Bank subsidiary

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



	Three months ended September 30				Nine months ended September 30
(in thousands)	2013		2012		2013		2012
Interest and dividend income
Interest and fees on loans	$	43,337	$	43,880	$	129,564	$	133,241
Interest and dividend on investment and mortgage-related securities	3,025		3,432		9,723		10,534
Total interest and dividend income	46,362		47,312		139,287		143,775
Interest expense
Interest on deposit liabilities	1,262		1,540		3,870		5,015
Interest on other borrowings	1,206		1,201		3,548		3,676
Total interest expense	2,468		2,741		7,418		8,691
Net interest income	43,894		44,571		131,869		135,084
Provision for loan losses	54		3,580		953		9,504
Net interest income after provision for loan losses	43,840		40,991		130,916		125,580
Noninterest income
Fees from other financial services	5,728		7,674		21,367		22,474
Fee income on deposit liabilities	4,819		4,527		13,566		13,127
Fee income on other financial products	2,714		1,660		6,288		4,741
Mortgage banking income	1,547		4,077		6,896		8,297
Gain on sale of securities	—		—		1,226		134
Other income	3,888		1,346		7,211		4,021
Total noninterest income	18,696		19,284		56,554		52,794
Noninterest expense
Compensation and employee benefits	20,564		18,684		60,715		56,026
Occupancy	4,208		4,400		12,550		12,866
Data processing	2,168		2,644		7,982		7,244
Services	2,424		3,062		6,855		7,066
Equipment	1,825		1,762		5,469		5,299
Other expense	8,539		8,096		24,634		22,909
Total noninterest expense	39,728		38,648		118,205		111,410
Income before income taxes	22,808		21,627		69,265		66,964
Income taxes	7,532		7,419		23,915		22,690
Net income	$	15,276	$	14,208	$	45,350	$	44,274

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data



	Three months ended September 30					Nine months ended September 30
(in thousands)	2013			2012		2013			2012
Net income	$	15,276		$	14,208	$	45,350		$	44,274
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities:
Net unrealized gains (losses) on securities arising during the period, net of (taxes) benefits, of $1,049 and ($689) for the three months ended September 30, 2013 and 2012 and $7,081 and ($1,261) for the nine months ended September 30, 2013 and 2012, respectively	(1,589		)	1,043		(10,724		)	1,910
Less: reclassification adjustment for net realized gains, included in net income, net of taxes, of nil for the three months ended September 30, 2013 and 2012 and $488 and $53 for the nine months ended September 30, 2013 and 2012, respectively	—			—		(738		)	(81		)
Retirement benefit plans:
Less: amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $278 and $176 for the three months ended September 30, 2013 and 2012 and $2,010 and $508 for the nine months ended September 30, 2013 and 2012, respectively	420			266		3,043			769
Other comprehensive income (loss), net of taxes	(1,169		)	1,309		(8,419		)	2,598
Comprehensive income	$	14,107		$	15,517	$	36,931		$	46,872

American Savings Bank, F.S.B.

Balance Sheets Data



(in thousands)	September 30, 2013						December 31, 2012
Assets
Cash and cash equivalents				$	189,524					$	184,430
Available-for-sale investment and mortgage-related securities				535,264						671,358
Investment in stock of Federal Home Loan Bank of Seattle				93,413						96,022
Loans receivable held for investment				4,046,184						3,779,218
Allowance for loan losses				(41,052		)				(41,985		)
Loans receivable held for investment, net				4,005,132						3,737,233
Loans held for sale, at lower of cost or fair value				5,829						26,005
Other				248,020						244,435
Goodwill				82,190						82,190
Total assets				$	5,159,372					$	5,041,673

Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,205,526					$	1,164,308
Deposit liabilities—interest-bearing				3,105,316						3,065,608
Other borrowings				239,612						195,926
Other				102,172						117,752
Total liabilities				4,652,626						4,543,594
Commitments and contingencies (see “Litigation” below)
Common stock				335,448						333,712
Retained earnings				195,113						179,763
Accumulated other comprehensive income (loss), net of taxes
Net unrealized gains (losses) on securities	$	(701	)				$	10,761
Retirement benefit plans	(23,114		)	(23,815		)	(26,157		)	(15,396		)
Total shareholder’s equity				506,746						498,079
Total liabilities and shareholder’s equity				$	5,159,372					$	5,041,673

Other assets
Bank-owned life insurance				$	128,833					$	125,726
Premises and equipment, net				67,634						62,458
Prepaid expenses				4,394						13,199
Accrued interest receivable				13,372						13,228
Mortgage-servicing rights				11,806						10,818
Real estate acquired in settlement of loans, net				1,488						6,050
Other				20,493						12,956
				$	248,020					$	244,435
Other liabilities
Accrued expenses				$	20,463					$	17,103
Federal and state income taxes payable				30,249						35,408
Cashier’s checks				24,183						23,478
Advance payments by borrowers				5,694						9,685
Other				21,583						32,078
				$	102,172					$	117,752

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

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $140 million and $100 million, respectively, as of September 30, 2013 and $146 million and $50 million, respectively, as of December 31, 2012.

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



(in millions)	Gross amount of recognized liabilities		Gross amount offset in the Balance Sheet		Net amount of liabilities presented in the Balance Sheet
Repurchase agreements
September 30, 2013	$	140	$	—	$	140
December 31, 2012	146		—		146



	Gross amount not offset in the Balance Sheet
(in millions)	Net amount of liabilities presented in the Balance Sheet		Financial instruments		Cash collateral pledged		Net amount
September 30, 2013
Financial institution	$	50	$	50	$	—	$	—
Commercial account holders	90		90		—		—
Total	$	140	$	140	$	—	$	—

December 31, 2012
Financial institution	$	50	$	50	$	—	$	—
Commercial account holders	96		96		—		—
Total	$	146	$	146	$	—	$	—

Investment and mortgage-related securities portfolio.

Available-for-sale securities. The book value (amortized cost), gross unrealized gains and losses, estimated fair value and gross unrealized losses (fair value and amount by duration of time in which positions have been held in a continuous loss position) for securities held in ASB’s “available-for-sale” portfolio by major security type were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value		Gross unrealized losses
										Less than 12 months					12 months or longer
(in thousands)										Fair value		Amount			Fair value		Amount
September 30, 2013
Federal agency obligations	$	99,812	$	389	$	(1,936	)	$	98,265	$	29,755	$	(1,936	)	$	—	$	—
Mortgage-related securities- FNMA, FHLMC and GNMA	359,437		6,308		(7,768		)	357,977		164,998		(7,620		)	3,910		(148		)
Municipal bonds	77,181		2,034		(193		)	79,022		26,526		(193		)	—		—
	$	536,430	$	8,731	$	(9,897	)	$	535,264	$	221,279	$	(9,749	)	$	3,910	$	(148	)

December 31, 2012
Federal agency obligations	$	168,324	$	3,167	$	—		$	171,491	$	—	$	—		$	—	$	—
Mortgage-related securities- FNMA, FHLMC and GNMA	407,175		10,412		(204		)	417,383		32,269		(204		)	—		—
Municipal bonds	77,993		4,491		—			82,484		—		—			—		—
	$	653,492	$	18,070	$	(204	)	$	671,358	$	32,269	$	(204	)	$	—	$	—

The unrealized losses on ASB’s investments in mortgage-related securities and obligations issued by federal agencies were caused by interest rate movements. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because ASB does not intend to sell the securities and has determined it is more likely than not that it will not be required to sell the investments before recovery of their amortized costs basis, which may be at maturity, ASB did not consider these investments to be other-than-temporarily impaired at September 30, 2013.

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

The following table details the contractual maturities of available-for-sale securities. All positions with variable maturities (e.g. callable debentures and mortgage-related securities) are disclosed based upon the bond’s contractual maturity. Actual maturities will likely differ from these contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.



September 30, 2013	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	28,120	$	28,143
Due after one year through five years	37,922		38,324
Due after five years through ten years	85,760		87,192
Due after ten years	25,191		23,628
	176,993		177,287
Mortgage-related securities-FNMA,FHLMC and GNMA	359,437		357,977
Total available-for-sale securities	$	536,430	$	535,264

Allowance for loan losses. 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 consists of an allocated portion, which estimates credit losses for specifically identified loans and pools of loans, and an unallocated portion.

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



(in thousands)	Residential 1-4 family			Commercial real estate		Home equity line of credit			Residential land			Commercial construction			Residential construction		Commercial loans			Consumer loans			Unallocated		Total
Three months ended September 30, 2013
Allowance for loan losses:
Beginning balance	$	6,357		$	4,117	$	5,009		$	2,187		$	2,305		$	14	$	16,307		$	2,399		$	2,309	$	41,004
Charge-offs	(106		)	—		(44		)	(3		)	—			—		(305		)	(407		)	—		(865		)
Recoveries	157			—		78			282			—			—		166			176			—		859
Provision	(604		)	204		12			(361		)	44			2		(361		)	42			1,076		54
Ending balance	$	5,804		$	4,321	$	5,055		$	2,105		$	2,349		$	16	$	15,807		$	2,210		$	3,385	$	41,052
Three months ended September 30, 2012
Allowance for loan losses:
Beginning balance	$	7,212		$	2,078	$	4,843		$	3,340		$	2,255		$	3	$	13,961		$	3,797		$	1,974	$	39,463
Charge-offs	(964		)	—		(363		)	(1,093		)	—			—		(1,130		)	(601		)	—		(4,151		)
Recoveries	379			—		7			226			—			—		155			151			—		918
Provision	100			4		378			1,324			(324		)	5		1,344			462			287		3,580
Ending balance	$	6,727		$	2,082	$	4,865		$	3,797		$	1,931		$	8	$	14,330		$	3,809		$	2,261	$	39,810
Nine months ended September 30, 2013
Allowance for loan losses:
Beginning balance	$	6,068		$	2,965	$	4,493		$	4,275		$	2,023		$	9	$	15,931		$	4,019		$	2,202	$	41,985
Charge-offs	(1,162		)	—		(782		)	(238		)	—			—		(1,655		)	(1,811		)	—		(5,648		)
Recoveries	1,382			—		334			782			—			—		778			486			—		3,762
Provision	(484		)	1,356		1,010			(2,714		)	326			7		753			(484		)	1,183		953
Ending balance	$	5,804		$	4,321	$	5,055		$	2,105		$	2,349		$	16	$	15,807		$	2,210		$	3,385	$	41,052
Ending balance: individually evaluated for impairment	$	944		$	888	$	—		$	1,585		$	—		$	—	$	2,679		$	—		$	—	$	6,096
Ending balance: collectively evaluated for impairment	$	4,860		$	3,433	$	5,055		$	520		$	2,349		$	16	$	13,128		$	2,210		$	3,385	$	34,956
Financing Receivables:
Ending balance	$	2,015,082		$	405,037	$	703,210		$	18,400		$	51,067		$	10,460	$	749,733		$	102,400		$	—	$	4,055,389
Ending balance: individually evaluated for impairment	$	22,123		$	4,484	$	960		$	12,747		$	—		$	—	$	22,777		$	19		$	—	$	63,110
Ending balance: collectively evaluated for impairment	$	1,992,959		$	400,553	$	702,250		$	5,653		$	51,067		$	10,460	$	726,956		$	102,381		$	—	$	3,992,279
Nine months ended September 30, 2012
Allowance for loan losses:
Beginning balance	$	6,500		$	1,688	$	4,354		$	3,795		$	1,888		$	4	$	14,867		$	3,806		$	1,004	$	37,906
Charge-offs	(2,476		)	—		(402		)	(2,340		)	—			—		(2,964		)	(1,853		)	—		(10,035		)
Recoveries	974			—		95			471			—			—		511			384			—		2,435
Provision	1,729			394		818			1,871			43			4		1,916			1,472			1,257		9,504
Ending balance	$	6,727		$	2,082	$	4,865		$	3,797		$	1,931		$	8	$	14,330		$	3,809		$	2,261	$	39,810
Ending balance: individually evaluated for impairment	$	324		$	7	$	313		$	2,321		$	—		$	—	$	1,656		$	—		$	—	$	4,621
Ending balance: collectively evaluated for impairment	$	6,403		$	2,075	$	4,552		$	1,476		$	1,931		$	8	$	12,674		$	3,809		$	2,261	$	35,189
Financing Receivables:																									0
Ending balance	$	1,899,580		$	367,765	$	604,279		$	29,280		$	42,913		$	5,648	$	704,100		$	104,338		$	—	$	3,757,903
Ending balance: individually evaluated for impairment	$	26,912		$	2,929	$	1,913		$	25,146		$	—		$	—	$	17,956		$	22		$	—	$	74,878
Ending balance: collectively evaluated for impairment	$	1,872,668		$	364,836	$	602,366		$	4,134		$	42,913		$	5,648	$	686,144		$	104,316		$	—	$	3,683,025

The reversal of provision for loan losses for the 1-4 family, residential land and commercial loan portfolios in the third quarter of 2013 was due to lower loss rates as a result of improving charge-off and credit trends, as well as declining balances in the higher risk purchased mortgage and land loan portfolios. The increase in the unallocated allowance for loan losses in the third quarter of 2013 was primarily due to uncertainty over the impact of the possible U.S. debt default and the federal government shutdown in the first half of October 2013 that could affect the credit quality of the loan portfolios as individuals and businesses struggling with loan payments are pushed into delinquency or default.

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 and industrial, commercial real estate and commercial construction loans.

A dual ten-point risk rating system is used to reflect the probability of default (borrower risk rating) and loss given default (transaction risk rating). The borrower risk rating addresses risk presented by the individual borrower and is based on the overall assessment of the borrower’s financial and operating strength including earnings, operating cash flow, debt service capacity, asset and liability structure, competitive issues, experience and quality of management, financial reporting quality and industry/economic factors. Separately, the transaction risk rating addresses risk in the transaction and is a function of the type of collateral control exercised over the collateral, loan structure, guarantees, and other structural support or enhancements to the loan.

The numerical representation of the risk categories are:



	1- Substantially risk free	6- Acceptable risk
	2- Minimal risk	7- Special mention
	3- Modest risk	8- Substandard
	4- Better than average risk	9- Doubtful
	5- Average risk	10- Loss

Grades 1 through 6 are considered pass grades. 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.

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



	September 30, 2013						December 31, 2012
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	332,407	$	51,067	$	661,720	$	314,182	$	39,063	$	638,854
Special mention	40,437		—		18,948		25,437		4,925		24,511
Substandard	28,403		—		65,571		29,308		—		53,538
Doubtful	3,790		—		3,494		6,750		—		4,446
Loss	—		—		—		—		—		—
Total	$	405,037	$	51,067	$	749,733	$	375,677	$	43,988	$	721,349

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
September 30, 2013
Real estate loans:
Residential 1-4 family	$	3,026	$	1,599	$	15,060	$	19,685	$	1,995,397	$	2,015,082	$	—
Commercial real estate	—		—		3,790		3,790		401,247		405,037		—
Home equity line of credit	658		373		880		1,911		701,299		703,210		—
Residential land	684		80		5,352		6,116		12,284		18,400		1,746
Commercial construction	—		—		—		—		51,067		51,067		—
Residential construction	—		—		—		—		10,460		10,460		—
Commercial loans	1,026		166		4,105		5,297		744,436		749,733		—
Consumer loans	420		212		182		814		101,586		102,400		—
Total loans	$	5,814	$	2,430	$	29,369	$	37,613	$	4,017,776	$	4,055,389	$	1,746
December 31, 2012
Real estate loans:
Residential 1-4 family	$	6,353	$	1,741	$	24,054	$	32,148	$	1,834,302	$	1,866,450	$	—
Commercial real estate	85		—		6,750		6,835		368,842		375,677		—
Home equity line of credit	1,077		142		1,319		2,538		627,637		630,175		—
Residential land	2,851		75		7,788		10,714		15,101		25,815		—
Commercial construction	—		—		—		—		43,988		43,988		—
Residential construction	—		—		—		—		6,171		6,171		—
Commercial loans	3,052		2,814		1,098		6,964		714,385		721,349		131
Consumer loans	598		348		424		1,370		119,861		121,231		242
Total loans	$	14,016	$	5,120	$	41,433	$	60,569	$	3,730,287	$	3,790,856	$	373

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



	September 30, 2013				December 31, 2012
(in thousands)	Nonaccrual loans		Accruing loans 90 days or more past due		Nonaccrual loans		Accruing loans 90 days or more past due
Real estate loans:
Residential 1-4 family	$	18,908	$	—	$	26,721	$	—
Commercial real estate	4,483		—		6,750		—
Home equity line of credit	1,948		—		2,349		—
Residential land	3,606		1,746		8,561		—
Commercial construction	—		—		—		—
Residential construction	—		—		—		—
Commercial loans	21,308		—		20,222		131
Consumer loans	519		—		284		242
Total	$	50,772	$	1,746	$	64,887	$	373

The total carrying amount and the total unpaid principal balance of impaired loans, with and without recorded allowance for loan losses and combined, were as follows:



	September 30, 2013						Three months ended September 30, 2013				Nine months ended September 30, 2013
(in thousands)	Recorded investment		Unpaid principal balance		Related Allowance		Average recorded investment		Interest income recognized*		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate loans:
Residential 1-4 family	$	10,121	$	13,122	$	—	$	9,777	$	62	$	12,304	$	294
Commercial real estate	—		—		—		—		—		1,069		—
Home equity line of credit	523		1,068		—		526		—		606		—
Residential land	5,734		6,712		—		6,095		216		7,477		435
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	6,311		8,624		—		4,941		7		4,518		8
Consumer loans	19		19		—		20		—		20		—
	22,708		29,545		—		21,359		285		25,994		737
With an allowance recorded
Real estate loans:
Residential 1-4 family	7,147		7,167		943		7,155		83		6,411		259
Commercial real estate	4,484		4,536		888		4,028		—		6,157		151
Home equity line of credit	—		—		—		—		—		—		—
Residential land	6,101		6,228		1,585		6,105		102		7,123		304
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	16,466		17,978		2,679		16,524		67		15,606		72
Consumer loans	—		—		—		—		—		—		—
	34,198		35,909		6,095		33,812		252		35,297		786
Total
Real estate loans:
Residential 1-4 family	17,268		20,289		943		16,932		145		18,715		553
Commercial real estate	4,484		4,536		888		4,028		—		7,226		151
Home equity line of credit	523		1,068		—		526		—		606		—
Residential land	11,835		12,940		1,585		12,200		318		14,600		739
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	22,777		26,602		2,679		21,465		74		20,124		80
Consumer loans	19		19		—		20		—		20		—
	$	56,906	$	65,454	$	6,095	$	55,171	$	537	$	61,291	$	1,523



	December 31, 2012						Year ended December 31, 2012
(in thousands)	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized*
With no related allowance recorded
Real estate loans:
Residential 1-4 family	$	14,633	$	20,247	$	—	$	16,688	$	294
Commercial real estate	2,929		2,929		—		7,771		237
Home equity line of credit	581		1,374		—		632		1
Residential land	7,691		10,624		—		21,589		1,185
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	4,265		6,994		—		24,605		986
Consumer loans	21		21		—		23		—
	30,120		42,189		—		71,308		2,703
With an allowance recorded
Real estate loans:
Residential 1-4 family	4,803		4,803		384		4,204		250
Commercial real estate	3,821		3,840		535		1,295		—
Home equity line of credit	—		—		—		26		—
Residential land	9,984		10,364		3,221		7,428		575
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	16,033		16,912		2,659		8,429		23
Consumer loans	—		—		—		—		—
	34,641		35,919		6,799		21,382		848
Total
Real estate loans:
Residential 1-4 family	19,436		25,050		384		20,892		544
Commercial real estate	6,750		6,769		535		9,066		237
Home equity line of credit	581		1,374		—		658		1
Residential land	17,675		20,988		3,221		29,017		1,760
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	20,298		23,906		2,659		33,034		1,009
Consumer loans	21		21		—		23		—
	$	64,761	$	78,108	$	6,799	$	92,690	$	3,551

___________________________________________

* Since loan was classified as impaired.

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

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

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

Loan modifications that occurred were as follows for the indicated periods:



	Three months ended September 30, 2013					Nine months ended September 30, 2013
	Number of	Outstanding recorded investment				Number of	Outstanding recorded investment
(dollars in thousands)	contracts	Pre-modification		Post-modification		contracts	Pre-modification		Post-modification
Troubled debt restructurings
Real estate loans:
Residential 1-4 family	14	$	2,864	$	2,874	32	$	8,631	$	8,712
Commercial real estate	—	—		—		—	—		—
Home equity line of credit	—	—		—		4	462		215
Residential land	9	2,943		2,943		16	4,983		4,974
Commercial loans	3	2,076		2,076		6	2,790		2,790
Consumer loans	—	—		—		—	—		—
	26	$	7,883	$	7,893	58	$	16,866	$	16,691



	Three months ended September 30, 2012					Nine months ended September 30, 2012
	Number of	Outstanding recorded investment				Number of	Outstanding recorded investment
(dollars in thousands)	contracts	Pre-modification		Post-modification		contracts	Pre-modification		Post-modification
Troubled debt restructurings
Real estate loans:
Residential 1-4 family	4	$	1,415	$	1,332	26	$	5,884	$	5,614
Commercial real estate	—	—		—		—	—		—
Home equity line of credit	—	—		—		—	—		—
Residential land	6	1,168		1,001		21	4,676		4,022
Commercial loans	4	517		517		18	2,546		2,546
Consumer loans	—	—		—		—	—		—
	14	$	3,100	$	2,850	65	$	13,106	$	12,182

Loans modified in TDRs that experienced a payment default of 90 days or more in 2013 and 2012, and for which the payment default occurred within one year of the modification, were as follows:



	Three months ended September 30, 2013			Nine months ended September 30, 2013
(dollars in thousands)	Number of contracts	Recorded investment		Number of contracts	Recorded investment
Troubled debt restructurings that subsequently defaulted
Real estate loans:
Residential 1-4 family	—	$	—	—	$	—
Commercial real estate	—	—		—	—
Home equity line of credit	1	67		1	67
Residential land	—	—		—	—
Commercial loans	3	669		3	669
Consumer loans	—	—		—	—
	4	$	736	4	$	736



	Three months ended September 30, 2012			Nine months ended September 30, 2012
(dollars in thousands)	Number of contracts	Recorded investment		Number of contracts	Recorded investment
Troubled debt restructurings that subsequently defaulted
Real estate loans:
Residential 1-4 family	—	$	—	—	$	—
Commercial real estate	—	—		—	—
Home equity line of credit	—	—		—	—
Residential land	—	—		—	—
Commercial loans	—	—		1	488
Consumer loans	—	—		—	—
	—	$	—	1	$	488

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 $0.3 million as of September 30, 2013.

Litigation. 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. The lawsuit is still in its preliminary stage, thus, the probable outcome and range of reasonably possible loss are not determinable at this time.

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