Bank subsidiary

6 Months Ended

Jun. 30, 2011

Bank subsidiary

Bank subsidiary

4 · Bank subsidiary

Selected financial information

American Savings Bank, F.S.B. and Subsidiaries

Consolidated Statements of Income Data (unaudited)

	Three months ended June 30				Six months ended June 30
(in thousands)	2011		2010		2011		2010
Interest and dividend income
Interest and fees on loans	$	45,648	$	49,328	$	91,745	$	99,073
Interest and dividends on investment and mortgage-related securities	3,793		3,646		7,562		6,963
Total interest and dividend income	49,441		52,974		99,307		106,036
Interest expense
Interest on deposit liabilities	2,387		3,852		4,980		8,275
Interest on other borrowings	1,382		1,418		2,749		2,844
Total interest expense	3,769		5,270		7,729		11,119
Net interest income	45,672		47,704		91,578		94,917
Provision for loan losses	2,555		990		7,105		6,349
Net interest income after provision for loan losses	43,117		46,714		84,473		88,568
Noninterest income
Fee income on deposit liabilities	4,599		7,891		9,048		15,411
Fees from other financial services	7,240		6,649		14,186		13,063
Fee income on other financial products	1,861		1,735		3,534		3,260
Other income	3,177		2,383		5,556		4,776
Total noninterest income	16,877		18,658		32,324		36,510
Noninterest expense
Compensation and employee benefits	18,166		18,907		35,671		36,309
Occupancy	4,288		4,216		8,528		8,441
Data processing	2,058		4,564		4,028		8,902
Services	1,949		1,845		3,720		3,573
Equipment	1,772		1,640		3,429		3,349
Other expense	7,955		8,453		15,888		17,021
Total noninterest expense	36,188		39,625		71,264		77,595
Income before income taxes	23,806		25,747		45,533		47,483
Income taxes	8,611		9,616		16,487		17,616
Net income	$	15,195	$	16,131	$	29,046	$	29,867

American Savings Bank, F.S.B. and Subsidiaries

Consolidated Balance Sheets Data (unaudited)

(in thousands)	June 30, 2011			December 31, 2010
Assets
Cash and cash equivalents	$	178,251		$	204,397
Federal funds sold	1,249			1,721
Available-for-sale investment and mortgage-related securities	711,347			678,152
Investment in stock of Federal Home Loan Bank of Seattle	97,764			97,764
Loans receivable held for investment, net	3,580,418			3,489,880
Loans held for sale, at lower of cost or fair value	4,784			7,849
Other	234,524			234,806
Goodwill	82,190			82,190
Total assets	$	4,890,527		$	4,796,759
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing	$	912,034		$	865,642
Deposit liabilities—interest-bearing	3,142,915			3,109,730
Other borrowings	239,122			237,319
Other	99,260			90,683
Total liabilities	4,393,331			4,303,374
Common stock	331,348			330,562
Retained earnings	170,157			169,111
Accumulated other comprehensive loss, net of tax benefits	(4,309		)	(6,288		)
Total shareholder’s equity	497,196			493,385
Total liabilities and shareholder’s equity	$	4,890,527		$	4,796,759
Other assets
Bank-owned life insurance	$	119,671		$	117,565
Premises and equipment, net	56,415			56,495
Prepaid expenses	17,700			18,608
Accrued interest receivable	15,178			14,887
Mortgage-servicing rights	6,854			6,699
Real estate acquired in settlement of loans, net	4,722			4,292
Other	13,984			16,260
	$	234,524		$	234,806
Other liabilities
Accrued expenses	$	13,036		$	16,426
Federal and state income taxes payable	34,167			28,372
Cashier’s checks	26,486			22,396
Advance payments by borrowers	10,061			10,216
Other	15,510			13,273
	$	99,260		$	90,683

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $174 million and $65 million, respectively, as of June 30, 2011 and $172 million and $65 million, respectively, as of December 31, 2010.

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.

As of June 30, 2011, ASB had total commitments to borrowers for loan commitments and unused lines and letters of credit of $1.3 billion.

Investment and mortgage-related securities portfolio.

Available-for-sale securities.  The book value and aggregate fair value by major security type were as follows:

	June 30, 2011									December 31, 2010
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		unrealized		unrealized			fair		Amortized		unrealized		unrealized			fair
(in thousands)	cost		gains		losses			value		cost		gains		losses			value
Federal agency obligations	$	292,346	$	1,049	$	(439	)	$	292,956	$	317,945	$	171	$	(2,220	)	$	315,896
Mortgage-related securities — FNMA, FHLMC and GNMA	365,908		10,680		(209		)	376,379		310,711		9,570		(311		)	319,970
Municipal bonds	41,459		568		(15		)	42,012		43,632		7		(1,353		)	42,286
	$	699,713	$	12,297	$	(663	)	$	711,347	$	672,288	$	9,748	$	(3,884	)	$	678,152

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.

June 30, 2011 (in thousands)	Amortized Cost		Fair value
Due in one year or less	$	10,800	$	10,830
Due after one year through five years	272,346		273,366
Due after five years through ten years	41,577		41,673
Due after ten years	9,082		9,099
	333,805		334,968
Mortgage-related securities-FNMA,FHLMC and GNMA	365,908		376,379
Total available-for-sale securities	$	699,713	$	711,347

Gross unrealized losses and fair value.  The gross unrealized losses and fair values (for securities held in available for sale by duration of time in which positions have been held in a continuous loss position) were as follows:

	Less than 12 months					12 months or more					Total
	Gross unrealized			Fair		Gross unrealized			Fair		Gross unrealized			Fair
(in thousands)	losses			value		losses			value		losses			value
June 30, 2011
Federal agency obligations	$	(439	)	$	39,555	$	—		$	—	$	(439	)	$	39,555
Mortgage-related securities — FNMA, FHLMC and GNMA	(100		)	19,793		(109		)	20,164		(209		)	39,957
Municipal bonds	(15		)	4,540		—			—		(15		)	4,540
	$	(554	)	$	63,888	$	(109	)	$	20,164	$	(663	)	$	84,052
December 31, 2010
Federal agency obligations	$	(2,220	)	$	205,316	$	—		$	—	$	(2,220	)	$	205,316
Mortgage-related securities — FNMA, FHLMC and GNMA	(311		)	30,986		—			—		(311		)	30,986
Municipal bonds	(1,353		)	41,479		—			—		(1,353		)	41,479
	$	(3,884	)	$	277,781	$	—		$	—	$	(3,884	)	$	277,781

The unrealized losses on ASB’s investments in 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 bases 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 bases, which may be at maturity, ASB does not consider these investments to be other-than-temporarily impaired at June 30, 2011.

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

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 was comprised of the following:

				Commercial		Home
	Residential			real		equity line			Residential			Commercial			Residential			Commercial			Consumer
(in thousands)	1-4 family			estate		of credit			land			construction			construction			loans			loans			Unallocated			Total
June 30, 2011
Allowance for loan losses:
Beginning balance	$	6,497		$	1,474	$	4,269		$	6,411		$	1,714		$	7		$	16,015		$	3,325		$	934		$	40,646
Charge-offs	(2,695		)	—		(362		)	(2,790		)	—			—			(1,773		)	(1,518		)	—			(9,138		)
Recoveries	33			—		4			19			—			—			300			314			—			670
Provision	3,694			168		(695		)	1,385			15			(2		)	327			1,350			863			7,105
Ending balance	$	7,529		$	1,642	$	3,216		$	5,025		$	1,729		$	5		$	14,869		$	3,471		$	1,797		$	39,283
Ending balance: individually evaluated for impairment	$	230		$	—	$	—		$	3,067		$	—		$	—		$	1,923		$	—		$	—		$	5,220
Ending balance: collectively evaluated for impairment	$	7,299		$	1,642	$	3,216		$	1,958		$	1,729		$	5		$	12,946		$	3,471		$	1,797		$	34,063
Financing Receivables:
Ending balance	$	2,028,502		$	321,967	$	466,783		$	51,901		$	38,419		$	3,738		$	640,221		$	83,059		$	—		$	3,634,590
Ending balance: individually evaluated for impairment	$	30,816		$	13,543	$	1,263		$	41,268		$	—		$	—		$	54,620		$	25		$	—		$	141,535
Ending balance: collectively evaluated for impairment	$	1,997,686		$	308,424	$	465,520		$	10,633		$	38,419		$	3,738		$	585,601		$	83,034		$	—		$	3,493,055
December 31, 2010
Allowance for loan losses:
Beginning balance	$	5,522		$	861	$	4,679		$	4,252		$	3,068		$	19		$	19,498		$	2,590		$	1,190		$	41,679
Charge-offs	(6,142		)	—		(2,517		)	(6,487		)	—			—			(6,261		)	(3,408		)	—			(24,815		)
Recoveries	744			—		63			63			—			—			1,537			481			—			2,888
Provision	6,373			613		2,044			8,583			(1,354		)	(12		)	1,241				3,662		(256		)	20,894
Ending balance	$	6,497		$	1,474	$	4,269		$	6,411		$	1,714		$	7		$	16,015		$	3,325		$	934		$	40,646
Ending balance: individually evaluated for impairment	$	230		$	—	$	—		$	1,642		$	—		$	—		$	1,588		$	—		$	—		$	3,460
Ending balance: collectively evaluated for impairment	$	6,267		$	1,474	$	4,269		$	4,769		$	1,714		$	7		$	14,427		$	3,325		$	934		$	37,186
Financing Receivables:
Ending balance	$	2,087,813		$	300,689	$	416,453		$	65,599		$	38,079		$	5,602		$	551,683		$	80,138		$	—		$	3,546,056
Ending balance: individually evaluated for impairment	$	34,615		$	12,156	$	827		$	39,631		$	—		$	—		$	28,886		$	76		$	—		$	116,191
Ending balance: collectively evaluated for impairment	$	2,053,198		$	288,533	$	415,626		$	25,968		$	38,079		$	5,602		$	522,797		$	80,062		$	—		$	3,429,865

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 quality problems so that appropriate steps can be initiated to avoid or minimize future losses. Loans subject to grading include commercial, commercial real estate and commercial construction loans.

A ten-point risk rating system is used to determine loan grade and is based on borrower loan risk. The risk rating is a numerical representation of risk 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 issues and industry/economic factors.

The loan grade 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:

	June 30, 2011						December 31, 2010
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	305,260	$	38,419	$	557,463	$	285,624	$	38,079	$	462,078
Special mention	1,056		—		23,820		526		—		44,759
Substandard	15,651		—		56,795		14,539		—		44,259
Doubtful	—		—		1,978		—		—		556
Loss	—		—		165		—		—		31
Total	$	321,967	$	38,419	$	640,221	$	300,689	$	38,079	$	551,683

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
June 30, 2011
Real estate loans:
Residential 1-4 family	$	4,775	$	2,837	$	34,942	$	42,554	$	1,985,948	$	2,028,502	$	—
Commercial real estate	—		—		—		—		321,967		321,967		—
Home equity line of credit	993		729		1,492		3,214		463,569		466,783		—
Residential land	968		834		14,027		15,829		36,072		51,901		—
Commercial construction	—		—		—		—		38,419		38,419		—
Residential construction	—		—		—		—		3,738		3,738		—
Commercial loans	1,400		1,667		2,837		5,904		634,317		640,221		60
Consumer loans	483		280		615		1,378		81,681		83,059		442
Total loans	$	8,619	$	6,347	$	53,913	$	68,879	$	3,565,711	$	3,634,590	$	502
December 31, 2010
Real estate loans:
Residential 1-4 family	$	8,245	$	3,719	$	36,419	$	48,383	$	2,039,430	$	2,087,813	$	—
Commercial real estate	—		4		—		4		300,685		300,689		—
Home equity line of credit	1,103		227		1,659		2,989		413,464		416,453		—
Residential land	1,543		1,218		16,060		18,821		46,778		65,599		581
Commercial construction	—		—		—		—		38,079		38,079		—
Residential construction	—		—		—		—		5,602		5,602		—
Commercial loans	892		1,317		3,191		5,400		546,283		551,683		64
Consumer loans	629		410		617		1,656		78,482		80,138		320
Total loans	$	12,412	$	6,895	$	57,946	$	77,253	$	3,468,803	$	3,546,056	$	965

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

	June 30, 2011						December 31, 2010
(in thousands)	Nonaccrual loans		Accruing loans 90 days or more past due		Trouble debt restructured loans		Nonaccrual loans		Accruing loans 90 days or more past due		Trouble debt restructured loans
Real estate loans:
Residential 1-4 family	$	34,942	$	—	$	4,938	$	36,420	$	—	$	5,150
Commercial real estate	—		—		—		—		—		1,963
Home equity line of credit	1,492		—		—		1,659		—		—
Residential land	16,022		—		25,857		15,479		581		27,689
Commercial construction	—		—		—		—		—		—
Residential construction	—		—		—		—		—		—
Commercial loans	5,442		60		26,203		4,956		64		4,035
Consumer loans	210		442		—		341		320		—
Total	$	58,108	$	502	$	56,998	$	58,855	$	965	$	38,837

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

	June 30, 2011						Three months ended June 30, 2011				Six months ended June 30, 2011
(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	$	20,771	$	28,523	$	—	$	20,000	$	68	$	19,848	$	128
Commercial real estate	13,543		13,543		—		12,396		183		11,276		331
Home equity line of credit	543		1,422		—		654		1		615		1
Residential land	32,310		40,526		—		32,092		420		33,177		939
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	43,665		43,665		—		39,419		702		37,284		1,361
Consumer loans	—		—		—		—		—		—		—
	110,832		127,679		—		104,561		1,374		102,200		2,760
With an allowance recorded
Real estate loans:
Residential 1-4 family	3,884		3,884		230		3,890		49		3,898		109
Commercial real estate	—		—		—		—		—		—		—
Home equity line of credit	—		—		—		—		—		—		—
Residential land	8,748		8,808		3,067		8,482		146		7,363		316
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	10,955		10,955		1,923		8,418		130		7,179		230
Consumer loans	—		—		—		—		—		—		—
	23,587		23,647		5,220		20,790		325		18,440		655
Total
Real estate loans:
Residential 1-4 family	24,655		32,407		230		23,890		117		23,746		237
Commercial real estate	13,543		13,543		—		12,396		183		11,276		331
Home equity line of credit	543		1,422		—		654		1		615		1
Residential land	41,058		49,334		3,067		40,574		566		40,540		1,255
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	54,620		54,620		1,923		47,837		832		44,463		1,591
Consumer loans	—		—		—		—		—		—		—
	$	134,419	$	151,326	$	5,220	$	125,351	$	1,699	$	120,640	$	3,415

	December 31, 2010						2010
(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	$	18,205	$	24,692	$	—	$	14,609	$	278
Commercial real estate	12,156		12,156		—		14,276		979
Home equity line of credit	—		—		—		—		—
Residential land	33,777		40,802		—		29,914		1,499
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	22,041		22,041		—		29,636		1,846
Consumer loans	—		—		—		—		—
	86,179		99,691		—		88,435		4,602
With an allowance recorded
Real estate loans:
Residential 1-4 family	3,917		3,917		230		2,807		175
Commercial real estate	—		—		—		—		—
Home equity line of credit	—		—		—		—		—
Residential land	5,041		5,090		1,642		3,753		327
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	6,845		6,845		1,588		2,796		182
Consumer loans	—		—		—		—		—
	15,803		15,852		3,460		9,356		684
Total
Real estate loans:
Residential 1-4 family	22,122		28,609		230		17,416		453
Commercial real estate	12,156		12,156		—		14,276		979
Home equity line of credit	—		—		—		—		—
Residential land	38,818		45,892		1,642		33,667		1,826
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	28,886		28,886		1,588		32,432		2,028
Consumer loans	—		—		—		—		—
	$	101,982	$	115,543	$	3,460	$	97,791	$	5,286

Litigation.  In March 2011, a purported class action lawsuit was filed by a customer who claimed that ASB had improperly charged overdraft fees on debit card transactions. Management is evaluating the merits of the claims alleged in the lawsuit, which is in its preliminary stage. Thus, the outcome is not determinable.