| Bank segment (HEI only) | 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 Home equity 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 Pre-modification Post-modification of contracts Pre-modification Post-modification 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 Accumulated amortization Valuation allowance Net 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 analysi |
