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)	2017		2016		2017		2016
Interest and dividend income
Interest and fees on loans	$	52,210	$	50,444	$	155,269	$	148,571
Interest and dividends on investment securities	6,850		4,759		20,593		14,219
Total interest and dividend income	59,060		55,203		175,862		162,790
Interest expense
Interest on deposit liabilities	2,444		1,871		6,858		5,154
Interest on other borrowings	470		1,464		2,110		4,416
Total interest expense	2,914		3,335		8,968		9,570
Net interest income	56,146		51,868		166,894		153,220
Provision for loan losses	490		5,747		7,231		15,266
Net interest income after provision for loan losses	55,656		46,121		159,663		137,954
Noninterest income
Fees from other financial services	5,635		5,599		17,055		16,799
Fee income on deposit liabilities	5,533		5,627		16,526		16,045
Fee income on other financial products	1,904		2,151		5,741		6,563
Bank-owned life insurance	1,257		1,616		4,165		3,620
Mortgage banking income	520		2,347		1,896		5,096
Gains on sale of investment securities, net	—		—		—		598
Other income, net	380		1,165		1,229		1,786
Total noninterest income	15,229		18,505		46,612		50,507
Noninterest expense
Compensation and employee benefits	23,724		22,844		71,703		67,197
Occupancy	4,284		3,991		12,623		12,244
Data processing	3,262		3,150		9,749		9,599
Services	2,863		2,427		7,989		8,093
Equipment	1,814		1,759		5,333		5,193
Office supplies, printing and postage	1,444		1,483		4,506		4,431
Marketing	934		747		2,290		2,507
FDIC insurance	746		907		2,296		2,704
Other expense	5,050		4,591		14,066		13,948
Total noninterest expense	44,121		41,899		130,555		125,916
Income before income taxes	26,764		22,727		75,720		62,545
Income taxes	9,172		7,623		25,582		21,483
Net income	$	17,592	$	15,104	$	50,138	$	41,062

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended September 30					Nine months ended September 30
(in thousands)	2017		2016			2017		2016
Net income	$	17,592	$	15,104		$	50,138	$	41,062
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 $(137), $1,417, $(1,619) and $(5,413), respectively	208		(2,147		)	2,452		8,197
Reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, nil and $238, respectively	—		—			—		(360		)
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 $138, $144, $675 and $421, respectively	209		219			1,023		638
Other comprehensive income (loss), net of taxes	417		(1,928		)	3,475		8,475
Comprehensive income	$	18,009	$	13,176		$	53,613	$	49,537

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	September 30, 2017						December 31, 2016
Assets
Cash and due from banks				$	120,492					$	137,083
Interest-bearing deposits				69,223						52,128
Restricted cash				—						1,764
Available-for-sale investment securities, at fair value				1,320,110						1,105,182
Stock in Federal Home Loan Bank, at cost				9,706						11,218
Loans receivable held for investment				4,676,281						4,738,693
Allowance for loan losses				(53,047		)				(55,533		)
Net loans				4,623,234						4,683,160
Loans held for sale, at lower of cost or fair value				15,728						18,817
Other				378,224						329,815
Goodwill				82,190						82,190
Total assets				$	6,618,907					$	6,421,357

Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,710,698					$	1,639,051
Deposit liabilities—interest-bearing				4,041,628						3,909,878
Other borrowings				153,552						192,618
Other				107,558						101,635
Total liabilities				6,013,436						5,843,182
Commitments and contingencies
Common stock				1						1
Additional paid in capital				344,512						342,704
Retained earnings				279,956						257,943
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities	$	(5,479	)				$	(7,931	)
Retirement benefit plans	(13,519		)	(18,998		)	(14,542		)	(22,473		)
Total shareholder’s equity				605,471						578,175
Total liabilities and shareholder’s equity				$	6,618,907					$	6,421,357

Other assets
Bank-owned life insurance				$	147,391					$	143,197
Premises and equipment, net				123,326						90,570
Prepaid expenses				5,356						3,348
Accrued interest receivable				17,488						16,824
Mortgage-servicing rights				9,070						9,373
Low-income housing equity investments				54,515						47,081
Real estate acquired in settlement of loans, net				1,183						1,189
Other				19,895						18,233
				$	378,224					$	329,815
Other liabilities
Accrued expenses				$	41,698					$	36,754
Federal and state income taxes payable				6,829						4,728
Cashier’s checks				27,448						24,156
Advance payments by borrowers				4,867						10,335
Other				26,716						25,662
				$	107,558					$	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 $104 million and $50 million, respectively, as of September 30, 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
September 30, 2017
Available-for-sale
U.S. Treasury and federal agency obligations	$	182,535	$	882	$	(1,299	)	$	182,118	15	$	91,203	$	(1,064	)	2	$	13,072	$	(235	)
Mortgage-related securities- FNMA, FHLMC and GNMA	1,131,245		2,127		(10,807		)	1,122,565		84	686,186		(7,709		)	29	138,051		(3,098		)
Mortgage revenue bond	15,427		—		—			15,427		—	—		—			—	—		—
	$	1,329,207	$	3,009	$	(12,106	)	$	1,320,110	99	$	777,389	$	(8,773	)	31	$	151,123	$	(3,333	)
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 September 30, 2017, represent an other-than-temporary impairment (OTTI). 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 and nine month periods ended September 30, 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:



September 30, 2017	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	9,998	$	9,999
Due after one year through five years	77,138		77,331
Due after five years through ten years	81,464		81,170
Due after ten years	29,362		29,045
	197,962		197,545
Mortgage-related securities-FNMA, FHLMC and GNMA	1,131,245		1,122,565
Total available-for-sale securities	$	1,329,207	$	1,320,110

Proceeds from the sale of available-for-sale securities were nil for both the three month periods ended September 30, 2017 and 2016 and nil and $16.4 million for the nine months ended September 30, 2017 and 2016, respectively. Gross realized gains were nil for both the three month periods ended September 30, 2017 and 2016, and nil and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively. Gross realized losses were nil or not material for all periods presented.

Loans receivable. The components of loans receivable were summarized as follows:



	September 30, 2017			December 31, 2016
(in thousands)
Real estate:
Residential 1-4 family	$	2,066,023		$	2,048,051
Commercial real estate	745,583			800,395
Home equity line of credit	905,249			863,163
Residential land	18,611			18,889
Commercial construction	128,407			126,768
Residential construction	13,031			16,080
Total real estate	3,876,904			3,873,346
Commercial	589,669			692,051
Consumer	211,571			178,222
Total loans	4,678,144			4,743,619
Less: Deferred fees and discounts	(1,863		)	(4,926		)
Allowance for loan losses	(53,047		)	(55,533		)
Total loans, net	$	4,623,234		$	4,683,160

ASB's policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination. ASB is subject to the risk that the insurance company cannot satisfy the bank's claim on policies.

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 September 30, 2017
Allowance for loan losses:
Beginning balance	$	3,130		$	18,840		$	5,527		$	1,264		$	4,706		$	9		$	14,552		$	8,328		$	—	$	56,356
Charge-offs	(522		)	—			—			—			—			—			(1,215		)	(3,160		)	—		(4,897		)
Recoveries	33			—			164			259			—			—			326			316			—		1,098
Provision	347			(2,800		)	(36		)	(141		)	370			2			(595		)	3,343			—		490
Ending balance	$	2,988		$	16,040		$	5,655		$	1,382		$	5,076		$	11		$	13,068		$	8,827		$	—	$	53,047
Three months ended September 30, 2016
Allowance for loan losses:
Beginning balance	$	4,384		$	13,561		$	7,836		$	1,689		$	6,993		$	12		$	17,085		$	3,771		$	—	$	55,331
Charge-offs	(373		)	—			(108		)	—			—			—			(833		)	(1,879		)	—		(3,193		)
Recoveries	92			—			15			187			—			—			347			211			—		852
Provision	154			1,289			(248		)	23			179			(2		)	2,457			1,895			—		5,747
Ending balance	$	4,257		$	14,850		$	7,495		$	1,899		$	7,172		$	10		$	19,056		$	3,998		$	—	$	58,737
Nine months ended September 30, 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	(528		)	—			(14		)	(92		)	—			—			(3,477		)	(8,360		)	—		(12,471		)
Recoveries	91			—			294			477			—			—			922			970			—		2,754
Provision	552			36			336			(741		)	(1,373		)	(1		)	(995		)	9,417			—		7,231
Ending balance	$	2,988		$	16,040		$	5,655		$	1,382		$	5,076		$	11		$	13,068		$	8,827		$	—	$	53,047
September 30, 2017
Ending balance: individually evaluated for impairment	$	1,317		$	72		$	409		$	373		$	—		$	—		$	667		$	30				$	2,868
Ending balance: collectively evaluated for impairment	$	1,671		$	15,968		$	5,246		$	1,009		$	5,076		$	11		$	12,401		$	8,797		$	—	$	50,179
Financing Receivables:
Ending balance	$	2,066,023		$	745,583		$	905,249		$	18,611		$	128,407		$	13,031		$	589,669		$	211,571				$	4,678,144
Ending balance: individually evaluated for impairment	$	19,757		$	1,281		$	7,078		$	2,385		$	—		$	—		$	5,486		$	67				$	36,054
Ending balance: collectively evaluated for impairment	$	2,046,266		$	744,302		$	898,171		$	16,226		$	128,407		$	13,031		$	584,183		$	211,504				$	4,642,090
Nine months ended September 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	(433		)	—			(108		)	—			—			—			(3,138		)	(4,977		)	—		(8,656		)
Recoveries	144			—			46			306			—			—			907			686			—		2,089
Provision	360			3,508			297			(78		)	2,711			(3		)	4,079			4,392			—		15,266
Ending balance	$	4,257		$	14,850		$	7,495		$	1,899		$	7,172		$	10		$	19,056		$	3,998		$	—	$	58,737
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:



	September 30, 2017						December 31, 2016
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	647,599	$	103,892	$	539,336	$	701,657	$	102,955	$	614,139
Special mention	44,088		22,500		25,053		65,541		—		25,229
Substandard	53,896		2,015		23,130		33,197		23,813		52,683
Doubtful	—		—		2,150		—		—		—
Loss	—		—		—		—		—		—
Total	$	745,583	$	128,407	$	589,669	$	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
September 30, 2017
Real estate:
Residential 1-4 family	$	3,905	$	1,513	$	4,452	$	9,870	$	2,056,153	$	2,066,023	$	—
Commercial real estate	5,414		—		—		5,414		740,169		745,583		—
Home equity line of credit	1,936		177		1,367		3,480		901,769		905,249		—
Residential land	498		984		497		1,979		16,632		18,611		—
Commercial construction	—		—		—		—		128,407		128,407		—
Residential construction	—		—		—		—		13,031		13,031		—
Commercial	1,095		218		648		1,961		587,708		589,669		—
Consumer	2,508		1,465		1,178		5,151		206,420		211,571		—
Total loans	$	15,356	$	4,357	$	8,142	$	27,855	$	4,650,289	$	4,678,144	$	—
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)	September 30, 2017		December 31, 2016
Real estate:
Residential 1-4 family	$	12,853	$	11,154
Commercial real estate	—		223
Home equity line of credit	4,000		3,080
Residential land	1,022		878
Commercial construction	—		—
Residential construction	—		—
Commercial	3,691		6,708
Consumer	1,791		1,282
Total nonaccrual loans	$	23,357	$	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	$	11,592	$	14,450
Commercial real estate	1,281		1,346
Home equity line of credit	5,250		4,934
Residential land	1,555		2,751
Commercial construction	—		—
Residential construction	—		—
Commercial	2,052		14,146
Consumer	67		10
Total troubled debt restructured loans not included above	$	21,797	$	37,637

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



	September 30, 2017						Three months ended September 30, 2017				Nine months ended September 30, 2017
(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	$	9,987	$	10,541	$	—	$	9,650	$	70	$	9,503	$	230
Commercial real estate	—		—		—		—		—		121		11
Home equity line of credit	1,565		1,889		—		1,918		32		2,108		97
Residential land	1,134		1,425		—		1,209		73		1,080		107
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	2,901		6,257		—		1,808		29		2,888		37
Consumer	—		—		—		—		—		—		—
	$	15,587	$	20,112	$	—	$	14,585	$	204	$	15,700	$	482
With an allowance recorded
Real estate:
Residential 1-4 family	$	9,770	$	9,972	$	1,317	$	9,788	$	97	$	9,963	$	333
Commercial real estate	1,281		1,281		72		1,284		13		1,292		41
Home equity line of credit	5,513		5,543		409		5,076		68		4,670		164
Residential land	1,251		1,251		373		1,251		12		1,620		73
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	2,585		2,595		667		2,482		225		4,104		694
Consumer	67		67		30		67		1		55		2
	$	20,467	$	20,709	$	2,868	$	19,948	$	416	$	21,704	$	1,307
Total
Real estate:
Residential 1-4 family	$	19,757	$	20,513	$	1,317	$	19,438	$	167	$	19,466	$	563
Commercial real estate	1,281		1,281		72		1,284		13		1,413		52
Home equity line of credit	7,078		7,432		409		6,994		100		6,778		261
Residential land	2,385		2,676		373		2,460		85		2,700		180
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	5,486		8,852		667		4,290		254		6,992		731
Consumer	67		67		30		67		1		55		2
	$	36,054	$	40,821	$	2,868	$	34,533	$	620	$	37,404	$	1,789



	December 31, 2016						Three months ended September 30, 2016				Nine months ended September 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	$	9,571	$	10,400	$	—	$	10,069	$	65	$	10,378	$	268
Commercial real estate	223		228		—		1,206		—		1,177		—
Home equity line of credit	1,500		1,900		—		1,220		6		1,035		15
Residential land	1,218		1,803		—		1,521		16		1,532		47
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	6,299		8,869		—		14,352		141		9,240		154
Consumer	—		—		—		10		—		3		—
	$	18,811	$	23,200	$	—	$	28,378	$	228	$	23,365	$	484
With an allowance recorded
Real estate:
Residential 1-4 family	$	10,283	$	10,486	$	1,352	$	11,800	$	119	$	11,933	$	356
Commercial real estate	1,346		1,346		80		2,444		—		1,939		—
Home equity line of credit	4,658		4,712		215		4,165		36		3,470		91
Residential land	2,411		2,411		789		2,915		44		3,090		165
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	14,240		14,240		1,641		11,433		65		15,075		275
Consumer	10		10		6		11		—		12		—
	$	32,948	$	33,205	$	4,083	$	32,768	$	264	$	35,519	$	887
Total
Real estate:
Residential 1-4 family	$	19,854	$	20,886	$	1,352	$	21,869	$	184	$	22,311	$	624
Commercial real estate	1,569		1,574		80		3,650		—		3,116		—
Home equity line of credit	6,158		6,612		215		5,385		42		4,505		106
Residential land	3,629		4,214		789		4,436		60		4,622		212
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	20,539		23,109		1,641		25,785		206		24,315		429
Consumer	10		10		6		21		—		15		—
	$	51,759	$	56,405	$	4,083	$	61,146	$	492	$	58,884	$	1,371


*	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 third quarters and first nine months of 2017 and 2016 and the impact on the allowance for loan losses were as follows:



	Three months ended September 30, 2017							Nine months ended September 30, 2017
	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	$	83	$	83	$	—	7	$	955	$	963	$	45
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	15	862		862		184		28	1,386		1,372		277
Residential land	—	—		—		—		—	—		—		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	1	330		330		38		2	672		672		38
Consumer	—	—		—		—		1	59		59		27
	18	$	1,275	$	1,275	$	222	38	$	3,072	$	3,066	$	387



	Three months ended September 30, 2016							Nine months ended September 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	2	$	251	$	251	$	46	11	$	2,239	$	2,351	$	305
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	12	1,268		1,268		237		30	2,705		2,705		492
Residential land	—	—		—		—		1	120		121		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	6	3,462		3,462		53		14	20,119		20,119		723
Consumer	—	—		—		—		—	—		—		—
	20	$	4,981	$	4,981	$	336	56	$	25,183	$	25,296	$	1,520


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



	Three months ended September 30, 2017			Nine months ended September 30, 2017
(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	$	222
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		—	—
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	—	—		—	—
Consumer	—	—		—	—
	—	$	—	1	$	222



	Three months ended September 30, 2016			Nine months ended September 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	$	239	1	$	239
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		—	—
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	—	—		1	25
Consumer	—	—		—	—
	1	$	239	2	$	264

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 nil and $2.6 million at September 30, 2017 and December 31, 2016, respectively.

The Company had $4.9 million and $3.9 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at September 30, 2017 and December 31, 2016, respectively.

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 $39.8 million and $70.0 million for the three months ended September 30, 2017 and 2016 and $119.7 million and $168.5 million for the nine months ended September 30, 2017 and 2016, respectively, and recognized gains on such sales of $0.5 million and $2.4 million for the three months ended September 30, 2017 and 2016 and $1.9 million and $5.1 million for the nine months ended September 30, 2017 and 2016, respectively.

There were no repurchased mortgage loans for the three and nine months ended September 30, 2017 and 2016. The repurchase reserve was $0.1 million as of September 30, 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 September 30, 2017 and 2016, respectively and $2.3 million and $2.1 million for the nine months ended September 30, 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
September 30, 2017	$	18,463	$	(9,393	)	$	—	$	9,070
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:



	Three months ended September 30						Nine months ended September 30
(in thousands)	2017			2016			2017			2016
Mortgage servicing rights
Beginning balance	$	9,181		$	9,016		$	9,373		$	8,884
Amount capitalized	394			824			1,192			1,944
Amortization	(505		)	(649		)	(1,495		)	(1,637		)
Other-than-temporary impairment	—			—			—			—
Carrying amount before valuation allowance	9,070			9,191			9,070			9,191
Valuation allowance for mortgage servicing rights
Beginning balance	—			—			—			—
Provision (recovery)	—			—			—			—
Other-than-temporary impairment	—			—			—			—
Ending balance	—			—			—			—
Net carrying value of mortgage servicing rights	$	9,070		$	9,191		$	9,070		$	9,191

ASB capitalizes mortgage servicing rights acquired through either the purchase or upon the sale of mortgage loans 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 “Revenues - bank” 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)	September 30, 2017			December 31, 2016
Unpaid principal balance	$	1,212,730		$	1,188,380
Weighted average note rate	3.94		%	3.96		%
Weighted average discount rate	10.0		%	9.4		%
Weighted average prepayment speed	9.2		%	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)	September 30, 2017			December 31, 2016
Prepayment rate:
25 basis points adverse rate change	$	(878	)	$	(567	)
50 basis points adverse rate change	(1,847		)	(1,154		)
Discount rate:
25 basis points adverse rate change	(111		)	(128		)
50 basis points adverse rate change	(220		)	(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 condensed consolidated balance sheets. 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
September 30, 2017
Financial institution	$	—	$	—	$	—
Government entities	—		—		—
Commercial account holders	104		165		—
Total	$	104	$	165	$	—
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. 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:



	September 30, 2017					December 31, 2016
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	385	$	7		$	25,883	$	421
Forward commitments	500		(2		)	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	September 30, 2017				December 31, 2016
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	7	$	—	$	445	$	24
Forward commitments	—		2		8		185
	$	7	$	2	$	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 ASB’s 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)		2017			2016		2017			2016
Interest rate lock commitments	Mortgage banking income	$	(119	)	$	48	$	(414	)	$	459
Forward commitments	Mortgage banking income	(90		)	103		175			(134		)
		$	(209	)	$	151	$	(239	)	$	325

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $18.6 million and $14.0 million at September 30, 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. As of September 30, 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

September 30, 2017

December 31, 2016