ISBC 2017 Form 10-K & 2018 Proxy Statement

FORM 10-K immediately changed interest rate scenarios. In calculating changes in EVE, for the various scenarios we forecast loan and securities prepayment rates, reinvestment rates and deposit decay rates. Quantitative Analysis. The table below sets forth, as of December 31, 2017, the estimated changes in our EVE 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 EVE 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 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 EVE and net interest income for an interest rate decrease of 100 basis points and increase of 200 basis points. EVE (1) (2) Net Interest Income (3) Change in Interest Rates (basis points) Estimated EVE Estimated Increase (Decrease) Estimated Net Interest Income Estimated Increase (Decrease) Amount Percent Amount Percent (Dollars in thousands) + 200bp $4,288,102 (377,715) (8.1)% $628,982 (44,054) (6.5)% 0bp $4,665,817 — — $673,036 — — -100bp $4,774,987 109,170 2.3% $693,003 19,967 3.0% (1) Assumes an instantaneous and parallel shift in interest rates at all maturities. (2) EVE 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 December 31, 2017, in the event of a 200 basis points increase in interest rates, we would be expected to experience a 8.1% decrease in EVE and a $44.1 million, or 6.5%, decrease in net interest income. In the event of a 100 basis points decrease in interest rates, we would be expected to experience a 2.3% increase in EVE and a $20.0 million, or 3.0%, increase in net interest income. This data does not reflect any future actions we may take in response to changes in interest rates, such as changing the mix in or growth of our assets and liabilities, which could change the results of the EVE and net interest income calculations. As mentioned above, we use an internally developed asset liability model 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 EVE 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 EVE and net interest income table presented above assumes no growth and that generally 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. Accordingly, although the EVE 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 EVE and net interest income. Liquidity and Capital Resources Liquidity is the ability to economically meet current and future financial obligations. Our primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB and other borrowings and, to a lesser extent, proceeds from the sale of loans and 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. 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. The Company has other 66