Bank subsidiary

3 Months Ended

Mar. 31, 2012

Bank subsidiary

Bank subsidiary

4 · Bank subsidiary

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data

Three months ended March 31
(in thousands)	2012			2011
Interest income
Interest and fees on loans	$	44,888		$	46,097
Interest on investment and mortgage-related securities	3,805			3,769
Total interest income	48,693			49,866
Interest expense
Interest on deposit liabilities	1,779			2,593
Interest on other borrowings	1,261			1,367
Total interest expense	3,040			3,960
Net interest income	45,653			45,906
Provision for loan losses	3,546			4,550
Net interest income after provision for loan losses	42,107			41,356
Noninterest income
Fees from other financial services	7,337			6,946
Fee income on deposit liabilities	4,278			4,449
Fee income on other financial products	1,549			1,673
Other income	3,395			2,379
Total noninterest income	16,559			15,447
Noninterest expense
Compensation and employee benefits	18,646			17,505
Occupancy	4,225			4,240
Data processing	2,111			1,970
Services	1,783			1,771
Equipment	1,730			1,657
Other expense	6,707			7,933
Total noninterest expense	35,202			35,076
Income before income taxes	23,464			21,727
Income taxes	7,587			7,876
Net income	$	15,877		$	13,851
American Savings Bank, F.S.B.
Statements of Comprehensive Income Data
Three months ended March 31
(in thousands)	2012			2011
Net income	$	15,877		$	13,851
Other comprehensive income (loss), net of taxes:
Net unrealized losses on securities:
Net unrealized losses on securities arising during the period, net of tax benefits, of $149 and $414 for the three months ended March 31, 2012 and 2011, respectively	(226		)	(626		)
Retirement benefit plans:
Less: amortization of net loss, prior service gain and transition obligation included in net periodic benefit cost, net of taxes (tax benefits) of $(164) and $1,082 for the three months ended March 31, 2012 and 2011, respectively	248			(1,639		)
Other comprehensive income (loss), net of taxes	22			(2,265		)
Comprehensive net income	$	15,899		$	11,586

American Savings Bank, F.S.B.

Balance Sheets Data

(in thousands)	March 31, 2012			December 31, 2011
Assets
Cash and cash equivalents	$	229,635		$	219,678
Available-for-sale investment and mortgage-related securities	631,063			624,331
Investment in stock of Federal Home Loan Bank of Seattle	97,764			97,764
Loans receivable held for investment, net	3,672,401			3,642,818
Loans held for sale, at lower of cost or fair value	14,657			9,601
Other	235,407			233,592
Goodwill	82,190			82,190
Total assets	$	4,963,117		$	4,909,974
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing	$	1,054,512		$	993,828
Deposit liabilities—interest-bearing	3,070,692			3,076,204
Other borrowings	232,843			233,229
Other	110,117			118,078
Total liabilities	4,468,164			4,421,339
Commitments and contingencies (see “Litigation” below)
Common stock	332,299			331,880
Retained earnings	172,003			166,126
Accumulated other comprehensive loss, net of tax benefits	(9,349		)	(9,371		)
Total shareholder’s equity	494,953			488,635
Total liabilities and shareholder’s equity	$	4,963,117		$	4,909,974
Other assets
Bank-owned life insurance	$	122,631		$	121,470
Premises and equipment, net	53,217			52,940
Prepaid expenses	15,957			15,297
Accrued interest receivable	14,186			14,190
Mortgage-servicing rights	8,582			8,227
Real estate acquired in settlement of loans, net	6,091			7,260
Other	14,743			14,208
	$	235,407		$	233,592
Other liabilities
Accrued expenses	$	12,124		$	21,216
Federal and state income taxes payable	42,598			35,002
Cashier’s checks	22,410			22,802
Advance payments by borrowers	6,464			10,100
Other	26,521			28,958
	$	110,117		$	118,078

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $183 million and $50 million, respectively, as of March 31, 2012 and December 31, 2011.

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 March 31, 2012, ASB had total commitments to borrowers for loan commitments and unused lines and letters of credit of $1.4 billion, including $3 million to lend additional funds to borrowers whose loan terms have been modified in troubled debt restructurings (TDRs).

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:

			Gross		Gross			Estimated		Gross unrealized losses
	Amortized		unrealized		unrealized			fair		Less than 12 months					12 months or longer
(dollars in thousands)	cost		gains		losses			value		Fair value		Amount			Fair value		Amount
March 31, 2012
Federal agency obligations	$	208,267	$	2,344	$	(71	)	$	210,540	$	19,870	$	(71	)	$	—	$	—
Mortgage-related securities- FNMA, FHLMC and GNMA	347,824		10,823		(61		)	358,586		10,012		(61		)	—		—
Municipal bonds	58,935		3,034		(32		)	61,937		3,638		(32		)	—		—
	$	615,026	$	16,201	$	(164	)	$	631,063	$	33,520	$	(164	)	$	—	$	—
December 31, 2011
Federal agency obligations	$	218,342	$	2,393	$	(8	)	$	220,727	$	19,992	$	(8	)	$	—	$	—
Mortgage-related securities- FNMA, FHLMC and GNMA	334,183		10,699		(17		)	344,865		11,994		(17		)	—		—
Municipal bonds	55,393		3,346		—			58,739		—		—			—		—
	$	607,918	$	16,438	$	(25	)	$	624,331	$	31,986	$	(25	)	$	—	$	—

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 did not consider these investments to be other-than-temporarily impaired at March 31, 2012.

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 may have the right to call or prepay obligations with or without call or prepayment penalties.

March 31, 2012
(in thousands)	Amortized cost		Fair value
Due in one year or less	$	—	$	—
Due after one year through five years	189,439		191,371
Due after five years through ten years	66,828		69,705
Due after ten years	10,935		11,401
	267,202		272,477
Mortgage-related securities-FNMA,FHLMC and GNMA	347,824		358,586
Total available-for-sale securities	$	615,026	$	631,063

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:

	Residential			Commercial real		Home equity line			Residential			Commercial		Residential			Commercial			Consumer
(in thousands)	1-4 family			estate		of credit			land			construction		construction			loans			loans			Unallocated		Total
March 31, 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	(600		)	—		—			(856		)	—		—			(1,359		)	(676		)	—		(3,491		)
Recoveries	489			—		8			74			—		—			196			106			—		873
Provision	330			79		397			493			265		1			871			514			596		3,546
Ending balance	$	6,719		$	1,767	$	4,759		$	3,506		$	2,153	$	5		$	14,575		$	3,750		$	1,600	$	38,834
Ending balance: individually evaluated for impairment	$	218		$	—	$	—		$	2,322		$	—	$	—		$	551		$	—		$	—	$	3,091
Ending balance: collectively evaluated for impairment	$	6,501		$	1,767	$	4,759		$	1,184		$	2,153	$	5		$	14,024		$	3,750		$	1,600	$	35,743
Financing Receivables:
Ending balance	$	1,895,442		$	351,716	$	562,386		$	39,025		$	47,850	$	3,082		$	727,292		$	97,262		$	—	$	3,724,055
Ending balance: individually evaluated for impairment	$	26,988		$	13,336	$	1,371		$	34,361		$	—	$	—		$	46,363		$	23		$	—	$	122,442
Ending balance: collectively evaluated for impairment	$	1,868,454		$	338,380	$	561,015		$	4,664		$	47,850	$	3,082		$	680,929		$	97,239		$	—	$	3,601,613
December 31, 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	(5,528		)	—		(1,439		)	(4,071		)	—		—			(5,335		)	(3,117		)	—		(19,490		)
Recoveries	110			—		25			170			—		—			869			567			—		1,741
Provision	5,421			214		1,499			1,285			174		(3		)	3,318			3,031			70		15,009
Ending balance	$	6,500		$	1,688	$	4,354		$	3,795		$	1,888	$	4		$	14,867		$	3,806		$	1,004	$	37,906
Ending balance: individually evaluated for impairment	$	203		$	—	$	—		$	2,525		$	—	$	—		$	976		$	—		$	—	$	3,704
Ending balance: collectively evaluated for impairment	$	6,297		$	1,688	$	4,354		$	1,270		$	1,888	$	4		$	13,891		$	3,806		$	1,004	$	34,202
Financing Receivables:
Ending balance	$	1,926,774		$	331,931	$	535,481		$	45,392		$	41,950	$	3,327		$	716,427		$	93,253		$	—	$	3,694,535
Ending balance: individually evaluated for impairment	$	26,012		$	13,397	$	1,450		$	39,364		$	—	$	—		$	48,241		$	24		$	—	$	128,488
Ending balance: collectively evaluated for impairment	$	1,900,762		$	318,534	$	534,031		$	6,028		$	41,950	$	3,327		$	668,186		$	93,229		$	—	$	3,566,047

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 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 quality 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:

	March 31, 2012						December 31, 2011
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	325,360	$	47,850	$	657,235	$	308,843	$	41,950	$	650,234
Special mention	11,931		—		19,703		8,594		—		14,660
Substandard	10,989		—		43,733		11,058		—		47,607
Doubtful	3,436		—		6,621		3,436		—		3,926
Loss	—		—		—		—		—		—
Total	$	351,716	$	47,850	$	727,292	$	331,931	$	41,950	$	716,427

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
March 31, 2012
Real estate loans:
Residential 1-4 family	$	8,111	$	6,236	$	29,575	$	43,922	$	1,851,520	$	1,895,442	$	—
Commercial real estate	3,955		—		3,436		7,391		344,325		351,716		—
Home equity line of credit	1,007		545		1,816		3,368		559,018		562,386		—
Residential land	261		24		10,777		11,062		27,963		39,025		—
Commercial construction	—		—		—		—		47,850		47,850		—
Residential construction	—		—		—		—		3,082		3,082		—
Commercial loans	1,410		4,815		4,476		10,701		716,591		727,292		52
Consumer loans	642		298		456		1,396		95,866		97,262		310
Total loans	$	15,386	$	11,918	$	50,536	$	77,840	$	3,646,215	$	3,724,055	$	362
December 31, 2011
Real estate loans:
Residential 1-4 family	$	10,391	$	4,583	$	28,113	$	43,087	$	1,883,687	$	1,926,774	$	—
Commercial real estate	—		—		—		—		331,931		331,931		—
Home equity line of credit	1,671		494		1,421		3,586		531,895		535,481		—
Residential land	2,352		575		13,037		15,964		29,428		45,392		205
Commercial construction	—		—		—		—		41,950		41,950		—
Residential construction	—		—		—		—		3,327		3,327		—
Commercial loans	226		733		1,340		2,299		714,128		716,427		28
Consumer loans	553		344		486		1,383		91,870		93,253		308
Total loans	$	15,193	$	6,729	$	44,397	$	66,319	$	3,628,216	$	3,694,535	$	541

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

	March 31, 2012				December 31, 2011
(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	$	30,901	$	—	$	28,298	$	—
Commercial real estate	3,436		—		3,436		—
Home equity line of credit	2,799		—		2,258		—
Residential land	11,672		—		14,535		205
Commercial construction	—		—		—		—
Residential construction	—		—		—		—
Commercial loans	19,734		52		17,946		28
Consumer loans	272		310		281		308
Total	$	68,814	$	362	$	66,754	$	541

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

	March 31, 2012										December 31, 2011
(in thousands)	Recorded investment		Unpaid principal balance		Related Allowance		Average recorded investment		Interest income recognized*		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	$	17,505	$	24,271	$	—	$	18,496	$	89	$	19,217	$	26,614	$	—	$	21,385	$	282
Commercial real estate	13,336		13,336		—		13,357		145		13,397		13,397		—		13,404		747
Home equity line of credit	659		1,557		—		659		1		711		1,612		—		954		6
Residential land	26,960		34,979		—		27,900		405		30,781		39,136		—		33,398		1,779
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	44,646		47,199		—		42,160		496		41,680		43,516		—		40,952		2,912
Consumer loans	24		24		—		24		—		25		25		—		16		—
	103,130		121,366		—		102,596		1,136		105,811		124,300		—		110,109		5,726
With an allowance recorded
Real estate loans:
Residential 1-4 family	3,860		3,860		218		3,633		75		3,525		3,525		203		3,527		201
Commercial real estate	—		—		—		—		—		—		—		—		—		—
Home equity line of credit	—		—		—		—		—		—		—		—		—		—
Residential land	7,210		7,270		2,322		7,583		185		7,792		7,852		2,525		8,158		603
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	1,717		1,717		551		4,663		9		6,561		6,561		976		8,131		737
Consumer loans	—		—		—		—		—		—		—		—		—		—
	12,787		12,847		3,091		15,879		269		17,878		17,938		3,704		19,816		1,541
Total
Real estate loans:
Residential 1-4 family	21,365		28,131		218		22,129		164		22,742		30,139		203		24,912		483
Commercial real estate	13,336		13,336		—		13,357		145		13,397		13,397		—		13,404		747
Home equity line of credit	659		1,557		—		659		1		711		1,612		—		954		6
Residential land	34,170		42,249		2,322		35,483		590		38,573		46,988		2,525		41,556		2,382
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	46,363		48,916		551		46,823		505		48,241		50,077		976		49,083		3,649
Consumer loans	24		24		—		24		—		25		25		—		16		—
	$	115,917	$	134,213	$	3,091	$	118,475	$	1,405	$	123,689	$	142,238	$	3,704	$	129,925	$	7,267

*    Since loan was classified as impaired.

Troubled debt restructurings.  A loan modification is deemed to be a TDR when ASB grants a concession it would not otherwise consider were it not for the borrower’s financial difficulty.  When a borrower fails to make a required payment on a loan or is in imminent default, ASB takes a number of steps to induce the borrower to cure the delinquency and restore the loan to current status or to avoid payment default. At times, ASB may restructure a loan to help a distressed borrower improve their financial position to eventually be able to fully repay the loan, provided the borrower has demonstrated both the willingness and the ability to handle 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, temporary deferral of principal payments, temporary interest rate reductions, and covenant amendments or waivers. ASB does not grant principal forgiveness in its TDR modifications. Residential loan modifications generally involve the deferral of principal payments for a period of time not exceeding one year or a temporary reduction of principal and/or interest rate for a period of time generally not exceeding two years. Land loans 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 another one to three 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, amendment or waiver of financial covenants, and to a lesser extent 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 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 original effective interest at time of impairment, (2) fair value of collateral less costs 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:

	Three months ended March 31, 2012					Three months ended March 31, 2011
(dollars in thousands)	Number of contracts	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Number  of contracts	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Troubled debt restructurings
Real estate loans:
Residential 1-4 family	7	$	1,413	$	1,410	9	$	2,358	$	2,235
Commercial real estate	—	—		—		—	—		—
Home equity line of credit	—	—		—		—	—		—
Residential land	7	1,734		1,441		18	2,912		2,920
Commercial loans	6	160		160		20	10,100		10,100
Consumer loans	—	—		—		—	—		—
Total	20	$	3,307	$	3,011	47	$	15,370	$	15,255

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

	Three months ended March 31, 2012			Three months ended March 31, 2011
(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	—	—		1	396
Commercial loans	4	879		6	697
Consumer loans	—	—		—	—
Total	4	$	879	7	$	1,093

The four commercial loans that subsequently defaulted were modified by extending the maturity date and deferring principal payments for a short period of time.

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.