Bank segment

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



	Three months ended June 30				Six months ended June 30
(in thousands)	2016		2015		2016		2015
Interest and dividend income
Interest and fees on loans	$	49,690	$	46,035	$	98,127	$	91,233
Interest and dividends on investment securities	4,443		3,306		9,460		6,357
Total interest and dividend income	54,133		49,341		107,587		97,590
Interest expense
Interest on deposit liabilities	1,691		1,266		3,283		2,526
Interest on other borrowings	1,467		1,487		2,952		2,953
Total interest expense	3,158		2,753		6,235		5,479
Net interest income	50,975		46,588		101,352		92,111
Provision for loan losses	4,753		1,825		9,519		2,439
Net interest income after provision for loan losses	46,222		44,763		91,833		89,672
Noninterest income
Fees from other financial services	5,701		5,550		11,200		10,905
Fee income on deposit liabilities	5,262		5,424		10,418		10,739
Fee income on other financial products	2,207		2,103		4,412		3,992
Bank-owned life insurance	1,006		1,058		2,004		2,041
Mortgage banking income	1,554		2,068		2,749		3,890
Gains on sale of investment securities, net	598		—		598		—
Other income, net	288		239		621		974
Total noninterest income	16,616		16,442		32,002		32,541
Noninterest expense
Compensation and employee benefits	21,919		22,319		44,353		44,085
Occupancy	4,115		4,009		8,253		8,122
Data processing	3,277		2,953		6,449		6,069
Services	2,755		2,833		5,666		5,174
Equipment	1,771		1,690		3,434		3,391
Office supplies, printing and postage	1,583		1,303		2,948		2,786
Marketing	899		844		1,760		1,685
FDIC insurance	913		773		1,797		1,584
Other expense	5,382		4,755		9,357		8,960
Total noninterest expense	42,614		41,479		84,017		81,856
Income before income taxes	20,224		19,726		39,818		40,357
Income taxes	6,939		6,875		13,860		14,031
Net income	$	13,285	$	12,851	$	25,958	$	26,326

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended June 30						Six months ended June 30
(in thousands)	2016			2015			2016			2015
Net income	$	13,285		$	12,851		$	25,958		$	26,326
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 ($1,925), $2,439, ($6,830) and $161 for the respective periods	2,915			(3,694		)	10,344			(243		)
Less: reclassification adjustment for net realized gains included in net income, net of taxes of $238, nil, $238 and nil for the respective periods	(360		)	—			(360		)	—
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 $140, $255, $277 and $514 for the respective periods	211			387			419			779
Other comprehensive income (loss), net of taxes	2,766			(3,307		)	10,403			536
Comprehensive income	$	16,051		$	9,544		$	36,361		$	26,862

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	June 30, 2016						December 31, 2015
Assets
Cash and due from banks				$	111,738					$	127,201
Interest-bearing deposits				62,850						93,680
Available-for-sale investment securities, at fair value				894,021						820,648
Stock in Federal Home Loan Bank, at cost				11,218						10,678
Loans receivable held for investment				4,754,954						4,615,819
Allowance for loan losses				(55,331		)				(50,038		)
Net loans				4,699,623						4,565,781
Loans held for sale, at lower of cost or fair value				6,217						4,631
Other				320,233						309,946
Goodwill				82,190						82,190
Total assets				$	6,188,090					$	6,014,755

Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,583,420					$	1,520,374
Deposit liabilities—interest-bearing				3,648,783						3,504,880
Other borrowings				272,887						328,582
Other				103,396						101,029
Total liabilities				5,608,486						5,454,865
Commitments and contingencies
Common stock				1						1
Additional paid in capital				341,849						340,496
Retained earnings				244,622						236,664
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains (losses) on securities	$	8,111					$	(1,872	)
Retirement benefit plans	(14,979		)	(6,868		)	(15,399		)	(17,271		)
Total shareholder’s equity				579,604						559,890
Total liabilities and shareholder’s equity				$	6,188,090					$	6,014,755

Other assets
Bank-owned life insurance				$	140,176					$	138,139
Premises and equipment, net				91,256						88,077
Prepaid expenses				4,715						3,550
Accrued interest receivable				15,749						15,192
Mortgage-servicing rights				9,016						8,884
Low-income housing equity investments				41,080						37,793
Real estate acquired in settlement of loans, net				446						1,030
Other				17,795						17,281
				$	320,233					$	309,946
Other liabilities
Accrued expenses				$	30,569					$	30,705
Federal and state income taxes payable				16,761						13,448
Cashier’s checks				21,497						21,768
Advance payments by borrowers				10,851						10,311
Other				23,718						24,797
				$	103,396					$	101,029

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 $173 million and $100 million, respectively, as of June 30, 2016 and $229 million and $100 million, respectively, as of December 31, 2015.

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
(dollars in thousands)										Number of issues	Fair value		Amount			Number of issues	Fair value		Amount
June 30, 2016
Available-for-sale
U.S. Treasury and federal agency obligations	$	194,048	$	4,131	$	(20	)	$	198,159	—	$	—	$	—		1	$	3,842	$	(20	)
Mortgage-related securities- FNMA, FHLMC and GNMA	686,506		10,022		(666		)	695,862		3	20,608		(65		)	14	63,466		(601		)
	$	880,554	$	14,153	$	(686	)	$	894,021	3	$	20,608	$	(65	)	15	$	67,308	$	(621	)
December 31, 2015
Available-for-sale
U.S. Treasury and federal agency obligations	$	213,234	$	1,025	$	(1,300	)	$	212,959	13	$	83,053	$	(866	)	3	$	17,378	$	(434	)
Mortgage-related securities- FNMA, FHLMC and GNMA	610,522		3,564		(6,397		)	607,689		38	305,785		(2,866		)	25	125,817		(3,531		)
	$	823,756	$	4,589	$	(7,697	)	$	820,648	51	$	388,838	$	(3,732	)	28	$	143,195	$	(3,965	)

ASB does not believe that the investment securities that were in an unrealized loss position at June 30, 2016, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to rising interest rates relative to when the investment securities were purchased and not due to the credit quality of the investment securities. The contractual cash flows of the investment securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for the quarters ended June 30, 2016 and 2015.

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:



June 30, 2016	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	9,991	$	10,001
Due after one year through five years	81,303		83,162
Due after five years through ten years	81,439		83,406
Due after ten years	21,315		21,590
	194,048		198,159
Mortgage-related securities-FNMA,FHLMC and GNMA	686,506		695,862
Total available-for-sale securities	$	880,554	$	894,021

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			Unallo-cated		Total
Three months ended June 30, 2016
Allowance for loan losses:
Beginning balance	$	4,593		$	11,806		$	7,172		$	1,740		$	6,164		$	12		$	16,991		$	3,848		$	—	$	52,326
Charge-offs	(15		)	—			—			—			—			—			(962		)	(1,528		)	—		(2,505		)
Recoveries	35			—			16			16			—			—			425			265			—		757
Provision	(229		)	1,755			648			(67		)	829			—			631			1,186			—		4,753
Ending balance	$	4,384		$	13,561		$	7,836		$	1,689		$	6,993		$	12		$	17,085		$	3,771		$	—	$	55,331
Three months ended June 30, 2015
Allowance for loan losses:
Beginning balance	$	4,921		$	11,228		$	6,523		$	2,286		$	2,837		$	21		$	14,580		$	3,399		$	—	$	45,795
Charge-offs	(58		)	—			(17		)	—			—			—			(756		)	(983		)	—		(1,814		)
Recoveries	55			—			8			136			—			—			106			254			—		559
Provision	(627		)	(808		)	99			(319		)	(262		)	(3		)	3,539			206			—		1,825
Ending balance	$	4,291		$	10,420		$	6,613		$	2,103		$	2,575		$	18		$	17,469		$	2,876		$	—	$	46,365
Six months ended June 30, 2016
Allowance for loan losses:
Beginning balance	$	4,186		$	11,342		$	7,260		$	1,671		$	4,461		$	13		$	17,208		$	3,897		$	—	$	50,038
Charge-offs	(60		)	—			—			—			—			—			(2,305		)	(3,098		)	—		(5,463		)
Recoveries	52			—			31			119			—			—			560			475			—		1,237
Provision	206			2,219			545			(101		)	2,532			(1		)	1,622			2,497			—		9,519
Ending balance	$	4,384		$	13,561		$	7,836		$	1,689		$	6,993		$	12		$	17,085		$	3,771		$	—	$	55,331
June 30, 2016
Ending balance: individually evaluated for impairment	$	1,709		$	172		$	826		$	819		$	—		$	—		$	2,647		$	7				$	6,180
Ending balance: collectively evaluated for impairment	$	2,675		$	13,389		$	7,010		$	870		$	6,993		$	12		$	14,438		$	3,764		$	—	$	49,151
Financing Receivables:
Ending balance	$	2,064,343		$	740,322		$	860,522		$	18,447		$	134,642		$	16,004		$	772,565		$	153,212				$	4,760,057
Ending balance: individually evaluated for impairment	$	22,279		$	3,630		$	4,646		$	4,453		$	—		$	—		$	24,153		$	12				$	59,173
Ending balance: collectively evaluated for impairment	$	2,042,064		$	736,692		$	855,876		$	13,994		$	134,642		$	16,004		$	748,412		$	153,200				$	4,700,884
Six months ended June 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	(214		)	—			(20		)	—			—			—			(802		)	(1,925		)	—		(2,961		)
Recoveries	67			—			39			185			—			—			447			531			—		1,269
Provision	(224		)	1,466			(388		)	43			(2,896		)	(10		)	3,807			641			—		2,439
Ending balance	$	4,291		$	10,420		$	6,613		$	2,103		$	2,575		$	18		$	17,469		$	2,876		$	—	$	46,365
December 31, 2015
Ending balance: individually evaluated for impairment	$	1,453		$	—		$	442		$	891		$	—		$	—		$	3,527		$	7				$	6,320
Ending balance: collectively evaluated for impairment	$	2,733		$	11,342		$	6,818		$	780		$	4,461		$	13		$	13,681		$	3,890		$	—	$	43,718
Financing Receivables:
Ending balance	$	2,069,665		$	690,561		$	846,294		$	18,229		$	100,796		$	14,089		$	758,659		$	123,775				$	4,622,068
Ending balance: individually evaluated for impairment	$	22,457		$	1,188		$	3,225		$	5,683		$	—		$	—		$	21,119		$	13				$	53,685
Ending balance: collectively evaluated for impairment	$	2,047,208		$	689,373		$	843,069		$	12,546		$	100,796		$	14,089		$	737,540		$	123,762				$	4,568,383

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:



	June 30, 2016						December 31, 2015
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	664,731	$	107,552	$	712,020	$	642,410	$	86,991	$	703,208
Special mention	43,607		—		12,607		7,710		13,805		7,029
Substandard	31,984		27,090		47,698		40,441		—		47,975
Doubtful	—		—		240		—		—		447
Loss	—		—		—		—		—		—
Total	$	740,322	$	134,642	$	772,565	$	690,561	$	100,796	$	758,659

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
June 30, 2016
Real estate:
Residential 1-4 family	$	5,421	$	1,860	$	10,526	$	17,807	$	2,046,536	$	2,064,343	$	—
Commercial real estate	—		—		—		—		740,322		740,322		—
Home equity line of credit	878		445		602		1,925		858,597		860,522		—
Residential land	—		—		148		148		18,299		18,447		—
Commercial construction	—		—		—		—		134,642		134,642		—
Residential construction	—		—		—		—		16,004		16,004		—
Commercial	438		111		308		857		771,708		772,565		—
Consumer	1,354		692		476		2,522		150,690		153,212		—
Total loans	$	8,091	$	3,108	$	12,060	$	23,259	$	4,736,798	$	4,760,057	$	—
December 31, 2015
Real estate:
Residential 1-4 family	$	4,967	$	3,289	$	11,503	$	19,759	$	2,049,906	$	2,069,665	$	—
Commercial real estate	—		—		—		—		690,561		690,561		—
Home equity line of credit	896		706		477		2,079		844,215		846,294		—
Residential land	—		—		415		415		17,814		18,229		—
Commercial construction	—		—		—		—		100,796		100,796		—
Residential construction	—		—		—		—		14,089		14,089		—
Commercial	125		223		878		1,226		757,433		758,659		—
Consumer	1,383		593		644		2,620		121,155		123,775		—
Total loans	$	7,371	$	4,811	$	13,917	$	26,099	$	4,595,969	$	4,622,068	$	—

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



(in thousands)	June 30, 2016		December 31, 2015
Real estate:
Residential 1-4 family	$	21,056	$	20,554
Commercial real estate	3,630		1,188
Home equity line of credit	3,331		2,254
Residential land	693		970
Commercial construction	—		—
Residential construction	—		—
Commercial	18,827		20,174
Consumer	807		895
Total nonaccrual loans	$	48,344	$	46,035
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	$	13,450	$	13,962
Commercial real estate	—		—
Home equity line of credit	3,400		2,467
Residential land	3,760		4,713
Commercial construction	—		—
Residential construction	—		—
Commercial	5,420		1,104
Consumer	—		—
Total troubled debt restructured loans not included above	$	26,030	$	22,246

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



	June 30, 2016						Three months ended June 30, 2016				Six months ended June 30, 2016
(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	$	10,262	$	11,381	$	—	$	10,672	$	152	$	10,532	$	203
Commercial real estate	1,144		1,422		—		1,152		—		1,163		—
Home equity line of credit	1,020		1,288		—		1,038		9		943		9
Residential land	1,482		2,178		—		1,484		15		1,537		31
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	15,430		16,776		—		8,369		7		5,818		13
Consumer	—		—		—		—		—		—		—
	$	29,338	$	33,045	$	—	$	22,715	$	183	$	19,993	$	256
With an allowance recorded
Real estate:
Residential 1-4 family	$	12,017	$	12,220	$	1,709	$	11,982	$	115	$	12,000	$	237
Commercial real estate	2,486		2,526		172		2,519		—		1,686		—
Home equity line of credit	3,626		3,699		826		3,299		28		3,122		55
Residential land	2,971		2,971		819		2,977		54		3,177		121
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	8,723		8,904		2,647		16,821		180		16,896		210
Consumer	12		12		7		12		—		12		—
	$	29,835	$	30,332	$	6,180	$	37,610	$	377	$	36,893	$	623
Total
Real estate:
Residential 1-4 family	$	22,279	$	23,601	$	1,709	$	22,654	$	267	$	22,532	$	440
Commercial real estate	3,630		3,948		172		3,671		—		2,849		—
Home equity line of credit	4,646		4,987		826		4,337		37		4,065		64
Residential land	4,453		5,149		819		4,461		69		4,714		152
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	24,153		25,680		2,647		25,190		187		22,714		223
Consumer	12		12		7		12		—		12		—
	$	59,173	$	63,377	$	6,180	$	60,325	$	560	$	56,886	$	879



	December 31, 2015						Three months ended June 30, 2015				Six months ended June 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	$	10,596	$	11,805	$	—	$	11,193	$	66	$	11,373	$	155
Commercial real estate	1,188		1,436		—		530		—		543		—
Home equity line of credit	707		948		—		433		1		417		2
Residential land	1,644		2,412		—		3,026		44		2,831		96
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	5,671		6,333		—		5,432		139		6,363		141
Consumer	—		—		—		—		—		—		—
	$	19,806	$	22,934	$	—	$	20,614	$	250	$	21,527	$	394
With an allowance recorded
Real estate:
Residential 1-4 family	$	11,861	$	11,914	$	1,453	$	11,794	$	130	$	11,651	$	256
Commercial real estate	—		—		—		1,474		—		2,978		—
Home equity line of credit	2,518		2,579		442		1,212		8		919		14
Residential land	4,039		4,117		891		4,142		84		4,666		167
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	15,448		16,073		3,527		9,358		36		7,170		86
Consumer	13		13		7		15		—		15		—
	$	33,879	$	34,696	$	6,320	$	27,995	$	258	$	27,399	$	523
Total
Real estate:
Residential 1-4 family	$	22,457	$	23,719	$	1,453	$	22,987	$	196	$	23,024	$	411
Commercial real estate	1,188		1,436		—		2,004		—		3,521		—
Home equity line of credit	3,225		3,527		442		1,645		9		1,336		16
Residential land	5,683		6,529		891		7,168		128		7,497		263
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	21,119		22,406		3,527		14,790		175		13,533		227
Consumer	13		13		7		15		—		15		—
	$	53,685	$	57,630	$	6,320	$	48,609	$	508	$	48,926	$	917


*	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 or reduction 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 June 30, 2016							Six months ended June 30, 2016
	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	5	$	891	$	885	$	98	9	$	1,988	$	2,100	$	259
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	8	768		768		181		18	1,437		1,437		255
Residential land	1	120		121		—		1	120		121		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	5	457		457		145		8	16,657		16,657		670
Consumer	—	—		—		—		—	—		—		—
	19	$	2,236	$	2,231	$	424	36	$	20,202	$	20,315	$	1,184



	Three months ended June 30, 2015							Six months ended June 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	2	$	318	$	318	$	—	7	$	1,195	$	1,213	$	47
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	13	690		690		105		22	1,119		1,119		160
Residential land	—	—		—		—		—	—		—		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	3	161		161		78		4	253		253		78
Consumer	—	—		—		—		—	—		—		—
	18	$	1,169	$	1,169	$	183	33	$	2,567	$	2,585	$	285


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 the indicated periods, and for which the payment of default occurred within one year of the modification, were as follows:



	Three months ended June 30, 2016			Six months ended June 30, 2016
(dollars in thousands)	Number of contracts	Recorded investment		Number of contracts	Recorded investment
Troubled debt restructurings that subsequently defaulted
Real estate:
Residential 1-4 family	—	$	—	1	$	488
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		—	—
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	1	26		1	26
Consumer	—	—		—	—
	1	$	26	2	$	514

There were no loans modified in TDRs that experienced a payment default of 90 days or more in the second quarter of 2015 and six months ended June 30, 2015, and for which the payment of default occurred within one year of the modification.

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 modified in a TDR totaled $2.7 million at June 30, 2016.

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 loans other than the servicing rights of certain loans sold.

ASB received proceeds from the sale of residential mortgages of $58.1 million and $95.0 million for the three months ended June 30, 2016 and 2015 and $98.5 million and $173.3 million for the six months ended June 30, 2016 and 2015, respectively, and recognized gains on such sales of $1.5 million and $2.1 million for the three months ended June 30, 2016 and 2015 and $2.7 million and $3.9 million for the six months ended June 30, 2016 and 2015 respectively.

There were no repurchased mortgage loans for the three months ended June 30, 2016 and 2015 and six months ended June 30, 2016 and 2015. The repurchase reserve was $0.1 million and nil for the period ended June 30, 2016 and 2015, respectively.

Mortgage servicing fees, a component of other income, net, were $0.7 million and $0.9 million for the three months ended June 30, 2016 and 2015 and $1.4 million and $1.8 million for the six months ended June 30, 2016 and 2015, respectively.

Changes in the carrying value of mortgage servicing rights were as follows:



(in thousands)	Gross carrying amount¹		Accumulated amortization¹			Valuation allowance		Net carrying amount
June 30, 2016	$	15,652	$	(6,636	)	$	—	$	9,016
December 31, 2015	14,531		(5,647		)	—		8,884

¹ Reflects the impact of loans paid in full.

Changes related to mortgage servicing rights were as follows:



(in thousands)	2016			2015
Mortgage servicing rights
Balance, January 1	$	8,884		$	11,749
Amount capitalized	1,120			2,001
Amortization	(988		)	(1,444		)
Other-than-temporary impairment	—			(4		)
Carrying amount before valuation allowance, June 30	9,016			12,302
Valuation allowance for mortgage servicing rights
Balance, January 1	—			209
Provision (recovery)	—			(168		)
Other-than-temporary impairment	—			(4		)
Balance, June 30	—			37
Net carrying value of mortgage servicing rights	$	9,016		$	12,265

ASB capitalizes mortgage servicing rights acquired through either the purchase or origination of mortgage loans for sale with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the mortgage servicing rights to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the mortgage servicing rights. ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15 and 30 year mortgages and note rate in bands of 50 to 100 basis points. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. 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. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others.

ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in other income, net in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable.

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



(dollars in thousands)	June 30, 2016			December 31, 2015
Unpaid principal balance	$	1,137,226		$	1,097,314
Weighted average note rate	4.03		%	4.05		%
Weighted average discount rate	9.4		%	9.6		%
Weighted average prepayment speed	11.4		%	9.3		%

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



(dollars in thousands)	June 30, 2016			December 31, 2015
Prepayment rate:
25 basis points adverse rate change	$	(567	)	$	(561	)
50 basis points adverse rate change	(1,037		)	(1,104		)
Discount rate:
25 basis points adverse rate change	(97		)	(111		)
50 basis points adverse rate change	(192		)	(220		)

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.

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. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. 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
June 30, 2016	$173	$—	$173
December 31, 2015	229	—	229



	Gross amount not offset in the Balance Sheet
(in millions)	Liabilities presented in the Balance Sheet		Financial instruments		Cash collateral pledged
June 30, 2016
Financial institution	$	50	$	57	$	—
Government entities	27		42		—
Commercial account holders	96		117		—
Total	$	173	$	216	$	—
December 31, 2015
Financial institution	$	50	$	56	$	—
Government entities	56		61		—
Commercial account holders	123		144		—
Total	$	229	$	261	$	—

The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. 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 consolidated balance sheets. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts.

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:



	June 30, 2016					December 31, 2015
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	34,277	$	795		$	22,241	$	384
Forward commitments	31,228		(266		)	23,644		(29		)

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



Derivative Financial Instruments Not Designated as Hedging Instruments ¹	June 30, 2016				December 31, 2015
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	795	$	—	$	384	$	—
Forward commitments	4		270		1		30
	$	799	$	270	$	385	$	30

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 June 30						Six months ended June 30
(in thousands)		2016			2015			2016			2015
Interest rate lock commitments	Mortgage banking income	$	140		$	(389	)	$	411		$	56
Forward commitments	Mortgage banking income	(74		)	258			(237		)	99
		$	66		$	(131	)	$	174		$	155

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $10.0 million and $10.1 million at June 30, 2016 and December 31, 2015, 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 June 30, 2016, 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. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.