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Bank segment | 9 Months Ended
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Sep. 30, 2014
Bank subsidiary |
Bank segment | 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) |  | 2014 |  | 2013 |  | 2014 |  | 2013
Interest and dividend income |  |  |  |  |  |  |  |  |  |  |  |
Interest and fees on loans |  | $ | 45,532 |  |  | $ | 43,337 |  |  | $ | 133,065 |  |  | $ | 129,564 |
Interest and dividends on investment and mortgage-related securities |  | 2,773 |  |  | 3,025 |  |  | 8,758 |  |  | 9,723 |
Total interest and dividend income |  | 48,305 |  |  | 46,362 |  |  | 141,823 |  |  | 139,287 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  |
Interest on deposit liabilities |  | 1,312 |  |  | 1,262 |  |  | 3,774 |  |  | 3,870 |
Interest on other borrowings |  | 1,438 |  |  | 1,206 |  |  | 4,263 |  |  | 3,548 |
Total interest expense |  | 2,750 |  |  | 2,468 |  |  | 8,037 |  |  | 7,418 |
Net interest income |  | 45,555 |  |  | 43,894 |  |  | 133,786 |  |  | 131,869 |
Provision for loan losses |  | 1,550 |  |  | 54 |  |  | 3,566 |  |  | 953 |
Net interest income after provision for loan losses |  | 44,005 |  |  | 43,840 |  |  | 130,220 |  |  | 130,916 |
Noninterest income |  |  |  |  |  |  |  |  |  |  |  |
Fees from other financial services |  | 5,642 |  |  | 5,728 |  |  | 15,987 |  |  | 21,367 |
Fee income on deposit liabilities |  | 5,109 |  |  | 4,819 |  |  | 14,175 |  |  | 13,566 |
Fee income on other financial products |  | 1,971 |  |  | 2,714 |  |  | 6,325 |  |  | 6,288 |
Mortgage banking income |  | 875 |  |  | 1,547 |  |  | 1,749 |  |  | 6,896 |
Gain on sale of securities |  | — |  |  | — |  |  | 2,847 |  |  | 1,226 |
Other income, net |  | 1,634 |  |  | 3,888 |  |  | 4,865 |  |  | 7,211 |
Total noninterest income |  | 15,231 |  |  | 18,696 |  |  | 45,948 |  |  | 56,554 |
Noninterest expense |  |  |  |  |  |  |  |  |  |  |  |
Compensation and employee benefits |  | 19,892 |  |  | 20,564 |  |  | 60,050 |  |  | 60,715 |
Occupancy |  | 4,517 |  |  | 4,208 |  |  | 12,959 |  |  | 12,550 |
Data processing |  | 2,684 |  |  | 2,168 |  |  | 8,715 |  |  | 7,982 |
Services |  | 2,580 |  |  | 2,424 |  |  | 7,708 |  |  | 6,855 |
Equipment |  | 1,672 |  |  | 1,825 |  |  | 4,926 |  |  | 5,469 |
Office supplies, printing and postage |  | 1,415 |  |  | 907 |  |  | 4,487 |  |  | 2,806 |
Marketing |  | 948 |  |  | 692 |  |  | 2,690 |  |  | 2,054 |
Communication |  | 412 |  |  | 479 |  |  | 1,363 |  |  | 1,374 |
Other expense |  | 5,544 |  |  | 6,461 |  |  | 15,026 |  |  | 18,400 |
Total noninterest expense |  | 39,664 |  |  | 39,728 |  |  | 117,924 |  |  | 118,205 |
Income before income taxes |  | 19,572 |  |  | 22,808 |  |  | 58,244 |  |  | 69,265 |
Income taxes |  | 6,312 |  |  | 7,532 |  |  | 18,769 |  |  | 23,915 |
Net income |  | $ | 13,260 |  |  | $ | 15,276 |  |  | $ | 39,475 |  |  | $ | 45,350 |
American Savings Bank, F.S.B. Statements of Comprehensive Income Data
|  | Three months ended September 30 |  | Nine months ended September 30
(in thousands) |  | 2014 |  | 2013 |  | 2014 |  | 2013
Net income |  | $ | 13,260 |  |  | $ | 15,276 |  |  | $ | 39,475 |  |  | $ | 45,350 |
Other comprehensive income (loss), net of taxes: |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized gains (losses) on securities: |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized gains (losses) on securities arising during the period, net of (taxes) tax benefits of $1,094, $1,049, ($2,249) and $7,081 for the respective periods |  | (1,657 | ) |  | (1,589 | ) |  | 3,406 |  |  | (10,724 | )
Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, $1,132 and $488 for the respective periods |  | — |  |  | — |  |  | (1,715 | ) |  | (738 | )
Retirement benefit plans: |  |  |  |  |  |  |  |  |  |  |  |
Less: amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $138, $278, $424 and $2,010 for the respective periods |  | 208 |  |  | 420 |  |  | 642 |  |  | 3,043 |
Other comprehensive income (loss), net of taxes |  | (1,449 | ) |  | (1,169 | ) |  | 2,333 |  |  | (8,419 | )
Comprehensive income |  | $ | 11,811 |  |  | $ | 14,107 |  |  | $ | 41,808 |  |  | $ | 36,931 |
American Savings Bank, F.S.B. Balance Sheets Data
(in thousands) |  | September 30, 2014 |  | December 31, 2013
Assets |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  |  |  |  | $ | 98,879 |  |  |  |  |  | $ | 108,998 |
Interest-bearing deposits |  |  |  | 74,654 |  |  |  |  | 47,605 |
Available-for-sale investment and mortgage-related securities |  |  |  |  | 531,603 |  |  |  |  |  | 529,007 |
Investment in stock of Federal Home Loan Bank of Seattle |  |  |  |  | 75,063 |  |  |  |  |  | 92,546 |
Loans receivable held for investment |  |  |  |  | 4,335,421 |  |  |  |  |  | 4,150,229 |
Allowance for loan losses |  |  |  |  | (43,461 | ) |  |  |  |  | (40,116 | )
Loans receivable held for investment, net |  |  |  |  | 4,291,960 |  |  |  |  |  | 4,110,113 |
Loans held for sale, at lower of cost or fair value |  |  |  |  | 2,328 |  |  |  |  |  | 5,302 |
Other |  |  |  |  | 285,659 |  |  |  |  |  | 268,063 |
Goodwill |  |  |  |  | 82,190 |  |  |  |  |  | 82,190 |
Total assets |  |  |  |  | $ | 5,442,336 |  |  |  |  |  | $ | 5,243,824 |
Liabilities and shareholder’s equity |  |  |  |  |  |  |  |  |  |  |  |
Deposit liabilities—noninterest-bearing |  |  |  |  | $ | 1,298,726 |  |  |  |  |  | $ | 1,214,418 |
Deposit liabilities—interest-bearing |  |  |  |  | 3,235,071 |  |  |  |  |  | 3,158,059 |
Other borrowings |  |  |  |  | 263,204 |  |  |  |  |  | 244,514 |
Other |  |  |  |  | 107,814 |  |  |  |  |  | 105,679 |
Total liabilities |  |  |  |  | 4,904,815 |  |  |  |  |  | 4,722,670 |
Commitments and contingencies (see “Litigation” section) |  |  |  |  |  |  |  |  |  |  |  |
Common stock |  |  |  |  | 1 |  |  |  |  |  | 1 |
Additional paid in capital |  |  |  | 337,862 |  |  |  |  | 336,053 |
Retained earnings |  |  |  |  | 209,522 |  |  |  |  |  | 197,297 |
Accumulated other comprehensive loss, net of tax benefits |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized losses on securities |  | $ | (1,972 | ) |  |  |  |  | $ | (3,663 | ) |  |  |
Retirement benefit plans |  | (7,892 | ) |  | (9,864 | ) |  | (8,534 | ) |  | (12,197 | )
Total shareholder’s equity |  |  |  |  | 537,521 |  |  |  |  |  | 521,154 |
Total liabilities and shareholder’s equity |  |  |  |  | $ | 5,442,336 |  |  |  |  |  | $ | 5,243,824 |
Other assets |  |  |  |  |  |  |  |  |  |  |  |
Bank-owned life insurance |  |  |  |  | $ | 133,066 |  |  |  |  |  | $ | 129,963 |
Premises and equipment, net |  |  |  |  | 70,105 |  |  |  |  |  | 67,766 |
Prepaid expenses |  |  |  |  | 3,941 |  |  |  |  |  | 3,616 |
Accrued interest receivable |  |  |  |  | 13,436 |  |  |  |  |  | 13,133 |
Mortgage-servicing rights |  |  |  |  | 11,524 |  |  |  |  |  | 11,687 |
Low-income housing equity investments |  |  |  | 22,825 |  |  |  |  | 14,543 |
Real estate acquired in settlement of loans, net |  |  |  |  | 580 |  |  |  |  |  | 1,205 |
Other |  |  |  |  | 30,182 |  |  |  |  |  | 26,150 |
|  |  |  |  | $ | 285,659 |  |  |  |  |  | $ | 268,063 |
Other liabilities |  |  |  |  |  |  |  |  |  |  |  |
Accrued expenses |  |  |  |  | $ | 24,733 |  |  |  |  |  | $ | 19,989 |
Federal and state income taxes payable |  |  |  |  | 35,096 |  |  |  |  |  | 37,807 |
Cashier’s checks |  |  |  |  | 23,754 |  |  |  |  |  | 21,110 |
Advance payments by borrowers |  |  |  |  | 5,013 |  |  |  |  |  | 9,647 |
Other |  |  |  |  | 19,218 |  |  |  |  |  | 17,126 |
|  |  |  |  | $ | 107,814 |  |  |  |  |  | $ | 105,679 |
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. ASB invests, as a limited partner, in Low-Income Housing Tax Credit (LIHTC) investment partnerships formed for the purpose of providing funding for affordable multifamily rental properties. These properties are rented to qualified low-income tenants, pursuant to Section 42 of the Internal Revenue Code, allowing the properties to be eligible for federal and, for some properties, state tax credits. ASB realizes a return on its investment through reductions in income tax expense that result from tax credits and the deductibility of the operating losses of these partnerships. The partnership agreements are typically structured to meet a required 15-year period of occupancy by qualified low-income tenants. ASB’s maximum exposure to loss is equal to its legally binding equity commitments adjusted for recorded impairment, partnership results, and/or proportional amortization for qualifying low income housing tax credit investments, where applicable. Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $153 million and $110 million, respectively, as of September 30, 2014 and $145 million and $100 million, respectively, as of December 31, 2013. Investment and mortgage-related securities portfolio. Available-for-sale securities. The book value (amortized cost), gross unrealized gains and losses, estimated fair value and gross unrealized losses (fair value and amount by duration of time in which positions have been held in a continuous loss position) for securities held in ASB’s “available-for-sale” portfolio by major security type 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
(in thousands) |  |  |  |  |  | Fair value |  | Amount |  | Fair value |  | Amount
September 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agency obligations |  | $ | 107,072 |  |  | $ | 631 |  |  | $ | (1,407 | ) |  | $ | 106,296 |  |  | $ | 29,628 |  |  | $ | (137 | ) |  | $ | 29,168 |  |  | $ | (1,270 | )
Mortgage-related securities- FNMA, FHLMC and GNMA |  | 427,804 |  |  | 5,327 |  |  | (7,824 | ) |  | 425,307 |  |  | 89,402 |  |  | (910 | ) |  | 148,544 |  |  | (6,914 | )
Municipal bonds |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | $ | 534,876 |  |  | $ | 5,958 |  |  | $ | (9,231 | ) |  | $ | 531,603 |  |  | $ | 119,030 |  |  | $ | (1,047 | ) |  | $ | 177,712 |  |  | $ | (8,184 | )
December 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal agency obligations |  | $ | 83,193 |  |  | $ | 174 |  |  | $ | (2,394 | ) |  | $ | 80,973 |  |  | $ | 70,799 |  |  | $ | (2,394 | ) |  | $ | — |  |  | $ | — |
Mortgage-related securities- FNMA, FHLMC and GNMA |  | 374,993 |  |  | 4,911 |  |  | (10,460 | ) |  | 369,444 |  |  | 228,543 |  |  | (8,819 | ) |  | 19,655 |  |  | (1,641 | )
Municipal bonds |  | 76,904 |  |  | 1,826 |  |  | (140 | ) |  | 78,590 |  |  | 14,478 |  |  | (140 | ) |  | — |  |  | — |
|  | $ | 535,090 |  |  | $ | 6,911 |  |  | $ | (12,994 | ) |  | $ | 529,007 |  |  | $ | 313,820 |  |  | $ | (11,353 | ) |  | $ | 19,655 |  |  | $ | (1,641 | )
The unrealized losses on ASB’s investments in mortgage-related securities and obligations issued by federal agencies were caused by interest rate movements. Because ASB does not intend to sell the securities and has determined it is more likely than not that it will not be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, ASB did not consider these investments to be other-than-temporarily impaired at September 30, 2014. The fair values of ASB’s investment securities could decline if interest rates rise or spreads widen. The following table details the contractual maturities of available-for-sale securities. All positions with variable maturities (e.g. callable debentures and mortgage-related securities) are disclosed based upon the bond’s contractual maturity. Actual maturities will likely differ from these contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
September 30, 2014 |  | Amortized cost |  | Fair value
(in thousands) |  |  |  |
Due in one year or less |  | $ | — |  |  | $ | — |
Due after one year through five years |  | 44,498 |  |  | 44,419 |
Due after five years through ten years |  | 37,332 |  |  | 37,641 |
Due after ten years |  | 25,242 |  |  | 24,236 |
|  | 107,072 |  |  | 106,296 |
Mortgage-related securities-FNMA,FHLMC and GNMA |  | 427,804 |  |  | 425,307 |
Total available-for-sale securities |  | $ | 534,876 |  |  | $ | 531,603 |
Allowance for loan losses. ASB maintains an allowance for loan losses that it believes is adequate to absorb losses inherent in its loan portfolio. The level of allowance for loan losses is based on a continuing assessment of existing risks in the loan portfolio, historical loss experience, changes in collateral values and current conditions (e.g., economic conditions, real estate market conditions and interest rate environment). The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment. The formula-based approach emphasizes loss factors primarily derived from actual historical default and loss rates, which are combined with an assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan categories. Adverse changes in any of these factors could result in higher charge-offs and provision for loan losses. ASB disaggregates its portfolio loans into portfolio segments for purposes of determining the allowance for loan losses. Commercial and commercial real estate loans are defined as non-homogeneous loans and ASB utilizes a risk rating system for evaluating the credit quality of the loans. Loans are rated based on the degree of risk at origination and periodically thereafter, as appropriate. Values are applied separately to the probability of default (borrower risk) and loss given default (transaction risk). ASB’s credit review department performs an evaluation of these loan portfolios to ensure compliance with the internal risk rating system and timeliness of rating changes. Non-homogeneous loans are categorized into the regulatory asset quality classifications—Pass, Special Mention, Substandard, Doubtful, and Loss based on credit quality. For loans classified as substandard, an analysis is done to determine if the loan is impaired. A loan is deemed impaired when it is probable that ASB will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is deemed impaired, ASB applies a valuation methodology to determine whether there is an impairment shortfall. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral, net of costs to sell. For all loans collateralized by real estate whose repayment is dependent on the sale of the underlying collateral property, ASB measures impairment by utilizing the fair value of the collateral, net of costs to sell; for other loans that are not considered collateral dependent, generally the discounted cash flow method is used to measure impairment. For loans collateralized by real estate that are classified as troubled debt restructured loans, the present value of the expected future cash flows of the loans may also be used to measure impairment as these loans are expected to perform according to their restructured terms. Impairment shortfalls are charged to the provision for loan losses and included in the allowance for loan losses. However, impairment shortfalls that are deemed to be confirmed losses (uncollectible) are charged off, with the loan written down by the amount of the confirmed loss. Residential, consumer and credit scored business loans are considered homogeneous loans, which are typically underwritten based on common, uniform standards, and are generally classified as to the level of loss exposure based on delinquency status. The homogeneous loan portfolios are stratified into individual products with common risk characteristics and segmented into various secured and unsecured loan product types. For the homogeneous portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. ASB does supplement performance data with an 11-risk rating retail credit model that assigns a probability of default to each borrower based primarily on the borrower's current Fair Isaac Corporation (FICO) score and for the home equity line of credit (HELOC) and unsecured consumer products, the bankruptcy score (BK). Current FICO and BK data is purchased and appended to all homogeneous loans on a quarterly basis and used to estimate the borrower’s probability of default and the loss given default. ASB also considers the following qualitative factors for all loans in estimating the allowance for loan losses:
• | changes in lending policies and procedures;
• | changes in economic and business conditions and developments that affect the collectability of the portfolio;
• | changes in the nature, volume and terms of the loan portfolio;
• | changes in lending management and other relevant staff;
• | changes in loan quality (past due, non-accrual, classified loans);
• | changes in the quality of the loan review system;
• | changes in the value of underlying collateral;
• | effect of, and changes in the level of, any concentrations of credit; and
• | effect of other external and internal factors.
ASB’s methodology for determining the allowance for loan losses was generally based on historic loss rates using various look-back periods. During the second quarter of 2014, ASB implemented enhancements to the loss rate calculation for estimating the allowance for loan losses that included several refinements to determining the probability of default and the loss given default for the various segments of the loan portfolio that are more statistically sound than those previously employed. The result is an estimated loss rate established for each borrower. ASB also updated its measurement of the loss emergence period in the calculation of the allowance for loan losses. The loss emergence period is broadly defined as the period that it takes, on average, for the lender to identify the specific borrower and amount of loss incurred by the bank for a loan that has suffered from a loss-causing event. In most cases, the loss emergence period was within a twelve month period; however, as credit quality and conditions improve, management has observed that the loss emergence period has extended and has incorporated this observed change in the estimate of the allowance for loan losses. Management believes these enhancements will improve the precision in estimating the allowance for loan losses. The enhancement did not have a material effect on the total allowance for loan losses or the provision for loan losses for the second quarter 2014. The enhancement did result in the full allocation of the previously unallocated portion of the allowance for loan losses. In conjunction with the above enhancement, management also adopted an enhanced risk rating system for monitoring and managing credit risk in the non-homogenous loan portfolios, that measures general creditworthiness at the borrower level. The numerical-based, risk rating “PD Model” takes into consideration fiscal year-end financial information of the borrower and identified financial attributes including retained earnings, operating cash flows, interest coverage, liquidity and leverage that demonstrate a strong correlation with default to assign default probabilities at the borrower level. In addition, a loss given default (LGD) value is assigned to each loan to measure loss in the event of default based on loan specific features such as collateral that mitigates the amount of loss in the event of default. Together the PD Model and LGD construct provide a more quantitative, data driven and consistent framework for measuring risk within the portfolio, on a loan by loan basis and for the ultimate collectability of each loan. Management believes its allowance for loan losses adequately estimates actual loan losses that will ultimately be incurred. However, such estimates are based on currently available information and historical experience, and future adjustments may be required from time to time to the allowance for loan losses based on new information and changes that occur (e.g., due to changes in economic conditions, particularly in Hawaii). Actual losses could differ from management’s estimates, and these differences and subsequent adjustments could be material. 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 |  | Unallocated |  | Total
Three months ended September 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 5,667 |  |  | $ | 7,230 |  |  | $ | 7,081 |  |  | $ | 1,837 |  |  | $ | 3,390 |  |  | $ | 26 |  |  | $ | 15,144 |  |  | $ | 1,997 |  |  | $ | — |  |  | $ | 42,372 |
Charge-offs |  | (632 | ) |  | — |  |  | (46 | ) |  | (28 | ) |  | — |  |  | — |  |  | (886 | ) |  | (592 | ) |  | — |  |  | (2,184 | )
Recoveries |  | 160 |  |  | — |  |  | 299 |  |  | 90 |  |  | — |  |  | — |  |  | 952 |  |  | 222 |  |  | — |  |  | 1,723 |
Provision |  | 670 |  |  | 3 |  |  | (119 | ) |  | (92 | ) |  | 1,724 |  |  | 3 |  |  | (1,130 | ) |  | 491 |  |  | — |  |  | 1,550 |
Ending balance |  | $ | 5,865 |  |  | $ | 7,233 |  |  | $ | 7,215 |  |  | $ | 1,807 |  |  | $ | 5,114 |  |  | $ | 29 |  |  | $ | 14,080 |  |  | $ | 2,118 |  |  | $ | — |  |  | $ | 43,461 |
Three months ended September 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 6,357 |  |  | $ | 4,117 |  |  | $ | 5,009 |  |  | $ | 2,187 |  |  | $ | 2,305 |  |  | $ | 14 |  |  | $ | 16,307 |  |  | $ | 2,399 |  |  | $ | 2,309 |  |  | $ | 41,004 |
Charge-offs |  | (106 | ) |  | — |  |  | (44 | ) |  | (3 | ) |  | — |  |  | — |  |  | (305 | ) |  | (407 | ) |  | — |  |  | (865 | )
Recoveries |  | 157 |  |  | — |  |  | 78 |  |  | 282 |  |  | — |  |  | — |  |  | 166 |  |  | 176 |  |  | — |  |  | 859 |
Provision |  | (604 | ) |  | 204 |  |  | 12 |  |  | (361 | ) |  | 44 |  |  | 2 |  |  | (361 | ) |  | 42 |  |  | 1,076 |  |  | 54 |
Ending balance |  | $ | 5,804 |  |  | $ | 4,321 |  |  | $ | 5,055 |  |  | $ | 2,105 |  |  | $ | 2,349 |  |  | $ | 16 |  |  | $ | 15,807 |  |  | $ | 2,210 |  |  | $ | 3,385 |  |  | $ | 41,052 |
Nine months ended September 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 5,534 |  |  | $ | 5,059 |  |  | $ | 5,229 |  |  | $ | 1,817 |  |  | $ | 2,397 |  |  | $ | 19 |  |  | $ | 15,803 |  |  | $ | 2,367 |  |  | $ | 1,891 |  |  | $ | 40,116 |
Charge-offs |  | (992 | ) |  | — |  |  | (182 | ) |  | (81 | ) |  | — |  |  | — |  |  | (1,256 | ) |  | (1,614 | ) |  | — |  |  | (4,125 | )
Recoveries |  | 1,056 |  |  | — |  |  | 624 |  |  | 253 |  |  | — |  |  | — |  |  | 1,277 |  |  | 694 |  |  | — |  |  | 3,904 |
Provision |  | 267 |  |  | 2,174 |  |  | 1,544 |  |  | (182 | ) |  | 2,717 |  |  | 10 |  |  | (1,744 | ) |  | 671 |  |  | (1,891 | ) |  | 3,566 |
Ending balance |  | $ | 5,865 |  |  | $ | 7,233 |  |  | $ | 7,215 |  |  | $ | 1,807 |  |  | $ | 5,114 |  |  | $ | 29 |  |  | $ | 14,080 |  |  | $ | 2,118 |  |  | $ | — |  |  | $ | 43,461 |
Ending balance: individually evaluated for impairment |  | $ | 917 |  |  | $ | 4 |  |  | $ | 8 |  |  | $ | 1,171 |  |  | $ | — |  |  | $ | — |  |  | $ | 810 |  |  | $ | 5 |  |  | $ | — |  |  | $ | 2,915 |
Ending balance: collectively evaluated for impairment |  | $ | 4,948 |  |  | $ | 7,229 |  |  | $ | 7,207 |  |  | $ | 636 |  |  | $ | 5,114 |  |  | $ | 29 |  |  | $ | 13,270 |  |  | $ | 2,113 |  |  | $ | — |  |  | $ | 40,546 |
Financing Receivables: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 2,030,337 |  |  | $ | 502,356 |  |  | $ | 808,991 |  |  | $ | 16,935 |  |  | $ | 87,461 |  |  | $ | 18,699 |  |  | $ | 770,079 |  |  | $ | 107,531 |  |  | $ | — |  |  | $ | 4,342,389 |
Ending balance: individually evaluated for impairment |  | $ | 20,015 |  |  | $ | 754 |  |  | $ | 392 |  |  | $ | 8,872 |  |  | $ | — |  |  | $ | — |  |  | $ | 15,058 |  |  | $ | 16 |  |  | $ | — |  |  | $ | 45,107 |
Ending balance: collectively evaluated for impairment |  | $ | 2,010,322 |  |  | $ | 501,602 |  |  | $ | 808,599 |  |  | $ | 8,063 |  |  | $ | 87,461 |  |  | $ | 18,699 |  |  | $ | 755,021 |  |  | $ | 107,515 |  |  | $ | — |  |  | $ | 4,297,282 |
Nine months ended September 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 6,068 |  |  | $ | 2,965 |  |  | $ | 4,493 |  |  | $ | 4,275 |  |  | $ | 2,023 |  |  | $ | 9 |  |  | $ | 15,931 |  |  | $ | 4,019 |  |  | $ | 2,202 |  |  | $ | 41,985 |
Charge-offs |  | (1,162 | ) |  | — |  |  | (782 | ) |  | (238 | ) |  | — |  |  | — |  |  | (1,655 | ) |  | (1,811 | ) |  | — |  |  | (5,648 | )
Recoveries |  | 1,382 |  |  | — |  |  | 334 |  |  | 782 |  |  | — |  |  | — |  |  | 778 |  |  | 486 |  |  | — |  |  | 3,762 |
Provision |  | (484 | ) |  | 1,356 |  |  | 1,010 |  |  | (2,714 | ) |  | 326 |  |  | 7 |  |  | 753 |  |  | (484 | ) |  | 1,183 |  |  | 953 |
Ending balance |  | $ | 5,804 |  |  | $ | 4,321 |  |  | $ | 5,055 |  |  | $ | 2,105 |  |  | $ | 2,349 |  |  | $ | 16 |  |  | $ | 15,807 |  |  | $ | 2,210 |  |  | $ | 3,385 |  |  | $ | 41,052 |
Ending balance: individually evaluated for impairment |  | $ | 944 |  |  | $ | 888 |  |  | $ | — |  |  | $ | 1,585 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,679 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,096 |
Ending balance: collectively evaluated for impairment |  | $ | 4,860 |  |  | $ | 3,433 |  |  | $ | 5,055 |  |  | $ | 520 |  |  | $ | 2,349 |  |  | $ | 16 |  |  | $ | 13,128 |  |  | $ | 2,210 |  |  | $ | 3,385 |  |  | $ | 34,956 |
Financing Receivables: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 0 |
Ending balance |  | $ | 2,015,082 |  |  | $ | 405,037 |  |  | $ | 703,210 |  |  | $ | 18,400 |  |  | $ | 51,067 |  |  | $ | 10,460 |  |  | $ | 749,733 |  |  | $ | 102,400 |  |  | $ | — |  |  | $ | 4,055,389 |
Ending balance: individually evaluated for impairment |  | $ | 22,123 |  |  | $ | 4,484 |  |  | $ | 960 |  |  | $ | 12,747 |  |  | $ | — |  |  | $ | — |  |  | $ | 22,777 |  |  | $ | 19 |  |  | $ | — |  |  | $ | 63,110 |
Ending balance: collectively evaluated for impairment |  | $ | 1,992,959 |  |  | $ | 400,553 |  |  | $ | 702,250 |  |  | $ | 5,653 |  |  | $ | 51,067 |  |  | $ | 10,460 |  |  | $ | 726,956 |  |  | $ | 102,381 |  |  | $ | — |  |  | $ | 3,992,279 |
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 and industrial, commercial real estate and commercial construction loans. Each loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The AQR is a function of the PD Model rating, the LGD, 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. The credit risk profile by internally assigned grade for loans was as follows:
|  | September 30, 2014 |  | December 31, 2013
(in thousands) |  | Commercial real estate |  | Commercial construction |  | Commercial |  | Commercial real estate |  | Commercial construction |  | Commercial
Grade: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 444,723 |  |  | $ | 70,335 |  |  | $ | 715,284 |  |  | $ | 375,217 |  |  | $ | 52,112 |  |  | $ | 703,053 |
Special mention |  | 18,199 |  |  | — |  |  | 8,500 |  |  | 33,436 |  |  | — |  |  | 17,634 |
Substandard |  | 39,434 |  |  | 17,126 |  |  | 45,101 |  |  | 28,020 |  |  | — |  |  | 59,663 |
Doubtful |  | — |  |  | — |  |  | 1,194 |  |  | 3,770 |  |  | — |  |  | 3,038 |
Loss |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total |  | $ | 502,356 |  |  | $ | 87,461 |  |  | $ | 770,079 |  |  | $ | 440,443 |  |  | $ | 52,112 |  |  | $ | 783,388 |
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, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | $ | 6,449 |  |  | $ | 909 |  |  | $ | 14,427 |  |  | $ | 21,785 |  |  | $ | 2,008,552 |  |  | $ | 2,030,337 |  |  | $ | — |
Commercial real estate |  | — |  |  | — |  |  | — |  |  | — |  |  | 502,356 |  |  | 502,356 |  |  | — |
Home equity line of credit |  | 578 |  |  | 166 |  |  | 143 |  |  | 887 |  |  | 808,104 |  |  | 808,991 |  |  | — |
Residential land |  | 260 |  |  | — |  |  | 525 |  |  | 785 |  |  | 16,150 |  |  | 16,935 |  |  | 525 |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |  |  | 87,461 |  |  | 87,461 |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | 18,699 |  |  | 18,699 |  |  | — |
Commercial loans |  | 239 |  |  | 34 |  |  | 954 |  |  | 1,227 |  |  | 768,852 |  |  | 770,079 |  |  | — |
Consumer loans |  | 781 |  |  | 377 |  |  | 293 |  |  | 1,451 |  |  | 106,080 |  |  | 107,531 |  |  | — |
Total loans |  | $ | 8,307 |  |  | $ | 1,486 |  |  | $ | 16,342 |  |  | $ | 26,135 |  |  | $ | 4,316,254 |  |  | $ | 4,342,389 |  |  | $ | 525 |
December 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | $ | 2,728 |  |  | $ | 622 |  |  | $ | 15,411 |  |  | $ | 18,761 |  |  | $ | 1,987,246 |  |  | $ | 2,006,007 |  |  | $ | — |
Commercial real estate |  | — |  |  | — |  |  | 3,770 |  |  | 3,770 |  |  | 436,673 |  |  | 440,443 |  |  | — |
Home equity line of credit |  | 765 |  |  | 312 |  |  | 960 |  |  | 2,037 |  |  | 737,294 |  |  | 739,331 |  |  | — |
Residential land |  | 184 |  |  | 48 |  |  | 2,756 |  |  | 2,988 |  |  | 13,188 |  |  | 16,176 |  |  | — |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |  |  | 52,112 |  |  | 52,112 |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | 12,774 |  |  | 12,774 |  |  | — |
Commercial loans |  | 1,668 |  |  | 612 |  |  | 3,026 |  |  | 5,306 |  |  | 778,082 |  |  | 783,388 |  |  | — |
Consumer loans |  | 436 |  |  | 158 |  |  | 304 |  |  | 898 |  |  | 107,824 |  |  | 108,722 |  |  | — |
Total loans |  | $ | 5,781 |  |  | $ | 1,752 |  |  | $ | 26,227 |  |  | $ | 33,760 |  |  | $ | 4,125,193 |  |  | $ | 4,158,953 |  |  | $ | — |
The credit risk profile based on nonaccrual loans and accruing loans 90 days or more past due was as follows:
|  | September 30, 2014 |  | December 31, 2013
(in thousands) |  | Nonaccrual loans |  | Accruing loans 90 days or more past due |  | Nonaccrual loans |  | Accruing loans 90 days or more past due
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | $ | 20,499 |  |  | $ | — |  |  | $ | 19,679 |  |  | $ | — |
Commercial real estate |  | 596 |  |  | — |  |  | 4,439 |  |  | — |
Home equity line of credit |  | 1,105 |  |  | — |  |  | 2,060 |  |  | — |
Residential land |  | 2,798 |  |  | 525 |  |  | 3,161 |  |  | — |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |
Commercial loans |  | 11,414 |  |  | — |  |  | 18,781 |  |  | — |
Consumer loans |  | 502 |  |  | — |  |  | 401 |  |  | — |
Total |  | $ | 36,914 |  |  | $ | 525 |  |  | $ | 48,521 |  |  | $ | — |
The total carrying amount and the total unpaid principal balance of impaired loans, with and without recorded allowance for loan losses and combined, were as follows:
|  | September 30, 2014 |  | Three months ended September 30, 2014 |  | Nine months ended September 30, 2014
(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 loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | $ | 8,718 |  |  | $ | 10,398 |  |  | $ | — |  |  | $ | 8,519 |  |  | $ | 30 |  |  | $ | 9,077 |  |  | $ | 189 |
Commercial real estate |  | 596 |  |  | 642 |  |  | — |  |  | 199 |  |  | — |  |  | 66 |  |  | — |
Home equity line of credit |  | 208 |  |  | 332 |  |  | — |  |  | 274 |  |  | — |  |  | 450 |  |  | 4 |
Residential land |  | 2,500 |  |  | 3,356 |  |  | — |  |  | 2,610 |  |  | 40 |  |  | 2,823 |  |  | 138 |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial loans |  | 8,858 |  |  | 14,147 |  |  | — |  |  | 6,152 |  |  | 6 |  |  | 4,145 |  |  | 22 |
Consumer loans |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 10 |  |  | — |
|  | 20,880 |  |  | 28,875 |  |  | — |  |  | 17,754 |  |  | 76 |  |  | 16,571 |  |  | 353 |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | 11,297 |  |  | 11,338 |  |  | 917 |  |  | 10,232 |  |  | 112 |  |  | 8,019 |  |  | 303 |
Commercial real estate |  | 158 |  |  | 158 |  |  | 4 |  |  | 3,045 |  |  | 455 |  |  | 4,049 |  |  | 458 |
Home equity line of credit |  | 184 |  |  | 212 |  |  | 8 |  |  | 198 |  |  | 1 |  |  | 89 |  |  | 2 |
Residential land |  | 6,372 |  |  | 6,450 |  |  | 1,171 |  |  | 6,379 |  |  | 81 |  |  | 6,685 |  |  | 301 |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial loans |  | 6,200 |  |  | 6,637 |  |  | 810 |  |  | 10,549 |  |  | 207 |  |  | 14,249 |  |  | 301 |
Consumer loans |  | 16 |  |  | 16 |  |  | 5 |  |  | 17 |  |  | — |  |  | 8 |  |  | — |
|  | 24,227 |  |  | 24,811 |  |  | 2,915 |  |  | 30,420 |  |  | 856 |  |  | 33,099 |  |  | 1,365 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | 20,015 |  |  | 21,736 |  |  | 917 |  |  | 18,751 |  |  | 142 |  |  | 17,096 |  |  | 492 |
Commercial real estate |  | 754 |  |  | 800 |  |  | 4 |  |  | 3,244 |  |  | 455 |  |  | 4,115 |  |  | 458 |
Home equity line of credit |  | 392 |  |  | 544 |  |  | 8 |  |  | 472 |  |  | 1 |  |  | 539 |  |  | 6 |
Residential land |  | 8,872 |  |  | 9,806 |  |  | 1,171 |  |  | 8,989 |  |  | 121 |  |  | 9,508 |  |  | 439 |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial loans |  | 15,058 |  |  | 20,784 |  |  | 810 |  |  | 16,701 |  |  | 213 |  |  | 18,394 |  |  | 323 |
Consumer loans |  | 16 |  |  | 16 |  |  | 5 |  |  | 17 |  |  | — |  |  | 18 |  |  | — |
|  | $ | 45,107 |  |  | $ | 53,686 |  |  | $ | 2,915 |  |  | $ | 48,174 |  |  | $ | 932 |  |  | $ | 49,670 |  |  | $ | 1,718 |
|  | December 31, 2013 |  | Year ended December 31, 2013
(in thousands) |  | Recorded investment |  | Unpaid principal balance |  | Related allowance |  | Average recorded investment |  | Interest income recognized*
With no related allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | $ | 9,708 |  |  | $ | 12,144 |  |  | $ | — |  |  | $ | 11,674 |  |  | $ | 386 |
Commercial real estate |  | — |  |  | — |  |  | — |  |  | 802 |  |  | — |
Home equity line of credit |  | 672 |  |  | 1,227 |  |  | — |  |  | 623 |  |  | 2 |
Residential land |  | 2,622 |  |  | 3,612 |  |  | — |  |  | 6,675 |  |  | 482 |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial loans |  | 3,466 |  |  | 4,715 |  |  | — |  |  | 4,837 |  |  | 12 |
Consumer loans |  | 19 |  |  | 19 |  |  | — |  |  | 20 |  |  | — |
|  | 16,487 |  |  | 21,717 |  |  | — |  |  | 24,631 |  |  | 882 |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | 6,216 |  |  | 6,236 |  |  | 642 |  |  | 6,455 |  |  | 372 |
Commercial real estate |  | 4,604 |  |  | 4,686 |  |  | 1,118 |  |  | 5,745 |  |  | 152 |
Home equity line of credit |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential land |  | 7,452 |  |  | 7,623 |  |  | 1,332 |  |  | 6,844 |  |  | 409 |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial loans |  | 17,759 |  |  | 20,640 |  |  | 2,246 |  |  | 15,635 |  |  | 139 |
Consumer loans |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 36,031 |  |  | 39,185 |  |  | 5,338 |  |  | 34,679 |  |  | 1,072 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | 15,924 |  |  | 18,380 |  |  | 642 |  |  | 18,129 |  |  | 758 |
Commercial real estate |  | 4,604 |  |  | 4,686 |  |  | 1,118 |  |  | 6,547 |  |  | 152 |
Home equity line of credit |  | 672 |  |  | 1,227 |  |  | — |  |  | 623 |  |  | 2 |
Residential land |  | 10,074 |  |  | 11,235 |  |  | 1,332 |  |  | 13,519 |  |  | 891 |
Commercial construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial loans |  | 21,225 |  |  | 25,355 |  |  | 2,246 |  |  | 20,472 |  |  | 151 |
Consumer loans |  | 19 |  |  | 19 |  |  | — |  |  | 20 |  |  | — |
|  | $ | 52,518 |  |  | $ | 60,902 |  |  | $ | 5,338 |  |  | $ | 59,310 |  |  | $ | 1,954 |
* | Since loan was classified as impaired.
Troubled debt restructurings. A loan modification is deemed to be a troubled debt restructuring (TDR) when ASB grants a concession it would not otherwise consider were it not for the borrower’s financial difficulty. When a borrower experiencing financial difficulty fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to improve the collectability of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans are considered an alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery. ASB may consider various types of concessions in granting a TDR including maturity date extensions, extended amortization of principal, temporary deferral of principal payments, and temporary interest rate reductions. ASB rarely grants principal forgiveness in its TDR modifications. Residential loan modifications generally involve interest rate reduction, extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance. Land loans at origination are typically structured as a three-year term, interest-only monthly payment with a balloon payment due at maturity. Land loan TDR modifications typically involve extending the maturity date up to five years and converting the payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization period, and temporary deferral 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 costs 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 were as follows for the indicated periods:
|  | Three months ended September 30, 2014 |  | Nine months ended September 30, 2014
|  | Number of |  | Outstanding recorded investment |  | Number of |  | Outstanding recorded investment
(dollars in thousands) |  | contracts |  | Pre-modification |  | Post-modification |  | contracts |  | Pre-modification |  | Post-modification
Troubled debt restructurings |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | 6 |  | $ | 1,800 |  |  | $ | 1,825 |  |  | 18 |  | $ | 4,915 |  |  | $ | 4,972 |
Commercial real estate |  | — |  | — |  |  | — |  |  | — |  | — |  |  | — |
Home equity line of credit |  | 1 |  | 91 |  |  | 91 |  |  | 1 |  | 91 |  |  | 91 |
Residential land |  | 2 |  | 256 |  |  | 256 |  |  | 18 |  | 4,304 |  |  | 4,304 |
Commercial loans |  | 2 |  | 2,600 |  |  | 2,600 |  |  | 7 |  | 3,827 |  |  | 3,827 |
Consumer loans |  | — |  | — |  |  | — |  |  | — |  | — |  |  | — |
|  | 11 |  | $ | 4,747 |  |  | $ | 4,772 |  |  | 44 |  | $ | 13,137 |  |  | $ | 13,194 |
|  | Three months ended September 30, 2013 |  | Nine months ended September 30, 2013
|  | Number of |  | Outstanding recorded investment |  | Number of |  | Outstanding recorded investment
(dollars in thousands) |  | contracts |  | Pre-modification |  | Post-modification |  | contracts |  | Pre-modification |  | Post-modification
Troubled debt restructurings |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | 14 |  | $ | 2,864 |  |  | $ | 2,874 |  |  | 32 |  | $ | 8,631 |  |  | $ | 8,712 |
Commercial real estate |  | — |  | — |  |  | — |  |  | — |  | — |  |  | — |
Home equity line of credit |  | — |  | — |  |  | — |  |  | 4 |  | 462 |  |  | 215 |
Residential land |  | 9 |  | 2,943 |  |  | 2,943 |  |  | 16 |  | 4,983 |  |  | 4,974 |
Commercial loans |  | 3 |  | 2,076 |  |  | 2,076 |  |  | 6 |  | 2,790 |  |  | 2,790 |
Consumer loans |  | — |  | — |  |  | — |  |  | — |  | — |  |  | — |
|  | 26 |  | $ | 7,883 |  |  | $ | 7,893 |  |  | 58 |  | $ | 16,866 |  |  | $ | 16,691 |
Loans modified in TDRs that experienced a payment default of 90 days or more for the indicated periods, and for which the payment default occurred within one year of the modification, were as follows:
|  | Three months ended September 30, 2014 |  | Nine months ended September 30, 2014
(dollars in thousands) |  | Number of contracts |  | Recorded investment |  | Number of contracts |  | Recorded investment
Troubled debt restructurings that subsequently defaulted |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | — |  | $ | — |  |  | 1 |  | $ | 390 |
Commercial real estate |  | — |  | — |  |  | — |  | — |
Home equity line of credit |  | — |  | — |  |  | — |  | — |
Residential land |  | — |  | — |  |  | — |  | — |
Commercial loans |  | — |  | — |  |  | — |  | — |
Consumer loans |  | — |  | — |  |  | — |  | — |
|  | — |  | $ | — |  |  | 1 |  | $ | 390 |
|  | Three months ended September 30, 2013 |  | Nine months ended September 30, 2013
(dollars in thousands) |  | Number of contracts |  | Recorded investment |  | Number of contracts |  | Recorded investment
Troubled debt restructurings that subsequently defaulted |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |
Residential 1-4 family |  | — |  | $ | — |  |  | — |  | $ | — |
Commercial real estate |  | — |  | — |  |  | — |  | — |
Home equity line of credit |  | 1 |  | 67 |  |  | 1 |  | 67 |
Residential land |  | — |  | — |  |  | — |  | — |
Commercial loans |  | 3 |  | 669 |  |  | 3 |  | 669 |
Consumer loans |  | — |  | — |  |  | — |  | — |
|  | 4 |  | $ | 736 |  |  | 4 |  | $ | 736 |
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. There were no commitments to lend additional funds to borrowers whose loans have been designated impaired or whose terms have been modified in TDRs as of September 30, 2014. Other borrowings. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the balance sheet. All such agreements are subject to master netting arrangements, which provide for conditional right of set-off in case of default by either party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The following tables present information about the securities sold under agreements to repurchase, including the related collateral received from or pledged to counterparties:
(in millions) |  | Gross amount of recognized liabilities |  | Gross amount offset in the Balance Sheet |  | Net amount of liabilities presented in the Balance Sheet
Repurchase agreements |  |  |  |  |  |
September 30, 2014 |  | $153 |  | $— |  | $153
December 31, 2013 |  | 145 |  | — |  | 145
|  | Gross amount not offset in the Balance Sheet
(in millions) |  | Net amount of liabilities presented in the Balance Sheet |  | Financial instruments |  | Cash collateral pledged |  | Net amount
September 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |
Financial institution |  | $ | 50 |  |  | $ | 50 |  |  | $ | — |  |  | $ | — |
Government entities |  | 15 |  |  | 15 |  |  | — |  |  | — |
Commercial account holders |  | 88 |  |  | 88 |  |  | — |  |  | — |
Total |  | $ | 153 |  |  | $ | 153 |  |  | $ | — |  |  | $ | — |
December 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |
Financial institution |  | $ | 51 |  |  | $ | 51 |  |  | $ | — |  |  | $ | — |
Commercial account holders |  | 94 |  |  | 94 |  |  | — |  |  | — |
Total |  | $ | 145 |  |  | $ | 145 |  |  | $ | — |  |  | $ | — |
Amortized intangible assets. The table below presents the gross carrying amount, accumulated amortization, valuation allowance and net carrying amount of ASB’s mortgage servicing assets as of September 30, 2014 and 2013:
September 30 |  | 2014 |  | 2013
(in thousands) |  | Gross carrying amount |  | Accumulated amortization |  | Valuation allowance |  | Net carrying amount |  | Gross carrying amount |  | Accumulated amortization |  | Valuation allowance |  | Net carrying amount
Mortgage servicing assets |  | $ | 26,685 |  |  | (15,003 | ) |  | (158 | ) |  | $ | 11,524 |  |  | $ | 25,198 |  |  | (13,265 | ) |  | (127 | ) |  | $ | 11,806 |
Changes in the valuation allowance for mortgage servicing assets were as follows:
(in thousands) |  | 2014 |  |  | 2013 |
Valuation allowance, January 1 |  | $ | 251 |  |  | $ | 498 |
Provision (recovery) |  | (36 | ) |  | (215 | )
Other-than-temporary impairment |  | (57 | ) |  | (156 | )
Valuation allowance, September 30 |  | $ | 158 |  |  | $ | 127 |
ASB recognizes a mortgage servicing asset when a mortgage loan is sold with servicing rights retained. This mortgage servicing right (MSR) is initially capitalized at its presumed fair value based on market data at the time of sale and accounted for in subsequent periods at the lower of amortized cost or fair value. The MSR is amortized in proportion to and over the period of estimated net servicing income and assessed for impairment at each reporting date. ASB stratifies the MSR based on predominant risk characteristics of the underlying loans including loan type and note rate. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. 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. 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 ASB’s noninterest 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 the bank’s mortgage servicing rights were as follows:
(dollars in thousands) |  | September 30, 2014 |  |  | September 30, 2013 |
Unpaid principal balance |  | $ | 1,380,299 |  |  | $ | 1,329,815 |
Weighted average note rate |  | 4.08 | % |  | 4.06 | %
Weighted average discount rate |  | 9.6 | % |  | 10.1 | %
Weighted average prepayment speed |  | 8.1 | % |  | 6.6 | %
Derivative financial instruments. ASB enters into interest rate lock commitments with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risk associated with selling loans. ASB enters into interest rate lock commitments (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 as of September 30, 2014 and December 31, 2013 were as follows:
|  | September 30, 2014 |  | December 31, 2013
(dollars in thousands) |  | Notional amount |  | Fair value |  | Notional amount |  | Fair value
Interest rate lock commitments |  | $ | 14,511 |  |  | $ | 215 |  |  | $ | 25,070 |  |  | $ | 464 |
Forward commitments |  | 12,707 |  |  | (25 | ) |  | 26,018 |  |  | 139 |
The following table presents ASB’s derivative financial instruments, their fair values, and balance sheet location as of September 30, 2014 and December 31, 2013:
Derivative Financial Instruments Not Designated as Hedging Instruments 1 |  | September 30, 2014 |  | December 31, 2013
(dollars in thousands) |  | Derivative asset |  | Derivative liability |  | Derivative asset |  | Derivative liability
Interest rate lock commitments |  | $ | 216 |  |  | $ | 1 |  |  | $ | 488 |  |  | $ | 24 |
Forward commitments |  | 1 |  |  | 26 |  |  | 141 |  |  | 2 |
|  | $ | 217 |  |  | $ | 27 |  |  | $ | 629 |  |  | $ | 26 |
1 Derivative assets are included in other assets and derivative liabilities are included in other liabilities in the balance sheets. The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in the statements of income for the three and nine months ended September 30, 2014 and 2013.
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
(dollars in thousands) |  | 2014 |  | 2013 |  | 2014 |  | 2013
Interest rate lock commitments | Mortgage banking income |  | $ | 215 |  |  | $ | 818 |  |  | $ | (249 | ) |  | $ | 556 |
Forward commitments | Mortgage banking income |  | (25 | ) |  | (1,173 | ) |  | (164 | ) |  | (273 | )
|  |  | $ | 190 |  |  | $ | (355 | ) |  | $ | (413 | ) |  | $ | 283 |
Litigation. In March 2011, a purported class action lawsuit was filed in the First Circuit Court of the state of Hawaii by a customer who claimed that ASB had improperly charged overdraft fees on debit card transactions. ASB filed a motion to dismiss the lawsuit on the basis that as a bank chartered under federal law, ASB believes its business practices are governed by federal regulations established for federal savings banks and not by state law. In July 2011, the Circuit Court denied ASB’s motion and ASB appealed that decision. ASB’s appeal is currently pending before the Hawaii Supreme Court. The probable outcome and range of reasonably possible loss remains indeterminable at this time. 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.

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