5 · Bank segment (HEI only)

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



Years ended December 31	2015		2014		2013
(in thousands)
Interest and dividend income
Interest and fees on loans	$	184,782	$	179,341	$	172,969
Interest and dividends on investment securities	15,120		11,945		13,095
Total interest and dividend income	199,902		191,286		186,064
Interest expense
Interest on deposit liabilities	5,348		5,077		5,092
Interest on other borrowings	5,978		5,731		4,985
Total interest expense	11,326		10,808		10,077
Net interest income	188,576		180,478		175,987
Provision for loan losses	6,275		6,126		1,507
Net interest income after provision for loan losses	182,301		174,352		174,480
Noninterest income
Fees from other financial services	22,211		21,747		27,099
Fee income on deposit liabilities	22,368		19,249		18,363
Fee income on other financial products	8,094		8,131		8,405
Bank-owned life insurance	4,078		3,949		3,928
Mortgage banking income	6,330		2,913		8,309
Gains on sale of investment securities	—		2,847		1,226
Other income, net	4,750		2,375		4,753
Total noninterest income	67,831		61,211		72,083
Noninterest expense
Compensation and employee benefits	90,518		79,885		82,910
Occupancy	16,365		17,197		16,747
Data processing	12,103		11,690		10,952
Services	10,204		10,269		9,015
Equipment	6,577		6,564		7,295
Office supplies, printing and postage	5,749		6,089		4,233
Marketing	3,463		3,999		3,373
FDIC insurance	3,274		3,261		3,253
Other expense	18,067		17,314		19,637
Total noninterest expense	166,320		156,268		157,415
Income before income taxes	83,812		79,295		89,148
Income taxes	29,082		27,994		31,421
Net income	$	54,730	$	51,301	$	57,727

Statements of Comprehensive Income



Years ended December 31	2015			2014			2013
(in thousands)
Net income	$	54,730		$	51,301		$	57,727
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on available-for sale investment securities:
Net unrealized gains (losses) on available-for sale investment securities arising during the period, net of (taxes) benefits of $1,541, ($3,856),and $9,037 for 2015, 2014 and 2013, respectively	(2,334		)	5,840			(13,686		)
Less: reclassification adjustment for net realized gains included in net income, net of taxes of nil, $1,132 and $488 for 2015, 2014 and 2013, respectively	—			(1,715		)	(738		)
Retirement benefit plans:
Net gains (losses) arising during the period, net of (taxes) benefits of ($59), $6,164 and ($10,450) for 2015, 2014 and 2013, respectively	90			(9,336		)	15,826
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 $1,011, $561 and $1,187 for 2015, 2014 and 2013, respectively	1,531			850			1,797
Other comprehensive income (loss), net of taxes	(713		)	(4,361		)	3,199
Comprehensive income	$	54,017		$	46,940		$	60,926

Balance Sheets Data



December 31				2015						2014
(in thousands)
Assets
Cash and due from banks				$	127,201					$	107,233
Interest-bearing deposits				93,680						54,230
Available-for-sale investment securities, at fair value				820,648						550,394
Stock in Federal Home Loan Bank, at cost				10,678						69,302
Loans receivable held for investment				4,615,819						4,434,651
Allowance for loan losses				(50,038		)				(45,618		)
Net loans				4,565,781						4,389,033
Loans held for sale, at lower of cost or fair value				4,631						8,424
Other				309,946						305,416
Goodwill				82,190						82,190
Total assets				$	6,014,755					$	5,566,222
Liabilities and shareholder’s equity
Deposit liabilities–noninterest-bearing				$	1,520,374					$	1,342,794
Deposit liabilities–interest-bearing				3,504,880						3,280,621
Other borrowings				328,582						290,656
Other				101,029						118,363
Total liabilities				5,454,865						5,032,434
Commitments and contingencies
Common stock				1						1
Additional paid in capital				340,496						338,411
Retained earnings				236,664						211,934
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains (losses) on securities	$	(1,872	)				$	462
Retirement benefit plans	(15,399		)	(17,271		)	(17,020		)	(16,558		)
Total shareholder’s equity				559,890						533,788
Total liabilities and shareholder’s equity				$	6,014,755					$	5,566,222



December 31	2015		2014
(in thousands)
Other assets
Bank-owned life insurance	$	138,139	$	134,115
Premises and equipment, net	88,077		92,407
Prepaid expenses	3,550		3,196
Accrued interest receivable	15,192		13,632
Mortgage-servicing rights	8,884		11,540
Low-income housing equity investments	37,793		33,438
Real estate acquired in settlement of loans, net	1,030		891
Other	17,281		16,197
	$	309,946	$	305,416
Other liabilities
Accrued expenses	$	30,705	$	37,880
Federal and state income taxes payable	13,448		28,642
Cashier’s checks	21,768		20,509
Advance payments by borrowers	10,311		9,652
Other	24,797		21,680
	$	101,029	$	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.

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, 2015
Available-for-sale
U.S. Treasury and federal agency obligations	$	213,234	$	1,025	$	(1,300	)	$	212,959	13	$	83,053	$	(866	)	3	$	17,378	$	(434	)
Mortgage-related securities- FNMA, FHLMC and GNMA	610,522		3,564		(6,397		)	607,689		38	305,785		(2,866		)	25	125,817		(3,531		)
	$	823,756	$	4,589	$	(7,697	)	$	820,648	51	$	388,838	$	(3,732	)	28	$	143,195	$	(3,965	)
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	)

ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2015, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to rising interest rates relative to when the investment securities were purchased and not due to the credit quality of the investment securities. The contractual cash flows of the investment securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for 2015, 2014 and 2013.

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, 2015	Cost		value
(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years	86,379		86,935
Due after five years through ten years	71,972		71,812
Due after ten years	54,883		54,212
	213,234		212,959
Mortgage-related securities-FNMA,FHLMC and GNMA	610,522		607,689
Total available-for-sale securities	$	823,756	$	820,648

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



Years ended December 31	2015		2014		2013
(in millions)
Proceeds	$	—	$	79.6	$	71.4
Gross gains	—		2.8		1
Gross losses	—		—		—

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



Years ended December 31	2015		2014		2013
(in thousands)
Taxable	$	15,120	$	11,666	$	11,474
Non-taxable	—		279		1,621
	$	15,120	$	11,945	$	13,095

ASB pledged securities with a market value of approximately $100.5 million and $88.6 million as of December 31, 2015 and 2014, respectively, as collateral for public funds deposits, automated clearinghouse transactions with Bank of Hawaii, to-be-announced mortgage-backed securities settlements with JP Morgan, and deposits in ASB’s bankruptcy account with the Federal Reserve Bank of San Francisco. As of December 31, 2015 and 2014, securities with a carrying value of $260.5 million and $230.2 million, respectively, were pledged as collateral for securities sold under agreements to repurchase.

Stock in FHLB. As of December 31, 2015 and 2014, ASB’s stock in FHLB was carried at cost ($10.7 million and $69.3 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. In May 2015, the FHLB of Seattle and FHLB of Des Moines completed the merger of the two banks and began operating as the FHLB of Des Moines on June 1, 2015. At December 31, 2014, the Company had $55 million of FHLB stock in excess of the required investment. With the merger, all of the Company's excess FHLB stock was repurchased. The FHLB repurchased a total of $58.6 million and $23.2 million of FHLB stock from ASB in 2015 and 2014, respectively. There was no other significant impact on ASB as a result of the merger.

Periodically and as conditions warrant, ASB reviews its investment in the stock of the FHLB for impairment. ASB evaluated its investment in FHLB stock for OTTI as of December 31, 2015, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2015 based on its evaluation of the underlying investment, including:


•	the net income and growth in retained earnings recorded by the FHLB in the first nine months of 2015;


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


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


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


•	the liquidity position of the FHLB; 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.

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

Loans receivable.

The components of loans receivable were summarized as follows:



December 31	2015			2014
(in thousands)
Real estate:
Residential 1-4 family	$	2,069,665		$	2,044,205
Commercial real estate	690,561			531,917
Home equity line of credit	846,294			818,815
Residential land	18,229			16,240
Commercial construction	100,796			96,438
Residential construction	14,089			18,961
Total real estate	3,739,634			3,526,576
Commercial	758,659			791,757
Consumer	123,775			122,656
Total loans	4,622,068			4,440,989
Less: Deferred fees and discounts	(6,249		)	(6,338		)
Allowance for loan losses	(50,038		)	(45,618		)
Total loans, net	$	4,565,781		$	4,389,033

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

ASB services real estate loans for investors (principal balance of $1.5 billion, $1.4 billion and $1.4 billion as of December 31, 2015, 2014 and 2013, 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, 2015 and 2014, ASB had pledged loans with an amortized cost of approximately $2.3 billion and $1.9 billion, respectively, as collateral to secure advances from the FHLB.

As of December 31, 2015 and 2014, 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 $27.8 million and $49.6 million, respectively. The $21.8 million decrease in such loans in 2015 was attributed to closed lines of credits and repayments of $21.8 million. As of December 31, 2015 and 2014, $25.8 million and $46.2 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, 2015
Allowance for loan losses:
Beginning balance	$	4,662		$	8,954	$	6,982		$	1,875		$	5,471		$	28		$	14,017		$	3,629		$	—		$	45,618
Charge-offs	(356		)	—		(205		)	—			—			—			(1,074		)	(4,791		)	—			(6,426		)
Recoveries	226			—		80			507			—			—			2,773			985			—			4,571
Provision	(346		)	2,388		403			(711		)	(1,010		)	(15		)	1,492			4,074						6,275
Ending balance	$	4,186		$	11,342	$	7,260		$	1,671		$	4,461		$	13		$	17,208		$	3,897		$	—		$	50,038
Ending balance: individually evaluated for impairment	$	1,453		$	—	$	442		$	891		$	—		$	—		$	3,527		$	7					$	6,320
Ending balance: collectively evaluated for impairment	$	2,733		$	11,342	$	6,818		$	780		$	4,461		$	13		$	13,681		$	3,890		$	—		$	43,718
Financing Receivables:
Ending balance	$	2,069,665		$	690,561	$	846,294		$	18,229		$	100,796		$	14,089		$	758,659		$	123,775					$	4,622,068
Ending balance: individually evaluated for impairment	$	22,457		$	1,188	$	3,225		$	5,683		$	—		$	—		$	21,119		$	13					$	53,685
Ending balance: collectively evaluated for impairment	$	2,047,208		$	689,373	$	843,069		$	12,546		$	100,796		$	14,089		$	737,540		$	123,762					$	4,568,383
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

Changes in the allowance for loan losses were as follows:



(dollars in thousands)	2015			2014			2013
Allowance for loan losses, January 1	$	45,618		$	40,116		$	41,985
Provision for loan losses	6,275			6,126			1,507
Charge-offs, net of recoveries
Real estate loans	(252		)	(1,137		)	(678		)
Other loans	2,107			1,761			4,054
Net charge-offs	1,855			624			3,376
Allowance for loan losses, December 31	$	50,038		$	45,618		$	40,116
Ratio of net charge-offs to average total loans	0.04		%	0.01		%	0.09		%

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	2015							2014
(in thousands)	Commercial real estate		Commercial construction		Commercial		Total	Commercial real estate		Commercial construction		Commercial		Total
Grade:
Pass	$	642,410	$	86,991	$	703,208	1,432,609	$	493,105	$	79,312	$	743,334	$	1,315,751
Special mention	7,710		13,805		7,029		28,544	5,209		—		16,095		21,304
Substandard	40,441		—		47,975		88,416	33,603		17,126		31,665		82,394
Doubtful	—		—		447		447	—		—		663		663
Loss	—		—		—		—	—		—		—		—
Total	$	690,561	$	100,796	$	758,659	1,550,016	$	531,917	$	96,438	$	791,757	$	1,420,112

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, 2015
Real estate:
Residential 1-4 family	$	4,967	$	3,289	$	11,503	$	19,759	$	2,049,906	$	2,069,665	$	—
Commercial real estate	—		—		—		—		690,561		690,561		—
Home equity line of credit	896		706		477		2,079		844,215		846,294		—
Residential land	—		—		415		415		17,814		18,229		—
Commercial construction	—		—		—		—		100,796		100,796		—
Residential construction	—		—		—		—		14,089		14,089		—
Commercial	125		223		878		1,226		757,433		758,659		—
Consumer	1,383		593		644		2,620		121,155		123,775		—
Total loans	$	7,371	$	4,811	$	13,917	$	26,099	$	4,595,969	$	4,622,068	$	—
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:



December 31	2015		2014
(in thousands)
Real estate:
Residential 1-4 family	$	20,554	$	19,253
Commercial real estate	1,188		5,112
Home equity line of credit	2,254		1,087
Residential land	970		720
Commercial construction	—		—
Residential construction	—		—
Commercial	20,174		10,053
Consumer	895		661
Total nonaccrual loans	$	46,035	$	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	$	13,962	$	13,525
Commercial real estate	—		—
Home equity line of credit	2,467		480
Residential land	4,713		7,130
Commercial construction	—		—
Residential construction	—		—
Commercial	1,104		2,972
Consumer	—		—
Total troubled debt restructured loans not included above	$	22,246	$	24,107

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



December 31	2015										2014
(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	$	10,596	$	11,805	$	—	$	11,215	$	332	$	11,654	$	12,987	$	—	$	9,056	$	227
Commercial real estate	1,188		1,436		—		370		74		571		626		—		194		—
Home equity line of credit	707		948		—		484		4		363		606		—		402		5
Residential land	1,644		2,412		—		2,397		137		2,344		3,200		—		2,728		172
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	5,671		6,333		—		5,185		157		8,235		11,471		—		5,204		38
Consumer	—		—		—		—		—		—		—		—		8		—
	19,806		22,934		—		19,651		704		23,167		28,890		—		17,592		442
With an allowance recorded
Real estate:
Residential 1-4 family	11,861		11,914		1,453		11,578		562		11,327		11,347		951		8,822		419
Commercial real estate	—		—		—		1,699		—		4,541		4,541		1,845		3,415		478
Home equity line of credit	2,518		2,579		442		1,597		49		416		420		46		132		6
Residential land	4,039		4,117		891		4,337		318		5,506		5,584		1,057		6,415		484
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	15,448		16,073		3,527		12,507		211		4,873		5,211		760		12,089		438
Consumer	13		13		7		14		—		16		16		6		9		—
	33,879		34,696		6,320		31,732		1,140		26,679		27,119		4,665		30,882		1,825
Total
Real estate:
Residential 1-4 family	22,457		23,719		1,453		22,793		894		22,981		24,334		951		17,878		646
Commercial real estate	1,188		1,436		—		2,069		74		5,112		5,167		1,845		3,609		478
Home equity line of credit	3,225		3,527		442		2,081		53		779		1,026		46		534		11
Residential land	5,683		6,529		891		6,734		455		7,850		8,784		1,057		9,143		656
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	21,119		22,406		3,527		17,692		368		13,108		16,682		760		17,293		476
Consumer	13		13		7		14		—		16		16		6		17		—
	$	53,685	$	57,630	$	6,320	$	51,383	$	1,844	$	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 TDR when ASB grants a concession it would not otherwise consider were it not for the borrower’s financial difficulty. When a borrower experiencing financial difficulty fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to improve the collectability of the loan and maximize the likelihood of full repayment. At times, ASB may modify or restructure a loan to help a distressed borrower improve its financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated both the willingness and the ability to fulfill the modified terms. TDR loans are considered an alternative to foreclosure or liquidation with the goal of minimizing losses to ASB and maximizing recovery.

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

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

Loan modifications that occurred during 2015 and 2014 were as follows:



Years ended December 31	2015							2014
	Number	Outstanding recorded investment				Net increase in ALLL		Number	Outstanding recorded investment				Net increase in ALLL
(dollars in thousands)	of contracts	Pre-modification		Post-modification		Net increase in ALLL		of contracts	Pre-modification		Post-modification		Net increase in ALLL
Troubled debt restructurings
Real estate:
Residential 1-4 family	19	$	3,594	$	3,668	$	87	38	$	10,680	$	10,737	$	163
Commercial real estate	1	1,500		1,500		—		—	—		—		—
Home equity line of credit	39	2,441		2,441		370		8	502		502		42
Residential land	1	218		218		—		18	4,304		4,304		242
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	8	2,267		2,267		486		7	3,827		3,827		13
Consumer	—	—		—		—		—	—		—		—
	68	$	10,020	$	10,094	$	943	71	$	19,313	$	19,370	$	460

Loans modified in TDRs that experienced a payment default of 90 days or more in 2015 and 2014, and for which the payment default occurred within one year of the modification, were as follows:



Years ended December 31	2015			2014
(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	6		—	—
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	1	1,056		1	14
Consumer	—	—		—	—
	2	$	1,062	2	$	404

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 $0.1 million at December 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 loans, but may retain the servicing rights of the loans sold.

ASB received $275.3 million, $155.0 million, and $273.8 million of proceeds from the sale of residential mortgages in 2015, 2014, and 2013, respectively, and recognized gains on such sales of $6.3 million, $2.9 million, and $8.3 million in 2015, 2014, and 2013, respectively. Repurchased mortgage loans in 2015, 2014, and 2013, were nil, $0.5 million and $1.9 million, respectively.

Mortgage servicing fees, a component of other income, net, were $3.5 million, $3.5 million, and $3.3 million for the years ended December 31, 2015, 2014, and 2013, 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, 2015	$	14,531	¹	$	(5,647	)	¹	$	—		$	8,884
December 31, 2014	$	27,185		$	(15,436	)		$	(209	)	$	11,540

¹ Reflects sale of mortgage servicing rights and impact of loans paid in full.

Changes related to mortgage servicing rights were as follows:



(in thousands)	2015			2014			2013
Mortgage servicing rights
Balance, January 1	$	11,749		$	11,938		$	11,316
Amount capitalized	3,123			1,637			2,611
Amortization	(2,682		)	(1,731		)	(1,802		)
Sale of mortgage servicing rights	(3,302		)	—			—
Other-than-temporary impairment	(4		)	(95		)	(187		)
Carrying amount before valuation allowance, December 31	8,884			11,749			11,938
Valuation allowance for mortgage servicing rights
Balance, January 1	209			251			498
Provision (recovery)	(205		)	53			(60		)
Other-than-temporary impairment	(4		)	(95		)	(187		)
Balance, December 31	—			209			251
Net carrying value of mortgage servicing rights	$	8,884		$	11,540		$	11,687

The estimated aggregate amortization expenses of mortgage servicing rights for 2016, 2017, 2018, 2019 and 2020 are $1.3 million, $1.2 million, $1.0 million, $0.9 million and $0.8 million, respectively.

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

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

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



December 31	2015			2014
(dollars in thousands)
Unpaid principal balance	$	1,097,314		$	1,391,030
Weighted average note rate	4.05		%	4.07		%
Weighted average discount rate	9.6		%	9.6		%
Weighted average prepayment speed	9.3		%	9.5		%

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	2015			2014
(in thousands)
Prepayment rate:
25 basis points adverse rate change	$	(561	)	$	(757	)
50 basis points adverse rate change	(1,104		)	(1,524		)
Discount rate:
25 basis points adverse rate change	(111		)	(140		)
50 basis points adverse rate change	(220		)	(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.

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



December 31	2015				2014
(dollars in thousands)	Weighted-average stated rate		Amount		Weighted-average stated rate		Amount
Savings	0.07	%	$	2,030,644	0.06	%	$	1,923,062
Checking
Interest-bearing	0.02		831,143		0.02		768,787
Noninterest-bearing	—		746,875		—		665,005
Commercial checking	—		773,499		—		677,789
Money market	0.13		167,641		0.12		158,010
Term certificates	0.93		475,452		0.83		430,762
	0.12	%	$	5,025,254	0.11	%	$	4,623,415

As of December 31, 2015 and 2014, term certificates of $100,000 or more totaled $163.2 million and $119.9 million, respectively.

The approximate scheduled maturities of term certificates outstanding at December 31, 2015 were as follows:



(in thousands)
2016	$	197,095
2017	72,817
2018	63,876
2019	53,525
2020	84,749
Thereafter	3,390
	$	475,452

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



Years ended December 31	2015		2014		2013
(in thousands)
Term certificates	$	3,747	$	3,603	$	3,702
Savings	1,257		1,134		1,052
Money market	205		214		232
Interest-bearing checking	139		126		106
	$	5,348	$	5,077	$	5,092

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



(in millions)	Gross amount of recognized liabilities		Gross amount offset in the Balance Sheet		Net amount of liabilities presented in the Balance Sheet
Repurchase agreements
December 31, 2015	$	229	$	—	$	229
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
December 31, 2015
Financial institution	$	50	$	56	$	—
Government entities	56		61		—
Commercial account holders	123		144		—
Total	$	229	$	261	$	—
December 31, 2014
Financial institution	$	50	$	57	$	—
Government entities	56		59		—
Commercial account holders	85		115		—
Total	$	191	$	231	$	—

The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. Securities sold under agreements to repurchase are accounted for as financing transactions and the obligations to repurchase these securities are recorded as liabilities in the consolidated balance sheets. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts. 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)	2015			2014			2013
Amount outstanding as of December 31	$	229		$	191		$	145
Average amount outstanding during the year	$	219		$	155		$	147
Maximum amount outstanding as of any month-end	$	277		$	195		$	151
Weighted-average interest rate as of December 31	1.24		%	1.45		%	1.75		%
Weighted-average interest rate during the year	1.29		%	1.67		%	1.74		%
Weighted-average remaining days to maturity as of December 31	117			343			367

Securities sold under agreements to repurchase were summarized as follows:



December 31	2015							2014
Maturity	Repurchase liability			Weighted-average interest rate		Collateralized by mortgage-related securities and federal agency obligations at fair value plus accrued interest		Repurchase liability			Weighted-average interest rate		Collateralized by mortgage-related securities and federal agency obligations at fair value plus accrued interest
(dollars in thousands)
Overnight	$	122,684		0.15	%	$	144,146	$	84,758		0.15	%	$	114,883
1 to 29 days	—			—		—		—			—		—
30 to 90 days	18,535			0.29		20,364		—			—		—
Over 90 days	87,363		¹	2.96		96,553		105,898		¹	2.50		115,842
	$	228,582		1.24	%	$	261,063	$	190,656		1.45	%	$	230,725


¹	$50.3 million callable by the counterparties 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, 2015	Weighted-average stated rate		Amount
(dollars in thousands)
Due in
2016	—	%	$	—
2017	4.28		50,000		¹
2018	1.95		50,000
2019	—		—
2020	—		—
Thereafter	—		—
	3.12	%	$	100,000


¹	Callable quarterly at par until maturity in 2017.

ASB and the FHLB 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 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, 2015 and 2014, ASB’s available FHLB borrowing capacity was $1.7 billion and $1.2 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, 2015 and 2014.

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, 2015, 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, 2015, ASB was in compliance with the minimum capital requirements under OCC regulations.

In 2015, ASB paid cash dividends of $30 million to HEI, compared to cash dividends of $36 million in 2014. The FRB and OCC approved the dividends.

Related-party transactions. HEI charged ASB $2.1 million, $2.3 million and $1.9 million for general management and administrative services in 2015, 2014 and 2013, 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	2015					2014
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	22,241	$	384		$	29,330	$	390
Forward commitments	23,644		(29		)	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
December 31	2015				2014
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	384	$	—	$	393	$	3
Forward commitments	1		30		5		111
	$	385	$	30	$	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	Location of net gains
as Hedging Instruments	(losses) recognized in	Years ended December 31
(in thousands)	the Statements of Income	2015			2014			2013
Interest rate lock commitments	Mortgage banking income	$	(6	)	$	(74	)	$	464
Forward commitments	Mortgage banking income	77			(245		)	139
		$	71		$	(319	)	$	603

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	2015		2014
(in thousands)
Unfunded commitments to extend credit:
Home equity line of credit	$	1,096,532	$	1,089,633
Commercial and commercial real estate	631,780		526,133
Consumer	60,198		56,312
Residential 1-4 family	24,863		20,524
Commercial and financial standby letters of credit	18,709		20,082
Total	$	1,832,082	$	1,712,684

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, 2015, 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 to 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 received final Circuit Court approval on May 21, 2015, provided for a payment of $2.0 million into a class settlement fund, the proceeds of which would 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. The $2.0 million settlement amount was fully reserved by ASB in December 2014 and paid into the settlement fund in January 2015.

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, 2015 and 2014, ASB’s FDIC insurance assessments were $3.0 million and $3.0 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.