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FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

6 Months Ended

Jun. 30, 2021

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. As of June 30, 2021, the weighted average discount rate used in the valuation of loans was 4.53%. 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. As of June 30, 2021, the weighted average discount rate used in the valuation of time deposits was 0.31%. 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. As of June 30, 2021, the weighted average discount rate used in the valuation of long-term debt was 5.82%.

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)
June 30, 2021
Financial assets:
Cash and due from banks			$	116,009					$	116,009					$	116,009					$	—					$	—
Interest-bearing deposits in other banks			224,469						224,469						224,469						—						—
Investment securities			1,408,918						1,408,918						1,578						1,398,430						8,910
Loans held for sale			5,361						5,361						—						5,361						—
Net loans			4,999,537						4,882,130						—						—						4,882,130
Accrued interest receivable			19,014						19,014						19,014						—						—
Financial liabilities:
Deposits:
Noninterest-bearing demand			2,203,806						2,203,806						2,203,806						—						—
Interest-bearing demand and savings and money market			3,390,225						3,390,225						3,390,225						—						—
Time			803,128						802,904						—						—						802,904
Long-term debt			105,495						90,309						—						—						90,309
Accrued interest payable (included in other liabilities)			1,142						1,142						1,142						—						—

																					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)
June 30, 2021
Derivatives:
Interest rate lock commitments			$	779					$	14					$	14					$	—					$	14					$	—
Forward sale commitments			4,945						(14)						(14)						—						(14)						—
Risk participation agreement			37,647						(22)						(22)						—						—						(22)
Off-balance sheet financial instruments:
Commitments to extend credit			1,308,203						—						1,620						—						1,620						—
Standby letters of credit and financial guarantees written			11,456						—						172						—						172						—

															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, 2020
Financial assets:
Cash and due from banks			$	97,546					$	97,546					$	97,546					$	—					$	—
Interest-bearing deposits in other banks			6,521						6,521						6,521						—						—
Investment securities			1,183,960						1,183,960						1,351						1,170,283						12,326
Loans held for sale			16,687						16,687						—						16,687						—
Net loans			4,880,844						4,795,776						—						—						4,795,776
Accrued interest receivable			20,224						20,224						20,224						—						—
Financial liabilities:
Deposits:
Noninterest-bearing demand			1,790,269						1,790,269						1,790,269						—						—
Interest-bearing demand and savings and money market			3,106,931						3,106,931						3,106,931						—						—
Time			898,918						899,562						—						—						899,562
Short-term borrowings			22,000						22,000						—						22,000						—
Long-term debt			105,385						92,488						—						—						92,488
Accrued interest payable (included in other liabilities)			1,727						1,727						1,727						—						—

																					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, 2020
Derivatives:
Interest rate lock commitments			$	714					$	18					$	18					$	—					$	18					$	—
Forward sale commitments			16,603						(115)						(115)						—						(115)						—
Risk participation agreements			37,762						(48)						(48)						—						—						(48)
Off-balance sheet financial instruments:
Commitments to extend credit			1,176,065						—						1,313						—						1,313						—
Standby letters of credit and financial guarantees written			10,544						—						158						—						158						—

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.

There were no transfers of financial assets and liabilities into or out of Level 3 of the fair value hierarchy during the three and six months ended June 30, 2021.

The following tables present the fair value of assets and liabilities measured on a recurring basis as of June 30, 2021 and December 31, 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)
June 30, 2021
Available-for-sale securities:
Debt securities:
States and political subdivisions			$	196,764					$	—					$	188,794					$	7,970
Corporate securities			46,678						—						46,678						—
U.S. Treasury obligations and direct obligations of U.S Government agencies			39,734						—						39,734						—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities			984,678						—						984,678						—
Commercial - U.S. Government agencies and sponsored entities			81,466						—						81,466						—
Residential - Non-government agencies			15,446						—						14,506						940
Commercial - Non-government agencies			42,574						—						42,574						—
Total available-for-sale securities			1,407,340						—						1,398,430						8,910
Equity securities			1,578						1,578						—						—
Derivatives: Interest rate lock, forward sale commitments and risk participation agreements			(22)						—						—						(22)
Total			$	1,408,896					$	1,578					$	1,398,430					$	8,888

									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, 2020
Available-for-sale securities:
Debt securities:
States and political subdivisions			$	168,766					$	—					$	157,429					$	11,337
Corporate securities			48,008						—						48,008						—
U.S. Treasury obligations and direct obligations of U.S Government agencies			33,145						—						33,145						—
Mortgage-backed securities:
Residential - U.S. Government sponsored entities			778,826						—						778,826						—
Commercial - U.S. Government agencies and sponsored entities			87,469						—						87,469						—
Residential - Non-government agencies			23,423						—						22,434						989
Commercial - Non-government agencies			42,972						—						42,972						—
Total available-for-sale securities			1,182,609						—						1,170,283						12,326
Equity securities			1,351						1,351						—						—
Derivatives: Interest rate lock, forward sale commitments and risk participation agreements			(145)						—						(97)						(48)
Total			$	1,183,815					$	1,351					$	1,170,186					$	12,278

For the six months ended June 30, 2021 and 2020, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

			Available-For-Sale Debt Securities:
(dollars in thousands)			States and Political Subdivisions						Residential - Non-Government Agencies						Total
Balance at December 31, 2020			$	11,337					$	989					$	12,326
Principal payments received			(2,734)						(11)						(2,745)
Unrealized net loss included in other comprehensive income			(633)						(38)						(671)
Balance at June 30, 2021			$	7,970					$	940					$	8,910
Balance at December 31, 2019			$	11,255					$	—					$	11,255
Principal payments received			(212)						—						(212)
Unrealized net gain included in other comprehensive income			628						—						628
Balance at June 30, 2020			$	11,671					$	—					$	11,671

Within the states and political subdivisions available-for-sale debt securities category, the Company holds two mortgage revenue bonds issued by the City & County of Honolulu with an aggregate fair value of $8.0 million and $11.7 million at June 30, 2021 and June 30, 2020, respectively. Within the other MBS non-agency category, the Company holds two mortgage backed bonds issued by Habitat for Humanity with a fair value of $0.9 million at June 30, 2021. The Company estimates the aggregate fair value of $8.9 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 City & County of Honolulu mortgage revenue bonds and Habitat for Humanity mortgage backed bonds is the weighted average discount rate. As of June 30, 2021, the weighted average discount rate utilized was 3.19% compared to 2.82% at June 30, 2020 and 2.83% at December 31, 2020, 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 June 30, 2021 and December 31, 2020:

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)

June 30, 2021

Other real estate (1)

$

—

$

—

$

—

$

—

December 31, 2020

Other real estate (1)

$

—

$

—

$

—

$

—

(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.

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- References

No definition available.

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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/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258

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