Bank segment

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



	Three months ended March 31
(in thousands)	2015		2014
Interest and dividend income
Interest and fees on loans	$	45,198	$	43,682
Interest and dividends on investment securities	3,051		3,035
Total interest and dividend income	48,249		46,717
Interest expense
Interest on deposit liabilities	1,260		1,225
Interest on other borrowings	1,466		1,405
Total interest expense	2,726		2,630
Net interest income	45,523		44,087
Provision for loan losses	614		995
Net interest income after provision for loan losses	44,909		43,092
Noninterest income
Fees from other financial services	5,355		5,128
Fee income on deposit liabilities	5,315		4,421
Fee income on other financial products	1,889		2,290
Bank-owned life insurance	983		963
Mortgage banking income	1,822		628
Gains on sale of investment securities	—		2,847
Other income, net	735		625
Total noninterest income	16,099		16,902
Noninterest expense
Compensation and employee benefits	21,766		20,286
Occupancy	4,113		3,953
Data processing	3,116		3,060
Services	2,341		2,273
Equipment	1,701		1,645
Office supplies, printing and postage	1,483		1,616
Marketing	841		711
FDIC insurance	811		796
Other expense	4,205		3,122
Total noninterest expense	40,377		37,462
Income before income taxes	20,631		22,532
Income taxes	7,156		8,133
Net income	$	13,475	$	14,399

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended March 31
(in thousands)	2015		2014
Net income	$	13,475	$	14,399
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 tax benefits of $2,278 and $1,664 for the respective periods	3,451		2,520
Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil and $1,132 for the respective periods	—		(1,715		)
Retirement benefit plans:
Less: amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $259 and $144 for the respective periods	392		219
Other comprehensive income, net of taxes	3,843		1,024
Comprehensive income	$	17,318	$	15,423

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	March 31, 2015						December 31, 2014
Assets
Cash and due from banks				$	98,484					$	107,233
Interest-bearing deposits				172,517						54,230
Available-for-sale investment securities, at fair value				590,648						550,394
Stock in Federal Home Loan Bank of Seattle, at cost				63,711						69,302
Loans receivable held for investment				4,447,299						4,434,651
Allowance for loan losses				(45,795		)				(45,618		)
Net loans				4,401,504						4,389,033
Loans held for sale, at lower of cost or fair value				9,906						8,424
Other				305,917						305,416
Goodwill				82,190						82,190
Total assets				$	5,724,877					$	5,566,222

Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,420,085					$	1,342,794
Deposit liabilities—interest-bearing				3,331,243						3,280,621
Other borrowings				312,094						290,656
Other				117,849						118,363
Total liabilities				5,181,271						5,032,434
Commitments and contingencies
Common stock				1						1
Additional paid in capital				338,411						338,411
Retained earnings				217,909						211,934
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains on securities	$	3,913					$	462
Retirement benefit plans	(16,628		)	(12,715		)	(17,020		)	(16,558		)
Total shareholder’s equity				543,606						533,788
Total liabilities and shareholder’s equity				$	5,724,877					$	5,566,222

Other assets
Bank-owned life insurance				$	135,141					$	134,115
Premises and equipment, net				85,174						92,407
Prepaid expenses				4,892						3,196
Accrued interest receivable				13,720						13,632
Mortgage-servicing rights				11,965						11,540
Low-income housing equity investments				32,140						33,438
Real estate acquired in settlement of loans, net				665						891
Other				22,220						16,197
				$	305,917					$	305,416
Other liabilities
Accrued expenses				$	29,670					$	37,880
Federal and state income taxes payable				36,010						28,642
Cashier’s checks				24,686						20,509
Advance payments by borrowers				5,904						9,652
Other				21,579						21,680
				$	117,849					$	118,363

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

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $212 million and $100 million, respectively, as of March 31, 2015 and $191 million and $100 million, respectively, as of December 31, 2014.

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



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value			Gross unrealized losses
										Less than 12 months						12 months or longer
(dollar in thousands)										Number of issues	Fair value		Amount			Number of issues	Fair value		Amount
March 31, 2015
Available-for-sale
U.S. Treasury and federal agency obligations	$	138,593	$	2,029	$	(395	)	$	140,227	1	$	9,973	$	(2	)	3	$	19,198	$	(393	)
Mortgage-related securities- FNMA, FHLMC and GNMA	445,559		7,149		(2,287		)	450,421		6	40,889		(89		)	26	147,722		(2,198		)
	$	584,152	$	9,178	$	(2,682	)	$	590,648	7	$	50,862	$	(91	)	29	$	166,920	$	(2,591	)
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	)

The unrealized losses on ASB’s investments in mortgage-related securities and obligations issued by federal agencies were caused by interest rate movements. Because ASB does not intend to sell the securities and has determined it is more likely than not that it will not be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, ASB did not consider these investments to be other-than-temporarily impaired at March 31, 2015.

The fair values of ASB’s investment securities could decline if interest rates rise or spreads widen.

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:



March 31, 2015	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years	29,958		30,296
Due after five years through ten years	71,811		73,188
Due after ten years	36,824		36,743
	138,593		140,227
Mortgage-related securities-FNMA,FHLMC and GNMA	445,559		450,421
Total available-for-sale securities	$	584,152	$	590,648

Allowance for loan losses. The allowance for loan losses (balances and changes) and financing receivables were as follows:



(in thousands)	Residential 1-4 family			Commercial real estate		Home equity line of credit			Residential land			Commercial construction			Residential construction			Commercial loans			Consumer loans			Unallocated			Total
Three months ended March 31, 2015
Allowance for loan losses:
Beginning balance	$	4,662		$	8,954	$	6,982		$	1,875		$	5,471		$	28		$	14,017		$	3,629		$	—		$	45,618
Charge-offs	(156		)	—		(3		)	—			—			—			(46		)	(942		)	—			(1,147		)
Recoveries	12			—		31			49			—			—			341			277			—			710
Provision	403			2,274		(487		)	362			(2,634		)	(7		)	268			435			—			614
Ending balance	$	4,921		$	11,228	$	6,523		$	2,286		$	2,837		$	21		$	14,580		$	3,399		$	—		$	45,795
Ending balance: individually evaluated for impairment	$	1,429		$	1,785	$	144		$	1,085		$	—		$	—		$	1,096		$	9					$	5,548
Ending balance: collectively evaluated for impairment	$	3,492		$	9,443	$	6,379		$	1,201		$	2,837		$	21		$	13,484		$	3,390		$	—		$	40,247
Financing Receivables:
Ending balance	$	2,039,099		$	561,189	$	814,265		$	18,155		$	77,164		$	20,804		$	803,545		$	119,310					$	4,453,531
Ending balance: individually evaluated for impairment	$	23,089		$	4,998	$	1,183		$	7,819		$	—		$	—		$	11,879		$	15					$	48,983
Ending balance: collectively evaluated for impairment	$	2,016,010		$	556,191	$	813,082		$	10,336		$	77,164		$	20,804		$	791,666		$	119,295					$	4,404,548
Three months ended March 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	(266		)	—		—			(6		)	—			—			(124		)	(561		)	—			(957		)
Recoveries	341			—		11			86			—			—			100			231			—			769
Provision	(134		)	656		729			(322		)	666			5			(187		)	279			(697		)	995
Ending balance	$	5,475		$	5,715	$	5,969		$	1,575		$	3,063		$	24		$	15,592		$	2,316		$	1,194		$	40,923
Ending balance: individually evaluated for impairment	$	906		$	1,544	$	—		$	1,102		$	—		$	—		$	2,133		$	—					$	5,685
Ending balance: collectively evaluated for impairment	$	4,569		$	4,171	$	5,969		$	473		$	3,063		$	24		$	13,459		$	2,316		$	1,194		$	35,238
Financing Receivables:
Ending balance	$	1,985,812		$	452,303	$	764,483		$	15,906		$	66,578		$	16,474		$	786,611		$	108,202					$	4,196,369
Ending balance: individually evaluated for impairment	$	20,141		$	4,558	$	1,164		$	10,351		$	—		$	—		$	19,399		$	18					$	55,631
Ending balance: collectively evaluated for impairment	$	1,965,671		$	447,745	$	763,319		$	5,555		$	66,578		$	16,474		$	767,212		$	108,184					$	4,140,738

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:



	March 31, 2015						December 31, 2014
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	507,993	$	77,164	$	739,721	$	493,105	$	79,312	$	743,334
Special mention	5,203		—		31,863		5,209		—		16,095
Substandard	47,993		—		31,335		33,603		17,126		31,665
Doubtful	—		—		626		—		—		663
Loss	—		—		—		—		—		—
Total	$	561,189	$	77,164	$	803,545	$	531,917	$	96,438	$	791,757

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
March 31, 2015
Real estate:
Residential 1-4 family	$	6,074	$	2,718	$	12,231	$	21,023	$	2,018,076	$	2,039,099	$	—
Commercial real estate	—		—		—		—		561,189		561,189		—
Home equity line of credit	1,041		807		629		2,477		811,788		814,265		—
Residential land	422		—		—		422		17,733		18,155
Commercial construction	—		—		—		—		77,164		77,164		—
Residential construction	—		—		—		—		20,804		20,804		—
Commercial	680		238		532		1,450		802,095		803,545		—
Consumer	895		270		266		1,431		117,879		119,310		—
Total loans	$	9,112	$	4,033	$	13,658	$	26,803	$	4,426,728	$	4,453,531	$	—
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	$	—

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



(in thousands)	March 31, 2015		December 31, 2014
Real estate:
Residential 1-4 family	$	18,205	$	19,253
Commercial real estate	4,998		5,112
Home equity line of credit	1,701		1,087
Residential land	717		720
Commercial construction	—		—
Residential construction	—		—
Commercial	9,018		10,053
Consumer	542		661
Total nonaccrual loans	$	35,181	$	36,886
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	$	14,334	$	13,525
Commercial real estate	—		—
Home equity line of credit	750		480
Residential land	7,102		7,130
Commercial construction	—		—
Residential construction	—		—
Commercial	2,720		2,972
Consumer	—		—
Total troubled debt restructured loans not included above	$	24,906	$	24,107

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



	March 31, 2015						Three months ended March 31, 2015
(in thousands)	Recorded investment		Unpaid principal balance		Related Allowance		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	11,168	$	12,460	$	—	$	11,552	$	89
Commercial real estate	547		609		—		555		—
Home equity line of credit	339		544		—		400		1
Residential land	3,265		4,121		—		2,637		52
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	6,289		8,089		—		7,295		2
Consumer	—		—		—		—		—
	$	21,608	$	25,823	$	—	$	22,439	$	144
With an allowance recorded
Real estate:
Residential 1-4 family	$	11,921	$	11,974	$	1,429	$	11,510	$	126
Commercial real estate	4,451		4,511		1,785		4,482		—
Home equity line of credit	844		900		144		626		6
Residential land	4,554		4,632		1,085		5,189		83
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	5,590		7,549		1,096		4,982		50
Consumer	15		15		9		15		—
	$	27,375	$	29,581	$	5,548	$	26,804	$	265
Total
Real estate:
Residential 1-4 family	$	23,089	$	24,434	$	1,429	$	23,062	$	215
Commercial real estate	4,998		5,120		1,785		5,037		—
Home equity line of credit	1,183		1,444		144		1,026		7
Residential land	7,819		8,753		1,085		7,826		135
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	11,879		15,638		1,096		12,277		52
Consumer	15		15		9		15		—
	$	48,983	$	55,404	$	5,548	$	49,243	$	409



	December 31, 2014						Year ended December 31, 2014
(in thousands)	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate:
Residential 1-4 family	$	11,654	$	12,987	$	—	$	9,056	$	227
Commercial real estate	571		626		—		194		—
Home equity line of credit	363		606		—		402		5
Residential land	2,344		3,200		—		2,728		172
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	8,235		11,471		—		5,204		38
Consumer	—		—		—		8		—
	$	23,167	$	28,890	$	—	$	17,592	$	442
With an allowance recorded
Real estate:
Residential 1-4 family	$	11,327	$	11,347	$	951	$	8,822	$	419
Commercial real estate	4,541		4,541		1,845		3,415		478
Home equity line of credit	416		420		46		132		6
Residential land	5,506		5,584		1,057		6,415		484
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	4,873		5,211		760		12,089		438
Consumer	16		16		6		9		—
	$	26,679	$	27,119	$	4,665	$	30,882	$	1,825
Total
Real estate:
Residential 1-4 family	$	22,981	$	24,334	$	951	$	17,878	$	646
Commercial real estate	5,112		5,167		1,845		3,609		478
Home equity line of credit	779		1,026		46		534		11
Residential land	7,850		8,784		1,057		9,143		656
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial	13,108		16,682		760		17,293		476
Consumer	16		16		6		17		—
	$	49,846	$	56,009	$	4,665	$	48,474	$	2,267


*	Since loan was classified as impaired.

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

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

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



	Three months ended March 31, 2015
	Number of	Outstanding recorded investment				Net increase in ALL
(dollars in thousands)	contracts	Pre-modification		Post-modification		(as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	5	$	877	$	895	$	47
Commercial real estate	—	—		—		—
Home equity line of credit	9	429		429		55
Residential land	—	—		—		—
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	1	92		92		—
Consumer	—	—		—		—
	15	$	1,398	$	1,416	$	102



	Three months ended March 31, 2014
	Number of	Outstanding recorded investment				Net increase in ALL
(dollars in thousands)	contracts	Pre-modification		Post-modification		(as of period end)
Troubled debt restructurings
Real estate:
Residential 1-4 family	5	$	921	$	935	$	44
Commercial real estate	—	—		—		—
Home equity line of credit	—	—		—		—
Residential land	7	1,133		1,133		175
Commercial construction	—	—		—		—
Residential construction	—	—		—		—
Commercial	3	473		473		14
Consumer	—	—		—		—
	15	$	2,527	$	2,541	$	233

There were no loans modified in TDRs that experienced a payment default of 90 days or more in the first quarter of 2015 and 2014, and for which the payment of default occurred within one year of the modification.

If loans modified in a TDR subsequently default, ASB evaluates the loan for further impairment. Based on its evaluation, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. There were no commitments to lend additional funds to borrowers whose loan terms have been impaired or modified in TDRs as of March 31, 2015.

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.

Mortgage servicing fees, a component of other income, net, were $0.9 million for the three months ended March 31, 2015 and 2014.

The carrying values of mortgage servicing assets were as follows:



(in thousands)	Gross carrying amount		Accumulated amortization			Valuation allowance			Net carrying amount
March 31, 2015	$	28,090	$	(16,084	)	$	(41	)	$	11,965
March 31, 2014	26,097		(14,138		)	(202		)	11,757

Changes related to mortgage servicing rights were as follows:



(in thousands)	2015			2014
Mortgage servicing rights
Balance, January 1	$	11,749		$	11,938
Amount capitalized	906			467
Amortization	(647		)	(432		)
Other-than-temporary impairment	(2		)	(14		)
Carrying amount before valuation allowance, March 31	12,006			11,959
Valuation allowance for mortgage servicing rights
Balance, January 1	209			251
Provision (recovery)	(166		)	(35		)
Other-than-temporary impairment	(2		)	(14		)
Balance, March 31	41			202
Net carrying value of mortgage servicing rights	$	11,965		$	11,757

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 the bank’s mortgage servicing rights were as follows:



(dollars in thousands)	March 31, 2015			December 31, 2014
Unpaid principal balance	$	1,414,990		$	1,391,030
Weighted average note rate	4.06		%	4.07		%
Weighted average discount rate	9.6		%	9.6		%
Weighted average prepayment speed	10.6		%	9.5		%

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



(dollars in thousands)	March 31, 2015			December 31, 2014
Prepayment rate:
25 basis points adverse rate change	$	(750	)	$	(757	)
50 basis points adverse change	(1,408		)	(1,524		)
Discount rate:
25 basis points adverse change	(129		)	(140		)
50 basis points adverse rate change	(256		)	(278		)

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

Other borrowings. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the balance sheet. 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
March 31, 2015	$212	$—	$212
December 31, 2014	191	—	191



	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
March 31, 2015
Financial institution	$	50	$	50	$	—	$	—
Government entities	56		56		—		—
Commercial account holders	106		106		—		—
Total	$	212	$	212	$	—	$	—

December 31, 2014
Financial institution	$	50	$	50	$	—	$	—
Government entities	56		56		—		—
Commercial account holders	85		85		—		—
Total	$	191	$	191	$	—	$	—

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:



	March 31, 2015					December 31, 2014
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	50,301	$	835		$	29,330	$	390
Forward commitments	46,489		(265		)	32,833		(106		)

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



Derivative Financial Instruments Not Designated as Hedging Instruments ¹	March 31, 2015				December 31, 2014
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	836	$	1	$	393	$	3
Forward commitments	15		280		5		111
	$	851	$	281	$	398	$	114

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

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



Derivative Financial Instruments Not Designated as Hedging Instruments	Location of net gains (losses) recognized in the Statement of Income	Three months ended March 31
(in thousands)		2015			2014
Interest rate lock commitments	Mortgage banking income	$	445		$	(270	)
Forward commitments	Mortgage banking income	(159		)	(106		)
		$	286		$	(376	)

Commitments to fund Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $12.5 million and $14.8 million at March 31, 2015 and December 31, 2014, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of March 31, 2015, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.

Contingencies. 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 March 2015, the $2.0 million tentative settlement amount was fully reserved by ASB.