4· Bank segment (HEI only)

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



Years ended December 31	2017		2016		2015
(in thousands)
Interest and dividend income
Interest and fees on loans	$	207,255	$	199,774	$	184,782
Interest and dividends on investment securities	28,823		19,184		15,120
Total interest and dividend income	236,078		218,958		199,902
Interest expense
Interest on deposit liabilities	9,660		7,167		5,348
Interest on other borrowings	2,496		5,588		5,978
Total interest expense	12,156		12,755		11,326
Net interest income	223,922		206,203		188,576
Provision for loan losses	10,901		16,763		6,275
Net interest income after provision for loan losses	213,021		189,440		182,301
Noninterest income
Fees from other financial services	22,796		22,384		22,211
Fee income on deposit liabilities	22,204		21,759		22,368
Fee income on other financial products	7,205		8,707		8,094
Bank-owned life insurance	5,539		4,637		4,078
Mortgage banking income	2,201		6,625		6,330
Gains on sale of investment securities, net	—		598		—
Other income, net	1,617		2,256		4,750
Total noninterest income	61,562		66,966		67,831
Noninterest expense
Compensation and employee benefits	95,751		90,117		90,518
Occupancy	16,699		16,321		16,365
Data processing	13,280		13,030		12,103
Services	10,994		11,054		10,204
Equipment	7,232		6,938		6,577
Office supplies, printing and postage	6,182		6,075		5,749
Marketing	3,501		3,489		3,463
FDIC insurance	2,904		3,543		3,274
Other expense	19,324		18,487		18,067
Total noninterest expense	175,867		169,054		166,320
Income before income taxes	98,716		87,352		83,812
Income taxes	31,719		30,073		29,082
Net income	$	66,997	$	57,279	$	54,730

Reconciliation to amounts per HEI Consolidated Statements of Income*:



Years ended December 31	2017		2016		2015
Interest and dividend income	$	236,078	$	218,958	$	199,902
Noninterest income	61,562		66,966		67,831
*Revenues-Bank	297,640		285,924		267,733
Total interest expense	12,156		12,755		11,326
Provision for loan losses	10,901		16,763		6,275
Total noninterest expense	175,867		169,054		166,320
*Expenses-Bank	198,924		198,572		183,921
Income before income taxes/*Operating income-Bank	$	98,716	$	87,352	$	83,812

Statements of Comprehensive Income Data



Years ended December 31	2017			2016			2015
(in thousands)
Net income	$	66,997		$	57,279		$	54,730
Other comprehensive income (loss), net of taxes:
Net unrealized losses on available-for sale investment securities:
Net unrealized losses on available-for sale investment securities arising during the period, net of tax benefits of $2,886, $3,763 and $1,541 for 2017, 2016 and 2015, respectively	(4,370		)	(5,699		)	(2,334		)
Reclassification adjustment for net realized gains included in net income, net of taxes of nil, $238 and nil for 2017, 2016 and 2015, respectively	—			(360		)	—
Retirement benefit plans:
Net gains arising during the period, net of taxes of nil, nil and $59 for 2017, 2016 and 2015, respectively	—			—			90
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $812, $566 and $1,011 for 2017, 2016 and 2015, respectively	1,231			857			1,531
Other comprehensive loss, net of tax benefits	(3,139		)	(5,202		)	(713		)
Comprehensive income	$	63,858		$	52,077		$	54,017

Balance Sheets Data



December 31				2017						2016
(in thousands)
Assets
Cash and due from banks				$	140,934					$	137,083
Interest-bearing deposits				93,165						52,128
Restricted cash				—						1,764
Investment securities
Available-for-sale, at fair value				1,401,198						1,105,182
Held-to-maturity, at amortized cost (fair value of $44,412 and nil, respectively)				44,515						—
Stock in Federal Home Loan Bank, at cost				9,706						11,218
Loans receivable held for investment				4,670,768						4,738,693
Allowance for loan losses				(53,637		)				(55,533		)
Net loans				4,617,131						4,683,160
Loans held for sale, at lower of cost or fair value				11,250						18,817
Other				398,570						329,815
Goodwill				82,190						82,190
Total assets				$	6,798,659					$	6,421,357
Liabilities and shareholder’s equity
Deposit liabilities–noninterest-bearing				$	1,760,233					$	1,639,051
Deposit liabilities–interest-bearing				4,130,364						3,909,878
Other borrowings				190,859						192,618
Other				110,356						101,635
Total liabilities				6,191,812						5,843,182
Commitments and contingencies
Common stock				1						1
Additional paid in capital				345,018						342,704
Retained earnings				292,957						257,943
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities	$	(14,951	)				$	(7,931	)
Retirement benefit plans	(16,178		)	(31,129		)	(14,542		)	(22,473		)
Total shareholder’s equity				606,847						578,175
Total liabilities and shareholder’s equity				$	6,798,659					$	6,421,357



December 31	2017		2016
(in thousands)
Other assets
Bank-owned life insurance	$	148,775	$	143,197
Premises and equipment, net	136,270		90,570
Prepaid expenses	3,961		3,348
Accrued interest receivable	18,724		16,824
Mortgage-servicing rights	8,639		9,373
Low-income housing investments	59,016		47,081
Real estate acquired in settlement of loans, net	133		1,189
Other	23,052		18,233
	$	398,570	$	329,815
Other liabilities
Accrued expenses	$	39,312	$	36,754
Federal and state income taxes payable	3,736		4,728
Cashier’s checks	27,000		24,156
Advance payments by borrowers	10,245		10,335
Other	30,063		25,662
	$	110,356	$	101,635

Bank-owned life insurance is life insurance purchased by ASB on the lives of certain key employees, with ASB as the beneficiary. The insurance is used to fund employee benefits through tax-free income from increases in the cash value of the policies and insurance proceeds paid to ASB upon an insured’s death.

The increase in premises and equipment, net was due to the expenditures of $32.7 million for the new campus project.

Investment securities. The major components of investment securities were as follows:



										Gross unrealized losses
			Gross		Gross			Estimated		Less than 12 months						12 months or longer
(dollars in thousands)	Amortized cost		unrealized gains		unrealized losses			fair value		Number of issues	Fair value		Amount			Number of issues	Fair value		Amount
December 31, 2017
Available-for-sale
U.S. Treasury and federal agency obligations	$	185,891	$	438	$	(2,031	)	$	184,298	15	$	83,137	$	(825	)	8	$	62,296	$	(1,206	)
Mortgage-related securities- FNMA, FHLMC and GNMA	1,220,304		793		(19,624		)	1,201,473		67	653,635		(6,839		)	77	459,912		(12,785		)
Mortgage revenue bond	15,427		—		—			15,427		—	—		—			—	—		—
	$	1,421,622	$	1,231	$	(21,655	)	$	1,401,198	82	$	736,772	$	(7,664	)	85	$	522,208	$	(13,991	)
Held-to-maturity
Mortgage-related securities- FNMA, FHLMC and GNMA	$	44,515	$	1	$	(104	)	$	44,412	2	$	35,744	$	(104	)	—	$	—	$	—
	$	44,515	$	1	$	(104	)	$	44,412	2	$	35,744	$	(104	)	—	$	—	$	—
December 31, 2016
Available-for-sale
U.S. Treasury and federal agency obligations	$	193,515	$	920	$	(2,154	)	$	192,281	18	$	123,475	$	(2,010	)	1	$	3,485	$	(144	)
Mortgage-related securities- FNMA, FHLMC and GNMA	909,408		1,742		(13,676		)	897,474		88	709,655		(12,143		)	13	47,485		(1,533		)
Mortgage revenue bond	15,427		—		—			15,427		—	—		—			—	—		—
	$	1,118,350	$	2,662	$	(15,830	)	$	1,105,182	106	$	833,130	$	(14,153	)	14	$	50,970	$	(1,677	)

ASB did not have any investment securities classified as held-to-maturity as of December 31, 2016.

ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2017, represent an OTTI. Total gross unrealized losses were primarily attributable to rising interest rates relative to when the investment securities were purchased and not due to the credit quality of the investment securities. The contractual cash flows of the U.S. Treasury, federal agency obligations and mortgage-related securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for 2017, 2016 and 2015.

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

The contractual maturities of investment securities were as follows:



	Amortized		Fair
December 31, 2017	Cost		value
(in thousands)
Available-for-sale
Due in one year or less	$	5,000	$	4,992
Due after one year through five years	87,404		87,020
Due after five years through ten years	80,161		79,358
Due after ten years	28,753		28,355
	201,318		199,725
Mortgage-related securities-FNMA, FHLMC and GNMA	1,220,304		1,201,473
	$	1,421,622	$	1,401,198
Held-to-maturity
Mortgage-related securities-FNMA, FHLMC and GNMA	$	44,515	$	44,412
	$	44,515	$	44,412

The proceeds, gross gains and losses from sales of available-for-sale investment securities were as follows:



Years ended December 31	2017		2016		2015
(in millions)
Proceeds	$	—	$	16.4	$	—
Gross gains	—		0.6		—
Gross losses	—		—		—

Interest income from taxable and non-taxable investment securities were as follows:



Years ended December 31	2017		2016		2015
(in thousands)
Taxable	$	28,398	$	19,166	$	15,120
Non-taxable	425		18		—
	$	28,823	$	19,184	$	15,120

ASB pledged securities with a market value of approximately $411.4 million and $277.1 million as of December 31, 2017 and 2016, respectively, as collateral for public funds and other deposits, automated clearinghouse transactions with Bank of Hawaii, borrowing at the discount window of the Federal Reserve Bank of San Francisco, and deposits in ASB’s bankruptcy account with the Federal Reserve Bank of San Francisco. As of December 31, 2017 and 2016, securities with a carrying value of $165.1 million and $114.9 million, respectively, were pledged as collateral for securities sold under agreements to repurchase.

Stock in FHLB. As of December 31, 2017 and 2016, ASB’s stock in FHLB was carried at cost ($9.7 million and $11.2 million, respectively) because it can only be redeemed at par and it is a required investment based on measurements of ASB’s capital, assets and borrowing levels.

Periodically and as conditions warrant, ASB reviews its investment in the stock of the FHLB for impairment. ASB evaluated its investment in FHLB stock for OTTI as of December 31, 2017, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2017 based on its evaluation of the underlying investment.

Future deterioration in the FHLB's financial position and/or negative developments in any of the factors considered in ASB's impairment evaluation may result in future impairment losses.

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



December 31	2017			2016
(in thousands)
Real estate:
Residential 1-4 family	$	2,118,047		$	2,048,051
Commercial real estate	733,106			800,395
Home equity line of credit	913,052			863,163
Residential land	15,797			18,889
Commercial construction	108,273			126,768
Residential construction	14,910			16,080
Total real estate	3,903,185			3,873,346
Commercial	544,828			692,051
Consumer	223,564			178,222
Total loans	4,671,577			4,743,619
Less: Deferred fees and discounts	(809		)	(4,926		)
Allowance for loan losses	(53,637		)	(55,533		)
Total loans, net	$	4,617,131		$	4,683,160

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

ASB services real estate loans for investors (principal balance of $1.2 billion, $1.2 billion and $1.5 billion as of December 31, 2017, 2016 and 2015, respectively), which are not included in the accompanying balance sheets data. ASB reports fees earned for servicing such loans as income when the related mortgage loan payments are collected and charges loan servicing cost to expense as incurred.

As of December 31, 2017 and 2016, ASB had pledged loans with an amortized cost of approximately $2.4 billion as collateral to secure advances from the FHLB.

As of December 31, 2017 and 2016, the aggregate amount of loans to directors and executive officers of ASB and its affiliates and any related interests (as defined in Federal Reserve Board (FRB) Regulation O) of such individuals, was $23.8 million and $22.9 million, respectively. As of December 31, 2017 and 2016, $18.7 million and $19.0 million of the loan balances, respectively, were to related interests of individuals who are directors of ASB. All such loans were made at ASB’s normal credit terms.

Allowance for loan losses. As discussed in Note 1, ASB must maintain an allowance for loan losses that is adequate to absorb estimated probable credit losses associated with its loan portfolio.

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			Consumer			Unallo- cated		Total
December 31, 2017
Allowance for loan losses:
Beginning balance	$	2,873		$	16,004		$	5,039		$	1,738		$	6,449		$	12		$	16,618		$	6,800		$	—	$	55,533
Charge-offs	(826		)	—			(14		)	(210		)	—			—			(4,006		)	(11,757		)	—		(16,813		)
Recoveries	157			—			308			482			—			—			1,852			1,217			—		4,016
Provision	698			(208		)	2,189			(1,114		)	(1,778		)	—			(3,613		)	14,727			—		10,901
Ending balance	$	2,902		$	15,796		$	7,522		$	896		$	4,671		$	12		$	10,851		$	10,987		$	—	$	53,637
Ending balance: individually evaluated for impairment	$	1,248		$	65		$	647		$	47		$	—		$	—		$	694		$	29				$	2,730
Ending balance: collectively evaluated for impairment	$	1,654		$	15,731		$	6,875		$	849		$	4,671		$	12		$	10,157		$	10,958		$	—	$	50,907
Financing Receivables:
Ending balance	$	2,118,047		$	733,106		$	913,052		$	15,797		$	108,273		$	14,910		$	544,828		$	223,564				$	4,671,577
Ending balance: individually evaluated for impairment	$	18,284		$	1,016		$	8,188		$	1,265		$	—		$	—		$	4,574		$	66				$	33,393
Ending balance: collectively evaluated for impairment	$	2,099,763		$	732,090		$	904,864		$	14,532		$	108,273		$	14,910		$	540,254		$	223,498				$	4,638,184
December 31, 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	(639		)	—			(112		)	(138		)	—			—			(5,943		)	(7,413		)	—		(14,245		)
Recoveries	421			—			59			461			—			—			1,093			943			—		2,977
Provision	(1,095		)	4,662			(2,168		)	(256		)	1,988			(1		)	4,260			9,373			—		16,763
Ending balance	$	2,873		$	16,004		$	5,039		$	1,738		$	6,449		$	12		$	16,618		$	6,800		$	—	$	55,533
Ending balance: individually evaluated for impairment	$	1,352		$	80		$	215		$	789		$	—		$	—		$	1,641		$	6				$	4,083
Ending balance: collectively evaluated for impairment	$	1,521		$	15,924		$	4,824		$	949		$	6,449		$	12		$	14,977		$	6,794		$	—	$	51,450
Financing Receivables:
Ending balance	$	2,048,051		$	800,395		$	863,163		$	18,889		$	126,768		$	16,080		$	692,051		$	178,222				$	4,743,619
Ending balance: individually evaluated for impairment	$	19,854		$	1,569		$	6,158		$	3,629		$	—		$	—		$	20,539		$	10				$	51,759
Ending balance: collectively evaluated for impairment	$	2,028,197		$	798,826		$	857,005		$	15,260		$	126,768		$	16,080		$	671,512		$	178,212				$	4,691,860
December 31, 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	(356		)	—			(205		)	—			—			—			(1,074		)	(4,791		)	—		(6,426		)
Recoveries	226			—			80			507			—			—			2,773			985			—		4,571
Provision	(346		)	2,388			403			(711		)	(1,010		)	(15		)	1,492			4,074			—		6,275
Ending balance	$	4,186		$	11,342		$	7,260		$	1,671		$	4,461		$	13		$	17,208		$	3,897		$	—	$	50,038
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. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.

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



December 31	2017								2016
(in thousands)	Commercial real estate		Commercial construction		Commercial		Total		Commercial real estate		Commercial construction		Commercial		Total
Grade:
Pass	$	630,877	$	83,757	$	492,942	$	1,207,576	$	701,657	$	102,955	$	614,139	$	1,418,751
Special mention	49,347		22,500		27,997		99,844		65,541		—		25,229		90,770
Substandard	52,882		2,016		23,421		78,319		33,197		23,813		52,683		109,693
Doubtful	—		—		468		468		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total	$	733,106	$	108,273	$	544,828	$	1,386,207	$	800,395	$	126,768	$	692,051	$	1,619,214

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
December 31, 2017
Real estate:
Residential 1-4 family	$	1,532	$	1,715	$	5,071	$	8,318	$	2,109,729	$	2,118,047	$	—
Commercial real estate	—		—		—		—		733,106		733,106		—
Home equity line of credit	425		114		2,051		2,590		910,462		913,052		—
Residential land	23		—		625		648		15,149		15,797		—
Commercial construction	—		—		—		—		108,273		108,273		—
Residential construction	—		—		—		—		14,910		14,910		—
Commercial	1,825		2,025		730		4,580		540,248		544,828		—
Consumer	3,432		2,159		1,876		7,467		216,097		223,564		—
Total loans	$	7,237	$	6,013	$	10,353	$	23,603	$	4,647,974	$	4,671,577	$	—
December 31, 2016
Real estate:
Residential 1-4 family	$	5,467	$	2,338	$	3,505	$	11,310	$	2,036,741	$	2,048,051	$	—
Commercial real estate	2,416		—		—		2,416		797,979		800,395		—
Home equity line of credit	1,263		381		1,342		2,986		860,177		863,163		—
Residential land	—		—		255		255		18,634		18,889		—
Commercial construction	—		—		—		—		126,768		126,768		—
Residential construction	—		—		—		—		16,080		16,080		—
Commercial	413		510		1,303		2,226		689,825		692,051		—
Consumer	1,945		1,001		963		3,909		174,313		178,222		—
Total loans	$	11,504	$	4,230	$	7,368	$	23,102	$	4,720,517	$	4,743,619	$	—

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



December 31	2017		2016
(in thousands)
Real estate:
Residential 1-4 family	$	12,598	$	11,154
Commercial real estate	—		223
Home equity line of credit	4,466		3,080
Residential land	841		878
Commercial construction	—		—
Residential construction	—		—
Commercial	3,069		6,708
Consumer	2,617		1,282
Total nonaccrual loans	$	23,591	$	23,325
Real estate:
Residential 1-4 family	$	—	$	—
Commercial real estate	—		—
Home equity line of credit	—		—
Residential land	—		—
Commercial construction	—		—
Residential construction	—		—
Commercial	—		—
Consumer	—		—
Total accruing loans 90 days or more past due	$	—	$	—
Real estate:
Residential 1-4 family	$	10,982	$	14,450
Commercial real estate	1,016		1,346
Home equity line of credit	6,584		4,934
Residential land	425		2,751
Commercial construction	—		—
Residential construction	—		—
Commercial	1,741		14,146
Consumer	66		10
Total troubled debt restructured loans not included above	$	20,814	$	37,637

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



December 31	2017						2016
(in thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded
Real estate:
Residential 1-4 family	$	9,097	$	9,644	$	—	$	9,571	$	10,400	$	—
Commercial real estate	—		—		—		223		228		—
Home equity line of credit	1,496		1,789		—		1,500		1,900		—
Residential land	1,143		1,434		—		1,218		1,803		—
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	2,328		3,166		—		6,299		8,869		—
Consumer	8		8		—		—		—		—
	14,072		16,041		—		18,811		23,200		—
With an allowance recorded
Real estate:
Residential 1-4 family	9,187		9,390		1,248		10,283		10,486		1,352
Commercial real estate	1,016		1,016		65		1,346		1,346		80
Home equity line of credit	6,692		6,736		647		4,658		4,712		215
Residential land	122		122		47		2,411		2,411		789
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	2,246		2,252		694		14,240		14,240		1,641
Consumer	58		58		29		10		10		6
	19,321		19,574		2,730		32,948		33,205		4,083
Total
Real estate:
Residential 1-4 family	18,284		19,034		1,248		19,854		20,886		1,352
Commercial real estate	1,016		1,016		65		1,569		1,574		80
Home equity line of credit	8,188		8,525		647		6,158		6,612		215
Residential land	1,265		1,556		47		3,629		4,214		789
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	4,574		5,418		694		20,539		23,109		1,641
Consumer	66		66		29		10		10		6
	$	33,393	$	35,615	$	2,730	$	51,759	$	56,405	$	4,083

ASB's average recorded investment of, and interest income recognized from, impaired loans were as follows:



December 31	2017				2016				2015
(in thousands)	Average recorded investment		Interest income recognized*		Average recorded investment		Interest income recognized*		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	9,440	$	316	$	10,136	$	324	$	11,215	$	332
Commercial real estate	91		11		1,124		—		370		74
Home equity line of credit	1,976		101		1,105		23		484		4
Residential land	1,094		117		1,518		66		2,397		137
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	2,776		54		8,694		370		5,185		157
Consumer	1		—		2		—		—		—
	15,378		599		22,579		783		19,651		704
With an allowance recorded
Real estate:
Residential 1-4 family	9,818		493		11,589		457		11,578		562
Commercial real estate	1,241		54		1,962		15		1,699		—
Home equity line of credit	5,045		251		3,765		137		1,597		49
Residential land	1,308		97		2,964		206		4,337		318
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	3,691		723		16,106		456		12,507		211
Consumer	57		3		12		—		14		—
	21,160		1,621		36,398		1,271		31,732		1,140
Total
Real estate:
Residential 1-4 family	19,258		809		21,725		781		22,793		894
Commercial real estate	1,332		65		3,086		15		2,069		74
Home equity line of credit	7,021		352		4,870		160		2,081		53
Residential land	2,402		214		4,482		272		6,734		455
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	6,467		777		24,800		826		17,692		368
Consumer	58		3		14		—		14		—
	$	36,538	$	2,220	$	58,977	$	2,054	$	51,383	$	1,844

* Since loan was classified as impaired.

Troubled debt restructurings. A loan modification is deemed to be a TDR when the borrower is determined to be experiencing financial difficulties and ASB grants a concession it would not otherwise consider. When a borrower experiencing financial difficulty fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to improve the collectability of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans are considered an alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery.

ASB may consider various types of concessions in granting a TDR including maturity date extensions, extended amortization of principal, temporary deferral of principal payments, and temporary interest rate reductions. ASB rarely grants principal forgiveness in its TDR modifications. Residential loan modifications generally involve interest rate reduction, extending the amortization period, or capitalizing certain delinquent amounts owed not to exceed the original loan balance. Land loans at origination are typically structured as a three-year term, interest-only monthly payment with a balloon payment due at maturity. Land loan TDR modifications typically involve extending the maturity date up to five years and converting the payments from interest-only to principal and interest monthly, at the same or higher interest rate. Commercial loan modifications generally involve extensions of maturity dates, extending the amortization period, and temporary deferral or reduction of principal payments. ASB generally does not reduce the interest rate on commercial loan TDR modifications. Occasionally, additional collateral and/or guaranties are obtained.

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

Loan modifications that occurred during 2017, 2016, and 2015 and the impact on the allowance for loan losses were as follows:



(dollars in thousands)	Number of contracts	Outstanding recorded investment				Net increase in ALLL
Years ended	Number of contracts	Pre-modification		Post-modification		Net increase in ALLL
December 31, 2017
Real estate:
Residential 1-4 family	7	$	742	$	750	$	45
Commercial real estate	—	—		—		—
Home equity line of credit	46	3,016		3,002		557
Residential land	1	92		92		—
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	9	889		889		248
Consumer	1	59		59		27
	64	$	4,798	$	4,792	$	877
December 31, 2016
Real estate:
Residential 1-4 family	14	$	3,131	$	3,245	$	337
Commercial real estate	—	—		—		—
Home equity line of credit	36	3,337		3,337		554
Residential land	2	203		204		—
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	15	20,266		20,266		865
Consumer	—	—		—		—
	67	$	26,937	$	27,052	$	1,756
December 31, 2015
Real estate:
Residential 1-4 family	19	$	3,594	$	3,668	$	87
Commercial real estate	1	1,500		1,500		—
Home equity line of credit	39	2,441		2,441		370
Residential land	1	218		218		—
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	8	2,267		2,267		486
Consumer	—	—		—		—
	68	$	10,020	$	10,094	$	943

Loans modified in TDRs that experienced a payment default of 90 days or more in 2017, 2016, and 2015 and for which the payment default occurred within one year of the modification, were as follows:



Years ended December 31	2017			2016			2015
(dollars in thousands)	Number of contracts	Recorded investment		Number of contracts	Recorded investment		Number of contracts	Recorded investment
Troubled debt restructurings that subsequently defaulted
Real estate:
Residential 1-4 family	1	$	222	1	$	239	—	$	—
Commercial real estate	—	—		—	—		—	—
Home equity line of credit	—	—		—	—		1	6
Residential land	—	—		—	—		—	—
Commercial construction	—	—		—	—		—	—
Residential construction	—	—		—	—		—	—
Commercial	—	—		1	24		1	1,056
Consumer	—	—		—	—		—	—
	1	$	222	2	$	263	2	$	1,062

If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. Commitments to lend additional funds to borrowers whose loan terms have been modified in a TDR totaled nil and $2.6 million at December 31, 2017 and 2016, respectively.

The Company had $4.3 million and $3.9 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at December 31, 2017 and 2016, respectively.

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

ASB received $128.0 million, $236.1 million and $275.3 million of proceeds from the sale of residential mortgages in 2017, 2016, and 2015, respectively, and recognized gains on such sales of $2.2 million, $6.6 million, and $6.3 million in 2017, 2016, and 2015, respectively. Repurchased mortgage loans were nil for 2017, 2016 and 2015.

Mortgage servicing fees, a component of other income, net, were $3.0 million, $2.9 million, and $3.5 million for the years ended December 31, 2017, 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
December 31, 2017	$	17,511	$	(8,872	)	$	—	$	8,639
December 31, 2016	$	17,271	$	(7,898	)	$	—	$	9,373

¹ Reflects impact of loans paid in full.

Changes related to mortgage servicing rights were as follows:



(in thousands)	2017			2016			2015
Mortgage servicing rights
Balance, January 1	$	9,373		$	8,884		$	11,749
Amount capitalized	1,239			2,740			3,123
Amortization	(1,973		)	(2,251		)	(2,682		)
Sale of mortgage servicing rights	—			—			(3,302		)
Other-than-temporary impairment	—			—			(4		)
Carrying amount before valuation allowance, December 31	8,639			9,373			8,884
Valuation allowance for mortgage servicing rights
Balance, January 1	—			—			209
Provision (recovery)	—			—			(205		)
Other-than-temporary impairment	—			—			(4		)
Balance, December 31	—			—			—
Net carrying value of mortgage servicing rights	$	8,639		$	9,373		$	8,884

The estimated aggregate amortization expenses of mortgage servicing rights for 2018, 2019, 2020, 2021 and 2022 are $1.3 million, $1.1 million, $1.0 million, $0.9 million and $0.8 million, respectively.

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

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

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



December 31	2017			2016
(dollars in thousands)
Unpaid principal balance	$	1,195,454		$	1,188,380
Weighted average note rate	3.94		%	3.96		%
Weighted average discount rate	10.0		%	9.4		%
Weighted average prepayment speed	9.0		%	8.5		%

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



December 31	2017			2016
(in thousands)
Prepayment rate:
25 basis points adverse rate change	$	(869	)	$	(567	)
50 basis points adverse rate change	(1,828		)	(1,154		)
Discount rate:
25 basis points adverse rate change	(111		)	(128		)
50 basis points adverse rate change	(220		)	(254		)

The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair value of MSRs typically is not linear.

Deposit liabilities. The summarized components of deposit liabilities were as follows:



December 31	2017				2016
(dollars in thousands)	Weighted-average stated rate		Amount		Weighted-average stated rate		Amount
Savings	0.07	%	$	2,303,450	0.07	%	$	2,208,594
Checking
Interest-bearing	0.03		944,833		0.02		890,633
Noninterest-bearing	—		896,292		—		817,867
Commercial checking	—		863,941		—		821,184
Money market	0.09		114,797		0.12		153,126
Time certificates	1.26		767,284		1.00		657,525
	0.20	%	$	5,890,597	0.15	%	$	5,548,929

As of December 31, 2017 and 2016, time certificates of $100,000 or more totaled $433.4 million and $328.1 million, respectively.

The approximate scheduled maturities of time certificates outstanding at December 31, 2017 were as follows:



(in thousands)
2018	$	401,650
2019	114,434
2020	123,310
2021	71,729
2022	52,860
Thereafter	3,301
	$	767,284

Overdrawn deposit accounts are classified as loans and totaled $1.7 million and $1.8 million at December 31, 2017 and 2016, respectively.

Interest expense on deposit liabilities by type of deposit was as follows:



Years ended December 31	2017		2016		2015
(in thousands)
Time certificates	$	7,687	$	5,390	$	3,747
Savings	1,567		1,402		1,257
Money market	168		202		205
Interest-bearing checking	238		173		139
	$	9,660	$	7,167	$	5,348

Other borrowings.

Securities sold under agreements to repurchase. 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. 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
December 31, 2017	$	141	$	—	$	141
December 31, 2016	93		—		93



	Gross amount not offset in the Balance Sheet
(in millions)	Net amount of liabilities presented in the Balance Sheet		Financial instruments		Cash collateral pledged
December 31, 2017
Commercial account holders	$	141	$	165	$	—
Total	$	141	$	165	$	—
December 31, 2016
Government entities	$	14	$	15	$	—
Commercial account holders	79		101		—
Total	$	93	$	116	$	—

The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts. The counterparties or tri-parties may determine that additional collateral is required based on movements in the fair value of the collateral. Typically, a five percent discount is taken from the fair value of the investment securities to determine the value of the collateral pledged for the repurchase agreements.

Information concerning securities sold under agreements to repurchase, which provided for the repurchase of identical securities, was as follows:



(dollars in millions)	2017			2016			2015
Amount outstanding as of December 31	$	141		$	93		$	229
Average amount outstanding during the year	$	98		$	170		$	219
Maximum amount outstanding as of any month-end	$	141		$	229		$	277
Weighted-average interest rate as of December 31	0.65		%	0.23		%	1.24		%
Weighted-average interest rate during the year	0.26		%	1.43		%	1.29		%
Weighted-average remaining days to maturity as of December 31	1			6			117

Securities sold under agreements to repurchase were summarized as follows:



December 31	2017						2016
Maturity	Repurchase liability		Weighted-average interest rate		Collateralized by mortgage-related securities and federal agency obligations at fair value plus accrued interest		Repurchase liability		Weighted-average interest rate		Collateralized by mortgage-related securities and federal agency obligations at fair value plus accrued interest
(dollars in thousands)
Overnight	$	140,859	0.65	%	$	165,464	$	79,083	0.15	%	$	100,305
1 to 29 days	—		—		—		—		—		—
30 to 90 days	—		—		—		13,535		0.70		15,239
Over 90 days	—		—		—		—		—		—
	$	140,859	0.65	%	$	165,464	$	92,618	0.23	%	$	115,544

Advances from Federal Home Loan Bank. FHLB advances are fixed rate for a specific term and consist of the following:



December 31, 2017	Weighted-average stated rate		Amount
(dollars in thousands)
Due in
2018	1.95	%	$	50,000
2019	—		—
2020	—		—
2021	—		—
2022	—		—
Thereafter	—		—
	1.95	%	$	50,000

ASB and the FHLB are parties to an Advances, Pledge and Security Agreement (Advances Agreement), which applies to currently outstanding and future advances, and governs the terms and conditions under which ASB borrows and the FHLB makes loans or advances from time to time. Under the Advances Agreement, ASB agrees to abide by the FHLB’s credit policies, and makes certain warranties and representations to the FHLB. Upon the occurrence of and during the continuation of an “Event of Default” (which term includes any event of nonpayment of interest or principal of any advance when due or failure to perform any promise or obligation under the Advances Agreement or other credit arrangements between the parties), the FHLB may, at its option, declare all indebtedness and accrued interest thereon, including any prepayment fees or charges, to be immediately due and payable. Advances from the FHLB are collateralized by loans and stock in the FHLB. As of December 31, 2017 and 2016, ASB’s available FHLB borrowing capacity was $1.8 billion. ASB is required to obtain and hold a specific number of shares of capital stock of the FHLB. ASB was in compliance with all Advances Agreement requirements as of December 31, 2017 and 2016.

Common stock equity. ASB is regulated and supervised by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on ASB's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, ASB must meet specific capital guidelines that involve quantitative measures of ASB's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The prompt corrective action provisions impose certain restrictions on institutions that are undercapitalized. The restrictions imposed become increasingly more severe as an institution's capital category declines from "undercapitalized" to "critically undercapitalized." The regulators have substantial discretion in the corrective actions that might direct and could include restrictions on dividends and other distributions that ASB may make to ASB Hawaii and the requirement that ASB develop and implement a plan to restore its capital. In 1988, HEI agreed with the OTS predecessor regulatory agency at the time, to contribute additional capital to ASB up to a maximum aggregate amount of approximately $65.1 million (Capital Maintenance Agreement). As of December 31, 2017, as a result of capital contributions in prior years, HEI’s maximum obligation to contribute additional capital under the Capital Maintenance Agreement has been reduced to approximately $28.3 million.

To be categorized as "well capitalized," ASB must maintain minimum total capital, Tier 1 capital, and Tier 1 leverage ratios as set forth in the table below. As of December 31, 2017, and 2016 ASB was in compliance with the minimum capital requirements under OCC regulations, and was categorized as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the institution's category under the capital guidelines.

The tables below set forth actual and minimum required capital amounts and ratios:



	Actual			Minimum required			Required to be well capitalized
(dollars in thousands)	Capital	Ratio		Capital	Ratio		Capital	Ratio
December 31, 2017
Tier 1 leverage	571,810	8.58	%	266,430	4.00	%	333,038	5.00	%
Common equity tier 1	571,810	12.95	%	198,628	4.50	%	286,907	6.50	%
Tier 1 capital	571,810	12.95	%	264,838	6.00	%	353,117	8.00	%
Total capital	626,987	14.20	%	353,117	8.00	%	441,396	10.00	%
December 31, 2016
Tier 1 leverage	542,239	8.59	%	252,515	4.00	%	315,644	5.00	%
Common equity tier 1	542,239	12.17	%	200,455	4.50	%	289,545	6.50	%
Tier 1 capital	542,239	12.17	%	267,273	6.00	%	356,364	8.00	%
Total capital	597,940	13.42	%	356,364	8.00	%	445,455	10.00	%

ASB is subject to a range of bank regulatory compliance obligations and is unable to predict what actions, if any, may be initiated by the OCC and other governmental authorities against ASB as a result of deficiencies, or the impact of any such measures or actions on ASB.

In 2017, ASB paid cash dividends of $37.5 million to HEI, compared to cash dividends of $36.0 million in 2016. The FRB and OCC approved the dividends.

Related-party transactions. HEI charged ASB $2.1 million, $2.3 million and $2.1 million for general management and administrative services in 2017, 2016 and 2015, respectively. The amounts charged by HEI for services performed by HEI employees to its subsidiaries are allocated primarily on the basis of time expended in providing such services.

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:



December 31	2017					2016
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	13,669	$	131		$	25,883	$	421
Forward commitments	14,465		(24		)	30,813		(177		)

ASB’s derivative financial instruments, their fair values, and balance sheet location were as follows:



Derivative Financial Instruments Not Designated
as Hedging Instruments ¹
December 31	2017				2016
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	133	$	2	$	445	$	24
Forward commitments	4		28		8		185
	$	137	$	30	$	453	$	209

¹ Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.

The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in ASB's statements of income:



Derivative Financial Instruments Not Designated	Location of net gains
as Hedging Instruments	(losses) recognized in	Years ended December 31
(in thousands)	the Statements of Income	2017			2016			2015
Interest rate lock commitments	Mortgage banking income	$	(290	)	$	37		$	(6	)
Forward commitments	Mortgage banking income	153			(148		)	77
		$	(137	)	$	(111	)	$	71

Commitments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitments. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. ASB minimizes its exposure to loss under these commitments by requiring that customers meet certain conditions prior to disbursing funds. The amount of collateral, if any, is based on a credit evaluation of the borrower and may include residential real estate, accounts receivable, inventory and property, plant and equipment.

Letters of credit are conditional commitments issued by ASB to guarantee payment and performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. ASB holds collateral supporting those commitments for which collateral is deemed necessary.

The following is a summary of outstanding off-balance sheet arrangements:



December 31	2017		2016
(in thousands)
Unfunded commitments to extend credit:
Home equity line of credit	$	1,214,103	$	1,146,339
Commercial and commercial real estate	466,510		577,410
Consumer	68,053		64,762
Residential 1-4 family	18,635		38,271
Commercial and financial standby letters of credit	13,136		16,017
Total	$	1,780,437	$	1,842,799

Contingency. In October 2007, ASB, as a member financial institution of Visa U.S.A. Inc., received restricted shares of Visa, Inc. (Visa) as a result of a restructuring of Visa U.S.A. Inc. in preparation for an initial public offering by Visa. As a part of the restructuring, ASB entered into a judgment and loss sharing agreement with Visa in order to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements related to indemnified litigation involving Visa. In November 2012, a federal judge granted preliminary approval to a proposed settlement between merchants and Visa over credit card fees and in December 2013, a federal judge granted final approval to the settlement. Some merchants and trade organizations filed a notice of appeal shortly after the approval was issued. As of December 31, 2017, ASB had accrued a reserve of $1.1 million related to the agreement. Because the extent of ASB’s obligations under this agreement depends entirely upon the occurrence of future events, ASB’s maximum potential future liability under this agreement is not determinable.

Federal Deposit Insurance Corporation assessment. In February 2011, the Federal Deposit Insurance Corporation (FDIC) finalized rules to change its assessment base from total domestic deposits to average total assets minus average tangible equity, as required in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Assessment rates were reduced to a range of 2.5 to 9 basis points on the new assessment base for financial institutions in the lowest risk category. Financial institutions in the highest risk category have assessment rates of 30 to 45 basis points. The new rate schedule was effective April 1, 2011. As of June 30, 2016, the deposit insurance fund surpassed a target of 1.15 percent of estimated insured deposits that triggered important changes in the FDIC assessments for all banks. The changes took effect for premiums billed and paid in December 2016. Banks with less than $10 billion in assets saw their overall schedule decline by two basis points for banks paying the lowest premiums and up to five points for those at the top end of the assessment scale. In addition, a new formula for calculating risk-based assessment rates is now in effect. For the years ended December 31, 2017 and 2016, ASB’s FDIC insurance assessments were $2.6 million and $3.2 million, respectively. The FDIC may impose special assessments in the future if it is deemed necessary to ensure the Deposit Insurance Fund ratio does not decline to a level that is close to zero or that could otherwise undermine public confidence in federal deposit insurance.