Bank segment

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



	Three months ended March 31
(in thousands)	2018		2017
Interest and dividend income
Interest and fees on loans	$	52,800	$	50,742
Interest and dividends on investment securities	9,202		6,980
Total interest and dividend income	62,002		57,722
Interest expense
Interest on deposit liabilities	2,957		2,103
Interest on other borrowings	496		816
Total interest expense	3,453		2,919
Net interest income	58,549		54,803
Provision for loan losses	3,541		3,907
Net interest income after provision for loan losses	55,008		50,896
Noninterest income
Fees from other financial services	4,654		5,610
Fee income on deposit liabilities	5,189		5,428
Fee income on other financial products	1,654		1,866
Bank-owned life insurance	871		983
Mortgage banking income	613		789
Other income, net	436		458
Total noninterest income	13,417		15,134
Noninterest expense
Compensation and employee benefits	24,440		23,042
Occupancy	4,280		4,154
Data processing	3,464		3,280
Services	3,047		2,360
Equipment	1,728		1,748
Office supplies, printing and postage	1,507		1,535
Marketing	645		517
FDIC insurance	713		728
Other expense	4,101		4,506
Total noninterest expense	43,925		41,870
Income before income taxes	24,500		24,160
Income taxes	5,540		8,347
Net income	$	18,960	$	15,813

Reconciliation to amounts per HEI Condensed Consolidated Statements of Income*:



	Three months ended March 31
(in thousands)	2018			2017
Interest and dividend income	$	62,002		$	57,722
Noninterest income	13,417			15,134
*Revenues-Bank	75,419			72,856
Total interest expense	3,453			2,919
Provision for loan losses	3,541			3,907
Noninterest expense	43,925			41,870
Less: Retirement defined benefits expense—other than service costs	(387		)	(195		)
*Expenses-Bank	50,532			48,501
*Operating income-Bank	24,887			24,355
Add back: Retirement defined benefits expense—other than service costs	387			195
Income before income taxes	$	24,500		$	24,160

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended March 31
(in thousands)	2018			2017
Net income	$	18,960		$	15,813
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 $4,867 and $(148), respectively	(13,297		)	223
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 $694 and $404, respectively	1,222			612
Other comprehensive income (loss), net of taxes	(12,075		)	835
Comprehensive income	$	6,885		$	16,648

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	March 31, 2018						December 31, 2017
Assets
Cash and due from banks				$	123,580					$	140,934
Interest-bearing deposits				90,643						93,165
Investment securities
Available-for-sale, at fair value				1,418,490						1,401,198
Held-to-maturity, at amortized cost (fair value of $42,491 and $44,412, respectively)				43,450						44,515
Stock in Federal Home Loan Bank, at cost				10,158						9,706
Loans held for investment				4,742,024						4,670,768
Allowance for loan losses				(53,895		)				(53,637		)
Net loans				4,688,129						4,617,131
Loans held for sale, at lower of cost or fair value				7,379						11,250
Other				425,426						398,570
Goodwill				82,190						82,190
Total assets				$	6,889,445					$	6,798,659
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,795,114					$	1,760,233
Deposit liabilities—interest-bearing				4,283,953						4,130,364
Other borrowings				100,430						190,859
Other				106,482						110,356
Total liabilities				6,285,979						6,191,812
Commitments and contingencies
Common stock				1						1
Additional paid in capital				345,652						345,018
Retained earnings				300,837						292,957
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities	$	(28,248	)				$	(14,951	)
Retirement benefit plans	(14,776		)	(43,024		)	(16,178		)	(31,129		)
Total shareholder’s equity				603,466						606,847
Total liabilities and shareholder’s equity				$	6,889,445					$	6,798,659

Other assets
Bank-owned life insurance				$	149,656					$	148,775
Premises and equipment, net				164,702						136,270
Prepaid expenses				4,549						3,961
Accrued interest receivable				18,461						18,724
Mortgage-servicing rights				8,541						8,639
Low-income housing equity investments				57,222						59,016
Real estate acquired in settlement of loans, net				—						133
Other				22,295						23,052
				$	425,426					$	398,570
Other liabilities
Accrued expenses				$	49,034					$	39,312
Federal and state income taxes payable				1,369						3,736
Cashier’s checks				22,990						27,000
Advance payments by borrowers				6,255						10,245
Other				26,834						30,063
				$	106,482					$	110,356

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 $50 million and $50 million, respectively, as of March 31, 2018 and $141 million and $50 million, respectively, as of December 31, 2017.

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, 2018
Available-for-sale
U.S. Treasury and federal agency obligations	$	181,919	$	164	$	(3,255	)	$	178,828	18	$	93,034	$	(1,424	)	9	$	68,489	$	(1,831	)
Mortgage-related securities- FNMA, FHLMC and GNMA	1,259,732		389		(35,886		)	1,224,235		86	762,936		(17,161		)	79	447,876		(18,725		)
Mortgage revenue bond	15,427		—		—			15,427		—	—		—			—	—		—
	$	1,457,078	$	553	$	(39,141	)	$	1,418,490	104	$	855,970	$	(18,585	)	88	$	516,365	$	(20,556	)
Held-to-maturity
Mortgage-related securities- FNMA, FHLMC and GNMA	$	43,450	$	—	$	(959	)	$	42,491	3	$	42,491	$	(959	)	—	$	—	$	—
	$	43,450	$	—	$	(959	)	$	42,491	3	$	42,491	$	(959	)	—	$	—	$	—
December 31, 2017
Available-for-sale
U.S. Treasury and federal agency obligations	$	185,891	$	438	$	(2,031	)	$	184,298	15	$	83,137	$	(825	)	8	$	62,296	$	(1,206	)
Mortgage-related securities- FNMA, FHLMC and GNMA	1,220,304		793		(19,624		)	1,201,473		67	653,635		(6,839		)	77	459,912		(12,785		)
Mortgage revenue bond	15,427		—		—			15,427		—	—		—			—	—		—
	$	1,421,622	$	1,231	$	(21,655	)	$	1,401,198	82	$	736,772	$	(7,664	)	85	$	522,208	$	(13,991	)
Held-to-maturity
Mortgage-related securities- FNMA, FHLMC and GNMA	$	44,515	$	1	$	(104	)	$	44,412	2	$	35,744	$	(104	)	—	$	—	$	—
	$	44,515	$	1	$	(104	)	$	44,412	2	$	35,744	$	(104	)	—	$	—	$	—

ASB does not believe that the investment securities that were in an unrealized loss position at March 31, 2018, 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 ended March 31, 2018 and 2017.

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 investment securities were as follows:



March 31, 2018	Amortized cost		Fair value
(in thousands)
Available-for-sale
Due in one year or less	$	15,000	$	14,902
Due after one year through five years	83,983		82,887
Due after five years through ten years	69,986		68,521
Due after ten years	28,377		27,945
	197,346		194,255
Mortgage-related securities-FNMA, FHLMC and GNMA	1,259,732		1,224,235
Total available-for-sale securities	$	1,457,078	$	1,418,490
Held-to-maturity
Mortgage-related securities-FNMA, FHLMC and GNMA	$	43,450	$	42,491
Total held-to-maturity securities	$	43,450	$	42,491

Proceeds from the sale of available-for-sale securities were nil for both the three months ended March 31, 2018 and 2017. Gross realized gains and losses were nil for both the three months ended March 31, 2018 and 2017.

Loans. The components of loans were summarized as follows:



	March 31, 2018			December 31, 2017
(in thousands)
Real estate:
Residential 1-4 family	$	2,116,121		$	2,118,047
Commercial real estate	766,522			733,106
Home equity line of credit	914,941			913,052
Residential land	16,569			15,797
Commercial construction	114,535			108,273
Residential construction	15,363			14,910
Total real estate	3,944,051			3,903,185
Commercial	568,371			544,828
Consumer	230,258			223,564
Total loans	4,742,680			4,671,577
Less: Deferred fees and discounts	(656		)	(809		)
Allowance for loan losses	(53,895		)	(53,637		)
Total loans, net	$	4,688,129		$	4,617,131

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 private mortgage 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 March 31, 2018
Allowance for loan losses:
Beginning balance	$	2,902		$	15,796	$	7,522		$	896		$	4,671		$	12		$	10,851		$	10,987		$	—	$	53,637
Charge-offs	(31		)	—		—			(8		)	—			—			(602		)	(4,232		)	—		(4,873		)
Recoveries	54			—		14			5			—			—			1,170			347			—		1,590
Provision	(400		)	163		446			(219		)	(310		)	(8		)	(1,064		)	4,933			—		3,541
Ending balance	$	2,525		$	15,959	$	7,982		$	674		$	4,361		$	4		$	10,355		$	12,035		$	—	$	53,895
March 31, 2018
Ending balance: individually evaluated for impairment	$	1,207		$	68	$	892		$	17		$	—		$	—		$	519		$	3				$	2,706
Ending balance: collectively evaluated for impairment	$	1,318		$	15,891	$	7,090		$	657		$	4,361		$	4		$	9,836		$	12,032		$	—	$	51,189
Financing Receivables:
Ending balance	$	2,116,121		$	766,522	$	914,941		$	16,569		$	114,535		$	15,363		$	568,371		$	230,258				$	4,742,680
Ending balance: individually evaluated for impairment	$	17,728		$	1,004	$	10,265		$	1,184		$	—		$	—		$	4,385		$	65				$	34,631
Ending balance: collectively evaluated for impairment	$	2,098,393		$	765,518	$	904,676		$	15,385		$	114,535		$	15,363		$	563,986		$	230,193				$	4,708,049
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
December 31, 2017
Ending balance: individually evaluated for impairment	$	1,248		$	65	$	647		$	47		$	—		$	—		$	694		$	29				$	2,730
Ending balance: collectively evaluated for impairment	$	1,654		$	15,731	$	6,875		$	849		$	4,671		$	12		$	10,157		$	10,958		$	—	$	50,907
Financing Receivables:
Ending balance	$	2,118,047		$	733,106	$	913,052		$	15,797		$	108,273		$	14,910		$	544,828		$	223,564				$	4,671,577
Ending balance: individually evaluated for impairment	$	18,284		$	1,016	$	8,188		$	1,265		$	—		$	—		$	4,574		$	66				$	33,393
Ending balance: collectively evaluated for impairment	$	2,099,763		$	732,090	$	904,864		$	14,532		$	108,273		$	14,910		$	540,254		$	223,498				$	4,638,184

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 commercial and commercial real estate 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, 2018						December 31, 2017
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	667,555	$	89,802	$	518,819	$	630,877	$	83,757	$	492,942
Special mention	46,283		22,500		27,876		49,347		22,500		27,997
Substandard	52,684		2,233		21,676		52,882		2,016		23,421
Doubtful	—		—		—		—		—		468
Loss	—		—		—		—		—		—
Total	$	766,522	$	114,535	$	568,371	$	733,106	$	108,273	$	544,828

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, 2018
Real estate:
Residential 1-4 family	$	1,902	$	662	$	4,605	$	7,169	$	2,108,952	$	2,116,121	$	—
Commercial real estate	—		—		—		—		766,522		766,522		—
Home equity line of credit	1,943		1,350		2,121		5,414		909,527		914,941		—
Residential land	—		—		640		640		15,929		16,569		—
Commercial construction	—		—		—		—		114,535		114,535		—
Residential construction	—		—		—		—		15,363		15,363		—
Commercial	344		689		232		1,265		567,106		568,371		—
Consumer	2,889		1,523		1,856		6,268		223,990		230,258		—
Total loans	$	7,078	$	4,224	$	9,454	$	20,756	$	4,721,924	$	4,742,680	$	—
December 31, 2017
Real estate:
Residential 1-4 family	$	1,532	$	1,715	$	5,071	$	8,318	$	2,109,729	$	2,118,047	$	—
Commercial real estate	—		—		—		—		733,106		733,106		—
Home equity line of credit	425		114		2,051		2,590		910,462		913,052		—
Residential land	23		—		625		648		15,149		15,797		—
Commercial construction	—		—		—		—		108,273		108,273		—
Residential construction	—		—		—		—		14,910		14,910		—
Commercial	1,825		2,025		730		4,580		540,248		544,828		—
Consumer	3,432		2,159		1,876		7,467		216,097		223,564		—
Total loans	$	7,237	$	6,013	$	10,353	$	23,603	$	4,647,974	$	4,671,577	$	—

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



(in thousands)	March 31, 2018		December 31, 2017
Real estate:
Residential 1-4 family	$	13,578	$	12,598
Commercial real estate	—		—
Home equity line of credit	5,049		4,466
Residential land	853		841
Commercial construction	—		—
Residential construction	—		—
Commercial	2,714		3,069
Consumer	2,949		2,617
Total nonaccrual loans	$	25,143	$	23,591
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	$	10,874	$	10,982
Commercial real estate	1,004		1,016
Home equity line of credit	8,467		6,584
Residential land	331		425
Commercial construction	—		—
Residential construction	—		—
Commercial	1,886		1,741
Consumer	65		66
Total troubled debt restructured loans not included above	$	22,627	$	20,814

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



	March 31, 2018						Three months ended March 31, 2018
(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	$	8,673	$	9,205	$	—	$	8,496	$	107
Commercial real estate	—		—		—		—		—
Home equity line of credit	1,690		1,982		—		1,700		5
Residential land	1,130		1,429		—		1,168		5
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	2,499		3,411		—		2,357		10
Consumer	7		7		—		7		—
	$	13,999	$	16,034	$	—	$	13,728	$	127
With an allowance recorded
Real estate:
Residential 1-4 family	$	9,055	$	9,258	$	1,207	$	9,129	$	93
Commercial real estate	1,004		1,004		68		1,008		11
Home equity line of credit	8,575		8,619		892		7,741		81
Residential land	54		54		17		77		2
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	1,886		1,886		519		1,957		36
Consumer	58		58		3		58		1
	$	20,632	$	20,879	$	2,706	$	19,970	$	224
Total
Real estate:
Residential 1-4 family	$	17,728	$	18,463	$	1,207	$	17,625	$	200
Commercial real estate	1,004		1,004		68		1,008		11
Home equity line of credit	10,265		10,601		892		9,441		86
Residential land	1,184		1,483		17		1,245		7
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	4,385		5,297		519		4,314		46
Consumer	65		65		3		65		1
	$	34,631	$	36,913	$	2,706	$	33,698	$	351



	December 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	$	9,097	$	9,644	$	—	$	9,555	$	84
Commercial real estate	—		—		—		220		—
Home equity line of credit	1,496		1,789		—		2,004		14
Residential land	1,143		1,434		—		957		26
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	2,328		3,166		—		4,907		6
Consumer	8		8		—		—		—
	$	14,072	$	16,041	$	—	$	17,643	$	130
With an allowance recorded
Real estate:
Residential 1-4 family	$	9,187	$	9,390	$	1,248	$	10,048	$	119
Commercial real estate	1,016		1,016		65		1,300		14
Home equity line of credit	6,692		6,736		647		4,562		49
Residential land	122		122		47		2,076		37
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	2,246		2,252		694		7,268		401
Consumer	58		58		29		30		—
	$	19,321	$	19,574	$	2,730	$	25,284	$	620
Total
Real estate:
Residential 1-4 family	$	18,284	$	19,034	$	1,248	$	19,603	$	203
Commercial real estate	1,016		1,016		65		1,520		14
Home equity line of credit	8,188		8,525		647		6,566		63
Residential land	1,265		1,556		47		3,033		63
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	4,574		5,418		694		12,175		407
Consumer	66		66		29		30		—
	$	33,393	$	35,615	$	2,730	$	42,927	$	750


*	Since loan was classified as impaired.

Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider. 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 during the first quarters of 2018 and 2017 and the impact on the allowance for loan losses were as follows:



	Three months ended March 31, 2018
	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	1	$	339	$	344	$	16
Commercial real estate	—	—		—		—
Home equity line of credit	18	2,170		2,174		388
Residential land	1	109		109		—
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	5	2,251		2,251		—
Consumer	—	—		—		—
	25	$	4,869	$	4,878	$	404



	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


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 2018 and 2017, and for which the payment of default occurred within one year of the modification, were as follows:



	Three months ended March 31, 2018			Three months ended March 31, 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	$	49	1	$	301
Commercial real estate	—	—		—	—
Home equity line of credit	1	86		—	—
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	—	—		—	—
Consumer	—	—		—	—
	2	$	135	1	$	301

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 at March 31, 2018 and December 31, 2017.

The Company had $4.0 million and $4.3 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at March 31, 2018 and December 31, 2017, 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 $33.1 million and $40.6 million for the three months ended March 31, 2018 and 2017, respectively, and recognized gains on such sales of $0.6 million and $0.8 million for the three months ended March 31, 2018 and 2017, respectively.

There were no repurchased mortgage loans for the three months ended March 31, 2018 and 2017. The repurchase reserve was $0.1 million as of March 31, 2018 and 2017.

Mortgage servicing fees, a component of other income, net, were $0.7 million and $0.8 million for the three months ended March 31, 2018 and 2017, 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, 2018	$	17,846	$	(9,305	)	$	—	$	8,541
December 31, 2017	17,511		(8,872		)	—		8,639

¹ Reflects the impact of loans paid in full.

Changes related to mortgage servicing rights were as follows:



	Three months ended March 31
(in thousands)	2018			2017
Mortgage servicing rights
Beginning balance	$	8,639		$	9,373
Amount capitalized	335			436
Amortization	(433		)	(515		)
Other-than-temporary impairment	—			—
Carrying amount before valuation allowance	8,541			9,294
Valuation allowance for mortgage servicing rights
Beginning balance	—			—
Provision (recovery)	—			—
Other-than-temporary impairment	—			—
Ending balance	—			—
Net carrying value of mortgage servicing rights	$	8,541		$	9,294

ASB capitalizes mortgage servicing rights (MSRs) acquired 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)	March 31, 2018			December 31, 2017
Unpaid principal balance	$	1,184,160		$	1,195,454
Weighted average note rate	3.94		%	3.94		%
Weighted average discount rate	10.0		%	10.0		%
Weighted average prepayment speed	7.1		%	9.0		%

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, 2018			December 31, 2017
Prepayment rate:
25 basis points adverse rate change	$	(378	)	$	(869	)
50 basis points adverse rate change	(883		)	(1,828		)
Discount rate:
25 basis points adverse rate change	(127		)	(111		)
50 basis points adverse rate change	(252		)	(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 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:



(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, 2018	$	50	$	—	$	50
December 31, 2017	141		—		141



	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, 2018
Commercial account holders	$	50	$	97	$	—
Total	$	50	$	97	$	—
December 31, 2017
Commercial account holders	$	141	$	165	$	—
Total	$	141	$	165	$	—

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:



	March 31, 2018					December 31, 2017
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	24,741	$	255		$	13,669	$	131
Forward commitments	26,844		(60		)	14,465		(24		)

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, 2018				December 31, 2017
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	264	$	9	$	133	$	2
Forward commitments	18		78		4		28
	$	282	$	87	$	137	$	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 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 March 31
(in thousands)		2018			2017
Interest rate lock commitments	Mortgage banking income	$	124		$	(104	)
Forward commitments	Mortgage banking income	(36		)	73
		$	88		$	(31	)

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $14.4 million and $15.8 million at March 31, 2018 and December 31, 2017, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of March 31, 2018, 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.