------- Table of Contents Total interest and dividend income decreased by$9.5 million , or 3.9%, to$231.2 million for the three months endedSeptember 30, 2021 from$240.7 million for the three months endedSeptember 30, 2020 . Interest income on loans decreased by$4.0 million , or 1.9%, to$211.2 million for the three months endedSeptember 30, 2021 , primarily attributed to the weighted average yield on net loans which decreased 15 basis points to 3.97%. Partially offsetting this decrease, the average balance of net loans increased$404.6 million to$21.28 billion , driven by loan originations and$219 million of loans acquired fromBerkshire Bank , reduced by paydowns and payoffs. Prepayment penalties, which are included in interest income, totaled$5.3 million for the three months endedSeptember 30, 2021 compared to$7.4 million for the three months endedSeptember 30, 2020 . Interest income on all other interest-earning assets, excluding loans, decreased by$5.4 million , or 21.3%, to$20.1 million for the three months endedSeptember 30, 2021 which is attributed to the weighted average yield on interest-earning assets, excluding loans, which decreased 27 basis points to 1.70% for the three months endedSeptember 30, 2021 . In addition, the average balance of all other interest-earning assets, excluding loans, decreased$447.1 million to$4.72 billion for the three months endedSeptember 30, 2021 . Total interest and dividend income decreased by$59.4 million , or 8.0%, to$683.6 million for the nine months endedSeptember 30, 2021 from$743.0 million for the nine months endedSeptember 30, 2020 . Interest income on loans decreased by$36.0 million , or 5.5%, to$621.5 million for the nine months endedSeptember 30, 2021 , primarily as a result of a 17 basis point decrease in the weighted average yield on net loans to 3.97%. In addition, the average balance of net loans decreased$302.9 million to$20.85 billion , mainly from paydowns and payoffs, partially offset by loan originations,$219 million of loans acquired fromBerkshire Bank and$453.3 million of loans acquired fromGold Coast inApril 2020 . Prepayment penalties, which are included in interest income, totaled$18.4 million for the nine months endedSeptember 30, 2021 compared to$23.2 million for the nine months endedSeptember 30, 2020 . Interest income on all other interest-earning assets, excluding loans, decreased by$23.4 million , or 27.3%, to$62.2 million for the nine months endedSeptember 30, 2021 which is attributed to the weighted average yield on interest-earning assets, excluding loans, which decreased 44 basis points to 1.86%. In addition, the average balance of all other interest-earning assets, excluding loans, decreased$481.4 million to$4.47 billion for the nine months endedSeptember 30, 2021 . Total interest expense decreased by$22.4 million , or 38.0%, to$36.6 million for the three months endedSeptember 30, 2021 from$59.1 million for the three months endedSeptember 30, 2020 . Interest expense on interest-bearing deposits decreased$18.4 million , or 54.0%, to$15.7 million for the three months endedSeptember 30, 2021 . The weighted average cost of interest-bearing deposits decreased 44 basis points to 0.40% for the three months endedSeptember 30, 2021 . In addition, the average balance of total interest-bearing deposits decreased$576.4 million , or 3.6%, to$15.63 billion for the three months endedSeptember 30, 2021 . Interest expense on borrowed funds decreased by$4.0 million , or 16.1%, to$21.0 million for the three months endedSeptember 30, 2021 . The average balance of borrowed funds decreased$630.1 million , or 14.0%, to$3.86 billion for the three months endedSeptember 30, 2021 . In addition, the weighted average cost of borrowings decreased 5 basis points to 2.17% for the three months endedSeptember 30, 2021 . Total interest expense decreased by$92.5 million , or 44.9%, to$113.6 million for the nine months endedSeptember 30, 2021 from$206.1 million for the nine months endedSeptember 30, 2020 . Interest expense on interest-bearing deposits decreased$73.4 million , or 58.1%, to$52.9 million for the nine months endedSeptember 30, 2021 . The weighted average cost of interest-bearing deposits decreased 59 basis points to 0.46% for the nine months endedSeptember 30, 2021 . In addition, the average balance of total interest-bearing deposits decreased$758.1 million , or 4.7%, to$15.32 billion for the nine months endedSeptember 30, 2021 . Interest expense on borrowed funds decreased by$19.1 million , or 23.9%, to$60.7 million for the nine months endedSeptember 30, 2021 . The average balance of borrowed funds decreased$1.29 billion , or 25.5%, to$3.77 billion for the nine months endedSeptember 30, 2021 . Partially offsetting this decrease, the weighted average cost of borrowings increased 5 basis points to 2.15% for the nine months endedSeptember 30, 2021 . Provision for Credit Losses. Our provision for credit losses is primarily a result of the expected credit losses on our loans, unfunded commitments and held-to-maturity debt securities over the life of these financial instruments based on historical experience, current conditions, and reasonable and supportable forecasts. Our provision for credit losses is also impacted by the inherent credit risk in these financial instruments, the composition of and changes in our portfolios of these financial instruments, and the level of charge-offs. AtSeptember 30, 2021 , our allowance for credit losses continued to be affected by the impact of the COVID-19 pandemic on the current and forecasted economic conditions. For the three months endedSeptember 30, 2021 , our provision for credit losses was impacted by improving economic conditions and commercial real estate prices. For the three months endedSeptember 30, 2021 , our provision for credit losses was negative$13.0 million , compared to$8.3 million for the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2021 , net loan charge-offs were$251,000 compared to$667,000 for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , our provision for credit losses was negative$25.7 million , compared to$72.8 million for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , net loan recoveries were$2.3 million compared to net loan charge-offs of$12.8 million for the nine months endedSeptember 30, 2020 . 54
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Non-Interest Income. Total non-interest income decreased$4.0 million to$16.0 million for the three months endedSeptember 30, 2021 from$19.9 million for the three months endedSeptember 30, 2020 . The decrease was due primarily to a decrease of$3.6 million in gain on loans due to a lower volume of mortgage banking loan sales to third parties and a$931,000 unrealized loss on equity securities during the three months endedSeptember 30, 2021 , partially offset by an increase of$1.2 million in customer swap fee income. Total non-interest income increased$4.3 million to$49.0 million for the nine months endedSeptember 30, 2021 from$44.7 million for the nine months endedSeptember 30, 2020 . The increase in non-interest income was due primarily to an increase of$3.0 million in fees and service charges predominately related to our mortgage servicing rights valuation, an increase of$2.8 million in income from our wealth and investment products and an increase of$2.0 million in customer swap fee income, partially offset by a decrease of$3.9 million in gain on loans due to a lower volume of mortgage banking loan sales to third parties. Non-Interest Expenses. Total non-interest expenses were$132.0 million for the three months endedSeptember 30, 2021 , an increase of$28.0 million , or 26.9%, compared to the three months endedSeptember 30, 2020 . The increase was primarily driven by$10.2 million of costs associated with our extinguishment of$600 million of FHLB borrowings and$14.9 million of merger and acquisition related costs resulting from theBerkshire Bank and Citizens transactions inclusive of$6.6 million of occupancy costs resulting from anticipated branch closures related to branch rationalization plans connected with theBerkshire Bank branch acquisition. Total non-interest expenses were$344.8 million for the nine months endedSeptember 30, 2021 , an increase of$38.2 million , or 12.5%, compared to the nine months endedSeptember 30, 2020 . This increase was driven by an increase of$8.9 million in debt extinguishment costs, an increase of$8.5 million in professional fees driven by acquisition-related fees, an increase of$8.0 million in compensation and fringe benefit expense primarily related to incentive compensation and medical expenses and$6.6 million of occupancy costs resulting from anticipated branch closures related to branch rationalization plans connected with theBerkshire Bank branch acquisition. Included in non-interest expenses for the nine months endedSeptember 30, 2021 were$10.0 million of acquisition-related costs. Income Taxes. Income tax expense for the third quarter of 2021 was$24.6 million compared to$24.8 million for the third quarter 2020. The effective tax rate was 26.9% for the three months endedSeptember 30, 2021 and 27.9% for the three months endedSeptember 30, 2020 . Income tax expense for the nine months endedSeptember 30, 2021 was$80.9 million compared to$55.7 million for the nine months endedSeptember 30, 2020 . The effective tax rate was 27.0% for the nine months endedSeptember 30, 2021 and 27.6% for the nine months endedSeptember 30, 2020 . The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income and the level of expenses not deductible for tax purposes relative to the overall level of pre-tax income. In addition, the effective tax rate is affected by the level of income allocated to the various state and local jurisdictions where we operate, because tax rates differ among such jurisdictions. Analysis of Net Interest Income Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities. Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, however interest receivable on these loans have been fully reserved for and not included in interest income. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. 55
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Three Months Ended September 30,
2021 2020
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)Interest-earning assets: Interest-bearing deposits$ 844,365 $ 268 0.13 %$ 978,037 $ 233 0.10 % Equity securities 8,747 65 2.97 % 7,177 45 2.51 % Debt securities available-for-sale 2,501,016 9,683 1.55 % 2,758,679 13,473 1.95 % Debt securities held-to-maturity, net 1,174,563 7,806 2.66 % 1,200,933 8,277 2.76 % Net loans 21,284,262 211,189 3.97 % 20,879,661 215,221 4.12 % Stock in FHLB 192,111 2,234 4.65 % 223,032 3,452 6.19 % Total interest-earning assets 26,005,064 231,245 3.56 % 26,047,519 240,701 3.70 % Non-interest-earning assets 1,151,571 1,157,358 Total assets$ 27,156,635 $ 27,204,877 Interest-bearing liabilities: Savings deposits$ 2,060,893 $ 1,381 0.27 %$ 2,033,495 $ 2,690 0.53 % Interest-bearing checking 6,658,248 6,833 0.41 % 5,901,759 8,658 0.59 % Money market accounts 4,613,066 4,475 0.39 % 4,349,536 8,520 0.78 % Certificates of deposit 2,299,850 2,994 0.52 % 3,923,651 14,241 1.45 % Total interest-bearing deposits 15,632,057 15,683 0.40 % 16,208,441 34,109 0.84 % Borrowed funds 3,863,460 20,960 2.17 % 4,493,591 24,970 2.22 % Total interest-bearing liabilities 19,495,517 36,643 0.75 % 20,702,032 59,079 1.14 % Non-interest-bearing liabilities 4,827,551 3,856,553 Total liabilities 24,323,068 24,558,585 Stockholders' equity 2,833,567 2,646,292 Total liabilities and stockholders' equity$ 27,156,635 $ 27,204,877 Net interest income$ 194,602 $ 181,622 Net interest rate spread(1) 2.81 % 2.56 % Net interest-earning assets(2)$ 6,509,547 $ 5,345,487 Net interest margin(3) 2.99 % 2.79 % Ratio of interest-earning assets to total interest-bearing liabilities 1.33 1.26 (1)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (3)Net interest margin represents net interest income divided by average total interest-earning assets. 56
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Nine Months Ended September 30,
2021 2020
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)Interest-earning assets: Interest-bearing deposits$ 496,273 $ 367 0.10 %$ 880,015 $ 1,367 0.21 % Equity securities 19,074 394 2.75 % 6,480 110 2.26 % Debt securities available-for-sale 2,578,106 31,538 1.63 % 2,657,564 46,371 2.33 % Debt securities held-to-maturity 1,189,302 23,462 2.63 % 1,158,357 25,802 2.97 % Net loans 20,854,173 621,462 3.97 % 21,157,077 657,483 4.14 % Stock in FHLB 185,520 6,417 4.61 % 247,260 11,881 6.41 % Total interest-earning assets 25,322,448 683,640 3.60 % 26,106,753 743,014 3.79 % Non-interest-earning assets 1,137,556 1,080,136 Total assets$ 26,460,004 $ 27,186,889 Interest-bearing liabilities: Savings deposits$ 2,028,057 $ 4,265 0.28 %$ 2,039,596 $ 9,505 0.62 % Interest-bearing checking 6,328,197 20,397 0.43 % 5,786,659 34,191 0.79 % Money market accounts 4,557,672 16,136 0.47 % 4,172,144 32,624 1.04 % Certificates of deposit 2,408,527 12,070 0.67 % 4,082,118 49,959 1.63 % Total interest-bearing deposits 15,322,453 52,868 0.46 % 16,080,517 126,279 1.05 % Borrowed funds 3,774,346 60,725 2.15 % 5,066,253 79,843 2.10 % Total interest-bearing liabilities 19,096,799 113,593 0.79 % 21,146,770 206,122 1.30 % Non-interest-bearing liabilities 4,574,136 3,402,930 Total liabilities 23,670,935 24,549,700 Stockholders' equity 2,789,069 2,637,189 Total liabilities and stockholders' equity$ 26,460,004 $ 27,186,889 Net interest income$ 570,047 $ 536,892 Net interest rate spread(1) 2.81 % 2.49 % Net interest-earning assets(2)$ 6,225,649 $ 4,959,983 Net interest margin(3) 3.00 % 2.74 % Ratio of interest-earning assets to total interest-bearing liabilities 1.33 1.23 (1)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (3)Net interest margin represents net interest income divided by average total interest-earning assets. 57
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Comparison of Financial Condition at
Total Assets. Total assets increased by$1.29 billion , or 5.0%, to$27.32 billion atSeptember 30, 2021 fromDecember 31, 2020 . Cash and cash equivalents increased by$499.9 million to$670.3 million atSeptember 30, 2021 fromDecember 31, 2020 . Net loans increased by$1.04 billion , or 5.1%, to$21.62 billion atSeptember 30, 2021 fromDecember 31, 2020 . Securities decreased by$230.4 million , or 5.7%, to$3.81 billion atSeptember 30, 2021 fromDecember 31, 2020 . Net Loans. Net loans increased by$1.04 billion to$21.62 billion atSeptember 30, 2021 from$20.58 billion atDecember 31, 2020 . The detail of the loan portfolio is below: September 30, 2021 December 31, 2020 (Dollars in thousands) Commercial loans: Multi-family loans $ 7,655,135 7,122,840 Commercial real estate loans 5,135,123
4,947,212
Commercial and industrial loans 3,933,926 3,575,641 Construction loans 509,620 404,367 Total commercial loans 17,233,804 16,050,060 Residential mortgage loans 3,930,683 4,119,894 Consumer and other 740,827 702,801 Total loans 21,905,314 20,872,755 Deferred fees, premiums and other, net (17,071) (9,318) Allowance for loan losses (263,515) (282,986) Net loans$ 21,624,728 20,580,451 During the nine months endedSeptember 30, 2021 , we originated or funded$1.87 billion in multi-family loans,$1.01 billion in residential loans,$858.0 million in commercial and industrial loans,$580.0 million in commercial real estate loans,$101.6 million in construction loans and$86.1 million in consumer and other loans. Our originations reflect our continued focus on diversifying our loan portfolio. In addition, we acquired$219 million of loans fromBerkshire Bank . A significant portion of our commercial loan portfolio, including commercial and industrial loans, are secured by commercial real estate and are primarily on properties and businesses located inNew Jersey andNew York . One of our key operating objectives has been, and continues to be, maintaining a high level of asset quality. We maintain sound credit standards for new loan originations and purchases. We do not originate or purchase sub-prime loans, negative amortization loans or option ARM loans. Our portfolio contains interest-only and no income verification residential mortgage loans. We have not originated residential mortgage loans without verifying income in recent years. As ofSeptember 30, 2021 , these loans totaled$87.8 million . As ofSeptember 30, 2021 , interest-only residential and consumer loans totaled$21.6 million , which represented less than 1% of the residential and consumer portfolio. Although it is not a standard product offering for commercial real estate and multi-family loans, we originate interest-only in addition to amortizing loans in these segments. As ofSeptember 30, 2021 , these loans totaled$2.11 billion . As part of our underwriting, these loans are evaluated as fully amortizing for risk classification purposes, with the interest-only period ranging from one to ten years. In addition, we evaluate our policy limits on a regular basis. We believe these criteria adequately control the potential risks of such loans and that adequate provisions for loan losses are provided for all known and inherent risks. SinceApril 2020 , we have, at the request of commercial borrowers experiencing financial difficulty resulting from the pandemic, temporarily deferred the payment of principal and/or interest for an agreed-upon period of time. Although a significant portion of these loans are paying interest-only during the deferral period, they are not included in the amount of interest-only loans disclosed in this section. 58 -------------------------------------------------------------------------------- Table of Contents Loan Deferrals. While we have continued to support our customers by granting payment deferrals for those experiencing continued hardship because of the pandemic, we have also worked diligently with our customers to ensure a return to current payment status for a significant portion of our clients who have ended their initial deferral period. AtMay 4, 2020 , loans with an aggregated outstanding balance of$4.3 billion , or 20.1% of total loans, were in COVID-19 related deferment. Since then, customers representing approximately$3.9 billion in loan balances have ended their COVID-19 related deferrals and as ofOctober 19, 2021 , loans with an aggregate outstanding balance of approximately$410.0 million , or 1.9% of total loans, were in COVID-19 related deferment. The following table presents the balance of deferred loans in the Company's loan portfolio by loan segment, industry sector and type of deferral as ofOctober 19, 2021 . Principal and Principal Deferred Loan % of Segment and industry sector Interest Deferral Deferral Total Total Loans (1) (Dollars in millions) Commercial and industrial Accommodation and food service $ - 170 170 0.8 % Arts, entertainment and recreation - 23 23 0.1 % Real estate and rental - 1 1 - % Total deferred commercial and industrial - 194 194 0.9 %
Commercial real estate
Accommodation and food service - 61 61 0.3 % Other - 7 7 - % Total deferred commercial real estate - 68 68 0.3 % Construction - - - - % Multi-family - 99 99 0.5 % Total deferred commercial loans - 361 361 1.7 % Residential and consumer 49 - 49 0.2 % Total deferred loans (2) $ 49 361 410 1.9 % (1) Percentage calculated using total loan balance as ofSeptember 30, 2021 . (2) Of the total deferred loans, approximately 35% of the deferments expire in the fourth quarter of 2021 with the remainder expiring inJanuary 2022 . Given the unprecedented uncertainty and continually evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are highly uncertain. Should economic conditions deteriorate the macroeconomic environment may have an adverse effect on our business and results of operations, including additional borrower deferral requests, delinquent loans and non-accrual loans. For more information on how the risks related to COVID-19 may adversely affect our business, results of operations and financial condition, reference is made to Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . 59 -------------------------------------------------------------------------------- Table of Contents The following table presents the Company's loan portfolio atSeptember 30, 2021 by industry sector: Loan Balance Segment/Industry (in millions) % of Total Segment Commercial and industrial: Accommodation and food service $ 285 7 % Administrative and support and waste management 149 4 % Agriculture, forestry, fishing and hunting 23 1 % Arts, entertainment, and recreation 101 3 % Construction 307 8 % Educational service 134 3 % Finance and insurance 267 7 % Health care and social assistance 622 16 % Information 136 3 % Management of companies and enterprises 6 0 % Manufacturing 216 5 % Mining, quarrying, and oil and gas extraction 48 1 % Professional, scientific, and technical services 125 3 % Public administration 1 0 % Real estate and rental 619 16 % Retail trade - clothing, home, gasoline, health 167 4 % Retail trade - sporting, hobby, vending, e-commerce 7 0 % Transportation - air, rail, truck, water, pipeline 265 7 % Utilities 2 0 % Wholesale trade 223 6 % Other 231 6 % Total commercial and industrial $ 3,934 100 % Commercial real estate: Accommodation and food service $ 113 2 % Arts, entertainment, and recreation 17 0 % Health care and social assistance 159 3 % Mixed use property 504 10 % Office 1,244 24 % Retail store 926 18 % Shopping center 1,000 20 % Warehouse 698 14 % Other 474 9 % Total commercial real estate $ 5,135 100 % Multi-family 7,655 100 % Construction 510 100 % Residential and consumer 4,671 100 % Total loans$ 21,905 100 % 60
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Non-Performing Loans. The following table sets forth non-accrual loans
(excluding loans held-for-sale) and accruing troubled debt restructured loans on
the dates indicated as well as certain asset quality ratios:
September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020
# of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount
(dollars in millions)
Multi-family 15 $ 19.9 11 $ 16.6 13 $ 19.2 15 $ 35.6 13 $ 51.1
Commercial real estate 22 9.8 24 13.0 25 14.0 29 15.9 28 17.8
Commercial and
industrial 16 3.3 13 5.2 15 4.4 21 9.2 19 10.9
Construction - - - - - - - - - -
Total commercial loans 53 33.0 48 34.8 53 37.6 65 60.7 60 79.8
Residential and consumer 231 43.5 232 42.8 239 45.7 246 46.4 250 52.2
Total non-accrual loans 284 $ 76.5 280 $ 77.6 292 $ 83.3 311 $ 107.1 310 $ 132.0
Accruing troubled debt
restructured loans 47 $ 8.1 49 $ 9.3 45 $ 9.1 47 $ 9.2 51 $ 9.8
Non-accrual loans to
total loans 0.35 % 0.36 % 0.40 % 0.51 % 0.63 %
Allowance for loan
losses as a percent of
non-accrual loans 344.61 % 348.05 % 340.60 % 264.17 % 217.75 %
Allowance for loan
losses as a percent of
total loans 1.20 % 1.26 % 1.36 % 1.36 % 1.37 %
Total non-accrual loans were $76.5 million at September 30, 2021 compared to
$77.6 million at June 30, 2021 and $132.0 million at September 30, 2020 . At
September 30, 2021 , there were $4.7 million of multi-family loans, $2.9 million
of commercial and industrial loans and $1.9 million of commercial real estate
loans that were classified as non-accrual which were performing in accordance
with their contractual terms. Criticized and classified loans as a percent of
total loans decreased to 6.95% at September 30, 2021 from 7.99% at December 31,
2020 . We continue to proactively and diligently work to resolve our troubled
loans.
During the nine months ended September 30, 2021 , we sold three non-performing
multi-family loans totaling $19.9 million and recognized a recovery of $1.4
million in the allowance for credit losses on the sale of one of the loans.
During the nine months ended September 30, 2021 , we also sold a $762,000
non-performing commercial real estate loan.
At September 30, 2021 , there were $26.4 million of loans deemed as TDRs, of
which $22.0 million were residential and consumer loans and $4.4 million were
commercial real estate loans. TDRs of $8.1 million were classified as accruing
and $18.3 million were classified as non-accrual at September 30, 2021 . Included
were $1.3 million of residential loans deemed to be TDRs as the borrower was
granted a payment deferral related to COVID-19 but did not meet the criteria to
be excluded from TDR as described in Note 6, Loans Receivable, Net.
In addition to non-accrual loans, we continue to monitor our portfolio for
potential problem loans. Potential problem loans are defined as loans about
which we have concerns as to the ability of the borrower to comply with the
current loan repayment terms and which may cause the loan to be placed on
non-accrual status. As of September 30, 2021 , we have deemed potential problem
loans totaling $81.1 million , which is comprised of 14 multi-family loans
totaling $57.4 million , 12 commercial real estate loans totaling $21.3 million
and 13 commercial and industrial loans totaling $2.4 million . In addition, we
continue to support our customers by deferring payments for borrowers
experiencing hardship because of the COVID-19 pandemic. As of October 19, 2021 ,
$410.0 million , or 1.9%, of loans were deferring principal and/or interest
payments. For further information, please refer to the Loan Deferrals disclosure
above. Management is actively monitoring all of these loans.
The ratio of non-accrual loans to total loans was 0.35% at
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264.17% at
Allowance for Credit Losses on Loans. The allowance for loan losses decreased by$19.5 million to$263.5 million atSeptember 30, 2021 from$283.0 million atDecember 31, 2020 . The decrease reflects a negative provision for loan losses of$22.8 million , partially offset by an increase of$2.3 million resulting from net loan recoveries and an increase of approximately$1.0 million from the initial allowance on loans identified as PCD which were acquired fromBerkshire Bank . Our allowance for loan losses atSeptember 30, 2021 was affected by the improving current and forecasted economic conditions and commercial real estate prices. Future increases in the allowance for loan losses may be necessary based on the composition of and change in the loan portfolio, the level of loan delinquency and the current and forecasted economic condition over the life of our loans. The following table sets forth the allowance for credit losses on loans allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is the estimated amount considered necessary to cover lifetime expected credit losses inherent in any particular category as of the balance sheet date and does not restrict the use of the allowance to absorb losses in other categories. September 30, 2021 December 31, 2020 Percent of Loans Percent of Loans Allowance for in Each Category Allowance for in Each Category Loan Losses to Total Loans Loan Losses to Total Loans (Dollars in thousands) End of period allocated to: Multi-family loans $ 59,169 35.0 % $ 56,731 34.1 % Commercial real estate loans 87,016 23.4 % 115,918 23.7 % Commercial and industrial loans 85,036 18.0 % 79,327 17.1 % Construction loans 9,359 2.3 % 7,267 2.0 % Residential mortgage loans 19,328 17.9 % 19,941 19.7 % Consumer and other loans 3,607 3.4 % 3,802 3.4 % Total allowance $ 263,515 100.0 %$ 282,986 100.0 % Securities. Securities are held primarily for liquidity, interest rate risk management and yield enhancement. Our Investment Policy requires that investment transactions conform to Federal and State investment regulations. Our investments purchased may include, but are not limited to,U.S. Treasury obligations, securities issued by various Federal Agencies, State and Municipal subdivisions, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, corporate debt instruments, and mutual funds. In addition, we may invest in equity securities subject to certain limitations. Purchase and sale decisions are based upon a thorough pre-transaction analysis of each instrument to determine if it conforms to our overall asset/liability management objectives. The analysis must consider its effect on our risk-based capital measurement, prospects for yield and/or appreciation and other risk factors. Debt securities are classified as held-to-maturity or available-for-sale when purchased. AtSeptember 30, 2021 , our securities portfolio represented 14.0% of our total assets. Securities, in the aggregate, decreased by$230.4 million , or 5.7%, to$3.81 billion atSeptember 30, 2021 fromDecember 31, 2020 . This decrease was primarily a result of paydowns and sales, partially offset by purchases. AtSeptember 30, 2021 , our allowance for credit losses on held-to-maturity debt securities was$2.0 million . Stock in theFederal Home Loan Bank , Bank Owned Life Insurance and Other Assets. The amount of stock we own in the FHLB increased by$17.2 million , or 10.8%, to$177.1 million atSeptember 30, 2021 from$159.8 million atDecember 31, 2020 . The amount of stock we own in the FHLB is primarily related to the balance of our outstanding borrowings from the FHLB. Bank owned life insurance was$227.8 million atSeptember 30, 2021 and$223.7 million atDecember 31, 2020 . Other assets were$139.6 million atSeptember 30, 2021 and$163.2 million atDecember 31, 2020 . The decrease in other assets was primarily driven by hedge-related assets. Deposits. AtSeptember 30, 2021 , deposits totaled$20.40 billion , representing 83.4% of our total liabilities. Our deposit strategy is focused on attracting core deposits (savings, checking and money market accounts), resulting in a deposit mix of lower cost core products. We are committed to our plan of attracting more core deposits because they represent a more stable source of low cost funds and may be less sensitive to changes in market interest rates. We have a suite of commercial deposit and treasury management products, designed to appeal to small and mid-sized businesses and non-profit organizations including electronic deposit services such as mobile and remote deposit capture. 62 -------------------------------------------------------------------------------- Table of Contents Interest rates, maturity terms, service fees and withdrawal penalties are all reviewed on a periodic basis. Deposit rates and terms are based primarily on our current operating strategies, market rates, liquidity requirements and competitive forces. We also rely on personalized customer service, long-standing relationships with customers and an active marketing program to attract and retain deposits. Deposits increased by$875.0 million , or 4.5%, to$20.40 billion atSeptember 30, 2021 from$19.53 billion atDecember 31, 2020 primarily driven by an increase in checking account deposits, partially offset by decreases in time deposits and money market deposits. Checking account deposits increased$1.56 billion to$11.26 billion atSeptember 30, 2021 from$9.71 billion atDecember 31, 2020 . Core deposits represented approximately 89% of our total deposit portfolio atSeptember 30, 2021 compared to 86% atDecember 31, 2020 . We acquired$632 million of deposits fromBerkshire Bank during the quarter endedSeptember 30, 2021 . The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated: September 30, 2021 December 31, 2020 Percent of Total Percent of Total Balance Deposits Balance Deposits (Dollars in thousands) Non-interest bearing: Checking accounts$ 4,345,871 21.3 %$ 3,663,073 18.8 % Interest-bearing: Checking accounts 6,917,964 33.9 % 6,043,393 30.9 % Money market deposits 4,768,986 23.4 % 5,037,327 25.8 % Savings 2,052,819 10.1 % 2,063,447 10.6 % Certificates of deposit 2,314,784 11.3 % 2,718,179 13.9 % Total Deposits$ 20,400,424 100.0 %$ 19,525,419 100.0 % Borrowed Funds. Borrowings are primarily with the FHLB and are collateralized by our residential and commercial mortgage portfolios. Borrowed funds increased by$238.7 million , or 7.2%, to$3.53 billion atSeptember 30, 2021 from$3.30 billion atDecember 31, 2020 to support balance sheet growth. Stockholders' Equity. Stockholders' equity increased by$142.6 million to$2.85 billion atSeptember 30, 2021 from$2.71 billion atDecember 31, 2020 . The increase was primarily attributed to net income of$219.0 million , share-based plan activity of$21.8 million and other comprehensive income of$17.7 million for the nine months endedSeptember 30, 2021 . These increases were partially offset by cash dividends paid of$0.42 per share totaling$103.9 million and the repurchase of approximately 1.0 million shares of common stock for$12.1 million during the nine months endedSeptember 30, 2021 . Liquidity and Capital Resources The Company's primary sources of funds are deposits, principal and interest payments on loans and securities, FHLB advances and other borrowings and, to a lesser extent, proceeds from the sale of loans and investment maturities. While scheduled amortization of loans is usually a predictable source of funds, deposit flows and mortgage and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity, including unsecured overnight lines of credit, brokered deposits and other types of borrowings. The Company's total borrowing capacity from the FHLB and other borrowing sources was approximately$22.77 billion atSeptember 30, 2021 . Excluding outstanding borrowings and encumbered collateral, available borrowing capacity and other available liquidity sources totaled approximately$12.89 billion atSeptember 30, 2021 . Our Asset Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies to ensure that sufficient liquidity exists for meeting the needs of our customers as well as unanticipated contingencies. These liquidity risk management practices have allowed us to effectively manage the market stress related to the COVID-19 pandemic that began in the first quarter of 2020. AtSeptember 30, 2021 , the Company had no overnight borrowings outstanding. The Company had$188.0 million of overnight borrowings outstanding atDecember 31, 2020 . The Company borrows directly from the FHLB and various financial institutions. The Company had total borrowings of$3.53 billion atSeptember 30, 2021 , an increase of$238.7 million from$3.30 billion atDecember 31, 2020 . In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. AtSeptember 30, 2021 , commitments to originate loans totaled$266.7 million ; unused home equity lines of credit and undisbursed business and construction loans totaled approximately$2.48 billion ; and outstanding standby letters of credit totaled$45.3 million . There were no outstanding commitments to sell loans. The Company expects to have sufficient 63 -------------------------------------------------------------------------------- Table of Contents funds available to meet current commitments in the normal course of business. Time deposits scheduled to mature in one year or less totaled$2.01 billion atSeptember 30, 2021 . Based upon historical experience, management estimates that a significant portion of such deposits will remain with the Company. Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities. OnJuly 30, 2021 our rating was placed on positive after the acquisition agreement with Citizens Financial Group was announced. OnMay 24, 2021 S&P revised our rating outlook to stable from negative to reflect decreasing economic risks. InMay 2020 , S&P had revised our rating outlook to negative due to economic downturn from COVID-19.Regulatory Capital and Developments. Capital Requirements. Federal regulations requireFDIC insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. Common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income ("AOCI"), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). The Bank exercised its AOCI opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash andU.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four- family residential real estate loans, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginningJanuary 1, 2016 until fully implemented at 2.5% onJanuary 1, 2019 . CECL Capital Implications. OnJanuary 1, 2020 , the Company adopted the new accounting standard that requires the measurement of the allowance for credit loss to be based on the best estimate of lifetime expected credit losses inherent in the Company's relevant financial asset. OnMarch 27, 2020 , in response to the COVID-19 pandemic,U.S. banking regulators issued an interim final rule that the Company adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e. a five-year transition period). During the two-year delay, the Company will add back to common equity tier 1 capital ("CET1") 100% of the initial adoption impact of CECL plus 25% of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting onJanuary 1, 2022 , the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period. Paycheck Protection Program. OnApril 9, 2020 , in response to the economic impact of the COVID-19 pandemic, theFederal Reserve , OCC andFDIC issued an interim final rule that excludes loans pledged as collateral to theFederal Reserve's PPP Lending Facility from supplemental leverage ratio exposure, average total consolidated assets and Advanced and Standardized risk-weighted assets. Additionally, PPP loans, which are guaranteed by theSmall Business Administration , will receive a zero percent risk weight under theBasel 3 Advanced and Standardized approaches regardless of whether they are 64 -------------------------------------------------------------------------------- Table of Contents pledged as collateral to the PPP Lending Facility. OnDecember 27, 2020 , the Consolidated Appropriations Act, 2021, was enacted and included a reopening of the PPP. The majority of the Company's PPP loans were sold in the fourth quarter of 2020 with the remainder being forgiven by theSmall Business Administration in the second quarter of 2021. As ofSeptember 30, 2021 , the Bank and the Company were considered "well capitalized" under applicable regulations and exceeded all regulatory capital requirements as follows:
As of
Actual Minimum Capital Requirement with To be Well Capitalized under Prompt
Conservation Buffer Corrective Action Provisions (2)
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Bank:
Tier 1 Leverage Ratio$ 2,435,271 9.02 %$ 1,079,893 4.00 %$ 1,349,866 5.00 % Common Equity Tier 1 Risk-Based Capital 2,435,271 11.32 % 1,506,273 7.00 % 1,398,682 6.50 % Tier 1 Risk Based Capital 2,435,271 11.32 % 1,829,046 8.50 % 1,721,455 8.00 %Total Risk-Based Capital 2,697,950 12.54 % 2,259,409 10.50 % 2,151,818 10.00 %Investors Bancorp, Inc. : Tier 1 Leverage Ratio$ 2,769,611 10.24 %$ 1,081,515 4.00 % n/a n/a Common Equity Tier 1 Risk-Based Capital 2,769,611 12.83 % 1,510,878 7.00 % n/a n/a Tier 1 Risk Based Capital 2,769,611 12.83 % 1,834,637 8.50 % n/a n/aTotal Risk-Based Capital 3,045,823 14.11 % 2,266,317 10.50 % n/a n/a
(1) For purposes of calculating Tier 1 leverage ratio, assets are based on adjusted total average assets. In calculating Tier 1 risk-based capital and Total risk-based capital, assets are based on total risk-weighted assets. (2) Prompt corrective action provisions do not apply to the bank holding company. Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations and Commitments. In the ordinary course of business, we routinely enter into various financial obligations, including contractual obligations that may require future cash payments. As a financial provider, we routinely enter into commitments to extend credit, including loan commitments, standby and commercial letters of credit as well as unused lines of credit as discussed above in Liquidity and Capital Resources. While these contractual obligations represent our potential future cash requirements, a significant portion of our commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval processes that we use for loans that we originate. The following table shows the contractual obligations of the Company by expected payment period as ofSeptember 30, 2021 : Contractual Obligations Total Less than One Year One-Two Years Two-Three Years More
than Three Years
(In thousands)
Debt obligations (excluding finance
leases) $ 3,534,536 2,350,000 348,965 821,019 14,552
Commitments to originate and
purchase loans $ 266,741 266,741 - - -
Commitments to sell loans $ - - - - -
Debt obligations include borrowings from the FHLB and other borrowings. The
borrowings have defined terms, and none of the borrowings were callable at the
option of the lender as of September 30, 2021 . Additionally, at September 30,
2021 , the Company's commitments to fund unused lines of credit totaled $2.48
billion . Commitments to extend credit are agreements to lend to customers as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
In addition to the contractual obligations previously discussed, we have other
liabilities which include $216.4 million of operating lease liabilities of which
$9.3 million was acquired in the Berkshire Bank acquisition during the nine
months ended September 30, 2021 and $3.6 million was acquired from Gold Coast
during the year ended December 31, 2020 . We have $1.2 million of finance lease
liabilities. These contractual obligations as of September 30, 2021 have not
changed significantly from December 31, 2020 .
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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. Derivative Instruments and Hedging Activities. The Company has entered into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's borrowings and loans. During the three and nine months endedSeptember 30, 2021 , such derivatives were used (i) to hedge the variability in cash flows associated with borrowings and (ii) to hedge changes in the fair value of certain pools of prepayable fixed rate assets. These derivatives had an aggregate notional amount of$3.58 billion as ofSeptember 30, 2021 . During the year endedDecember 31, 2020 , the Company terminated two interest rate swaps with an aggregate notional amount of$475.0 million that had been used to hedge changes in the fair value of certain pools of prepayable fixed- and adjustable-rate assets. Also during the year endedDecember 31, 2020 , the Company terminated four interest rate swaps with an aggregate notional of$400.0 million that had been designated as cash flow hedges on wholesale funding. The Company has credit derivatives resulting from participation in interest rate swaps provided to external lenders as part of loan participation arrangements which are, therefore, not used to manage interest rate risk in the Company's assets or liabilities. Additionally, the Company provides interest rate risk management services to commercial customers, primarily interest rate swaps. The Company's market risk from unfavorable movements in interest rates related to these derivative contracts is minimized by concurrently entering into offsetting derivative contracts that have identical notional values, terms and indices.
For 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
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