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)	2018		2017		2018		2017
Interest and dividend income
Interest and fees on loans	$	55,885	$	52,210	$	163,318	$	155,269
Interest and dividends on investment securities	9,300		6,850		27,130		20,593
Total interest and dividend income	65,185		59,060		190,448		175,862
Interest expense
Interest on deposit liabilities	3,635		2,444		9,876		6,858
Interest on other borrowings	404		470		1,293		2,110
Total interest expense	4,039		2,914		11,169		8,968
Net interest income	61,146		56,146		179,279		166,894
Provision for loan losses	6,033		490		12,337		7,231
Net interest income after provision for loan losses	55,113		55,656		166,942		159,663
Noninterest income
Fees from other financial services	4,543		5,635		13,941		17,055
Fee income on deposit liabilities	5,454		5,533		15,781		16,526
Fee income on other financial products	1,746		1,904		5,075		5,741
Bank-owned life insurance	2,663		1,257		4,667		4,165
Mortgage banking income	169		520		1,399		1,896
Other income, net	736		380		1,708		1,229
Total noninterest income	15,311		15,229		42,571		46,612
Noninterest expense
Compensation and employee benefits	23,952		23,512		72,047		71,095
Occupancy	4,363		4,284		12,837		12,623
Data processing	3,583		3,262		10,587		9,749
Services	2,485		2,863		8,560		7,989
Equipment	1,783		1,814		5,385		5,333
Office supplies, printing and postage	1,556		1,444		4,554		4,506
Marketing	993		934		2,723		2,290
FDIC insurance	638		746		2,078		2,296
Other expense	4,240		5,262		12,897		14,674
Total noninterest expense	43,593		44,121		131,668		130,555
Income before income taxes	26,831		26,764		77,845		75,720
Income taxes	5,610		9,172		17,103		25,582
Net income	$	21,221	$	17,592	$	60,742	$	50,138

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



	Three months ended September 30						Nine months ended September 30
(in thousands)	2018			2017			2018			2017
Interest and dividend income	65,185			59,060			$	190,448		$	175,862
Noninterest income	15,311			15,229			42,571			46,612
*Revenues-Bank	80,496			74,289			233,019			222,474
Total interest expense	4,039			2,914			11,169			8,968
Provision for loan losses	6,033			490			12,337			7,231
Noninterest expense	43,593			44,121			131,668			130,555
Less: Retirement defined benefits expense—other than service costs	(433		)	(212		)	(1,223		)	(608		)
*Expenses-Bank	53,232			47,313			153,951			146,146
*Operating income-Bank	27,264			26,976			79,068			76,328
Add back: Retirement defined benefits expense—other than service costs	433			212			1,223			608
Income before income taxes	$	26,831		$	26,764		$	77,845		$	75,720

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended September 30					Nine months ended September 30
(in thousands)	2018			2017		2018			2017
Net income	$	21,221		$	17,592	$	60,742		$	50,138
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 tax benefits (taxes) of $1,876, $(137), $8,335 and $(1,619), respectively	(5,123		)	208		(22,768		)	2,452
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 $141, $138, $968 and $675, respectively	382			209		1,970			1,023
Other comprehensive income (loss), net of taxes	(4,741		)	417		(20,798		)	3,475
Comprehensive income	$	16,480		$	18,009	$	39,944		$	53,613

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	September 30, 2018						December 31, 2017
Assets
Cash and due from banks				$	119,453					$	140,934
Interest-bearing deposits				39,575						93,165
Investment securities
Available-for-sale, at fair value				1,387,571						1,401,198
Held-to-maturity, at amortized cost (fair value of $99,929 and $44,412, respectively)				102,498						44,515
Stock in Federal Home Loan Bank, at cost				8,158						9,706
Loans held for investment				4,754,359						4,670,768
Allowance for loan losses				(54,127		)				(53,637		)
Net loans				4,700,232						4,617,131
Loans held for sale, at lower of cost or fair value				1,036						11,250
Other				488,743						398,570
Goodwill				82,190						82,190
Total assets				$	6,929,456					$	6,798,659
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,789,351					$	1,760,233
Deposit liabilities—interest-bearing				4,341,064						4,130,364
Other borrowings				71,110						190,859
Other				115,401						110,356
Total liabilities				6,316,926						6,191,812
Commitments and contingencies
Common stock				1						1
Additional paid in capital				346,757						345,018
Retained earnings				317,519						292,957
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities	$	(37,719	)				$	(14,951	)
Retirement benefit plans	(14,028		)	(51,747		)	(16,178		)	(31,129		)
Total shareholder’s equity				612,530						606,847
Total liabilities and shareholder’s equity				$	6,929,456					$	6,798,659

Other assets
Bank-owned life insurance				$	150,772					$	148,775
Premises and equipment, net				203,062						136,270
Prepaid expenses				5,477						3,961
Accrued interest receivable				19,818						18,724
Mortgage-servicing rights				8,426						8,639
Low-income housing equity investments				69,865						59,016
Real estate acquired in settlement of loans, net				438						133
Other				30,885						23,052
				$	488,743					$	398,570
Other liabilities
Accrued expenses				$	56,830					$	39,312
Federal and state income taxes payable				1,287						3,736
Cashier’s checks				23,711						27,000
Advance payments by borrowers				4,998						10,245
Other				28,575						30,063
				$	115,401					$	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 $71 million and nil, respectively, as of September 30, 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
September 30, 2018
Available-for-sale
U.S. Treasury and federal agency obligations	$	175,144	$	24	$	(4,754	)	$	170,414	11	$	67,258	$	(1,339	)	17	$	93,132	$	(3,415	)
Mortgage-related securities- FNMA, FHLMC and GNMA	1,195,492		292		(47,094		)	1,148,690		59	473,714		(13,996		)	111	666,149		(33,098		)
Corporate bonds	49,378		46		(41		)	49,383		5	22,839		(41		)	—	—		—
Mortgage revenue bonds	19,084		—		—			19,084		—	—		—			—	—		—
	$	1,439,098	$	362	$	(51,889	)	$	1,387,571	75	$	563,811	$	(15,376	)	128	$	759,281	$	(36,513	)
Held-to-maturity
Mortgage-related securities- FNMA, FHLMC and GNMA	$	102,498	$	—	$	(2,569	)	$	99,929	7	$	99,929	$	(2,569	)	—	$	—	$	—
	$	102,498	$	—	$	(2,569	)	$	99,929	7	$	99,929	$	(2,569	)	—	$	—	$	—
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 September 30, 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. The corporate bonds are all investment grade and rated A- or higher. 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 months ended September 30, 2018 and 2017.

U.S. Treasury, federal agency obligations, corporate bonds, and mortgage revenue bonds 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:



September 30, 2018	Amortized cost		Fair value
(in thousands)
Available-for-sale
Due in one year or less	$	25,004	$	24,896
Due after one year through five years	108,364		106,774
Due after five years through ten years	82,720		80,439
Due after ten years	27,518		26,772
	243,606		238,881
Mortgage-related securities-FNMA, FHLMC and GNMA	1,195,492		1,148,690
Total available-for-sale securities	$	1,439,098	$	1,387,571
Held-to-maturity
Mortgage-related securities-FNMA, FHLMC and GNMA	$	102,498	$	99,929
Total held-to-maturity securities	$	102,498	$	99,929

Proceeds from the sale of available-for-sale securities were nil for both the three and nine months ended September 30, 2018 and 2017. Gross realized gains and losses were nil for both the three and nine months ended September 30, 2018 and 2017.

Loans. The components of loans were summarized as follows:



	September 30, 2018			December 31, 2017
(in thousands)
Real estate:
Residential 1-4 family	$	2,110,489		$	2,118,047
Commercial real estate	733,749			733,106
Home equity line of credit	949,872			913,052
Residential land	12,982			15,797
Commercial construction	112,838			108,273
Residential construction	13,441			14,910
Total real estate	3,933,371			3,903,185
Commercial	574,243			544,828
Consumer	247,058			223,564
Total loans	4,754,672			4,671,577
Less: Deferred fees and discounts	(313		)	(809		)
Allowance for loan losses	(54,127		)	(53,637		)
Total loans, net	$	4,700,232		$	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 September 30, 2018
Allowance for loan losses:
Beginning balance	$	2,939		$	15,298		$	7,334		$	642		$	4,616		$	4		$	10,161		$	11,809		$	—	$	52,803
Charge-offs	—			—			(80		)	(1		)	—			—			(788		)	(4,508		)	—		(5,377		)
Recoveries	5			—			71			122			—			—			105			365			—		668
Provision	(623		)	(1,033		)	(347		)	(296		)	(356		)	—			1,255			7,433			—		6,033
Ending balance	$	2,321		$	14,265		$	6,978		$	467		$	4,260		$	4		$	10,733		$	15,099		$	—	$	54,127
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
Nine months ended September 30, 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		)	—			(224		)	(18		)	—			—			(1,930		)	(12,628		)	—		(14,831		)
Recoveries	73			—			98			173			—			—			1,555			1,085			—		2,984
Provision	(623		)	(1,531		)	(418		)	(584		)	(411		)	(8		)	257			15,655			—		12,337
Ending balance	$	2,321		$	14,265		$	6,978		$	467		$	4,260		$	4		$	10,733		$	15,099		$	—	$	54,127
September 30, 2018
Ending balance: individually evaluated for impairment	$	1,020		$	51		$	1,088		$	—		$	—		$	—		$	728		$	3				$	2,890
Ending balance: collectively evaluated for impairment	$	1,301		$	14,214		$	5,890		$	467		$	4,260		$	4		$	10,005		$	15,096		$	—	$	51,237
Financing Receivables:
Ending balance	$	2,110,489		$	733,749		$	949,872		$	12,982		$	112,838		$	13,441		$	574,243		$	247,058				$	4,754,672
Ending balance: individually evaluated for impairment	$	17,703		$	981		$	14,602		$	2,057		$	—		$	—		$	5,727		$	90				$	41,160
Ending balance: collectively evaluated for impairment	$	2,092,786		$	732,768		$	935,270		$	10,925		$	112,838		$	13,441		$	568,516		$	246,968				$	4,713,512
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
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:



	September 30, 2018						December 31, 2017
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	651,524	$	88,049	$	523,335	$	630,877	$	83,757	$	492,942
Special mention	35,642		22,500		18,512		49,347		22,500		27,997
Substandard	46,583		2,289		32,396		52,882		2,016		23,421
Doubtful	—		—		—		—		—		468
Loss	—		—		—		—		—		—
Total	$	733,749	$	112,838	$	574,243	$	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
September 30, 2018
Real estate:
Residential 1-4 family	$	2,000	$	2,254	$	4,132	$	8,386	$	2,102,103	$	2,110,489	$	—
Commercial real estate	—		—		—		—		733,749		733,749		—
Home equity line of credit	1,375		493		3,194		5,062		944,810		949,872		—
Residential land	—		—		418		418		12,564		12,982		—
Commercial construction	—		—		—		—		112,838		112,838		—
Residential construction	—		—		—		—		13,441		13,441		—
Commercial	1,053		417		463		1,933		572,310		574,243		—
Consumer	4,679		2,200		1,969		8,848		238,210		247,058		—
Total loans	$	9,107	$	5,364	$	10,176	$	24,647	$	4,730,025	$	4,754,672	$	—
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)	September 30, 2018		December 31, 2017
Real estate:
Residential 1-4 family	$	12,768	$	12,598
Commercial real estate	—		—
Home equity line of credit	7,191		4,466
Residential land	516		841
Commercial construction	—		—
Residential construction	—		—
Commercial	4,176		3,069
Consumer	3,266		2,617
Total nonaccrual loans	$	27,917	$	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	$	10,701	$	10,982
Commercial real estate	981		1,016
Home equity line of credit	11,131		6,584
Residential land	1,542		425
Commercial construction	—		—
Residential construction	—		—
Commercial	1,806		1,741
Consumer	63		66
Total troubled debt restructured loans not included above	$	26,224	$	20,814

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



	September 30, 2018						Three months ended September 30, 2018				Nine months ended September 30, 2018
(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	$	8,689	$	9,200	$	—	$	8,940	$	239	$	8,779	$	396
Commercial real estate	—		—		—		—		—		—		—
Home equity line of credit	2,359		2,714		—		2,234		23		2,103		35
Residential land	2,057		2,256		—		1,773		6		1,358		16
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	3,948		4,915		—		3,915		6		3,099		26
Consumer	32		32		—		33		—		18		—
	$	17,085	$	19,117	$	—	$	16,895	$	274	$	15,357	$	473
With an allowance recorded
Real estate:
Residential 1-4 family	$	9,014	$	9,218	$	1,020	$	8,820	$	84	$	8,909	$	274
Commercial real estate	981		981		51		985		11		997		32
Home equity line of credit	12,243		12,327		1,088		12,090		111		10,083		288
Residential land	—		—		—		20		—		45		3
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	1,779		1,779		728		1,774		28		1,824		94
Consumer	58		58		3		57		1		58		3
	$	24,075	$	24,363	$	2,890	$	23,746	$	235	$	21,916	$	694
Total
Real estate:
Residential 1-4 family	$	17,703	$	18,418	$	1,020	$	17,760	$	323	$	17,688	$	670
Commercial real estate	981		981		51		985		11		997		32
Home equity line of credit	14,602		15,041		1,088		14,324		134		12,186		323
Residential land	2,057		2,256		—		1,793		6		1,403		19
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	5,727		6,694		728		5,689		34		4,923		120
Consumer	90		90		3		90		1		76		3
	$	41,160	$	43,480	$	2,890	$	40,641	$	509	$	37,273	$	1,167



	December 31, 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	$	9,097	$	9,644	$	—	$	9,650	$	70	$	9,503	$	230
Commercial real estate	—		—		—		—		—		121		11
Home equity line of credit	1,496		1,789		—		1,918		32		2,108		97
Residential land	1,143		1,434		—		1,209		73		1,080		107
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	2,328		3,166		—		1,808		29		2,888		37
Consumer	8		8		—		—		—		—		—
	$	14,072	$	16,041	$	—	$	14,585	$	204	$	15,700	$	482
With an allowance recorded
Real estate:
Residential 1-4 family	$	9,187	$	9,390	$	1,248	$	9,788	$	97	$	9,963	$	333
Commercial real estate	1,016		1,016		65		1,284		13		1,292		41
Home equity line of credit	6,692		6,736		647		5,076		68		4,670		164
Residential land	122		122		47		1,251		12		1,620		73
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	2,246		2,252		694		2,482		225		4,104		694
Consumer	58		58		29		67		1		55		2
	$	19,321	$	19,574	$	2,730	$	19,948	$	416	$	21,704	$	1,307
Total
Real estate:
Residential 1-4 family	$	18,284	$	19,034	$	1,248	$	19,438	$	167	$	19,466	$	563
Commercial real estate	1,016		1,016		65		1,284		13		1,413		52
Home equity line of credit	8,188		8,525		647		6,994		100		6,778		261
Residential land	1,265		1,556		47		2,460		85		2,700		180
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	4,574		5,418		694		4,290		254		6,992		731
Consumer	66		66		29		67		1		55		2
	$	33,393	$	35,615	$	2,730	$	34,533	$	620	$	37,404	$	1,789


*	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.

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 2018 and 2017 and the impact on the allowance for loan losses were as follows:



	Three months ended September 30, 2018							Nine months ended September 30, 2018
	Number of contracts	Outstanding recorded investment¹				Net increase in allowance		Number of contracts	Outstanding recorded investment¹				Net increase in allowance
(dollars in thousands)	Number of contracts	Pre-modification		Post-modification		(as of period end)		Number of contracts	Pre-modification		Post-modification		(as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	3	$	632	$	649	$	1	4	$	971	$	993	$	17
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	16	1,584		1,585		263		55	7,092		7,097		1,205
Residential land	3	1,562		1,568		—		4	1,671		1,677		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	6	256		256		134		13	2,550		2,550		176
Consumer	—	—		—		—		—	—		—		—
	28	$	4,034	$	4,058	$	398	76	$	12,284	$	12,317	$	1,398



	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


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



	Three months ended September 30, 2018			Nine months ended September 30, 2018
(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	—	$	—	—	$	—
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		1	81
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	—	—		1	291
Consumer	—	—		—	—
	—	$	—	2	$	372



	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

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 $0.06 million and nil at September 30, 2018 and December 31, 2017, respectively.

The Company had $5.0 million and $4.3 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at September 30, 2018 and December 31, 2017, respectively.

Mortgage servicing rights (MSRs). 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 $31.9 million and $39.8 million for the three months ended September 30, 2018 and 2017 and $109.3 million and $119.7 million for the nine months ended September 30, 2018 and 2017, respectively, and recognized gains on such sales of $0.2 million and $0.5 million for the three months ended September 30, 2018 and 2017 and $1.4 million and $1.9 million for the nine months ended September 30, 2018 and 2017, respectively.

There were no repurchased mortgage loans for the three and nine months ended September 30, 2018 and 2017. The repurchase reserve was $0.1 million as of September 30, 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 September 30, 2018 and 2017, respectively, and $2.2 million and $2.3 million for the nine months ended September 30, 2018 and 2017, respectively.

Changes in the carrying value of MSRs were as follows:



(in thousands)	Gross carrying amount¹		Accumulated amortization¹			Valuation allowance		Net carrying amount
September 30, 2018	$	18,543	$	(10,117	)	$	—	$	8,426
December 31, 2017	17,511		(8,872		)	—		8,639

¹ Reflects the impact of loans paid in full.

Changes related to MSRs were as follows:



	Three months ended September 30						Nine months ended September 30
(in thousands)	2018			2017			2018			2017
Mortgage servicing rights
Beginning balance	$	8,509		$	9,181		$	8,639		$	9,373
Amount capitalized	305			394			1,032			1,192
Amortization	(388		)	(505		)	(1,245		)	(1,495		)
Other-than-temporary impairment	—			—			—			—
Carrying amount before valuation allowance	8,426			9,070			8,426			9,070
Valuation allowance for mortgage servicing rights
Beginning balance	—			—			—			—
Provision (recovery)	—			—			—			—
Other-than-temporary impairment	—			—			—			—
Ending balance	—			—			—			—
Net carrying value of mortgage servicing rights	$	8,426		$	9,070		$	8,426		$	9,070

ASB capitalizes MSRs acquired upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the MSRs to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the MSRs.

ASB uses a present value cash flow model 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 MSRs used in the impairment analysis were as follows:



(dollars in thousands)	September 30, 2018			December 31, 2017
Unpaid principal balance	$	1,206,025		$	1,195,454
Weighted average note rate	3.98		%	3.94		%
Weighted average discount rate	10.0		%	10.0		%
Weighted average prepayment speed	7.0		%	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)	September 30, 2018			December 31, 2017
Prepayment rate:
25 basis points adverse rate change	$	(379	)	$	(869	)
50 basis points adverse rate change	(836		)	(1,828		)
Discount rate:
25 basis points adverse rate change	(134		)	(111		)
50 basis points adverse rate change	(265		)	(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
September 30, 2018	$	71	$	—	$	71
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
Commercial account holders
September 30, 2018	$	71	$	154	$	—
December 31, 2017	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:



	September 30, 2018				December 31, 2017
(in thousands)	Notional amount		Fair value		Notional amount		Fair value
Interest rate lock commitments	$	—	$	—	$	13,669	$	131
Forward commitments	—		—		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	September 30, 2018				December 31, 2017
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	—	$	—	$	133	$	2
Forward commitments	—		—		4		28
	$	—	$	—	$	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 September 30						Nine months ended September 30
(in thousands)		2018			2017			2018			2017
Interest rate lock commitments	Mortgage banking income	$	(248	)	$	(119	)	$	(131	)	$	(414	)
Forward commitments	Mortgage banking income	62			(90		)	24			175
		$	(186	)	$	(209	)	$	(107	)	$	(239	)

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $24.9 million and $15.8 million at September 30, 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 September 30, 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.