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.

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.

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. As of September 30, 2020, the weighted average discount rate used in the valuation of loans was 4.78%. In accordance with ASU 2016-01, the fair value of loans are measured based on the notion of exit price.

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.

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. As of September 30, 2020, the weighted average discount rate used in the valuation of time deposits was 0.41%. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

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. As of September 30, 2020, the weighted average discount rate used in the valuation of long-term debt was 2.83%.

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.

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.

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, 2020
Financial assets:
Cash and due from banks	$	89,665	$	89,665	$	89,665	$	—	$	—
Interest-bearing deposits in other banks	5,489		5,489		5,489		—		—
Investment securities	1,167,523		1,167,523		1,204		1,153,791		12,528
Loans held for sale	23,962		23,962		—		23,962		—
Net loans	4,950,084		4,844,662		—		—		4,844,662

Accrued interest receivable	21,478		21,478		21,478		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	1,762,476		1,762,476		1,762,476		—		—
Interest-bearing demand and savings and money market	2,995,227		2,995,227		2,995,227		—		—
Time	921,226		922,223		—		—		922,223
Short-term borrowings	206,000		206,000		—		206,000		—
Long-term debt	101,547		90,690		—		—		90,690
Accrued interest payable (included in other liabilities)	1,608		1,608		1,608		—		—


							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, 2020
Derivatives:
Interest rate lock commitments	$	2,927	$	111	$	111	$	—	$	111	$	—
Forward sale commitments	19,341		(73)		(73)		—		(73)		—
Risk participation agreement	28,800		(54)		(54)		—		—		(54)

Off-balance sheet financial instruments:
Commitments to extend credit	1,195,510		1,368		1,368		—		1,368		—
Standby letters of credit and financial guarantees written	10,842		163		163		—		163		—


					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, 2019
Financial assets:
Cash and due from banks	$	78,418	$	78,418	$	78,418	$	—	$	—
Interest-bearing deposits in other banks	24,554		24,554		24,554		—		—
Investment securities	1,128,110		1,128,110		1,127		1,115,728		11,255
Loans held for sale	9,083		9,083		—		9,083		—
Net loans	4,401,569		4,392,477		—		—		4,392,477

Accrued interest receivable	16,500		16,500		16,500		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	1,450,532		1,450,532		1,450,532		—		—
Interest-bearing demand and savings and money market	2,643,038		2,643,038		2,643,038		—		—
Time	1,026,453		1,023,362		—		—		1,023,362
Short-term borrowings	150,000		150,000		—		150,000		—
Long-term debt	101,547		97,827		—		97,827		—
Accrued interest payable (included in other liabilities)	4,288		4,288		4,288		—		—


							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, 2019
Derivatives:
Interest rate lock commitments	$	625	$	8	$	8	$	—	$	8	$	—
Forward sale commitments	8,968		(28)		(28)		—		(28)		—

Off-balance sheet financial instruments:
Commitments to extend credit	1,089,135		1,230		1,230		—		1,230		—
Standby letters of credit and financial guarantees written	10,526		158		158		—		158		—

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.

There was one transfer into Level 3 of the fair value hierarchy for long-term debt during the three and nine months ended September 30, 2020. There were no transfers of financial assets and liabilities out of Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2020.


			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, 2020
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	168,589	$	—	$	157,055	$	11,534
Corporate securities	50,558		—		50,558		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	34,944		—		34,944		—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities	763,326		—		763,326		—
Commercial - U.S. Government agencies and sponsored entities	73,786		—		73,786		—
Residential - Non-government agencies	28,676		—		27,682		994
Commercial - Non-government agencies	46,440		—		46,440		—

Total available-for-sale securities	1,166,319		—		1,153,791		12,528

Equity securities	1,204		1,204		—		—

Derivatives: Interest rate lock and forward sale commitments	(16)		—		38		(54)
Total	$	1,167,507	$	1,204	$	1,153,829	$	12,474


			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, 2019
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	122,018	$	—	$	110,763	$	11,255
Corporate securities	30,529		—		30,529		—
U.S. Treasury obligations and direct obligations of U.S Government agencies	40,381		—		40,381		—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities	677,822		—		677,822		—
Commercial - U.S. Government agencies and sponsored entities	81,225		—		81,225		—
Residential - Non-government agencies	37,191		—		37,191		—
Commercial - Non-government agencies	137,817		—		137,817		—

Total available-for-sale securities	1,126,983		—		1,115,728		11,255

Equity securities	1,127		1,127		—		—

Derivatives: Interest rate lock and forward sale commitments	(20)		—		(20)		—
Total	$	1,128,090	$	1,127	$	1,115,708	$	11,255


	Available-For-Sale Debt Securities:
(dollars in thousands)	States and Political Subdivisions		Residential - Non-Government Agencies		Total
Balance at December 31, 2019	$	11,255	$	—	$	11,255
Principal payments received	(319)		—		(319)
Unrealized net gain included in other comprehensive income	598		—		598
Purchases	—		994		994
Balance at September 30, 2020	$	11,534	$	994	$	12,528

Balance at December 31, 2018	$	11,169	$	—	$	11,169
Principal payments received	(285)		—		(285)
Unrealized net gain included in other comprehensive income	618		—		618
Purchases	—		—		—
Balance at September 30, 2019	$	11,502	$	—	$	11,502

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 $11.5 million at September 30, 2020 and September 30, 2019, respectively. Within the residential non-government agency available-for-sale debt securities category, the Company purchased two mortgage backed bonds issued by Habitat for Humanity with a fair value of $1.0 million. The Company estimates the aggregate fair value of $12.5 million 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 and Habitat for Humanity mortgage backed bonds is the weighted average discount rate. As of September 30, 2020, the weighted average

discount rate utilized was 2.79% compared to 3.94% at September 30, 2019 and 4.08% at December 31, 2019, 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, 2020 and December 31, 2019:


			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, 2020


Other real estate (1)	$	128	$	—	$	128	$	—

December 31, 2019


Other real estate (1)	$	164	$	—	$	164	$	—