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Fair value measurements - HECO | 9 Months Ended
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Sep. 30, 2013
Fair value measurements | Fair value measurements Fair value estimates are based on the price that would be received to sell an asset, or paid upon the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent sources. However, in certain cases, the Company uses its own assumptions about market participant assumptions based on the best information available in the circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the Company were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of the Company’s financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates. The Company groups its financial assets measured at fair value in three levels outlined as follows: Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. The Company used the following methods and assumptions to estimate the fair value of each applicable class of financial instruments for which it is practicable to estimate that value: Short term borrowings—other than bank. The carrying amount approximated fair value because of the short maturity of these instruments. Investment and mortgage-related securities. To determine the fair value of investment securities held in ASB’s available-for-sale portfolio, independent third-party vendor or broker pricing is used on an unadjusted basis. Prices for investments and mortgage-related securities 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 (to be announced) 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 finding 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. Loans receivable. The estimated fair value of loans receivable is determined based on characteristics such as loan category, repricing features and remaining maturity, and includes prepayment estimates. For residential real estate loans, fair values were estimated by discounting estimated cash flows using discount rates based on current industry pricing for loans with similar contractual characteristics and remaining maturity. For other types of loans, fair values were estimated by discounting contractual cash flows using discount rates that reflect current industry pricing for loans with similar characteristics and remaining maturity. Where industry pricing is not available, discount rates are based on ASB’s current pricing for loans with similar characteristics and remaining maturity. The fair value of all loans was adjusted to reflect current assessments of loan collectability. Also see “Fair value measurements on a nonrecurring basis” below. Deposit liabilities. The fair value of savings, negotiable orders of withdrawal, demand and money market deposits was the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Other bank borrowings. Fair value was estimated by discounting the future cash flows using the current rates available for borrowings with similar credit terms and remaining maturities. Long-term debt. Fair value was obtained from third-party financial services providers based on the current rates offered for debt of the same or similar remaining maturities and from discounting the future cash flows using the current rates offered for debt of the same or similar remaining maturities. Derivative financial instruments. See “Fair value measurements on a recurring basis” below. Off-balance sheet financial instruments. The fair value of loans serviced for others was calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams were estimated based on industry assumptions regarding prepayment speeds and income and expenses associated with servicing residential mortgage loans for others. The fair value of commitments to originate loans was estimated based on the change in current primary market prices of new commitments. Since lines of credit can expire without being drawn and customers are under no obligation to utilize the lines, no fair value was assigned to unused lines of credit. The fair value of letters of credit was estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The estimated fair values of certain of the Company’s financial instruments were as follows:
|  | Carrying or notional |  | Estimated fair value
(in thousands) |  | amount |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
September 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 10 |  |  | $ | — |  |  | $ | 10 |  |  | $ | — |  |  | $ | 10 |
Available-for-sale investment and mortgage-related securities |  | 535,264 |  |  | — |  |  | 535,264 |  |  | — |  |  | 535,264 |
Investment in stock of Federal Home Loan Bank of Seattle |  | 93,413 |  |  | — |  |  | 93,413 |  |  | — |  |  | 93,413 |
Loans receivable, net |  | 4,010,961 |  |  | — |  |  | — |  |  | 4,149,137 |  |  | 4,149,137 |
Derivative assets |  | 24,196 |  |  | — |  |  | 558 |  |  | — |  |  | 558 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  | 0 |
Deposit liabilities |  | 4,310,842 |  |  | — |  |  | 4,313,560 |  |  | — |  |  | 4,313,560 |
Short-term borrowings—other than bank |  | 131,341 |  |  | — |  |  | 131,341 |  |  | — |  |  | 131,341 |
Other bank borrowings |  | 239,612 |  |  | — |  |  | 252,230 |  |  | — |  |  | 252,230 |
Long-term debt, net—other than bank |  | 1,422,880 |  |  | — |  |  | 1,431,434 |  |  | — |  |  | 1,431,434 |
Derivative liabilities |  | 22,185 |  |  | 202 |  |  | 73 |  |  | — |  |  | 275 |
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 10 |  |  | $ | — |  |  | $ | 10 |  |  | $ | — |  |  | $ | 10 |
Available-for-sale investment and mortgage-related securities |  | 671,358 |  |  | — |  |  | 671,358 |  |  | — |  |  | 671,358 |
Investment in stock of Federal Home Loan Bank of Seattle |  | 96,022 |  |  | — |  |  | 96,022 |  |  | — |  |  | 96,022 |
Loans receivable, net |  | 3,763,238 |  |  | — |  |  | — |  |  | 3,957,752 |  |  | 3,957,752 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  | 0 |
Deposit liabilities |  | 4,229,916 |  |  | — |  |  | 4,235,527 |  |  | — |  |  | 4,235,527 |
Short-term borrowings—other than bank |  | 83,693 |  |  | — |  |  | 83,693 |  |  | — |  |  | 83,693 |
Other bank borrowings |  | 195,926 |  |  | — |  |  | 212,163 |  |  | — |  |  | 212,163 |
Long-term debt, net—other than bank |  | 1,422,872 |  |  | — |  |  | 1,481,004 |  |  | — |  |  | 1,481,004 |
As of September 30, 2013 and December 31, 2012, loan commitments and unused lines and letters of credit issued by ASB had notional amounts of $1.6 billion and $1.5 billion, respectively, and their estimated fair value on such dates were $0.6 million and $1.2 million, respectively. As of September 30, 2013 and December 31, 2012, loans serviced by ASB for others had notional amounts of $1.4 billion and $1.3 billion, respectively, and the estimated fair value of the servicing rights for such loans was $16.6 million and $11.9 million, respectively. Fair value measurements on a recurring basis. Securities. While securities held in ASB’s investment portfolio trade in active markets, they do not trade on listed exchanges nor do the specific holdings trade in quoted markets by dealers or brokers. All holdings are valued using market-based approaches that are based on exit prices that are taken from identical or similar market transactions, even in situations where trading volume may be low when compared with prior periods. Inputs to these valuation techniques reflect the assumptions that consider credit and nonperformance risk that market participants would use in pricing the asset based on market data obtained from independent sources. Available-for-sale securities were comprised of federal agency obligations and mortgage-backed securities and municipal bonds. Derivative financial instruments. ASB enters into interest rate lock commitments (IRLC) 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. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. IRLCs are classified as Level 2 measurements. ASB utilizes forward commitments as economic hedges against potential changes in the values of the IRLCs and loans held for sale. To reduce the impact of price fluctuations of IRLC and mortgage loans held for sale, ASB will purchase to be announced (TBA) mortgage-backed securities forward commitments, mandatory and best effort commitments. These commitments help protect our loan sale profit margin from fluctuations in interest rates. The changes in the fair value of these commitments are recognized as part of mortgage banking income on the consolidated statements of income. TBA forward commitments are classified as Level 1, and consist of publicly-traded debt securities for which identical fair values can be obtained through quoted market prices in active exchange markets. The fair values of ASB’s best efforts and mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable and are classified as Level 2 measurements. Assets measured at fair value on a recurring basis were as follows:
|  | Fair value measurements using
|  | Quoted prices in active markets for identical assets |  | Significant otherobservable inputs |  | Significant unobservable inputs
(in thousands) |  | (Level 1) |  | (Level 2) |  | (Level 3)
September 30, 2013 |  |  |  |  |  |  |  |  |
Money market funds (“other” segment) |  | $ | — |  |  | $ | 10 |  |  | $ | — |
Available-for-sale securities (bank segment) |  |  |  |  |  |  |  |  |
Mortgage-related securities-FNMA, FHLMC and GNMA |  | $ | — |  |  | $ | 357,977 |  |  | $ | — |
Federal agency obligations |  | — |  |  | 98,265 |  |  | — |
Municipal bonds |  | — |  |  | 79,022 |  |  | — |
|  | $ | — |  |  | $ | 535,264 |  |  | $ | — |
Derivative assets (1) |  |  |  |  |  |  |  |  |
Interest rate lock commitments |  | $ | — |  |  | $ | 556 |  |  | $ | — |
Forward commitments |  | — |  |  | 2 |  |  | — |
|  | $ | — |  |  | $ | 558 |  |  | $ | — |
Derivative liabilities (1) - Forward commitments |  | $ | 202 |  |  | $ | 73 |  |  | $ | — |
December 31, 2012 |  |  |  |  |  |  |  |  |
Money market funds (“other” segment) |  | $ | — |  |  | $ | 10 |  |  | $ | — |
Available-for-sale securities (bank segment) |  |  |  |  |  |  |  |  |
Mortgage-related securities-FNMA, FHLMC and GNMA |  | $ | — |  |  | $ | 417,383 |  |  | $ | — |
Federal agency obligations |  | — |  |  | 171,491 |  |  | — |
Municipal bonds |  | — |  |  | 82,484 |  |  | — |
|  | $ | — |  |  | $ | 671,358 |  |  | $ | — |
___________________________________________ (1) Derivatives are carried at fair value with changes in value reflected in the balance sheet in other assets or other liabilities and included in mortgage banking income. Fair value measurements on a nonrecurring basis. From time to time, the Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the writedowns of individual assets. ASB does not record loans at fair value on a recurring basis. However, from time to time, ASB records nonrecurring fair value adjustments based on the current appraised value of the collateral securing the loans or unobservable market assumptions. Unobservable assumptions reflect ASB’s own estimate of the fair value of collateral used in valuing the loan. ASB may also be required to measure goodwill at fair value on a nonrecurring basis. During the first nine months of 2013, it was not required that a measurement of the fair value of goodwill be calculated and goodwill was not measured at fair value. Assets measured at fair value on a nonrecurring basis were as follows:
|  |  |  | Fair value measurements
(in millions) |  | Balance |  | Level 1 |  | Level 2 |  | Level 3
Loans |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2013 |  | $ | 5 |  |  | $ | — |  |  | $ | — |  |  | $ | 5 |
December 31, 2012 |  | 21 |  |  | — |  |  | — |  |  | 21 |
Real estate acquired in settlement of loans |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2013 |  | $ | — |  |  | — |  |  | — |  |  | $ | — |
December 31, 2012 |  | 3 |  |  | — |  |  | — |  |  | 3 |
At September 30, 2013 and 2012, there were no adjustments to fair value for ASB’s loans held for sale. Residential loans. The fair value of ASB’s residential loans that were written down due to impairment was determined based on third party appraisals, which include the appraisers’ assumptions and judgment, and therefore, is classified as a Level 3 measurement. Home equity lines of credit. The fair value of ASB’s home equity lines of credit that were written down due to impairment was determined based on third party appraisals, which include the appraisers’ assumptions and judgment, and therefore, is classified as a Level 3 measurement. Commercial loans. The fair value of ASB’s commercial loans that were written down due to impairment was determined based on the value placed on the assets of the business, and therefore, is classified as a Level 3 measurement. Real estate acquired in settlement of loans. The fair value of ASB’s real estate acquired in settlement of loans that were written down due to impairment was determined based on third party appraisals, which include the appraisers’ assumptions and judgment, and therefore, is classified as a Level 3 measurement. For loans and real estate acquired in settlement of loans classified as Level 3 as of September 30, 2013, the significant unobservable inputs used in the fair value measurement were as follows:
|  | Fair value at |  |  |  |  |  | Significant unobservable input value (1)
($ in thousands) |  | September 30, 2013 |  | Valuation technique |  | Significant unobservable input |  | Range |  | Weighted Average
Residential loans |  | $ | 4,028 |  |  | Fair value of property or collateral |  | Appraised value less 7% selling cost |  | 44-96% |  | 81%
Home equity lines of credit |  | 172 |  |  | Fair value of property or collateral |  | Appraised value less 7% selling cost |  | 46-50% |  | 50%
Commercial loans |  | 759 |  |  | Fair value of property or collateral |  | Fair value of business assets |  | 31-91% |  | 60%
Total loans |  | 4,959 |  |  |  |  |  |  |  |  |
Real estate acquired in settlement of loans |  | 192 |  |  | Fair value of property or collateral |  | Appraised value less 7% selling cost |  | 81-95% |  | 90%
(1) Represent percent of outstanding principal balance. Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurement.
Hawaiian Electric Company, Inc. and Subsidiaries |
Fair value measurements | Fair value measurements See Note 9 “Fair value measurements,” of HEI’s “Notes to Consolidated Financial Statements” for discussions of fair value estimates, grouping of financial instruments and methods and assumptions used to estimate the fair value of short-term borrowings and long-term debt. The estimated fair values of certain of the electric utilities’ financial instruments were as follows:
|  | September 30, 2013 |  | December 31, 2012
(in thousands) |  | Carrying amount |  | Estimated fair value (Level 2) |  | Carrying amount |  | Estimated fair value (Level 2)
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |
Short-term borrowings - non-affiliates |  | $ | 73,246 |  |  | $ | 73,246 |  |  | $ | — |  |  | $ | — |
Long-term debt, net, including amounts due within one year |  | 1,147,880 |  |  | 1,149,213 |  |  | 1,147,872 |  |  | 1,181,631 |
Fair value measurements on a nonrecurring basis. From time to time, the Utilities may be required to measure certain liabilities at fair value on a nonrecurring basis in accordance with GAAP. The fair value of the Utilities ARO (Level 3) was determined by discounting the expected future cash flows using market-observable risk-free rates as adjusted by Hawaiian Electric’s credit spread. Also, see “Asset retirement obligations” in Note 5.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. + Details
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