5 · Bank segment (HEI only)

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



Years ended December 31	2014		2013		2012
(in thousands)
Interest and dividend income
Interest and fees on loans	$	179,341	$	172,969	$	176,057
Interest and dividends on investment securities	11,945		13,095		13,822
Total interest and dividend income	191,286		186,064		189,879
Interest expense
Interest on deposit liabilities	5,077		5,092		6,423
Interest on other borrowings	5,731		4,985		4,869
Total interest expense	10,808		10,077		11,292
Net interest income	180,478		175,987		178,587
Provision for loan losses	6,126		1,507		12,883
Net interest income after provision for loan losses	174,352		174,480		165,704
Noninterest income
Fees from other financial services	21,747		27,099		31,361
Fee income on deposit liabilities	19,249		18,363		17,775
Fee income on other financial products	8,131		8,405		6,577
Bank-owned life insurance	3,949		3,928		3,981
Mortgage banking income	2,913		8,309		14,628
Gains on sale of investment securities	2,847		1,226		134
Other income, net	2,375		4,753		1,204
Total noninterest income	61,211		72,083		75,660
Noninterest expense
Compensation and employee benefits	79,885		82,910		75,979
Occupancy	17,197		16,747		17,179
Data processing	11,690		10,952		10,098
Services	10,269		9,015		9,866
Equipment	6,564		7,295		7,105
Office supplies, printing and postage	6,089		4,233		3,870
Marketing	3,999		3,373		3,260
FDIC insurance	3,261		3,253		3,307
Other expense	20,990		21,726		21,679
Total noninterest expense	159,944		159,504		152,343
Income before income taxes	75,619		87,059		89,021
Income taxes	24,127		29,525		30,384
Net income	$	51,492	$	57,534	$	58,637

Statements of Comprehensive Income



Years ended December 31	2014			2013			2012
(in thousands)
Net income	$	51,492		$	57,534		$	58,637
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for sale investment securities:
Net unrealized gains (losses) on available-for sale investment securities arising during the period, net of (taxes) benefits of $(3,856), $9,037 and ($631), for 2014, 2013 and 2012, respectively	5,840			(13,686		)	956
Less: reclassification adjustment for net realized gains included in net income, net of taxes of $1,132, $488 and $53 for 2014, 2013 and 2012, respectively	(1,715		)	(738		)	(81		)
Retirement benefit plans:
Net gains (losses) arising during the period, net of (taxes) benefits of $6,164, ($10,450) and $5,240 for 2014, 2013 and 2012, respectively	(9,336		)	15,826			(7,936		)
Less: amortization of transition obligation, prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $561, $1,187 and $684 for 2014, 2013 and 2012, respectively	850			1,797			1,036
Other comprehensive income (loss), net of taxes	(4,361		)	3,199			(6,025		)
Comprehensive income	$	47,131		$	60,733		$	52,612

Balance Sheets Data



December 31				2014						2013
(in thousands)
Assets
Cash and due from banks				$	107,233					$	108,998
Interest-bearing deposits				54,230						47,605
Available-for-sale investment securities, at fair value				550,394						529,007
Stock in Federal Home Loan Bank of Seattle, at cost				69,302						92,546
Loans receivable held for investment				4,434,651						4,150,229
Allowance for loan losses				(45,618		)				(40,116		)
Net loans				4,389,033						4,110,113
Loans held for sale, at lower of cost or fair value				8,424						5,302
Other				304,435						268,063
Goodwill				82,190						82,190
Total assets				$	5,565,241					$	5,243,824
Liabilities and shareholder’s equity
Deposit liabilities–noninterest-bearing				$	1,342,794					$	1,214,418
Deposit liabilities–interest-bearing				3,280,621						3,158,059
Other borrowings				290,656						244,514
Other				116,527						105,679
Total liabilities				5,030,598						4,722,670
Commitments and contingencies (see “Litigation” below)
Common stock				1						1
Additional paid in capital				338,411						336,053
Retained earnings				212,789						197,297
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains (losses) on securities	$	462					$	(3,663	)
Retirement benefit plans	(17,020		)	(16,558		)	(8,534		)	(12,197		)
Total shareholder’s equity				534,643						521,154
Total liabilities and shareholder’s equity				$	5,565,241					$	5,243,824



December 31	2014		2013
(in thousands)
Other assets
Bank-owned life insurance	$	134,115	$	129,963
Premises and equipment, net	92,407		67,766
Prepaid expenses	3,196		3,616
Accrued interest receivable	13,632		13,133
Mortgage-servicing rights	11,540		11,687
Low-income housing equity investments	32,457		14,543
Real estate acquired in settlement of loans, net	891		1,205
Other	16,197		26,150
	$	304,435	$	268,063
Other liabilities
Accrued expenses	$	37,880	$	19,989
Federal and state income taxes payable	26,806		37,807
Cashier’s checks	20,509		21,110
Advance payments by borrowers	9,652		9,647
Other	21,680		17,126
	$	116,527	$	105,679

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

Available-for-sale 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, 2014
Available-for-sale
U.S. Treasury and federal agency obligations	$	119,507	$	1,092	$	(1,039	)	$	119,560	6	$	41,970	$	(361	)	5	$	29,168	$	(678	)
Mortgage-related securities- FNMA, FHLMC and GNMA	430,120		5,653		(4,939		)	430,834		6	47,029		(164		)	29	172,623		(4,775		)
	$	549,627	$	6,745	$	(5,978	)	$	550,394	12	$	88,999	$	(525	)	34	$	201,791	$	(5,453	)
December 31, 2013
Available-for-sale
Federal agency obligations	$	83,193	$	174	$	(2,394	)	$	80,973	10	$	70,799	$	(2,394	)	—	$	—	$	—
Mortgage-related securities- FNMA, FHLMC and GNMA	374,993		4,911		(10,460		)	369,444		36	228,543		(8,819		)	4	19,655		(1,641		)
Municipal bonds	76,904		1,826		(140		)	78,590		3	14,478		(140		)	—	—		—
	$	535,090	$	6,911	$	(12,994	)	$	529,007	49	$	313,820	$	(11,353	)	4	$	19,655	$	(1,641	)

During 2014, ASB sold all of the municipal bonds held in its investment securities portfolio.

ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2014, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to rising interest rates relative to when the investment securities were purchased and not due to the credit quality of the investment securities. The gross unrealized losses reported for 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. ASB did not recognize OTTI for 2014, 2013 and 2012.

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

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



	Amortized		Fair
December 31, 2014	Cost		value
(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years	34,953		35,007
Due after five years through ten years	47,131		47,885
Due after ten years	37,423		36,668
	119,507		119,560
Mortgage-related securities-FNMA,FHLMC and GNMA	430,120		430,834
Total available-for-sale securities	$	549,627	$	550,394

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



Years ended December 31	2014		2013		2012
(in millions)
Proceeds	$	79.6	$	71.4	$	3.5
Gross gains	2.8		1.2		—
Gross losses	—		—		—

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



Years ended December 31	2014		2013		2012
(in thousands)
Taxable	$	11,666	$	11,474	$	12,309
Non-taxable	279		1,621		1,513
	$	11,945	$	13,095	$	13,822

ASB pledged securities with a market value of approximately $88.6 million and $87.1 million as of December 31, 2014 and 2013, respectively, as collateral for public funds deposits, automated clearinghouse transactions with Bank of Hawaii, and deposits in ASB’s bankruptcy account with the Federal Reserve Bank of San Francisco. As of December 31, 2014 and 2013, securities with a carrying value of $230.2 million and $187.1 million, respectively, were pledged as collateral for securities sold under agreements to repurchase.

Stock in FHLB of Seattle. As of December 31, 2014 and 2013, ASB’s stock in FHLB of Seattle was carried at cost ($69.3 million and $92.5 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 of Seattle for impairment. ASB evaluated its investment in FHLB stock for OTTI as of December 31, 2014, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2014 based on its evaluation of the underlying investment, including:


•	the net income and growth in retained earnings recorded by the FHLB of Seattle in the first nine months of 2014;


•	compliance by the FHLB of Seattle with all of its regulatory capital requirements and being classified “adequately capitalized” by the Federal Housing Finance Agency (Finance Agency);


•	being allowed by the Finance Agency to repurchase excess stock;


•	commitments by the FHLB of Seattle to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB of Seattle;


•	the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB of Seattle;


•	the liquidity position of the FHLB of Seattle; and


•	ASB’s intent and assessment of whether it will more likely than not be required to sell the FHLB stock before recovery of its par value.

Deterioration in the FHLB of Seattle’s financial position may result in future impairment losses.

Loans receivable.

The components of loans receivable were summarized as follows:



December 31	2014			2013
(in thousands)
Real estate:
Residential 1-4 family	$	2,044,205		$	2,006,007
Commercial real estate	531,917			440,443
Home equity line of credit	818,815			739,331
Residential land	16,240			16,176
Commercial construction	96,438			52,112
Residential construction	18,961			12,774
Total real estate	3,526,576			3,266,843
Commercial	791,757			783,388
Consumer	122,656			108,722
Total loans	4,440,989			4,158,953
Less: Deferred fees and discounts	(6,338		)	(8,724		)
Allowance for loan losses	(45,618		)	(40,116		)
Total loans, net	$	4,389,033		$	4,110,113

The Company’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. The Company is subject to the risk that the insurance company cannot satisfy the Company’s claim on policies.

ASB services real estate loans for investors (principal balance of $1.4 billion, $1.4 billion and $1.3 billion as of December 31, 2014, 2013 and 2012, respectively), which are not included in the accompanying consolidated 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, 2014 and 2013, ASB had pledged loans with an amortized cost of approximately $1.9 billion and $1.7 billion, respectively, as collateral to secure advances from the FHLB of Seattle.

As of December 31, 2014 and 2013, 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 $49.6 million and $45.8 million, respectively. The $3.8 million increase in such loans in 2014 was attributed to new commitments and loans of $6.4 million to new and existing directors and executive officers, offset by closed lines of credits and repayments of $2.6 million. As of December 31, 2014 and 2013, $46.2 million and $40.5 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. Management believes these loans do not represent more than a normal risk of collection.

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, 2014
Allowance for loan losses:
Beginning balance	$	5,534		$	5,059	$	5,229		$	1,817		$	2,397	$	19	$	15,803		$	2,367		$	1,891		$	40,116
Charge-offs	(987		)	—		(196		)	(81		)	—		—		(1,872		)	(2,414		)	—			(5,550		)
Recoveries	1,180			—		752			469			—		—		1,636			889			—			4,926
Provision	(1,065		)	3,895		1,197			(330		)	3,074		9		(1,550		)	2,787			(1,891		)	6,126
Ending balance	$	4,662		$	8,954	$	6,982		$	1,875		$	5,471	$	28	$	14,017		$	3,629		$	—		$	45,618
Ending balance: individually evaluated for impairment	$	951		$	1,845	$	46		$	1,057		$	—	$	—	$	760		$	6					$	4,665
Ending balance: collectively evaluated for impairment	$	3,711		$	7,109	$	6,936		$	818		$	5,471	$	28	$	13,257		$	3,623		$	—		$	40,953
Financing Receivables:
Ending balance	$	2,044,205		$	531,917	$	818,815		$	16,240		$	96,438	$	18,961	$	791,757		$	122,656					$	4,440,989
Ending balance: individually evaluated for impairment	$	22,981		$	5,112	$	779		$	7,850		$	—	$	—	$	13,108		$	16					$	49,846
Ending balance: collectively evaluated for impairment	$	2,021,224		$	526,805	$	818,036		$	8,390		$	96,438	$	18,961	$	778,649		$	122,640					$	4,391,143
December 31, 2013
Allowance for loan losses:
Beginning balance	$	6,068		$	2,965	$	4,493		$	4,275		$	2,023	$	9	$	15,931		$	4,019		$	2,202		$	41,985
Charge-offs	(1,162		)	—		(782		)	(485		)	—		—		(3,056		)	(2,717		)	—			(8,202		)
Recoveries	1,881			—		358			868			—		—		1,089			630			—			4,826
Provision	(1,253		)	2,094		1,160			(2,841		)	374		10		1,839			435			(311		)	1,507
Ending balance	$	5,534		$	5,059	$	5,229		$	1,817		$	2,397	$	19	$	15,803		$	2,367		$	1,891		$	40,116
Ending balance: individually evaluated for impairment	$	642		$	1,118	$	—		$	1,332		$	—	$	—	$	2,246		$	—					$	5,338
Ending balance: collectively evaluated for impairment	$	4,892		$	3,941	$	5,229		$	485		$	2,397	$	19	$	13,557		$	2,367		$	1,891		$	34,778
Financing Receivables:
Ending balance	$	2,006,007		$	440,443	$	739,331		$	16,176		$	52,112	$	12,774	$	783,388		$	108,722					$	4,158,953
Ending balance: individually evaluated for impairment	$	20,317		$	4,604	$	1,179		$	10,577		$	—	$	—	$	21,225		$	19					$	57,921
Ending balance: collectively evaluated for impairment	$	1,985,690		$	435,839	$	738,152		$	5,599		$	52,112	$	12,774	$	762,163		$	108,703					$	4,101,032

Changes in the allowance for loan losses were as follows:



(dollars in thousands)	2014			2013			2012
Allowance for loan losses, January 1	$	40,116		$	41,985		$	37,906
Provision for loan losses	6,126			1,507			12,883
Charge-offs, net of recoveries
Real estate loans	(1,137		)	(678		)	3,828
Other loans	1,761			4,054			4,976
Net charge-offs	624			3,376			8,804
Allowance for loan losses, December 31	$	45,618		$	40,116		$	41,985
Ratio of net charge-offs to average total loans	0.01		%	0.09		%	0.24		%

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 PD Model rating, the LGD, and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens, and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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



December 31	2014						2013
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	493,105	$	79,312	$	743,334	$	375,217	$	52,112	$	703,053
Special mention	5,209		—		16,095		33,436		—		17,634
Substandard	33,603		17,126		31,665		28,020		—		59,663
Doubtful	—		—		663		3,770		—		3,038
Loss	—		—		—		—		—		—
Total	$	531,917	$	96,438	$	791,757	$	440,443	$	52,112	$	783,388

The credit risk profile based on payment activity for loans was as follows:



(in thousands)	30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Current		Total financing receivables		Recorded Investment> 90 days and accruing
December 31, 2014
Real estate:
Residential 1-4 family	$	6,124	$	1,732	$	12,632	$	20,488	$	2,023,717	$	2,044,205	$	—
Commercial real estate	—		—		—		—		531,917		531,917		—
Home equity line of credit	1,341		501		194		2,036		816,779		818,815		—
Residential land	—		—		—		—		16,240		16,240		—
Commercial construction	—		—		—		—		96,438		96,438		—
Residential construction	—		—		—		—		18,961		18,961		—
Commercial	699		145		569		1,413		790,344		791,757		—
Consumer	829		333		403		1,565		121,091		122,656		—
Total loans	$	8,993	$	2,711	$	13,798	$	25,502	$	4,415,487	$	4,440,989	$	—
December 31, 2013
Real estate:
Residential 1-4 family	$	2,728	$	622	$	15,411	$	18,761	$	1,987,246	$	2,006,007	$	—
Commercial real estate	—		—		3,770		3,770		436,673		440,443		—
Home equity line of credit	765		312		960		2,037		737,294		739,331		—
Residential land	184		48		2,756		2,988		13,188		16,176		—
Commercial construction	—		—		—		—		52,112		52,112		—
Residential construction	—		—		—		—		12,774		12,774		—
Commercial	1,668		612		3,026		5,306		778,082		783,388		—
Consumer	436		158		304		898		107,824		108,722		—
Total loans	$	5,781	$	1,752	$	26,227	$	33,760	$	4,125,193	$	4,158,953	$	—

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



December 31	2014		2013
(in thousands)
Real estate:
Residential 1-4 family	$	19,253	$	19,679
Commercial real estate	5,112		4,439
Home equity line of credit	1,087		2,060
Residential land	720		3,161
Commercial construction	—		—
Residential construction	—		—
Commercial	10,053		18,781
Consumer	661		401
Total nonaccrual loans	$	36,886	$	48,521
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	$	13,525	$	9,744
Commercial real estate	—		—
Home equity line of credit	480		171
Residential land	7,130		7,476
Commercial construction	—		—
Residential construction	—		—
Commercial	2,972		1,649
Consumer	—		—
Total troubled debt restructured loans not included above	$	24,107	$	19,040

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



December 31	2014										2013
(in thousands)	Recorded investment		Unpaid principal balance		Related Allow- ance		Average recorded investment		Interest income recognized*		Recorded investment		Unpaid principal balance		Related allow- ance		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	11,654	$	12,987	$	—	$	9,056	$	227	$	9,708	$	12,144	$	—	$	11,674	$	386
Commercial real estate	571		626		—		194		—		—		—		—		802		—
Home equity line of credit	363		606		—		402		5		672		1,227		—		623		2
Residential land	2,344		3,200		—		2,728		172		2,622		3,612		—		6,675		482
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	8,235		11,471		—		5,204		38		3,466		4,715		—		4,837		12
Consumer	—		—		—		8		—		19		19		—		20		—
	23,167		28,890		—		17,592		442		16,487		21,717		—		24,631		882
With an allowance recorded
Real estate:
Residential 1-4 family	11,327		11,347		951		8,822		419		6,216		6,236		642		6,455		372
Commercial real estate	4,541		4,541		1,845		3,415		478		4,604		4,686		1,118		5,745		152
Home equity line of credit	416		420		46		132		6		—		—		—		—		—
Residential land	5,506		5,584		1,057		6,415		484		7,452		7,623		1,332		6,844		409
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	4,873		5,211		760		12,089		438		17,759		20,640		2,246		15,635		139
Consumer	16		16		6		9		—		—		—		—		—		—
	26,679		27,119		4,665		30,882		1,825		36,031		39,185		5,338		34,679		1,072
Total
Real estate:
Residential 1-4 family	22,981		24,334		951		17,878		646		15,924		18,380		642		18,129		758
Commercial real estate	5,112		5,167		1,845		3,609		478		4,604		4,686		1,118		6,547		152
Home equity line of credit	779		1,026		46		534		11		672		1,227		—		623		2
Residential land	7,850		8,784		1,057		9,143		656		10,074		11,235		1,332		13,519		891
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	13,108		16,682		760		17,293		476		21,225		25,355		2,246		20,472		151
Consumer	16		16		6		17		—		19		19		—		20		—
	$	49,846	$	56,009	$	4,665	$	48,474	$	2,267	$	52,518	$	60,902	$	5,338	$	59,310	$	1,954

* Since loan was classified as impaired.

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

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

All TDR loans are classified as impaired and are segregated and reviewed separately when assessing the adequacy of the allowance for loan losses based on the appropriate method of measuring impairment: (1) present value of expected future cash flows discounted at the loan’s effective original contractual rate, (2) fair value of collateral less 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 2014 and 2013 were as follows:



Years ended December 31	2014							2013
	Number	Outstanding recorded investment				Net increase in ALLL (as of period end)		Number	Outstanding recorded investment				Net increase in ALLL (as of period end)
(dollars in thousands)	of contracts	Pre-modification		Post-modification		Net increase in ALLL (as of period end)		of contracts	Pre-modification		Post-modification		Net increase in ALLL (as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	38	$	10,680	$	10,737	$	163	34	$	8,876	$	8,957	$	297
Commercial real estate	—	—		—		—		—	—		—		—
Home equity line of credit	8	502		502		42		5	637		390		—
Residential land	18	4,304		4,304		242		20	6,215		6,206		131
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	7	3,827		3,827		13		7	4,646		4,646		94
Consumer	—	—		—		—		—	—		—		—
	71	$	19,313	$	19,370	$	460	66	$	20,374	$	20,199	$	522

Loans modified in TDRs that experienced a payment default of 90 days or more in 2014 and 2013, and for which the payment default occurred within one year of the modification, were as follows:



Years ended December 31	2014			2013
(dollars in thousands)	Number of contracts	Recorded investment		Number of contracts	Recorded investment
Troubled debt restructurings that subsequently defaulted
Real estate:
Residential 1-4 family	1	$	390	—	$	—
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		1	67
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	1	14		2	660
Consumer	—	—		—	—
	2	$	404	3	$	727

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 impaired or modified in TDRs totaled $0.5 million at December 31, 2014.

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 sales, but may retain the servicing rights of the loans sold.

ASB received $155.0 million, $273.8 million, and $513.0 million of proceeds from the sale of residential mortgages in 2014, 2013, and 2012, respectively, and recognized gains on such loans of $2.9 million, $8.3 million, and $14.6 million in 2014, 2013, and 2012, respectively. Repurchased mortgage loans in 2014, 2013, and 2012 were $0.5 million, $1.9 million and $0.4 million, respectively.

Mortgage servicing fees, a component of other income, net, were $3.5 million, $3.3 million, and $2.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.

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



(in thousands)	Gross carrying amount		Accumulated amortization			Valuation allowance			Net carrying amount
December 31, 2014	$	27,185	$	(15,436	)	$	(209	)	$	11,540
December 31, 2013	$	25,644	$	(13,706	)	$	(251	)	$	11,687

Changes related to mortgage servicing rights were as follows:



(in thousands)	2014			2013			2012
Mortgage servicing rights
Balance, January 1	$	11,938		$	11,316		$	8,402
Amount capitalized	1,637			2,611			4,845
Amortization	(1,731		)	(1,802		)	(1,750		)
Other-than-temporary impairment	(95		)	(187		)	(181		)
Carrying amount before valuation allowance, December 31	11,749			11,938			11,316
Valuation allowance for mortgage servicing rights
Balance, January 1	251			498			175
Provision (recovery)	53			(60		)	504
Other-than-temporary impairment	(95		)	(187		)	(181		)
Balance, December 31	209			251			498
Net carrying value of mortgage servicing rights	$	11,540		$	11,687		$	10,818

The estimated aggregate amortization expenses of mortgage servicing rights for 2015, 2016, 2017, 2018 and 2019 are $1.7 million, $1.5 million, $1.3 million, $1.1 million and $1.0 million, respectively.

ASB capitalizes mortgage servicing rights acquired through either the purchase or origination of mortgage loans for sale with servicing rights retained. 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.

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



December 31	2014			2013
(dollars in thousands)
Unpaid principal balance	$	1,391,030		$	1,357,003
Weighted average note rate	4.07		%	4.07		%
Weighted average discount rate	9.6		%	9.8		%
Weighted average prepayment speed	9.5		%	8.6		%

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



December 31	2014			2013
(in thousands)
Prepayment rate:
25 basis points adverse rate change	$	(757	)	$	(732	)
50 basis points adverse change	(1,524		)	(1,492		)
Discount rate:
25 basis points adverse rate change	(140		)	(154		)
50 basis points adverse change	(278		)	(306		)

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	2014				2013
(dollars in thousands)	Weighted-average stated rate		Amount		Weighted-average stated rate		Amount
Savings	0.06	%	$	1,923,062	0.06	%	$	1,826,907
Checking
Interest-bearing	0.02		768,787		0.02		721,700
Noninterest-bearing	—		665,005		—		643,628
Commercial checking	—		677,789		—		570,790
Money market	0.12		158,010		0.13		182,546
Term certificates	0.83		430,762		0.80		426,906
	0.11	%	$	4,623,415	0.11	%	$	4,372,477

As of December 31, 2014 and 2013, term certificates of $100,000 or more totaled $120 million and $102 million, respectively.

The approximate scheduled maturities of term certificates outstanding at December 31, 2014 were as follows:



(in thousands)
2015	$	255,896
2016	55,614
2017	44,315
2018	16,949
2019	54,979
Thereafter	3,009
	$	430,762

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



Years ended December 31	2014		2013		2012
(in thousands)
Term certificates	$	3,603	$	3,702	$	4,865
Savings	1,134		1,052		1,128
Money market	214		232		319
Interest-bearing checking	126		106		111
	$	5,077	$	5,092	$	6,423

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 balance sheet. All such agreements are subject to master netting arrangements, which provide for conditional right of set-off in case of default by either party; however, ASB presents securities sold under agreements to repurchase on a gross basis in the balance sheet. The following tables present information about the securities sold under agreements to repurchase, including the related collateral received from or pledged to counterparties:



(in millions)	Gross amount of recognized liabilities		Gross amount offset in the Balance Sheet		Net amount of liabilities presented in the Balance Sheet
Repurchase agreements
December 31, 2014	$	191	$	—	$	191
December 31, 2013	145		—		145



	Gross amount not offset in the Balance Sheet
(in millions)	Net amount of liabilities presented in the Balance Sheet		Financial instruments		Cash collateral pledged		Net amount
December 31, 2014
Financial institution	$	50	$	50	$	—	$	—
Government entities	56		56		—		—
Commercial account holders	85		85		—		—
Total	$	191	$	191	$	—	$	—
December 31, 2013
Financial institution	$	51	$	51	$	—	$	—
Commercial account holders	94		94		—		—
Total	$	145	$	145	$	—	$	—

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

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



(dollars in millions)	2014			2013			2012
Amount outstanding as of December 31	$	191		$	145		$	146
Average amount outstanding during the year	$	155		$	147		$	173
Maximum amount outstanding as of any month-end	$	195		$	151		$	189
Weighted-average interest rate as of December 31	1.45		%	1.75		%	1.74		%
Weighted-average interest rate during the year	1.67		%	1.74		%	1.56		%
Weighted-average remaining days to maturity as of December 31	343			367			489

As of December 31, 2014, securities sold under agreements to repurchase were summarized as follows:



Maturity	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	$	84,758		0.15	%	$	114,883
1 to 29 days	—			—		—
30 to 90 days	—			—		—
Over 90 days	105,898		¹	2.50		115,842
	$	190,656		1.45	%	$	230,725


¹	$50.3 million callable quarterly at par until maturity in 2016.

Advances from Federal Home Loan Bank.

FHLB advances are fixed rate for a specific term and consist of the following:



December 31, 2014	Weighted-average stated rate		Amount
(dollars in thousands)
Due in
2015	—	%	$	—
2016	—		—
2017	4.28		50,000		¹
2018	1.95		50,000
2019	—		—
Thereafter	—		—
	3.12	%	$	100,000


¹	Callable quarterly at par until maturity in 2017.

ASB and the FHLB of Seattle are parties to an Advances, Security and Deposit Agreement (Advances Agreement), which applies to currently outstanding and future advances, and governs the terms and conditions under which ASB borrows and the FHLB of Seattle makes loans or advances from time to time. Under the Advances Agreement, ASB agrees to abide by the FHLB of Seattle’s credit policies, and makes certain warranties and representations to the FHLB of Seattle. 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 of Seattle 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 of Seattle are collateralized by loans and stock in the FHLB of Seattle. As of December 31, 2014 and 2013, ASB’s available FHLB of Seattle borrowing capacity was $1.2 billion and $1.1 billion, respectively. ASB is required to obtain and hold a specific number of shares of capital stock of the FHLB of Seattle. ASB was in compliance with all Advances Agreement requirements as of December 31, 2014 and 2013.

Common stock equity. 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, 2014, 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. As of December 31, 2014, ASB was in compliance with the minimum capital requirements under OCC regulations.

In 2014, ASB paid cash dividends of $36 million to HEI, compared to cash dividends of $40 million in 2013. The FRB and OCC approved the dividends.

Related-party transactions. HEI charged ASB $2.3 million, $2.3 million and $1.9 million for general management and administrative services in 2014, 2013 and 2012, 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 risk 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	2014					2013
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	29,330	$	390		$	25,070	$	464
Forward commitments	32,833		(106		)	26,018		139

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	2014				2013
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	393	$	3	$	488	$	24
Forward commitments	5		111		141		2
	$	398	$	114	$	629	$	26

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

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



Derivative Financial Instruments Not Designated	Location of net gains
as Hedging Instruments	(losses) recognized in	Years ended December 31
(in thousands)	the Statements of Income	2014			2013		2012
Interest rate lock commitments	Mortgage banking income	$	(74	)	$	464	$	—
Forward commitments	Mortgage banking income	(245		)	139		—
		$	(319	)	$	603	$	—

There were no significant gains or losses on derivatives in 2012.

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. The Company 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 the Company 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. The Company holds collateral supporting those commitments for which collateral is deemed necessary.

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



December 31	2014		2013
(in thousands)
Unfunded commitments to extend credit:
Home equity line of credit	$	1,089,633	$	1,011,334
Commercial and commercial real estate	526,133		527,987
Consumer	56,312		58,080
Residential 1-4 family	20,524		14,241
Commercial and financial standby letters of credit	20,082		15,747
Total	$	1,712,684	$	1,627,389

Guarantees. 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, 2014, 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.

Contingencies. In March 2011, a purported class action lawsuit was filed in the First Circuit Court of the state of Hawaii by a customer who claimed that ASB had improperly charged overdraft fees on debit card transactions. ASB filed a motion to dismiss the lawsuit on the basis that ASB’s overdraft practices are governed by federal regulations established for federal savings banks which preempt the customer’s state law claims. In July 2011, the Circuit Court denied ASB's motion without prejudice and ASB appealed that decision. ASB's appeal is pending before the Hawaii Supreme Court. However, in December 2014, through a voluntary mediation process, ASB reached a tentative settlement of the claims. The tentative settlement, which remains subject to final court approval, provides for a payment of $2.0 million into a class settlement fund, the proceeds of which will be used to refund class members and pay attorneys’ fees and administrative and other costs, in exchange for a complete release of all claims asserted against ASB. As of December 2014, the $2.0 million tentative settlement amount was fully reserved by ASB.

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

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. For the years ended December 31, 2014 and 2013, ASB’s FDIC insurance assessments were $3.0 million and $2.9 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.