Investar Holding Corp Fair Value Disclosure
NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS
In accordance with ASC 820, disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, is required. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Fair value is best determined based upon quoted market prices or exit prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows, and the fair value estimates may not be realized in an immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
Fair Value Hierarchy
In accordance with ASC 820, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value.
Level 1 – Valuation is based upon quoted prices for identical assets or liabilities traded in active markets.
Level 2 – Valuation is based upon observable inputs other than quoted prices included in level 1, such as quoted prices for similar assets and 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 corroborated by observable market data.
Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The following methods and assumptions were used by the Company in estimating the fair value of assets and liabilities valued on a recurring basis:
AFS Investment Securities and Marketable Equity Securities – Where quoted prices are available in an active market, the Company classifies the securities within level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include marketable equity securities in corporate stocks and mutual funds.
If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy if observable inputs are available, include obligations of the U.S. Treasury and U.S. government agencies and corporations, obligations of state and political subdivisions, corporate bonds, residential mortgage-backed securities, and commercial mortgage-backed securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in level 3.
Management monitors the current placement of securities in the fair value hierarchy to determine whether transfers between levels may be warranted based on market reference data, which may include reported trades; bids, offers or broker/dealer quotes; benchmark yields and spreads; as well as other reference data. At December 31, 2024 and December 31, 2023, the majority of the Company’s level 3 investments were obligations of state and political subdivisions. The Company estimated the fair value of these level 3 investments using discounted cash flow models, the key inputs of which are the coupon rate, current spreads to the yield curves, and expected repayment dates, adjusted for illiquidity of the local municipal market and sinking funds, if applicable. Option-adjusted models may be used for structured or callable notes, as appropriate.
Derivative Financial Instruments – The fair value for interest rate swap agreements is based upon the amounts required to settle the contracts. These derivative instruments are classified in level 2 of the fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis are summarized in the table below as of the dates indicated (dollars in thousands).
| Quoted Prices in | Significant | |||||||||||||||
| Active Markets for | Significant Other | Unobservable | ||||||||||||||
| Identical Assets | Observable Inputs | Inputs | ||||||||||||||
| Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| December 31, 2024 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 15,707 | $ | — | $ | 15,707 | $ | — | ||||||||
| Obligations of state and political subdivisions | 16,120 | — | 11,803 | 4,317 | ||||||||||||
| Corporate bonds | 27,267 | — | 26,773 | 494 | ||||||||||||
| Residential mortgage-backed securities | 208,768 | — | 208,768 | — | ||||||||||||
| Commercial mortgage-backed securities | 63,259 | — | 63,259 | — | ||||||||||||
| Equity securities at fair value | 2,593 | 2,593 | — | — | ||||||||||||
| Interest rate swaps - gross assets | 17,195 | — | 17,195 | — | ||||||||||||
| Total assets | $ | 350,909 | $ | 2,593 | $ | 343,505 | $ | 4,811 | ||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swaps - gross liabilities | $ | 17,195 | $ | — | $ | 17,195 | $ | — | ||||||||
| December 31, 2023 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Obligations of the U.S. Treasury and U.S. government agencies and corporations | $ | 20,043 | $ | — | $ | 20,043 | $ | — | ||||||||
| Obligations of state and political subdivisions | 16,703 | — | 11,453 | 5,250 | ||||||||||||
| Corporate bonds | 26,356 | — | 25,893 | 463 | ||||||||||||
| Residential mortgage-backed securities | 232,045 | — | 232,045 | — | ||||||||||||
| Commercial mortgage-backed securities | 66,771 | — | 66,771 | — | ||||||||||||
| Equity securities at fair value | 1,180 | 1,180 | — | — | ||||||||||||
| Interest rate swaps - gross assets | 17,325 | — | 17,325 | — | ||||||||||||
| Total assets | $ | 380,423 | $ | 1,180 | $ | 373,530 | $ | 5,713 | ||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swaps - gross liabilities | $ | 17,325 | $ | — | $ | 17,325 | $ | — | ||||||||
The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. The table below provides a reconciliation for assets measured at fair value on a recurring basis using significant unobservable inputs, or level 3 inputs (dollars in thousands).
| Obligations of State and Political Subdivisions | Corporate Bonds | Total | ||||||||||
| Balance at December 31, 2022 | $ | 5,965 | $ | 479 | $ | 6,444 | ||||||
| Realized gain (loss) included in net income | — | — | — | |||||||||
| Unrealized loss included in | (689 | ) | (16 | ) | (705 | ) | ||||||
| Purchases | — | — | — | |||||||||
| Sales | — | — | — | |||||||||
| Maturities, prepayments, and calls | (26 | ) | — | (26 | ) | |||||||
| Transfers into level 3 | — | — | — | |||||||||
| Transfers out of level 3 | — | — | — | |||||||||
| Balance at December 31, 2023 | $ | 5,250 | $ | 463 | $ | 5,713 | ||||||
| Realized gain (loss) included in net income | — | — | — | |||||||||
| Unrealized (loss) gain included in | (906 | ) | 31 | (875 | ) | |||||||
| Purchases | — | — | — | |||||||||
| Sales | — | — | — | |||||||||
| Maturities, prepayments, and calls | (27 | ) | — | (27 | ) | |||||||
| Transfers into level 3 | — | — | — | |||||||||
| Transfers out of level 3 | — | — | — | |||||||||
| Balance at December 31, 2024 | $ | 4,317 | $ | 494 | $ | 4,811 | ||||||
There were no liabilities measured at fair value on a recurring basis using level 3 inputs at December 31, 2024 and 2023. For the years ended December 31, 2024, 2023 and 2022, there were no gains or losses included in earnings related to the change in fair value of the assets measured on a recurring basis using significant unobservable inputs held at the end of the period.
The following table provides quantitative information about significant unobservable inputs used in fair value measurements of level 3 assets measured at fair value on a recurring basis at December 31, 2024 and 2023 (dollars in thousands).
| Estimated Fair Value | Valuation Technique | Unobservable Inputs | Range of Discounts | ||||||||
| December 31, 2024 | |||||||||||
| Obligations of state and political subdivisions | $ | 4,317 | Option-adjusted discounted cash flow model; present value of expected future cash flow model | Bond appraisal adjustment(1) | 2% - 15% | ||||||
| Corporate bonds | 494 | Option-adjusted discounted cash flow model; present value of expected future cash flow model | Bond appraisal adjustment(1) | 1% | |||||||
| December 31, 2023 | |||||||||||
| Obligations of state and political subdivisions | $ | 5,250 | Option-adjusted discounted cash flow model; present value of expected future cash flow model | Bond appraisal adjustment(1) | 0% - 11% | ||||||
| Corporate bonds | 463 | Option-adjusted discounted cash flow model; present value of expected future cash flow model | Bond appraisal adjustment(1) | 8% | |||||||
| (1) | Fair values determined through valuation analysis using coupon, yield (discount margin), liquidity and expected repayment dates. |
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The following methods and assumptions were used by the Company in estimating the fair value of assets and liabilities valued on a nonrecurring basis:
Loans Individually Evaluated – For collateral dependent loans where the borrower is experiencing financial difficulty, the expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral, which is based on third-party appraisals. Individually evaluated loans that are not collateral dependent are evaluated based on a discounted cash flow methodology. Credits deemed uncollectible are charged to the ACL. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as level 3.
Other Real Estate Owned – Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure and real property no longer used in the Bank’s business operations. Real estate acquired through foreclosure is initially recorded at fair value at the time of foreclosure, less estimated selling cost, and any related write-down is charged to the ACL. Real property no longer used in the Bank’s business operations is recorded at the lower of its net book value or fair value at the date of transfer to other real estate owned. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. Accordingly, values for other real estate owned are classified as level 3.
Quantitative information about assets measured at fair value on a nonrecurring basis based on significant unobservable inputs (level 3) are summarized below as of the dates indicated; there were no liabilities measured on a nonrecurring basis at December 31, 2024 or 2023 (dollars in thousands).
| Estimated Fair Value | Valuation Technique | Unobservable Inputs | Range of Discounts | Weighted Average Discount(3) | |||||||||||
| December 31, 2024 | |||||||||||||||
| Loans individually evaluated for impairment(1) | $ | 2,174 | Discounted cash flows, underlying collateral value | Collateral discounts and estimated costs to sell | 0% - 79% | 31% | |||||||||
| Other real estate owned(2) | 900 | Underlying collateral value, third party appraisals | Collateral discounts and discount rates | 18% | 18% | ||||||||||
| December 31, 2023 | |||||||||||||||
| Loans individually evaluated for impairment(1) | $ | 1,293 | Discounted cash flows, underlying collateral value | Collateral discounts and estimated costs to sell | 6% - 100% | 29% | |||||||||
| (1) | Loans individually evaluated that were re-measured during the period had a carrying value of $2.4 million and $1.8 million at December 31, 2024 and December 31, 2023, respectively, with related ACL of $0.2 million and $0.5 million as of such dates. | |
| (2) | Other real estate owned that was remeasured during the period had a carrying value of $0.9 million at December 31, 2024. During the year ended December 31, 2024, the Company recorded a $0.2 million write-down of other real estate owned, which is included as part of “Other operating expenses” in noninterest expense on the accompanying consolidated statement of income. | |
| (3) | Weighted by relative fair value. |
Financial Instruments
Accounting guidance requires the disclosure of estimated fair value information about certain on- and off-balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring or nonrecurring basis. The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below.
Cash and Cash Equivalents – For these short-term instruments, the fair value is the carrying value. The Company classifies these assets in level 1 of the fair value hierarchy.
Investment Securities and Equity Securities – The fair value measurement techniques and assumptions for AFS securities and marketable equity securities is discussed earlier in the note. The same measurement techniques and assumptions were applied to the valuation of HTM securities and nonmarketable equity securities including equity in correspondent banks.
Loans – The fair value of portfolio loans, net is determined using an exit price methodology. The exit price methodology is based on a discounted cash flow analysis, in which projected cash flows are based on contractual cash flows adjusted for prepayments for certain loan types (e.g. residential mortgage loans and multifamily loans) and the use of a discount rate based on expected relative risk of the cash flows. The discount rate selected considers loan type, maturity date, a liquidity premium, cost to service, and cost of capital, which is a level 3 fair value estimate.
Loans held for sale are measured using quoted market prices when available. If quoted market prices are not available, comparable market values or discounted cash flow analyses may be utilized. The Company classifies these assets in level 3 of the fair value hierarchy.
Deposits – The fair values disclosed for noninterest-bearing demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). These noninterest-bearing deposits are classified in level 2 of the fair value hierarchy. All interest-bearing deposits are classified in level 3 of the fair value hierarchy. The carrying amounts of variable-rate accounts (for example interest-bearing checking, savings, and money market accounts), fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings – The carrying amounts of federal funds purchased, repurchase agreements, and other short-term borrowings approximate their fair values. The Company classifies these borrowings in level 2 of the fair value hierarchy.
Long-Term Borrowings, including Junior Subordinated Debt Securities – The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is therefore classified in level 3 in the fair value hierarchy.
Subordinated Debt Securities – The fair value of subordinated debt is estimated based on current market rates on similar debt in the market. The Company classifies this debt in level 2 of the fair value hierarchy.
Derivative Financial Instruments – The fair value measurement techniques and assumptions for derivative financial instruments is discussed earlier in the note.
The estimated fair values of the Company’s financial instruments at December 31, 2024 and December 31, 2023 are shown below (dollars in thousands).
| December 31, 2024 | ||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 27,922 | $ | 27,922 | $ | 27,922 | $ | — | $ | — | ||||||||||
| Investment securities - AFS | 331,121 | 331,121 | — | 326,310 | 4,811 | |||||||||||||||
| Investment securities - HTM | 42,687 | 42,144 | — | 1,821 | 40,323 | |||||||||||||||
| Equity securities at fair value | 2,593 | 2,593 | 2,593 | — | — | |||||||||||||||
| Nonmarketable equity securities | 16,502 | 16,502 | — | 16,502 | — | |||||||||||||||
| Loans, net of allowance | 2,098,363 | 1,973,780 | — | — | 1,973,780 | |||||||||||||||
| Interest rate swaps - gross assets | 17,195 | 17,195 | — | 17,195 | — | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits, noninterest-bearing | $ | 432,143 | $ | 432,143 | $ | — | $ | 432,143 | $ | — | ||||||||||
| Deposits, interest-bearing | 1,913,801 | 1,826,868 | — | — | 1,826,868 | |||||||||||||||
| FHLB short-term advances and repurchase agreements | 15,591 | 15,577 | — | 15,577 | — | |||||||||||||||
| FHLB long-term advances | 60,000 | 59,620 | — | — | 59,620 | |||||||||||||||
| Junior subordinated debt | 8,733 | 8,733 | — | — | 8,733 | |||||||||||||||
| Subordinated debt | 17,000 | 14,738 | — | 14,738 | — | |||||||||||||||
| Interest rate swaps - gross liabilities | 17,195 | 17,195 | — | 17,195 | — | |||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 32,009 | $ | 32,009 | $ | 32,009 | $ | — | $ | — | ||||||||||
| Investment securities - AFS | 361,918 | 361,918 | — | 356,205 | 5,713 | |||||||||||||||
| Investment securities - HTM | 20,472 | 20,513 | — | 2,118 | 18,395 | |||||||||||||||
| Equity securities at fair value | 1,180 | 1,180 | 1,180 | — | — | |||||||||||||||
| Nonmarketable equity securities | 13,417 | 13,417 | — | 13,417 | — | |||||||||||||||
| Loans, net of allowance | 2,180,079 | 2,020,924 | — | — | 2,020,924 | |||||||||||||||
| Interest rate swaps - gross assets | 17,325 | 17,325 | — | 17,325 | — | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits, noninterest-bearing | $ | 448,752 | $ | 448,752 | $ | — | $ | 448,752 | $ | — | ||||||||||
| Deposits, interest-bearing | 1,806,975 | 1,735,562 | — | — | 1,735,562 | |||||||||||||||
| Borrowings under BTFP and repurchase agreements | 221,133 | 221,133 | — | 221,133 | — | |||||||||||||||
| FHLB long-term advances | 23,500 | 22,945 | — | — | 22,945 | |||||||||||||||
| Junior subordinated debt | 8,630 | 8,630 | — | — | 8,630 | |||||||||||||||
| Subordinated debt | 45,000 | 44,544 | — | 44,544 | — | |||||||||||||||
| Interest rate swaps - gross liabilities | 17,325 | 17,325 | — | 17,325 | — | |||||||||||||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.