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Bank segment
 6 Months Ended
Jun. 30, 2017
Bank subsidiary  
Bank segment
Bank segment
Selected financial information
American Savings Bank, F.S.B.
Statements of Income Data (unaudited)
 
 
Three months ended June 30
 
Six months ended June 30
(in thousands)
 
2017
 
2016
 
2017
 
2016
Interest and dividend income
 
 

 
 

 
 

 
 

Interest and fees on loans
 
$
52,317

 
$
49,690

 
$
103,059

 
$
98,127

Interest and dividends on investment securities
 
6,763

 
4,443

 
13,743

 
9,460

Total interest and dividend income
 
59,080

 
54,133

 
116,802

 
107,587

Interest expense
 
 

 
 

 
 

 
 

Interest on deposit liabilities
 
2,311

 
1,691

 
4,414

 
3,283

Interest on other borrowings
 
824

 
1,467

 
1,640

 
2,952

Total interest expense
 
3,135

 
3,158

 
6,054

 
6,235

Net interest income
 
55,945

 
50,975

 
110,748

 
101,352

Provision for loan losses
 
2,834

 
4,753

 
6,741

 
9,519

Net interest income after provision for loan losses
 
53,111

 
46,222

 
104,007

 
91,833

Noninterest income
 
 

 
 

 
 

 
 

Fees from other financial services
 
5,810

 
5,701

 
11,420

 
11,200

Fee income on deposit liabilities
 
5,565

 
5,262

 
10,993

 
10,418

Fee income on other financial products
 
1,971

 
2,207

 
3,837

 
4,412

Bank-owned life insurance
 
1,925

 
1,006

 
2,908

 
2,004

Mortgage banking income
 
587

 
1,554

 
1,376

 
2,749

Gains on sale of investment securities, net
 
—

 
598

 
—

 
598

Other income, net
 
391

 
288

 
849

 
621

Total noninterest income
 
16,249

 
16,616

 
31,383

 
32,002

Noninterest expense
 
 

 
 

 
 

 
 

Compensation and employee benefits
 
24,742

 
21,919

 
47,979

 
44,353

Occupancy
 
4,185

 
4,115

 
8,339

 
8,253

Data processing
 
3,207

 
3,277

 
6,487

 
6,449

Services
 
2,766

 
2,755

 
5,126

 
5,666

Equipment
 
1,771

 
1,771

 
3,519

 
3,434

Office supplies, printing and postage
 
1,527

 
1,583

 
3,062

 
2,948

Marketing
 
839

 
899

 
1,356

 
1,760

FDIC insurance
 
822

 
913

 
1,550

 
1,797

Other expense
 
4,705

 
5,382

 
9,016

 
9,357

Total noninterest expense
 
44,564

 
42,614

 
86,434

 
84,017

Income before income taxes
 
24,796

 
20,224

 
48,956

 
39,818

Income taxes
 
8,063

 
6,939

 
16,410

 
13,860

Net income
 
$
16,733

 
$
13,285

 
$
32,546

 
$
25,958



American Savings Bank, F.S.B.
Statements of Comprehensive Income Data (unaudited)
 
 
Three months ended June 30
 
Six months ended June 30
(in thousands)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
16,733

 
$
13,285

 
$
32,546

 
$
25,958

Other comprehensive income, net of taxes:
 
 

 
 

 
 

 
 

Net unrealized gains on available-for-sale investment securities:
 
 

 
 

 
 

 
 

Net unrealized gains on available-for-sale investment securities arising during the period, net of taxes of $1,334, $1,925, $1,482 and $6,830, respectively
 
2,021

 
2,915

 
2,244

 
10,344

Reclassification adjustment for net realized gains included in net income, net of taxes of nil, $238, nil and $238, respectively
 
—

 
(360
)
 
—

 
(360
)
Retirement benefit plans:
 
 

 
 

 
 

 
 

Adjustment for amortization of prior service credit and net losses recognized during the period in net periodic benefit cost, net of tax benefits of $133, $140, $537 and $277, respectively
 
202

 
211

 
814

 
419

Other comprehensive income, net of taxes
 
2,223

 
2,766

 
3,058

 
10,403

Comprehensive income
 
$
18,956

 
$
16,051

 
$
35,604

 
$
36,361


American Savings Bank, F.S.B.
Balance Sheets Data (unaudited)
(in thousands)
 
June 30, 2017
 
December 31, 2016
Assets
 
 

 
 

 
 

 
 

Cash and due from banks
 
 

 
$
128,609

 
 

 
$
137,083

Interest-bearing deposits
 
 
 
37,049

 
 
 
52,128

Restricted cash
 
 
 
—

 
 
 
1,764

Available-for-sale investment securities, at fair value
 
 

 
1,302,886

 
 

 
1,105,182

Stock in Federal Home Loan Bank, at cost
 
 

 
11,706

 
 

 
11,218

Loans receivable held for investment
 
 

 
4,744,634

 
 

 
4,738,693

Allowance for loan losses
 
 

 
(56,356
)
 
 

 
(55,533
)
Net loans
 
 

 
4,688,278

 
 

 
4,683,160

Loans held for sale, at lower of cost or fair value
 
 

 
5,261

 
 

 
18,817

Other
 
 

 
354,898

 
 

 
329,815

Goodwill
 
 

 
82,190

 
 

 
82,190

Total assets
 
 

 
$
6,610,877

 
 

 
$
6,421,357

 
 
 
 
 
 
 
 
 
Liabilities and shareholder’s equity
 
 

 
 

 
 

 
 

Deposit liabilities—noninterest-bearing
 
 

 
$
1,694,150

 
 

 
$
1,639,051

Deposit liabilities—interest-bearing
 
 

 
4,030,236

 
 

 
3,909,878

Other borrowings
 
 

 
188,130

 
 

 
192,618

Other
 
 

 
101,974

 
 

 
101,635

Total liabilities
 
 

 
6,014,490

 
 

 
5,843,182

Commitments and contingencies
 
 

 


 
 

 


Common stock
 
 

 
1

 
 

 
1

Additional paid in capital
 
 
 
344,062

 
 
 
342,704

Retained earnings
 
 

 
271,739

 
 

 
257,943

Accumulated other comprehensive loss, net of tax benefits
 
 

 
 

 
 

 
 

Net unrealized losses on securities
 
$
(5,687
)
 
 

 
$
(7,931
)
 
 

Retirement benefit plans
 
(13,728
)
 
(19,415
)
 
(14,542
)
 
(22,473
)
Total shareholder’s equity
 
 

 
596,387

 
 

 
578,175

Total liabilities and shareholder’s equity
 
 

 
$
6,610,877

 
 

 
$
6,421,357

 
 
 
 
 
 
 
 
 
Other assets
 
 

 
 

 
 

 
 

Bank-owned life insurance
 
 

 
$
146,122

 
 

 
$
143,197

Premises and equipment, net
 
 

 
108,158

 
 

 
90,570

Prepaid expenses
 
 

 
4,632

 
 

 
3,348

Accrued interest receivable
 
 

 
16,949

 
 

 
16,824

Mortgage-servicing rights
 
 

 
9,181

 
 

 
9,373

Low-income housing equity investments
 
 
 
48,596

 
 
 
47,081

Real estate acquired in settlement of loans, net
 
 

 
1,554

 
 

 
1,189

Other
 
 

 
19,706

 
 

 
18,233

 
 
 

 
$
354,898

 
 

 
$
329,815

Other liabilities
 
 

 
 

 
 

 
 

Accrued expenses
 
 

 
$
34,451

 
 

 
$
36,754

Federal and state income taxes payable
 
 

 
6,336

 
 

 
4,728

Cashier’s checks
 
 

 
24,191

 
 

 
24,156

Advance payments by borrowers
 
 

 
10,334

 
 

 
10,335

Other
 
 

 
26,662

 
 

 
25,662

 
 
 

 
$
101,974

 
 

 
$
101,635

    
 
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 $88 million and $100 million, respectively, as of June 30, 2017 and $93 million and $100 million, respectively, as of December 31, 2016.
Available-for-sale investment securities.  The major components of investment securities were as follows:
 
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair
value
 
Gross unrealized losses
 
 
 
 
 
 
Less than 12 months
 
12 months or longer
(dollars in thousands)
 
 
 
 
 
Number of issues
 
Fair 
value
 
Amount
 
Number of issues
 
Fair 
value
 
Amount
June 30, 2017
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and federal agency obligations
 
$
187,289

 
$
947

 
$
(1,653
)
 
$
186,583

 
16

 
$
104,417

 
$
(1,532
)
 
1

 
$
3,186

 
$
(121
)
Mortgage-related securities- FNMA, FHLMC and GNMA
 
1,109,613

 
2,202

 
(10,939
)
 
1,100,876

 
98

 
759,643

 
(9,658
)
 
13

 
43,296

 
(1,281
)
Mortgage revenue bond
 
15,427

 
—

 
—

 
15,427

 
—

 
—

 
—

 
—

 
—

 
—

 
 
$
1,312,329

 
$
3,149

 
$
(12,592
)
 
$
1,302,886

 
114

 
$
864,060

 
$
(11,190
)
 
14

 
$
46,482

 
$
(1,402
)
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and federal agency obligations
 
$
193,515

 
$
920

 
$
(2,154
)
 
$
192,281

 
18

 
$
123,475

 
$
(2,010
)
 
1

 
$
3,485

 
$
(144
)
Mortgage-related securities- FNMA, FHLMC and GNMA
 
909,408

 
1,742

 
(13,676
)
 
897,474

 
88

 
709,655

 
(12,143
)
 
13

 
47,485

 
(1,533
)
Mortgage revenue bond
 
15,427

 
—

 
—

 
15,427

 
—

 
—

 
—

 
—

 
—

 
—

 
 
$
1,118,350

 
$
2,662

 
$
(15,830
)
 
$
1,105,182

 
106

 
$
833,130

 
$
(14,153
)
 
14

 
$
50,970

 
$
(1,677
)

ASB does not believe that the investment securities that were in an unrealized loss position at June 30, 2017, represent an other-than-temporary impairment (OTTI). Total gross unrealized losses were primarily attributable to rising interest rates relative to when the investment securities were purchased and not due to the credit quality of the investment securities. The contractual cash flows of the U.S. Treasury, federal agency obligations and mortgage-related securities are backed by the full faith and credit guaranty of the United States government or an agency of the government. ASB does not intend to sell the securities before the recovery of its amortized cost basis and there have been no adverse changes in the timing of the contractual cash flows for the securities. ASB did not recognize OTTI for the quarters and six month periods ended June 30, 2017 and 2016.
U.S. Treasury, federal agency obligations, and the mortgage revenue bond 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.
The contractual maturities of available-for-sale investment securities were as follows:
June 30, 2017
 
Amortized cost
 
Fair value
(in thousands)
 
 
 
 
Due in one year or less
 
$
9,992

 
$
9,993

Due after one year through five years
 
77,151

 
77,307

Due after five years through ten years
 
85,724

 
85,258

Due after ten years
 
29,849

 
29,452

 
 
202,716

 
202,010

Mortgage-related securities-FNMA, FHLMC and GNMA
 
1,109,613

 
1,100,876

Total available-for-sale securities
 
$
1,312,329

 
$
1,302,886


Proceeds and gross realized gains from the sale of available-for-sale investment securities were $16.4 million and $0.6 million, respectively, for the three and six months ended June 30, 2016. Gross realized losses recognized during the three and six months ended June 30, 2016 were not material. No available-for-sale investment securities were sold during the three and six month periods ended June 30, 2017.
Loans receivable. The components of loans receivable were summarized as follows:
 
June 30, 2017
 
December 31, 2016
(in thousands)
 

 
 

Real estate:
 

 
 

Residential 1-4 family
$
2,061,549

 
$
2,048,051

Commercial real estate
808,900

 
800,395

Home equity line of credit
883,135

 
863,163

Residential land
16,009

 
18,889

Commercial construction
116,548

 
126,768

Residential construction
10,759

 
16,080

Total real estate
3,896,900

 
3,873,346

Commercial
649,657

 
692,051

Consumer
201,199

 
178,222

Total loans
4,747,756

 
4,743,619

Less: Deferred fees and discounts
(3,122
)
 
(4,926
)
          Allowance for loan losses
(56,356
)
 
(55,533
)
Total loans, net
$
4,688,278

 
$
4,683,160


ASB's policy is to require private mortgage insurance on all real estate loans when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For non-owner occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price at origination. ASB is subject to the risk that the insurance company cannot satisfy the bank's claim on policies.
Allowance for loan losses.  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
 
Commercial loans
 
Consumer loans
 
Unallo-cated
 
Total
Three months ended June 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
2,781

 
$
16,504

 
$
5,417

 
$
1,479

 
$
7,257

 
$
11

 
$
14,902

 
$
7,646

 
$
—

 
$
55,997

Charge-offs
 
—

 
—

 
—

 
(92
)
 
—

 
—

 
(752
)
 
(2,390
)
 
—

 
(3,234
)
Recoveries
 
49

 
—

 
39

 
15

 
—

 
—

 
299

 
357

 
—

 
759

Provision
 
300

 
2,336

 
71

 
(138
)
 
(2,551
)
 
(2
)
 
103

 
2,715

 
—

 
2,834

Ending balance
 
$
3,130

 
$
18,840

 
$
5,527

 
$
1,264

 
$
4,706

 
$
9

 
$
14,552

 
$
8,328

 
$
—

 
$
56,356

Three months ended June 30, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
4,593

 
$
11,806

 
$
7,172

 
$
1,740

 
$
6,164

 
$
12

 
$
16,991

 
$
3,848

 
$
—

 
$
52,326

Charge-offs
 
(15
)
 
—

 
—

 
—

 
—

 
—

 
(962
)
 
(1,528
)
 
—

 
(2,505
)
Recoveries
 
35

 
—

 
16

 
16

 
—

 
—

 
425

 
265

 
—

 
757

Provision
 
(229
)
 
1,755

 
648

 
(67
)
 
829

 
—

 
631

 
1,186

 
—

 
4,753

Ending balance
 
$
4,384

 
$
13,561

 
$
7,836

 
$
1,689

 
$
6,993

 
$
12

 
$
17,085

 
$
3,771

 
$
—

 
$
55,331

Six months ended June 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
2,873

 
$
16,004

 
$
5,039

 
$
1,738

 
$
6,449

 
$
12

 
$
16,618

 
$
6,800

 
$
—

 
$
55,533

Charge-offs
 
(6
)
 
—

 
(14
)
 
(92
)
 
—

 
—

 
(2,262
)
 
(5,200
)
 
—

 
(7,574
)
Recoveries
 
58

 
—

 
130

 
218

 
—

 
—

 
596

 
654

 
—

 
1,656

Provision
 
205

 
2,836

 
372

 
(600
)
 
(1,743
)
 
(3
)
 
(400
)
 
6,074

 
—

 
6,741

Ending balance
 
$
3,130

 
$
18,840

 
$
5,527

 
$
1,264

 
$
4,706

 
$
9

 
$
14,552

 
$
8,328

 
$
—

 
$
56,356

June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
1,332

 
$
73

 
$
275

 
$
480

 
$
—

 
$
—

 
$
939

 
$
30

 
 
 
$
3,129

Ending balance: collectively evaluated for impairment
 
$
1,798

 
$
18,767

 
$
5,252

 
$
784

 
$
4,706

 
$
9

 
$
13,613

 
$
8,298

 
$
—

 
$
53,227

Financing Receivables:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
2,061,549

 
$
808,900

 
$
883,135

 
$
16,009

 
$
116,548

 
$
10,759

 
$
649,657

 
$
201,199

 
 
 
$
4,747,756

Ending balance: individually evaluated for impairment
 
$
19,188

 
$
1,289

 
$
6,684

 
$
2,589

 
$
—

 
$
—

 
$
4,283

 
$
68

 
 
 
$
34,101

Ending balance: collectively evaluated for impairment
 
$
2,042,361

 
$
807,611

 
$
876,451

 
$
13,420

 
$
116,548

 
$
10,759

 
$
645,374

 
$
201,131

 
 
 
$
4,713,655

Six months ended June 30, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
4,186

 
$
11,342

 
$
7,260

 
$
1,671

 
$
4,461

 
$
13

 
$
17,208

 
$
3,897

 
$
—

 
$
50,038

Charge-offs
 
(60
)
 
—

 
—

 
—

 
—

 
—

 
(2,305
)
 
(3,098
)
 
—

 
(5,463
)
Recoveries
 
52

 
—

 
31

 
119

 
—

 
—

 
560

 
475

 
—

 
1,237

Provision
 
206

 
2,219

 
545

 
(101
)
 
2,532

 
(1
)
 
1,622

 
2,497

 
—

 
9,519

Ending balance
 
$
4,384

 
$
13,561

 
$
7,836

 
$
1,689

 
$
6,993

 
$
12

 
$
17,085

 
$
3,771

 
$
—

 
$
55,331

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
1,352

 
$
80

 
$
215

 
$
789

 
$
—

 
$
—

 
$
1,641

 
$
6

 
 
 
$
4,083

Ending balance: collectively evaluated for impairment
 
$
1,521

 
$
15,924

 
$
4,824

 
$
949

 
$
6,449

 
$
12

 
$
14,977

 
$
6,794

 
$
—

 
$
51,450

Financing Receivables:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
2,048,051

 
$
800,395

 
$
863,163

 
$
18,889

 
$
126,768

 
$
16,080

 
$
692,051

 
$
178,222

 
 
 
$
4,743,619

Ending balance: individually evaluated for impairment
 
$
19,854

 
$
1,569

 
$
6,158

 
$
3,629

 
$
—

 
$
—

 
$
20,539

 
$
10

 
 
 
$
51,759

Ending balance: collectively evaluated for impairment
 
$
2,028,197

 
$
798,826

 
$
857,005

 
$
15,260

 
$
126,768

 
$
16,080

 
$
671,512

 
$
178,212

 
 
 
$
4,691,860


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, commercial real estate and commercial construction loans.
Each loan is assigned an Asset Quality Rating (AQR) reflecting the likelihood of repayment or orderly liquidation of that loan transaction pursuant to regulatory credit classifications:  Pass, Special Mention, Substandard, Doubtful and Loss. The AQR is a function of the probability of default model rating, the loss given default and possible non-model factors which impact the ultimate collectability of the loan such as character of the business owner/guarantor, interim period performance, litigation, tax liens and major changes in business and economic conditions. 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. Special Mention loans have potential weaknesses that, if left uncorrected, could jeopardize the liquidation of the debt.  Substandard loans have well-defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Bank may sustain some loss. An asset classified Doubtful has the weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and has such little value that its continuance as a bankable asset is not warranted.
The credit risk profile by internally assigned grade for loans was as follows:
 
 
June 30, 2017
 
December 31, 2016
(in thousands)
 
Commercial
real estate
 
Commercial
construction
 
Commercial
 
Commercial
real estate
 
Commercial
construction
 
Commercial
Grade:
 
 

 
 

 
 

 
 

 
 

 
 

Pass
 
$
660,015

 
$
92,069

 
$
602,903

 
$
701,657

 
$
102,955

 
$
614,139

Special mention
 
95,656

 
22,500

 
19,429

 
65,541

 
—

 
25,229

Substandard
 
53,229

 
1,979

 
27,325

 
33,197

 
23,813

 
52,683

Doubtful
 
—

 
—

 
—

 
—

 
—

 
—

Loss
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
808,900

 
$
116,548

 
$
649,657

 
$
800,395

 
$
126,768

 
$
692,051



The credit risk profile based on payment activity for loans was as follows:
(in thousands)
 
30-59
days
past due
 
60-89
days
past due
 
Greater
than
90 days
 
Total
past due
 
Current
 
Total
financing
receivables
 
Recorded
investment>
90 days and
accruing
June 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
2,308

 
$
2,694

 
$
5,411

 
$
10,413

 
$
2,051,136

 
$
2,061,549

 
$
—

Commercial real estate
 
—

 
—

 
—

 
—

 
808,900

 
808,900

 
—

Home equity line of credit
 
502

 
494

 
1,516

 
2,512

 
880,623

 
883,135

 
—

Residential land
 
—

 
—

 
305

 
305

 
15,704

 
16,009

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
116,548

 
116,548

 
—

Residential construction
 
—

 
—

 
—

 
—

 
10,759

 
10,759

 
—

Commercial
 
1,486

 
614

 
1,096

 
3,196

 
646,461

 
649,657

 
—

Consumer
 
2,266

 
1,305

 
863

 
4,434

 
196,765

 
201,199

 
—

Total loans
 
$
6,562

 
$
5,107

 
$
9,191

 
$
20,860

 
$
4,726,896

 
$
4,747,756

 
$
—

December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
5,467

 
$
2,338

 
$
3,505

 
$
11,310

 
$
2,036,741

 
$
2,048,051

 
$
—

Commercial real estate
 
2,416

 
—

 
—

 
2,416

 
797,979

 
800,395

 
—

Home equity line of credit
 
1,263

 
381

 
1,342

 
2,986

 
860,177

 
863,163

 
—

Residential land
 
—

 
—

 
255

 
255

 
18,634

 
18,889

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
126,768

 
126,768

 
—

Residential construction
 
—

 
—

 
—

 
—

 
16,080

 
16,080

 
—

Commercial
 
413

 
510

 
1,303

 
2,226

 
689,825

 
692,051

 
—

Consumer
 
1,945

 
1,001

 
963

 
3,909

 
174,313

 
178,222

 
—

Total loans
 
$
11,504

 
$
4,230

 
$
7,368

 
$
23,102

 
$
4,720,517

 
$
4,743,619

 
$
—



The credit risk profile based on nonaccrual loans, accruing loans 90 days or more past due and TDR loans was as follows:
(in thousands)
 
June 30, 2017
 
December 31, 2016
Real estate:
 
 

 
 

Residential 1-4 family
 
$
12,270

 
$
11,154

Commercial real estate
 
—

 
223

Home equity line of credit
 
4,306

 
3,080

Residential land
 
915

 
878

Commercial construction
 
—

 
—

Residential construction
 
—

 
—

Commercial
 
1,972

 
6,708

Consumer
 
1,501

 
1,282

  Total nonaccrual loans
 
$
20,964

 
$
23,325

Real estate:
 
 
 
 
Residential 1-4 family
 
$
—

 
$
—

Commercial real estate
 
—

 
—

Home equity line of credit
 
—

 
—

Residential land
 
—

 
—

Commercial construction
 
—

 
—

Residential construction
 
—

 
—

Commercial
 
—

 
—

Consumer
 
—

 
—

     Total accruing loans 90 days or more past due
 
$
—

 
$
—

Real estate:
 
 
 
 
Residential 1-4 family
 
$
13,112

 
$
14,450

Commercial real estate
 
1,289

 
1,346

Home equity line of credit
 
4,548

 
4,934

Residential land
 
1,674

 
2,751

Commercial construction
 
—

 
—

Residential construction
 
—

 
—

Commercial
 
2,692

 
14,146

Consumer
 
68

 
10

     Total troubled debt restructured loans not included above
 
$
23,383

 
$
37,637



The total carrying amount and the total unpaid principal balance of impaired loans were as follows:
 
 
June 30, 2017
 
Three months ended June 30, 2017
 
Six months ended June 30, 2017
(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:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
9,364

 
$
9,963

 
$
—

 
$
9,304

 
$
76

 
$
9,429

 
$
160

Commercial real estate
 
—

 
—

 
—

 
143

 
11

 
182

 
11

Home equity line of credit
 
2,287

 
2,707

 
—

 
2,401

 
51

 
2,203

 
65

Residential land
 
1,249

 
1,788

 
—

 
1,075

 
8

 
1,016

 
34

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
1,592

 
4,267

 
—

 
1,949

 
2

 
3,428

 
8

Consumer
 
—

 
—

 
—

 
1

 
—

 
—

 
—

 
 
$
14,492

 
$
18,725

 
$
—

 
$
14,873

 
$
148

 
$
16,258

 
$
278

With an allowance recorded
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
9,824

 
$
10,027

 
$
1,332

 
$
10,054

 
$
117

 
$
10,051

 
$
236

Commercial real estate
 
1,289

 
1,289

 
73

 
1,292

 
14

 
1,296

 
28

Home equity line of credit
 
4,397

 
4,425

 
275

 
4,372

 
47

 
4,467

 
96

Residential land
 
1,340

 
1,340

 
480

 
1,532

 
24

 
1,804

 
61

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
2,691

 
2,691

 
939

 
2,562

 
68

 
4,915

 
469

Consumer
 
68

 
68

 
30

 
68

 
1

 
49

 
1

 
 
$
19,609

 
$
19,840

 
$
3,129

 
$
19,880

 
$
271

 
$
22,582

 
$
891

Total
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
19,188

 
$
19,990

 
$
1,332

 
$
19,358

 
$
193

 
$
19,480

 
$
396

Commercial real estate
 
1,289

 
1,289

 
73

 
1,435

 
25

 
1,478

 
39

Home equity line of credit
 
6,684

 
7,132

 
275

 
6,773

 
98

 
6,670

 
161

Residential land
 
2,589

 
3,128

 
480

 
2,607

 
32

 
2,820

 
95

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
4,283

 
6,958

 
939

 
4,511

 
70

 
8,343

 
477

Consumer
 
68

 
68

 
30

 
69

 
1

 
49

 
1

 
 
$
34,101

 
$
38,565

 
$
3,129

 
$
34,753

 
$
419

 
$
38,840

 
$
1,169


 
 
December 31, 2016
 
Three months ended June 30, 2016
 
Six months ended June 30, 2016
(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:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
9,571

 
$
10,400

 
$
—

 
$
10,672

 
$
152

 
$
10,532

 
$
203

Commercial real estate
 
223

 
228

 
—

 
1,152

 
—

 
1,163

 
—

Home equity line of credit
 
1,500

 
1,900

 
—

 
1,038

 
9

 
943

 
9

Residential land
 
1,218

 
1,803

 
—

 
1,484

 
15

 
1,537

 
31

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
6,299

 
8,869

 
—

 
8,369

 
7

 
5,818

 
13

Consumer
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
$
18,811

 
$
23,200

 
$
—

 
$
22,715

 
$
183

 
$
19,993

 
$
256

With an allowance recorded
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
10,283

 
$
10,486

 
$
1,352

 
$
11,982

 
$
115

 
$
12,000

 
$
237

Commercial real estate
 
1,346

 
1,346

 
80

 
2,519

 
—

 
1,686

 
—

Home equity line of credit
 
4,658

 
4,712

 
215

 
3,299

 
28

 
3,122

 
55

Residential land
 
2,411

 
2,411

 
789

 
2,977

 
54

 
3,177

 
121

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
14,240

 
14,240

 
1,641

 
16,821

 
180

 
16,896

 
210

Consumer
 
10

 
10

 
6

 
12

 
—

 
12

 
—

 
 
$
32,948

 
$
33,205

 
$
4,083

 
$
37,610

 
$
377

 
$
36,893

 
$
623

Total
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Real estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential 1-4 family
 
$
19,854

 
$
20,886

 
$
1,352

 
$
22,654

 
$
267

 
$
22,532

 
$
440

Commercial real estate
 
1,569

 
1,574

 
80

 
3,671

 
—

 
2,849

 
—

Home equity line of credit
 
6,158

 
6,612

 
215

 
4,337

 
37

 
4,065

 
64

Residential land
 
3,629

 
4,214

 
789

 
4,461

 
69

 
4,714

 
152

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
20,539

 
23,109

 
1,641

 
25,190

 
187

 
22,714

 
223

Consumer
 
10

 
10

 
6

 
12

 
—

 
12

 
—

 
 
$
51,759

 
$
56,405

 
$
4,083

 
$
60,325

 
$
560

 
$
56,886

 
$
879

*
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 collectibility 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 or reduction 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 during the second quarters and first six months of 2017 and 2016 and the impact on the allowance for loan losses were as follows:
 
 
Three months ended June 30, 2017
 
Six months ended June 30, 2017
 
 
Number of contracts
 
Outstanding recorded 
investment1
 
Net increase in allowance
 
Number of contracts
 
Outstanding recorded 
investment1
 
Net increase in allowance
(dollars in thousands)
 
 
Pre-modification
 
Post-modification
 
(as of period end)
 
 
Pre-modification
 
Post-modification
 
(as of period end)
Troubled debt restructurings
 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 
Real estate:
 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 
Residential 1-4 family
 
2

 
$
360

 
$
360

 
$
—

 
5

 
$
872

 
$
880

 
$
45

Commercial real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Home equity line of credit
 
5

 
298

 
298

 
59

 
13

 
524

 
510

 
93

Residential land
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
—

 
—

 
—

 
—

 
1

 
342

 
342

 
—

Consumer
 
—

 
—

 
—

 
—

 
1

 
59

 
59

 
27

 
 
7

 
$
658

 
$
658

 
$
59

 
20

 
$
1,797

 
$
1,791

 
$
165

 
 
Three months ended June 30, 2016
 
Six months ended June 30, 2016
 
 
Number of contracts
 
Outstanding recorded 
investment1
 
Net increase in allowance
 
Number of contracts
 
Outstanding recorded 
investment1
 
Net increase in allowance
(dollars in thousands)
 
 
Pre-modification
 
Post-modification
 
(as of period end)
 
 
Pre-modification
 
Post-modification
 
(as of period end)
Troubled debt restructurings
 
 

 
 

 
 

 
 
 
 
 
 

 
 

 
 
Real estate:
 
 

 
 

 
 

 
 
 
 
 
 

 
 

 
 
Residential 1-4 family
 
5

 
$
891

 
$
885

 
$
98

 
9

 
$
1,988

 
$
2,100

 
$
259

Commercial real estate
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Home equity line of credit
 
8

 
768

 
768

 
181

 
18

 
1,437

 
1,437

 
255

Residential land
 
1

 
120

 
121

 
—

 
1

 
120

 
121

 
—

Commercial construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial
 
5

 
457

 
457

 
145

 
8

 
16,657

 
16,657

 
670

Consumer
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
19

 
$
2,236

 
$
2,231

 
$
424

 
36

 
$
20,202

 
$
20,315

 
$
1,184


1
The reported balances include loans that became TDR during the period, and were fully paid-off, charged-off, or sold prior to period end.
Loans modified in TDRs that experienced a payment default of 90 days or more during the second quarters and first six months of 2017 and 2016, and for which the payment of default occurred within one year of the modification, were as follows:
 
 
Three months ended June 30, 2017
 
Six months ended June 30, 2017
(dollars in thousands)
 
Number of contracts
 
Recorded investment
 
Number of contracts
 
Recorded investment
Troubled debt restructurings that
 subsequently defaulted
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 

 
 
 
 

Residential 1-4 family
 
1
 
$
222

 
2
 
$
523

Commercial real estate
 
—
 
—

 
—
 
—

Home equity line of credit
 
—
 
—

 
—
 
—

Residential land
 
—
 
—

 
—
 
—

Commercial construction
 
—
 
—

 
—
 
—

Residential construction
 
—
 
—

 
—
 
—

Commercial
 
—
 
—

 
—
 
—

Consumer
 
—
 
—

 
—
 
—

 
 
1
 
$
222

 
2
 
$
523


 
 
Three months ended June 30, 2016
 
Six months ended June 30, 2016
(dollars in thousands)
 
Number of contracts
 
Recorded investment
 
Number of contracts
 
Recorded investment
Troubled debt restructurings that
 subsequently defaulted
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 

 
 
 
 

Residential 1-4 family
 
—
 
$
—

 
1
 
$
488

Commercial real estate
 
—
 
—

 
—
 
—

Home equity line of credit
 
—
 
—

 
—
 
—

Residential land
 
—
 
—

 
—
 
—

Commercial construction
 
—
 
—

 
—
 
—

Residential construction
 
—
 
—

 
—
 
—

Commercial
 
1
 
26

 
1
 
26

Consumer
 
—
 
—

 
—
 
—

 
 
1
 
$
26

 
2
 
$
514


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 modified in a TDR totaled nil and $2.6 million at June 30, 2017 and December 31, 2016, respectively.
The Company had $4.6 million and $3.6 million of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at June 30, 2017 and December 31, 2016, respectively.
Mortgage servicing rights. In its mortgage banking business, ASB sells residential mortgage loans to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. ASB retains no beneficial interests in these loans other than the servicing rights of certain loans sold.
ASB received proceeds from the sale of residential mortgages of $39.3 million and $58.1 million for the three months ended June 30, 2017 and 2016 and $79.9 million and $98.5 million for the six months ended June 30, 2017 and 2016, respectively, and recognized gains on such sales of $0.6 million and $1.5 million for the three months ended June 30, 2017 and 2016 and $1.4 million and $2.7 million for the six months ended June 30, 2017 and 2016, respectively.
There were no repurchased mortgage loans for the three and six months ended June 30, 2017 and 2016. The repurchase reserve was $0.1 million as of June 30, 2017 and 2016.
Mortgage servicing fees, a component of other income, net, were $0.7 million for both the three months ended June 30, 2017 and 2016 and $1.5 million and $1.4 million for the six months ended June 30, 2017 and 2016, respectively.
Changes in the carrying value of mortgage servicing rights were as follows:
(in thousands)
 
Gross
carrying amount1
 
Accumulated amortization1
 
Valuation allowance
 
Net
carrying amount
June 30, 2017
 
$
18,069

 
$
(8,888
)
 
$
—

 
$
9,181

December 31, 2016
 
17,271

 
(7,898
)
 
—

 
9,373

1 Reflects the impact of loans paid in full.

Changes related to mortgage servicing rights were as follows:
 
 
Three months ended June 30
 
Six months ended June 30
(in thousands)
 
2017
 
2016
 
2017
 
2016
Mortgage servicing rights
 
 
 
 
 
 
 
 
Beginning balance
 
$
9,294

 
$
8,857

 
$
9,373

 
$
8,884

Amount capitalized
 
362

 
665

 
798

 
1,120

Amortization
 
(475
)
 
(506
)
 
(990
)
 
(988
)
Other-than-temporary impairment
 
—

 
—

 
—

 
—

Carrying amount before valuation allowance
 
9,181

 
9,016

 
9,181

 
9,016

Valuation allowance for mortgage servicing rights
 
 
 
 
 
 
 
 
Beginning balance
 
—

 
—

 
—

 
—

Provision (recovery)
 
—

 
—

 
—

 
—

Other-than-temporary impairment
 
—

 
—

 
—

 
—

Ending balance
 
—

 
—

 
—

 
—

Net carrying value of mortgage servicing rights
 
$
9,181

 
$
9,016

 
$
9,181

 
$
9,016


ASB capitalizes mortgage servicing rights acquired through either the purchase or upon the sale of mortgage loans with servicing rights retained. On a monthly basis, ASB compares the net carrying value of the mortgage servicing rights to its fair value to determine if there are any changes to the valuation allowance and/or other-than-temporary impairment for the mortgage servicing rights. ASB’s MSRs are stratified based on predominant risk characteristics of the underlying loans including loan type such as fixed-rate 15 and 30 year mortgages and note rate in bands of 50 to 100 basis points. For each stratum, fair value is calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Changes in mortgage interest rates impact the value of ASB’s mortgage servicing rights. Rising interest rates typically result in slower prepayment speeds in the loans being serviced for others, which increases the value of mortgage servicing rights, whereas declining interest rates typically result in faster prepayment speeds which decrease the value of mortgage servicing rights and increase the amortization of the mortgage servicing rights. Expected net income streams are estimated based on industry assumptions regarding prepayment expectations and income and expenses associated with servicing residential mortgage loans for others.
ASB uses a present value cash flow model using techniques described above to estimate the fair value of MSRs. Impairment is recognized through a valuation allowance for each stratum when the carrying amount exceeds fair value, with any associated provision recorded as a component of loan servicing fees included in “Revenues - bank” in the consolidated statements of income. A direct write-down is recorded when the recoverability of the valuation allowance is deemed to be unrecoverable.
Key assumptions used in estimating the fair value of ASB’s mortgage servicing rights used in the impairment analysis were as follows:
(dollars in thousands)
 
June 30, 2017

 
December 31, 2016

Unpaid principal balance
 
$
1,208,404

 
$
1,188,380

Weighted average note rate
 
3.95
%
 
3.96
%
Weighted average discount rate
 
10.0
%
 
9.4
%
Weighted average prepayment speed
 
8.8
%
 
8.5
%

The sensitivity analysis of fair value of MSRs to hypothetical adverse changes of 25 and 50 basis points in certain key assumptions was as follows:
(dollars in thousands)
 
June 30, 2017

 
December 31, 2016

Prepayment rate:
 
 
 
 
  25 basis points adverse rate change
 
$
(939
)
 
$
(567
)
  50 basis points adverse rate change
 
(2,048
)
 
(1,154
)
Discount rate:
 
 
 
 
  25 basis points adverse rate change
 
(115
)
 
(128
)
  50 basis points adverse rate change
 
(227
)
 
(254
)


The effect of a variation in certain assumptions on fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the changes in the fair value of MSRs typically is not linear.
Other borrowings.  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. ASB pledges investment securities as collateral for securities sold under agreements to repurchase. All such agreements are subject to master netting arrangements, which provide for a 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
 
 
 
 
 
 
June 30, 2017
 
$88
 
$—
 
$88
December 31, 2016
 
93
 
—
 
93
 
 
Gross amount not offset in the Balance Sheet
(in millions)
 
 Net amount of liabilities presented
in the Balance Sheet
 
Financial
instruments
 
Cash
collateral
pledged
June 30, 2017
 
 

 
 

 
 

Financial institution
 
$
—

 
$
—

 
$
—

Government entities
 
—

 
—

 
—

Commercial account holders
 
88

 
120

 
—

Total
 
$
88

 
$
120

 
$
—

December 31, 2016
 
 

 
 

 
 

Financial institution
 
$
—

 
$
—

 
$
—

Government entities
 
14

 
15

 
—

Commercial account holders
 
79

 
101

 
—

Total
 
$
93

 
$
116

 
$
—


The securities underlying the agreements to repurchase are book-entry securities and were delivered by appropriate entry into the counterparties’ accounts or into segregated tri-party custodial accounts at the FHLB. 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.
Derivative financial instruments. ASB enters into interest rate lock commitments (IRLCs) 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 risks associated with selling loans.
ASB enters into 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 were as follows:
 
 
June 30, 2017
 
December 31, 2016
(in thousands)
 
Notional amount
 
Fair value
 
Notional amount
 
Fair value
Interest rate lock commitments
 
$
22,737

 
$
126

 
$
25,883

 
$
421

Forward commitments
 
22,925

 
88

 
30,813

 
(177
)

ASB’s derivative financial instruments, their fair values and balance sheet location were as follows:
Derivative Financial Instruments Not Designated as Hedging Instruments 1
 
June 30, 2017
 
December 31, 2016
(in thousands)
 
 Asset derivatives
 
 Liability
derivatives
 
 Asset derivatives
 
 Liability
derivatives
Interest rate lock commitments
 
$
142

 
$
16

 
$
445

 
$
24

Forward commitments
 
88

 
—

 
8

 
185

 
 
$
230

 
$
16

 
$
453

 
$
209

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 ASB’s statements of income:
Derivative Financial Instruments Not Designated as Hedging Instruments
 
Location of net gains (losses) recognized in the Statement of Income
 
Three months ended June 30
 
Six months ended June 30
(in thousands)
 
 
2017
 
2016
 
2017
 
2016
Interest rate lock commitments
 
Mortgage banking income
 
$
(191
)
 
$
140

 
$
(295
)
 
$
411

Forward commitments
 
Mortgage banking income
 
192

 
(74
)
 
265

 
(237
)
 
 
 
 
$
1

 
$
66

 
$
(30
)
 
$
174


Low-Income Housing Tax Credit (LIHTC). ASB’s unfunded commitments to fund its LIHTC investment partnerships were $14.3 million and $14.0 million at June 30, 2017 and December 31, 2016, respectively. These unfunded commitments were unconditional and legally binding and are recorded in other liabilities with a corresponding increase in other assets. As of June 30, 2017, ASB did not have any impairment losses resulting from forfeiture or ineligibility of tax credits or other circumstances related to its LIHTC investment partnerships.
Contingencies.  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.