Note 18 - Fair Value Measurements and Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2025

NOTE 18 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with accounting guidance, we group 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. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Fair Value Hierarchy

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - 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 instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, DCF models, and similar techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2).

Interest Rate Lock Contracts and Forward Mortgage Loan Sale Contracts: The fair values of interest rate lock contracts and forward mortgage loan sale contracts are determined by loan lock-in rate, loan funded rate, market interest rate, fees to be collected from the borrower, fees and costs associated with the origination of the loan, expiration timing, sale price, and the value of the retained servicing. We classified these derivatives as level 3 due to management’s estimate of market rate, cost and expiration timing on these contracts.

Assets and Liabilities Measured on a Non-Recurring Basis

Collateral-dependent individually evaluated loans:

Collateral-dependent individually evaluated loans are carried at fair value when it is probable that we will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected selling costs.

The fair value of collateral-dependent individually evaluated loans is based on third party appraisals of the property, less management’s estimate of selling costs. Third party appraisals generally use a sales comparison or income capitalization approach to derive the appraised value based on market transactions involving similar or comparable properties. Adjustments are routinely made by the third party appraisers to adjust for differences between the comparable sales and income data used in the appraisal. Adjustments may also result from the consideration of relevant economic and demographic factors which may affect property values. Positive adjustments in the appraisal represent increases to the sales comparisons and negative adjustments represent decreases.

Other Real Estate Owned (“OREO”): (included in “Accrued interest and other assets” in the consolidated balance sheets)

OREO is initially recorded at fair value less estimated selling costs at the date of transfer. This amount becomes the property's new basis. Fair values are generally based on third party appraisals of the property and discounted by management to reflect estimated selling costs (Level 3).

Appraisals for OREO and collateral-dependent loans are performed by state licensed appraisers (for commercial properties) or state certified appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. We review the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison to independent data sources such as recent market data or industry wide statistics for residential appraisals. We also consider the actual selling price of collateral that has been sold in recent periods to determine what additional adjustments, if any, should be made to the appraisal values to arrive at fair value. In determining the net realizable value of the underlying collateral for individually evaluated loans and OREO, we discount the valuation to cover both market price fluctuations and selling costs, typically ranging from 6% to 10% of the collateral value, that may be incurred in the event of foreclosure. Generally, if the existing appraisal is older than twelve months for OREO or collateral-dependent loans, a new appraisal report is ordered.

The following table presents our financial assets and liabilities measured at fair value on a recurring basis or on a non-recurring basis as of the dates indicated:

	*Fair Value Measurements Using:*
December 31, 2025	*Level 1*		*Level 2*		*Level 3*		*Total*
Assets measured at fair value:	*(dollars in thousands)*
On a recurring basis:
Securities available for sale
Government agency securities	$	—	$	22,705	$	—	$	22,705
SBA agency securities		—		21,180		—		21,180
Mortgage-backed securities		—		92,155		—		92,155
Collateralized mortgage obligations		—		213,272		—		213,272
Commercial paper		—		19,948		—		19,948
Corporate debt securities		—		28,429		—		28,429
Municipal securities		—		9,515		—		9,515
Forward Mortgage Loan Sale Contracts ⁽¹⁾		—		—		11		11
	$	—	$	407,204	$	11	$	407,215
On a non-recurring basis:
Collateral dependent individually evaluated loans:
Commercial real estate loans	$	—	$	—	$	3,071	$	3,071
Construction and land development loans		—		—		19,465		19,465
Commercial and industrial loans		—		—		4,708		4,708
Other real estate owned ⁽¹⁾		—		—		8,830		8,830
	$	—	$	—	$	36,074	$	36,074

(1) Included in “Accrued interest and other assets” on the consolidated balance sheets.

December 31, 2024	*Level 1*		*Level 2*		*Level 3*		*Total*
Assets measured at fair value:	*(dollars in thousands)*
On a recurring basis:
Securities available for sale
Government agency securities	$	—	$	21,042	$	—	$	21,042
SBA agency securities		—		26,764		—		26,764
Mortgage-backed securities		—		55,677		—		55,677
Collateralized mortgage obligations		—		197,132		—		197,132
Commercial paper		—		78,685		—		78,685
Corporate debt securities		—		31,815		—		31,815
Municipal securities		—		9,075		—		9,075
	$	—	$	420,190	$	—	$	420,190
On a non-recurring basis:
Collateral dependent individually evaluated loans:
Commercial real estate loans	$	—	$	—	$	4,751	$	4,751
Construction and land development loans		—		—		30,676		30,676
SBA loans		—		—		66		66
	$	—	$	—	$	35,493	$	35,493

The fair value of assets evaluated on a non-recurring basis is based on third party appraisals, including adjustments to comparable market data as summarized in the table below.

December 31, 2025	*Fair Value*		*Valuation Techniques*	*Unobservable Input(s)*	*Range*
	*(dollars in thousands)*
Collateral dependent loans:
Commercial real estate loans	$	3,071	Market approach	Adjustments ⁽¹⁾		(41%) to 4%
Construction and land development loans		19,465	Market approach	Adjustments ⁽¹⁾		9% to 23%
Commercial and industrial loans		4,708	Market approach	Adjustments ⁽¹⁾		(20%) to 20%
Other real estate owned ⁽²⁾		8,830	Market approach	Adjustments ⁽¹⁾		(10%) to 21%
Total	$	36,074

(1)	Represents the minimum and maximum range of adjustments made by appraisers for differences in comparable sales.
(2)	Included in “Accrued interest and other assets” on the consolidated balance sheets.

December 31, 2024	*Fair Value*		*Valuation Techniques*	*Unobservable Input(s)*	*Range*
	*(dollars in thousands)*
Collateral dependent loans:
Commercial real estate loans	$	4,751	Market approach	Adjustments ⁽¹⁾		(41%) to 4%
Construction and land development loans		30,676	Market approach	Adjustments ⁽¹⁾		(19%) to 5%
SBA loans		66	Market approach	Adjustments ⁽¹⁾		(4%) to 11%
Total	$	35,493

(1)	Represents the minimum and maximum range of adjustments made by appraisers for differences in comparable sales.

There was $8.8 million of OREO as of December 31, 2025, and no OREO as of December 31, 2024. During 2024, we foreclosed on and sold three properties, and recognized a total gain on OREO of $1.0 million.

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.

Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of our financial instruments; however, there are inherent limitations in any estimation technique.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering our entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The following methods and assumptions were used to estimate the fair value of significant financial instruments not previously presented:

Cash and Due From Banks -- The carrying amounts of cash and short-term instruments approximate fair values, a Level 1 measurement.

Time Deposits in Other Banks -- Fair values for time deposits with other banks are estimated using DCF analyses, using interest rates currently being offered with similar terms, a Level 1 measurement.

Investment securities available for sale and held to maturity -- Fair values are measured by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement.

Loans Held for Sale -- Fair value is based on quotes or bids from third party investors, recent sale prices, or third party appraisals, a Level 2 measurement.

Loans -- For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for all other loans are estimated using DCF analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of loans as of December 31, 2025 and 2024, was measured using an exit price notion, a Level 3 measurement.

Individually evaluated loans -- Defaulted loans are reviewed individually for expected credit loss, if any, and are recorded at fair value on a non-recurring basis. These defaulted loans are excluded from the loan pools used within the collective evaluation of estimated credit losses. When a defaulted loan is collateral dependent, we measure expected credit loss based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is based on third party appraisals, adjusted for estimated selling costs; a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement.

Equity Securities -- The fair values of equity securities are measured based on unobservable inputs at the reporting date, a Level 3 measurement. Equity securities are comprised primarily of affordable housing investment funds, CRA investments, other bank stocks and investments in limited partnerships with less than 3% ownership.

Investment in FHLB Stock -- Investments in FHLB stock are recorded at cost and measured for impairment quarterly. Ownership of FHLB stock is restricted to member banks and does not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB stock is equal to the carrying amount and is categorized as a Level 2 measurement.

Servicing Rights -- Mortgage and SBA servicing rights are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, a Level 3 measurement.

Accrued Interest Receivable -- Accrued interest receivable includes accrued interest on investment securities (Level 2), accrued interest on loans (Level 3), accrued interest on due from banks (Level 1), and accrued interest on equity securities (Level 3).

Off-Balance Sheet Financial Instruments -- The fair value of commitments to extend credit and standby letters of credit, interest rate lock commitments and forward mortgage loan sales contracts is estimated using the fees currently charged to enter into similar agreements. Unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability result in a Level 3 measurement.

Deposits -- The fair values disclosed for demand deposits, including interest and noninterest demand accounts, savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits, a Level 2 measurement. Early withdrawal of fixed-rate certificates of deposit is not expected to be significant.

FHLB Advances -- The fair values of the Company’s FHLB Advances are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

Long-Term Debt -- The fair values of the Company’s long-term borrowings are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

Subordinated Debentures -- The fair values of the Company’s subordinated debentures are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

Accrued Interest Payable -- Accrued interest payable includes accrued interest on deposits (Level 2), accrued interest on FHLB advances (Level 3), accrued interest on long-term debt (Level 3), and accrued interest on subordinated debentures (Level 3).

Fair value is estimated in accordance with ASC Topic 825. Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The fair value hierarchy level and estimated fair value of significant financial instruments at December 31, 2025 and 2024, are summarized as follows:

		*December 31, 2025*				*December 31, 2024*
	*Fair Value*	*Carrying*		*Fair*		*Carrying*		*Fair*
	*Hierarchy*	*Value*		*Value*		*Value*		*Value*
Financial Assets:		*(dollars in thousands)*
Cash and due from banks	Level 1	$	212,317	$	212,317	$	257,745	$	257,745
Interest-earning deposits in other financial institutions	Level 1		600		600		600		600
Investment securities - AFS	Level 2		407,204		407,204		420,190		420,190
Investment securities - HTM	Level 2		4,184		4,103		5,191		4,948
Loans held for sale	Level 2		2,067		2,067		11,250		11,250
Loans, net	Level 3		3,270,413		3,221,797		3,005,501		2,942,026
Equity securities ⁽¹⁾	Level 3		26,086		26,086		22,944		22,944
Investment in FHLB stock	Level 2		15,000		15,000		15,000		15,000
Servicing assets ⁽¹⁾	Level 3		6,041		11,521		6,985		13,761
Accrued interest receivable ⁽¹⁾	Level 1/2/3		16,230		16,230		14,582		14,582

		*Notional*		*Fair*		*Notional*		*Fair*
Derivative assets:		*Value*		*Value*		*Value*		*Value*
Forward Mortgage Loan Sale Contracts ⁽¹⁾	Level 3	$	515	$	11	$	—	$	—

		*Carrying*		*Fair*		*Carrying*		*Fair*
Financial Liabilities:		*Value*		*Value*		*Value*		*Value*
Deposits	Level 2	$	3,350,398	$	3,350,982	$	3,083,789	$	3,078,409
FHLB advances	Level 3		130,000		129,198		200,000		198,783
Long-term debt	Level 3		119,911		114,691		119,529		109,463
Subordinated debentures	Level 3		15,375		15,227		15,156		14,975
Accrued interest payable ⁽²⁾	Level 2/3		7,960		7,960		7,950		7,950

(1) Included in “Accrued interest and other assets” on the consolidated balance sheets.

(2) Included in “Accrued interest and other liabilities” on the consolidated balance sheets.

- 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

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+ Details

RBB Bancorp 10-K