Note 4· Bank segment (HEI only)

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



Years ended December 31	2018		2017		2016
(in thousands)
Interest and dividend income
Interest and fees on loans	$	220,463	$	207,255	$	199,774
Interest and dividends on investment securities	37,762		28,823		19,184
Total interest and dividend income	258,225		236,078		218,958
Interest expense
Interest on deposit liabilities	13,991		9,660		7,167
Interest on other borrowings	1,548		2,496		5,588
Total interest expense	15,539		12,156		12,755
Net interest income	242,686		223,922		206,203
Provision for loan losses	14,745		10,901		16,763
Net interest income after provision for loan losses	227,941		213,021		189,440
Noninterest income
Fees from other financial services	18,937		22,796		22,384
Fee income on deposit liabilities	21,311		22,204		21,759
Fee income on other financial products	7,052		7,205		8,707
Bank-owned life insurance	5,057		5,539		4,637
Mortgage banking income	1,493		2,201		6,625
Gains on sale of investment securities, net	—		—		598
Other income, net	2,200		1,617		2,256
Total noninterest income	56,050		61,562		66,966
Noninterest expense
Compensation and employee benefits	98,387		94,931		89,242
Occupancy	17,073		16,699		16,321
Data processing	14,268		13,280		13,030
Services	10,847		10,994		11,054
Equipment	7,186		7,232		6,938
Office supplies, printing and postage	6,134		6,182		6,075
Marketing	3,567		3,501		3,489
FDIC insurance	2,713		2,904		3,543
Other expense	17,238		20,144		19,362
Total noninterest expense	177,413		175,867		169,054
Income before income taxes	106,578		98,716		87,352
Income taxes	24,069		31,719		30,073
Net income	$	82,509	$	66,997	$	57,279

Reconciliation to amounts per HEI Consolidated Statements of Income*:



Years ended December 31	2018			2017			2016
(in thousands)
Interest and dividend income	$	258,225		$	236,078		$	218,958
Noninterest income	56,050			61,562			66,966
*Revenues-Bank	314,275			297,640			285,924
Total interest expense	15,539			12,156			12,755
Provision for loan losses	14,745			10,901			16,763
Total noninterest expense	177,413			175,867			169,054
Less: Retirement defined benefits expense—other than service costs	(1,657		)	(820		)	(875		)
*Expenses-Bank	206,040			198,104			197,697
*Operating income-Bank	108,235			99,536			88,227
Add back: Retirement defined benefits expense—other than service costs	1,657			820			875
Income before income taxes	$	106,578		$	98,716		$	87,352

Statements of Comprehensive Income Data



Years ended December 31	2018			2017			2016
(in thousands)
Net income	$	82,509		$	66,997		$	57,279
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 $3,468, $2,886 and $3,763 for 2018, 2017 and 2016, respectively	(9,472		)	(4,370		)	(5,699		)
Reclassification adjustment for net realized gains included in net income, net of taxes of nil, nil and $238 for 2018, 2017 and 2016, respectively	—			—			(360		)
Retirement benefit plans:
Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,108, $812 and $566 for 2018, 2017 and 2016, respectively	2,353			1,231			857
Other comprehensive loss, net of tax benefits	(7,119		)	(3,139		)	(5,202		)
Comprehensive income	$	75,390		$	63,858		$	52,077

Balance Sheets Data



December 31				2018						2017
(in thousands)
Assets
Cash and due from banks				$	122,059					$	140,934
Interest-bearing deposits				4,225						93,165
Investment securities
Available-for-sale, at fair value				1,388,533						1,401,198
Held-to-maturity, at amortized cost (fair value of $142,057 and $44,412 at December 31, 2018 and 2017, respectively)				141,875						44,515
Stock in Federal Home Loan Bank, at cost				9,958						9,706
Loans held for investment				4,843,021						4,670,768
Allowance for loan losses				(52,119		)				(53,637		)
Net loans				4,790,902						4,617,131
Loans held for sale, at lower of cost or fair value				1,805						11,250
Other				486,347						398,570
Goodwill				82,190						82,190
Total assets				$	7,027,894					$	6,798,659
Liabilities and shareholder’s equity
Deposit liabilities–noninterest-bearing				$	1,800,727					$	1,760,233
Deposit liabilities–interest-bearing				4,358,125						4,130,364
Other borrowings				110,040						190,859
Other				124,613						110,356
Total liabilities				6,393,505						6,191,812
Commitments and contingencies
Common stock				1						1
Additional paid in capital				347,170						345,018
Retained earnings				325,286						292,957
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities	$	(24,423	)				$	(14,951	)
Retirement benefit plans	(13,645		)	(38,068		)	(16,178		)	(31,129		)
Total shareholder’s equity				634,389						606,847
Total liabilities and shareholder’s equity				$	7,027,894					$	6,798,659



December 31	2018		2017
(in thousands)
Other assets
Bank-owned life insurance	$	151,172	$	148,775
Premises and equipment, net	214,415		136,270
Accrued interest receivable	20,140		18,724
Mortgage servicing rights	8,062		8,639
Low-income housing investments	67,626		59,016
Real estate acquired in settlement of loans, net	406		133
Other	24,526		27,013
	$	486,347	$	398,570
Other liabilities
Accrued expenses	$	54,084	$	39,312
Federal and state income taxes payable	2,012		3,736
Cashier’s checks	26,906		27,000
Advance payments by borrowers	10,183		10,245
Other	31,428		30,063
	$	124,613	$	110,356

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

The increase in premises and equipment, net was due to the expenditures of $76.5 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, 2018
Available-for-sale
U.S. Treasury and federal agency obligations	$	156,694	$	62	$	(2,407	)	$	154,349	5	$	25,882	$	(208	)	19	$	118,405	$	(2,199	)
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	1,192,169		789		(31,542		)	1,161,416		22	129,011		(1,330		)	145	947,890		(30,212		)
Corporate bonds	49,398		103		(369		)	49,132		6	23,175		(369		)	—	—		—
Mortgage revenue bonds	23,636		—		—			23,636		—	—		—			—	—		—
	$	1,421,897	$	954	$	(34,318	)	$	1,388,533	33	$	178,068	$	(1,907	)	164	$	1,066,295	$	(32,411	)
Held-to-maturity
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	$	141,875	$	1,446	$	(1,264	)	$	142,057	3	$	29,814	$	(400	)	2	$	31,505	$	(864	)
	$	141,875	$	1,446	$	(1,264	)	$	142,057	3	$	29,814	$	(400	)	2	$	31,505	$	(864	)
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-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	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-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	$	44,515	$	1	$	(104	)	$	44,412	2	$	35,744	$	(104	)	—	$	—	$	—
	$	44,515	$	1	$	(104	)	$	44,412	2	$	35,744	$	(104	)	—	$	—	$	—

ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2018, represent an OTTI. Total gross unrealized losses were primarily attributable to change in market conditions. On a quarterly basis the investment securities are evaluated for changes in financial condition of the issuer. Based upon ASB’s evaluation, all securities held within the investment portfolio continue to be investment grade by one or more agencies. The contractual cash flows of the U.S. Treasury, federal agency obligations and agency mortgage-backed 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 2018, 2017 and 2016.

U.S. Treasury, federal agency obligations, corporate bonds, and mortgage revenue bonds have contractual terms to maturity. Mortgage-backed 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, 2018	Cost		value
(in thousands)
Available-for-sale
Due in one year or less	$	20,002	$	19,955
Due after one year through five years	117,549		116,508
Due after five years through ten years	76,750		75,227
Due after ten years	15,427		15,427
	229,728		227,117
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	1,192,169		1,161,416
Total available-for-sale securities	$	1,421,897	$	1,388,533
Held-to-maturity
Mortgage-backed securities — issued or guaranteed by U.S. Government agencies or sponsored agencies	$	141,875	$	142,057
Total held-to-maturity securities	$	141,875	$	142,057

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



Years ended December 31	2018		2017		2016
(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	2018		2017		2016
(in thousands)
Taxable	$	37,153	$	28,398	$	19,166
Non-taxable	609		425		18
	$	37,762	$	28,823	$	19,184

ASB pledged securities with a market value of approximately $546.1 million and $411.4 million as of December 31, 2018 and 2017, 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, 2018 and 2017, securities with a carrying value of $92.0 million and $165.1 million, respectively, were pledged as collateral for securities sold under agreements to repurchase.

Stock in FHLB. As of December 31, 2018 and 2017, ASB’s stock in FHLB was carried at cost ($10.0 million and $9.7 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.

Quarterly 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, 2018, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2018, 2017 and 2016 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. The components of loans were summarized as follows:



December 31	2018			2017
(in thousands)
Real estate:
Residential 1-4 family	$	2,143,397		$	2,118,047
Commercial real estate	748,398			733,106
Home equity line of credit	978,237			913,052
Residential land	13,138			15,797
Commercial construction	92,264			108,273
Residential construction	14,307			14,910
Total real estate	3,989,741			3,903,185
Commercial	587,891			544,828
Consumer	266,002			223,564
Total loans	4,843,634			4,671,577
Less: Deferred fees and discounts	(613		)	(809		)
Allowance for loan losses	(52,119		)	(53,637		)
Total loans, net	$	4,790,902		$	4,617,131

ASB’s policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination.

ASB services real estate loans for investors (principal balance of $1.2 billion as of December 31, 2018, 2017 and 2016), 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, 2018 and 2017, ASB had pledged loans with an amortized cost of approximately $2.7 billion and $2.4 billion, respectively, as collateral to secure advances from the FHLB.

As of December 31, 2018 and 2017, 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 $24.0 million and $23.8 million, respectively. As of December 31, 2018 and 2017, $18.3 million and $18.7 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			Total
December 31, 2018
Allowance for loan losses:
Beginning balance	$	2,902		$	15,796		$	7,522		$	896		$	4,671		$	12		$	10,851		$	10,987		$	53,637
Charge-offs	(128		)	—			(353		)	(18		)	—			—			(2,722		)	(17,296		)	(20,517		)
Recoveries	74			—			257			179			—			—			2,136			1,608			4,254
Provision	(872		)	(1,291		)	(1,055		)	(578		)	(1,881		)	(8		)	(1,040		)	21,470			14,745
Ending balance	$	1,976		$	14,505		$	6,371		$	479		$	2,790		$	4		$	9,225		$	16,769		$	52,119
Ending balance: individually evaluated for impairment	$	876		$	7		$	701		$	6		$	—		$	—		$	628		$	4		$	2,222
Ending balance: collectively evaluated for impairment	$	1,100		$	14,498		$	5,670		$	473		$	2,790		$	4		$	8,597		$	16,765		$	49,897
Financing Receivables:
Ending balance	$	2,143,397		$	748,398		$	978,237		$	13,138		$	92,264		$	14,307		$	587,891		$	266,002		$	4,843,634
Ending balance: individually evaluated for impairment	$	16,494		$	915		$	14,800		$	2,059		$	—		$	—		$	5,340		$	89		$	39,697
Ending balance: collectively evaluated for impairment	$	2,126,903		$	747,483		$	963,437		$	11,079		$	92,264		$	14,307		$	582,551		$	265,913		$	4,803,937
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

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

Each commercial and commercial real estate loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The AQR is a function of the probability of default model rating, the loss given default, and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.

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



December 31	2018								2017
(in thousands)	Commercial real estate		Commercial construction		Commercial		Total		Commercial real estate		Commercial construction		Commercial		Total
Grade:
Pass	$	658,288	$	89,974	$	547,640	$	1,295,902	$	630,877	$	83,757	$	492,942	$	1,207,576
Special mention	32,871		—		11,598		44,469		49,347		22,500		27,997		99,844
Substandard	57,239		2,290		28,653		88,182		52,882		2,016		23,421		78,319
Doubtful	—		—		—		—		—		—		468		468
Loss	—		—		—		—		—		—		—		—
Total	$	748,398	$	92,264	$	587,891	$	1,428,553	$	733,106	$	108,273	$	544,828	$	1,386,207

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, 2018
Real estate:
Residential 1-4 family	$	3,757	$	2,773	$	2,339	$	8,869	$	2,134,528	$	2,143,397	$	—
Commercial real estate	—		—		—		—		748,398		748,398		—
Home equity line of credit	1,139		681		2,720		4,540		973,697		978,237		—
Residential land	9		—		319		328		12,810		13,138		—
Commercial construction	—		—		—		—		92,264		92,264		—
Residential construction	—		—		—		—		14,307		14,307		—
Commercial	315		281		548		1,144		586,747		587,891		—
Consumer	5,220		3,166		2,702		11,088		254,914		266,002		—
Total loans	$	10,440	$	6,901	$	8,628	$	25,969	$	4,817,665	$	4,843,634	$	—
December 31, 2017
Real estate:
Residential 1-4 family	$	1,532	$	1,715	$	5,071	$	8,318	$	2,109,729	$	2,118,047	$	—
Commercial real estate	—		—		—		—		733,106		733,106		—
Home equity line of credit	425		114		2,051		2,590		910,462		913,052		—
Residential land	23		—		625		648		15,149		15,797		—
Commercial construction	—		—		—		—		108,273		108,273		—
Residential construction	—		—		—		—		14,910		14,910		—
Commercial	1,825		2,025		730		4,580		540,248		544,828		—
Consumer	3,432		2,159		1,876		7,467		216,097		223,564		—
Total loans	$	7,237	$	6,013	$	10,353	$	23,603	$	4,647,974	$	4,671,577	$	—

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



December 31	2018		2017
(in thousands)
Real estate:
Residential 1-4 family	$	12,037	$	12,598
Commercial real estate	—		—
Home equity line of credit	6,348		4,466
Residential land	436		841
Commercial construction	—		—
Residential construction	—		—
Commercial	4,278		3,069
Consumer	4,196		2,617
Total nonaccrual loans	$	27,295	$	23,591
Real estate:
Residential 1-4 family	$	—	$	—
Commercial real estate	—		—
Home equity line of credit	—		—
Residential land	—		—
Commercial construction	—		—
Residential construction	—		—
Commercial	—		—
Consumer	—		—
Total accruing loans 90 days or more past due	$	—	$	—
Real estate:
Residential 1-4 family	$	10,194	$	10,982
Commercial real estate	915		1,016
Home equity line of credit	11,597		6,584
Residential land	1,622		425
Commercial construction	—		—
Residential construction	—		—
Commercial	1,527		1,741
Consumer	62		66
Total troubled debt restructured loans not included above	$	25,917	$	20,814

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



December 31	2018						2017
(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	$	7,822	$	8,333	$	—	$	9,097	$	9,644	$	—
Commercial real estate	—		—		—		—		—		—
Home equity line of credit	2,743		3,004		—		1,496		1,789		—
Residential land	2,030		2,228		—		1,143		1,434		—
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	3,722		4,775		—		2,328		3,166		—
Consumer	32		32		—		8		8		—
	16,349		18,372		—		14,072		16,041		—
With an allowance recorded
Real estate:
Residential 1-4 family	8,672		8,875		876		9,187		9,390		1,248
Commercial real estate	915		915		7		1,016		1,016		65
Home equity line of credit	12,057		12,086		701		6,692		6,736		647
Residential land	29		29		6		122		122		47
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	1,618		1,618		628		2,246		2,252		694
Consumer	57		57		4		58		58		29
	23,348		23,580		2,222		19,321		19,574		2,730
Total
Real estate:
Residential 1-4 family	16,494		17,208		876		18,284		19,034		1,248
Commercial real estate	915		915		7		1,016		1,016		65
Home equity line of credit	14,800		15,090		701		8,188		8,525		647
Residential land	2,059		2,257		6		1,265		1,556		47
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	5,340		6,393		628		4,574		5,418		694
Consumer	89		89		4		66		66		29
	$	39,697	$	41,952	$	2,222	$	33,393	$	35,615	$	2,730

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



December 31	2018				2017				2016
(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	$	8,595	$	445	$	9,440	$	316	$	10,136	$	324
Commercial real estate	—		—		91		11		1,124		—
Home equity line of credit	2,206		75		1,976		101		1,105		23
Residential land	1,532		40		1,094		117		1,518		66
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	3,275		28		2,776		54		8,694		370
Consumer	22		—		1		—		2		—
	15,630		588		15,378		599		22,579		783
With an allowance recorded
Real estate:
Residential 1-4 family	8,878		363		9,818		493		11,589		457
Commercial real estate	982		42		1,241		54		1,962		15
Home equity line of credit	10,617		440		5,045		251		3,765		137
Residential land	37		3		1,308		97		2,964		206
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	1,789		122		3,691		723		16,106		456
Consumer	57		4		57		3		12		—
	22,360		974		21,160		1,621		36,398		1,271
Total
Real estate:
Residential 1-4 family	17,473		808		19,258		809		21,725		781
Commercial real estate	982		42		1,332		65		3,086		15
Home equity line of credit	12,823		515		7,021		352		4,870		160
Residential land	1,569		43		2,402		214		4,482		272
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial	5,064		150		6,467		777		24,800		826
Consumer	79		4		58		3		14		—
	$	37,990	$	1,562	$	36,538	$	2,220	$	58,977	$	2,054

* 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 2018, 2017, and 2016 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, 2018
Real estate:
Residential 1-4 family	5	$	1,107	$	1,133	$	17
Commercial real estate	—	—		—		—
Home equity line of credit	58	7,487		7,492		1,220
Residential land	5	1,776		1,786		—
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	13	2,550		2,550		176
Consumer	—	—		—		—
	81	$	12,920	$	12,961	$	1,413
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

Loans modified in TDRs that experienced a payment default of 90 days or more in 2018, 2017, and 2016 and for which the payment default occurred within one year of the modification, were as follows:



Years ended December 31	2018			2017			2016
(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	81		—	—		—	—
Residential land	—	—		—	—		—	—
Commercial construction	—	—		—	—		—	—
Residential construction	—	—		—	—		—	—
Commercial	1	246		—	—		1	24
Consumer	—	—		—	—		—	—
	2	$	327	1	$	222	2	$	263

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 were nil at December 31, 2018 and 2017.

The Company had $4.2 million and $4.3 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at December 31, 2018 and 2017, respectively.

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

ASB received $112.2 million, $128.0 million and $236.1 million of proceeds from the sale of residential mortgages in 2018, 2017, and 2016, respectively, and recognized gains on such sales of $1.5 million, $2.2 million, and $6.6 million in 2018, 2017, and 2016, respectively. Repurchased mortgage loans were nil for 2018, 2017 and 2016.

Mortgage servicing fees, a component of other income, net, were $3.0 million, $3.0 million, and $2.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.

Changes in the carrying value of MSRs were as follows:



(in thousands)	Gross carrying amount¹		Accumulated amortization¹			Valuation allowance		Net carrying amount
December 31, 2018	$	18,556	$	(10,494	)	$	—	$	8,062
December 31, 2017	$	17,511	$	(8,872	)	$	—	$	8,639

¹ Reflects impact of loans paid in full.

Changes related to MSRs were as follows:



(in thousands)	2018			2017			2016
Mortgage servicing rights
Balance, January 1	$	8,639		$	9,373		$	8,884
Amount capitalized	1,045			1,239			2,740
Amortization	(1,622		)	(1,973		)	(2,251		)
Sale of mortgage servicing rights	—			—			—
Other-than-temporary impairment	—			—			—
Carrying amount before valuation allowance, December 31	8,062			8,639			9,373
Valuation allowance for mortgage servicing rights
Balance, January 1	—			—			—
Provision (recovery)	—			—			—
Other-than-temporary impairment	—			—			—
Balance, December 31	—			—			—
Net carrying value of mortgage servicing rights	$	8,062		$	8,639		$	9,373

The estimated aggregate amortization expenses of MSRs for 2019, 2020, 2021, 2022 and 2023 are $1.1 million, $1.0 million, $0.9 million, $0.8 million and $0.7 million, respectively.

ASB capitalizes MSRs acquired upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the MSRs to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the MSRs. ASB’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 MSRs. Rising interest rates typically result in slower prepayment speeds in the loans being serviced for others, which increases the value of MSRs, whereas declining interest rates typically result in faster prepayment speeds which decrease the value of MSRs and increase the amortization of the MSRs. 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 MSRs used in the impairment analysis were as follows:



December 31	2018			2017
(dollars in thousands)
Unpaid principal balance	$	1,188,514		$	1,195,454
Weighted average note rate	3.98		%	3.94		%
Weighted average discount rate	10.0		%	10.0		%
Weighted average prepayment speed	6.5		%	9.0		%

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



December 31	2018			2017
(in thousands)
Prepayment rate:
25 basis points adverse rate change	$	(250	)	$	(869	)
50 basis points adverse rate change	(566		)	(1,828		)
Discount rate:
25 basis points adverse rate change	(139		)	(111		)
50 basis points adverse rate change	(275		)	(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.

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



December 31	2018				2017
(dollars in thousands)	Weighted-average stated rate		Amount		Weighted-average stated rate		Amount
Savings	0.07	%	$	2,322,552	0.07	%	$	2,303,450
Checking
Interest-bearing	0.09		1,055,019		0.03		944,833
Noninterest-bearing	—		932,608		—		896,292
Commercial checking	—		868,119		—		863,941
Money market	0.63		152,713		0.09		114,797
Time certificates	1.61		827,841		1.26		767,284
	0.27	%	$	6,158,852	0.20	%	$	5,890,597

As of December 31, 2018 and 2017, time certificates of $100,000 or more totaled $500.2 million and $433.4 million, respectively.

The approximate scheduled maturities of time certificates outstanding at December 31, 2018 were as follows:



(in thousands)
2019	$	508,833
2020	128,613
2021	107,095
2022	49,329
2023	30,456
Thereafter	3,515
	$	827,841

Overdrawn deposit accounts are classified as loans and totaled $2.1 million and $1.7 million at December 31, 2018 and 2017, respectively.

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



Years ended December 31	2018		2017		2016
(in thousands)
Time certificates	$	11,044	$	7,687	$	5,390
Savings	1,639		1,567		1,402
Money market	602		168		202
Interest-bearing checking	706		238		173
	$	13,991	$	9,660	$	7,167

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 Sheets		Net amount of liabilities presented in the Balance Sheets
Repurchase agreements
December 31, 2018	$	65	$	—	$	65
December 31, 2017	141		—		141



	Gross amount not offset in the Balance Sheets
(in millions)	Net amount of liabilities presented in the Balance Sheets		Financial instruments		Cash collateral pledged
Commercial account holders
December 31, 2018	$	65	$	92	$	—
December 31, 2017	141		165		—

The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts. 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)	2018			2017			2016
Amount outstanding as of December 31	$	65		$	141		$	93
Average amount outstanding during the year	$	99		$	98		$	170
Maximum amount outstanding as of any month-end	$	152		$	141		$	229
Weighted-average interest rate as of December 31	0.75		%	0.65		%	0.23		%
Weighted-average interest rate during the year	0.71		%	0.26		%	1.43		%
Weighted-average remaining days to maturity as of December 31	1			1			6

Securities sold under agreements to repurchase were summarized as follows:



December 31	2018						2017
Maturity	Repurchase liability		Weighted-average interest rate		Collateralized by mortgage-backed securities and federal agency obligations at fair value plus accrued interest		Repurchase liability		Weighted-average interest rate		Collateralized by mortgage-backed securities and federal agency obligations at fair value plus accrued interest
(dollars in thousands)
Overnight	$	65,040	0.75	%	$	92,290	$	140,859	0.65	%	$	165,464
1 to 29 days	—		—		—		—		—		—
30 to 90 days	—		—		—		—		—		—
Over 90 days	—		—		—		—		—		—
	$	65,040	0.75	%	$	92,290	$	140,859	0.65	%	$	165,464

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



December 31, 2018	Weighted-average stated rate		Amount
(dollars in thousands)
Due in
2019	2.63	%	$	45,000
2020	—		—
2021	—		—
2022	—		—
2023	—		—
Thereafter	—		—
	2.63	%	$	45,000

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, 2018 and 2017, ASB’s available FHLB borrowing capacity was $2.0 billion, and $1.8 billion, respectively.

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, 2018 and 2017.

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, 2018, 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, 2018, and 2017 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, 2018
Tier 1 leverage	606,291	8.70	%	278,811	4.00	%	348,514	5.00	%
Common equity tier 1	606,291	12.80	%	213,190	4.50	%	307,941	6.50	%
Tier 1 capital	606,291	12.80	%	284,253	6.00	%	379,004	8.00	%
Total capital	660,151	13.93	%	379,004	8.00	%	473,755	10.00	%
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	%

In 2018, ASB paid cash dividends of $50.0 million to HEI, compared to cash dividends of $37.5 million in 2017. The FRB and OCC approved the dividends.

Related-party transactions. HEI charged ASB $2.2 million, $2.1 million and $2.3 million for general management and administrative services in 2018, 2017 and 2016, 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. All amounts charged to ASB were settled as a capital contribution by HEI to ASB.

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	2018					2017
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	10,180	$	91		$	13,669	$	131
Forward commitments	10,132		(43		)	14,465		(24		)

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



Derivative Financial Instruments Not Designated
as Hedging Instruments ¹
December 31	2018				2017
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	91	$	—	$	133	$	2
Forward commitments	—		43		4		28
	$	91	$	43	$	137	$	30

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

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



Derivative Financial Instruments Not Designated	Location of net gains
as Hedging Instruments	(losses) recognized in	Years ended December 31
(in thousands)	the Statements of Income	2018			2017			2016
Interest rate lock commitments	Mortgage banking income	$	(40	)	$	(290	)	$	37
Forward commitments	Mortgage banking income	(19		)	153			(148		)
		$	(59	)	$	(137	)	$	(111	)

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 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	2018		2017
(in thousands)
Unfunded commitments to extend credit:
Home equity line of credit	$	1,242,804	$	1,214,103
Commercial and commercial real estate	515,058		466,510
Consumer	70,292		68,053
Residential 1-4 family	17,552		18,635
Commercial and financial standby letters of credit	13,340		13,136
Total	$	1,859,046	$	1,780,437

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, 2018, 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, 2018, 2017 and 2016 ASB’s FDIC insurance assessments were $2.5 million, $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.