Bank subsidiary

9 Months Ended

Sep. 30, 2012

Bank subsidiary

Bank subsidiary

4 · 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)	2012		2011		2012		2011
Interest income
Interest and fees on loans	$	43,880	$	46,240	$	133,241	$	137,985
Interest on investment and mortgage-related securities	3,432		3,654		10,534		11,216
Total interest income	47,312		49,894		143,775		149,201
Interest expense
Interest on deposit liabilities	1,540		2,166		5,015		7,146
Interest on other borrowings	1,201		1,375		3,676		4,124
Total interest expense	2,741		3,541		8,691		11,270
Net interest income	44,571		46,353		135,084		137,931
Provision for loan losses	3,580		3,822		9,504		10,927
Net interest income after provision for loan losses	40,991		42,531		125,580		127,004
Noninterest income
Fees from other financial services	7,674		7,219		22,474		21,405
Fee income on deposit liabilities	4,527		4,492		13,127		13,540
Fee income on other financial products	1,660		1,806		4,741		5,340
Gain on sale of loans	4,077		1,092		8,297		2,268
Other income	1,346		1,597		4,155		5,977
Total noninterest income	19,284		16,206		52,794		48,530
Noninterest expense
Compensation and employee benefits	18,684		17,646		56,026		53,317
Occupancy	4,400		4,313		12,866		12,841
Data processing	2,644		2,451		7,244		6,479
Services	3,062		1,686		7,066		5,406
Equipment	1,762		1,712		5,299		5,141
Other expense	8,096		7,763		22,909		23,651
Total noninterest expense	38,648		35,571		111,410		106,835
Income before income taxes	21,627		23,166		66,964		68,699
Income taxes	7,419		7,709		22,690		24,196
Net income	$	14,208	$	15,457	$	44,274	$	44,503

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data

	Three months ended September 30					Nine months ended September 30
(in thousands)	2012		2011			2012			2011
Net income	$	14,208	$	15,457		$	44,274		$	44,503
Other comprehensive income (loss), net of taxes:
Net unrealized gains on securities:
Net unrealized gains on securities arising during the period, net of taxes of $689 and $1,917 for the three months ended September 30, 2012 and 2011 and $1,261 and $4,258 for the nine months ended September 30, 2012 and 2011, respectively	1,043		3,013			1,910			6,448
Less: reclassification adjustment for net realized gains, included in net income, net of taxes of nil and $146 for the three months ended September 30, 2012 and 2011 and $53 and $148 for the nine months ended September 30, 2012 and 2011, respectively	—		(221		)	(81		)	(224		)
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 $(176) and $(175) for the three months ended September 30, 2012 and 2011 and $(508) and $902 for the nine months ended September 30, 2012 and 2011, respectively	266		86			769			(1,367		)
Other comprehensive income, net of taxes	1,309		2,878			2,598			4,857
Comprehensive income	$	15,517	$	18,335		$	46,872		$	49,360

American Savings Bank, F.S.B.

Balance Sheets Data

(in thousands)	September 30, 2012			December 31, 2011
Assets
Cash and cash equivalents	$	152,474		$	219,678
Available-for-sale investment and mortgage-related securities	664,051			624,331
Investment in stock of Federal Home Loan Bank of Seattle	96,893			97,764
Loans receivable held for investment	3,745,558			3,680,724
Allowance for loan losses	(39,810		)	(37,906		)
Loans receivable held for investment, net	3,705,748			3,642,818
Loans held for sale, at lower of cost or fair value	16,495			9,601
Other	234,999			233,592
Goodwill	82,190			82,190
Total assets	$	4,952,850		$	4,909,974
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing	$	1,097,809		$	993,828
Deposit liabilities—interest-bearing	3,028,979			3,076,204
Other borrowings	211,219			233,229
Other	107,960			118,078
Total liabilities	4,445,967			4,421,339
Commitments and contingencies (see “Litigation” below)
Common stock	333,256			331,880
Retained earnings	180,400			166,126
Accumulated other comprehensive loss, net of tax benefits	(6,773		)	(9,371		)
Total shareholder’s equity	506,883			488,635
Total liabilities and shareholder’s equity	$	4,952,850		$	4,909,974
Other assets
Bank-owned life insurance	$	124,672		$	121,470
Premises and equipment, net	53,451			52,940
Prepaid expenses	14,732			15,297
Accrued interest receivable	14,205			14,190
Mortgage-servicing rights	9,658			8,227
Real estate acquired in settlement of loans, net	4,414			7,260
Other	13,867			14,208
	$	234,999		$	233,592
Other liabilities
Accrued expenses	$	19,981		$	21,216
Federal and state income taxes payable	36,308			35,002
Cashier’s checks	20,575			22,802
Advance payments by borrowers	5,958			10,100
Other	25,138			28,958
	$	107,960		$	118,078

Other borrowings consisted of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB) of Seattle of $161 million and $50 million, respectively, as of September 30, 2012 and $183 million and $50 million, respectively, as of 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 September 30, 2012, ASB had total commitments to borrowers for loan commitments and unused lines and letters of credit of $1.5 billion, including $0.2 million to lend additional funds to borrowers whose loans are impaired. There are no commitments to lend additional funds to borrowers whose loan terms have been modified in trouble debt restructurings (TDRs) as of September 30, 2012.

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
September 30, 2012
Federal agency obligations	$	213,241	$	3,342	$	—		$	216,583	$	—	$	—		$	—	$	—
Mortgage-related securities- FNMA, FHLMC and GNMA	353,095		11,706		(181		)	364,620		36,225		(181		)	—		—
Municipal bonds	78,265		4,583		—			82,848		—		—			—		—
	$	644,601	$	19,631	$	(181	)	$	664,051	$	36,225	$	(181	)	$	—	$	—
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 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 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 September 30, 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.

September 30, 2012	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years	190,140		192,438
Due after five years through ten years	85,682		90,597
Due after ten years	15,684		16,396
	291,506		299,431
Mortgage-related securities-FNMA,FHLMC and GNMA	353,095		364,620
Total available-for-sale securities	$	644,601	$	664,051

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
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:
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
Year ended 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:

	September 30, 2012						December 31, 2011
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	326,532	$	42,913	$	630,616	$	308,843	$	41,950	$	650,234
Special mention	9,455		—		21,291		8,594		—		14,660
Substandard	28,849		—		48,460		11,058		—		47,607
Doubtful	2,929		—		3,733		3,436		—		3,926
Loss	—		—		—		—		—		—
Total	$	367,765	$	42,913	$	704,100	$	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
September 30, 2012
Real estate loans:
Residential 1-4 family	$	5,830	$	1,727	$	28,626	$	36,183	$	1,863,397	$	1,899,580	$	—
Commercial real estate	—		—		2,929		2,929		364,836		367,765		—
Home equity line of credit	584		758		1,965		3,307		600,972		604,279		—
Residential land	1,346		3,017		6,384		10,747		18,533		29,280		2,473
Commercial construction	—		—		—		—		42,913		42,913		—
Residential construction	—		—		—		—		5,648		5,648		—
Commercial loans	1,681		251		2,948		4,880		699,220		704,100		123
Consumer loans	878		356		491		1,725		102,613		104,338		360
Total loans	$	10,319	$	6,109	$	43,343	$	59,771	$	3,698,132	$	3,757,903	$	2,956
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:

	September 30, 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	$	29,613	$	—	$	28,298	$	—
Commercial real estate	2,929		—		3,436		—
Home equity line of credit	2,621		—		2,258		—
Residential land	4,393		2,473		14,535		205
Commercial construction	—		—		—		—
Residential construction	—		—		—		—
Commercial loans	17,856		123		17,946		28
Consumer loans	243		360		281		308
Total	$	57,655	$	2,956	$	66,754	$	541

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

	September 30, 2012						Three months ended September 30, 2012				Nine months ended September 30, 2012
(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	$	15,963	$	22,127	$	—	$	15,919	$	57	$	17,104	$	225
Commercial real estate	—		—		—		2,003		—		9,504		237
Home equity line of credit	584		1,376		—		630		—		648		1
Residential land	18,107		22,854		—		19,876		296		24,184		1,020
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	585		585		—		8,916		33		31,710		979
Consumer loans	22		22		—		23		—		23		—
	35,261		46,964		—		47,367		386		83,173		2,462
With an allowance recorded
Real estate loans:
Residential 1-4 family	4,504		4,504		324		4,509		58		4,072		192
Commercial real estate	2,929		2,929		7		976		—		326		—
Home equity line of credit	313		421		313		104		—		35		—
Residential land	7,021		7,243		2,321		7,134		122		7,306		429
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	17,370		20,398		1,656		9,476		2		5,777		20
Consumer loans	—		—		—		—		—		—		—
	32,137		35,495		4,621		22,199		182		17,516		641
Total
Real estate loans:
Residential 1-4 family	20,467		26,631		324		20,428		115		21,176		417
Commercial real estate	2,929		2,929		7		2,979		—		9,830		237
Home equity line of credit	897		1,797		313		734		—		683		1
Residential land	25,128		30,097		2,321		27,010		418		31,490		1,449
Commercial construction	—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—
Commercial loans	17,955		20,983		1,656		18,392		35		37,487		999
Consumer loans	22		22		—		23		—		23		—
	$	67,398	$	82,459	$	4,621	$	69,566	$	568	$	100,689	$	3,103

*  Since loan was classified as impaired.

	December 31, 2011						Year ended December 31, 2011
(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	$	19,217	$	26,614	$	—	$	21,385	$	282
Commercial real estate	13,397		13,397		—		13,404		747
Home equity line of credit	711		1,612		—		954		6
Residential land	30,781		39,136		—		33,398		1,779
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	41,680		43,516		—		40,952		2,912
Consumer loans	25		25		—		16		—
	105,811		124,300		—		110,109		5,726
With an allowance recorded
Real estate loans:
Residential 1-4 family	3,525		3,525		203		3,527		201
Commercial real estate	—		—		—		—		—
Home equity line of credit	—		—		—		—		—
Residential land	7,792		7,852		2,525		8,158		603
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	6,561		6,561		976		8,131		737
Consumer loans	—		—		—		—		—
	17,878		17,938		3,704		19,816		1,541
Total
Real estate loans:
Residential 1-4 family	22,742		30,139		203		24,912		483
Commercial real estate	13,397		13,397		—		13,404		747
Home equity line of credit	711		1,612		—		954		6
Residential land	38,573		46,988		2,525		41,556		2,382
Commercial construction	—		—		—		—		—
Residential construction	—		—		—		—		—
Commercial loans	48,241		50,077		976		49,083		3,649
Consumer loans	25		25		—		16		—
	$	123,689	$	142,238	$	3,704	$	129,925	$	7,267

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 rarely grants 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 effective original contractual rate, (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 for the indicated periods:

	Three months ended September 30, 2012					Nine months ended September 30, 2012
(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	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	—	—		—		—	—		—
Total	14	$	3,100	$	2,850	65	$	13,106	$	12,182

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 nil for the three months ended September 30, 2012 and were as follows for the nine months ended September 30, 2012:

	Nine months ended September 30, 2012
(dollars in thousands)	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	—	—
Total	1	$	488

The one commercial loan that subsequently defaulted was modified by temporarily lowering the monthly payments 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.