OVLY 10-K & 10-Q changes, risk factors and insider trading

Risks AssociatedRelated withto Our Business

In addition, any sudden or prolonged market downturn, as a result of the above factors or otherwise, could adversely affect our results of operations and financial condition, including capital and liquidity levels. Elevated inflation and interest rate levels, changes in trade policy, including the implementation of tariffs, monetary tightening by central banks, and geopolitical developments, including the Russia/Ukraine conflict and the conflicts in the Middle East, have adversely impacted and could continue to adversely impact financial markets and macroeconomic conditions, as well as result in additional market volatility and disruptions and recessionary risk. Additionally, changes to the size, structure, and operation of the federal government, including the workforce reduction, elimination or curtailment of federal agencies, delivery of government services and distribution of federal program funds and benefits may cause economic disruption that could adversely impact our customers and our business, results of operations and financial condition.

In addition, we expect the Trump administration will continue to seek to implement a regulatory reform agenda that is significantly different than that of the Biden administration, thereby impacting the rulemaking, supervision, examination and enforcement priorities of the federal banking agencies. Our results of operations could be adversely affected by changes in laws and regulations and in the way existing statutes and regulations are interpreted or applied by courts and government agencies.

Risks Related to Tax and Financial RisksMatters

Over the past several years, our network of branches and loan production offices have expanded geographically. We currently maintain eighteennineteen full-service offices. We intend to continue our growth strategy in future years through the opening of additional branches and loan production offices as our needs and resources permit.

Unfavorable trends in inflation prompted the Federal Reserve Open Market Committee, or FOMC, to increase the target federal funds rate (the interest rate banks charge each other for short-term borrowing) in 2022 and 2023, which resulted in yield increases on our earning assets. In response to moderating inflation and weakening economic conditions, in 2024 and 2025 the FOMC made minimalapproved interest rates cuts. In spite of this, weWe expect the upward trend in our earning asset yield will continue to some degree in 20252026 due to continued repricing of existing loans. However, the negative impact of the 2022-2023 FOMC rate hikes was increased rates on deposit accounts, which may continue to some degree into 2025. Deposit interest rates are determined based on customer demand, market surveys of offerings from competitive institutions, and overall liquidity position.

The Fed Funds rate is forecasted to decrease moderatelyslightly during 2025,2026, which could potentiallyhave compressa negative impact on net interest income and net interest margin further,margin, given that our balance sheet is slightly asset sensitive to interest rate changes primarily due to the variable rate loans and interest-earning cash balances.

Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest- bearinginterest-bearing liabilities, referred to as volume changes. Our net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on our loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve Board.

Net interest income, on a fully tax equivalent basis (“FTE”), decreasedincreased $6,278,000$4,556,000 or 8.0%6.3% to $72,064,000$76,620,000 for the year ended December 31, 2024,2025, compared to $78,342,000$72,064,000 in 2023.2024. Net interest spread and net interest margin were 3.68% and 4.13%, respectively, for the year ended December 31, 2025, compared to 3.60% and 4.07%, respectively, for the year ended December 31, 2024, compared to 4.14% and 4.33%, respectively, for the year ended December 31, 2023.2024. This downwardupward trend is mainly due to an increase in the yield of our loan portfolio, and a slight reduction in our deposit interest expense that was necessary to remain competitive with peer banks, preserve liquidity, and continue to grow the balance sheet. The FOMC rate hikes that began in March 2022 resulted in an immediate increase in earning asset yields, but deposit rates experienced a lag effect and did not increase until 2023 and into 2024.rates.

The cost of funds on interest-bearing liabilities increaseddecreased to 1.16% in 2025 compared to 1.20% in 2024 compared to 0.46% in 2023 as a result of the competitivelower environmentinterest andrate customerenvironment. demandOur forcost higherof rates.funds is below the peer average, but remains competitive. Promotional rates on money market accounts and higher time-deposit rate offerings wereare utilized strategically to retain deposit relationships,relationships and develop new business, which contributed to the deposit growth of $45.2 million$97,272,000 during 2024.2025.

Our earning asset yield increased 204 basis points in 20242025 compared to 20232024 despite the FOMC cutting the federal funds target rate from a range of 5.25%4.25% to 5.50%4.50% at the beginning of 2024,2025, to a range of 4.25%3.50% to 4.50%3.75% by the end of the year. The FOMC rate hikes in 2022 and 2023 continued to have a positive impact on rates of loans that repriced during 2024.2025. The yield on loans recognized an increase of 3324 basis points for 20242025 as compared to 2023,2024, due to the upward repricing of variable rate loans and higher rate indexes on new loans. Growth in average gross loans of $108.9 million,$46,652,000, also contributed to net interest margin expansion.

The net interest margin compressionexpansion in 2024,2025, is due to the factors discussed above andbut could worsen if rate indexes on assets were to fall, and/or: 1) deposit interest rates continue to increase due to customer demand, or competitive pressure from peer banks, 2) competition in the lending market restrict significant increases in new loan rates, and 3) deposit growth out-paces loan growth, resulting in higher interest-bearing cash balances, which would offer lower yields than loans and investments depending on the Federal Funds rate as determined by the FOMC.

Changes in volume resulted in decreasean increase in net interest income (on a FTE basis) of $2,641,000$3,094,000 for the year of 20242025 compared to the year 2023,2024, and changes in interest rates and the mix resulted in aan decreaseincrease in net interest income (on a FTE basis) of $3,637,000$1,462,000 for the year 20242025 versus the year 2023.2024. Management closely monitors both total net interest income and the net interest margin.

Market rates are in part based on the FOMC target Federal funds interest rate (the interest rate banks charge each other for short-term borrowings).rate. The change in the Federal funds sold rates is the result of target rate changes implemented by the FOMC. In 2020, the FOMC decreased the Federal funds rate by 0.50% and 1.00% on two occasions in March resulting in a range of 0.00% to 0.25% as of December 31, 2020 and 2021. In 2022, the FOMC raised the federal funds rate seven times by an aggregate of 4.00%. In 2023, the FOMC raised the Federal funds rate four times by 0.25% resulting in a range of 5.25% to 5.50%. In 2024, the FOMC cut the Federal funds rate three times by an aggregate of 1.00%, resulting in a range of 4.25% to 4.50%. In 2025, the FOMC cut the Federal funds rate three times by an aggregate of 0.75%, resulting in a range of 3.50% to 3.75%. If FOMC were to cut rates in 20252026 or thereafter, we expect this would have a negative impact on our net interest income, due to repricing of interest-bearing cash balances, existing loans and investment securities.

The Company recorded a reversal of provision for credit loss provision of $1,620,000$805,000, and a credit loss provision reversal of $970,000$1,620,000 during the years ended December 31, 20242025 and 2023,2024, respectively. The 2025 credit loss provision is mainly due to loan growth and a specific reserve related to one collateral dependent loan that was individually evaluated for impairment. The 2024 provision reversal was mainly due to loan recoveries totaling $2.2 million,$2,184,000, which was offset in part by loan growth. The loan recoveries in 2024 were primarily from two loans from different borrowers recovered during third quarter of 2024 totaling $1,992,000. Each of the recovered loans date back to the recession period when collateral values were considerably depressed, and one of which was acquired in 2015 when we completed a bank acquisition. The loan recoveries initially increased the allowance for credit losses (“ACL”), which subsequently resulted in the reversal of $1,620,000.

Current and forecasted macro-economic conditions are closely evaluated among other inputs that our internal credit risk model utilizes to determine the appropriate credit loss allowance. The Company didhad notone havenonperforming anyloan as of December 31, 2025, a non-owner occupied commercial real estate loan with a balance of $4,587,000, compared to no nonperforming loans as of December 31, 2024 and 2023.2024. The allowance for credit losses was $11,460,000$12,381,000 and $10,896,000$11,460,000 as of December 31, 20242025 and 2023,2024, or 1.04%1.08% and 1.07%,1.04%, respectively, of total loans. The decreaseincrease as a percentage of total loans corresponds to the nonperforming loan described above, along with credit factors within the loan portfolio,portfolio and changes to the current and forecasted macro-economic factors that have been established as credit loss indicators within our model. TheNet strongloan creditcharge-offs qualityof has$65,000 resultedwere recorded in 2025, as compared to net loan recoveries of $2,184,000 and $112,000 in 2024 and 2023, respectively.2024.

Noninterest income was $6,555,000$7,114,000 for the year ended December 31, 2024,2025, compared to $6,631,000$6,555,000 for the year 2023.2024. Service charge income decreasedincreased to $1,785,000 in 2025 compared to $1,682,000 in 2024 compared to $1,813,000 for 2023,2024, due to a change in the NSF fee schedule that resulted in a decline in NSF Fee income collected on deposit accounts, despite an increase in theoverdraft fee income related to a higher number of checking accounts. Debit card transaction fee income decreased to $1,738,000$1,673,000 in 20242025 as compared to $1,773,000$1,738,000 in 2023,2024, due to debit card network costs that are included in the net revenue received by the bank. Earnings on the cash surrender value of life insurance recognized an increase of $264,000$145,000 in 20242025 compared to 2023,2024, due to higher yields and three new life insurance policies purchased during the second quarter of 2024. Mortgage commissions have increased by $11,000$2,000 for the year 2024,2025, as compared to 2023,2024, a moderate upward trend but overall demand for home purchases and refinancing remains low due to cost of housing and high interest rates. In 2024,2025, other income decreasedincreased by $143,000,$492,000, primarily due to a negativepositive change in the fair value of equity securities, asand compareddeath tobenefit 2023.gains recorded from life insurance policy redemptions. The Company continues to evaluate its deposit product offerings with the intention of continuing to expand its offerings to the consumer and business depositors.

Occupancy expense realized an increase of $69,000$134,000 in 20242025 compared to the prior year, primarily from property taxes, rent,rent and utilitiesdepreciation expense.expense on fixed assets.

Federal Deposit Insurance Corporation (“FDIC”) and California Department of Financial Protection and Innovation (“DFPI”) regulatory assessments increased by $70,000$30,000 in 20242025 over 2023,2024, mainly due to the increase in deposit balances. FDIC increased the base rate to 0.05%, on an annual basis, for all member banks in order to build up the Deposit Insurance Fund. The FDIC adopted a final rule in June 2022, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023. The final rule became effective as of January 1, 2023, with an invoice payment date of June 30, 2023. The FDIC said that the increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028. The final assessment rate for financial institutions is determined by making adjustments to the base rate for various credit quality factors and other risk metrics of the institution as defined by the FDIC. The Company’s risk profile and the related assessment rate remains at a relatively low level due to our strong credit quality, earnings and risk-based capital ratios. Management recognizes that assessments could increase further depending on deposit growth throughout the remainder of 2025,2026, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis, and based on FDIC’s discretion to increase the base assessment rate as needed to replenish the Deposit Insurance Fund. Moreover, the FDIC retains the authority and discretion to increase base assessment rates for banking entities in the future, as circumstances warrant.

Other operating expenses increased by $2,105,000$1,679,000 in 20242025 as compared to 2023,2024, primarily due to an increase in advertising expenses from a direct-mail campaign launched in 2024 targeting consumer deposit accounts, and various general operating expense increases required to support our growing business portfolios and compliance mandates. Some of these included auditlegal expenses, software license fees and charitable contributions.

The Company’s total assets were $2,023,116,000 at December 31, 2025 compared to $1,900,604,000 at December 31, 2024 compared to $1,842,422,000 at December 31, 2023,2024, an increase of $58,182,000$122,512,000 or 3.2%.6.4%. Net loans increased by $89,237,000,$36,092,000, investments increased $8,455,000,by $17,291,000, net bank premises and equipment increased $454,000,by $2,728,000, interest receivable and other assets decreasedincreased $370,000,by $5,632,000, while cash and cash equivalents decreasedincreased $47,817,000by $63,428,000 for the year ended December 31, 20242025 as compared to December 31, 2023.2024.

Loans gross of the allowance for credit losses and deferred fees were $1,143,930,000 as of December 31, 2025, compared to $1,106,535,000 as of December 31, 2024, compared to $1,016,579,000 as of December 31, 2023, an increase of $89,956,000$37,395,000 or 8.9%.3.4%. The increase was due to an increase of $65,906,000$50,508,000 or 7.4%5.3% in commercial real estate loans, ana increasedecrease of $18,354,000$13,310,000 or 28.1%15.9% in commercial and industrial loans, an increase of $2,282,000$527,000 or 7.2%1.6% in consumer loans, and ana increasedecrease of $3,414,000$330,000 or 13.2%1.1% in agriculture loans. The composition remained relatively unchanged as a percentage of total loans, with commercial real estate comprising 87%88% and 88%87% of the loan portfolio at December 31, 20242025 and 2023,2024, respectively.

Equity increased $17,344,000$24,539,000 or 10.4%13.4% to $183,436,000$207,975,000 as of December 31, 2024,2025, compared to $166,092,000$183,436,000 at December 31, 2023.2024. Equity increased due to earnings, and wasthe partiallydecrease offset byin the negative impact interest rates had on our unrealized loss on available-for-sale investment securities.securities due to lower interest rates.

The fair value of the equity security was $3,169,000$3,424,000 and $3,132,000$3,169,000 at December 31, 20242025 and December 31, 2023,2024, respectively. Consistent with ASU 2016-01, equity securities are carried at fair value with the changes in fair value recognized in the consolidated statement of income. Accordingly, the Company recognized an unrealized lossgain of $74,000$133,000 and an unrealized gainloss of $41,000$74,000 during the years ended December 31, 20242025 and 2023,2024, respectively.

Total investment securities as a percentage of total assets increaseddecreased to 27.9%27.0% as of December 31, 20242025 compared to 28.3%27.9% at December 31, 2023.2024. As of December 31, 2024,2025, $305,513,000$349,507,000 of the investment securities were pledged to secure public deposits.

Debt Investment MaturitiesSecurities Maturity and Repricing Schedule

Construction and land loans are classified as commercial real estate loans and decreasedincreased $45.2$30.2 million in 20242025 as compared to 2023, mainly due to the completion of construction on existing projects that converted to permanent financing during 2024. The table below shows an analysis of construction and land loans by type and location. Non-owner-occupied land loans of $5.6$4.8 million as of December 31, 20242025 included loans for land specified for commercial development of $3.9 million and for residential development of $1.7$1.0 million, the majority of which are located in Stanislaus County.

The majority of the properties taken as collateral are located in Northern California. We employ strict guidelines regarding the use of collateral located in less familiar market areas. Positive trends in Northern California real estate values, the low loan-to-value ratios in our commercial real estate portfolio, and the highsignificant percentage of owner-occupied properties further solidify our credit quality position.

Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. The past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower has experienced some changes in financial status, causing an inability to meet the original repayment terms, and where we believe the borrower will eventually overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar means and which management intends to offer for sale. The Company didhad notone havenon-owner anyoccupied commercial real estate loan with a balance of $4,587,000 classified as a nonperforming loan as of December 31, 2025, as compared to no nonperforming loans as of December 31, 2024 and 2023.2024.

The Company held no OREO properties as of December 31, 20242025 and 2023.2024. Accordingly, the Company had zero non-performing assets of $4,587,000 and $0 recorded on the balance sheet as of December 31, 20242025 and 2023.2024, respectively.

The allowance for credit losses increased to $11,460,000$12,381,000 as of December 31, 2024,2025, as compared with $10,896,000$11,460,000 at December 31, 2023.2024. The allowance for credit losses as a percentage of total loans decreasedincreased to 1.08% as of December 31, 2025, as compared to 1.04% as of December 31, 2024, as compared to 1.07% as of December 31, 2023, due to changes in the macro-economic indicators and qualitative factors used within our CECL model. Based on the current conditions of the loan portfolio, management believes that the $11,460,000$12,381,000 allowance for credit losses at December 31, 20242025 is adequate to absorb losses inherent in our loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.

Diversification, low loan-to-values, strong credit quality and enhanced credit monitoring contribute to a reduction in the portfolio’s overall risk in recent years and help to offset the various inherent credit risks. We continue to monitor the impact of the economic environment, and adjustments to the provision for credit loss will be made accordingly. During 2024,2025, the Company recognized net loan recoveriescharge-offs of $2,184,000$65,000, as compared to $112,000net loan recoveries of $2,184,000 in 2023.2024.

For various business purposes, we make investments in earning assets other than the interest-earning securities and loans discussed above. The primary other earning assets held by the Company as of December 31, 20242025 and 2023,2024, includes the cash surrender value of the BOLI policies, Federal Home Loan BankFHLB stock and Federal Reserve Bank stock. During 2024, we purchased three new life insurance policies on executive officers for a total investment of $5,000,000.$5,000,000, compared to no purchases in 2025.

During 20182018, 2022 and 2022,2025, we committed to invest $5,000,000$5,000,000, $10,500,000 and $10,500,000,$5,000,000, respectively, in low-income housing tax credit funds (“LIHTC”) to promote our participation in CRA activities, which had unfunded commitments of $5,664,000$4,598,000 and $9,782,000$5,664,000 as of December 31, 20242025 and 2023,2024, respectively. For LIHTC investments, we receive the return in the form of tax credits and tax deductions over a period of approximately 15 years.

Total deposits at December 31, 20242025 and 20232024 were $1,695,690,000$1,792,962,000 and $1,650,534,000,$1,695,690,000, respectively, representing an increase of $45,156,000$97,272,000 or 2.7%5.7% in 2024.2025. The average deposits for the year ended December 31, 20242025 decreasedincreased $52,777,000$76,939,000 or 3.1%4.6% to $1,656,045,000$1,732,984,000 compared to $1,708,822,000 at$1,656,045,000 for the year ended December 31, 2023.2024. Deposit data analysis has resulted in an estimate of $811,351,000$869,509,000 in uninsured deposits, representing the balance that is not covered by FDIC insurance limits as of December 31, 2024.2025.

In the past two years, our primary source of capital has been internally generated operating income through retained earnings. At December 31, 2024,2025, total shareholders’ equity increased to $183.4$208.0 million, representing an increase of $17.4$24.5 million from December 31, 2023.2024. The increase was due to net income of $24.9$23.9 million recorded to retained earnings, which was partially offset byand other comprehensive lossesincome of $4.5$5.0 million, net of income tax benefit, due to the negativepositive effect that risinglower long-term treasury yields had on the unrealized market value adjustment of our available-for-sale investment portfolio during 2024.2025. Also, retained earnings was reduced by the common stock dividend payments totaling $3.7$5.0 million during 2024.2025. As of December 31, 2024,2025, we had no material commitments for capital expenditures.

The Bank also offers other services for both individuals and businesses including online banking, remote deposit capture, merchant services, night depository, extended hours, traveler’scredit checks,cards, wire transfer of funds, note collection, and automated teller machines in a national network. The Bank does not currently offer international banking or trust services although the Bank may make such services available to the Bank’s customers through financial institutions with which the Bank has correspondent banking relationships. The Bank does not offer stock transfer services, nor does it directly issue credit cards.services.

Management believes the following were important factors in the Company’s performance during the three-monththree periodand six-month periods ended MarchJune 31,30, 2026:

For the three-monththree periodand six-month periods ended MarchJune 31,30, 2026, the Company recorded net income of $5,309,000,$5,114,000 and $10,423,000, respectively, representing an increasedecreases of $12,000,$474,000 and $462,000, as compared to the same periodperiods in 2025. Return on average assets (annualized) was 1.07%1.04% and 1.05% for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to 1.13%1.18% and 1.15% for the same periodperiods in 2025. Annualized return on average common equity was 10.23%9.74% and 9.98% for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to 11.58%12.21% and 11.89% for the same periodperiods in 2025. Net income before provisions for income taxes increaseddecreased by $10,000$738,000 and $728,000 for the three-monththree periodand six-month periods ended MarchJune 31,30, 2026, respectively, from the same periodperiods in 2025. The income statement components of these variances are as follows:

Net interest income is the largest source of the Company’s operating income. For the three-monththree periodand six-month periods ended MarchJune 31,30, 2026, net interest income was $18,824,000,$18,944,000 and $37,768,000, respectively, which represents an increaseincreases of $1,017,000,$790,000 and $1,807,000, from the comparable periodperiods in 2025. The increase was due to growth of earning assets and upward repricing of our loan yield in spite of short-term rate cuts by the FOMC during 2025.

TheDue FOMCto the current interest rate cuts during 2024 and 2025 totaled 150 basis points, which promptedenvironment, the CompanyBank tohas reduceexperienced a modest increase in the average interest ratesrate paid on certain deposit accounts towardsas theit endcontinues ofto 2024competitively price deposits to meet customer demand, maintain deposit relationships, and intosupport 2025.liquidity. The resultingCompany’s average cost of funds was 0.78%0.81% and 0.80% for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to 0.79%0.77% and 0.78% in the same periodperiods of 2025.

The net interest margin (net interest income as a percentage of average interest earning assets) was 4.12%4.15% and 4.13% for the three-monththree periodand six-month periods ended MarchJune 31,30, 2026, respectively, as compared to 4.09%4.11% and 4.10% for the same periodperiods in 2025. The net interest margin increased compared to the prior year due to the rising loan yields,yields and earning asset growthgrowth, andwhich downwardwas trendpartially ofoffset by the slight increase to deposit interest rates. The earning asset yield increased by 17 basis pointpoints and 4 basis points for the three-monththree periodand six-month periods ended MarchJune 31,30, 2026, as compared to the same periodperiods of 2025.

The following tabletables showsshow the relative impact of changes in average balances of interest earning assets and interest-bearing liabilities, and interest rates earned and paid by the Company on those assets and liabilities for the three-monththree and six-month periods ended MarchJune 31,30, 2026 and 2025:

(2) Yields and interest income on tax-exempt municipal securities and loans have been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of 21.0%. Non-GAAP tax benefit adjustments of $18 thousand and $521$529 thousand have been added to GAAP interest income on gross loans and investment securities, respectively, for the three-months ended MarchJune 31,30, 2026, as compared to $18 thousand and $478$480 thousand, respectively, in the comparable periodperiods of 2025. These non-GAAP adjustments are used by management to assess the Company’s performance and provide additional information and transparency to investors with respect to the Company’s gross loans and investment securities. Non-GAAP performance measures do not have a standardized meaning and such measures may not be comparable to similar measures presented by other companies. Non-GAAP measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Shown in the following table is the relative impact on net interest income of changes in the average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by the Company on those assets and liabilities for the three-monththree and six-month periods ended MarchJune 31,30, 2026 and 2025. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated to the rate column below.

The table above reflects an increase of $779,000$519,000 in net interest income due to changes in volume combined with the overall change in mix of balances during the firstsecond quarter of 2026, as compared to the same period of 2025. Changes in earning asset yields and rates on interest-bearing liabilities resulted in an increase of $280,000$320,000 to net interest income, over the same period. This increase was mainly due to higher loan yields as our loan portfolio continues to reprice upward.

During the three-monththree periodand six-month periods ended MarchJune 31,30, 2026, the Company recorded a provisionprovisions for credit losses of $464,000,$21,000 and $485,000, respectively, consisting of a provision for loan losses of $539,000$15,000 and provisions for off balance sheet items of $6,000 during the second quarter of 2026, and a provision for loan losses of $554,000 and a reversal of provisions for off balance sheet items of $75,000.$69,000 Duringduring the year-to-date period of 2026. In comparison, during the three-month period ended MarchJune 31,30, 2025, the Company recorded a provision for credit losses of $274,000,$245,000, related to the reserve for off balance sheet items. For the year-to-date period of 2025, the Company recorded a provision for credit losses of $519,000, related to the reserve for off balance sheet items. There was one home equity non-accrual loan with a balance of $50,000 that was individually evaluated resulting in ano specific reserve as of MarchJune 31,30, 20262026, andas Decembercompared 31,to 2025, aone non-owner occupied commercial real estate loan with a balance of $4,574,000$4,587,000 andas $4,587,000,of respectively.December 31, 2025 that had a specific reserve included in the ACL.

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from mortgage commissions and investment service fee income. For the three-monththree periodand six-month periods ended MarchJune 31,30, 2026, non-interest income was $1,952,000,$1,665,000 and $3,617,000, respectively, representing a decrease of $38,000, or 2.2% and an increase of $339,000,$301,000 or 21.0%,9.1%, compared to the same periodperiods in 2025.

Service charges on deposits decreasedincreased by $6,000$13,000 and $7,000 for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, compared to the same periodperiods in 2025. The decreaseincrease was mainly due to a reduction in overdraft fee income despite the growth in the number of demand deposit accounts.

Debit card transaction fee income increaseddecreased by $12,000$85,000 and $73,000 for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, compared to the same periodperiods in 2025, mainly due to a one-time correction from Mastercard for network processing fees. Excluding this one-time correction, the growth in the number of demand deposit accounts and the continuing industry shift to electronic payment methods.methods continues to increase revenue at a steady pace.

Earnings on cash surrender value of life insurance increased by $16,000$50,000 and $67,000 for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, compared to the same periodperiods in 2025, corresponding to higher yields earned in 2026 and two new life insurance policies that were purchased during the second quarter of 2026.

A lossLosses on calls ofcalled available-for-sale securities of $5,000$2,000 wasand $7,000 were recorded during the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, compared to no gain or lossgains on calls ofcalled available-for-sale securities of $2,000 for the same periodperiods in 2025. There were no sales during the first threesix months of 2026 and 2025.

Other income increaseddecreased by $320,000$12,000 for the three-months ended MarchJune 31,30, 2026, and increased by $309,000 for the six-months ended June 30, 2026, as compared to the same periodperiods of 2025,2025. The quarter-to-date decrease was related to a market value adjustment on a limited partnership equity investment and the year-to-date increase was mainly due to higher production from investment advisory services and a non-recurring special dividend of $181,000 paid by the Federal Home Loan Bank during the first quarter of 2026.

Non-interest expenses increased by $1,156,000,$1,714,000, or 9.4%,13.8% and $2,870,000 or 11.6%, for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to the same periodperiods of 2025. Salaries and employee benefits increased by $812,000$1,324,000 and $2,135,000 for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to the same periodperiods of 2025, mainly due to additional staffing expense required to support the continued growth of our business portfolios.

Occupancy expenses increased by $267,000$231,000 and $498,000 for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to the same periodperiods of 2025, due to increases in rent and maintenance costs related to branch facilities. Our new Lodi branch was opened in October 2025, and contributed to the increase in overhead expense.

Data processing fees increased by $95,000$136,000 and $269,000 for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to the same periodperiods of 2025, due to servicing costs on the growing number of loan and deposit accounts.

OtherAdvertising expenseand decreasedmarketing expenses increased by $28,000$127,000 and $83,000 for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to the same periodperiods inof 2025, due to normal fluctuations in various generaladvertising operatingcampaigns expensedesigned categories.to promote the Company including a direct mailing campaign.

The Company recorded provisions for income taxes of $1,497,000$1,317,000 and $2,814,000 for the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, representing a decreasedecreases of $2,000,$264,000 and $266,000, compared to the provisions recorded in the comparable periodperiods of 2025. The effective income tax rate on income from continuing operations was 22.0%20.5% and 21.3% for the three-monthsthree and six-months ended MarchJune 31,30, 2026, compared to 22.1% for the comparable periodperiods of 2025. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on qualified municipal securities, bank owned life insurance and certain tax-exempt loans). The disparity between the effective tax rates for the year-to-date period of 2026 as compared to 2025 is primarily due to tax credits from low-income housing projects as well as tax-free income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2026 as compared to 2025.

Non-accrual loans totaled $4,574,000$50,000 as of MarchJune 31,30, 20262026, andconsisting of one home equity line of credit loan, as compared to $4,587,000 as of December 31, 2025, consisting of one non-owner occupied commercial real estate loan. The non-accrual loan at December 31, 2025 was partially charged-off and the remaining fair value balance was transferred to OREO during the second quarter of 2026. At MarchJune 31,30, 2026 and December 31, 2025, there were no loan modifications pursuant to ASU 2022-02, and therefore there were no payment delinquencies on modified loans during the three-monthsthree and six-months ended MarchJune 31,30, 2026.

As of MarchJune 31,30, 2026 andthere was one OREO property with a balance of $2,581,000, as compared to no OREO properties owned as of December 31, 2025,2025. there were noThe OREO properties.property Thereowned as of June 30, 2026 is a commercial real estate property that was acquired during the second quarter of 2026 through a foreclosure. Except for the acquisition of that property, there were no sales, acquisitions or fair value adjustments of OREO properties during the three-monthsthree and six-months ended MarchJune 31,30, 2026 and 2025.

The following table presents information about the Bank’s non-performing assets, including asset quality ratios as of MarchJune 31,30, 2026 and December 31, 2025:

Due to credit risk inherent in the lending business, the Company routinely sets aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. Charges for the outstanding loan portfolio have been credited to the allowance for credit losses, whereas charges for off-balance sheet items have been credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The Company recorded a provision for credit losses of $539,000$15,000 and $554,000 during the three-monthsthree and six-months ended MarchJune 31,30, 2026, respectively, as compared to no provisions during the same periodperiods of 2025. The provision of $539,000provisions recorded in the first quarter ofduring 2026 waswere primarily related to the specific allowance of the onecommercial real estate non-accrual loan that iswas individually evaluated, in addition to loan growth and qualitative risk factors within our credit risk model. The Company recorded a reversal of provisionsprovision for off balance sheet items of $75,000$6,000 and a reversal of $69,000 during the three-monthsthree and six-months ended MarchJune 31,30, 20262026, respectively, due to anormal decreasefluctuations in the unfunded loan commitments, as compared to a provisionprovisions of $274,000$245,000 and $519,000 during the same periodperiods of 2025.

The allowance for credit losses increaseddecreased by $529,000$1,209,000 to $12,910,000$11,172,000 as of MarchJune 31,30, 2026, as compared to $12,381,000 as of December 31, 2025, due to the charge-offs of $1,769,000 and the offsetting provision for credit losses of $539,000$554,000 during the first threesix months of 2026. The allowance for credit losses as a percentage of total loans increaseddecreased to 1.13%0.96% as of MarchJune 31,30, 2026 as compared to 1.08% as of December 31, 2025.2025, due to the charge-offs of $1,769,000.

Although management believes the allowance as of MarchJune 31,30, 2026 was adequate to absorb expected credit losses from any known and inherent risks in the portfolio, no assurance can be given that the adverse effect of current and future economic conditions on the Company’s service areas, or other variables, will not result in increased losses in the loan portfolio in the future.

The Company holds federal funds sold, unpledged available-for-sale securities and salable government guaranteed loans to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of MarchJune 31,30, 2026, and December 31, 2025, the Company had $201,603,000$194,803,000 and $232,179,000, respectively, in cash and cash equivalents.

Management of the investment securities portfolio focuses on providing an adequate level of liquidity and establishing an interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities that the Company intends to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as available-for-sale or equity securities. Currently, all of the investment securities are classified as available-for-sale except for one mutual fund classified as an equity security with a carrying value of $3,434,000$3,449,000 as of MarchJune 31,30, 2026. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. The carrying values of equity securities are adjusted for unrealized gains or losses through noninterest income in the consolidated statement of income.

The unrealized losses are due primarily to rising market yields and not due to credit deterioration. As such, no ACL on available-for-sale securities has been established as of MarchJune 31,30, 2026. The Company does not intend to sell the securities and it is not likely that the Company will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

During 2018 and 2022, we committed to invest $5,000,000 and $10,500,000, respectively, in low-income housing tax credit funds (“LIHTC”) to promote our participation in CRA activities. During the three-months ended March 31, 2025, we committed an additional $5,000,000 that included a housing project in our local area that qualified for CRA credit. Unfunded commitments on the LIHTC funds were $4,394,000 and $4,598,000 as of MarchJune 31,30, 2026 and December 31, 2025, respectively. For LIHTC investments, we receive the return in the form of tax credits and tax deductions over a period of approximately 15 years.

Total deposits as of MarchJune 31,30, 2026 were $1,780,996,000,$1,763,551,000, a decrease of $11,966,000,$29,411,000, or 0.7%,1.6%, from the deposit total of $1,792,962,000 as of December 31, 2025. Average deposits increased by $79,300,000$65,345,000 to $1,772,430,000$1,760,153,000 for the three-monthsix-month period ended MarchJune 31,30, 2026, as compared to the same period in 2025.

Because the Company’s client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks. FourThree clients carry deposit balances of more than 1% of total deposits, one of which had a deposit balance of more than 3% of total deposits as of MarchJune 31,30, 2026. Management believes that the Company’s funding concentration risk is not significant and is mitigated by the ample sources of funds the Bank has access to.

Since the deposit growth strategy emphasizes core deposit growth, the Company has avoided relying on brokered deposits as a consistent source of funds. The Company had no brokered deposits as of MarchJune 31,30, 2026 and December 31, 2025.

Although deposits are the primary source of funds for lending and investment activities and for general business purposes, the Company may obtain advances from the Federal Home Loan Bank (“FHLB”) as an alternative to retail deposit funds. As of MarchJune 31,30, 2026 and December 31, 2025, there were no outstanding FHLB advances or borrowings of any kind, as the Company continues to rely on deposit growth as its primary source of funding. See “Liquidity and Capital Resources” below for the details on the FHLB borrowings program.

We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on the Company’sour financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bankwe must meet specific capital guidelines that rely on the quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. TheOur Bank’scapital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. (See “Description of Business-Regulation and Supervision-Capital Adequacy Requirements” in the Company’s 2025 Annual Report on Form 10-K for exact definitions and regulatory capital requirements.)

Proposed rules for U.S. implementation of capital requirements under Basel IV rules, commonly referred to as the “Basel III Endgame”, were initially issued by the U.S. federal banking agencies on July 27, 2023, but such proposed rules were met with strong objections from the banking industry. As a result, on March 19, 2026, the Office of the Comptroller of the Currency, (the “OCC”), FDIC and the Federal Reserve rescinded the Basel III Endgame 2023 proposal and concurrently issued three revised notices of proposed rulemaking. The three proposals include (i) a revised Basel III Endgame proposal that would apply an expanded risk-based approach to Category I and Category II banking organizations, thus narrowing the mandatory scope from the 2023 proposal, with all other banking organizations permitted to opt in; (ii) a revised standardized approach proposal that would reduce risk weights for traditional lending activities for banking organizations not subject to the expanded risk-based approach; and (iii) a revised capital surcharge proposal for globally systemically important bank holding companies. The OCC, FDIC and the Federal Reserve estimate that the revised proposals would decrease aggregate common equity tier 1 capital requirements by approximately 4.8% for Category I and Category II banking organizations, in contrast to the significant capital increases that would have resulted under the Basel III Endgame 2023 proposal. Additionally, the revised proposal would eliminate the requirement to deduct mortgage servicing assets from common equity tier 1 capital, instead assigning a 250% risk weight, which is designed to promote mortgage origination and servicing by banking organizations. The Federal Reserve voted 6-to-1 to advance all three proposals and the FDIC board voted unanimously in favor of the revised Basel III Endgame and standardized approach proposals. The public comment period for the revised proposals is scheduled to closeclosed on June 18, 2026. As of the date of this report, the federal banking agencies are reviewing the comments received, and no final rules have been adopted. Accordingly, the ultimate form, scope, timing, and impact of the revised capital framework remain uncertain.

The following table summarizes short- and long-term material cash requirements as of MarchJune 31,30, 2026. Management expects to fund these obligations through cash generated from operations and other available sources of funds: