Financial Instruments

The following is a summary of the carrying amounts and fair values of the Company's financial assets and liabilities at June 30, 2014 and December 31, 2013:



	June 30, 2014
	Carrying amount		Estimated fair value		Level 1		Level 2		Level 3
	(Amounts in thousands)
Financial assets:
Cash and cash equivalents	$	36,131	$	36,131	$	36,131	$	—	$	—
Investment securities	259,143		259,143		3,033		256,110		—
Loans and loans held-for-sale, net	1,419,115		1,388,764		—		15,696		1,373,068
Accrued interest receivable	5,878		5,878		—		1,600		4,277
Federal Home Loan Bank stock	3,778		3,778		—		3,778		—
Interest rate swap agreements	106		106		—		—		106
Interest rate lock commitments	231		231		—		—		231
Financial liabilities:
Demand deposits, NOW, savings
and money market accounts	994,099		994,099		—		994,099		—
Time deposits	515,482		520,501		—		520,501		—
Borrowed funds	108,838		92,025		—		92,025		—
Accrued interest payable	734		734		—		734		—
Interest rate swap agreements	106		106		—		—		106
Forward sales commitments	100		100		—		100		—



	December 31, 2013
	Carrying amount		Estimated fair value		Level 1		Level 2		Level 3
	(Amounts in thousands)
Financial assets:
Cash and cash equivalents	$	40,995	$	40,995	$	40,995	$	—	$	—
Investment securities	288,922		288,922		3,151		285,771		—
Loans and loans held-for-sale, net	1,359,596		1,294,654		—		18,913		1,275,741
Accrued interest receivable	6,219		6,219		—		1,705		4,514
Federal Home Loan Bank stock	3,473		3,473		3,473		—		—
Interest rate swap agreements	132		132		—		—		132
Forward sales commitments	147		147		—		147		—
Financial liabilities:
Demand deposits, NOW, savings
and money market accounts	961,154		911,457		—		911,457		—
Time deposits	557,269		560,008		—		560,008		—
Borrowed funds	89,214		66,690		—		66,690		—
Accrued interest payable	852		852		—		852		—
Interest rate swap agreements	132		132		—		—		132
Interest rate lock commitments	23		23		—		—		23

The fair values as have been determined using the following methodologies for each financial instrument class except that the fair value methodology for June 30, 2014 is consistent with the fair values used in the previously disclosed VantageSouth business combination transaction in the areas of loans receivable, demand deposits, time deposits, and borrowing as follows:


•	The fair value was estimated based on the estimated lifetime credit losses on the loan portfolio, and the present value of the differences between contractual interest rates and market interest rates.

•

The fair value of demand deposits and savings accounts is the amount payable on demand at June 30, 2014 and December 31, 2013, respectively. The fair value of fixed-maturity certificates of deposit and individual retirement accounts represents the estimated fair value premium on time deposits which was calculated by discounting future contractual interest payments at a current market interest rate.


•	The fair values of borrowings are based on the estimated fair value of borrowings, which was calculated by discounting future contractual interest payments at a current market interest rate. This fair value premium is also consistent with the prepayment penalty the FHLB would charge to terminate the advance.

The carrying amounts of cash and cash equivalents approximate their fair value.

The fair value of marketable securities is based on quoted market prices, prices quoted for similar instruments, and prices obtained from independent pricing services.

The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB stock.

The carrying values of accrued interest receivable and accrued interest payable approximates fair values due to the short-term duration.

Interest rate swaps are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.

Interest rate locks and forward loan sale commitments are recorded at fair value on a recurring basis. The fair value of forward sales commitments is based on changes in loan pricing between the commitment date and period end, typically month end. The fair value of interest rate lock commitments is based on servicing release premium, origination income net of origination costs, and changes in loan pricing between the commitment date and period end, typically month end.

As of December 31, 2013, for certain categories of loans, such as installment and commercial loans, the fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The cost of fixed rate mortgage loans held-for-sale approximates the lower of cost or market as these loans are typically sold within 60 days of origination. Fair values for adjustable-rate mortgages are based on quoted market prices of similar loans adjusted for differences in loan characteristics. The Company applied an additional illiquidity discount in the amount of 5.0%.

The fair value of demand deposits and savings accounts is the amount payable on demand at December 31, 2013. The fair value of fixed-maturity certificates of deposit and individual retirement accounts is estimated using the present value of the projected cash flows using rates currently offered for similar deposits with similar maturities.

The fair values of borrowings as of December 31, 2013 are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements. The carrying values of short-term borrowings, including overnight, securities sold under agreements to repurchase, federal funds purchased and FHLB advances, approximates the fair values due to the short maturities of those instruments. The Company's credit risk is not material to calculation of fair value because these borrowings are collateralized.