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)	2016		2015		2016		2015
Interest and dividend income
Interest and fees on loans	$	50,444	$	46,413	$	148,571	$	137,646
Interest and dividends on investment securities	4,759		4,213		14,219		10,570
Total interest and dividend income	55,203		50,626		162,790		148,216
Interest expense
Interest on deposit liabilities	1,871		1,355		5,154		3,881
Interest on other borrowings	1,464		1,515		4,416		4,468
Total interest expense	3,335		2,870		9,570		8,349
Net interest income	51,868		47,756		153,220		139,867
Provision for loan losses	5,747		2,997		15,266		5,436
Net interest income after provision for loan losses	46,121		44,759		137,954		134,431
Noninterest income
Fees from other financial services	5,599		5,639		16,799		16,544
Fee income on deposit liabilities	5,627		5,883		16,045		16,622
Fee income on other financial products	2,151		2,096		6,563		6,088
Bank-owned life insurance	1,616		1,021		3,620		3,062
Mortgage banking income	2,347		1,437		5,096		5,327
Gains on sale of investment securities, net	—		—		598		—
Other income, net	1,165		2,389		1,786		3,363
Total noninterest income	18,505		18,465		50,507		51,006
Noninterest expense
Compensation and employee benefits	22,844		22,728		67,197		66,813
Occupancy	3,991		4,128		12,244		12,250
Data processing	3,150		3,032		9,599		9,101
Services	2,427		2,556		8,093		7,730
Equipment	1,759		1,608		5,193		4,999
Office supplies, printing and postage	1,483		1,511		4,431		4,297
Marketing	747		934		2,507		2,619
FDIC insurance	907		809		2,704		2,393
Other expense	4,591		5,116		13,948		14,076
Total noninterest expense	41,899		42,422		125,916		124,278
Income before income taxes	22,727		20,802		62,545		61,159
Income taxes	7,623		7,351		21,483		21,382
Net income	$	15,104	$	13,451	$	41,062	$	39,777

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended September 30					Nine months ended September 30
(in thousands)	2016			2015		2016			2015
Net income	$	15,104		$	13,451	$	41,062		$	39,777
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for-sale investment securities:
Net unrealized gains (losses) on available-for-sale investment securities arising during the period, net of (taxes) benefits of $1,417, $(2,543), $(5,413) and $(2,382) for the respective periods	(2,147		)	3,851		8,197			3,608
Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil, $238 and nil for the respective periods	—			—		(360		)	—
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 $144, $249, $421 and $763 for the respective periods	219			376		638			1,155
Other comprehensive income (loss), net of taxes	(1,928		)	4,227		8,475			4,763
Comprehensive income	$	13,176		$	17,678	$	49,537		$	44,540

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	September 30, 2016						December 31, 2015
Assets
Cash and due from banks				$	109,591					$	127,201
Interest-bearing deposits				103,989						93,680
Available-for-sale investment securities, at fair value				996,984						820,648
Stock in Federal Home Loan Bank, at cost				11,218						10,678
Loans receivable held for investment				4,734,638						4,615,819
Allowance for loan losses				(58,737		)				(50,038		)
Net loans				4,675,901						4,565,781
Loans held for sale, at lower of cost or fair value				26,743						4,631
Other				330,054						309,946
Goodwill				82,190						82,190
Total assets				$	6,336,670					$	6,014,755

Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,570,613					$	1,520,374
Deposit liabilities—interest-bearing				3,810,108						3,504,880
Other borrowings				265,388						328,582
Other				106,396						101,029
Total liabilities				5,752,505						5,454,865
Commitments and contingencies
Common stock				1						1
Additional paid in capital				342,234						340,496
Retained earnings				250,726						236,664
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains (losses) on securities	$	5,965					$	(1,872	)
Retirement benefit plans	(14,761		)	(8,796		)	(15,399		)	(17,271		)
Total shareholder’s equity				584,165						559,890
Total liabilities and shareholder’s equity				$	6,336,670					$	6,014,755

Other assets
Bank-owned life insurance				$	141,262					$	138,139
Premises and equipment, net				91,354						88,077
Prepaid expenses				4,072						3,550
Accrued interest receivable				15,489						15,192
Mortgage-servicing rights				9,191						8,884
Low-income housing equity investments				48,474						37,793
Real estate acquired in settlement of loans, net				219						1,030
Other				19,993						17,281
				$	330,054					$	309,946
Other liabilities
Accrued expenses				$	37,671					$	30,705
Federal and state income taxes payable				13,971						13,448
Cashier’s checks				24,923						21,768
Advance payments by borrowers				5,531						10,311
Other				24,300						24,797
				$	106,396					$	101,029

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 $165 million and $100 million, respectively, as of September 30, 2016 and $229 million and $100 million, respectively, as of December 31, 2015.

Available-for-sale investment securities. The major components of investment securities were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value			Gross unrealized losses
										Less than 12 months						12 months or longer
(dollars in thousands)										Number of issues	Fair value		Amount			Number of issues	Fair value		Amount
September 30, 2016
Available-for-sale
U.S. Treasury and federal agency obligations	$	186,287	$	3,125	$	(40	)	$	189,372	1	$	9,988	$	(12	)	1	$	3,834	$	(28	)
Mortgage-related securities- FNMA, FHLMC and GNMA	800,794		7,782		(964		)	807,612		18	134,687		(323		)	13	51,458		(641		)
	$	987,081	$	10,907	$	(1,004	)	$	996,984	19	$	144,675	$	(335	)	14	$	55,292	$	(669	)
December 31, 2015
Available-for-sale
U.S. Treasury and federal agency obligations	$	213,234	$	1,025	$	(1,300	)	$	212,959	13	$	83,053	$	(866	)	3	$	17,378	$	(434	)
Mortgage-related securities- FNMA, FHLMC and GNMA	610,522		3,564		(6,397		)	607,689		38	305,785		(2,866		)	25	125,817		(3,531		)
	$	823,756	$	4,589	$	(7,697	)	$	820,648	51	$	388,838	$	(3,732	)	28	$	143,195	$	(3,965	)

ASB does not believe that the investment securities that were in an unrealized loss position at September 30, 2016, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to rising interest rates relative to when the investment securities were purchased and not due to the credit quality of the investment securities. The contractual cash flows of the investment securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for the quarters ended September 30, 2016 and 2015.

U.S. Treasury and federal agency obligations have contractual terms to maturity. Mortgage-related securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages.

The contractual maturities of available-for-sale investment securities were as follows:



September 30, 2016	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years	87,165		88,754
Due after five years through ten years	78,222		79,534
Due after ten years	20,900		21,084
	186,287		189,372
Mortgage-related securities-FNMA,FHLMC and GNMA	800,794		807,612
Total available-for-sale securities	$	987,081	$	996,984

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, 2016
Allowance for loan losses:
Beginning balance	$	4,384		$	13,561	$	7,836		$	1,689		$	6,993		$	12		$	17,085		$	3,771		$	—	$	55,331
Charge-offs	(373		)	—		(108		)	—			—			—			(833		)	(1,879		)	—		(3,193		)
Recoveries	92			—		15			187			—			—			347			211			—		852
Provision	154			1,289		(248		)	23			179			(2		)	2,457			1,895			—		5,747
Ending balance	$	4,257		$	14,850	$	7,495		$	1,899		$	7,172		$	10		$	19,056		$	3,998		$	—	$	58,737
Three months ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	4,291		$	10,420	$	6,613		$	2,103		$	2,575		$	18		$	17,469		$	2,876		$	—	$	46,365
Charge-offs	(138		)	—		(185		)	—			—			—			(126		)	(1,271		)	—		(1,720		)
Recoveries	45			—		33			34			—			—			279			241			—		632
Provision	285			987		446			(73		)	944			(5		)	(920		)	1,333			—		2,997
Ending balance	$	4,483		$	11,407	$	6,907		$	2,064		$	3,519		$	13		$	16,702		$	3,179		$	—	$	48,274
Nine months ended September 30, 2016
Allowance for loan losses:
Beginning balance	$	4,186		$	11,342	$	7,260		$	1,671		$	4,461		$	13		$	17,208		$	3,897		$	—	$	50,038
Charge-offs	(433		)	—		(108		)	—			—			—			(3,138		)	(4,977		)	—		(8,656		)
Recoveries	144			—		46			306			—			—			907			686			—		2,089
Provision	360			3,508		297			(78		)	2,711			(3		)	4,079			4,392			—		15,266
Ending balance	$	4,257		$	14,850	$	7,495		$	1,899		$	7,172		$	10		$	19,056		$	3,998		$	—	$	58,737
September 30, 2016
Ending balance: individually evaluated for impairment	$	1,625		$	161	$	1,040		$	951		$	—		$	—		$	4,734		$	2				$	8,513
Ending balance: collectively evaluated for impairment	$	2,632		$	14,689	$	6,455		$	948		$	7,172		$	10		$	14,322		$	3,996		$	—	$	50,224
Financing Receivables:
Ending balance	$	2,054,460		$	774,349	$	859,952		$	19,666		$	140,758		$	15,073		$	717,450		$	158,065				$	4,739,773
Ending balance: individually evaluated for impairment	$	21,566		$	3,762	$	5,886		$	4,428		$	—		$	—		$	28,685		$	11				$	64,338
Ending balance: collectively evaluated for impairment	$	2,032,894		$	770,587	$	854,066		$	15,238		$	140,758		$	15,073		$	688,765		$	158,054				$	4,675,435
Nine months ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	4,662		$	8,954	$	6,982		$	1,875		$	5,471		$	28		$	14,017		$	3,629		$	—	$	45,618
Charge-offs	(352		)	—		(205		)	—			—			—			(928		)	(3,196		)	—		(4,681		)
Recoveries	112			—		72			219			—			—			726			772			—		1,901
Provision	61			2,453		58			(30		)	(1,952		)	(15		)	2,887			1,974			—		5,436
Ending balance	$	4,483		$	11,407	$	6,907		$	2,064		$	3,519		$	13		$	16,702		$	3,179		$	—	$	48,274
December 31, 2015
Ending balance: individually evaluated for impairment	$	1,453		$	—	$	442		$	891		$	—		$	—		$	3,527		$	7				$	6,320
Ending balance: collectively evaluated for impairment	$	2,733		$	11,342	$	6,818		$	780		$	4,461		$	13		$	13,681		$	3,890		$	—	$	43,718
Financing Receivables:
Ending balance	$	2,069,665		$	690,561	$	846,294		$	18,229		$	100,796		$	14,089		$	758,659		$	123,775				$	4,622,068
Ending balance: individually evaluated for impairment	$	22,457		$	1,188	$	3,225		$	5,683		$	—		$	—		$	21,119		$	13				$	53,685
Ending balance: collectively evaluated for impairment	$	2,047,208		$	689,373	$	843,069		$	12,546		$	100,796		$	14,089		$	737,540		$	123,762				$	4,568,383

Credit quality. ASB performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The objectives of the loan review and grading procedures are to identify, in a timely manner, existing or emerging credit trends so that appropriate steps can be initiated to manage risk and avoid or minimize future losses. Loans subject to grading include commercial, commercial real estate and commercial construction loans.

Each loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful and Loss. The AQR is a function of the probability of default model rating, the loss given default and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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



	September 30, 2016						December 31, 2015
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	681,712	$	114,325	$	643,547	$	642,410	$	86,991	$	703,208
Special mention	58,411		—		17,654		7,710		13,805		7,029
Substandard	34,226		26,433		54,156		40,441		—		47,975
Doubtful	—		—		2,093		—		—		447
Loss	—		—		—		—		—		—
Total	$	774,349	$	140,758	$	717,450	$	690,561	$	100,796	$	758,659

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, 2016
Real estate:
Residential 1-4 family	$	4,293	$	1,626	$	10,576	$	16,495	$	2,037,965	$	2,054,460	$	—
Commercial real estate	—		—		—		—		774,349		774,349		—
Home equity line of credit	827		787		674		2,288		857,664		859,952		—
Residential land	—		—		541		541		19,125		19,666		393
Commercial construction	—		—		—		—		140,758		140,758		—
Residential construction	—		—		—		—		15,073		15,073		—
Commercial	681		997		19		1,697		715,753		717,450		—
Consumer	1,708		636		813		3,157		154,908		158,065		—
Total loans	$	7,509	$	4,046	$	12,623	$	24,178	$	4,715,595	$	4,739,773	$	393
December 31, 2015
Real estate:
Residential 1-4 family	$	4,967	$	3,289	$	11,503	$	19,759	$	2,049,906	$	2,069,665	$	—
Commercial real estate	—		—		—		—		690,561		690,561		—
Home equity line of credit	896		706		477		2,079		844,215		846,294		—
Residential land	—		—		415		415		17,814		18,229		—
Commercial construction	—		—		—		—		100,796		100,796		—
Residential construction	—		—		—		—		14,089		14,089		—
Commercial	125		223		878		1,226		757,433		758,659		—
Consumer	1,383		593		644		2,620		121,155		123,775		—
Total loans	$	7,371	$	4,811	$	13,917	$	26,099	$	4,595,969	$	4,622,068	$	—

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



(in thousands)	September 30, 2016		December 31, 2015
Real estate:
Residential 1-4 family	$	20,929	$	20,554
Commercial real estate	3,762		1,188
Home equity line of credit	2,404		2,254
Residential land	776		970
Commercial construction	—		—
Residential construction	—		—
Commercial	23,588		20,174
Consumer	1,157		895
Total nonaccrual loans	$	52,616	$	46,035
Real estate:
Residential 1-4 family	$	—	$	—
Commercial real estate	—		—
Home equity line of credit	—		—
Residential land	393		—
Commercial construction	—		—
Residential construction	—		—
Commercial	—		—
Consumer	—		—
Total accruing loans 90 days or more past due	$	393	$	—
Real estate:
Residential 1-4 family	$	13,308	$	13,962
Commercial real estate	—		—
Home equity line of credit	4,501		2,467
Residential land	3,258		4,713
Commercial construction	—		—
Residential construction	—		—
Commercial	4,673		1,104
Consumer	—		—
Total troubled debt restructured loans not included above	$	25,740	$	22,246

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



	September 30, 2016						Three months ended September 30, 2016				Nine months ended September 30, 2016
(in thousands)	Recorded investment		Unpaid principal balance		Related Allowance		Average recorded investment		Interest income recognized*		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	10,137	$	11,473	$	—	$	10,069	$	65	$	10,378	$	268
Commercial real estate	1,351		1,645		—		1,206		—		1,177		—
Home equity line of credit	1,300		1,695		—		1,220		6		1,035		15
Residential land	1,608		2,304		—		1,521		16		1,532		47
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	6,624		7,637		—		14,352		141		9,240		154
Consumer	—		—		—		10		—		3		—
	$	21,020	$	24,754	$	—	$	28,378	$	228	$	23,365	$	484
With an allowance recorded
Real estate:
Residential 1-4 family	$	11,429	$	11,632	$	1,625	$	11,800	$	119	$	11,933	$	356
Commercial real estate	2,411		2,482		161		2,444		—		1,939		—
Home equity line of credit	4,587		4,657		1,040		4,165		36		3,470		91
Residential land	2,819		2,819		951		2,915		44		3,090		165
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	22,061		22,434		4,734		11,433		65		15,075		275
Consumer	11		11		2		11		—		12		—
	$	43,318	$	44,035	$	8,513	$	32,768	$	264	$	35,519	$	887
Total
Real estate:
Residential 1-4 family	$	21,566	$	23,105	$	1,625	$	21,869	$	184	$	22,311	$	624
Commercial real estate	3,762		4,127		161		3,650		—		3,116		—
Home equity line of credit	5,887		6,352		1,040		5,385		42		4,505		106
Residential land	4,427		5,123		951		4,436		60		4,622		212
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	28,685		30,071		4,734		25,785		206		24,315		429
Consumer	11		11		2		21		—		15		—
	$	64,338	$	68,789	$	8,513	$	61,146	$	492	$	58,884	$	1,371



	December 31, 2015						Three months ended September 30, 2015				Nine months ended September 30, 2015
(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	$	10,596	$	11,805	$	—	$	11,159	$	119	$	11,301	$	274
Commercial real estate	1,188		1,436		—		—		74		362		74
Home equity line of credit	707		948		—		498		1		444		3
Residential land	1,644		2,412		—		2,280		29		2,647		125
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	5,671		6,333		—		4,250		3		5,659		144
Consumer	—		—		—		—		—		—		—
	$	19,806	$	22,934	$	—	$	18,187	$	226	$	20,413	$	620
With an allowance recorded
Real estate:
Residential 1-4 family	$	11,861	$	11,914	$	1,453	$	11,451	$	174	$	11,585	$	430
Commercial real estate	—		—		—		—		—		1,985		—
Home equity line of credit	2,518		2,579		442		2,048		13		1,295		27
Residential land	4,039		4,117		891		3,971		74		4,435		241
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	15,448		16,073		3,527		18,487		106		10,942		192
Consumer	13		13		7		14		—		15		—
	$	33,879	$	34,696	$	6,320	$	35,971	$	367	$	30,257	$	890
Total
Real estate:
Residential 1-4 family	$	22,457	$	23,719	$	1,453	$	22,610	$	293	$	22,886	$	704
Commercial real estate	1,188		1,436		—		—		74		2,347		74
Home equity line of credit	3,225		3,527		442		2,546		14		1,739		30
Residential land	5,683		6,529		891		6,251		103		7,082		366
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial	21,119		22,406		3,527		22,737		109		16,601		336
Consumer	13		13		7		14		—		15		—
	$	53,685	$	57,630	$	6,320	$	54,158	$	593	$	50,670	$	1,510


*	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 or reduction of principal payments. ASB generally does not reduce the interest rate on commercial loan TDR modifications. Occasionally, additional collateral and/or guaranties are obtained.

All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the allowance for loan losses based on the appropriate method of measuring impairment: (1) present value of expected future cash flows discounted at the loan’s effective original contractual rate, (2) fair value of collateral less cost to sell or (3) observable market price. The financial impact of the calculated impairment amount is an increase to the allowance associated with the modified loan. When available information confirms that specific loans or portions thereof are uncollectible (confirmed losses), these amounts are charged off against the allowance for loan losses.

Loan modifications that occurred and the impact on the allowance for loan losses were as follows:



	Three months ended September 30, 2016							Nine months ended September 30, 2016
	Number of contracts	Outstanding recorded investment¹				Net increase in allowance		Number of contracts	Outstanding recorded investment¹				Net increase in allowance
(dollars in thousands)	Number of contracts	Pre-modification		Post-modification		(as of period end)		Number of contracts	Pre-modification		Post-modification		(as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	2	$	251	$	251	$	46	11	$	2,239	$	2,351	$	305
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	12	1,268		1,268		237		30	2,705		2,705		492
Residential land	—	—		—		—		1	120		121		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	6	3,462		3,462		53		14	20,119		20,119		723
Consumer	—	—		—		—		—	—		—		—
	20	$	4,981	$	4,981	$	336	56	$	25,183	$	25,296	$	1,520



	Three months ended September 30, 2015							Nine months ended September 30, 2015
	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	$	860	$	866	$	1	10	$	2,055	$	2,079	$	48
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	10	943		943		140		32	2,062		2,062		300
Residential land	—	—		—		—		—	—		—		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	2	1,208		1,208		16		6	1,461		1,461		94
Consumer	—	—		—		—		—	—		—		—
	15	$	3,011	$	3,017	$	157	48	$	5,578	$	5,602	$	442


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 in the indicated periods, and for which the payment of default occurred within one year of the modification, were as follows:



	Three months ended September 30, 2016			Nine months ended September 30, 2016
(dollars in thousands)	Number of contracts	Recorded investment		Number of contracts	Recorded investment
Troubled debt restructurings that subsequently defaulted
Real estate:
Residential 1-4 family	1	$	239	1	$	239
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		—	—
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	—	—		1	25
Consumer	—	—		—	—
	1	$	239	2	$	264



	Three months ended September 30, 2015			Nine months ended September 30, 2015
(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	7		1	7
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	—	—		—	—
Consumer	—	—		—	—
	1	$	7	1	$	7

If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR totaled $2.5 million at September 30, 2016.

Mortgage servicing rights. In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these loans other than the servicing rights of certain loans sold.

ASB received proceeds from the sale of residential mortgages of $70.0 million and $58.2 million for the three months ended September 30, 2016 and 2015 and $168.5 million and $231.5 million for the nine months ended September 30, 2016 and 2015, respectively, and recognized gains on such sales of $2.4 million and $1.4 million for the three months ended September 30, 2016 and 2015 and $5.1 million and $5.3 million for the nine months ended September 30, 2016 and 2015 respectively.

There were no repurchased mortgage loans for the three months ended September 30, 2016 and 2015 and nine months ended September 30, 2016 and 2015. The repurchase reserve was $0.1 million and $0.1 million as of September 30, 2016 and 2015, respectively.

Mortgage servicing fees, a component of other income, net, were $0.7 million and $0.9 million for the three months ended September 30, 2016 and 2015 and $2.1 million and $2.7 million for the nine months ended September 30, 2016 and 2015, respectively.

Changes in the carrying value of mortgage servicing rights were as follows:



(in thousands)	Gross carrying amount¹		Accumulated amortization¹			Valuation allowance		Net carrying amount
September 30, 2016	$	16,475	$	(7,284	)	$	—	$	9,191
December 31, 2015	14,531		(5,647		)	—		8,884

¹ Reflects the impact of loans paid in full.

Changes related to mortgage servicing rights were as follows:



(in thousands)	2016			2015
Mortgage servicing rights
Balance, January 1	$	8,884		$	11,749
Amount capitalized	1,944			2,636
Amortization	(1,637		)	(2,123		)
Other-than-temporary impairment	—			(4		)
Carrying amount before valuation allowance, September 30	9,191			12,258
Valuation allowance for mortgage servicing rights
Balance, January 1	—			209
Provision (recovery)	—			(205		)
Other-than-temporary impairment	—			(4		)
Balance, September 30	—			—
Net carrying value of mortgage servicing rights	$	9,191		$	12,258

ASB capitalizes mortgage servicing rights acquired through either the purchase or origination of mortgage loans for sale with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the mortgage servicing rights to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the mortgage servicing rights. ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15 and 30 year mortgages and note rate in bands of 50 to 100 basis points. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Changes in mortgage interest rates impact the value of ASB’s mortgage servicing rights. Rising interest rates typically result in slower prepayment speeds in the loans being serviced for others, which increases the value of mortgage servicing rights, whereas declining interest rates typically result in faster prepayment speeds which decrease the value of mortgage servicing rights and increase the amortization of the mortgage servicing rights. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others.

ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in other income, net in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable.

Key assumptions used in estimating the fair value of ASB’s mortgage servicing rights used in the impairment analysis were as follows:



(dollars in thousands)	September 30, 2016			December 31, 2015
Unpaid principal balance	$	1,160,266		$	1,097,314
Weighted average note rate	4.00		%	4.05		%
Weighted average discount rate	9.4		%	9.6		%
Weighted average prepayment speed	12.4		%	9.3		%

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



(dollars in thousands)	September 30, 2016			December 31, 2015
Prepayment rate:
25 basis points adverse rate change	$	(533	)	$	(561	)
50 basis points adverse rate change	(952		)	(1,104		)
Discount rate:
25 basis points adverse rate change	(90		)	(111		)
50 basis points adverse rate change	(179		)	(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 balance sheet. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for 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, 2016	$165	$—	$165
December 31, 2015	229	—	229



	Gross amount not offset in the Balance Sheet
(in millions)	Liabilities presented in the Balance Sheet		Financial instruments		Cash collateral pledged
September 30, 2016
Financial institution	$	50	$	53	$	—
Government entities	14		16		—
Commercial account holders	101		135		—
Total	$	165	$	204	$	—
December 31, 2015
Financial institution	$	50	$	56	$	—
Government entities	56		61		—
Commercial account holders	123		144		—
Total	$	229	$	261	$	—

The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the consolidated balance sheets. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts.

Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risks associated with selling loans.

ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

The notional amount and fair value of ASB’s derivative financial instruments were as follows:



	September 30, 2016					December 31, 2015
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	40,700	$	843		$	22,241	$	384
Forward commitments	43,500		(163		)	23,644		(29		)

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, 2016				December 31, 2015
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	843	$	—	$	384	$	—
Forward commitments	1		164		1		30
	$	844	$	164	$	385	$	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 the statements of income:



Derivative Financial Instruments Not Designated as Hedging Instruments	Location of net gains (losses) recognized in the Statement of Income	Three months ended September 30					Nine months ended September 30
(in thousands)		2016		2015			2016			2015
Interest rate lock commitments	Mortgage banking income	$	48	$	139		$	459		$	195
Forward commitments	Mortgage banking income	103		(117		)	(134		)	(18		)
		$	151	$	22		$	325		$	177

Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $18.1 million and $10.1 million at September 30, 2016 and December 31, 2015, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. Cash contributions and payments made on commitments to LIHTC investment partnerships are classified as operating activities in the Company’s consolidated statements of cash flows. As of September 30, 2016, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.

Contingencies. ASB is subject in the normal course of business to pending and threatened legal proceedings. Management does not anticipate that the aggregate ultimate liability arising out of these pending or threatened legal proceedings will be material to its financial position. However, ASB cannot rule out the possibility that such outcomes could have a material adverse effect on the results of operations or liquidity for a particular reporting period in the future.