Fair value measurements

12 Months Ended

Dec. 31, 2011

Fair value measurements

Fair value measurements

15 · Fair value measurements

Fair value estimates are based on the price that would be received to sell an asset, or paid upon the transfer of a liability, in an orderly transaction between market participants at the measurement date. The fair value estimates are generally determined based on assumptions that market participants would use in pricing the asset or liability and are based on market data obtained from independent sources. However, in certain cases, the Company uses its own assumptions about market participant assumptions based on the best information available in the circumstances. These valuations are estimates at a specific point in time, based on relevant market information, information about the financial instrument and judgments regarding future expected loss experience, economic conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result if the Company were to sell its entire holdings of a particular financial instrument at one time. Because no active trading market exists for a portion of the Company’s financial instruments, fair value estimates cannot be determined with precision. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates. Fair value estimates are provided for certain financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates, but have not been considered in making such estimates.

The Company groups its financial assets measured at fair value in three levels outlined as follows:

Level 1:Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities 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:Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3:Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value isdetermined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company used the following methods and assumptions to estimate the fair value of each applicable class of financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents and short-term borrowings—other than bank.  The carrying amount approximated fair value because of the short maturity of these instruments.

Investment and mortgage-related securities.  Fair value prices were provided by independent market participants and were based on observable inputs using market-based valuation techniques.

Loans receivable.  For residential real estate loans, fair value was calculated by discounting estimated cash flows using discount rates based on current industry pricing for loans with similar contractual characteristics.

For other types of loans, fair value was estimated by discounting contractual cash flows using discount rates that reflect current industry pricing for loans with similar characteristics and remaining maturity.  Where industry pricing is not available, discount rates are based on ASB’s current pricing for loans with similar characteristics and remaining maturity.

The fair value of all loans was adjusted to reflect current assessments of loan collectability.

Deposit liabilities.  The fair value of savings, negotiable orders of withdrawal, demand and money market deposits was the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Other bank borrowings and long-term debt.  Fair value was estimated by discounting the future cash flows using the current rates available for borrowings with similar credit terms and remaining maturities.

Forward Starting Swaps.  Fair value was estimated by discounting the expected future cash flows of the swaps, using the contractual terms of the swaps, including the period to maturity, and observable market-based inputs, including forward interest rate curves. Fair value incorporates credit valuation adjustments to appropriately reflect nonperformance risk.

Off-balance sheet financial instruments.  The fair value of loans serviced for others was calculated by discounting expected net income streams using discount rates that reflect industry pricing for similar assets. Expected net income streams were estimated based on industry assumptions regarding prepayment speeds and income and expenses associated with servicing residential mortgage loans for others. The fair value of commitments to originate loans was estimated based on the change in current primary market prices of new commitments. Since lines of credit can expire without being drawn and customers are under no obligation to utilize the lines, no fair value was assigned to unused lines of credit. The fair value of letters of credit was estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair value of HECO-obligated preferred securities of trust subsidiaries was based on quoted market prices.

The estimated fair values of certain of the Company’s financial instruments were as follows:

December 31	2011				2010
(in thousands)	Carrying ornotionalamount		Estimatedfair value		Carrying ornotionalamount		Estimatedfair value
Financial assets
Cash and cash equivalents, excluding money market funds	$	270,255	$	270,255	$	329,553	$	329,553
Money market funds	10		10		1,098		1,098
Available-for-sale investment and mortgage-related securities	624,331		624,331		678,152		678,152
Investment in stock of Federal Home Loan Bank of Seattle	97,764		97,764		97,764		97,764
Loans receivable, net	3,652,419		3,888,558		3,497,729		3,639,983
Financial liabilities
Deposit liabilities	4,070,032		3,991,717		3,975,372		3,979,027
Short-term borrowings—other than bank	68,821		68,821		24,923		24,923
Other bank borrowings	233,229		250,486		237,319		251,822
Long-term debt, net—other than bank	1,340,070		1,400,241		1,364,942		1,345,770
Forward starting swaps	–		–		2,762		2,762
Off-balance sheet items
HECO-obligated preferred securities of trust subsidiary	50,000		50,000		50,000		52,500

As of December 31, 2011 and 2010, loan commitments and unused lines and letters of credit issued by ASB had notional amounts of $1.3 billion and $1.2 billion, respectively, and their estimated fair value on such dates were $0.3 million and $0.4 million, respectively. As of December 31, 2011 and 2010, loans serviced by ASB for others had notional amounts of $993.3 million and $817.7 million and the estimated fair value of the servicing rights for such loans was $9.8 million and $8.8 million, respectively.

Fair value measurements on a recurring basis.While securities held in ASB’s investment portfolio trade in active markets, they do not trade on listed exchanges nor do the specific holdings trade in quoted markets by dealers or brokers. All holdings are valued using market-based approaches that are based on exit prices that are taken from identical or similar market transactions, even in situations where trading volume may be low when compared with prior periods as has been the case during the recent market disruption. Inputs to these valuation techniques reflect the assumptions that consider credit and nonperformance risk that market participants would use in pricing the asset based on market data obtained from independent sources. Available-for-sale securities were comprised of federal agency obligations and mortgage-backed securities and municipal bonds.

Assets and liabilities measured at fair value on a recurring basis were as follows:

	Fair value measurements using
(in thousands)	Quoted prices in active marketsfor identical assets (Level 1)	Significant other observableinputs (Level 2)	Significant unobservable inputs (Level 3)
December 31, 2011
Money market funds (“other” segment)	$–	$         10	$–
Available-for-sale securities (bank segment)
Mortgage-related securities-FNMA, FHLMC and GNMA	$–	$344,865	$–
Federal agency obligations	–	220,727	–
Municipal bonds	–	58,739	–
	$–	$624,331	$–
December 31, 2010
Money market funds (“other” segment)	$–	$   1,098	$–
Available-for-sale securities (bank segment)
Mortgage-related securities-FNMA, FHLMC and GNMA	$–	$319,970	$–
Federal agency obligations	–	315,896	–
Municipal bonds	–	42,286	–
	$–	$678,152	$–
Forward starting swaps (“other” segment)	$–	$(2,762)	$–

Fair value measurements on a nonrecurring basis.From time to time, the Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the writedowns of individual assets. ASB does not record loans at fair value on a recurring basis. However, from time to time, ASB records nonrecurring fair value adjustments to loans to reflect specific reserves on loans based on the current appraised value of the collateral or unobservable market assumptions. Unobservable assumptions reflect ASB’s own estimate of the fair value of collateral used in valuing the loan. ASB may also be required to measure goodwill at fair value on a nonrecurring basis. See “Goodwill and other intangibles” in Note 1 for ASB’s goodwill valuation methodology. During 2011 and 2010, goodwill was not measured at fair value.

From time to time, the Company may be required to measure certain liabilities at fair value on a nonrecurring basis in accordance with GAAP. The fair value of HECO’s ARO (Level 3) was determined by discounting the expected future cash flows using market-observable risk-free rates as adjusted by HECO’s credit spread (also see Note 3).

Assets measured at fair value on a nonrecurring basis were as follows:

		Fair value measurements using
		Quoted prices in active	Significant other	Significant
		markets for identical	Observable inputs	Unobservable inputs
(in millions)	Balance	assets (Level 1)	(Level 2)	(Level 3)
Loans
December 31, 2011	$34	$–	$25	$9
December 31, 2010	35	–	26	9

Specific reserves as of December 31, 2011 and 2010 were nil and $3.5 million, respectively, and were included in loans receivable held for investment, net. For 2011 and 2010, there were no adjustments to fair value for ASB’s loans held for sale.

Retirement benefit plans

Assets held in various trusts for the retirement benefit plans (Plans) are measured at fair value on a recurring basis (including items that are required to be measured at fair value and items for which the fair value option has been elected) and were as follows:

	Pension benefits				Other benefits
		Fair value measurements using				Fair value measurements using
(in millions)	December 31	Quoted prices in active markets for identical assets (Level 1)	Significant other observable inputs (Level 2)	Significant unobserv- able inputs (Level 3)	December 31	Quoted prices in active markets for identical assets (Level 1)	Significant other observable inputs (Level 2)	Significant unobserv- able inputs (Level 3)
2011
Equity securities	$425	$425	$–	$–	$73	$73	$–	$–
Equity index funds	82	82	–	–	15	15	–	–
Fixed income securities	283	98	185	–	43	37	6	–
Pooled and mutual funds	87	1	86	–	13	–	13	–
Total	877	$606	$271	$–	144	$125	$19	$–
Receivables andpayables, net	(37)				(1)
Fair value of plan assets	$840				$143
2010
Equity securities	$453	$453	$–	$–	$80	$80	$–	$–
Equity index funds	80	80	–	–	14	14	–	–
Fixed income securities	238	55	183	–	8	2	6	–
Pooled and mutual funds	78	9	69	–	49	39	10	–
Total	849	$597	$252	$–	151	$135	$16	$–
Receivables andpayables, net	(17)				–
Fair value of plan assets	$832				$151

The fair values of the financial instruments shown in the table above represent the Company’s best estimates of the amounts that would be received upon sale of those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s judgments about the assumptions that market participants would use in pricing the asset or liability.  Those judgments are developed by the Company based on the best information available in the circumstances.

In connection with the adoption of the fair value measurement standards, the Company adopted the provisions of ASU No. 2009-12, “Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent),” which allows for the estimation of the fair value of investments in investment companies for which the investment does not have a readily determinable fair value, using net asset value per share or its equivalent as a practical expedient.

The Company used the following valuation methodologies for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2011 and 2010.

Equity securities, equity index funds, U.S. Treasury fixed income securities and public mutual funds (Level 1).  Valued at the closing price reported on the active market on which the individual securities are traded or the published net asset value (NAV) of the fund.

Fixed income securities, equity securities, pooled securities and mutual funds (Level 2).  Fixed income securities, other than those issued by the U.S. Treasury, are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Equity securities and pooled and mutual funds include commingled equity funds and other closed funds, respectively, that are not open to public investment and are valued at the net asset value per share. Certain other investments are valued based on discounted cash flow analyses.

Other (Level 3).  The venture capital and limited partnership interests are valued at historical cost, modified by revaluation of financial assets and financial liabilities at fair value through profit or loss.

For 2011 and 2010, the changes in Level 3 assets were as follows:

	2011				2010
(in thousands)	Pension benefits		Other benefits		Pension benefits		Other benefits
Balance, January 1	$141		$ 5		$ 67,420		$ 13,703
Realized and unrealized gains	92		3		6,650		1,445
Purchases and settlements, net	(16	)	(1	)	(317	)	(3,854	)
Transfer in or out of Level 3	–		–		(73,612	)	(11,289	)
Balance, December 31	$217		$ 7		$      141		$          5