Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements [Abstract]

Fair Value of Financial Assets and Liabilities

Note 9 - Fair Value of Financial Assets and Liabilities

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.  In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use 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 pricing the assets or liabilities.

Assets Measured on a Recurring Basis

The following tables present information about CTBI's assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques and inputs utilized by CTBI to determine such fair value.

(in thousands)			Fair Value Measurements at September 30, 2011 Using
	Fair Value September 30 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
U.S. Treasury and government agencies	$	33,368	$	0	$	33,368	$	0
State and political subdivisions		63,484		0		63,484		0
U.S. government sponsored agency mortgage-backed securities		345,154		0		345,154		0
Marketable equity securities		21,604		0		21,393		211
Mortgage servicing rights		2,400		0		0		2,400
Total recurring assets measured at fair value	$	466,010	$	0	$	463,399	$	2,611

(in thousands)			Fair Value Measurements at December 31, 2010 Using
	Fair Value December 31 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
U.S. Treasury and government agencies	$	29,254	$	0	$	29,254	$	0
State and political subdivisions		51,865		0		51,865		0
U.S. government sponsored agency mortgage-backed securities		237,243		0		237,243		0
Marketable equity securities		20,313		0		20,102		211
Mortgage servicing rights		3,161		0		0		3,161
Total recurring assets measured at fair value	$	341,836	$	0	$	338,464	$	3,372

U.S. Treasury and government agencies, State and political subdivisions, U.S. government sponsored agency mortgage-backed securities, Marketable equity securities - Level 2 Inputs.  For these securities, CTBI obtains fair value measurements from an independent pricing service, which utilizes pricing models to determine fair value measurements. 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 things.

Marketable equity securities - Level 3 Inputs.  The securities owned by CTBI that were measured using Level 3 criteria are auction rate securities issued by FNMA.  These securities were valued using an independent third party.  For these securities, the valuation methods used were (1) a discounted cash flow model valuation, where the expected cash flows of the securities are discounted to the present using a yield that incorporates compensation for illiquidity and (2) a market comparables method, where the securities are valued based on indications, from the secondary market, of what discounts buyers demand when purchasing similar securities.  Using these methods, the auction rate securities are classified as Level 3.

Mortgage Servicing Rights - Level 3 Inputs.  CTBI records MSRs 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.  An estimate of the fair value of CTBI's MSRs is determined by the independent third party utilizing discounted cash flow models and assumptions about mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  All of CTBI's MSRs are classified as Level 3.

Following is a reconciliation of the beginning and ending balances of recurring fair value measurements using significant unobservable (Level 3) inputs:

	Three Months Ended				Nine Months Ended
	September 30				September 30
Marketable Equity Securities(in thousands)	2011		2010		2011		2010
Beginning balance	$	211	$	211	$	211	$	211
Total realized and unrealized gains and losses
Included in net income		0		0		0		0
Transfer of Securities from Level 3 to Level 2		0		0		0		0
Purchases		0		0		0		0
Issuances		0		0		0		0
Settlements		0		0		0		0
Ending balance	$	211	$	211	$	211	$	211

	Three Months Ended						Nine Months Ended
	September 30						September 30
Mortgage Servicing Rights(in thousands)	2011			2010			2011			2010
Beginning balance	$	3,029		$	2,692		$	3,161		$	3,406
Total realized and unrealized gains and losses
Included in net income		(763	)		(137	)		(957	)		(986	)
Transfer of Securities from Level 3 to Level 2		0			0			0			0
Purchases		0			0			0			0
Issuances		127			166			378			433
Settlements		7			(76	)		(182	)		(208	)
Ending balance	$	2,400		$	2,645		$	2,400		$	2,645

Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis as of September 30, 2011 and December 31, 2010 are summarized below:

(in thousands)			Fair Value Measurements at September 30, 2011 Using
	Fair Value September 30 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	7,837	$	0	$	0	$	7,837
Other real estate/assets owned		14,305		0		0		14,305

(in thousands)			Fair Value Measurements at December 31, 2010 Using
	Fair Value December 31 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	16,589	$	0	$	0	$	16,589
Other real estate/assets owned		4,579		0		0		4,579

Impaired Loans - Level 3 Inputs.  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 (1) partial write-downs that are based on the observable market price or current appraised value of the collateral or (2) the full charge-off of the loan carrying value. Quarter-to-date fair value adjustments on impaired loans were $0.2 million for September 30, 2011 compared to $1.1 million for December 31, 2010 and $3.1 million for September 30, 2010.  Year-to-date fair value adjustments on impaired loans were $0.5 million for September 30, 2011 compared to $5.5 million for December 31, 2010 and $2.5 million for September 30, 2010.

Other real estate/assets owned - Level 3 Inputs.  In accordance with the provisions of ASC 360, Property, Plant, and Equipment, long-lived assets held for sale with a carrying amount of $14.3 million were written down to their fair value during the year.  Long-lived assets are subject to nonrecurring fair value adjustments to reflect 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 were $0.7 million as of September 30, 2011 compared to $0.2 million as of December 31, 2011 and $0.1 million as of September 30, 2010. Year-to-date fair value adjustments on other real estate/assets owned were $2.8 million as of September 30, 2011 compared to $0.7 million as of December 31, 2010 and $0.5 million as of September 30, 2010.

The following table presents the carrying amounts and estimated fair values of financial instruments at September 30, 2011 and December 31, 2010:

(in thousands)	September 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	250,406	$	250,406	$	158,983	$	158,983
Certificates of deposits in other banks		13,279		13,020		14,762		14,775
Securities available-for-sale		463,610		463,610		338,675		338,675
Securities held-to-maturity		1,662		1,663		1,662		1,662
Loans, net (including impaired loans)		2,538,558		2,544,057		2,570,375		2,582,596
Loans held for sale		826		845		455		462
Federal Home Loan Bank stock		25,674		25,674		25,673		25,673
Federal Reserve Bank stock		4,882		4,882		4,434		4,434
Accrued interest receivable		11,969		11,969		12,574		12,574
Capitalized mortgage servicing rights		2,400		2,400		3,161		3,161
Financial liabilities:
Deposits	$	2,808,822	$	2,811,070	$	2,706,117	$	2,690,960
Repurchase agreements		229,000		228,892		188,275		186,989
Federal funds purchased		16,345		16,345		9,680		9,680
Advances from Federal Home Loan Bank		21,658		21,655		21,238		21,213
Long-term debt		61,341		31,988		61,341		30,894
Accrued interest payable		4,869		4,869		2,848		2,848
Unrecognized financial instruments:
Letters of credit	$	0	$	0	$	0	$	0
Commitments to extend credit		0		0		0		0

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

Cash and cash equivalents - The carrying amount approximates fair value.

Certificates of deposit in other banks - Fair values are based on quoted market prices or dealer quotes.

Securities - Fair values are based on quoted market prices, if available.  If a quoted price is not available, fair value is estimated using quoted prices for similar securities.

Loans (net of the allowance for loan and lease losses and including impaired loans) - The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  For other variable rate loans, the carrying amount approximates fair value.

Loans held for sale - The fair value is predetermined at origination based on sale price.

Federal Home Loan Bank stock - The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Federal Reserve Bank stock - The carrying value of Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal Reserve Bank.

Accrued interest receivable - The carrying amount approximates fair value.

Capitalized mortgage servicing rights - The fair value is determined quarterly based on an independent third-party valuation using a discounted cash flow analysis and calculated using a computer pricing model.  The computer valuation is based on key economic assumptions including the prepayment speeds of the underlying loans, the weighted-average life of the loan, the discount rate, the weighted-average coupon, and the weighted-average default rate, as applicable.

Deposits - The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.  For deposits including demand deposits, savings accounts, NOW accounts, and certain money market accounts, the carrying value approximates fair value.

Repurchase agreements - The fair value is estimated by discounting future cash flows using current rates.

Federal funds purchased - The carrying amount approximates fair value.

Advances from Federal Home Loan Bank - The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently offered for advances of similar remaining maturities.

Long-term debt - The fair value is estimated by discounting future cash flows using current rates.

Accrued interest payable - The carrying amount approximates fair value.

Other financial instruments - The estimated fair value for other financial instruments and off-balance sheet loan commitments approximates cost at September 30, 2011 and December 31, 2010.  Off-balance sheet loan commitments at September 30, 2011 and December 31, 2010 were $449.0 million and $431.5 million, respectively.

Letters of credit - The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.  The fair value of such letters of credit is not material.

Commitments to extend credit - The fair value of commitments to extend credit is based upon the difference between the interest rate at which we are committed to make the loans and the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for the estimated volume of loan commitments actually expected to close.  The fair value of such commitments is not material.