Bank segment

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data (unaudited)



	Three months ended March 31
(in thousands)	2017		2016
Interest and dividend income
Interest and fees on loans	$	50,742	$	48,437
Interest and dividends on investment securities	6,980		5,017
Total interest and dividend income	57,722		53,454
Interest expense
Interest on deposit liabilities	2,103		1,592
Interest on other borrowings	816		1,485
Total interest expense	2,919		3,077
Net interest income	54,803		50,377
Provision for loan losses	3,907		4,766
Net interest income after provision for loan losses	50,896		45,611
Noninterest income
Fees from other financial services	5,610		5,499
Fee income on deposit liabilities	5,428		5,156
Fee income on other financial products	1,866		2,205
Bank-owned life insurance	983		998
Mortgage banking income	789		1,195
Other income, net	458		333
Total noninterest income	15,134		15,386
Noninterest expense
Compensation and employee benefits	23,237		22,434
Occupancy	4,154		4,138
Data processing	3,280		3,172
Services	2,360		2,911
Equipment	1,748		1,663
Office supplies, printing and postage	1,535		1,365
Marketing	517		861
FDIC insurance	728		884
Other expense	4,311		3,975
Total noninterest expense	41,870		41,403
Income before income taxes	24,160		19,594
Income taxes	8,347		6,921
Net income	$	15,813	$	12,673

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data (unaudited)



	Three months ended March 31
(in thousands)	2017		2016
Net income	$	15,813	$	12,673
Other comprehensive income, net of taxes:
Net unrealized gains on available-for-sale investment securities:
Net unrealized gains on available-for-sale investment securities arising during the period, net of taxes of $148 and $4,905, respectively	223		7,429
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $404 and $137, respectively	612		208
Other comprehensive income, net of taxes	835		7,637
Comprehensive income	$	16,648	$	20,310

American Savings Bank, F.S.B.

Balance Sheets Data (unaudited)



(in thousands)	March 31, 2017						December 31, 2016
Assets
Cash and due from banks				$	125,901					$	137,083
Interest-bearing deposits				94,573						52,128
Restricted cash				—						1,764
Available-for-sale investment securities, at fair value				1,228,922						1,105,182
Stock in Federal Home Loan Bank, at cost				11,706						11,218
Loans receivable held for investment				4,725,271						4,738,693
Allowance for loan losses				(55,997		)				(55,533		)
Net loans				4,669,274						4,683,160
Loans held for sale, at lower of cost or fair value				10,454						18,817
Other				336,626						329,815
Goodwill				82,190						82,190
Total assets				$	6,559,646					$	6,421,357

Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,696,390					$	1,639,051
Deposit liabilities—interest-bearing				3,978,700						3,909,878
Other borrowings				200,154						192,618
Other				98,223						101,635
Total liabilities				5,973,467						5,843,182
Commitments and contingencies
Common stock				1						1
Additional paid in capital				343,435						342,704
Retained earnings				264,381						257,943
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities	$	(7,708	)				$	(7,931	)
Retirement benefit plans	(13,930		)	(21,638		)	(14,542		)	(22,473		)
Total shareholder’s equity				586,179						578,175
Total liabilities and shareholder’s equity				$	6,559,646					$	6,421,357

Other assets
Bank-owned life insurance				$	144,661					$	143,197
Premises and equipment, net				94,865						90,570
Prepaid expenses				4,031						3,348
Accrued interest receivable				16,508						16,824
Mortgage-servicing rights				9,294						9,373
Low-income housing equity investments				46,782						47,081
Real estate acquired in settlement of loans, net				1,242						1,189
Other				19,243						18,233
				$	336,626					$	329,815
Other liabilities
Accrued expenses				$	32,324					$	36,754
Federal and state income taxes payable				10,642						4,728
Cashier’s checks				23,777						24,156
Advance payments by borrowers				6,134						10,335
Other				25,346						25,662
				$	98,223					$	101,635

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 $100 million and $100 million, respectively, as of March 31, 2017 and $93 million and $100 million, respectively, as of December 31, 2016.

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
March 31, 2017
Available-for-sale
U.S. Treasury and federal agency obligations	$	189,420	$	928	$	(1,991	)	$	188,357	14	$	97,572	$	(1,855	)	1	$	3,492	$	(136	)
Mortgage-related securities- FNMA, FHLMC and GNMA	1,036,872		1,719		(13,453		)	1,025,138		96	792,672		(11,920		)	13	45,025		(1,533		)
Mortgage revenue bond	15,427		—		—			15,427		—	—		—			—	—		—
	$	1,241,719	$	2,647	$	(15,444	)	$	1,228,922	110	$	890,244	$	(13,775	)	14	$	48,517	$	(1,669	)
December 31, 2016
Available-for-sale
U.S. Treasury and federal agency obligations	$	193,515	$	920	$	(2,154	)	$	192,281	18	$	123,475	$	(2,010	)	1	$	3,485	$	(144	)
Mortgage-related securities- FNMA, FHLMC and GNMA	909,408		1,742		(13,676		)	897,474		88	709,655		(12,143		)	13	47,485		(1,533		)
Mortgage revenue bond	15,427		—		—			15,427		—	—		—			—	—		—
	$	1,118,350	$	2,662	$	(15,830	)	$	1,105,182	106	$	833,130	$	(14,153	)	14	$	50,970	$	(1,677	)

ASB does not believe that the investment securities that were in an unrealized loss position at March 31, 2017, 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 U.S. Treasury, federal agency obligations and mortgage-related 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 March 31, 2017 and 2016.

U.S. Treasury, federal agency obligations, and the mortgage revenue bond 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:



March 31, 2017	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	9,986	$	9,993
Due after one year through five years	77,165		77,274
Due after five years through ten years	78,014		77,582
Due after ten years	39,682		38,935
	204,847		203,784
Mortgage-related securities-FNMA, FHLMC and GNMA	1,036,872		1,025,138
Total available-for-sale securities	$	1,241,719	$	1,228,922

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 March 31, 2017
Allowance for loan losses:
Beginning balance	$	2,873		$	16,004	$	5,039		$	1,738		$	6,449	$	12		$	16,618		$	6,800		$	—	$	55,533
Charge-offs	(6		)	—		(14		)	—			—		—			(1,510		)	(2,810		)	—		(4,340		)
Recoveries	9			—		91			203			—		—			297			297			—		897
Provision	(95		)	500		301			(462		)	808		(1		)	(503		)	3,359			—		3,907
Ending balance	$	2,781		$	16,504	$	5,417		$	1,479		$	7,257	$	11		$	14,902		$	7,646		$	—	$	55,997
March 31, 2017
Ending balance: individually evaluated for impairment	$	1,386		$	74	$	228		$	660		$	—	$	—		$	1,318		$	34				$	3,700
Ending balance: collectively evaluated for impairment	$	1,395		$	16,430	$	5,189		$	819		$	7,257	$	11		$	13,584		$	7,612		$	—	$	52,297
Financing Receivables:
Ending balance	$	2,058,202		$	790,191	$	866,880		$	16,888		$	130,808	$	13,694		$	661,016		$	192,113				$	4,729,792
Ending balance: individually evaluated for impairment	$	19,340		$	1,515	$	6,803		$	2,863		$	—	$	—		$	9,175		$	69				$	39,765
Ending balance: collectively evaluated for impairment	$	2,038,862		$	788,676	$	860,077		$	14,025		$	130,808	$	13,694		$	651,841		$	192,044				$	4,690,027
Three months ended March 31, 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	(45		)	—		—			—			—		—			(1,343		)	(1,570		)	—		(2,958		)
Recoveries	17			—		15			103			—		—			135			210			—		480
Provision	435			464		(103		)	(34		)	1,703		(1		)	991			1,311			—		4,766
Ending balance	$	4,593		$	11,806	$	7,172		$	1,740		$	6,164	$	12		$	16,991		$	3,848		$	—	$	52,326
December 31, 2016
Ending balance: individually evaluated for impairment	$	1,352		$	80	$	215		$	789		$	—	$	—		$	1,641		$	6				$	4,083
Ending balance: collectively evaluated for impairment	$	1,521		$	15,924	$	4,824		$	949		$	6,449	$	12		$	14,977		$	6,794		$	—	$	51,450
Financing Receivables:
Ending balance	$	2,048,051		$	800,395	$	863,163		$	18,889		$	126,768	$	16,080		$	692,051		$	178,222				$	4,743,619
Ending balance: individually evaluated for impairment	$	19,854		$	1,569	$	6,158		$	3,629		$	—	$	—		$	20,539		$	10				$	51,759
Ending balance: collectively evaluated for impairment	$	2,028,197		$	798,826	$	857,005		$	15,260		$	126,768	$	16,080		$	671,512		$	178,212				$	4,691,860

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 probability of default 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. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.

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



	March 31, 2017						December 31, 2016
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	669,117	$	84,495	$	605,256	$	701,657	$	102,955	$	614,139
Special mention	89,370		22,500		22,568		65,541		—		25,229
Substandard	31,704		23,813		33,192		33,197		23,813		52,683
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	790,191	$	130,808	$	661,016	$	800,395	$	126,768	$	692,051

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
March 31, 2017
Real estate:
Residential 1-4 family	$	3,557	$	2,982	$	3,419	$	9,958	$	2,048,244	$	2,058,202	$	—
Commercial real estate	—		—		—		—		790,191		790,191		—
Home equity line of credit	594		571		1,532		2,697		864,183		866,880		—
Residential land	—		318		79		397		16,491		16,888		—
Commercial construction	—		—		—		—		130,808		130,808		—
Residential construction	—		—		—		—		13,694		13,694		—
Commercial	1,255		928		847		3,030		657,986		661,016		—
Consumer	1,809		917		908		3,634		188,479		192,113		—
Total loans	$	7,215	$	5,716	$	6,785	$	19,716	$	4,710,076	$	4,729,792	$	—
December 31, 2016
Real estate:
Residential 1-4 family	$	5,467	$	2,338	$	3,505	$	11,310	$	2,036,741	$	2,048,051	$	—
Commercial real estate	2,416		—		—		2,416		797,979		800,395		—
Home equity line of credit	1,263		381		1,342		2,986		860,177		863,163		—
Residential land	—		—		255		255		18,634		18,889		—
Commercial construction	—		—		—		—		126,768		126,768		—
Residential construction	—		—		—		—		16,080		16,080		—
Commercial	413		510		1,303		2,226		689,825		692,051		—
Consumer	1,945		1,001		963		3,909		174,313		178,222		—
Total loans	$	11,504	$	4,230	$	7,368	$	23,102	$	4,720,517	$	4,743,619	$	—

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



(in thousands)	March 31, 2017		December 31, 2016
Real estate:
Residential 1-4 family	$	11,709	$	11,154
Commercial real estate	218		223
Home equity line of credit	3,340		3,080
Residential land	695		878
Commercial construction	—		—
Residential construction	—		—
Commercial	2,016		6,708
Consumer	1,410		1,282
Total nonaccrual loans	$	19,388	$	23,325
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	$	13,661	$	14,450
Commercial real estate	1,297		1,346
Home equity line of credit	4,894		4,934
Residential land	2,246		2,751
Commercial construction	—		—
Residential construction	—		—
Commercial	7,234		14,146
Consumer	69		10
Total troubled debt restructured loans not included above	$	29,401	$	37,637

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



	March 31, 2017						Three months ended March 31, 2017
(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	$	9,145	$	9,980	$	—	$	9,555	$	84
Commercial real estate	218		227		—		220		—
Home equity line of credit	2,376		2,829		—		2,004		14
Residential land	954		1,401		—		957		26
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	2,315		5,391		—		4,907		6
Consumer	—		—		—		—		—
	$	15,008	$	19,828	$	—	$	17,643	$	130
With an allowance recorded
Real estate:
Residential 1-4 family	$	10,195	$	10,398	$	1,386	$	10,048	$	119
Commercial real estate	1,297		1,297		74		1,300		14
Home equity line of credit	4,427		4,443		228		4,562		49
Residential land	1,909		1,909		660		2,076		37
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	6,860		6,860		1,318		7,268		401
Consumer	69		69		34		30		—
	$	24,757	$	24,976	$	3,700	$	25,284	$	620
Total
Real estate:
Residential 1-4 family	$	19,340	$	20,378	$	1,386	$	19,603	$	203
Commercial real estate	1,515		1,524		74		1,520		14
Home equity line of credit	6,803		7,272		228		6,566		63
Residential land	2,863		3,310		660		3,033		63
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	9,175		12,251		1,318		12,175		407
Consumer	69		69		34		30		—
	$	39,765	$	44,804	$	3,700	$	42,927	$	750



	December 31, 2016						Three months ended March 31, 2016
(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	$	9,571	$	10,400	$	—	$	10,392	$	51
Commercial real estate	223		228		—		1,173		—
Home equity line of credit	1,500		1,900		—		849		—
Residential land	1,218		1,803		—		1,590		16
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	6,299		8,869		—		4,999		6
Consumer	—		—		—		—		—
	$	18,811	$	23,200	$	—	$	19,003	$	73
With an allowance recorded
Real estate:
Residential 1-4 family	$	10,283	$	10,486	$	1,352	$	12,018	$	122
Commercial real estate	1,346		1,346		80		854		—
Home equity line of credit	4,658		4,712		215		2,944		27
Residential land	2,411		2,411		789		3,378		67
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	14,240		14,240		1,641		16,970		30
Consumer	10		10		6		13		—
	$	32,948	$	33,205	$	4,083	$	36,177	$	246
Total
Real estate:
Residential 1-4 family	$	19,854	$	20,886	$	1,352	$	22,410	$	173
Commercial real estate	1,569		1,574		80		2,027		—
Home equity line of credit	6,158		6,612		215		3,793		27
Residential land	3,629		4,214		789		4,968		83
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	20,539		23,109		1,641		21,969		36
Consumer	10		10		6		13		—
	$	51,759	$	56,405	$	4,083	$	55,180	$	319


*	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 collectibility 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 during the first quarters of 2017 and 2016 and the impact on the allowance for loan losses were as follows:



	Three months ended March 31, 2017
	Number of contracts	Outstanding recorded investment¹				Net increase in allowance
(dollars in thousands)	Number of contracts	Pre-modification		Post-modification		(as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	3	$	512	$	520	$	45
Commercial real estate	—	—		—		—
Home equity line of credit	8	226		212		34
Residential land	—	—		—		—
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	1	342		342		—
Consumer	1	59		59		27
	13	$	1,139	$	1,133	$	106



	Three months ended March 31, 2016
	Number of contracts	Outstanding recorded investment¹				Net increase in allowance
(dollars in thousands)	Number of contracts	Pre-modification		Post-modification		(as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	4	$	1,097	$	1,215	$	161
Commercial real estate	—	—		—		—
Home equity line of credit	10	669		669		74
Residential land	—	—		—		—
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	3	16,200		16,200		525
Consumer	—	—		—		—
	17	$	17,966	$	18,084	$	760


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 during the first quarters of 2017 and 2016, and for which the payment of default occurred within one year of the modification, were as follows:



	Three months ended March 31, 2017			Three months ended March 31, 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	$	301	1	$	488
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		—	—
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	—	—		—	—
Consumer	—	—		—	—
	1	$	301	1	$	488

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 $2.1 million at March 31, 2017.

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 $40.6 million and $40.4 million for the three months ended March 31, 2017 and 2016, respectively, and recognized gains on such sales of $0.8 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively.

There were no repurchased mortgage loans for the three months ended March 31, 2017 and 2016. The repurchase reserve was $0.1 million as of March 31, 2017 and 2016.

Mortgage servicing fees, a component of other income, net, were $0.8 million and $0.7 million for the three months ended March 31, 2017 and 2016, 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
March 31, 2017	$	17,707	$	(8,413	)	$	—	$	9,294
December 31, 2016	17,271		(7,898		)	—		9,373

¹ Reflects the impact of loans paid in full.

Changes related to mortgage servicing rights were as follows:



(in thousands)	2017			2016
Mortgage servicing rights
Balance, January 1	$	9,373		$	8,884
Amount capitalized	436			455
Amortization	(515		)	(482		)
Other-than-temporary impairment	—			—
Carrying amount before valuation allowance, March 31	9,294			8,857
Valuation allowance for mortgage servicing rights
Balance, January 1	—			—
Provision (recovery)	—			—
Other-than-temporary impairment	—			—
Balance, March 31	—			—
Net carrying value of mortgage servicing rights	$	9,294		$	8,857

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)	March 31, 2017			December 31, 2016
Unpaid principal balance	$	1,205,197		$	1,188,380
Weighted average note rate	3.95		%	3.96		%
Weighted average discount rate	9.5		%	9.4		%
Weighted average prepayment speed	8.2		%	8.5		%

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



(dollars in thousands)	March 31, 2017			December 31, 2016
Prepayment rate:
25 basis points adverse rate change	$	(556	)	$	(567	)
50 basis points adverse rate change	(1,144		)	(1,154		)
Discount rate:
25 basis points adverse rate change	(134		)	(128		)
50 basis points adverse rate change	(266		)	(254		)

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 a 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:



	Gross amount not offset in the Balance Sheet
(in millions)	Net amount of liabilities presented in the Balance Sheet		Financial instruments		Cash collateral pledged
March 31, 2017
Financial institution	$	—	$	—	$	—
Government entities	—		—		—
Commercial account holders	100		119		—
Total	$	100	$	119	$	—
December 31, 2016
Financial institution	$	—	$	—	$	—
Government entities	14		15		—
Commercial account holders	79		101		—
Total	$	93	$	116	$	—

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 risks 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:



	March 31, 2017					December 31, 2016
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	21,771	$	317		$	25,883	$	421
Forward commitments	22,120		(104		)	30,813		(177		)

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



Derivative Financial Instruments Not Designated as Hedging Instruments ¹	March 31, 2017				December 31, 2016
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	317	$	—	$	445	$	24
Forward commitments	—		104		8		185
	$	317	$	104	$	453	$	209

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 March 31
(in thousands)		2017			2016
Interest rate lock commitments	Mortgage banking income	$	(104	)	$	271
Forward commitments	Mortgage banking income	73			(163		)
		$	(31	)	$	108

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $14.4 million and $14.0 million at March 31, 2017 and December 31, 2016, 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 March 31, 2017, 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.

(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

March 31, 2017

December 31, 2016