Bank segment

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



	Three months ended September 30				Nine months ended September 30
(in thousands)	2015		2014		2015		2014
Interest and dividend income
Interest and fees on loans	$	46,413	$	45,532	$	137,646	$	133,065
Interest and dividends on investment securities	4,213		2,773		10,570		8,758
Total interest and dividend income	50,626		48,305		148,216		141,823
Interest expense
Interest on deposit liabilities	1,355		1,312		3,881		3,774
Interest on other borrowings	1,515		1,438		4,468		4,263
Total interest expense	2,870		2,750		8,349		8,037
Net interest income	47,756		45,555		139,867		133,786
Provision for loan losses	2,997		1,550		5,436		3,566
Net interest income after provision for loan losses	44,759		44,005		134,431		130,220
Noninterest income
Fees from other financial services	5,639		5,642		16,544		15,987
Fee income on deposit liabilities	5,883		5,109		16,622		14,175
Fee income on other financial products	2,096		1,971		6,088		6,325
Bank-owned life insurance	1,021		1,000		3,062		2,945
Mortgage banking income	1,437		875		5,327		1,749
Gains on sale of investment securities	—		—		—		2,847
Other income, net	2,389		634		3,363		1,920
Total noninterest income	18,465		15,231		51,006		45,948
Noninterest expense
Compensation and employee benefits	22,728		19,892		66,813		60,050
Occupancy	4,128		4,517		12,250		12,959
Data processing	3,032		2,684		9,101		8,715
Services	2,556		2,580		7,730		7,708
Equipment	1,608		1,672		4,999		4,926
Office supplies, printing and postage	1,511		1,415		4,297		4,487
Marketing	934		948		2,619		2,690
FDIC insurance	809		840		2,393		2,441
Other expense	5,116		4,182		14,076		11,198
Total noninterest expense	42,422		38,730		124,278		115,174
Income before income taxes	20,802		20,506		61,159		60,994
Income taxes	7,351		7,253		21,382		21,806
Net income	$	13,451	$	13,253	$	39,777	$	39,188

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended September 30					Nine months ended September 30
(in thousands)	2015		2014			2015		2014
Net income	$	13,451	$	13,253		$	39,777	$	39,188
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for-sale investment securities:
Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of (taxes) benefits of $(2,543), $1,094, $(2,382) and $(2,249) for the respective periods	3,851		(1,657		)	3,608		3,406
Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, nil and $1,132 for the respective periods	—		—			—		(1,715		)
Retirement benefit plans:
Less: amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $249, $138, $763 and $424 for the respective periods	376		208			1,155		642
Other comprehensive income (loss), net of taxes	4,227		(1,449		)	4,763		2,333
Comprehensive income	$	17,678	$	11,804		$	44,540	$	41,521

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	September 30, 2015						December 31, 2014
Assets
Cash and due from banks				$	103,934					$	107,233
Interest-bearing deposits				73,041						54,230
Available-for-sale investment securities, at fair value				785,837						550,394
Stock in Federal Home Loan Bank, at cost				10,678						69,302
Loans receivable held for investment				4,535,404						4,434,651
Allowance for loan losses				(48,274		)				(45,618		)
Net loans				4,487,130						4,389,033
Loans held for sale, at lower of cost or fair value				5,598						8,424
Other				307,089						305,416
Goodwill				82,190						82,190
Total assets				$	5,855,497					$	5,566,222

Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,422,843					$	1,342,794
Deposit liabilities—interest-bearing				3,403,111						3,280,621
Other borrowings				368,593						290,656
Other				103,553						118,363
Total liabilities				5,298,100						5,032,434
Commitments and contingencies
Common stock				1						1
Additional paid in capital				339,980						338,411
Retained earnings				229,211						211,934
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains on securities	$	4,070					$	462
Retirement benefit plans	(15,865		)	(11,795		)	(17,020		)	(16,558		)
Total shareholder’s equity				557,397						533,788
Total liabilities and shareholder’s equity				$	5,855,497					$	5,566,222

Other assets
Bank-owned life insurance				$	136,969					$	134,115
Premises and equipment, net				87,432						92,407
Prepaid expenses				3,879						3,196
Accrued interest receivable				14,577						13,632
Mortgage-servicing rights				12,258						11,540
Low-income housing equity investments				34,323						33,438
Real estate acquired in settlement of loans, net				247						891
Other				17,404						16,197
				$	307,089					$	305,416
Other liabilities
Accrued expenses				$	28,952					$	37,880
Federal and state income taxes payable				21,565						28,642
Cashier’s checks				25,852						20,509
Advance payments by borrowers				5,389						9,652
Other				21,795						21,680
				$	103,553					$	118,363

Bank-owned life insurance is life insurance purchased by ASB on the lives of certain key employees, with ASB as the beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the policies and insurance proceeds paid to ASB upon an insured’s death.

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of $269 million and $100 million, respectively, as of September 30, 2015 and $191 million and $100 million, respectively, as of December 31, 2014.

Available-for-sale investment securities. The major components of investment securities were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value			Gross unrealized losses
										Less than 12 months						12 months or longer
(dollar in thousands)										Number of issues	Fair value		Amount			Number of issues	Fair value		Amount
September 30, 2015
Available-for-sale
U.S. Treasury and federal agency obligations	$	209,025	$	2,435	$	(342	)	$	211,118	4	$	24,676	$	(46	)	3	$	18,218	$	(296	)
Mortgage-related securities- FNMA, FHLMC and GNMA	570,055		6,884		(2,220		)	574,719		8	57,263		(278		)	25	132,874		(1,942		)
	$	779,080	$	9,319	$	(2,562	)	$	785,837	12	$	81,939	$	(324	)	28	$	151,092	$	(2,238	)
December 31, 2014
Available-for-sale
U.S. Treasury and federal agency obligations	$	119,507	$	1,092	$	(1,039	)	$	119,560	6	$	41,970	$	(361	)	5	$	29,168	$	(678	)
Mortgage-related securities- FNMA, FHLMC and GNMA	430,120		5,653		(4,939		)	430,834		6	47,029		(164		)	29	172,623		(4,775		)
	$	549,627	$	6,745	$	(5,978	)	$	550,394	12	$	88,999	$	(525	)	34	$	201,791	$	(5,453	)

The unrealized losses on ASB’s investments in mortgage-related securities and obligations issued by federal agencies were caused by interest rate movements. Because ASB does not intend to sell the securities and has determined it is more likely than not that it will not be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, ASB did not consider these investments to be other-than-temporarily impaired at September 30, 2015.

The fair values of ASB’s investment securities could decline if interest rates rise or spreads widen.

U.S. Treasury and federal agency obligations have contractual terms to maturity. Mortgage-related securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages.The contractual maturities of available-for-sale investment securities were as follows:



September 30, 2015	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years	75,332		76,786
Due after five years through ten years	71,667		72,198
Due after ten years	62,026		62,134
	209,025		211,118
Mortgage-related securities-FNMA,FHLMC and GNMA	570,055		574,719
Total available-for-sale securities	$	779,080	$	785,837

Allowance for loan losses. The allowance for loan losses (balances and changes) and financing receivables were as follows:



(in thousands)	Residential 1-4 family			Commercial real estate		Home equity line of credit			Residential land			Commercial construction			Residential construction			Commercial loans			Consumer loans			Unallocated			Total
Three months ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	4,291		$	10,420	$	6,613		$	2,103		$	2,575		$	18		$	17,469		$	2,876		$	—		$	46,365
Charge-offs	(138		)	—		(185		)	—			—			—			(126		)	(1,271		)	—			(1,720		)
Recoveries	45			—		33			34			—			—			279			241			—			632
Provision	285			987		446			(73		)	944			(5		)	(920		)	1,333			—			2,997
Ending balance	$	4,483		$	11,407	$	6,907		$	2,064		$	3,519		$	13		$	16,702		$	3,179		$	—		$	48,274
Three months ended September 30, 2014
Allowance for loan losses:
Beginning balance	$	5,667		$	7,230	$	7,081		$	1,837		$	3,390		$	26		$	15,144		$	1,997		$	—		$	42,372
Charge-offs	(632		)	—		(46		)	(28		)	—			—			(886		)	(592		)	—			(2,184		)
Recoveries	160			—		299			90			—			—			952			222			—			1,723
Provision	670			3		(119		)	(92		)	1,724			3			(1,130		)	491			—			1,550
Ending balance	$	5,865		$	7,233	$	7,215		$	1,807		$	5,114		$	29		$	14,080		$	2,118		$	—		$	43,461
Nine months ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	4,662		$	8,954	$	6,982		$	1,875		$	5,471		$	28		$	14,017		$	3,629		$	—		$	45,618
Charge-offs	(352		)	—		(205		)	—			—			—			(928		)	(3,196		)	—			(4,681		)
Recoveries	112			—		72			219			—			—			726			772			—			1,901
Provision	61			2,453		58			(30		)	(1,952		)	(15		)	2,887			1,974			—			5,436
Ending balance	$	4,483		$	11,407	$	6,907		$	2,064		$	3,519		$	13		$	16,702		$	3,179		$	—		$	48,274
Ending balance: individually evaluated for impairment	$	1,388		$	—	$	469		$	919		$	—		$	—		$	3,084		$	7					$	5,867
Ending balance: collectively evaluated for impairment	$	3,095		$	11,407	$	6,438		$	1,145		$	3,519		$	13		$	13,618		$	3,172		$	—		$	42,407
Financing Receivables:
Ending balance	$	2,062,458		$	618,113	$	832,267		$	17,369		$	80,230		$	14,318		$	798,428		$	118,450					$	4,541,633
Ending balance: individually evaluated for impairment	$	22,560		$	—	$	2,909		$	5,710		$	—		$	—		$	22,853		$	14					$	54,046
Ending balance: collectively evaluated for impairment	$	2,039,898		$	618,113	$	829,358		$	11,659		$	80,230		$	14,318		$	775,575		$	118,436					$	4,487,587
Nine months ended September 30, 2014
Allowance for loan losses:
Beginning balance	$	5,534		$	5,059	$	5,229		$	1,817		$	2,397		$	19		$	15,803		$	2,367		$	1,891		$	40,116
Charge-offs	(992		)	—		(182		)	(81		)	—			—			(1,256		)	(1,614		)	—			(4,125		)
Recoveries	1,056			—		624			253			—			—			1,277			694			—			3,904
Provision	267			2,174		1,544			(182		)	2,717			10			(1,744		)	671			(1,891		)	3,566
Ending balance	$	5,865		$	7,233	$	7,215		$	1,807		$	5,114		$	29		$	14,080		$	2,118		$	—		$	43,461
Ending balance: individually evaluated for impairment	$	917		$	4	$	8		$	1,171		$	—		$	—		$	810		$	5					$	2,915
Ending balance: collectively evaluated for impairment	$	4,948		$	7,229	$	7,207		$	636		$	5,114		$	29		$	13,270		$	2,113		$	—		$	40,546
Financing Receivables:
Ending balance	$	2,030,337		$	502,356	$	808,991		$	16,935		$	87,461		$	18,699		$	770,079		$	107,531					$	4,342,389
Ending balance: individually evaluated for impairment	$	20,015		$	754	$	392		$	8,872		$	—		$	—		$	15,058		$	16					$	45,107
Ending balance: collectively evaluated for impairment	$	2,010,322		$	501,602	$	808,599		$	8,063		$	87,461		$	18,699		$	755,021		$	107,515					$	4,297,282

Credit quality. ASB performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include commercial, commercial real estate and commercial construction loans.

Each loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The AQR is a function of the PD Model rating, the loss given default, and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens, and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The credit risk profile by internally assigned grade for loans was as follows:



	September 30, 2015						December 31, 2014
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	563,734	$	70,950	$	745,624	$	493,105	$	79,312	$	743,334
Special mention	9,460		9,280		10,316		5,209		—		16,095
Substandard	44,919		—		40,662		33,603		17,126		31,665
Doubtful	—		—		1,826		—		—		663
Loss	—		—		—		—		—		—
Total	$	618,113	$	80,230	$	798,428	$	531,917	$	96,438	$	791,757

The credit risk profile based on payment activity for loans was as follows:



(in thousands)	30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Current		Total financing receivables		Recorded investment> 90 days and accruing
September 30, 2015
Real estate:
Residential 1-4 family	$	6,354	$	1,722	$	11,852	$	19,928	$	2,042,530	$	2,062,458	$	—
Commercial real estate	—		—		—		—		618,113		618,113		—
Home equity line of credit	1,192		81		436		1,709		830,558		832,267		—
Residential land	120		—		415		535		16,834		17,369		—
Commercial construction	—		—		—		—		80,230		80,230		—
Residential construction	—		—		—		—		14,318		14,318		—
Commercial	546		312		1,005		1,863		796,565		798,428		—
Consumer	1,357		491		377		2,225		116,225		118,450		—
Total loans	$	9,569	$	2,606	$	14,085	$	26,260	$	4,515,373	$	4,541,633	$	—
December 31, 2014
Real estate:
Residential 1-4 family	$	6,124	$	1,732	$	12,632	$	20,488	$	2,023,717	$	2,044,205	$	—
Commercial real estate	—		—		—		—		531,917		531,917		—
Home equity line of credit	1,341		501		194		2,036		816,779		818,815		—
Residential land	—		—		—		—		16,240		16,240		—
Commercial construction	—		—		—		—		96,438		96,438		—
Residential construction	—		—		—		—		18,961		18,961		—
Commercial	699		145		569		1,413		790,344		791,757		—
Consumer	829		333		403		1,565		121,091		122,656		—
Total loans	$	8,993	$	2,711	$	13,798	$	25,502	$	4,415,487	$	4,440,989	$	—

The credit risk profile based on nonaccrual loans, accruing loans 90 days or more past due and TDR loans was as follows:



(in thousands)	September 30, 2015		December 31, 2014
Real estate:
Residential 1-4 family	$	19,987	$	19,253
Commercial real estate	—		5,112
Home equity line of credit	1,982		1,087
Residential land	975		720
Commercial construction	—		—
Residential construction	—		—
Commercial	21,767		10,053
Consumer	645		661
Total nonaccrual loans	$	45,356	$	36,886
Real estate:
Residential 1-4 family	$	—	$	—
Commercial real estate	—		—
Home equity line of credit	—		—
Residential land	—		—
Commercial construction	—		—
Residential construction	—		—
Commercial	—		—
Consumer	—		—
Total accruing loans 90 days or more past due	$	—	$	—
Real estate:
Residential 1-4 family	$	14,182	$	13,525
Commercial real estate	—		—
Home equity line of credit	2,297		480
Residential land	4,735		7,130
Commercial construction	—		—
Residential construction	—		—
Commercial	1,212		2,972
Consumer	—		—
Total troubled debt restructured loans not included above	$	22,426	$	24,107

The total carrying amount and the total unpaid principal balance of impaired loans were as follows:



	September 30, 2015						Three months ended September 30, 2015				Nine months ended September 30, 2015
(in thousands)	Recorded investment		Unpaid principal balance		Related Allowance		Average recorded investment		Interest income recognized*		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	11,125	$	12,476	$	—	$	11,159	$	119	$	11,301	$	274
Commercial real estate	—		—		—		—		74		362		74
Home equity line of credit	507		744		—		498		1		444		3
Residential land	1,652		2,421		—		2,280		29		2,647		125
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	3,152		4,765		—		4,250		3		5,659		144
Consumer	—		—		—		—		—		—		—
	$	16,436	$	20,406	$	—	$	18,187	$	226	$	20,413	$	620
With an allowance recorded
Real estate:
Residential 1-4 family	$	11,435	$	11,488	$	1,388	$	11,451	$	174	$	11,585	$	430
Commercial real estate	—		—		—		—		—		1,985		—
Home equity line of credit	2,402		2,464		469		2,048		13		1,295		27
Residential land	4,058		4,136		919		3,971		74		4,435		241
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	19,701		21,976		3,084		18,487		106		10,942		192
Consumer	14		14		7		14		—		15		—
	$	37,610	$	40,078	$	5,867	$	35,971	$	367	$	30,257	$	890
Total
Real estate:
Residential 1-4 family	$	22,560	$	23,964	$	1,388	$	22,610	$	293	$	22,886	$	704
Commercial real estate	—		—		—		—		74		2,347		74
Home equity line of credit	2,909		3,208		469		2,546		14		1,739		30
Residential land	5,710		6,557		919		6,251		103		7,082		366
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	22,853		26,741		3,084		22,737		109		16,601		336
Consumer	14		14		7		14		—		15		—
	$	54,046	$	60,484	$	5,867	$	54,158	$	593	$	50,670	$	1,510



	December 31, 2014						Year ended December 31, 2014
(in thousands)	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	11,654	$	12,987	$	—	$	9,056	$	227
Commercial real estate	571		626		—		194		—
Home equity line of credit	363		606		—		402		5
Residential land	2,344		3,200		—		2,728		172
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	8,235		11,471		—		5,204		38
Consumer	—		—		—		8		—
	$	23,167	$	28,890	$	—	$	17,592	$	442
With an allowance recorded
Real estate:
Residential 1-4 family	$	11,327	$	11,347	$	951	$	8,822	$	419
Commercial real estate	4,541		4,541		1,845		3,415		478
Home equity line of credit	416		420		46		132		6
Residential land	5,506		5,584		1,057		6,415		484
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	4,873		5,211		760		12,089		438
Consumer	16		16		6		9		—
	$	26,679	$	27,119	$	4,665	$	30,882	$	1,825
Total
Real estate:
Residential 1-4 family	$	22,981	$	24,334	$	951	$	17,878	$	646
Commercial real estate	5,112		5,167		1,845		3,609		478
Home equity line of credit	779		1,026		46		534		11
Residential land	7,850		8,784		1,057		9,143		656
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	13,108		16,682		760		17,293		476
Consumer	16		16		6		17		—
	$	49,846	$	56,009	$	4,665	$	48,474	$	2,267


*	Since loan was classified as impaired.

Troubled debt restructurings. A loan modification is deemed to be a troubled debt restructuring (TDR) when ASB grants a concession it would not otherwise consider were it not for the borrower’s financial difficulty. When a borrower experiencing financial difficulty fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to improve the collectability of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans are considered an alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery.

ASB may consider various types of concessions in granting a TDR, including maturity date extensions, extended amortization of principal, temporary deferral of principal payments and temporary interest rate reductions. ASB rarely grants principal forgiveness in its TDR modifications. Residential loan modifications generally involve interest rate reduction, extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance. Land loans at origination are typically structured as a three-year term, interest-only monthly payment with a balloon payment due at maturity. Land loan TDR modifications typically involve extending the maturity date up to five years and converting the payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization period and temporary deferral of principal payments. ASB generally does not reduce the interest rate on commercial loan TDR modifications. Occasionally, additional collateral and/or guaranties are obtained.

All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the allowance for loan losses based on the appropriate method of measuring impairment: (1) present value of expected future cash flows discounted at the loan’s effective original contractual rate, (2) fair value of collateral less cost to sell or (3) observable market price. The financial impact of the calculated impairment amount is an increase to the allowance associated with the modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off against the allowance for loan losses.

Loan modifications that occurred and the impact on the allowance for loan losses were as follows:



	Three months ended September 30, 2015							Nine months ended September 30, 2015
	Number of contracts	Outstanding recorded investment¹				Net increase in allowance		Number of contracts	Outstanding recorded investment¹				Net increase in allowance
(dollars in thousands)	Number of contracts	Pre-modification		Post-modification		(as of period end)		Number of contracts	Pre-modification		Post-modification		(as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	3	$	860	$	866	$	1	10	$	2,055	$	2,079	$	48
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	10	943		943		140		32	2,062		2,062		300
Residential land	—	—		—		—		—	—		—		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	2	1,208		1,208		16		6	1,461		1,461		94
Consumer	—	—		—		—		—	—		—		—
	15	$	3,011	$	3,017	$	157	48	$	5,578	$	5,602	$	442



	Three months ended September 30, 2014							Nine months ended September 30, 2014
	Number of contracts	Outstanding recorded investment¹				Net increase in allowance		Number of contracts	Outstanding recorded investment¹				Net increase in allowance
(dollars in thousands)	Number of contracts	Pre-modification		Post-modification		(as of period end)		Number of contracts	Pre-modification		Post-modification		(as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	6	$	1,800	$	1,825	$	43	18	$	4,915	$	4,972	$	294
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	1	91		91		—		1	91		91		—
Residential land	2	256		256		—		18	4,304		4,304		400
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	2	2,600		2,600		—		7	3,827		3,827		14
Consumer	—	—		—		—		—	—		—		—
	11	$	4,747	$	4,772	$	43	44	$	13,137	$	13,194	$	708


¹	The reported balances include loans that became TDR during the period, and were fully paid-off, charged-off, or sold prior to period end.

Loans modified in TDRs that experienced a payment default of 90 days or more in for the indicated periods, and for which the payment of default occurred within one year of the modification, were as follows:



	Three months ended September 30, 2015			Nine months ended September 30, 2015
(dollars in thousands)	Number of contracts	Recorded investment		Number of contracts	Recorded investment
Troubled debt restructurings that subsequently defaulted
Real estate loans:
Residential 1-4 family	—	$	—	—	$	—
Commercial real estate	—	—		—	—
Home equity line of credit	1	7		1	7
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial loans	—	—		—	—
Consumer loans	—	—		—	—
	1	$	7	1	$	7



	Three months ended September 30, 2014			Nine months ended September 30, 2014
(dollars in thousands)	Number of contracts	Recorded investment		Number of contracts	Recorded investment
Troubled debt restructurings that subsequently defaulted
Real estate loans:
Residential 1-4 family	—	$	—	1	$	390
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		—	—
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial loans	—	—		—	—
Consumer loans	—	—		—	—
	—	$	—	1	$	390

If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been impaired or modified in TDRs totaled $0.1 million at September 30, 2015.

Mortgage servicing rights. In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these sales, but may retain the servicing rights of the loans sold.

Mortgage servicing fees, a component of other income, net, were $0.9 million for the three months ended September 30, 2015 and 2014 and $2.7 million and $2.6 million for the nine months ended September 30, 2015 and 2014, respectively.

The carrying values of mortgage servicing assets were as follows:



(in thousands)	Gross carrying amount		Accumulated amortization			Valuation allowance			Net carrying amount
September 30, 2015	$	29,818	$	(17,560	)	$	—		$	12,258
September 30, 2014	26,685		(15,003		)	(158		)	11,524

Changes related to mortgage servicing rights were as follows:



(in thousands)	2015			2014
Mortgage servicing rights
Balance, January 1	$	11,749		$	11,938
Amount capitalized	2,636			1,098
Amortization	(2,123		)	(1,297		)
Other-than-temporary impairment	(4		)	(57		)
Carrying amount before valuation allowance, September 30	12,258			11,682
Valuation allowance for mortgage servicing rights
Balance, January 1	209			251
Provision (recovery)	(205		)	(36		)
Other-than-temporary impairment	(4		)	(57		)
Balance, September 30	—			158
Net carrying value of mortgage servicing rights	$	12,258		$	11,524

ASB capitalizes mortgage servicing rights acquired through either the purchase or origination of mortgage loans for sale with servicing rights retained. Changes in mortgage interest rates impact the value of ASB’s mortgage servicing rights. Rising interest rates typically result in slower prepayment speeds in the loans being serviced for others, which increases the value of mortgage servicing rights, whereas declining interest rates typically result in faster prepayment speeds which decrease the value of mortgage servicing rights and increase the amortization of the mortgage servicing rights.

Key assumptions used in estimating the fair value of the bank’s mortgage servicing rights were as follows:



(dollars in thousands)	September 30, 2015			December 31, 2014
Unpaid principal balance	$	1,503,369		$	1,391,030
Weighted average note rate	4.01		%	4.07		%
Weighted average discount rate	9.5		%	9.6		%
Weighted average prepayment speed	9.9		%	9.5		%

The sensitivity analysis of fair value of MSR to hypothetical adverse changes of 25 and 50 basis points in certain key assumptions is as follows:



(dollars in thousands)	September 30, 2015			December 31, 2014
Prepayment rate:
25 basis points adverse rate change	$	(832	)	$	(757	)
50 basis points adverse rate change	(1,643		)	(1,524		)
Discount rate:
25 basis points adverse rate change	(148		)	(140		)
50 basis points adverse rate change	(293		)	(278		)

The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair value of MSRs typically is not linear.

In October 2015, ASB entered into an agreement to sell certain MSRs for approximately 1,500 underlying fully amortizing, conventional residential mortgage loans with an unpaid principal balance of $419 million, subject to FNMA approval.

Other borrowings. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the balance sheet. All such agreements are subject to master netting arrangements, which provide for conditional right of set-off in case of default by either party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The following tables present information about the securities sold under agreements to repurchase, including the related collateral received from or pledged to counterparties:



(in millions)	Gross amount of recognized liabilities	Gross amount offset in the Balance Sheet	Net amount of liabilities presented in the Balance Sheet
Repurchase agreements
September 30, 2015	$269	$—	$269
December 31, 2014	191	—	191



	Gross amount not offset in the Balance Sheet
(in millions)	Net amount of liabilities presented in the Balance Sheet		Financial instruments		Cash collateral pledged		Net amount
September 30, 2015
Financial institution	$	50	$	50	$	—	$	—
Government entities	66		66		—		—
Commercial account holders	153		153		—		—
Total	$	269	$	269	$	—	$	—

December 31, 2014
Financial institution	$	50	$	50	$	—	$	—
Government entities	56		56		—		—
Commercial account holders	85		85		—		—
Total	$	191	$	191	$	—	$	—

Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risk associated with selling loans.

ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

The notional amount and fair value of ASB’s derivative financial instruments were as follows:



	September 30, 2015					December 31, 2014
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	27,587	$	585		$	29,330	$	390
Forward commitments	24,706		(124		)	32,833		(106		)

ASB’s derivative financial instruments, their fair values, and balance sheet location were as follows:



Derivative Financial Instruments Not Designated as Hedging Instruments ¹	September 30, 2015				December 31, 2014
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	585	$	—	$	393	$	3
Forward commitments	1		125		5		111
	$	586	$	125	$	398	$	114

¹ Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.

The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in the statements of income:



Derivative Financial Instruments Not Designated as Hedging Instruments	Location of net gains (losses) recognized in the Statement of Income	Three months ended September 30						Nine months ended September 30
(in thousands)		2015			2014			2015			2014
Interest rate lock commitments	Mortgage banking income	$	139		$	215		$	195		$	(249	)
Forward commitments	Mortgage banking income	(117		)	(25		)	(18		)	(164		)
		$	22		$	190		$	177		$	(413	)

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $9.2 million and $14.8 million at September 30, 2015 and December 31, 2014, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. Cash contributions and payments made on commitments to LIHTC investment partnerships are classified as operating activities in the Company’s consolidated statements of cash flows. As of September 30, 2015, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.

Contingencies. In March 2011, a purported class action lawsuit was filed in the First Circuit Court of the state of Hawaii by a customer who claimed that ASB had improperly charged overdraft fees on debit card transactions. ASB filed a motion to dismiss the lawsuit on the basis that ASB’s overdraft practices are governed by federal regulations established for federal savings banks which preempt the customer’s state law claims. In July 2011, the Circuit Court denied ASB's motion without prejudice and ASB appealed that decision. ASB's appeal is pending before the Hawaii Supreme Court. However, in December 2014, through a voluntary mediation process, ASB reached a tentative settlement of the claims. The tentative settlement, which received final court approval on May 21, 2015, provided for a payment of $2.0 million into a class settlement fund, the proceeds of which would be used to refund class members and pay attorneys’ fees and administrative and other costs, in exchange for a complete release of all claims asserted against ASB. The $2.0 million settlement amount was fully reserved by ASB in December 2014 and paid into the settlement fund in January 2015.