4 · Bank subsidiary (HEI only)

Selected financial information

American Savings Bank, F.S.B.

Statements of Income Data



Years ended December 31	2013		2012		2011
(in thousands)
Interest and dividend income
Interest and fees on loans	$	172,969	$	176,057	$	184,485
Interest and dividends on investment and mortgage-related securities	13,095		13,822		14,568
Total interest and dividend income	186,064		189,879		199,053
Interest expense
Interest on deposit liabilities	5,092		6,423		8,983
Interest on other borrowings	4,985		4,869		5,486
Total interest expense	10,077		11,292		14,469
Net interest income	175,987		178,587		184,584
Provision for loan losses	1,507		12,883		15,009
Net interest income after provision for loan losses	174,480		165,704		169,575
Noninterest income
Fees from other financial services	27,099		31,361		28,881
Fee income on deposit liabilities	18,363		17,775		18,026
Fee income on other financial products	8,405		6,577		6,704
Mortgage banking income	8,309		14,628		5,028
Gains on sale of securities	1,226		134		371
Other income, net	8,681		5,185		6,344
Total noninterest income	72,083		75,660		65,354
Noninterest expense
Compensation and employee benefits	82,910		75,979		71,137
Occupancy	16,747		17,179		17,154
Data processing	10,952		10,098		8,155
Services	9,015		9,866		7,396
Equipment	7,295		7,105		6,903
Office supplies, printing and postage	4,233		3,870		3,934
Marketing	3,373		3,260		3,001
Communication	1,864		1,809		1,764
Other expense	23,115		23,177		23,949
Total noninterest expense	159,504		152,343		143,393
Income before income taxes	87,059		89,021		91,536
Income taxes	29,525		30,384		31,693
Net income	$	57,534	$	58,637	$	59,843

Statements of Comprehensive Income



Years ended December 31	2013			2012			2011
(in thousands)
Net income	$	57,534		$	58,637		$	59,843
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 $9,037, ($631) and ($4,343), for 2013, 2012 and 2011, respectively	(13,686		)	956			6,578
Less: reclassification adjustment for net realized gains included in net income, net of taxes of $488, $53 and $148 for 2013, 2012 and 2011, respectively	(738		)	(81		)	(224		)
Retirement benefit plans:
Net gains (losses) arising during the period, net of (taxes) benefits of ($10,450), $5,240 and $6,577 for 2013, 2012 and 2011, respectively	15,826			(7,936		)	(9,960		)
Less: amortization of transition obligation, prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $1,187, $684 and $346 for 2013, 2012 and 2011, respectively	1,797			1,036			523
Other comprehensive income (loss), net of taxes	3,199			(6,025		)	(3,083		)
Comprehensive income	$	60,733		$	52,612		$	56,760

Balance Sheet Data



December 31				2013						2012
(in thousands)
Assets
Cash and cash equivalents				$	156,603					$	184,430
Available-for-sale investment and mortgage-related securities				529,007						671,358
Investment in stock of Federal Home Loan Bank of Seattle				92,546						96,022
Loans receivable held for investment				4,150,229						3,779,218
Allowance for loan losses				(40,116		)				(41,985		)
Loans receivable held for investment, net				4,110,113						3,737,233
Loans held for sale, at lower of cost or fair value				5,302						26,005
Other				268,063						244,435
Goodwill				82,190						82,190
Total assets				$	5,243,824					$	5,041,673
Liabilities and shareholder’s equity
Deposit liabilities–noninterest-bearing				$	1,214,418					$	1,164,308
Deposit liabilities–interest-bearing				3,158,059						3,065,608
Other borrowings				244,514						195,926
Other				105,679						117,752
Total liabilities				4,722,670						4,543,594
Commitments and contingencies (see “Litigation” below)
Common stock				336,054						333,712
Retained earnings				197,297						179,763
Accumulated other comprehensive loss, net of tax benefits
Net unrealized gains (losses) on securities	$	(3,663	)				$	10,761
Retirement benefit plans	(8,534		)	(12,197		)	(26,157		)	(15,396		)
Total shareholder’s equity				521,154						498,079
Total liabilities and shareholder’s equity				$	5,243,824					$	5,041,673
Other assets
Bank-owned life insurance				$	129,963					$	125,726
Premises and equipment, net				67,766						62,458
Prepaid expenses				3,616						13,199
Accrued interest receivable				13,133						13,228
Mortgage-servicing rights				11,687						10,818
Real estate acquired in settlement of loans, net				1,205						6,050
Other				40,693						12,956
				$	268,063					$	244,435
Other liabilities
Accrued expenses				$	19,989					$	17,103
Federal and state income taxes payable				37,807						35,408
Cashier’s checks				21,110						23,478
Advance payments by borrowers				9,647						9,685
Other				17,126						32,078
				$	105,679					$	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.

Investment and mortgage-related securities. ASB owns investment securities (federal agency obligations) and mortgage-related securities issued by the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and municipal bonds.

As of December 31, 2013, ASB’s investment portfolio distribution was 70% mortgage-related securities issued by FNMA, FHLMC or GNMA, 15% federal agency obligations and 15% municipal bonds. These investment and mortgage-related securities are widely traded in the market and have observable transactions that allow them to be readily priced.

Prices for investments and mortgage-related securities are provided by an independent third party pricing service and are based on observable inputs, including historical trading levels or sector yields, using market-based valuation techniques. The third party pricing service uses applications, models and pricing matrices that correlate security prices to benchmark securities which are adjusted for various inputs. Inputs include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark security bids and offers, TBA prices, monthly payment information, and reference data including market research. The pricing service may prioritize inputs differently on any given day for any security, and not all inputs are available for use in the evaluation process on any given day or for each security. The pricing vendor corroborates its findings on an on-going basis by monitoring market activity and events.

Third party pricing services provide security prices in good faith using rigorous methodologies; however, they do not warrant or guarantee the adequacy or accuracy of their information. Therefore, ASB utilizes a separate third party pricing vendor to corroborate security pricing of the first pricing vendor. If the pricing differential between the two pricing sources exceeds an established threshold, a pricing inquiry will be sent to both vendors or to an independent broker to determine a price that can be supported based on observable inputs found in the market. Such challenges to pricing are required infrequently and are generally resolved using additional security-specific information that was not available to a specific vendor.



			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
December 31, 2013
Available-for-sale
Federal agency obligations	$	83,193	$	174	$	(2,394	)	$	80,973	$	70,799	$	(2.394	)	$	—	$	—
Mortgage-related securities- FNMA, FHLMC and GNMA	374,993		4,911		(10,460		)	369,444		228,543		(8,819		)	19,655		(1,641		)
Municipal bonds	76,904		1,826		(140		)	78,590		14,478		(140		)	—		—
	$	535,090	$	6,911	$	(12,994	)	$	529,007	$	313,820	$	(11,353	)	$	19,655	$	(1,641	)
December 31, 2012
Available-for-sale
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	)	$	—	$	—

Federal agency obligations have contractual terms to maturity. Mortgage-related securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities will differ from contractual maturities because borrowers have the right to prepay the underlying mortgages (see contractual maturities table below).

The contractual maturities of available-for-sale securities were as follows:



	Amortized		Fair
(in thousands)	Cost		value
Due in one year or less	$	—	$	—
Due after one year through five years	42,920		43,137
Due after five years through ten years	95,860		96,751
Due after ten years	21,317		19,675
	160,097		159,563
Mortgage-related securities-FNMA,FHLMC and GNMA	374,993		369,444
Total available-for-sale securities	$	535,090	$	529,007

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.

In 2013, 2012 and 2011, proceeds from sales of available-for-sale mortgage-related securities were nil, $3.5 million and $30.7 million, resulting in gross realized gains of nil, $0.1 million and $0.4 million, respectively, and there were no gross realized losses. In 2013, proceeds from the sale of federal agency obligations were $71.4 million resulting in gross realized gains of $1.2 million and no gross realized losses. There were no federal agency obligation sales in 2012 and 2011. In 2011, proceeds from the sale of municipal bonds were $2.1 million resulting in gross realized gains of $5,000 and no gross realized losses. There were no sales of municipal bonds in 2013 and 2012.

ASB pledged mortgage-related securities and federal agency obligations with a market value of approximately $87.1 million and $98.0 million as of December 31, 2013 and 2012, respectively, as collateral for public funds deposits, automated clearinghouse transactions with Bank of Hawaii, and deposits in ASB’s bankruptcy account with the Federal Reserve Bank of San Francisco. As of December 31, 2013 and 2012, mortgage-related securities and federal agency obligations with a carrying value of $187.1 million and $189.3 million, respectively, were pledged as collateral for securities sold under agreements to repurchase.

FHLB of Seattle stock. As of December 31, 2013 and 2012, ASB’s investment in stock of the FHLB of Seattle was carried at cost because it can only be redeemed at par and it is a required investment based on measurements of ASB’s capital, assets and/or borrowing levels. Periodically and as conditions warrant, ASB reviews its investment in the stock of the FHLB of Seattle for impairment. ASB evaluated its investment in FHLB stock for OTTI as of December 31, 2013, consistent with its accounting policy. ASB did not recognize an OTTI loss for 2013 based on its evaluation of the underlying investment, including:


•	the net income and growth in retained earnings recorded by the FHLB of Seattle in the first nine months of 2013;


•	compliance by the FHLB of Seattle with all of its regulatory capital requirements and being classified “adequately capitalized” by the Federal Housing Finance Agency (Finance Agency);


•	being allowed by the Finance Agency to repurchase excess stock;


•	commitments by the FHLB of Seattle to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB of Seattle;


•	the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB of Seattle;


•	the liquidity position of the FHLB of Seattle; and


•	ASB’s intent and assessment of whether it will more likely than not be required to sell the FHLB stock before recovery of its par value.

Deterioration in the FHLB of Seattle’s financial position may result in future impairment losses.

Other-than-temporary impaired securities. All securities are reviewed for impairment in accordance with accounting standards for OTTI recognition. Under these standards ASB’s intent to sell the security, the probability of more-likely-than-not being forced to sell the position prior to recovery of its cost basis and the probability of more-likely-than-not recovering the amortized cost of the position was determined. If ASB’s intent is to hold positions determined to be other-than-temporarily impaired, credit losses, which are recognized in earnings, are quantified using the position’s pre-impairment discount rate and the net present value of cash flows expected to be collected from the security. Non-credit related impairments are reflected in other comprehensive income. ASB did not recognize OTTI for 2013, 2012 or 2011.

Loans receivable.



December 31	2013			2012
(in thousands)
Real estate loans:
Residential 1-4 family	$	2,006,007		$	1,866,450
Commercial real estate	440,443			375,677
Home equity line of credit	739,331			630,175
Residential land	16,176			25,815
Commercial construction	52,112			43,988
Residential construction	12,774			6,171
Total real estate loans	3,266,843			2,948,276
Commercial loans	783,388			721,349
Consumer loans	108,722			121,231
Total loans	4,158,953			3,790,856
Deferred loan fees, net and unamortized discounts	(8,724		)	(11,638		)
Allowance for loan losses	(40,116		)	(41,985		)
Total loans, net	$	4,110,113		$	3,737,233

As of December 31, 2013 and 2012, ASB’s commitments to originate loans approximated $163.7 million and $97.9 million, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitments. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. ASB minimizes its exposure to loss under these commitments by requiring that customers meet certain conditions prior to disbursing funds. The amount of collateral, if any, is based on a credit evaluation of the borrower and may include residential real estate, accounts receivable, inventory and property, plant and equipment.

As of December 31, 2013 and 2012, standby, commercial and banker’s acceptance letters of credit totaled $15.7 million and $10.5 million, respectively. Letters of credit are conditional commitments issued by ASB to guarantee payment and performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. ASB holds collateral supporting those commitments for which collateral is deemed necessary. As of December 31, 2013 and 2012, undrawn consumer lines of credit, including credit cards, totaled $1.1 billion and $1.0 billion, respectively, and undrawn commercial loans including lines of credit totaled $396.4 million and $376.2 million, respectively.

ASB services real estate loans for investors ($1.4 billion, $1.3 billion and $1.0 billion as of December 31, 2013, 2012 and 2011, respectively), which are not included in the accompanying consolidated balance sheet data. ASB reports fees earned for servicing such loans as income when the related mortgage loan payments are collected and charges loan servicing costs to expense as incurred.

As of December 31, 2013 and 2012, ASB had pledged loans with an amortized cost of approximately $1.7 billion and $1.0 billion, respectively, as collateral to secure advances from the FHLB of Seattle.

As of December 31, 2013 and 2012, the aggregate amount of loans to directors and executive officers of ASB and its affiliates and any related interests (as defined in Federal Reserve Board (FRB) Regulation O) of such individuals, was $45.8 million and $70.9 million, respectively. The $25.1 million decrease in such loans in 2013 was attributed to new commitments and loans of $0.5 million to new and existing directors and executive officers, offset by closed lines of credits and repayments of $25.6 million. As of December 31, 2013 and 2012, $40.5 million and $65.9 million of the loan balances, respectively, were to related interests of individuals who are directors of ASB. All such loans were made at ASB’s normal credit terms except that residential real estate loans and consumer loans to directors and executive officers of ASB were made at preferred employee interest rates. Management believes these loans do not represent more than a normal risk of collection.

Allowance for loan losses. As discussed in Note 1, 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.

Segmentation. ASB segments its loan portfolio by three levels. In the first level, the loan portfolio is separated into homogeneous and non-homogeneous loan portfolios. Residential, consumer and credit scored business loans are considered homogeneous loans. These are loans that are typically underwritten based on common, uniform standards, and are generally classified as to the level of loss exposure based on delinquency status. Commercial loans and commercial real estate (CRE) loans are defined as non-homogeneous loans and ASB utilitizes a uniform ten–point risk rating system for evaluating the credit quality of the loans. These are loans where the underwriting criteria are not uniform and the risk rating classification is based upon considerations broader than just delinquency performance.

In the second level of segmentation, the loan portfolios are further stratified into individual products with common risk characteristics. For residential loans, the loan portfolio is segmented by loan categories and geographic location first within the State of Hawaii (Oahu vs. the neighbor islands) and second collectively outside of the state. The consumer loan portfolio is segmented into various secured and unsecured loan product types. The credit scored business loan portfolio is segmented by loans under lines of credit or term loans. For commercial loans, the portfolio is differentiated by separating Commercial & Industrial (C&I) loans, C&I National Lending loans and C&I loans guaranteed by Small Business Administration programs while CRE loans are grouped by owner-occupied loans, investor loans, construction loans, and vacant land loans.

For the third and last level of segmentation, loans are categorized into the regulatory asset quality classifications – Pass, Substandard, and Loss for homogeneous loans based primarily on delinquency status, and Pass (Risk Rating 1 to 6), Special Mention (Risk Rating 7), Substandard (Risk Rating 8), Doubtful (Risk Rating 9), and Loss (Risk Rating 10) for non-homogeneous loans based on credit quality.

Specific allocation.

Residential real estate. All residential real estate loans that are 180 days delinquent, or where ASB has initiated foreclosure action or have been modified in a TDR are reviewed for impairment based on the fair value of the collateral, net of costs to sell. Generally, impairment amounts derived under this method are immediately charged off.

Consumer. The consumer loan portfolio specific allocation is determined based on delinquency; unsecured consumer loans are generally charged-off based on delinquency status varying from 120 to 180 days.

Commercial and CRE. A specific allocation is determined for impaired commercial and CRE loans. See further discussion in Note 1.

Pooled allocation.

Residential real estate and consumer. Pooled allocation for non-impaired residential real estate and consumer loans are determined using a historical loss rate analysis and qualitative factor considerations.

Commercial and CRE. Pooled allocation for pass, special mention, substandard, and doubtful grade commercial and CRE loans that share common risk characteristics and properties are determined using a historical loss rate analysis and qualitative factor considerations.

Qualitative adjustments. Qualitative adjustments to historical loss rates or other static sources may be necessary since these rates may not fully consider all losses inherent in the current portfolio (for example, risks in growing and/or unseasoned portfolios). To estimate the level of adjustments, management considers factors, including levels and trends in problem loans, the nature, volume and term of the loan portfolios, changes in lending policies and practices, changes in management and staffing, economic conditions, industry trends, and credit concentrations.

Unallocated allowance. ASB’s allowance incorporates an unallocated portion to cover risk factors and events that may have occurred as of the evaluation date that have not been reflected in the risk measures due to inherent limitations to the precision of the estimation process. These risk factors, in addition to micro- and macro- economic factors, past, current and anticipated events based on facts at the balance sheet date, and realistic courses of action that management expects to take, are assessed in determining the level of unallocated allowance.

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		Commer- cial loans			Consumer loans			Unallo- cated			Total
December 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	(1,162		)	—		(782		)	(485		)	—		—		(3,056		)	(2,717		)	—			(8,202		)
Recoveries	1,881			—		358			868			—		—		1,089			630			—			4,826
Provision	(1,253		)	2,094		1,160			(2,841		)	374		10		1,839			435			(311		)	1,507
Ending balance	$	5,534		$	5,059	$	5,229		$	1,817		$	2,397	$	19	$	15,803		$	2,367		$	1,891		$	40,116
Ending balance: individually evaluated for impairment	$	642		$	1,118	$	—		$	1,332		$	—	$	—	$	2,246		$	—		$	—		$	5,338
Ending balance: collectively evaluated for impairment	$	4,892		$	3,941	$	5,229		$	485		$	2,397	$	19	$	13,557		$	2,367		$	1,891		$	34,778
Financing Receivables:
Ending balance	$	2,006,007		$	440,443	$	739,331		$	16,176		$	52,112	$	12,774	$	783,388		$	108,722		$	—		$	4,158,953
Ending balance: individually evaluated for impairment	$	20,317		$	4,604	$	1,179		$	10,577		$	—	$	—	$	21,225		$	19		$	—		$	57,921
Ending balance: collectively evaluated for impairment	$	1,985,690		$	435,839	$	738,152		$	5,599		$	52,112	$	12,774	$	762,163		$	108,703		$	—		$	4,101,032
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

Changes in the allowance for loan losses were as follows:



(dollars in thousands)	2013			2012			2011
Allowance for loan losses, January 1	$	41,985		$	37,906		$	40,646
Provision for loan losses	1,507			12,883			15,009
Charge-offs, net of recoveries
Real estate loans	(678		)	3,828			10,733
Other loans	4,054			4,976			7,016
Net charge-offs	3,376			8,804			17,749
Allowance for loan losses, December 31	$	40,116		$	41,985		$	37,906
Ratio of net charge-offs to average loans outstanding	0.09		%	0.24		%	0.49		%

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:



December 31	2013						2012
(in thousands)	Commercial real estate		Commercial construction		Commercial		Commercial real estate		Commercial construction		Commercial
Grade:
Pass	$	375,217	$	52,112	$	703,053	$	314,182	$	39,063	$	638,854
Special mention	33,436		—		17,634		25,437		4,925		24,511
Substandard	28,020		—		59,663		29,308		—		53,538
Doubtful	3,770		—		3,038		6,750		—		4,446
Loss	—		—		—		—		—		—
Total	$	440,443	$	52,112	$	783,388	$	375,677	$	43,988	$	721,349

The increase in commercial real estate and commercial construction loans graded special mention, substandard or doubtful was due to the downgrade of a small number of specific large commercial credits that are being closely monitored and managed. This risk migration reflects both adverse financial trends affecting those borrowers and improved risk rating accuracy of loans across all portfolios.

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
December 31, 2013
Real estate loans:
Residential 1-4 family	$	2,728	$	622	$	15,411	$	18,761	$	1,987,246	$	2,006,007	$	—
Commercial real estate	—		—		3,770		3,770		436,673		440,443		—
Home equity line of credit	765		312		960		2,037		737,294		739,331		—
Residential land	184		48		2,756		2,988		13,188		16,176		—
Commercial construction	—		—		—		—		52,112		52,112		—
Residential construction	—		—		—		—		12,774		12,774		—
Commercial loans	1,668		612		3,026		5,306		778,082		783,388		—
Consumer loans	436		158		304		898		107,824		108,722		—
Total loans	$	5,781	$	1,752	$	26,227	$	33,760	$	4,125,193	$	4,158,953	$	—
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:



December 31	2013				2012
	Nonaccrual loans		Accruing loans 90 days or more past due		Nonaccrual loans		Accruing loans 90 days or more past due
(in thousands)
Real estate loans:
Residential 1–4 family	$	19,679	$	—	$	26,721	$	—
Commercial real estate	4,439		—		6,750		—
Home equity line of credit	2,060		—		2,349		—
Residential land	3,161		—		8,561		—
Commercial construction	—		—		—		—
Residential construction	—		—		—		—
Commercial loans	18,781		—		20,222		131
Consumer loans	401		—		284		242
Total	$	48,521	$	—	$	64,887	$	373

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



December 31	2013										2012
(in thousands)	Recorded investment		Unpaid principal balance		Related Allow- ance		Average recorded investment		Interest income recognized		Recorded investment		Unpaid principal balance		Related allow- ance		Average recorded investment		Interest income recognized
With no related allowance recorded
Real estate loans:
Residential 1-4 family	$	9,708	$	12,144	$	—	$	11,674	$	386	$	14,633	$	20,247	$	—	$	16,688	$	294
Commercial real estate	—		—		—		802		—		2,929		2,929		—		7,771		237
Home equity line of credit	672		1,227		—		623		2		581		1,374		—		632		1
Residential land	2,622		3,612		—		6,675		482		7,691		10,624		—		21,589		1,185
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	3,466		4,715		—		4,837		12		4,265		6,994		—		24,605		986
Consumer loans	19		19		—		20		—		21		21		—		23		—
	16,487		21,717		—		24,631		882		30,120		42,189		—		71,308		2,703
With an allowance recorded
Real estate loans:
Residential 1-4 family	6,216		6,236		642		6,455		372		4,803		4,803		384		4,204		250
Commercial real estate	4,604		4,686		1,118		5,745		152		3,821		3,840		535		1,295		—
Home equity line of credit	—		—		—		—		—		—		—		—		26		—
Residential land	7,452		7,623		1,332		6,844		409		9,984		10,364		3,221		7,428		575
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	17,759		20,640		2,246		15,635		139		16,033		16,912		2,659		8,429		23
Consumer loans	—		—		—		—		—		—		—		—		—		—
	36,031		39,185		5,338		34,679		1,072		34,641		35,919		6,799		21,382		848
Total
Real estate loans:
Residential 1-4 family	15,924		18,380		642		18,129		758		19,436		25,050		384		20,892		544
Commercial real estate	4,604		4,686		1,118		6,547		152		6,750		6,769		535		9,066		237
Home equity line of credit	672		1,227		—		623		2		581		1,374		—		658		1
Residential land	10,074		11,235		1,332		13,519		891		17,675		20,988		3,221		29,017		1,760
Commercial construction	—		—		—		—		—		—		—		—		—		—
Residential construction	—		—		—		—		—		—		—		—		—		—
Commercial loans	21,225		25,355		2,246		20,472		151		20,298		23,906		2,659		33,034		1,009
Consumer loans	19		19		—		20		—		21		21		—		23		—
	$	52,518	$	60,902	$	5,338	$	59,310	$	1,954	$	64,761	$	78,108	$	6,799	$	92,690	$	3,551

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 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 generally 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:



	2013					2012					2011
	Number	Outstanding recorded investment				Number	Outstanding recorded investment				Number	Outstanding recorded investment
(dollars in thousands)	of contracts	Pre-modification		Post-modification		of contracts	Pre-modification		Post-modification		of contracts	Pre-modification		Post-modification
Troubled debt restructurings
Real estate loans:
Residential 1-4 family	34	$	8,876	$	8,957	35	$	8,805	$	8,232	42	$	11,233	$	9,853
Commercial real estate	—	—		—		—	—		—		—	—		—
Home equity line of credit	5	637		390		—	—		—		1	93		93
Residential land	20	6,215		6,206		26	6,149		5,484		46	9,965		9,946
Commercial loans	7	4,646		4,646		19	2,583		2,583		56	35,349		35,349
Consumer loans	—	—		—		—	—		—		1	25		25
	66	$	20,374	$	20,199	80	$	17,537	$	16,299	146	$	56,665	$	55,266

Loans modified in TDRs that experienced a payment default of 90 days or more in 2013, 2012 and 2011, and for which the payment default occurred within one year of the modification, were as follows:



	2013			2012			2011
(dollars in thousands)	Number of contracts	Recorded investment		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		—	—		—	—
Residential land	—	—		—	—		1	528
Commercial loans	2	660		1	482		4	799
Consumer loans	—	—		—	—		—	—
	3	$	727	1	$	482	5	$	1,327

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 at December 31, 2013.

Deposit liabilities.



December 31	2013				2012
(dollars in thousands)	Weighted-average stated rate		Amount		Weighted-average stated rate		Amount
Savings	0.06	%	$	1,826,907	0.06	%	$	1,758,547
Other checking
Interest-bearing	0.02		721,700		0.02		641,970
Noninterest-bearing	—		643,628		—		621,806
Commercial checking	—		570,790		—		542,502
Money market	0.13		182,546		0.13		191,398
Term certificates	0.80		426,906		0.86		473,693
	0.11	%	$	4,372,477	0.13	%	$	4,229,916

As of December 31, 2013 and 2012, certificate accounts of $100,000 or more totaled $102 million and $106 million, respectively.

The approximate amounts of term certificates outstanding as of December 31, 2013 with scheduled maturities for 2014 through 2018 were $244 million in 2014, $94 million in 2015, $46 million in 2016, $22 million in 2017, $16 million in 2018, and $5 million thereafter.

Interest expense on deposit liabilities by type of deposit was as follows:



(in thousands)	2013		2012		2011
Term certificates	$	3,702	$	4,865	$	6,393
Savings	1,052		1,128		1,756
Money market	232		319		650
Interest-bearing checking	106		111		184
	$	5,092	$	6,423	$	8,983

Other borrowings.

Securities sold under agreements to repurchase. 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 a 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
December 31, 2013	$	145	$	—	$	145
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
December 31, 2013
Financial institution	$	51	$	51	$	—	$	—
Commercial account holders	94		94		—		—
Total	$	145	$	145	$	—	$	—
December 31, 2012
Financial institution	$	50	$	50	$	—	$	—
Commercial account holders	96		96		—		—
Total	$	146	$	146	$	—	$	—



December 31, 2013
Maturity	Repurchase liability			Weighted-average interest rate		Collateralized by mortgage-related securities and federal agency obligations– fair value plus accrued interest
(dollars in thousands)
Overnight	$	94,224		0.15	%	$	127,293
1 to 29 days	—			—		—
30 to 90 days	—			—		—
Over 90 days	50,290		¹	4.75		60,233
	$	144,514		1.75	%	$	187,526


¹	Callable quarterly at par until maturity in 2016.

The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts and segregated safekeeping accounts at the FHLB of Seattle. 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 consolidated balance sheets. The securities underlying the agreements to repurchase continue to be reflected in ASB’s asset accounts.

Information concerning securities sold under agreements to repurchase, which provided for the repurchase of identical securities, was as follows:



(dollars in millions)	2013			2012			2011
Amount outstanding as of December 31	$	145		$	146		$	183
Average amount outstanding during the year	$	147		$	173		$	183
Maximum amount outstanding as of any month-end	$	151		$	189		$	186
Weighted-average interest rate as of December 31	1.75		%	1.74		%	1.56		%
Weighted-average interest rate during the year	1.74		%	1.56		%	1.61		%
Weighted-average remaining days to maturity as of December 31	367			489			490

Advances from Federal Home Loan Bank.



December 31, 2013	Weighted-average stated rate		Amount
(dollars in thousands)
Due in
2014	—	%	$	—
2015	—		—
2016	—		—
2017	4.28		50,000		¹
2018	1.95		50,000
Thereafter	—		—
	3.12	%	$	100,000


¹	Callable quarterly at par until maturity in 2017.

ASB and the FHLB of Seattle are parties to an Advances, Security and Deposit Agreement (Advances Agreement), which applies to currently outstanding and future advances, and governs the terms and conditions under which ASB borrows and the FHLB of Seattle makes loans or advances from time to time. Under the Advances Agreement, ASB agrees to abide by the FHLB of Seattle’s credit policies, and makes certain warranties and representations to the FHLB of Seattle. Upon the occurrence of and during the continuation of an “Event of Default” (which term includes any event of nonpayment of interest or principal of any advance when due or failure to perform any promise or obligation under the Advances Agreement or other credit arrangements between the parties), the FHLB of Seattle may, at its option, declare all indebtedness and accrued interest thereon, including any prepayment fees or charges, to be immediately due and payable. Advances from the FHLB of Seattle are collateralized by loans and stock in the FHLB of Seattle. ASB is required to obtain and hold a specific number of shares of capital stock of the FHLB of Seattle. ASB was in compliance with all Advances Agreement requirements as of December 31, 2013 and 2012.

Common stock equity. In 1988, HEI agreed with the OTS predecessor regulatory agency at the time, to contribute additional capital to ASB up to a maximum aggregate amount of approximately $65.1 million (Capital Maintenance Agreement). As of December 31, 2013, as a result of capital contributions in prior years, HEI’s maximum obligation to contribute additional capital under the Capital Maintenance Agreement has been reduced to approximately $28.3 million. As of December 31, 2013, ASB was in compliance with the minimum capital requirements under OCC regulations.

In 2013, ASB paid cash dividends of $40 million to HEI, compared to cash dividends of $45 million in 2012. The FRB and OCC approved the dividends.

Related-party transactions. HEI charged ASB $2.3 million, $1.9 million and $1.4 million for general management and administrative services in 2013, 2012 and 2011, respectively. The amounts charged by HEI for services performed by HEI employees to its subsidiaries are allocated primarily on the basis of time expended in providing such services.

Derivative Financial Instruments. ASB enters into interest rate lock commitments with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed securities to investors to hedge against the inherent interest rate and pricing risk associated with selling loans.

ASB enters into interest rate lock commitments (IRLCs) for residential mortgage loans, which commit ASB to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ASB to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

ASB enters into forward commitments to hedge the interest rate risk for rate locked mortgage applications in process and closed mortgage loans held for sale. These commitments are primarily forward sales of to-be-announced mortgage backed securities. Generally, when mortgage loans are closed, the forward commitment is liquidated and replaced with a mandatory delivery forward sale of the mortgage to a secondary market investor. In some cases, a best-efforts forward sale agreement is utilized as the forward commitment. These commitments are free-standing derivatives which are carried at fair value with changes recorded in mortgage banking income.

Changes in the fair value of IRLCs and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

The notional amount and fair value of ASB’s derivative financial instruments as of December 31, 2013 and 2012 were as follows:



	2013				2012
(dollars in thousands)	Notional amount		Fair value		Notional amount		Fair value
Interest rate lock commitments	$	25,070	$	464	$	60,428	$	—
Forward commitments	26,018		139		86,563		—

The following table presents ASB’s derivative financial instruments, their fair values, and balance sheet location as of December 31, 2013 and 2012:



Derivative Financial Instruments Not Designated
as Hedging Instruments ¹	2013				2012
(dollars in thousands)	Asset derivative		Liability derivative		Asset derivative		Liability derivative
Interest rate lock commitments	$	488	$	24	$	—	$	—
Forward commitments	141		2		—		—
	$	629	$	26	$	—	$	—

¹ Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the balance sheets.

The following table presents ASB’s derivative financial instruments and the amount and location of the net gains or losses recognized in the statements of income for the years ended December 31, 2013, 2012 and 2011.



Derivative Financial Instruments Not Designated	Location of net gains
as Hedging Instruments	(losses) recognized in
(dollars in thousands)	the Statement of Income	2013		2012		2011
Interest rate lock commitments	Mortgage banking income	$	464	$	—	$	—
Forward commitments	Mortgage banking income	139		—		—
		$	603	$	—	$	—

There were no significant gains or losses on derivatives in 2012 or 2011.

Guarantees. In October 2007, ASB, as a member financial institution of Visa U.S.A. Inc., received restricted shares of Visa, Inc. (Visa) as a result of a restructuring of Visa U.S.A. Inc. in preparation for an initial public offering by Visa. As a part of the restructuring, ASB entered into a judgment and loss sharing agreement with Visa in order to apportion financial responsibilities arising from any potential adverse judgment or negotiated settlements related to indemnified litigation involving Visa. In November 2012, a federal judge granted preliminary approval to a proposed settlement between merchants and Visa over credit card fees and in December 2013, a federal judge granted final approval to the settlement. Some merchants and trade organizations have filed a notice of appeal shortly after the approval was issued. As of December 31, 2013, ASB had accrued $1.1 million related to the agreement. Because the extent of ASB’s obligations under this agreement depends entirely upon the occurrence of future events, ASB’s maximum potential future liability under this agreement is not determinable.

Federal Deposit Insurance Corporation restoration plan. In November 2009, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved a restoration plan that required banks to prepay, by December 30, 2009, their estimated quarterly, risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. For the fourth quarter of 2009 and all of 2010, the prepaid assessment rate was assessed according to a risk-based premium schedule adopted earlier in 2009. The prepaid assessment rate for 2011 and 2012 was the current assessment rate plus 3 basis points. The prepaid assessment was recorded as a prepaid asset as of December 30, 2009, and each quarter thereafter ASB recorded a charge to earnings for its regular quarterly assessment and offset the prepaid expense until the asset was exhausted. ASB’s prepaid assessment was approximately $24 million. For the year ended December 31, 2010, ASB’s assessment rate was 14 basis points of deposits, or $5.7 million.

In February 2011, the FDIC finalized rules to change its assessment base from total domestic deposits to average total assets minus average tangible equity, as required in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Assessment rates were reduced to a range of 2.5 to 9 basis points on the new assessment base for financial institutions in the lowest risk category. Financial institutions in the highest risk category have assessment rates of 30 to 45 basis points. The new rate schedule was effective April 1, 2011. For the years ended December 31, 2013 and 2012, ASB’s FDIC insurance assessments were $2.9 million and $3.0 million, respectively. In June 2013, the FDIC returned the remaining amount of the prepaid assessment. The cash received was included in the change in other assets and liabilities on HEI’s consolidated statements of cash flows.

The FDIC may impose additional special assessments in the future if it is deemed necessary to ensure the Deposit Insurance Fund ratio does not decline to a level that is close to zero or that could otherwise undermine public confidence in federal deposit insurance.

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. ASB filed a motion to dismiss the lawsuit on the basis that as a bank chartered under federal law, ASB believes its business practices are governed by federal regulations established for federal savings banks and not by state law. In July 2011, the Circuit Court denied ASB’s motion and ASB appealed that decision. ASB’s appeal is currently pending before the Hawaii Supreme Court. The probable outcome and range of reasonably possible loss remains indeterminable 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.