5 · Bank segment (HEI only)

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



Years ended December 31	2016		2015		2014
(in thousands)
Interest and dividend income
Interest and fees on loans	$	199,774	$	184,782	$	179,341
Interest and dividends on investment securities	19,184		15,120		11,945
Total interest and dividend income	218,958		199,902		191,286
Interest expense
Interest on deposit liabilities	7,167		5,348		5,077
Interest on other borrowings	5,588		5,978		5,731
Total interest expense	12,755		11,326		10,808
Net interest income	206,203		188,576		180,478
Provision for loan losses	16,763		6,275		6,126
Net interest income after provision for loan losses	189,440		182,301		174,352
Noninterest income
Fees from other financial services	22,384		22,211		21,747
Fee income on deposit liabilities	21,759		22,368		19,249
Fee income on other financial products	8,707		8,094		8,131
Bank-owned life insurance	4,637		4,078		3,949
Mortgage banking income	6,625		6,330		2,913
Gains on sale of investment securities	598		—		2,847
Other income, net	2,256		4,750		2,375
Total noninterest income	66,966		67,831		61,211
Noninterest expense
Compensation and employee benefits	90,117		90,518		79,885
Occupancy	16,321		16,365		17,197
Data processing	13,030		12,103		11,690
Services	11,054		10,204		10,269
Equipment	6,938		6,577		6,564
Office supplies, printing and postage	6,075		5,749		6,089
Marketing	3,489		3,463		3,999
FDIC insurance	3,543		3,274		3,261
Other expense	18,487		18,067		17,314
Total noninterest expense	169,054		166,320		156,268
Income before income taxes	87,352		83,812		79,295
Income taxes	30,073		29,082		27,994
Net income	$	57,279	$	54,730	$	51,301

Statements of Comprehensive Income



Years ended December 31	2016			2015			2014
(in thousands)
Net income	$	57,279		$	54,730		$	51,301
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 $3,763, $1,541 and $(3,856) for 2016, 2015 and 2014, respectively	(5,699		)	(2,334		)	5,840
Less: reclassification adjustment for net realized gains included in net income, net of taxes of $238, nil and $1,132 for 2016, 2015 and 2014, respectively	(360		)	—			(1,715		)
Retirement benefit plans:
Net gains (losses) arising during the period, net of (taxes) benefits of nil, $(59) and $6,164 for 2016, 2015 and 2014, respectively	—			90			(9,336		)
Less: amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $566, $1,011 and $561 for 2016, 2015 and 2014, respectively	857			1,531			850
Other comprehensive income (loss), net of taxes	(5,202		)	(713		)	(4,361		)
Comprehensive income	$	52,077		$	54,017		$	46,940

Balance Sheets Data



December 31				2016						2015
(in thousands)
Assets
Cash and due from banks				$	137,083					$	127,201
Interest-bearing deposits				52,128						93,680
Restricted cash				1,764						—
Available-for-sale investment securities, at fair value				1,105,182						820,648
Stock in Federal Home Loan Bank, at cost				11,218						10,678
Loans receivable held for investment				4,738,693						4,615,819
Allowance for loan losses				(55,533		)				(50,038		)
Net loans				4,683,160						4,565,781
Loans held for sale, at lower of cost or fair value				18,817						4,631
Other				329,815						309,946
Goodwill				82,190						82,190
Total assets				$	6,421,357					$	6,014,755
Liabilities and shareholder’s equity
Deposit liabilities–noninterest-bearing				$	1,639,051					$	1,520,374
Deposit liabilities–interest-bearing				3,909,878						3,504,880
Other borrowings				192,618						328,582
Other				101,635						101,029
Total liabilities				5,843,182						5,454,865
Commitments and contingencies
Common stock				1						1
Additional paid in capital				342,704						340,496
Retained earnings				257,943						236,664
Accumulated other comprehensive loss, net of tax benefits
Net unrealized losses on securities	$	(7,931	)				$	(1,872	)
Retirement benefit plans	(14,542		)	(22,473		)	(15,399		)	(17,271		)
Total shareholder’s equity				578,175						559,890
Total liabilities and shareholder’s equity				$	6,421,357					$	6,014,755



December 31	2016		2015
(in thousands)
Other assets
Bank-owned life insurance	$	143,197	$	138,139
Premises and equipment, net	90,570		88,077
Prepaid expenses	3,348		3,550
Accrued interest receivable	16,824		15,192
Mortgage-servicing rights	9,373		8,884
Low-income housing equity investments	47,081		37,793
Real estate acquired in settlement of loans, net	1,189		1,030
Other	18,233		17,281
	$	329,815	$	309,946
Other liabilities
Accrued expenses	$	36,754	$	30,705
Federal and state income taxes payable	4,728		13,448
Cashier’s checks	24,156		21,768
Advance payments by borrowers	10,335		10,311
Other	25,662		24,797
	$	101,635	$	101,029

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, 2016
Available-for-sale
U.S. Treasury and federal agency obligations	$	193,515	$	920	$	(2,154	)	$	192,281	18	$	123,475	$	(2,010	)	1	$	3,485	$	(144	)
Mortgage-related securities- FNMA, FHLMC and GNMA	909,408		1,742		(13,676		)	897,474		88	709,655		(12,143		)	13	47,485		(1,533		)
Mortgage revenue bond	15,427		—		—			15,427		—	—		—			—	—		—
	$	1,118,350	$	2,662	$	(15,830	)	$	1,105,182	106	$	833,130	$	(14,153	)	14	$	50,970	$	(1,677	)
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	)

ASB does not believe that the investment securities that were in an unrealized loss position as of December 31, 2016, 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 U.S. Treasury, federal agency obligations and mortgage-related securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for 2016, 2015 and 2014.

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

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



	Amortized		Fair
December 31, 2016	Cost		value
(in thousands)
Due in one year or less	$	9,979	$	10,001
Due after one year through five years	77,179		77,126
Due after five years through ten years	81,411		81,083
Due after ten years	40,373		39,498
	208,942		207,708
Mortgage-related securities-FNMA,FHLMC and GNMA	909,408		897,474
Total available-for-sale securities	$	1,118,350	$	1,105,182

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



Years ended December 31	2016		2015		2014
(in millions)
Proceeds	$	16.4	$	—	$	79.6
Gross gains	0.6		—		2.8
Gross losses	—		—		—

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



Years ended December 31	2016		2015		2014
(in thousands)
Taxable	$	19,166	$	15,120	$	11,666
Non-taxable	18		—		279
	$	19,184	$	15,120	$	11,945

ASB pledged securities with a market value of approximately $277.1 million and $100.5 million as of December 31, 2016 and 2015, respectively, as collateral for public funds and other deposits, automated clearinghouse transactions with Bank of Hawaii, to-be-announced mortgage-backed securities settlements with JP Morgan, borrowing at the discount window of the Federal Reserve Bank of San Francisco, and deposits in ASB’s bankruptcy account with the Federal Reserve Bank of San Francisco. As of December 31, 2016 and 2015, securities with a carrying value of $114.9 million and $260.5 million, respectively, were pledged as collateral for securities sold under agreements to repurchase.

Stock in FHLB. As of December 31, 2016 and 2015, ASB’s stock in FHLB was carried at cost ($11.2 million and $10.7 million, respectively) because it can only be redeemed at par and it is a required investment based on measurements of ASB’s capital, assets and borrowing levels. 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. With the merger, all of the ASB’s excess FHLB stock was repurchased. The FHLB repurchased a total of nil and $58.6 million of FHLB stock from ASB in 2016 and 2015, 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, 2016, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2016 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 2016;


•	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	2016			2015
(in thousands)
Real estate:
Residential 1-4 family	$	2,048,051		$	2,069,665
Commercial real estate	800,395			690,561
Home equity line of credit	863,163			846,294
Residential land	18,889			18,229
Commercial construction	126,768			100,796
Residential construction	16,080			14,089
Total real estate	3,873,346			3,739,634
Commercial	692,051			758,659
Consumer	178,222			123,775
Total loans	4,743,619			4,622,068
Less: Deferred fees and discounts	(4,926		)	(6,249		)
Allowance for loan losses	(55,533		)	(50,038		)
Total loans, net	$	4,683,160		$	4,565,781

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

ASB services real estate loans for investors (principal balance of $1.2 billion, $1.5 billion and $1.4 billion as of December 31, 2016, 2015 and 2014, 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, 2016 and 2015, ASB had pledged loans with an amortized cost of approximately $2.4 billion and $2.3 billion, respectively, as collateral to secure advances from the FHLB.

As of December 31, 2016 and 2015, 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 $22.9 million and $27.8 million, respectively. The $4.9 million decrease in such loans in 2016 was attributed to closed lines of credits and repayments of $4.9 million. As of December 31, 2016 and 2015, $19.0 million and $25.8 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, 2016
Allowance for loan losses:
Beginning balance	$	4,186		$	11,342	$	7,260		$	1,671		$	4,461		$	13		$	17,208		$	3,897		$	—	$	50,038
Charge-offs	(639		)	—		(112		)	(138		)	—			—			(5,943		)	(7,413		)	—		(14,245		)
Recoveries	421			—		59			461			—			—			1,093			943			—		2,977
Provision	(1,095		)	4,662		(2,168		)	(256		)	1,988			(1		)	4,260			9,373			—		16,763
Ending balance	$	2,873		$	16,004	$	5,039		$	1,738		$	6,449		$	12		$	16,618		$	6,800		$	—	$	55,533
Ending balance: individually evaluated for impairment	$	1,352		$	80	$	215		$	789		$	—		$	—		$	1,641		$	6				$	4,083
Ending balance: collectively evaluated for impairment	$	1,521		$	15,924	$	4,824		$	949		$	6,449		$	12		$	14,977		$	6,794		$	—	$	51,450
Financing Receivables:
Ending balance	$	2,048,051		$	800,395	$	863,163		$	18,889		$	126,768		$	16,080		$	692,051		$	178,222		$	—	$	4,743,619
Ending balance: individually evaluated for impairment	$	19,854		$	1,569	$	6,158		$	3,629		$	—		$	—		$	20,539		$	10		$	—	$	51,759
Ending balance: collectively evaluated for impairment	$	2,028,197		$	798,826	$	857,005		$	15,260		$	126,768		$	16,080		$	671,512		$	178,212		$	—	$	4,691,860
December 31, 2015
Allowance for loan losses:
Beginning balance	$	4,662		$	8,954	$	6,982		$	1,875		$	5,471		$	28		$	14,017		$	3,629		$	—	$	45,618
Charge-offs	(356		)	—		(205		)	—			—			—			(1,074		)	(4,791		)	—		(6,426		)
Recoveries	226			—		80			507			—			—			2,773			985			—		4,571
Provision	(346		)	2,388		403			(711		)	(1,010		)	(15		)	1,492			4,074					6,275
Ending balance	$	4,186		$	11,342	$	7,260		$	1,671		$	4,461		$	13		$	17,208		$	3,897		$	—	$	50,038
Ending balance: individually evaluated for impairment	$	1,453		$	—	$	442		$	891		$	—		$	—		$	3,527		$	7				$	6,320
Ending balance: collectively evaluated for impairment	$	2,733		$	11,342	$	6,818		$	780		$	4,461		$	13		$	13,681		$	3,890		$	—	$	43,718
Financing Receivables:
Ending balance	$	2,069,665		$	690,561	$	846,294		$	18,229		$	100,796		$	14,089		$	758,659		$	123,775				$	4,622,068
Ending balance: individually evaluated for impairment	$	22,457		$	1,188	$	3,225		$	5,683		$	—		$	—		$	21,119		$	13				$	53,685
Ending balance: collectively evaluated for impairment	$	2,047,208		$	689,373	$	843,069		$	12,546		$	100,796		$	14,089		$	737,540		$	123,762				$	4,568,383

Changes in the allowance for loan losses were as follows:



(dollars in thousands)	2016			2015			2014
Allowance for loan losses, January 1	$	50,038		$	45,618		$	40,116
Provision for loan losses	16,763			6,275			6,126
Charge-offs, net of recoveries
Real estate loans	(52		)	(252		)	(1,137		)
Other loans	11,320			2,107			1,761
Net charge-offs	11,268			1,855			624
Allowance for loan losses, December 31	$	55,533		$	50,038		$	45,618
Ratio of net charge-offs to average total loans	0.24		%	0.04		%	0.01		%

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

Each loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications: Pass, Special Mention, Substandard, Doubtful, and Loss. The AQR is a function of the probability of default model rating, the loss given default, and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. Pass exposures generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt. Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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



December 31	2016							2015
(in thousands)	Commercial real estate		Commercial construction		Commercial		Total	Commercial real estate		Commercial construction		Commercial		Total
Grade:
Pass	$	701,657	$	102,955	$	614,139	1,418,751	$	642,410	$	86,991	$	703,208	$	1,432,609
Special mention	65,541		—		25,229		90,770	7,710		13,805		7,029		28,544
Substandard	33,197		23,813		52,683		109,693	40,441		—		47,975		88,416
Doubtful	—		—		—		—	—		—		447		447
Loss	—		—		—		—	—		—		—		—
Total	$	800,395	$	126,768	$	692,051	1,619,214	$	690,561	$	100,796	$	758,659	$	1,550,016

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, 2016
Real estate:
Residential 1-4 family	$	5,467	$	2,338	$	3,505	$	11,310	$	2,036,741	$	2,048,051	$	—
Commercial real estate	2,416		—		—		2,416		797,979		800,395		—
Home equity line of credit	1,263		381		1,342		2,986		860,177		863,163		—
Residential land	—		—		255		255		18,634		18,889		—
Commercial construction	—		—		—		—		126,768		126,768		—
Residential construction	—		—		—		—		16,080		16,080		—
Commercial	413		510		1,303		2,226		689,825		692,051		—
Consumer	1,945		1,001		963		3,909		174,313		178,222		—
Total loans	$	11,504	$	4,230	$	7,368	$	23,102	$	4,720,517	$	4,743,619	$	—
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	$	—

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



December 31	2016		2015
(in thousands)
Real estate:
Residential 1-4 family	$	11,154	$	20,554
Commercial real estate	223		1,188
Home equity line of credit	3,080		2,254
Residential land	878		970
Commercial construction	—		—
Residential construction	—		—
Commercial	6,708		20,174
Consumer	1,282		895
Total nonaccrual loans	$	23,325	$	46,035
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	$	14,450	$	13,962
Commercial real estate	1,346		—
Home equity line of credit	4,934		2,467
Residential land	2,751		4,713
Commercial construction	—		—
Residential construction	—		—
Commercial	14,146		1,104
Consumer	10		—
Total troubled debt restructured loans not included above	$	37,637	$	22,246

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



December 31	2016										2015
(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	$	9,571	$	10,400	$	—	$	10,136	$	324	$	10,596	$	11,805	$	—	$	11,215	$	332
Commercial real estate	223		228		—		1,124		—		1,188		1,436		—		370		74
Home equity line of credit	1,500		1,900		—		1,105		23		707		948		—		484		4
Residential land	1,218		1,803		—		1,518		66		1,644		2,412		—		2,397		137
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	6,299		8,869		—		8,694		370		5,671		6,333		—		5,185		157
Consumer	—		—		—		2		—		—		—		—		—		—
	18,811		23,200		—		22,579		783		19,806		22,934		—		19,651		704
With an allowance recorded
Real estate:
Residential 1-4 family	10,283		10,486		1,352		11,589		457		11,861		11,914		1,453		11,578		562
Commercial real estate	1,346		1,346		80		1,962		15		—		—		—		1,699		—
Home equity line of credit	4,658		4,712		215		3,765		137		2,518		2,579		442		1,597		49
Residential land	2,411		2,411		789		2,964		206		4,039		4,117		891		4,337		318
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	14,240		14,240		1,641		16,106		456		15,448		16,073		3,527		12,507		211
Consumer	10		10		6		12		—		13		13		7		14		—
	32,948		33,205		4,083		36,398		1,271		33,879		34,696		6,320		31,732		1,140
Total
Real estate:
Residential 1-4 family	19,854		20,886		1,352		21,725		781		22,457		23,719		1,453		22,793		894
Commercial real estate	1,569		1,574		80		3,086		15		1,188		1,436		—		2,069		74
Home equity line of credit	6,158		6,612		215		4,870		160		3,225		3,527		442		2,081		53
Residential land	3,629		4,214		789		4,482		272		5,683		6,529		891		6,734		455
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial	20,539		23,109		1,641		24,800		826		21,119		22,406		3,527		17,692		368
Consumer	10		10		6		14		—		13		13		7		14		—
	$	51,759	$	56,405	$	4,083	$	58,977	$	2,054	$	53,685	$	57,630	$	6,320	$	51,383	$	1,844

* 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 2016 and 2015 and the impact on the allowance for loan losses were as follows:



Years ended December 31	2016							2015
	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	14	$	3,131	$	3,245	$	337	19	$	3,594	$	3,668	$	87
Commercial real estate	—	—		—		—		1	1,500		1,500		—
Home equity line of credit	36	3,337		3,337		554		39	2,441		2,441		370
Residential land	2	203		204		—		1	218		218		—
Commercial construction	—	—		—		—		—	—		—		—
Residential construction	—	—		—		—		—	—		—		—
Commercial	15	20,266		20,266		865		8	2,267		2,267		486
Consumer	—	—		—		—		—	—		—		—
	67	$	26,937	$	27,052	$	1,756	68	$	10,020	$	10,094	$	943

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



Years ended December 31	2016			2015
(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	$	239	—	$	—
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		1	6
Residential land	—	—		—	—
Commercial construction	—	—		—	—
Residential construction	—	—		—	—
Commercial	1	24		1	1,056
Consumer	—	—		—	—
	2	$	263	2	$	1,062

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

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

ASB received $236.1 million, $275.3 million and $155.0 million of proceeds from the sale of residential mortgages in 2016, 2015, and 2014, respectively, and recognized gains on such sales of $6.6 million, $6.3 million, and $2.9 million in 2016, 2015, and 2014, respectively. Repurchased mortgage loans in 2016, 2015, and 2014, were nil, nil and $0.5 million, respectively.

Mortgage servicing fees, a component of other income, net, were $2.9 million, $3.5 million, and $3.5 million for the years ended December 31, 2016, 2015, and 2014, respectively.

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



(in thousands)	Gross carrying amount			Accumulated amortization				Valuation allowance		Net carrying amount
December 31, 2016	$	17,271		$	(7,898	)		$	—	$	9,373
December 31, 2015	$	14,531	¹	$	(5,647	)	¹	$	—	$	8,884

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)	2016			2015			2014
Mortgage servicing rights
Balance, January 1	$	8,884		$	11,749		$	11,938
Amount capitalized	2,740			3,123			1,637
Amortization	(2,251		)	(2,682		)	(1,731		)
Sale of mortgage servicing rights	—			(3,302		)	—
Other-than-temporary impairment	—			(4		)	(95		)
Carrying amount before valuation allowance, December 31	9,373			8,884			11,749
Valuation allowance for mortgage servicing rights
Balance, January 1	—			209			251
Provision (recovery)	—			(205		)	53
Other-than-temporary impairment	—			(4		)	(95		)
Balance, December 31	—			—			209
Net carrying value of mortgage servicing rights	$	9,373		$	8,884		$	11,540

The estimated aggregate amortization expenses of mortgage servicing rights for 2017, 2018, 2019, 2020 and 2021 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	2016			2015
(dollars in thousands)
Unpaid principal balance	$	1,188,380		$	1,097,314
Weighted average note rate	3.96		%	4.05		%
Weighted average discount rate	9.4		%	9.6		%
Weighted average prepayment speed	8.5		%	9.3		%

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	2016			2015
(in thousands)
Prepayment rate:
25 basis points adverse rate change	$	(567	)	$	(561	)
50 basis points adverse rate change	(1,154		)	(1,104		)
Discount rate:
25 basis points adverse rate change	(128		)	(111		)
50 basis points adverse rate change	(254		)	(220		)

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

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



December 31	2016				2015
(dollars in thousands)	Weighted-average stated rate		Amount		Weighted-average stated rate		Amount
Savings	0.07	%	$	2,208,594	0.07	%	$	2,030,644
Checking
Interest-bearing	0.02		890,633		0.02		831,143
Noninterest-bearing	—		817,867		—		746,875
Commercial checking	—		821,184		—		773,499
Money market	0.12		153,126		0.13		167,641
Term certificates	1.00		657,525		0.93		475,452
	0.15	%	$	5,548,929	0.12	%	$	5,025,254

As of December 31, 2016 and 2015, term certificates of $100,000 or more totaled $328.1 million and $163.2 million, respectively.

The approximate scheduled maturities of term certificates outstanding at December 31, 2016 were as follows:



(in thousands)
2017	$	322,661
2018	70,611
2019	105,478
2020	81,818
2021	73,686
Thereafter	3,271
	$	657,525

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



Years ended December 31	2016		2015		2014
(in thousands)
Term certificates	$	5,390	$	3,747	$	3,603
Savings	1,402		1,257		1,134
Money market	202		205		214
Interest-bearing checking	173		139		126
	$	7,167	$	5,348	$	5,077

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, 2016	$	93	$	—	$	93
December 31, 2015	229		—		229



	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, 2016
Financial institution	$	—	$	—	$	—
Government entities	14		15		—
Commercial account holders	79		101		—
Total	$	93	$	116	$	—
December 31, 2015
Financial institution	$	50	$	56	$	—
Government entities	56		61		—
Commercial account holders	123		144		—
Total	$	229	$	261	$	—

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)	2016			2015			2014
Amount outstanding as of December 31	$	93		$	229		$	191
Average amount outstanding during the year	$	170		$	219		$	155
Maximum amount outstanding as of any month-end	$	229		$	277		$	195
Weighted-average interest rate as of December 31	0.23		%	1.24		%	1.45		%
Weighted-average interest rate during the year	1.43		%	1.29		%	1.67		%
Weighted-average remaining days to maturity as of December 31	6			117			343

Securities sold under agreements to repurchase were summarized as follows:



December 31	2016						2015
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	$	79,083	0.15	%	$	100,305	$	122,684		0.15	%	$	144,146
1 to 29 days	—		—		—		—			—		—
30 to 90 days	13,535		0.70		15,239		18,535			0.29		20,364
Over 90 days	—		—		—		87,363		¹	2.96		96,553
	$	92,618	0.23	%	$	115,544	$	228,582		1.24	%	$	261,063


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, 2016	Weighted-average stated rate		Amount
(dollars in thousands)
Due in
2017	4.28	%	$	50,000	¹
2018	1.95		50,000
2019	—		—
2020	—		—
2021	—		—
Thereafter	—		—
	3.12	%	$	100,000


¹	Callable quarterly at par until maturity in 2017.

ASB and the FHLB are parties to an Advances, Pledge and Security Agreement (Advances Agreement), which applies to currently outstanding and future advances, and governs the terms and conditions under which ASB borrows and the FHLB makes loans or advances from time to time. Under the Advances Agreement, ASB agrees to abide by the FHLB’s credit policies, and makes certain warranties and representations to the FHLB. Upon the occurrence of and during the continuation of an “Event of Default” (which term includes any event of nonpayment of interest or principal of any advance when due or failure to perform any promise or obligation under the Advances Agreement or other credit arrangements between the parties), the FHLB may, at its option, declare all indebtedness and accrued interest thereon, including any prepayment fees or charges, to be immediately due and payable. Advances from the FHLB are collateralized by loans and stock in the FHLB. As of December 31, 2016 and 2015, ASB’s available FHLB borrowing capacity was $1.8 billion and $1.7 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, 2016 and 2015.

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, 2016, 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, 2016, ASB was in compliance with the minimum capital requirements under OCC regulations.

In 2016, ASB paid cash dividends of $36 million to HEI, compared to cash dividends of $30 million in 2015. The FRB and OCC approved the dividends.

Related-party transactions. HEI charged ASB $2.3 million, $2.1 million and $2.3 million for general management and administrative services in 2016, 2015 and 2014, respectively. The amounts charged by HEI for services performed by HEI employees to its subsidiaries are allocated primarily on the basis of time expended in providing such services.

Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risks associated with selling loans.

ASB enters into IRLCs for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

The notional amount and fair value of ASB’s derivative financial instruments were as follows:



December 31	2016					2015
(in thousands)	Notional amount		Fair value			Notional amount		Fair value
Interest rate lock commitments	$	25,883	$	421		$	22,241	$	384
Forward commitments	30,813		(177		)	23,644		(29		)

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	2016				2015
(in thousands)	Asset derivatives		Liability derivatives		Asset derivatives		Liability derivatives
Interest rate lock commitments	$	445	$	24	$	384	$	—
Forward commitments	8		185		1		30
	$	453	$	209	$	385	$	30

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

The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in 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	2016			2015			2014
Interest rate lock commitments	Mortgage banking income	$	37		$	(6	)	$	(74	)
Forward commitments	Mortgage banking income	(148		)	77			(245		)
		$	(111	)	$	71		$	(319	)

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

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

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



December 31	2016		2015
(in thousands)
Unfunded commitments to extend credit:
Home equity line of credit	$	1,146,339	$	1,096,532
Commercial and commercial real estate	577,410		631,780
Consumer	64,762		60,198
Residential 1-4 family	38,271		24,863
Commercial and financial standby letters of credit	16,017		18,709
Total	$	1,842,799	$	1,832,082

Contingency. In October 2007, ASB, as a member financial institution of Visa U.S.A. Inc., received restricted shares of Visa, Inc. (Visa) as a result of a restructuring of Visa U.S.A. Inc. in preparation for an initial public offering by Visa. As a part of the restructuring, ASB entered into a judgment and loss sharing agreement with Visa in order to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements related to indemnified litigation involving Visa. In November 2012, a federal judge granted preliminary approval to a proposed settlement between merchants and Visa over credit card fees and in December 2013, a federal judge granted final approval to the settlement. Some merchants and trade organizations filed a notice of appeal shortly after the approval was issued. As of December 31, 2016, ASB had accrued a reserve of $1.1 million related to the agreement. Because the extent of ASB’s obligations under this agreement depends entirely upon the occurrence of future events, ASB’s maximum potential future liability under this agreement is not determinable.

Federal Deposit Insurance Corporation assessment. In February 2011, the Federal Deposit Insurance Corporation (FDIC) finalized rules to change its assessment base from total domestic deposits to average total assets minus average tangible equity, as required in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Assessment rates were reduced to a range of 2.5 to 9 basis points on the new assessment base for financial institutions in the lowest risk category. Financial institutions in the highest risk category have assessment rates of 30 to 45 basis points. The new rate schedule was effective April 1, 2011. As of June 30, 2016, the deposit insurance fund surpassed a target of 1.15 percent of estimated insured deposits that triggered important changes in the FDIC assessments for all banks. The changes took effect for premiums billed and paid in December 2016. Banks with less than $10 billion in assets saw their overall schedule decline by two basis points for banks paying the lowest premiums and up to five points for those at the top end of the assessment scale. In addition, a new formula for calculating risk-based assessment rates is now in effect. For the years ended December 31, 2016 and 2015, ASB’s FDIC insurance assessments were $3.2 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.