Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value [Abstract]

Fair Value

Note G – Fair Value

Accounting standards establish a hierarchy that prioritizes the use of fair value inputs used in valuation methodologies into the following three levels:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:  Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

Level 3:  Significant unobservable inputs that reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of Capitol's valuation methodologies used to measure and disclose the fair values of its assets and liabilities on a recurring or nonrecurring basis:

Investment securities available for sale:  Securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based on quoted prices, when available (Level 1 inputs).  If quoted prices are not available, fair values are measured using independent pricing models, as Level 2 inputs.

Mortgage loans held for sale:  Mortgage loans held for sale are carried at the lower of aggregate cost or fair value and are measured on a nonrecurring basis.  Fair value is based on independent quoted market prices, where applicable (Level 1 inputs), or the prices for other whole mortgage loans with similar characteristics, as Level 2 inputs.  There were no mortgage loans held for sale written down to fair value at September 30, 2012.

Loans:  The Corporation does not record loans at fair value on a recurring basis.  However, from time to time, nonrecurring fair value adjustments for collateral-dependent loans are recorded to reflect partial write-downs based on the observable market price, current appraised value of the collateral or other estimates of fair value, as Level 3 inputs.

Other real estate owned:  At the time of foreclosure, foreclosed properties are adjusted to estimated fair value less estimated costs to sell upon transfer from portfolio loans to other real estate owned, establishing a new carrying value.  The Corporation subsequently adjusts estimated fair value of other real estate owned on a nonrecurring basis to reflect partial write-downs based on the observable market price or current appraisal data, as Level 3 inputs.

Long-lived and indefinite-lived assets:  The Corporation does not record long-lived or indefinite-lived assets at fair value on a recurring basis.  However, from time to time, nonrecurring fair value adjustments to a long-lived or indefinite-lived asset are recorded to reflect partial write-downs based on the observable market price or other estimate of fair value in the event of impairment.

There were no liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2012 and December 31, 2011.

Assets measured at fair value on a recurring basis were as follows (in $1,000s):

	September 30, 2012				December 31, 2011
	Total		Significant Other Observable Inputs (Level 2)		Total		Significant Other Observable Inputs (Level 2)
Investment securities available for sale:(1)
United States treasury	$	3,500	$	3,500	$	4,013	$	4,013
United States government agency		2,000		2,000
Mortgage-backed		9,126		9,126		10,592		10,592
Municipalities		105		105		278		278
	$	14,731	$	14,731	$	14,883	$	14,883

(1) Level 2 inputs for investment securities available for sale include pricing models from independent pricing sources with reasonable levels of price transparency.

Assets measured at fair value on a nonrecurring basis were as follows (in $1,000s):

	September 30, 2012				December 31, 2011
	Total		Significant Unobservable Inputs (Level 3)		Total		Significant Unobservable Inputs (Level 3)
Impaired loans(1)	$	131,416	$	131,416	$	175,424	$	175,424
Other real estate owned(2)	$	89,754	$	89,754	$	95,523	$	95,523

⁽¹⁾       Level 3 inputs for impaired loans include appraised value of the applicable collateral or other unobservable

         estimates of fair value.

⁽²⁾       Level 3 inputs for other real estate owned include appraised value of the foreclosed property or other

         unobservable estimates of fair value.  Fair value is reduced by estimated costs to sell the properties.

Updated appraisals are generally obtained when it has been determined that a collateral-dependent loan has become impaired or when it is likely a loan secured by real estate will be foreclosed.  Adjustments to the loan's carrying value (or requirements for an allocation of the allowance for loan losses) are made, when appropriate, after review of appraisal data or, in the absence of a recent appraisal, if market conditions significantly decline further.  The timing of when a collateral-dependent loan should be classified as a nonperforming loan is contingent upon several factors, including the performance of the loan, the borrower's payment history and/or results of the bank's review of updated borrower financial information.

When a borrower's performance has deteriorated (for example, the borrower has become delinquent on required payments, the borrower's updated financial information received indicates adverse financial trends or sales/leasing activity is less than expected in the case of multi-unit properties), the loan will be downgraded and, if appropriate, an updated appraisal will be ordered.  In the period between a loan downgrade and receipt of an updated appraisal, the loan will be included within loss contingency pools, in conjunction with estimating the bank's requirements for its allowance for loan losses.  Upon receipt and review of updated appraisal data and after any further fair value analysis is completed, an impaired loan will be further evaluated for appropriate write-down.  Negative differences between appraised value, less the estimated cost to sell, and the related carrying value of the loans are charged to the allowance for loan losses, as partial write-downs/charge-offs, on a timely basis after the appraisal has been received and reviewed.  Occasionally, additional potential loss amounts may be included if circumstances exist

which may further adversely impact fair value estimates.  Such internally-developed evaluations may be used when the amount of a loan is less than $250,000.  Internally-prepared evaluations may also be used to estimate the current effect of economic conditions or deterioration when the most recent appraisal was obtained within a year.  Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

Comparative carrying values and estimated fair values of financial instruments based upon the accounting guidance set forth in Accounting Standards Codification 825-10 were as follows (in $1,000s):

			September 30, 2012						December 31, 2011
	Level Used to Measure Estimated Fair Value		Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Financial assets:
Cash		1	$	51,388		$	51,388		$	38,540		$	38,540
Cash equivalents		2		319,295			319,295			318,006			318,006
Loans held for sale		2		1,074			1,074			2,129			2,129
Investment securities:
Available for sale		2		14,731			14,731			14,883			14,883
Held for long-term investment		3		2,639			2,639			2,737			1,981
				17,370			17,370			17,620			16,864
Federal Home Loan Bank and Federal Reserve Bank stock		2		11,106			11,106			12,851			12,851
Portfolio loans:
Loans secured by real estate:
Commercial		3		797,345			794,664			907,377			903,687
Residential (including multi-family)		3		274,389			274,315			332,110			331,434
Construction, land development and other land		3		65,771			65,893			105,268			105,262
Total loans secured by real estate				1,137,505			1,134,872			1,344,755			1,340,383
Commercial and other business-purpose loans		3		134,083			133,977			181,349			181,350
Consumer		3		10,151			10,417			12,228			12,406
Other		3		2,450			2,321			2,781			2,546
Total portfolio loans				1,284,189			1,281,587			1,541,113			1,536,685
Less allowance for loan losses		3		(66,185	)		(66,185	)		(86,745	)		(86,745	)
Net portfolio loans				1,218,004			1,215,402			1,454,368			1,449,940
Financial liabilities:
Deposits:
Noninterest-bearing		1		360,252			360,252			328,896			328,896
Interest-bearing:
Demand accounts		2		488,121			488,121			502,866			502,866
Time certificates of less than $100,000		3		344,718			347,736			454,833			460,012
Time certificates of $100,000 or more		3		467,595			470,731			571,803			575,942
Total interest-bearing				1,300,434			1,306,588			1,529,502			1,538,820
Total deposits				1,660,686			1,666,840			1,858,398			1,867,716
Notes payable and other borrowings		3		19,487			18,082			50,445			50,824
Subordinated debentures		3								149,156			123,452

Estimated fair values of financial assets and liabilities in the preceding table are based upon a comparison of current interest rates on financial instruments and the timing of related scheduled cash flows to the estimated present value of such cash flows using current estimated market rates of interest (unless quoted market values or other fair value information is more readily available, except subordinated debentures, for which the fair value is based on the liquidation or principal amount outstanding).  For example, the estimated fair value of portfolio loans is determined based on discounted cash flow computations.  Similarly, the estimated fair values of time deposits, notes payable and other borrowings were determined through discounted cash flow computations.  Except for subordinated debentures, such estimates of fair value are not intended to represent portfolio liquidation value and, accordingly, only represent an estimate of fair value based on current financial reporting requirements.

Given current economic conditions, the majority of the loan portfolio is not readily marketable and, accordingly, market prices may not exist.  Capitol has not attempted to market the loan portfolio to potential buyers, if any exist, to determine the fair value of those instruments.  Since negotiated prices, if any, in illiquid markets depend upon the then-present motivations of the buyer and seller, it is reasonable to assume that potential sales prices could vary widely from any estimate of fair value made without the benefit of negotiations.  Additionally, changes in market interest rates commensurate with risk may dramatically impact the value of financial instruments at any time.  Accordingly, fair value measurements for loans included in the preceding table are unlikely to represent the instruments' liquidation values.