ISBC 2017 Form 10-K & 2018 Proxy Statement

FORM 10-K At December 31, 2017, our securities portfolio totaled $3.78 billion representing 15.1% of our total assets. Securities are classified as held-to-maturity or available-for-sale when purchased. At December 31, 2017, $1.80 billion of our securities were classified as held-to-maturity and reported at amortized cost and $1.99 billion were classified as available-for-sale and reported at fair value. Mortgage-Backed Securities. We purchase mortgage-backed pass through and collateralized mortgage obligation (“CMO”) securities insured or guaranteed by Fannie Mae, Freddie Mac (government-sponsored enterprises) and Ginnie Mae (government agency), and to a lesser extent, a variety of federal and state housing authorities (collectively referred to below as “agency-issued mortgage-backed securities”). At December 31, 2017, agency-issued mortgage-backed securities including CMOs, totaled $3.65 billion, or 96.4%, of our total securities portfolio. Mortgage-backed securities present a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments that can change the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. The fair value of such securities may be adversely affected by changes in interest rates and/or other market variables. Our mortgage-backed securities portfolio had a weighted average yield of 2.05% for the year ended December 31, 2017. The estimated fair value of our mortgage-backed securities at December 31, 2017 was $3.63 billion, which is $44.1 million less than the carrying value. The decrease to the fair value is attributed to an increase in interest rates during 2017. We also may invest in securities issued by non-agency or private mortgage originators, provided those securities are rated AAA by nationally recognized rating agencies and satisfactorily pass an internal credit review at the time of purchase. Currently, the Company does not hold any non-agency mortgage-backed securities in its portfolio. Corporate and Other Debt Securities. Our corporate and other debt securities portfolio primarily consists of collateralized debt obligations (“CDOs”) backed by pooled trust preferred securities (“TruPS”), principally issued by banks and to a lesser extent insurance companies, real estate investment trusts, and collateralized debt obligations. The interest rates on these securities reset quarterly in relation to 3 month LIBOR rate. These securities have been classified in the held-to-maturity portfolio since their purchase. At December 31, 2017, corporate and other debt securities totaled $48.1 million, or 1.27%, of our total securities portfolio. At December 31, 2017, the trust preferred securities portfolio had a carrying value of $43.1 million, or 1.14% of our total securities portfolio, and a fair value of $81.2 million with none of the securities in an unrealized loss position. Throughout the year we engage an independent valuation firm to assist us in valuing our TruPS portfolio and prepare our other-than temporary impairment, or OTTI, analysis. At December 31, 2017, management deemed that the present value of projected cash flows for each security was greater than the book value and we did not recognize any OTTI charges for the years ended December 31, 2017, 2016, and 2015. For the year ended December 31, 2017, the Company received sale proceeds of $3.1 million from the liquidation of one TruP security. As a result, $1.9 million was recognized as interest income from securities in the Consolidated Statements of Income. There was no liquidation of TruP securities for the year ended December 31, 2016. For the year ended December 31, 2015 the Company recognized a loss of $646,000 on one TruP security which was entirely liquidated by its Trustee. We continue to closely monitor the performance of the securities we own as well as the events surrounding this segment of the market. We will continue to evaluate for other-than-temporary impairment, which could result in a future non-cash charge to earnings. Municipal Bonds . At December 31, 2017, we had $40.6 million in municipal bonds which represents 1.07% of our total securities portfolio. These bonds are comprised of $36.3 million in short-term Bond Anticipation or 16