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FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES | 9 Months Ended
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Sep. 30, 2012
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES |
FAIR VALUE OF FINANCIAL 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. Loans Held for Sale The fair value of loans classified as held for sale are generally based upon quoted prices for similar assets in active markets, acceptance of firm offer letters with agreed upon purchase prices, discounted cash flow models that take into account market observable assumptions, or independent appraisals of the underlying collateral securing the loans. We report the fair values of Hawaii and U.S. Mainland construction and commercial real estate loans net of applicable selling costs on our consolidated balance sheets. 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 in |  |  |  | Significant |
|  |  |  |  |  | Active Markets for |  | Significant Other |  | Unobservable |
|  | Carrying |  | Estimated |  | Identical Assets |  | Observable Inputs |  | Inputs |
|  | amount |  | fair value |  | (Level 1) |  | (Level 2) |  | (Level 3) |
|  | (Dollars in thousands) |
September 30, 2012 |  |  |  |  |  |  |  |  |  |  |
Financial assets |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 61,078 |  | $ | 61,078 |  | $ | 61,078 |  | $ | — |  | $ | — |
Interest-bearing deposits in other banks |  | 159,595 |  | 159,595 |  | 159,595 |  | — |  | — |
Investment securities |  | 1,663,279 |  | 1,664,558 |  | 897 |  | 1,650,648 |  | 13,013 |
Loans held for sale |  | 24,080 |  | 24,080 |  | — |  | — |  | 24,080 |
Net loans and leases |  | 2,013,235 |  | 1,973,852 |  | — |  | 114,401 |  | 1,859,451 |
Accrued interest receivable |  | 13,198 |  | 13,198 |  | 13,198 |  | — |  | — |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | 803,796 |  | 803,796 |  | 803,796 |  | — |  | — |
Interest-bearing demand and savings deposits |  | 1,825,495 |  | 1,825,495 |  | 1,825,495 |  | — |  | — |
Time deposits |  | 992,299 |  | 995,030 |  | — |  | — |  | 995,030 |
Long-term debt |  | 108,285 |  | 41,892 |  | — |  | 41,892 |  | — |
Accrued interest payable (included in other liabilities) |  | 12,265 |  | 12,265 |  | 12,265 |  | — |  | — |
Off-balance sheet financial instruments |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit |  | 536,820 |  | 2,684 |  | — |  | 2,684 |  | — |
Standby letters of credit and financial guarantees written |  | 14,391 |  | 108 |  | — |  | 108 |  | — |
Interest rate options |  | 145,543 |  | 2,212 |  | — |  | 2,212 |  | — |
Forward interest rate contracts |  | 41,151 |  | (893 | ) | — |  | (893 | ) | — |
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 and nine months ended September 30, 2012. The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:
|  |  |  | Fair Value at Reporting Date 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) |
September 30, 2012 |  |  |  |  |  |  |  |  |
Available for sale securities: |  |  |  |  |  |  |  |  |
U.S. Government sponsored entities debt securities |  | $ | 316,997 |  | $ | — |  | $ | 316,997 |  | $ | — |
States and political subdivisions debt securities |  | 162,824 |  | — |  | 149,811 |  | 13,013 |
U.S. Government sponsored entities mortgage-backed securities |  | 967,699 |  | — |  | 967,699 |  | — |
Corporate securities |  | 51,129 |  | — |  | 51,129 |  | — |
Other |  | 897 |  | 897 |  | — |  | — |
Derivatives: |  |  |  |  |  |  |  |  |
Interest rate contracts |  | 1,319 |  | — |  | 1,319 |  | — |
Amended TARP Warrant |  | (800 | ) | — |  | (800 | ) | — |
Total |  | $ | 1,500,065 |  | $ | 897 |  | $ | 1,486,155 |  | $ | 13,013 |
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 nine months ended September 30, 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 |  | (285 | ) | — |
Unrealized net gain included in other comprehensive income |  | 304 |  | — |
Balance at September 30, 2012 |  | $ | 13,013 |  | $ | — |
Balance at December 31, 2010 |  | $ | 12,619 |  | $ | 17 |
Principal payments received |  | (264 | ) | (17 | )
Balance at September 30, 2011 |  | $ | 12,355 |  | $ | — |
(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 $13.0 million at September 30, 2012. 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 September 30, 2012, the weighted average discount rate utilized was 4.40%, which was derived by incorporating a credit spread over the FHLB Fixed-Rate Advance 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 September 30, 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) |
September 30, 2012 |  |  |  |  |  |  |  |  |
Impaired loans (1) |  | $ | 114,401 |  | $ | — |  | $ | 114,401 |  | $ | — |
Other real estate (2) |  | 47,378 |  | — |  | 47,378 |  | — |
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.

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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 Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 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 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 4: 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 5: 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 6: 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 7: 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. Reference 8: 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 9: 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 10: 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 11: 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 12: 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 13: 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 + Details
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