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 FHLB 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, 2023, the weighted average discount rate used in the valuation of loans was 8.01%. 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 estimated 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, for the purposes of this disclosure, are shown to equal the carrying amount which is the amount payable on demand. The fair value of time deposits is estimated by discounting future cash flows using rates currently offered for FHLB advances of similar remaining maturities. As of September 30, 2023, the weighted average discount rate used in the valuation of time deposits was 5.64%.

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, 2023, the weighted average discount rate used in the valuation of long-term debt was 7.68%.

The fair values of derivative financial instruments are based upon current market values, if available. If there are no relevant comparable values, 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 and financial instrument information. 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 cannot be determined with precision as they are subjective in nature and involve uncertainties and matters of significant judgment. 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, 2023
Financial assets:
Cash and due from financial institutions	$	108,818	$	108,818	$	108,818	$	—	$	—
Interest-bearing deposits in other financial institutions	329,913		329,913		329,913		—		—
Investment securities	1,265,306		1,157,140		—		1,150,106		7,034

Loans, net of ACL	5,444,193		4,977,934		—		—		4,977,934



Accrued interest receivable	21,529		21,529		21,529		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	1,969,523		1,969,523		1,969,523		—		—
Interest-bearing demand and savings and money market	3,555,393		3,555,393		3,555,393		—		—
Time	1,349,829		1,336,148		—		—		1,336,148

Long-term debt	156,041		138,733		—		—		138,733
Accrued interest payable (included in other liabilities)	16,752		16,752		16,752		—		—


							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, 2023
Off-balance sheet financial instruments:
Commitments to extend credit	$	1,331,239	$	—	$	1,299	$	—	$	1,299	$	—
Standby letters of credit and financial guarantees written	3,262		—		49		—		49		—

Derivatives:


Risk participation agreements	36,227		—		—		—		—		—
Back-to-back swap agreements:
Assets	35,262		5,043		5,043		—		—		5,043
Liabilities	(35,262)		(5,043)		(5,043)		—		—		(5,043)
Interest rate swap agreements	115,545		10,135		10,135		—		—		10,135


					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, 2022
Financial assets:
Cash and due from financial institutions	$	97,150	$	97,150	$	97,150	$	—	$	—
Interest-bearing deposits in other financial institutions	14,894		14,894		14,894		—		—
Investment securities	1,336,677		1,268,574		—		1,261,306		7,268
Loans held for sale	1,105		1,105		—		1,105		—
Loans, net of ACL	5,491,728		5,043,436		—		—		5,043,436



Accrued interest receivable	20,345		20,345		20,345		—		—

Financial liabilities:
Deposits:
Noninterest-bearing demand	2,092,823		2,092,823		2,092,823		—		—
Interest-bearing demand and savings and money market	3,652,195		3,652,195		3,652,195		—		—
Time	991,205		975,086		—		—		975,086
Short-term borrowings	5,000		5,000		—		5,000		—
Long-term debt	105,859		93,729		—		—		93,729
Accrued interest payable (included in other liabilities)	4,739		4,739		4,739		—		—


							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, 2022
Off-balance sheet financial instruments:
Commitments to extend credit	$	1,328,791	$	—	$	1,270	$	—	$	1,270	$	—
Standby letters of credit and financial guarantees written	5,367		—		80		—		80		—

Derivatives:

Forward sale commitments	1,110		8		8		—		8		—
Risk participation agreements	36,835		—		—		—		—		—
Back-to-back swap agreements:
Assets	32,335		4,611		4,611		—		—		4,611
Liabilities	(32,335)		(4,611)		(4,611)		—		—		(4,611)
Interest rate swap agreements	115,545		5,986		5,986		—		—		5,986

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 securities and derivatives are recorded at fair value on a recurring basis. Periodically, 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.


			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, 2023
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	124,977	$	—	$	118,614	$	6,363
Corporate securities	30,020		—		30,020		—
U.S. Treasury obligations and direct obligations of U.S. Government agencies	21,492		—		21,492		—
Mortgage-backed securities:
Residential - U.S. Government-sponsored enterprises	378,872		—		378,872		—
Residential - Non-government agencies	12,079		—		11,408		671
Commercial - U.S. Government-sponsored enterprises	43,048		—		43,048		—
Commercial - Non-government agencies	14,765		—		14,765		—

Total available-for-sale investment securities	625,253		—		618,219		7,034



Derivatives:




Interest rate swap agreements	10,135		—		—		10,135
Total derivatives	10,135		—		—		10,135
Total	$	635,388	$	—	$	618,219	$	17,169


			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, 2022
Available-for-sale securities:
Debt securities:
States and political subdivisions	$	135,752	$	—	$	129,168	$	6,584
Corporate securities	30,211		—		30,211		—
U.S. Treasury obligations and direct obligations of U.S. Government agencies	25,715		—		25,715		—
Mortgage-backed securities:
Residential - U.S. Government-sponsored enterprises	423,803		—		423,803		—
Residential - Non-government agencies	8,662		—		7,978		684
Commercial - U.S. Government-sponsored enterprises	46,144		—		46,144		—
Commercial - Non-government agencies	1,507		—		1,507		—

Total available-for-sale investment securities	671,794		—		664,526		7,268



Derivatives:
Interest rate lock commitments	8		—		8		—



Interest rate swap agreements	5,986		—		—		5,986
Total derivatives	5,994		—		8		5,986
Total	$	677,788	$	—	$	664,534	$	13,254


	Available-For-Sale Debt Securities:
(dollars in thousands)	States and Political Subdivisions		Residential - Non-Government Agencies		Interest Rate Swap Agreements		Total
Balance at December 31, 2022	$	6,584	$	684	$	5,986	$	13,254
Principal payments received	(172)		(17)		—		(189)
Unrealized net gain (loss) included in other comprehensive income	(49)		4		4,149		4,104

Balance at September 30, 2023	$	6,363	$	671	$	10,135	$	17,169

Balance at December 31, 2021	$	7,681	$	938	$	—	$	8,619
Principal payments received	(157)		(17)		—		(174)
Unrealized net gain (loss) included in other comprehensive income	(842)		(186)		6,966		5,938
Additions	—		—		(50)		(50)
Balance at September 30, 2022	$	6,682	$	735	$	6,916	$	14,333

Within the states and political subdivisions available-for-sale debt securities category, the Company held two mortgage revenue bonds issued by the City & County of Honolulu, which had an aggregate fair value of $6.4 million at September 30, 2023, compared to $6.6 million at December 31, 2022.

Within the other MBS non-agency category, the Company held two mortgage backed bonds issued by Habitat for Humanity with an aggregate fair value of $0.7 million at September 30, 2023 and also remained relatively unchanged from $0.7 million at December 31, 2022.

The Company estimates the aggregate fair value of $17.2 million and $13.3 million as of September 30, 2023 and December 31, 2022, respectively, 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 September 30, 2023, the weighted average discount rate utilized was 6.77%, compared to 6.41% at December 31, 2022, 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.

As discussed in Note 7 - Derivatives, during the first quarter of 2022, the Company entered into a forward starting interest rate swap, which was measured at fair value using Level 3 inputs. The significant unobservable input used in the fair value measurement of the Company's forward starting interest rate swap is the weighted-average discount rate. As of September 30, 2023, the weighted average discount rate utilized was 4.12%, compared to 3.31% at December 31, 2022.