ISBC 2017 Form 10-K & 2018 Proxy Statement

FORM 10-K ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Since the Company’s initial public offering in 2005, we have transitioned from a wholesale thrift business to a retail commercial bank. This transition has been primarily accomplished by increasing the amount of our commercial loans and core deposits (savings, checking and money market accounts). Our transformation can be attributed to a number of factors, including organic growth, de novo branch openings, bank and branch acquisitions, as well as product expansion. We believe the attractive markets we operate in, namely, New Jersey and the greater New York metropolitan area, will continue to provide us with growth opportunities. Our primary focus is to build and develop profitable customer relationships across all lines of business, both consumer and commercial. Our results of operations depend primarily on net interest income, which is directly impacted by the market interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily loans and investment securities, and the interest we pay on our interest-bearing liabilities, primarily interest-bearing transaction accounts, time deposits, and borrowed funds. Net interest income is affected by the level and direction of interest rates, the shape of the market yield curve, the timing of the placement and the repricing of interest-earning assets and interest-bearing liabilities on our balance sheet, and the prepayment rates on our mortgage-related assets. A flattening of the yield curve, caused primarily by rising short term interest rates combined with competitive pricing in both the loan and deposit markets, continues to create a challenging net interest margin environment. We continue to actively manage our interest rate risk against a backdrop of slow but positive economic growth and the potential for additional increases in short-term rates. If short-term interest rates increase, we may be subject to near-term net interest margin compression. Should the yield curve steepen, we may experience an improvement in net interest income, particularly if short-term interest rates do not increase further. Our results of operations are also significantly affected by general economic conditions. In December 2017, the Tax Act was enacted which reduced our federal tax rate from 35% to 21%, effective for tax years beginning after December 31, 2017. This however resulted in the Company recognizing a $49.2 million increase to income tax expense for the quarter and year ended December 31, 2017 as a result of revaluing our deferred tax assets. While the consumer continues to benefit from lower energy costs and improved housing and employment metrics, the velocity of economic growth, domestically and internationally, while recently improving may be negatively impacted by rising interest rates. Total assets increased $1.95 billion, or 8.4%, to $25.13 billion at December 31, 2017 from $23.17 billion at December 31, 2016. Net loans increased $1.28 billion, or 6.9%, to $19.85 billion at December 31, 2017 from $18.57 billion at December 31, 2016, while securities increased $368.4 million, or 10.8%, to $3.78 billion at December 31, 2017 from $3.42 billion at December 31, 2016. During the year ended December 31, 2017, we originated or funded $1.16 billion in multi-family loans, $705.1 million in commercial real estate loans, $663.4 million in commercial and industrial loans, $516.5 million in residential loans, $414.2 million in construction loans and $133.0 million in consumer and other loans. Our loan growth in 2017 was slower than in previous years, reflecting, in part the highly competitive nature of originating loans in the New York and New Jersey metropolitan markets. Our ongoing strategy is to continue to work towards becoming more commercial bank-like and maintain a well-diversified loan portfolio. We understand the heightened regulatory sensitivity around commercial real estate and multi-family concentration and continue to be diligent in our underwriting and credit risk monitoring of these portfolios. The overall level of non-performing loans remains low compared to our national and regional peers; however, our commercial real estate concentration is above 300% of regulatory capital and therefore subjects us to heightened regulatory scrutiny. Capital management is a key component of our business strategy. We continue to manage our capital through a combination of organic growth, stock repurchases and cash dividends. Effective capital management 53