4 ·Bank subsidiary

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data

Three months ended March 31	2013		2012
(in thousands)

Interest income
Interest and fees on loans	$	42,603	$	44,888
Interest on investment and mortgage-related securities	3,464		3,805
Total interest income	46,067		48,693
Interest expense
Interest on deposit liabilities	1,312		1,779
Interest on other borrowings	1,164		1,261
Total interest expense	2,476		3,040
Net interest income	43,591		45,653
Provision for loan losses	1,858		3,546
Net interest income after provision for loan losses	41,733		42,107
Noninterest income
Fees from other financial services	7,643		7,337
Fee income on deposit liabilities	4,314		4,278
Fee income on other financial products	1,794		1,549
Gain on sale of loans	3,346		2,035
Other income, net	1,592		1,360
Total noninterest income	18,689		16,559
Noninterest expense
Compensation and employee benefits	20,088		18,646
Occupancy	4,123		4,225
Data processing	2,987		2,111
Services	2,103		1,783
Equipment	1,774		1,730
Other expense	7,595		6,707
Total noninterest expense	38,670		35,202
Income before income taxes	21,752		23,464
Income taxes	7,597		7,587
Net income	$	14,155	$	15,877

American Savings Bank, F.S.B.

Statements of Comprehensive Income Data

Three months ended March 31	2013			2012
(in thousands)

Net income	$	14,155		$	15,877
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 $547and $149 for the three months ended March 31, 2013 and 2012, respectively	(828		)	(226		)
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 $1,424 and $164 for the three months ended March 31, 2013 and 2012, respectively	2,157			248
Other comprehensive income, net of taxes	1,329			22
Comprehensive income	$	15,484		$	15,899

American Savings Bank, F.S.B.

Balance Sheets Data

(in thousands)				March 31, 2013						December 31, 2012

Assets
Cash and cash equivalents				$	224,870					$	184,430
Available-for-sale investment and mortgage-related securities				659,400						671,358
Investment in stock of Federal Home Loan Bank of Seattle				95,152						96,022
Loans receivable held for investment				3,845,732						3,779,218
Allowance for loan losses				(42,730		)				(41,985		)
Loans receivable held for investment, net				3,803,002						3,737,233
Loans held for sale, at lower of cost or fair value				5,351						26,005
Other				246,420						244,435
Goodwill				82,190						82,190
Total assets				$	5,116,385					$	5,041,673
Liabilities and shareholder’s equity
Deposit liabilities—noninterest-bearing				$	1,223,921					$	1,164,308
Deposit liabilities—interest-bearing				3,088,699						3,065,608
Other borrowings				193,233						195,926
Other				106,337						117,752
Total liabilities				4,612,190						4,543,594
Commitments and contingencies (see “Litigation” below)
Common stock				334,344						333,712
Retained earnings				183,918						179,763
Accumulated other comprehensive income (loss), net of taxes
Net unrealized gains on securities	$	9,933					$	10,761
Retirement benefit plans	(24,000		)	(14,067		)	(26,157		)	(15,396		)
Total shareholder’s equity				504,195						498,079
Total liabilities and shareholder’s equity				$	5,116,385					$	5,041,673

Other assets
Bank-owned life insurance				$	126,798					$	125,726
Premises and equipment, net				64,217						62,458
Prepaid expenses				13,189						13,199
Accrued interest receivable				13,773						13,228
Mortgage-servicing rights				11,400						10,818
Real estate acquired in settlement of loans, net				3,785						6,050
Other				13,258						12,956
				$	246,420					$	244,435
Other liabilities
Accrued expenses				$	13,723					$	17,103
Federal and state income taxes payable				42,205						35,408
Cashier’s checks				21,810						23,478
Advance payments by borrowers				6,443						9,685
Other				22,156						32,078
				$	106,337					$	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 $143 million and $50 million, respectively, as of March 31, 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
March 31, 2013	$	143	$	—	$	143
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
March 31, 2013
Financial institution	$	50	$	50	$	—	$	—
Commercial account holders	93		93		—		—
Total	$	143	$	143	$	—	$	—
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:

			Gross		Gross			Estimated		Gross unrealized losses
	Amortized		unrealized		unrealized			fair		Less than 12 months					12 months or longer
(in thousands)	cost		gains		losses			value		Fair value		Amount			Fair value		Amount
March 31, 2013
Federal agency obligations	$	165,402	$	2,606	$	(48	)	$	167,960	$	12,025	$	(48	)	$	—	$	—
Mortgage-related securities- FNMA, FHLMC and GNMA	399,784		10,061		(506		)	409,339		66,595		(506		)	—		—
Municipal bonds	77,723		4,378		—			82,101		—		—			—		—
	$	642,909	$	17,045	$	(554	)	$	659,400	$	78,620	$	(554	)	$	—	$	—
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 March 31, 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.

March 31, 2013	Amortized cost		Fair value
(in thousands)
Due in one year or less	$	68,120	$	68,635
Due after one year through five years	63,839		65,258
Due after five years through ten years	78,211		82,977
Due after ten years	32,955		33,191
	243,125		250,061
Mortgage-related securities-FNMA,FHLMC and GNMA	399,784		409,339
Total available-for-sale securities	$	642,909	$	659,400

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:

				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
Three months ended March 31, 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	(210		)	—		(670		)	(227		)	—			—		(426		)	(645		)	—		(2,178		)
Recoveries	192			—		194			137			—			—		392			150			—		1,065
Provision	(39		)	3,691		540			(1,442		)	(151		)	3		(934		)	131			59		1,858
Ending balance	$	6,011		$	6,656	$	4,557		$	2,743		$	1,872		$	12	$	14,963		$	3,655		$	2,261	$	42,730
Ending balance: individually evaluated for impairment	$	454		$	3,169	$	—		$	1,943		$	—		$	—	$	2,285		$	—		$	—	$	7,851
Ending balance: collectively evaluated for impairment	$	5,557		$	3,487	$	4,557		$	800		$	1,872		$	12	$	12,678		$	3,655		$	2,261	$	34,879

Financing Receivables:
Ending balance	$	1,915,207		$	391,679	$	648,904		$	23,894		$	40,698		$	8,275	$	699,918		$	127,260		$	—	$	3,855,835
Ending balance: individually evaluated for impairment	$	25,320		$	10,662	$	1,259		$	17,618		$	—		$	—	$	19,302		$	21		$	—	$	74,182
Ending balance: collectively evaluated for impairment	$	1,889,887		$	381,017	$	647,645		$	6,276		$	40,698		$	8,275	$	680,616		$	127,239		$	—	$	3,781,653
Year ended December 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	(3,183		)	—		(716		)	(2,808		)	—			—		(3,606		)	(2,517		)	—		(12,830		)
Recoveries	1,328			—		108			1,443			—			—		649			498			—		4,026
Provision	1,423			1,277		747			1,845			135			5		4,021			2,232			1,198		12,883
Ending balance	$	6,068		$	2,965	$	4,493		$	4,275		$	2,023		$	9	$	15,931		$	4,019		$	2,202	$	41,985
Ending balance: individually evaluated for impairment	$	384		$	535	$	—		$	3,221		$	—		$	—	$	2,659		$	—		$	—	$	6,799
Ending balance: collectively evaluated for impairment	$	5,684		$	2,430	$	4,493		$	1,054		$	2,023		$	9	$	13,272		$	4,019		$	2,202	$	35,186

Financing Receivables:
Ending balance	$	1,866,450		$	375,677	$	630,175		$	25,815		$	43,988		$	6,171	$	721,349		$	121,231		$	—	$	3,790,856
Ending balance: individually evaluated for impairment	$	25,279		$	6,751	$	1,560		$	18,563		$	—		$	—	$	20,298		$	22		$	—	$	72,473
Ending balance: collectively evaluated for impairment	$	1,841,171		$	368,926	$	628,615		$	7,252		$	43,988		$	6,171	$	701,051		$	121,209		$	—	$	3,718,383

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

2- Minimal risk

3- Modest risk

4- Better than average risk

5- Average risk

6- Acceptable risk

7- Special mention

8- Substandard

9- Doubtful

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, 2013						December 31, 2012
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	310,265	$	35,623	$	620,811	$	314,182	$	39,063	$	638,854
Special mention	36,381		—		13,601		25,437		4,925		24,511
Substandard	41,222		5,075		61,133		29,308		—		53,538
Doubtful	3,811		—		4,373		6,750		—		4,446
Loss	—		—		—		—		—		—
Total	$	391,679	$	40,698	$	699,918	$	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
March 31, 2013
Real estate loans:
Residential 1-4 family	$	5,435	$	1,277	$	23,292	$	30,004	$	1,885,203	$	1,915,207	$	—
Commercial real estate	743		—		3,811		4,554		387,125		391,679		—
Home equity line of credit	649		371		1,323		2,343		646,561		648,904		—
Residential land	599		1,138		9,748		11,485		12,409		23,894		1,268
Commercial construction	—		—		—		—		40,698		40,698		—
Residential construction	—		—		—		—		8,275		8,275		—
Commercial loans	3,513		400		6,370		10,283		689,635		699,918		88
Consumer loans	567		250		402		1,219		126,041		127,260		272
Total loans	$	11,506	$	3,436	$	44,946	$	59,888	$	3,795,947	$	3,855,835	$	1,628
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:

	March 31, 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	$	25,578	$	—	$	26,721	$	—
Commercial real estate	10,663		—		6,750		—
Home equity line of credit	2,352		—		2,349		—
Residential land	9,249		1,268		8,561		—
Commercial construction	—		—		—		—
Residential construction	—		—		—		—
Commercial loans	19,305		88		20,222		131
Consumer loans	281		272		284		242
Total	$	67,428	$	1,628	$	64,887	$	373

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


	March 31, 2013										December 31, 2012
(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	$	14,815	$	20,228	$	—	$	14,756	$	134	$	14,633	$	20,247	$	—	$	16,688	$	294
Commercial real estate	—		—		—		3,207		—		2,929		2,929		—		7,771		237
Home equity line of credit	732		1,444		—		655		—		581		1,374		—		632		1
Residential land	9,141		11,535		—		7,833		97		7,691		10,624		—		21,589		1,185
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	4,573		8,175		—		4,220		—		4,265		6,994		—		24,605		986
Consumer loans	21		21		—		21		—		21		21		—		23		—
	29,282		41,403		—		30,692		231		30,120		42,189		—		71,308		2,703
With an allowance recorded
Real estate loans:
Residential 1-4 family	5,442		5,442		454		5,008		101		4,803		4,803		384		4,204		250
Commercial real estate	10,662		10,739		3,169		6,100		—		3,821		3,840		535		1,295		—
Home equity line of credit	—		—		—		—		—		—		—		—		26		—
Residential land	7,013		7,140		1,943		8,886		113		9,984		10,364		3,221		7,428		575
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	14,729		15,775		2,285		15,221		5		16,033		16,912		2,659		8,429		23
Consumer loans	—		—		—		—		—		—		—		—		—		—
	37,846		39,096		7,851		35,215		219		34,641		35,919		6,799		21,382		848
Total
Real estate loans:
Residential 1-4 family	20,257		25,670		454		19,764		235		19,436		25,050		384		20,892		544
Commercial real estate	10,662		10,739		3,169		9,307		—		6,750		6,769		535		9,066		237
Home equity line of credit	732		1,444		—		655		—		581		1,374		—		658		1
Residential land	16,154		18,675		1,943		16,719		210		17,675		20,988		3,221		29,017		1,760
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	19,302		23,950		2,285		19,441		5		20,298		23,906		2,659		33,034		1,009
Consumer loans	21		21		—		21		—		21		21		—		23		—
	$	67,128	$	80,499	$	7,851	$	65,907	$	450	$	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 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 March 31, 2013					Three months ended March 31, 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	$	1,122	$	1,063	7	$	1,413	$	1,410
Commercial real estate	—	—		—		—	—		—
Home equity line of credit	4	462		215		—	—		—
Residential land	3	924		868		7	1,734		1,441
Commercial loans	—	—		—		6	160		160
Consumer loans	—	—		—		—	—		—
	11	$	2,508	$	2,146	20	$	3,307	$	3,011

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 March 31, 2013			Three months ended March 31, 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	—	—		4	879
Consumer loans	—	—		—	—
	—	$	—	4	$	879

For 2012, the four commercial loans that subsequently defaulted were modified by extending the maturity date and deferring principal payments for a short period of time. There are no commitments to lend additional funds to borrowers whose loan terms have been impaired or modified in TDRs as of March 31, 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.