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FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
 9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
15. 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 financial institutions, interest-bearing deposits in other financial institutions, accrued interest receivable, the majority of Federal Home Loan Bank advances and other short-term borrowings, and accrued interest payable.

Investment Securities
 
The fair value of investment securities is based on market price quotations received from third-party pricing services. The third-party pricing services utilize pricing models supported with timely market data information. 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. In accordance with ASU 2016-01, the fair value of loans are measured 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, if any, net of applicable selling costs on our consolidated balance sheets.
 
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.
 
Long-Term Debt
 
The fair value of our long-term debt is estimated by discounting scheduled cash flows over the contractual borrowing period at the estimated market rate for similar borrowing arrangements.
 
Derivatives

The fair values of derivative financial instruments are based upon current market 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.

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.

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.

 
 
 
 
 
Fair Value Measurement Using
(dollars in thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
September 30, 2019
 

 
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
87,395

 
$
87,395

 
$
87,395

 
$
—

 
$
—

Interest-bearing deposits in other banks
7,803

 
7,803

 
7,803

 
—

 
—

Investment securities
1,187,933

 
1,187,933

 
1,058

 
1,175,373

 
11,502

Loans held for sale
7,016

 
7,016

 
—

 
7,016

 
—

Net loans and leases
4,319,695

 
4,328,177

 
—

 
9,752

 
4,318,425

Accrued interest receivable
16,220

 
16,220

 
16,220

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

Noninterest-bearing demand
1,399,200

 
1,399,200

 
1,399,200

 
—

 
—

Interest-bearing demand and savings and money market
2,591,775

 
2,591,775

 
2,591,775

 
—

 
—

Time
1,046,684

 
1,043,147

 
—

 
—

 
1,043,147

Short-term borrowings
205,000

 
205,000

 
—

 
205,000

 
—

Long-term debt
101,547

 
97,324

 
—

 
97,324

 
—

Accrued interest payable (included in other liabilities)
5,402

 
5,402

 
5,402

 


 
—



 
 
 
 
 
 
 
Fair Value Measurement Using
(dollars in thousands)
Notional
Amount
 
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
September 30, 2019
 
 
 

 
 

 
 

 
 

 
 

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
$
1,569

 
$
49

 
$
49

 
$
—

 
$
49

 
$
—

Forward sale commitments
8,412

 
(3
)
 
(3
)
 
—

 
(3
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
Off-balance sheet financial instruments:
 
 
 
 
 

 
 
 
 
 
 
Commitments to extend credit
1,106,657

 
1,295

 
1,295

 
—

 
1,295

 
—

Standby letters of credit and financial guarantees written
11,275

 
169

 
169

 
—

 
169

 
—


 
 
 
 
 
Fair Value Measurement Using
(dollars in thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
 

 
 

 
 

 
 

 
 

Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
80,569

 
$
80,569

 
$
80,569

 
$
—

 
$
—

Interest-bearing deposits in other banks
21,617

 
21,617

 
21,617

 
—

 
—

Investment securities
1,354,812

 
1,350,576

 
826

 
1,338,581

 
11,169

Loans held for sale
6,647

 
6,647

 
—

 
6,647

 
—

Net loans and leases
4,030,450

 
3,938,380

 
—

 
—

 
3,938,380

Accrued interest receivable
17,000

 
17,000

 
17,000

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

Noninterest-bearing demand
1,436,967

 
1,436,967

 
1,436,967

 
—

 
—

Interest-bearing demand and savings and money market
2,402,268

 
2,402,268

 
2,402,268

 
—

 
—

Time
1,107,255

 
1,099,560

 
—

 
—

 
1,099,560

Short-term borrowings
197,000

 
197,000

 
—

 
197,000

 
—

Long-term debt
122,166

 
118,057

 
—

 
118,057

 
—

Accrued interest payable (included in other liabilities)
5,051

 
5,051

 
5,051

 
—

 
—



 
 
 
 
 
 
 
Fair Value Measurement Using
(dollars in thousands)
Notional
Amount
 
Carrying
Amount
 
Estimated
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
$
2,158

 
$
11

 
$
11

 
$
—

 
$
11

 
$
—

Forward sale commitments
8,530

 
(95
)
 
(95
)
 
—

 
(95
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
Off-balance sheet financial instruments:
 

 
 

 
 

 
 

 
 

 
 

Commitments to extend credit
1,030,322

 
1,205

 
1,205

 
—

 
1,205

 
—

Standby letters of credit and financial guarantees written
13,377

 
201

 
201

 
—

 
201

 
—


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 the price that we would expect to 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 and equity 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, mortgage servicing rights, and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
 
The Company's policy is to recognize transfers into or out of a level as of the end of the reporting period. 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, 2019. Also, there were no transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2019.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of September 30, 2019 and December 31, 2018:
 
 
 
 
Fair Value at Reporting Date Using
(dollars in thousands)
Fair Value
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
September 30, 2019
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

States and political subdivisions
$
124,711

 
$
—

 
$
113,209

 
$
11,502

Corporate securities
30,713

 
—

 
30,713

 
—

U.S. Treasury obligations and direct obligations of U.S Government agencies
42,897

 
—

 
42,897

 
—

Mortgage-backed securities:
 

 
 

 
 

 
 

Residential - U.S. Government sponsored entities
723,644

 
—

 
723,644

 
—

Commercial - U.S. Government agencies and sponsored entities
87,742

 
—

 
87,742

 
—

Residential - Non-government agencies
39,109

 
—

 
39,109

 
—

Commercial - Non-government agencies
138,059

 
—

 
138,059

 
—

Total available-for-sale securities
1,186,875

 
—

 
1,175,373

 
11,502

 
 
 
 
 
 
 
 
Equity securities
1,058

 
1,058

 
—

 
—

 
 
 
 
 
 
 
 
Derivatives: Interest rate lock and forward sale commitments
46

 
—

 
46

 
—

Total
$
1,187,979

 
$
1,058

 
$
1,175,419

 
$
11,502



 
 
 
Fair Value at Reporting Date Using
(dollars in thousands)
Fair Value
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
 

 
 

 
 

 
 

Available-for-sale securities:
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

States and political subdivisions
$
173,674

 
$
—

 
$
162,505

 
$
11,169

Corporate securities
54,849

 
—

 
54,849

 
—

U.S. Treasury obligations and direct obligations of U.S Government agencies
32,574

 
—

 
32,574

 
—

Mortgage-backed securities:
 

 
 

 
 

 
 

Residential - U.S. Government sponsored entities
717,052

 
—

 
717,052

 
—

Commercial - U.S. Government agencies and sponsored entities
41,118

 
—

 
41,118

 
—

Residential - Non-government agencies
51,483

 
—

 
51,483

 
—

Commercial - Non-government agencies
134,728

 
—

 
134,728

 
—

Total available-for-sale securities
1,205,478

 
—

 
1,194,309

 
11,169

 
 
 
 
 
 
 
 
Equity securities
826

 
826

 
—

 
—

 
 
 
 
 
 
 
 
Derivatives: Interest rate lock and forward sale commitments
(84
)
 
—

 
(84
)
 
—

Total
$
1,206,220

 
$
826

 
$
1,194,225

 
$
11,169



For the nine months ended September 30, 2019 and 2018, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 
(dollars in thousands)
Available-For-Sale
Debt Securities:
States and
Political
Subdivisions
Balance at December 31, 2018
$
11,169

Principal payments received
(285
)
Unrealized net gain included in other comprehensive income
618

Balance at September 30, 2019
$
11,502

 
 

Balance at December 31, 2017
$
11,794

Principal payments received
(280
)
Unrealized net loss included in other comprehensive income
(370
)
Balance at September 30, 2018
$
11,144


 
Within the states and political subdivisions available-for-sale debt securities category, the Company holds four mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of $11.5 million and $11.1 million at September 30, 2019 and September 30, 2018, respectively. 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, 2019, the weighted average discount rate utilized was 3.94% compared to 5.28% at September 30, 2018 and 5.06% at December 31, 2018, 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.

The following table presents the fair value of assets measured on a nonrecurring basis and the level of valuation assumptions used to determine the respective fair values as of September 30, 2019 and December 31, 2018:
 
 
 
 
Fair Value Measurements Using
(dollars in thousands)
Fair Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
September 30, 2019
 

 
 

 
 

 
 

Other real estate (1)
$
466

 
$
—

 
$
466

 
$
—

 
 
 
 
 
 
 
 
December 31, 2018
 

 
 

 
 

 
 

Other real estate (1)
$
414

 
$
—

 
$
414

 
$
—



(1) 
Represents other real estate that is carried at fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral.