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FAIR VALUE OF ASSETS AND LIABILITIES
 3 Months Ended
Mar. 31, 2012
FAIR VALUE OF ASSETS AND LIABILITIES [Abstract]  
FAIR VALUE OF ASSETS AND LIABILITIES
17.  FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
 
Disclosures about Fair Value of Financial Instruments

Fair value estimates, methods and assumptions are set forth below for our financial instruments.

Short-Term Financial Instruments

The carrying values of short-term financial instruments are deemed to approximate fair values. Such instruments are considered readily convertible to cash and include cash and due from banks, interest-bearing deposits in other banks, accrued interest receivable, the majority of short-term borrowings and accrued interest payable.

Investment Securities

The fair value of investment securities is based on market price quotations received from securities dealers. Where quoted market prices are not available, fair values are based on quoted market prices of comparable securities.

Loans

Fair values of loans are estimated based on discounted cash flows of portfolios of loans with similar financial characteristics including the type of loan, interest terms and repayment history. Fair values are calculated by discounting scheduled cash flows through estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of credit and interest rate risks inherent in the Company's various loan types and are derived from available market information, as well as specific borrower information. The fair value of loans are not based on the notion of exit price.

Other Interest Earning Assets

The equity investment in common stock of the FHLB, which is redeemable for cash at par value, is reported at its par value.
 
Deposit Liabilities

The fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits and interest-bearing demand and savings accounts, are equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings and Long-Term Debt

The fair value for a portion of our short-term borrowings is estimated by discounting scheduled cash flows using rates currently offered for securities of similar remaining maturities. The fair value of our long-term debt, primarily FHLB advances, is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements.

Off-Balance Sheet Financial Instruments

The fair values of off-balance sheet financial instruments are estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties, current settlement values or quoted market prices of comparable instruments.

For derivative financial instruments, the fair values are based upon current settlement values, if available. If there are no relevant comparables, fair values are based on pricing models using current assumptions for interest rate swaps and options.

Limitations

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of future business and the value of assets and liabilities that are not considered financial instruments. For example, significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets, premises and equipment and intangible assets. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.
 
      
Fair Value Measurement Using
     Quoted Prices  Significant  
      
in Active
 Other 
Significant
      
Markets for
 
Observable
 
Unobservable
 
Carrying
 
Estimated
 
Identical Assets
 
Inputs
 
Inputs
 
amount
 
fair value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Dollars in thousands)
March 31, 2012
         
Financial assets
         
   Cash and due from banks
$69,873 $69,873 $69,873 $- $-
   Interest-bearing deposits in other banks
 57,661  57,661  57,661  -  -
   Investment securities
 1,646,656  1,646,670  877  1,632,560  13,233
   Loans held for sale  20,459   20,459   -   10,734   9,725
   Net loans and leases
 1,968,430  1,939,036  -  140,596  1,798,440
   Accrued interest receivable
 12,217  12,217  12,217  -  -
                
Financial liabilities
              
   Deposits:
              
      Noninterest-bearing deposits
 766,595  766,595  766,595  -  -
      Interest-bearing demand and savings deposits
 1,771,158  1,771,158  1,771,158  -  -
      Time deposits
 970,050  973,752  -  -  973,752
   Long-term debt
 108,294  39,609  -  39,609  -
   Accrued interest payable (included in other liabilities)
 10,633  10,633  10,633  -  -
                
Off-balance sheet financial instruments
              
   Commitments to extend credit
 471,057  2,355  -  2,355  -
   Standby letters of credit and financial guarantees written
 13,173  99  -  99  -
   Interest rate options
 86,365  246  -  246  -
   Forward interest rate contracts
 20,715  9  -  9  -
   Forward foreign exchange contracts
 585  30  -  30  -
                
December 31, 2011
              
Financial assets
              
   Cash and due from banks
$76,233 $76,233 $76,233 $- $-
   Interest-bearing deposits in other banks
 180,839  180,839  180,839  -  -
   Investment securities
 1,493,925  1,493,970  970  1,480,006  12,994
   Loans held for sale  50,290   50,290   -   12,414   37,876
   Net loans and leases
 1,942,354  1,858,267  -  131,836  1,726,431
   Accrued interest receivable
 11,674  11,674  11,674  -  -
                
Financial liabilities
              
   Deposits:
              
      Noninterest-bearing deposits
 729,149  729,149  729,149  -  -
      Interest-bearing demand and savings deposits
 1,705,551  1,705,551  1,705,551  -  -
      Time deposits
 1,008,828  1,012,121  -  -  1,012,121
   Short-term borrowings
 34  34  -  34  -
   Long-term debt
 158,298  89,646  -  89,646  -
   Accrued interest payable (included in other liabilities)
 10,019  10,019  10,019  -  -
                
Off-balance sheet financial instruments
              
   Commitments to extend credit
 451,378  2,257  -  2,257  -
   Standby letters of credit and financial guarantees written
 13,159  99  -  99  -
   Interest rate options
 68,979  515  -  515  -
   Forward interest rate contracts
 33,776  (413) -  (413) -
   Forward foreign exchange contracts
 547  1  -  1  -
 
Fair Value Measurements

We group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

·  
Level 1 - Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

·  
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

·  
Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that requires the use of significant judgment or estimation.

We base our fair values on the price that we would expect to receive if an asset were sold or pay to transfer a liability in an orderly transaction between market participants at the measurement date. We also maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

We use fair value measurements to record adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available for sale securities and derivatives are recorded at fair value on a recurring basis. From time to time, we may be required to record other financial assets at fair value on a nonrecurring basis such as loans held for sale, impaired loans and mortgage servicing rights. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
 
There were no transfers of financial assets and liabilities between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2012.
 
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011:
 
     
Fair Value at Reporting Date Using
  Fair  
Quoted Prices in Active Markets for Identical Assets
  
Significant Other Observable Inputs
  
Significant Unobservable Inputs
 
Value
  
(Level 1)
  
(Level 2)
  
(Level 3)
 
(Dollars in thousands)
March 31, 2012
          
Available for sale securities:
          
  U.S. Government sponsored entities debt securities
$372,390  $-  $372,390  $-
  States and political subdivisions debt securities
 40,208   -   26,975   13,233
  U.S. Government sponsored entities mortgage-backed securities
 1,217,834   -   1,217,834   -
  Corporate securities
 14,643   -   14,643   -
  Other
 877   877   -   -
Derivatives:
              
  Interest rate contracts
 255   -   255   -
  Amended TARP Warrant
 (701)  -   (701)  -
   Total
$1,645,506  $877  $1,631,396  $13,233
                
December 31, 2011
              
Available for sale securities:
              
  U.S. Government sponsored entities debt securities
$373,177  $-  $373,177  $-
  States and political subdivisions debt securities
 12,994   -   -   12,994
  U.S. Government sponsored entities mortgage-backed securities
 1,097,302   -   1,097,302   -
  Corporate securities
 8,551   -   8,551   -
  Other
 970   970   -   -
Derivatives:
              
  Interest rate contracts
 102   -   102   -
  Amended TARP Warrant
 (677)  -   (677)  -
   Total
$1,492,419  $970  $1,478,455  $12,994
 
For the three months ended March 31, 2012 and 2011, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
 
Available for sale states and political subdivisions debt securities
  
Available for sale non-agency collateralized mortgage obligations (1)
 
(Dollars in thousands)
      
Balance at December 31, 2011
$12,994  $-
   Principal payments received
 (95)  -
   Unrealized net gain included in other comprehensive income
 334   -
Balance at March 31, 2012
$13,233  $-
        
Balance at December 31, 2010
$12,619  $17
   Principal payments received
 (89)  -
Balance at March 31, 2011
$12,530  $17
        
(1) Represents available for sale non-agency collateralized mortgage obligations previously classified as
Level 2 for which the market became inactive during 2008; therefore the fair value measurement was
derived from discounted cash flow models using unobservable inputs and assumptions.
 
Within the state and political subdivisions debt securities category, the Company holds four mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of $13.2 million. The Company estimates the fair value of its mortgage revenue bonds by using a discounted cash flow model to calculate the present value of estimated future principal and interest payments.

The significant unobservable input used in the fair value measurement of the Company's mortgage revenue bonds is the weighted average discount rate. As of March 31, 2012, the weighted average discount rate utilized was 4.49%, which was derived by incorporating a credit spread over the London Interbank Offered Rate swap curve. Significant increases (decreases) in the weighted average discount rate could result in a significantly lower (higher) fair value measurement.

For assets measured at fair value on a nonrecurring basis that were recorded at fair value on our balance sheet at March 31, 2012 and December 31, 2011, the following table provides the level of valuation assumptions used to determine the respective fair values:
 
     
Fair Value Measurements Using
     
Quoted Prices in Active Markets for Identical Assets
  
Significant Other Observable Inputs
  
Significant Unobservable Inputs
 
Fair Value
  
(Level 1)
  
(Level 2)
  
(Level 3)
 
(Dollars in thousands)
March 31, 2012
          
Loans held for sale (1)
$10,734  $-  $10,734  $-
Impaired loans (1)
 140,596   -   140,596   -
Other real estate (2)
 52,725   -   52,725   -
                
December 31, 2011
              
Loans held for sale (1)
$12,414  $-  $12,414  $-
Impaired loans (1)
 131,836   -   131,836   -
Other real estate (2)
 61,681   -   61,681   -
                
(1) Represents carrying value and related write-downs of loans for which adjustments are based
      on agreed upon purchase prices for the loans or the appraised value of the collateral.
                
(2) Represents other real estate that is carried at the lower of carrying value or fair value less costs to sell.
      Fair value is generally based upon independent market prices or appraised values of the collateral.