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Fair Market Value of Financial Assets and Liabilities | 9 Months Ended
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Sep. 30, 2018
Fair Market Value of Financial Assets and Liabilities [Abstract] |
Fair Market Value of Financial Assets and Liabilities | Note 8 – Fair Market Value of Financial Assets and Liabilities Fair Value Measurements ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. In this standard, the FASB clarifies the principle that fair value should be based on the exit price when pricing the asset or liability. In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows: Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities. Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in determining an exit price for the assets or liabilities. Recurring Measurements The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 and indicate the level within the fair value hierarchy of the valuation techniques.
|  |  |  |  | Fair Value Measurements at September 30, 2018 Using |
(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) |
Assets measured – recurring basis |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agencies |  | $ | 242,799 |  |  | $ | 91,465 |  |  | $ | 151,334 |  |  | $ | 0 |
State and political subdivisions |  |  | 123,992 |  |  |  | 0 |  |  |  | 123,992 |  |  |  | 0 |
U.S. government sponsored agency mortgage-backed securities |  |  | 201,911 |  |  |  | 0 |  |  |  | 201,911 |  |  |  | 0 |
Other debt securities |  |  | 506 |  |  |  | 0 |  |  |  | 506 |  |  |  | 0 |
Mortgage servicing rights |  |  | 3,815 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,815 |
(in thousands) |  |  |  |  | Fair Value Measurements at December 31, 2017 Using |
|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets measured – recurring basis |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agencies |  | $ | 210,572 |  |  | $ | 64,598 |  |  | $ | 145,974 |  |  | $ | 0 |
State and political subdivisions |  |  | 145,015 |  |  |  | 0 |  |  |  | 145,015 |  |  |  | 0 |
U.S. government sponsored agency mortgage-backed securities |  |  | 205,309 |  |  |  | 0 |  |  |  | 205,309 |  |  |  | 0 |
Other debt securities |  |  | 507 |  |  |  | 0 |  |  |  | 507 |  |  |  | 0 |
CRA investment funds |  |  | 24,358 |  |  |  | 24,358 |  |  |  | 0 |  |  |  | 0 |
Mortgage servicing rights |  |  | 3,484 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,484 |
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. These valuation methodologies were applied to all of CTBI’s financial assets carried at fair value. CTBI had no liabilities measured and recorded at fair value as of September 30, 2018 and December 31, 2017. There have been no significant changes in the valuation techniques during the quarter or nine months ended September 30, 2018. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Available-for-Sale Securities Securities classified as available-for-sale are reported at fair value on a recurring basis. U.S. Treasury and government agencies are classified as Level 1 of the valuation hierarchy where quoted market prices are available in the active market on which the individual securities are traded. If quoted market prices are not available, CTBI obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement. CTBI reviews the pricing quarterly to verify the reasonableness of the pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors. U.S. Treasury and government agencies, state and political subdivisions, U.S. government sponsored agency mortgage-backed securities, and other debt securities are classified as Level 2 inputs. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. As of September 30, 2018 and December 31, 2017, CTBI does not own any securities valued using Level 3 inputs. Mortgage Servicing Rights Mortgage servicing rights do not trade in an active, open market with readily observable prices. CTBI reports mortgage servicing rights at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value. In determining fair value, CTBI utilizes the expertise of an independent third party. Accordingly, fair value is determined by the independent third party by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements of mortgage servicing rights are tested for impairment on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. See the table below for inputs and valuation techniques used for Level 3 mortgage servicing rights. Transfers between Levels There were no transfers between Levels 1, 2, and 3 as of September 30, 2018. Level 3 Reconciliation Following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs for the three and nine months ended September 30, 2018 and 2017:
Mortgage Servicing Rights |  |  |  |  |  |
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30 |  |  | September 30 |
(in thousands) |  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Beginning balance |  | $ | 3,772 |  |  | $ | 3,304 |  |  | $ | 3,484 |  |  | $ | 3,433 |
Total recognized gains (losses) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | 45 |  |  |  | 5 |  |  |  | 341 |  |  |  | (73 | )
Issues |  |  | 118 |  |  |  | 98 |  |  |  | 329 |  |  |  | 269 |
Settlements |  |  | (120 | ) |  |  | (124 | ) |  |  | (339 | ) |  |  | (346 | )
Ending balance |  | $ | 3,815 |  |  | $ | 3,283 |  |  | $ | 3,815 |  |  | $ | 3,283 |
Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date |  | $ | 45 |  |  | $ | 5 |  |  | $ | 341 |  |  | $ | (73 | )
Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as follows:
Noninterest Income |  |  |  |  |  |
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30 |  |  | September 30 |
(in thousands) |  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Total gains (losses) |  | $ | (75 | ) |  | $ | (119 | ) |  | $ | 2 |  |  | $ | (419 | )
Nonrecurring Measurements The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017 and indicate the level within the fair value hierarchy of the valuation techniques.
|  |  |  |  | Fair Value Measurements at September 30, 2018 Using |
(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) |
Assets measured – nonrecurring basis |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans (collateral dependent) |  | $ | 556 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 556 |
Other real estate owned |  |  | 7,640 |  |  |  | 0 |  |  |  | 0 |  |  |  | 7,640 |
|  |  |  |  | Fair Value Measurements at December 31, 2017 Using |
(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) |
Assets measured – nonrecurring basis |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans (collateral dependent) |  | $ | 2,709 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 2,709 |
Other real estate owned |  |  | 18,951 |  |  |  | 0 |  |  |  | 0 |  |  |  | 18,951 |
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Impaired Loans (Collateral Dependent) The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. CTBI considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Chief Credit Officer by comparison to historical results. Loans considered impaired under ASC 310-35, Impairment of a Loan, are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect subsequent (i) partial write-downs that are based on the observable market price or current appraised value of the collateral or (ii) the full charge-off of the loan carrying value. Quarter-to-date fair value adjustments on impaired loans disclosed above were $0.1 million for the quarter ended September 30, 2018 and $0.3 million for the quarters ended December 31, 2017 and September 30, 2017. Year-to-date fair value adjustments were $0.2 million for the nine months ended September 30, 2018, $1.0 million for the year ended December 31, 2017, and $0.7 million for the nine months ended September 30, 2017. Other Real Estate Owned In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy. Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral. Quarter-to-date fair value adjustments on other real estate/assets owned disclosed above were $0.8 million, $0.2 million, and $0.9 million for the quarters ended September 30, 2018, December 31, 2017, and September 30, 2017, respectively. Year-to-date adjustments were $1.8 million for the nine months ended September 30, 2018, $2.5 million for the year ended December 31, 2017, and $2.6 million for the nine months ended September 30, 2017. Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. Appraisers are selected from the list of approved appraisers maintained by management. Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2018 and December 31, 2017.
(in thousands) |  | Quantitative Information about Level 3 Fair Value Measurements
|  | Fair Value at September 30, 2018 |  | Valuation Technique(s) | Unobservable Input |  | Range (Weighted Average)
Mortgage servicing rights |  | $ | 3,815 |  | Discount cash flows, computer pricing model | Constant prepayment rate |  |  | 7.0% - 28.0% (8.3%)
|  |  |  |  |  | Probability of default |  |  | 0.0% - 100.0% (2.5%)
|  |  |  |  |  | Discount rate |  |  | 10.0% - 11.5% (10.1%)
Impaired loans (collateral-dependent) |  | $ | 556 |  | Market comparable properties | Marketability discount |  |  | 10.0% - 100.0% (44.1%)
Other real estate owned |  | $ | 7,640 |  | Market comparable properties | Comparability adjustments |  |  | 6.0% - 32.0% (15.7%)
(in thousands) |  | Quantitative Information about Level 3 Fair Value Measurements
|  | Fair Value at December 31, 2017 |  | Valuation Technique(s) | Unobservable Input |  | Range (Weighted Average)
Mortgage servicing rights |  | $ | 3,484 |  | Discount cash flows, computer pricing model | Constant prepayment rate |  |  | 7.0% - 45.0% (10.0%)
|  |  |  |  |  | Probability of default |  |  | 0.0% - 100.0% (3.0%)
|  |  |  |  |  | Discount rate |  |  | 10.0% - 11.5% (10.1%)
Impaired loans (collateral-dependent) |  | $ | 2,709 |  | Market comparable properties | Marketability discount |  |  | 1.9% - 89.8% (38.5%)
Other real estate owned |  | $ | 18,951 |  | Market comparable properties | Comparability adjustments |  |  | 6.0% - 58.6% (15.0%)
Sensitivity of Significant Unobservable Inputs The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. Mortgage Servicing Rights Fair market value for mortgage servicing rights is derived based on unobservable inputs, such as prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted average life of the loan, the discount rate, the weighted average coupon, and the weighted average default rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for prepayment speeds is accompanied by a directionally opposite change in the assumption for interest rates. Fair Value of Financial Instruments The following table presents estimated fair value of CTBI’s financial instruments as of September 30, 2018 and indicates the level within the fair value hierarchy of the valuation techniques. In accordance with the prospective adoption of ASU 2016-01, the fair values as of September 30, 2018 were measured using an exit price notion.
|  |  |  |  | Fair Value Measurements at September 30, 2018 Using |
(in thousands) |  | Carrying Amount |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 171,333 |  |  | $ | 171,333 |  |  | $ | 0 |  |  | $ | 0 |
Certificates of deposit in other banks |  |  | 5,145 |  |  |  | 0 |  |  |  | 5,134 |  |  |  | 0 |
Securities available-for-sale |  |  | 569,208 |  |  |  | 91,465 |  |  |  | 477,743 |  |  |  | 0 |
Securities held-to-maturity |  |  | 659 |  |  |  | 0 |  |  |  | 660 |  |  |  | 0 |
Loans held for sale |  |  | 1,029 |  |  |  | 1,050 |  |  |  | 0 |  |  |  | 0 |
Loans, net |  |  | 3,142,097 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,137,941 |
Federal Home Loan Bank stock |  |  | 14,713 |  |  |  | 0 |  |  |  | 14,713 |  |  |  | 0 |
Federal Reserve Bank stock |  |  | 4,887 |  |  |  | 0 |  |  |  | 4,887 |  |  |  | 0 |
Accrued interest receivable |  |  | 14,628 |  |  |  | 0 |  |  |  | 14,628 |  |  |  | 0 |
Mortgage servicing rights |  |  | 3,815 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,815 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 3,273,646 |  |  | $ | 826,804 |  |  | $ | 2,460,736 |  |  | $ | 0 |
Repurchase agreements |  |  | 250,983 |  |  |  | 0 |  |  |  | 0 |  |  |  | 251,261 |
Federal funds purchased |  |  | 1,305 |  |  |  | 0 |  |  |  | 1,305 |  |  |  | 0 |
Advances from Federal Home Loan Bank |  |  | 787 |  |  |  | 0 |  |  |  | 845 |  |  |  | 0 |
Long-term debt |  |  | 59,341 |  |  |  | 0 |  |  |  | 0 |  |  |  | 44,166 |
Accrued interest payable |  |  | 4,381 |  |  |  | 0 |  |  |  | 4,381 |  |  |  | 0 |
Unrecognized financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Letters of credit |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |
Commitments to extend credit |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Forward sale commitments |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2017 and indicates the level within the fair value hierarchy of the valuation techniques.
(in thousands) |  |  |  |  | Fair Value Measurements at December 31, 2017 Using |
|  | Carrying Amount |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 175,274 |  |  | $ | 175,274 |  |  | $ | 0 |  |  | $ | 0 |
Certificates of deposit in other banks |  |  | 9,800 |  |  |  | 0 |  |  |  | 9,772 |  |  |  | 0 |
Securities available-for-sale |  |  | 585,761 |  |  |  | 88,956 |  |  |  | 496,805 |  |  |  | 0 |
Securities held-to-maturity |  |  | 659 |  |  |  | 0 |  |  |  | 660 |  |  |  | 0 |
Loans held for sale |  |  | 1,033 |  |  |  | 1,060 |  |  |  | 0 |  |  |  | 0 |
Loans, net |  |  | 3,086,789 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,092,437 |
Federal Home Loan Bank stock |  |  | 17,927 |  |  |  | 0 |  |  |  | 17,927 |  |  |  | 0 |
Federal Reserve Bank stock |  |  | 4,887 |  |  |  | 0 |  |  |  | 4,887 |  |  |  | 0 |
Accrued interest receivable |  |  | 13,338 |  |  |  | 0 |  |  |  | 13,338 |  |  |  | 0 |
Mortgage servicing rights |  |  | 3,484 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,484 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 3,263,863 |  |  | $ | 790,930 |  |  | $ | 2,319,278 |  |  | $ | 0 |
Repurchase agreements |  |  | 243,814 |  |  |  | 0 |  |  |  | 0 |  |  |  | 243,932 |
Federal funds purchased |  |  | 7,312 |  |  |  | 0 |  |  |  | 7,312 |  |  |  | 0 |
Advances from Federal Home Loan Bank |  |  | 845 |  |  |  | 0 |  |  |  | 841 |  |  |  | 0 |
Long-term debt |  |  | 59,341 |  |  |  | 0 |  |  |  | 0 |  |  |  | 44,166 |
Accrued interest payable |  |  | 2,228 |  |  |  | 0 |  |  |  | 2,228 |  |  |  | 0 |
Unrecognized financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Letters of credit |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |
Commitments to extend credit |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Forward sale commitments |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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