What changed in this filing

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Item 1. Business

2026-03-13 compared with 2025-03-17 · 988 added, 325 removed, 436 unchanged (75% of the section changed)

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examination by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and by the California Department of Financial Protection and Innovation (“DFPI”).

The Company’s principal business is to serve as a holding company for the

Bank and for other banking or banking related subsidiaries, which the Company may establish or acquire.

As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends

paid by and other funds received from the Bank.

The Company’s principal business is to serve as a holding company for Farmers

& Merchants Bank of Central California (the “Bank” or “F&M Bank”) and for other banking or banking related subsidiaries, which the Company may establish or acquire.

As a legal entity separate and distinct from its subsidiary, the Company’s

principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank.

Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company.

See “Supervision and Regulation - Dividends and Other Transfer of

Funds.” The Company’s outstanding common stock as of December 31, 2024, consisted of 699,798 shares of common stock, $0.01 par value.

No shares of preferred stock were issued or outstanding as of December 31, 2024.

The Company operates all financial service activities through its wholly-owned banking subsidiary, Farmers & Merchants Bank of Central California (the “Bank”), which was organized in 1916.

incorporated under the laws of the State of California as a non-Federal Reserve member, California state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the

The Bank’s two wholly-owned subsidiaries are Farmers & Merchants Investment Corporation and Farmers/Merchants Corporation.

Farmers & Merchants Investment Corporation is currently dormant, and Farmers/Merchants Corporation acts as

trustee on deeds of trust originated by the Bank.

“Supervision and Regulation - Dividends and Other Transfer of Funds.” The Company’s outstanding common stock as of December 31, 2025, consisted of 697,904 shares of common stock, $0.01 par value.

No shares of preferred stock were issued or

outstanding as of December 31, 2025.

The Company operates all financial service activities through its wholly-owned banking subsidiary, Farmers & Merchants Bank of Central California, which was organized in 1916.

The Bank was incorporated under the

laws of the State of California as a non-Federal Reserve member, California state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the DFPI.

The Bank’s two

wholly-owned subsidiaries are Farmers & Merchants Investment Corporation and Farmers/Merchants Corporation.

Farmers & Merchants Investment Corporation was dormant as of December 31, 2025, and Farmers/Merchants Corporation acts as trustee on

deeds of trust originated by the Bank.

The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act, as amended (“FDIA”), up to applicable limits.

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In March 2002, F&M Bancorp, Inc.

was created to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M

was created to protect the name “F&M Bank.” During 2002, the Company completed a fictitious business name filing in California to begin using the streamlined name, “F&M

Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition.

Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan

and signage were redesigned to incorporate the trade name, “F & M Bank.”

Since 2002, the Company has converted all of its daily operating and image advertising to the “F&M Bank” name and the Company’s logo, slogan and

signage were redesigned to incorporate the trade name, “F&M Bank.”

In 2003, the Company formed a wholly-owned Connecticut statutory business trust, FMCB Statutory Trust I, for the sole purpose of issuing trust-preferred securities.

See Note 9 “Long-Term Subordinated Debentures”,

located in Item 8.

“Financial Statements and Supplementary Data” in this Form 10-K.

located in Item 8 “Financial Statements and Supplementary Data” in this Form 10-K.

The Company’s primary service area is the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced counties, and the east region of the San Francisco Bay Area, including

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This county had a Population of 0.8 million and a Median Household Income of approximately $92,179.

Significant employment sectors include the

Significant employment sectors include the following:

trade, transportation & utilities, government, and education & health services.

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Significant employment in the following sectors:

professional & business services, educational & health services, trade, and transportation & utilities.

& business services, educational & health services, trade, and transportation & utilities.

Unemployment was at 5.0%.

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manufacturing, leisure & hospitality, trade,

and educational & health services.

agriculture, and educational & health services.

Unemployment was at 4.1%.

Through its network of banking offices, the Company emphasizes personalized service along with a broad range of banking services to businesses and individuals located in the service areas of its offices.

the Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market.

Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market.

The Company offers a wide range of deposit products.

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The banking and financial services industry in California generally, and in the Company’s market areas specifically, is highly competitive.

The competitive environment is a result primarily of changes in

regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers.

The Company competes with other major commercial banks, diversified financial institutions, credit

unions, savings institutions, money market and other mutual funds, mortgage companies, and a variety of other non-banking financial services and advisory companies.

Federal legislation encourages competition between different types of financial

service providers and has fostered new entrants into the financial services market.

Non-traditional financial services firms, such as financial technology companies, are less regulated and continue to expand their offerings of services

traditionally provided by financial institutions.

The competitive environment is a result primarily of changes in regulation,

changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers.

The Company competes with other major commercial banks, diversified financial institutions, credit unions, savings

institutions, money market and other mutual funds, mortgage companies, and a variety of other non-banking financial services and advisory companies.

Federal legislation encourages competition between different types of financial service providers

and has fostered new entrants into the financial services market.

Non-traditional financial services firms, such as financial technology companies, are less regulated and continue to expand their offerings of services traditionally provided by

financial institutions.

It is anticipated that this trend will continue.

Using the financial holding company structure, insurance companies and securities firms may compete more directly with banks and bank holding

Further, the new Trump Administration is expected to seek to promote innovation across the financial services industry through a regulatory environment that is favorable to cryptocurrencies, digital assets, open banking initiatives and

financial technology companies, which has the potential to further increase competition within the banking industry.

Using the financial holding company structure, insurance companies and securities firms may compete more directly with banks and bank holding companies.

Further, the current

Trump Administration has taken a number of actions to promote innovation across the financial services industry through a regulatory environment that is favorable to cryptocurrencies, digital assets, open banking initiatives and financial

technology companies, which has the potential to further increase competition within the banking industry.

In 2025, the Office of the Comptroller of the Currency (“OCC”) announced its conditional approval of five national trust bank charter

applications to either newly charter or convert existing institutions into national trust banks that propose to offer digital asset products and services.

While national trust banks generally do not take insured deposits or engage in commercial

lending, these new non-traditional trust banks offer deposit-like products, although lacking FDIC insurance and core consumer protections, and they are not subject to the same capital, liquidity or supervisory standards as banks.

Many of our competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Company.

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The Company believes that its employee relations are satisfactory.

For the year ended December 31, 2024, salaries and employee benefits

expense totaled $72.5 million, representing 69% of our total non-interest expense.

For the year ended December 31, 2025, salaries and employee benefits expense

totaled $74.1 million, representing 67% of our total non-interest expense.

The Company makes significant investments in employee education, training, and recruiting.

We are led by an experienced management team with substantial experience in the markets we serve and the financial products we offer.

Our business strategy focuses on providing products and services through

long-term relationship managers.

Our business strategy focuses on providing products and services through long-term

relationship managers.

As a result, our success depends heavily on the performance of our employees, as well as on our ability to attract, motivate and retain highly qualified employees at all levels of the Company.

We believe that our

work environment contributes to employee satisfaction and retention.

We believe that our work

environment contributes to employee satisfaction and retention.

We are committed to maintaining a work environment where every employee is treated with dignity and respect, free from the threat of discrimination and harassment.

As stated in our Board approved (i) Code of

Conduct and (ii) Prohibited Harassment Policy, we expect these same standards to apply to all stakeholders, and to our interactions with customers, vendors and independent contractors.

As stated in our Board approved (i) Code of Conduct

and (ii) Prohibited Harassment Policy, we expect these same standards to apply to all stakeholders, and to our interactions with customers, vendors and independent contractors.

We are firmly committed to providing equal employment and advancement opportunities to all qualified individuals and will not tolerate any discrimination or harassment of any kind.

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different performance-based bonus programs for those in business generating roles and those in administrative support roles to ensure incentives align with job responsibilities and proper segregation of duties.

During 2024, total cash bonus

compensation amounted to nearly 30% of base salaries.

We believe that this “pay-for-performance” approach allows us to effectively recruit and retain key employees.

We believe that this

“pay-for-performance” approach allows us to effectively recruit and retain key employees.

Retirement Plans

All employees are eligible to participate in our Profit Sharing Plan after one year of service and having worked at the Company at least 1,000 hours.

All employees are eligible to participate and make contributions into the 401(k) portion of the Profit Sharing Plan after completing 120 days of service.

The Company makes contributions equal to 5% of the employee’s

eligible compensation plus a discretionary contribution determined annually by the Board of Directors.

Eligible employees begin participating in the employer contributions portion of the Profit Sharing Plan if they have worked at least 1,000 hours

during the year and are employed by the Company on December 31 st .

This is not a matching based program;

employees receive these contributions regardless of whether they make individual contributions to our

401(K) program.

During 2024, total contributions by the Company for the Profit Sharing Plan amounted to approximately 9.4% of eligible wages, a level that we believe helps us in recruitment and retention.

The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees and a Senior Management Retention Plan (“SMRP”) for certain senior level employees.

SMRP are a non-qualified deferred compensation plans and were developed to supplement the Company’s Profit Sharing Plan.

employees receive these contributions regardless of whether they make individual contributions to our 401(k) program.

Contributions

by the Company for the Profit Sharing Plan are made at a level that we believe helps us in recruitment and retention.

The Company, through the Bank, sponsored an Executive Retirement Plan (“ERP”) for certain executive level employees and a Senior Management Retention Plan (“SMRP”) for certain senior level employees.

The ERP and SMRP

were non-qualified deferred compensation plans and were developed to supplement the Company’s Profit Sharing Plan.

Effective November 29, 2024, both plans were terminated and frozen.

The liquidation of both plans will occur sometime between

the 12-month anniversary and the 24-month anniversary of the termination of the plans pursuant to regulations promulgated by the Department of the Treasury.

These plans were replaced with a new restricted stock compensation plan.

The liquidation of both plans occurred on December 10, 2025.

These plans were replaced with a new restricted stock compensation plan as described in the following paragraph.

Stock Compensation Plan

At the special meeting of shareholders held on November 25, 2024, the Company’s shareholders approved the Farmers & Merchants Bancorp 2025 Restricted Stock Retirement Plan (the “2025 Plan”).

The 2025 Plan

permits stock-based compensation awards to employees, officers and directors of the Company and its subsidiaries and affiliates.

The 2025 Plan permits

stock-based compensation awards to employees, officers and directors of the Company and its subsidiaries and affiliates.

The 2025 Plan authorized awards up to 80,000 shares.

No shares have been issued under the 2025 Plan as of December

The first grant awards under the 2025 Plan occurred in February 2025.

Under the 2025 Plan, the first grant was awarded in February 2025 and two

additional grant awards were made during the remainder of 2025.

The 2025 Plan was designed to replace the ERP and SMRP plans described above.

Medical and Other Benefits

In addition to competitive salaries, incentives and retirement benefits, we provide comprehensive medical, dental, and vision plans, health savings accounts, paid sick time, long-term disability, basic life and

AD&D insurance, flexible spending accounts, and employee assistance and wellness programs.

accidental death and dismemberment insurance, flexible spending accounts, and employee assistance and wellness programs.

We support team members, should they wish to continue their education in subjects and fields that are directly related to our operations, activities, and objectives.

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The Company has implemented a Performance Planning, Coaching and Evaluation (“PPC&E”) system that requires each year that employees and their managers establish detailed goals and objectives.

employees are reviewed relative to their progress in achieving those goals, with the objective of reducing performance surprises and encouraging behavior that is consistent with Company objectives.

We believe that this PPC&E discipline is

important in retaining and growing the skills of our employees.

Annually, employees

are reviewed relative to their progress in achieving those goals, with the objective of reducing performance surprises and encouraging behavior that is consistent with Company objectives.

We believe that this PPC&E discipline is important in

retaining and growing the skills of our employees.

Succession Planning

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The difference between the interest rates received by the Company on its

interest-earning assets, such as loans and leases extended to its customers and securities held in its investment portfolio, and the interest rates paid by the Company on interest-bearing liabilities, such as deposits and other borrowings,

comprise the major portion of the Company’s earnings.

the major portion of the Company’s earnings.

These rates are highly sensitive to many factors that are beyond the control of the Company and the Bank, such as inflation, recession, unemployment, and the monetary policy of the Federal Reserve.

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national monetary policies (with objectives such as curbing inflation and maximum employment, stable prices, and moderate long-term interest rates) through its open-market operations in U.S.

Government securities by adjusting the required level

of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions.

The actions of the Federal Reserve in these areas

influence the growth of bank loans and leases, investments, and deposits and affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities.

The nature and impact on the Company of any future changes in monetary

and fiscal policies cannot be predicted.

Government securities by adjusting the required level of

reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions.

The actions of the Federal Reserve in these areas influence

the growth of bank loans and leases, investments, and deposits and affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities.

The nature and impact on the Company of any future changes in monetary and fiscal

policies cannot be predicted.

From time to time, legislative acts, as well as regulations, are enacted which have the effect of increasing the Company’s cost of doing business, limiting or expanding permissible activities, or affecting the

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Congress, in the state legislatures including California’s, and before various regulatory agencies.

This legislation may change banking statutes and the operating environment of the Company and the Bank

in substantial and unpredictable ways.

This legislation may change banking statutes and the operating environment of the Company and the Bank in

substantial and unpredictable ways.

If enacted, such legislation or regulations could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings institutions,

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Bank holding companies and banks are extensively regulated under both federal and state law.

The regulation is intended primarily for the protection of the banking system and the Deposit Insurance Fund (“DIF”)

and clients of insured depository institutions and not for the benefit of shareholders of the Company.

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory

agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses.

These examinations consider not only compliance with applicable laws and regulations, but also

capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors.

The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a

regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these

The regulation is intended primarily for the protection of the banking system and the FDIC’s Deposit Insurance Fund

(“DIF”) and clients of insured depository institutions and not for the benefit of shareholders of the Company.

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective

regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses.

These examinations consider not only compliance with applicable laws and regulations,

but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors.

The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations

of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of

these agencies.

Set forth below is a summary description of the material laws and regulations which relate to the operations of the Company and the Bank.

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However, the Company, subject to the prior notice

to, and/or approval of, the Federal Reserve, may engage in any, or acquire shares of companies engaged in any, activities that are deemed by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a

proper incident thereto.

incident thereto.

A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.

In addition, it is the Federal

Reserve’s policy, that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress

or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.

This support may be required at times when a bank holding company may not be able to

provide such support.

A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a

violation of the Federal Reserve’s regulations or both.

Reserve’s policy that, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or

adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.

This support may be required at times when a bank holding company may not be able to provide

such support.

Federal Reserve’s regulations or both.

The Company is not a financial holding company for purposes of the BHCA.

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The Bank, as a California-chartered non-Federal Reserve member bank, is subject to primary supervision, periodic examination and regulation by the DFPI and the FDIC.

If, as a result of an examination of the Bank,

the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory, or that the Bank or its management is violating or

has violated any law or regulation, various remedies are available to the FDIC.

Such remedies include the power to issue cease and desist orders regarding or to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or

practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove or suspend officers and directors, and ultimately to

terminate the Bank’s deposit insurance, which for a California-chartered bank would result in a revocation of the Bank’s charter.

If, as a result of an examination of the Bank, the

FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory, or that the Bank or its management is violating or has

violated any law or regulation, various remedies are available to the FDIC.

to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove or suspend officers and directors, and ultimately to terminate the

Bank’s deposit insurance, which for a California-chartered bank would result in a revocation of the Bank’s charter.

The DFPI has many of the same remedial powers.

The term ‘‘unsafe or unsound practice’’ appears in the FDIA for purposes of the

agencies’ enforcement authority;

however, it is not defined in the statute.

In October 2025, the FDIC issued a proposed rule which seeks to implement a consistent definition of ‘‘unsafe or unsound practice’’ that would focus on material risks to

the financial condition of an institution and would generally require that an imprudent practice, act, or failure to act, if continued, would be likely to materially harm the institution’s financial condition or present a material risk of loss to

the FDIC’s DIF.

Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank.

State and federal statutes and regulations relate to many aspects of the

Bank’s operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans and leases, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital

State and federal statutes and regulations relate to many aspects of the Bank’s

operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans and leases, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital

requirements.

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imposing more stringent capital requirements on bank holding companies and subjecting certain activities, including interstate mergers and acquisitions, to heightened capital conditions;

changing the assessment base for federal deposit insurance from the amount of the insured deposits held by the depository institution to the depository institution’s average total consolidated assets less tangible equity, eliminating

the ceiling on the size of the FDIC’s DIF and increasing the floor on the size of the FDIC’s DIF;

ceiling on the size of the FDIC’s DIF and increasing the floor on the size of the FDIC’s DIF;

eliminating all remaining restrictions on interstate banking by authorizing state banks to establish de novo banking offices in any state that would permit a bank chartered in that state to open a banking office at that location;

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Many of the law’s provisions have been implemented by rules and regulations of the federal banking agencies.

The law contains many provisions which have particular relevance to our business, including provisions

that have resulted in adjustments to our FDIC deposit insurance premiums and that resulted in increased capital and liquidity requirements, increased supervision, increased regulatory and compliance risks and costs and other operational costs and

The law contains many provisions which have particular relevance to our business, including provisions that

have resulted in adjustments to our FDIC deposit insurance premiums and that resulted in increased capital and liquidity requirements, increased supervision, increased regulatory and compliance risks and costs and other operational costs and

expenses, reduced fee-based revenues and restrictions on some aspects of our operations, and increased interest expense on our demand deposits.

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that a depository institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile.

The Economic Growth Act also exempts community banks from Section 13 of the BHCA if they have less than $10

billion in total consolidated assets;

and exempts banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, from the Volcker Rule restrictions on trading

with their own capital.

The Economic Growth Act also exempts community banks from the Volcker Rule’s proprietary trading ban if they have

less than $10 billion in total consolidated assets and total trading assets and liabilities not exceeding more than five percent of their total assets.

The Economic Growth Act also added certain protections for consumers, including veterans and active duty military personnel, expanded credit freezes and created an identity theft protection

The Economic Growth Act also made changes applicable to bank holding companies, as it raises the threshold for automatic designation as a systemically important financial institution from $50 billion to $250 billion in assets,

subjects banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion in assets, and required the federal banking regulators , within 180 days of

passage, to raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.

banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion in assets, and required the federal banking regulators , within 180 days of passage, to

raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.

The Economic Growth Act also added certain protections for student borrowers.

The new Trump Administration has indicated a desire to reduce the regulatory burden on U.S.

The current Trump Administration has indicated a desire to reduce the regulatory burden on U.S.

companies, including financial institutions.

Further, in a recent statement, the Acting Chairman of the

FDIC indicated that a matter of FDIC focus (among other things) will include conducting a “wholesale” review of the agency’s regulations, guidance and manuals.

President Trump is likely to appoint, or has already appointed, new acting

leadership of bank regulatory agencies, including the CFPB, and, once appointed, this new agency leadership can rescind informal agency guidance, including advisory opinions, interpretive rules and policy statements, creating opportunities for

deregulation.

Further, in January 2025, the Acting Chairman of the FDIC

issued a statement in which he indicated that a matter of FDIC focus (among other things) will include conducting a “wholesale” review of the agency’s regulations, guidance and manuals.

President Trump is likely to appoint, or has already

appointed, new acting leadership of bank regulatory agencies, including the CFPB, and, once appointed, this new agency leadership can rescind informal agency guidance, including advisory opinions, interpretive rules and policy statements,

creating opportunities for deregulation.

On January 20, 2025, President Trump signed an executive order to pause all pending regulations.

Sweeping in nature, the order applies to “all executive departments and agencies” while directing them to “not propose or issue any

rule in any manner, including by sending a rule to the Office of the Federal Register (the “OFR”), until a department or agency head appointed or designated by the President after noon on January 20, 2025, reviews and approves the rule.” The

order also states that agencies must “immediately withdraw any rules that have been sent to the OFR but not published in the Federal Register, so that they can be reviewed and approved.” The executive order also states that agencies must

“consider postponing for 60 days from the date of this memorandum the effective date for any rules that have been published in the Federal Register, or any rules that have been issued in any manner but have not taken effect, for the purpose of

reviewing any questions of fact, law, and policy that the rules may raise.”

Sweeping in nature, the order applied to “all executive departments and agencies” while directing them to

“not propose or issue any rule in any manner, including by sending a rule to the Office of the Federal Register (the “OFR”), until a department or agency head appointed or designated by the President after noon on January 20, 2025, reviews and

approves the rule.” The order also stated that agencies must “immediately withdraw any rules that have been sent to the OFR but not published in the Federal Register, so that they can be reviewed and approved.” The executive order also stated

that agencies must “consider postponing for 60 days from the date of this memorandum the effective date for any rules that have been published in the Federal Register, or any rules that have been issued in any manner but have not taken effect,

for the purpose of reviewing any questions of fact, law, and policy that the rules may raise.”

At this time, no details on potential or proposed reforms have been published, and we are uncertain whether the intended deregulation will, in fact, occur, or have a significant impact on the

Whether and the extent to which any new legislation will result in additional regulatory initiatives and policies, or modifications of existing regulations and policies, which may impact our business, cannot be predicted at this time.

No current assurance may be given that any other such legislative changes will not have a negative impact on the results of operations and financial condition of the Company and the Bank.

current assurance may be given that any other such legislative changes will not have a negative impact on the results of operations and financial condition of the Company and the Bank.

Capital Standards

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banking organizations.

The rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening international capital standards, as well as implementing certain provisions

of the Dodd-Frank Act.

The rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening international capital standards, as well as implementing certain provisions of

the Dodd-Frank Act.

The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for some of their components).

The Basel III Capital Rules:

(i) introduce

a new capital measure called Common Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets;

(ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are

instruments treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements;

(iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of

and (iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations.

Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is

non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for credit losses, in each case, subject to the Basel III Capital Rules’ specific requirements.

(i) introduce a

new capital measure called Common Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets;

(ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are instruments

treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements;

(iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital;

(iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations.

Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is non-cumulative

perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for credit losses, in each case, subject to the Basel III Capital Rules’ specific requirements.

Under the Basel III Capital Rules, the following are the minimum capital ratios applicable to the Company and the Bank:

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These include, for example, the requirement that:

(i) mortgage servicing rights, (ii) deferred tax

assets arising from temporary differences that could not be realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category

exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded for the purposes of determining

regulatory capital ratios;

however, non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance sheet foreign exposures),

including the Company and the Bank, may make a one-time permanent election to exclude these items.

The Company and the Bank made this election in 2015 in order to avoid significant variations in the level of capital depending upon the impact of

interest rate fluctuations on the fair value of its available-for-sale investment securities portfolio, changes of which are included in accumulated other comprehensive income or loss.

(i) mortgage servicing rights, (ii) deferred tax assets

arising from temporary differences that could not be realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds

10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded for the purposes of determining regulatory

capital ratios;

Company and the Bank, may make a one-time permanent election to exclude these items.

The Company and the Bank made this election in 2015 in order to avoid significant variations in the level of capital depending upon the impact of interest rate

fluctuations on the fair value of its available-for-sale investment securities portfolio, changes of which are included in accumulated other comprehensive income or loss.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expands the risk weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%)

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Government and agency securities, to 600% for certain equity exposures, depending on the nature of the assets.

The Basel III capital rules

generally result in higher risk weights for a variety of asset classes.

The Basel III capital rules generally

result in higher risk weights for a variety of asset classes.

Additional aspects of the Basel III Capital Rules that are relevant to the Company and the Bank include:

consistent with the Basel I risk-based capital rules, assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk

weight category for all other mortgages;

category for all other mortgages;

providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (set at 0% under the Basel I risk-based capital rules);

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With respect to the Bank, the Basel III capital rules also revise the prompt corrective action regulations pursuant to Section 38 of the FDIA.

As of December 31, 2024, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for a “well

capitalized” institution under the Basel III capital rules on a fully phased-in basis.

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms, which standards are commonly referred to as Basel

Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including the recalibration of the risk weights and the introduction of new capital requirements for certain “unconditionally

cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

As of December 31, 2025, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for a “well-capitalized”

institution under the Basel III capital rules on a fully phased-in basis.

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms, which standards are commonly referred to as Basel IV.

commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Under the Basel framework, these standards were generally effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.

On July 27, 2023, the federal banking agencies issued a proposed rule to implement the final components of the Basel III standards set by the Basel Committee on Banking Supervision in 2017.

proposed rule, which would not apply to the Company and the Bank as proposed, would substantially revise the existing regulatory capital framework for institutions with $100 billion or more of assets.

On July 27, 2023, the federal banking agencies issued a proposed rule to implement the final components of the Basel III standards set by the Basel Committee on Banking Supervision in 2017, also known

as the “Basel III end game.” The proposed rule, which would not apply to the Company and the Bank as proposed, would substantially revise the existing regulatory capital framework for institutions with $100 billion or more of assets.

rule faced delays and opposition from both banks and regulators through 2023 and 2024.

Following President Trump’s reelection, the Basel III end game rules were expected to undergo significant revisions or re-proposals.

Recently, it has been

reported that the Federal Reserve is actively working with the FDIC and the OCC on a re-proposal of the Basel III end game rule, which is expected to be released sometime in early 2026.

This re-proposal is expected to reflect a more risk-based

approach and significantly ease the earlier proposal for the biggest banks.

Under the current U.S.

capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Bank.

The impact of Basel IV on us

will depend on how it is implemented by the federal bank regulators.

The new Trump Administration may consider adjustments to these capital and liquidity rules.

The impact of Basel IV on us will

depend on how it is implemented by the federal bank regulators.

The current Trump Administration may consider adjustments to these capital and liquidity rules.

Whether and the extent to which these proposed rules, or modifications of existing regulations and

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The FDIA includes the following five capital tiers:

“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant

capital measures and certain other factors, as established by regulation.

capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital

measures and certain other factors, as established by regulation.

The Basel III Capital Rules revised the PCA requirements effective January 1, 2015.

Under the revised PCA provisions of the FDIA, an insured depository institution

generally will be classified in the following categories based on the capital measures indicated:

Minimum to be Categorized as

"Well Capitalized"

Minimum to be Categorized as "Adequately Capitalized"

Under-capitalized

Significantly Under-capitalized

Critically Under-capitalized

Under the revised PCA provisions of the FDIA, an insureddepository institution generally will be

classified in the following categories based on the capital measures indicated:

Minimum to be

Categorized as

Minimum to be

Categorized as

Significantly

Risk-based capital to risk-weighted assets

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Supplemental leverage ratio

An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be operating in an unsafe or unsound

condition or if it receives an unsatisfactory examination rating with respect to certain matters.

An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be operating in an unsafe or unsound condition

or if it receives an unsatisfactory examination rating with respect to certain matters.

A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate

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depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans.

If a depository institution fails to submit an acceptable

plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become

If a depository institution fails to submit an acceptable plan,

it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become

“adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

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requirements under the framework will be considered to have met the “well capitalized” ratio requirements under the PCA regulations.

Such a community banking organization would not be subject to other risk-based and leverage capital

requirements (including the Basel III and Basel IV requirements).

Such a community banking organization would not be subject to other risk-based and leverage capital requirements

(including the Basel III and Basel IV requirements).

The CBLR is determined by dividing a financial institution’s tangible equity capital by its average total consolidated assets.

The rule describes what is included in tangible

equity capital and average total consolidated assets.

The rule describes what is included in tangible equity capital and

average total consolidated assets.

The CBLR framework was available for banks to use in their March 31, 2020, call report.

A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a

leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements.

Further, a CBLR bank may opt out of the

framework at any time, without restriction, by reverting to the generally applicable capital requirements.

While we are a qualifying community banking organization, the Company and Bank did not opt into the CBLR framework.

A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a leverage ratio greater

than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements.

Further, a CBLR bank may opt out of the framework at any time,

without restriction, by reverting to the generally applicable capital requirements.

On November 25, 2025, the US federal banking regulators proposed changes to the CBLR framework intended to encourage additional community banks to opt into the

CBLR framework.

This proposal would reduce the CBLR requirement from 9% to 8% and extend the grace period for qualifying institutions that fall below the 8% ratio to return to compliance from the current two quarters to four quarters, provided

they maintain a 7% leverage ratio.

While we are a qualifying community banking organization, the Company and Bank have not opted into the CBLR framework.

Anti-Money Laundering and Office of Foreign Assets Control Regulation

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and (vi) cooperation between financial institutions and law enforcement authorities.

authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with

all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory

approval is required or to prohibit such transactions even if approval is not required.

of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is

required or to prohibit such transactions even if approval is not required.

Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including

designated foreign countries, nationals and others.

foreign countries, nationals and others.

OFAC publishes lists of specially designated targets and countries.

Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and

countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.

Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC,

and failure of a financial institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and countries,

prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.

Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC, and failure

of a financial institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Privacy Restrictions

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personal information which is obtained by or shared with “covered businesses”, which includes the Bank and most other banking institutions subject to California law.

The CCPA gives consumers the right to request disclosure of information

collected about them and whether that information has been sold or shared with others, the right to request deletion of personal information subject to certain exceptions, the right to opt out of the sale of the consumer’s personal information

and the right not to be discriminated against because of choices regarding the consumer’s personal information.

The CCPA provides for certain monetary penalties and for its enforcement by the California Attorney General or consumers whose rights

under the law are not observed.

It also provides for damages as well as injunctive or declaratory relief if there has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security

The CCPA contains several exemptions, including a provision to the effect that the CCPA does not apply where the information is collected, processed, sold or disclosed pursuant to the GLBA if the GLBA is in conflict with the CCPA.

November 2020, California voters approved state-wide Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020 (the “CPREA”) which expanded and amended certain provisions of the CCPA and created the California

Privacy Protection Agency to enforce privacy rights for Californians and impose fines for violations of such rights.

The CPREA requires businesses to share a consumer’s personal information upon the consumer’s request, provides consumers with an

opt-out option for having their sensitive personal information used or disclosed for advertising or marketing, to obtain permission for collecting data on certain minors, and to correct a consumer’s inaccurate information upon the consumer’s

It also removed the ability of businesses to remedy violations before being penalized for violations and increased the penalties for such violations.

Most of the provisions of the CPREA took effect in 2023 but some portions, such as the

creation of the new state agency, went into effect immediately.

While GLBA-regulated nonpublic, personal information generally is exempt under the CCPA, the CCPA and certain other state laws apply to the personal information of representatives of

any business contacts that the Bank engages with who are California residents, employees who are California residents, and any other personal information that the Bank collects outside of the scope of GLBA, such as with respect to certain data

collected from visitors to our website.

The CCPA gives consumers the right to request disclosure of information collected

about them and whether that information has been sold or shared with others, the right to request deletion of personal information subject to certain exceptions, the right to opt out of the sale of the consumer’s personal information and the right

not to be discriminated against because of choices regarding the consumer’s personal information.

The CCPA provides for certain monetary penalties and for its enforcement by the California Attorney General or consumers whose rights under the law

are not observed.

contains several exemptions, including a provision to the effect that the CCPA does not apply where the information is collected, processed, sold or disclosed pursuant to the GLBA if the GLBA is in conflict with the CCPA.

In November 2020,

California voters approved state-wide Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020 (the “CPREA”) which expanded and amended certain provisions of the CCPA and created the California Privacy Protection

Agency to enforce privacy rights for Californians and impose fines for violations of such rights.

The CPREA requires businesses to share a consumer’s personal information upon the consumer’s request, provides consumers with an opt-out option for

having their sensitive personal information used or disclosed for advertising or marketing, to obtain permission for collecting data on certain minors, and to correct a consumer’s inaccurate information upon the consumer’s request.

It also removed

the ability of businesses to remedy violations before being penalized for violations and increased the penalties for such violations.

Most of the provisions of the CPREA took effect in 2023 but some portions, such as the creation of the new state

agency, went into effect immediately.

While GLBA-regulated nonpublic, personal information generally is exempt under the CCPA, the CCPA and certain other state laws apply to the personal information of representatives of any business contacts that

the Bank engages with who are California residents, employees who are California residents, and any other personal information that the Bank collects outside of the scope of GLBA, such as with respect to certain data collected from visitors to our

The impact of these laws on the business of the Bank could result in increased operating expenses as well as additional exposure to the risk of litigation by or on behalf of consumers.

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The Company is a legal entity separate and distinct from the Bank.

The Bank is subject to various statutory and regulatory

restrictions on its ability to pay dividends to the Company.

The Bank is subject to various statutory and regulatory restrictions

on its ability to pay dividends to the Company.

Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $131.8 million at December 31, 2025.

During 2024, the Bank paid $60.9 million

in dividends to the Company of which $13.0 million was used for cash dividends to shareholders, $45.3 million was allocated for share repurchases and $2.6 million was used to cover expenses and maintain a cash reserve.

During 2025, the Bank paid $51.8 million in dividends to

the Company of which $13.4 million was used for cash dividends to shareholders, $34.7 million was allocated for share repurchases and $3.7 million was used to cover expenses and maintain a cash reserve.

The FDIC and the DFPI also have authority to prohibit the Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business.

It is possible, depending upon

the financial condition of the bank in question and other factors, that the FDIC or the DFPI could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice.

Further, the Federal

Reserve and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by banks and bank holding companies under their jurisdiction.

Compliance with the standards set forth in such guidelines and the

restrictions that are or may be imposed under the PCA provisions of federal law could limit the amount of dividends that the Bank or the Company may pay.

An insured depository institution is prohibited from paying management fees to any

controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized.

It is possible, depending upon the

financial condition of the bank in question and other factors, that the FDIC or the DFPI could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice.

Further, the Federal Reserve

and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by banks and bank holding companies under their jurisdiction.

Compliance with the standards set forth in such guidelines and the restrictions

that are or may be imposed under the PCA provisions of federal law could limit the amount of dividends that the Bank or the Company may pay.

An insured depository institution is prohibited from paying management fees to any controlling persons or,

with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized.

The DFPI may impose similar limitations on the Bank.

See “Prompt Corrective Action” and

“Capital Standards”, above, for a discussion of these additional restrictions on capital distributions.

See “Prompt Corrective Action” and “Capital Standards”, above,

for a discussion of these additional restrictions on capital distributions.

Transactions with Affiliates

The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of the Company or other affiliates, the purchase of,

or investments in, stock or other securities of the Company or other affiliates, the taking of such securities as collateral for loans and leases, and the purchase of assets of the Company or other affiliates.

Such restrictions prevent the

Company and other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts.

Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates

are limited, individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate as to all affiliates, to 20% of the Bank’s capital and surplus (as

defined by federal regulations).

investments in, stock or other securities of the Company or other affiliates, the taking of such securities as collateral for loans and leases, and the purchase of assets of the Company or other affiliates.

Such restrictions prevent the Company and

other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts.

Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates are limited,

individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate as to all affiliates, to 20% of the Bank’s capital and surplus (as defined by federal

regulations).

In addition, the Company and its operating subsidiaries generally may not purchase a low-quality asset from an affiliate, and other specified transactions between the Company or its operating subsidiaries and an

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Additionally,

limitations involving the transactions with affiliates may be imposed on the Bank under the PCA provisions of federal law.

limitations involving transactions with affiliates may be imposed on the Bank under the PCA provisions of federal law.

See “Prompt Corrective Action.”

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In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.

an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance.

institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance.

If a financial

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institution to cure the deficiency.

Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the

rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances.

Noncompliance with the standards established by the safety and soundness guidelines may also

constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

Since the financial crisis of 2008-2009, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating

the activities of the financial institutions they supervise.

Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation,

and the size and speed of financial transactions have changed the nature of banking markets.

The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational,

legal, and reputational risk.

the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances.

Noncompliance with the standards established by the safety and soundness guidelines may also constitute

grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

In October 2025, the FDIC issued a proposed rule which would define the term “unsafe or unsound practice” for purposes of the statute that authorizes federal banking agencies to take formal

enforcement actions – including cease-and-desist orders, civil money penalties, and removal of personnel – against insured depository institutions engaging in unsafe or unsound practices.

If implemented, this proposed rule would also revise the

supervisory framework for the issuance of matters requiring attention (MRA) and other supervisory communications and is intended to promote greater clarity and certainty regarding certain enforcement and supervision standards and to ensure that

these standards prioritize material financial risks.

Since the financial crisis of 2008-2009, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the

activities of the financial institutions they supervise.

Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and

the size and speed of financial transactions have changed the nature of banking markets.

The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal,

and reputational risk.

In particular, regulatory pronouncements in the past few years have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches

in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses.

New products and services, third-party risk management and cyber-security are critical sources of operational risk that financial institutions are

expected to address in the current environment.

New products and services, third-party risk management and cyber-security are critical sources of operational risk that financial institutions are expected

to address in the current environment.

The Bank is expected to have active board and senior management oversight;

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deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations.

Effective July 1, 2016, the FDIC changed the deposit insurance assessment

system for banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years.

Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method”

to determine assessment rates for all such banks.

Effective July 1, 2016, the FDIC changed the deposit insurance assessment system

for banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years.

Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method” to

determine assessment rates for all such banks.

Under the financial ratios method, the FDIC determines assessment rates based on a combination of financial data and supervisory ratings that estimate a bank’s probability of failure within three

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The FDIC indicated that it was taking this action in order to restore the DIF reserve ratio to the required statutory minimum of 1.35% by the statutory deadline of September 30, 2028.

The FDIC said that the reserve ratio had declined below this level because of the increase in insured

deposits since the start of the COVID-19 pandemic and other factors that affect the level of the DIF.

Under the final rule, the increase in rates began with the first quarterly assessment period of 2023 and will remain in effect unless and

until the reserve ratio meets or exceeds 2% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2% reserve ratio.

The FDIC said that the reserve ratio had declined below this level because of the increase in insured deposits since the

start of the COVID-19 pandemic and other factors that affect the level of the DIF.

Under the final rule, the increase in rates began with the first quarterly assessment period of 2023 and will remain in effect unless and until the reserve ratio

meets or exceeds 2% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2% reserve ratio.

On November 16, 2023, the FDIC issued a final rule to implement a special assessment to recover the loss to the DIF associated with protecting uninsured depositors following the closures in early 2023 of Silicon

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estimated uninsured deposits.

Under the final rule, the FDIC will collect the special assessment at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 and will continue to collect special assessments

for an anticipated total of eight quarterly assessment periods.

This special assessment does not apply to the Bank.

Under the final rule, the FDIC will collect the special assessment at an annual rate of 13.4 basis points (with the special assessment rate for the final collection quarter reduced from 3.36 basis points to 2.97 basis

points) beginning with the first quarterly assessment period of 2024 and will continue to collect special assessments for an anticipated total of eight quarterly assessment periods (with a final invoice date of March 30, 2026).

assessment does not apply to the Bank.

The Bank’s FDIC premiums were $2.5 million, $2.4 million, and $2.4 million for the three years ended December 31, 2025, 2024, and 2023, respectively.

Future increases in insurance premiums could have adverse

effects on the operating expenses and results of operations of the Company.

Future increases in insurance premiums could have adverse effects

on the operating expenses and results of operations of the Company.

Management cannot predict what the FDIC insurance assessment rates will be in the future.

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institution’s performance in meeting the credit needs of its community and to consider such assessment in reviewing applications for mergers, acquisitions, relocation of existing branches, opening of new branches, and other transactions.

may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws.

be subject to substantial penalties and corrective measures for a violation of certain fair lending laws.

A bank’s compliance with the CRA is assessed using an evaluation system, which bases CRA ratings on an institution’s lending, service and investment performance.

An unsatisfactory rating may be the basis for

denying a merger application.

The Bank’s latest CRA examination was completed by the FDIC in August 2022 and the Bank received an overall Outstanding rating in complying with its CRA obligations.

An unsatisfactory rating may be the basis for denying

a merger application.

The Bank’s latest CRA examination was completed by the FDIC in December 2025 and the Bank received an overall Outstanding rating in complying with its CRA obligations.

On October 24, 2023, the federal banking agencies jointly issued a final rule to strengthen and modernize the existing CRA regulations.

Under the final rule, the agencies will evaluate a bank’s CRA performance

based upon the varied activities that it conducts and the communities in which it operates.

CRA evaluations and data collection requirements will be tailored based on bank size and type.

The Bank would be considered a large bank under the final

rule (with assets greater than $2 billion) and therefore will be evaluated under new lending, retail services and products, community development financing, and community development services tests.

The final rule includes CRA assessment areas

associated with mobile and online banking, and new metrics and benchmarks to assess retail lending performance.

In addition, the final rule emphasizes smaller loans and investments that can have a high impact and be more responsive to the needs

of low- and moderate-income communities.

The rule imposes new data collection requirements on large banks, although certain data collection and reporting requirements will be limited to larger banks with assets greater than $10 billion.

rule took effect on April 1, 2024;

however, on March 21, 2024 the agencies issued a supplemental final rule extending the applicability date for certain provisions.

Specifically, the requirements for facility-based assessment areas and public

file provisions, initially effective on April 1, 2024, were extended to January 1, 2026.

This extension aligns these provisions with the compliance date for other aspects of the final rule.

The supplemental final rule also clarifies that banks

are not required to make changes to their public files until January 1, 2026, providing institutions additional time to comply with the updated public notice requirements.

These developments indicate ongoing legal and regulatory adjustments

affecting the implementation timeline of the CRA final rule.

The Bank continues to monitor and stay informed on changes to ensure compliance with the evolving regulatory framework.

The final rule took effect on April 1, 2024;

however, on March 21, 2024 the

agencies issued a supplemental final rule extending the applicability date for certain provisions to January 1, 2026.

In July 2025, the Federal bank regulatory agencies jointly issued a proposal to rescind the CRA final rule issued in October 2023

and replace it with the prior CRA regulations that were originally adopted by the agencies in 1995 (and that the agencies continue to apply), with certain technical amendments.

The Bank continues to monitor and stay informed on changes to ensure

compliance with the evolving regulatory framework.

Consumer Protection Regulations

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Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity

Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, GLBA, Home Mortgage Disclosure Act, Right to Financial Privacy Act, Servicemembers Civil Relief Act, Military

Lending Act and Real Estate Settlement Procedures Act.

The FDIC regularly conducts compliance examinations of insured depository institutions to determine whether the institution is meeting its responsibility to comply with the requirements of

consumer protection laws and regulations.

Act and Real Estate Settlement Procedures Act.

The FDIC regularly conducts compliance examinations of insured depository institutions to determine whether the institution is meeting its responsibility to comply with the requirements of consumer

protection laws and regulations.

Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above.

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operations to supervise and enforce federal consumer protection laws.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created

a more intense and complex environment for consumer finance regulation.

The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the

Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices.

The review of products and practices to prevent such acts and practices have been a continuing focus of the CFPB, and of banking

regulators more broadly.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a

more intense and complex environment for consumer finance regulation.

The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the Dodd-Frank

Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices.

The review of products and practices to prevent such acts and practices have been a continuing focus of the CFPB, and of banking regulators

more broadly.

The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures.

It could also result in increased costs related to regulatory oversight,

supervision and examination, additional remediation efforts and possible penalties.

The Dodd-Frank Act also provided the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services,

including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices.

The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties.

It could also result in increased costs related to regulatory oversight, supervision and

examination, additional remediation efforts and possible penalties.

The Dodd-Frank Act also provided the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the

ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices.

The CFPB also

has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties.

The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards.

While the new Trump

Administration appointee to lead the CFPB and Administration policies could result in the rollback of rules implementing and enforcing consumer financial law and regulatory enforcement activities, there is an expectation of increased activity

at the state level to enforce consumer protection, data privacy, and banking regulations to address potential gaps in federal oversight.

State regulation of financial products and potential enforcement actions could also adversely affect our

business, financial condition or results of operations.

State regulation of financial products

and potential enforcement actions could also adversely affect our business, financial condition or results of operations.

The CFPB is authorized to issue rules for both bank and non-bank companies that offer consumer financial products and services, subject to consultation with the prudential banking regulators.

general, however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer compliance by their primary bank regulator.

In February 2025, the director of the CFPB was dismissed by the new Trump Administration and the new Director of the Office of Management and Budget was appointed as acting director of the CFPB.

In February 2025, the director of the CFPB was dismissed by the current Trump Administration and the new Director of the Office of Management and Budget was appointed as acting director of the CFPB.

The acting director of the CFPB directed agency staff to stop virtually all work, including supervision activities and pending investigations, and announced that the CFPB would not be taking its next draw of federal funding.

Later in February

2025, President Trump nominated a new director of the CFPB who, if confirmed by the Senate, will replace the acting CFPB director.

It cannot be predicted at this time what impact these changes will have on the CFPB and its regulatory

responsibilities in the consumer protection area.

In May 2025, the CFPB

revoked nearly 70 guidance documents, and, since February 2025, has dismissed most of its enforcement actions.

The funding of the CFPB is the subject of ongoing legal actions and disputes over the amount of funds legally available under statutory

authorities for the CFPB to request from the Federal Reserve, with Trump Administration officials, including the CFPB’s Acting Director, reportedly saying that they want to abolish the CFPB.

In November 2025, in letters to Congressional

appropriators and President Trump, the CFPB’s Acting Director reported that the CFPB will run out of funds sometime during the first quarter of 2026.

In January 2026, the CFPB’s Acting Director, in compliance with a December court order,

requested $145 million from the Federal Reserve;

with this funding, the CFPB will be able to remain open through March 2026.

It cannot be predicted at this time what impact these changes will have on the CFPB and its regulatory responsibilities

in the consumer protection area.

Notice and Approval Requirements Related to Control

16 unchanged sentences

In September 2024, the FDIC and the Office of the Comptroller of the Currency issued new policy statements on bank merger transactions.

The FDIC’s new policy statement, which supersedes the

agency’s prior policy statement and was intended to provide transparency and clarity around the FDIC’s approach to bank mergers, was opposed by the now Acting Chairman of the FDIC, who argued that this new supervisory guidance potentially makes

the bank merger process longer, more difficult and less predictable.

Further, in his recent statement, the Acting Chairman of the FDIC has indicated that a matter of FDIC focus (among other things) will include improving the bank merger

approval process and replacing the 2024 Statement of Policy to ensure that merger transactions that satisfy the Bank Merger Act are approved in a timely way.

At this time, it cannot be predicted whether and the extent to which this supervisory

guidance might be modified or withdrawn, or a new approach to bank merger transactions might be implemented.

The FDIC’s new policy statement, which supersedes the agency’s

prior policy statement and was intended to provide transparency and clarity around the FDIC’s approach to bank mergers, was opposed by the now Acting Chairman of the FDIC, who argued that this new supervisory guidance potentially makes the bank

merger process longer, more difficult and less predictable.

Further, in his recent statement, the Acting Chairman of the FDIC has indicated that a matter of FDIC focus (among other things) will include improving the bank merger approval process

and replacing the 2024 Statement of Policy to ensure that merger transactions that satisfy the Bank Merger Act are approved in a timely way.

At this time, it cannot be predicted whether and the extent to which this supervisory guidance might be

modified or withdrawn, or a new approach to bank merger transactions might be implemented.

Incentive Compensation

19 unchanged sentences

or (ii) that could lead to material financial loss to the institution.

The comment period for these proposed regulations has closed, but a final rule

has not been published.

Depending upon the outcome of the rule making process, the application of this rule to us could require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to

recruit and retain qualified employees.

Further, as discussed above, the Basel III Capital Rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds that started

being phased in on January 1, 2016.

In May 2024, several federal financial agencies (including the FDIC) adopted a notice of proposed rulemaking to address incentive-based compensation arrangements for financial institutions,

re-proposing the regulatory text previously proposed in June 2016 and seeking public comment on certain related matters.

The 2024 proposed rule requires enhanced disclosure and reporting of compensation arrangements by covered institutions and

prohibits incentive compensation arrangements that involve inappropriate risks or could lead to material financial loss.

The Federal Reserve and the SEC have not joined in issuing the 2024 proposed rule, which has not yet been published in the

Federal Register or opened for formal public comment.

At this time, it cannot be predicted whether this proposed rule will be modified or implemented.

Recent Developments

Following a bankruptcy filing by a financial services company known as Synapse, in October 2024, the FDIC approved a proposal which will require banks and their “fin-tech” partners holding certain

custodial accounts to maintain timely and accurate records to determine the actual consumers who own funds held in the pooled custodial accounts and the account balance attributable to each consumer so that the FDIC can meet insured deposit

claims to beneficial owners underlying the custody accounts upon the failure of the bank.

At the present time, the Bank does not have any such “fin-tech” partners.

The comment period for these proposed regulations has closed, but a final rule has

not been published.

retain qualified employees.

in on January 1, 2016.

Available Information

Company reports filed with the SEC, including the Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and ownership reports filed

by directors, executive officers and principal shareholders, can be accessed free of charge through the Company’s website at http://www.fmbonline.com , as soon

as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

The link to the SEC is on the About Us page.

Company reports filed with the SEC, including the Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and ownership reports filed by directors, executive officers and principal

shareholders, can be accessed free of charge through the Company’s website at http://www.fmbonline.com , as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

The link to the SEC is on

the About Us page.

The Company’s reports may also be accessed at the SEC’s Internet website (http://www.sec.gov).

An investment in our common stock is subject to risks inherent in our business.

The material risks and uncertainties that management believes may affect our business are described below.

Before making

an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Form 10-K.

The risks and uncertainties described below are

not the only ones facing our business.

Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations.

If any of the following risks actually

occur, our financial condition and results of operations could be materially and adversely affected.

If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.

Risks Relating to the Industry and Geographic Area in Which We Operate and the U.S.

As a financial services company, our business and operations may be adversely affected by weak economic conditions.

Our business operations, which

primarily consist of lending money to clients in the form of loans, borrowing money from clients in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States and California.

tightening of the Federal Reserve’s monetary policies, including repeated and aggressive increases in target range for the federal funds rate as well as the conclusion of the Federal Reserve’s tapering of asset purchases, together with ongoing

economic and geopolitical instability, increases the risk of an economic recession.

The prolonged inverted yield curve and the actions by the Treasury Department in recent years such as financing more of the U.S.

debt with short-term instruments

resulted in higher short-term borrowing costs.

Despite four rate cuts by the Federal Reserve between September and December 2024, and three consecutive 25 basis point rate cuts in late 2025, the Federal Reserve has signaled caution in easing

monetary policy.

At its January 2026 meeting, the Federal Reserve, citing continued elevated uncertainty about the economic outlook, low job gains, and inflation that remains somewhat elevated, determined to maintain the target range for the

federal funds rate at 3.50% to 3.75% percent.

During his second term, President Trump has regularly pushed for the Federal Reserve to cut short-term interest rates, threatened to fire the Federal Reserve Chairman, and taken steps to remove another

member of the Federal Reserve’s governing board, and, in January 2026, the U.S.

attorney’s office in the District of Columbia opened a criminal investigation into the Federal Reserve Chairman over the central bank’s renovation of its Washington

headquarters.

These actions have the potential to threaten the independence of the Federal Reserve, and the outcome of these actions, and their impact on interest rates, financial markets, borrowing costs and the U.S.

economy in general, cannot be

predicted at this time.

economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained and our asset quality, deposit levels, loan demand and results of operations may be adversely

In addition, economic conditions in foreign countries could affect the stability of global financial markets, which could hinder U.S.

economic growth.

Additionally, financial markets may be adversely affected by the current or anticipated

impact of military conflict, including the recent military actions in Iran and the Middle East, escalating military tension between Russia and Ukraine, terrorism and other geopolitical events.

Our business is also significantly affected by monetary

and related policies of the U.S.

federal government and its agencies.

Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control.

Adverse economic conditions and government policy

responses to such conditions could have a material adverse effect on our financial condition and operations.

Our clients businesses are also impacted by the strong US dollar which impacts commodity prices and hurts U.S.

A large portion of our loan portfolio is tied to the real estate market where we operate and we may be negatively impacted by downturns in that market.

significant percentage of our loans are real estate related, consisting of loans for construction and land development projects, and for the purchase, improvement or refinancing of residential and commercial real estate.

A downturn in the real

estate market could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.

Real estate collateral provides an alternate source of

repayment in the event of default by the client and may deteriorate in value during the time the credit is extended.

If values decline, it is also more likely that we would be required to increase our allowance for credit losses.

period of reduced real estate values, we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase our allowance for credit losses, it could materially reduce our profitability and adversely affect our

financial condition.

Although only 3.5% of our loan portfolio consisted of real estate construction, and acquisition and land development loans as of December 31, 2025, such loans generally have a higher degree of risk than long-term

financing of existing properties because repayment depends on the completion of the project and usually on the sale or long term financing of the property.

In addition, these loans are often “interest-only loans,” which normally require only the

payment of interest accrued prior to maturity.

Interest-only loans carry greater risk than other loans because no principal is paid prior to maturity.

This risk is particularly apparent during periods of rising interest rates and declining real

estate values.

If there is a significant decline in the real estate market due to a material increase in interest rates or for other reasons, many of these loans could default and result in foreclosure.

If we are forced to foreclose on a project

prior to completion, we may not be able to recover the entire unpaid portion of the loan or we may be required to fund additional money to complete the project or hold the property for an indeterminate period.

In addition, real estate exposes us to

incurring costs and liabilities for environmental contamination and remediation.

Any of these outcomes may result in losses and reduce our earnings.

The FDIC has given guidance recommending that if the sum of (i) certain categories of CRE loans and (ii) acquisition, development and construction loans (“ADC loans”) exceeds 300% of total risk-based capital, or if

ADC loans exceed 100% of total risk-based capital, heightened risk management practices should be employed to mitigate risk.

As of December 31, 2025, our ratio of the sum of CRE and ADC loans to total risk-based capital was 172% and our ratio of

ADC loans to total risk-based capital was 20.12%.

Our concentration in ADC loans is cyclical and tends to increase in the second and third quarters of each year as demand for ADC loans increases.

An increase in ADC loan concentration could cause

our ratio for ADC loans to increase and even exceed the FDIC’s guidance.

We have exceeded these guidance ratios at times in the past and may do so in the future.

We actively monitor and believe that we effectively manage our CRE and ADC loan

concentrations.

If we exceed the FDIC’s guidance and do not effectively manage the risk of our CRE and ADC loans, we may be subject to regulatory scrutiny, including a requirement to raise additional capital, reduce our loan concentrations, or

undertake other remedial actions.

The small to medium-sized businesses, including agricultural businesses, that we lend to may have fewer resources to weather adverse business and economic

developments, which may impair their ability to repay a loan, and such impairment could adversely affect our operations and financial condition.

Our business strategy targets primarily small to

medium-sized businesses, which frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete, and may experience substantial volatility in

operating results, any of which may impair a client’s ability to repay a loan.

During recessions, demand for goods and services slows down which may negatively affect business sales, levels of profits, and asset values, particularly real estate

which may decrease in value.

During recent years, the strong U.S.

dollar, high inflation rates and the inverted yield curve have had a negative impact on many of our borrowers, particularly in agri-business.

In February 2025, the current Trump Administration announced that it would be imposing increases in tariffs on goods imported to the U.S.

from Canada, Mexico, and China and, and, in April 2025, the Administration

announced the imposition of increased tariffs on goods imported to the U.S.

from other countries.

As a consequence, other countries, in retaliation to the U.S.’s announced tariff measures, announced the imposition of increased levels of tariffs on

goods exported to such countries by companies in the U.S.

Since imposing these tariffs, the President has issued several increases, reductions and modifications, and the Trump Administration has announced agreements in principle regarding tariffs

with certain significant trading partners of the United States, including (among others) the European Union, the United Kingdom, Japan, and South Korea.

It remains uncertain whether such agreements in principle will lead to definitive agreements

with such trading partners and, if so, on what terms and whether agreements with other trading partners will eventually be consummated.

President Trump imposed many of these tariffs by invoking authority under the International Emergency Economic

Powers Act (IEEPA).

On February 20, 2026, the U.S.

Supreme Court ruled that President Trump could not invoke the IEEPA to unilaterally set tariffs on imports, thereby invalidating those tariffs implemented using IEEPA.

The Trump Administration

responded by announcing the imposition of new tariffs under alternative legal authorities to replace the IEEPA tariffs, including an executive order imposing a global surcharge (tariff) of 10% on most imports, effective for 150 days.

President, on February 21, 2026, announced that the tariff rate would be increased to the maximum tariff rate of 15%, U.S.

Customs and Border Protection issued guidance on February 23, 2026, confirming that the tariff rate is 10%.

environment continues to remain highly dynamic, and the specific tariffs applicable to goods imported into the U.S.

continue to evolve, as do import tariffs charged by other countries.

These tariffs could be of particular concern to U.S.

operating in the agricultural sector who export agricultural goods to other countries.

The Company’s customers include a number of agricultural businesses, which could be affected, but to what extent remains uncertain.

As a result of these changes to U.S.

and foreign government trade policies, there may be changes to existing trade agreements, greater restrictions on free trade generally, the imposition of or significant further

increases in tariffs on goods imported into the U.S., and adverse responses by foreign governments to U.S.

trade policies, among other possible changes.

The extent and duration of any tariffs, and the resulting impact on global, national and state

economic conditions generally, and on our customers’ businesses in particular, are uncertain and depend on various factors, such as negotiations between the U.S.

and other countries, the responses of such countries, and exemptions or exclusions

that may be granted.

A significant trade disruption or the establishment or further increase of any tariffs, trade protection measures or restrictions could result in lost sales, adversely impacting our banking customers and their businesses,

including our agricultural business customers.

Impacts to the general economic conditions, such as a heightened risk of a recession caused by lower GDP, higher unemployment and/or changes in the interest rate environment, could adversely impact our

In addition, international trade disputes, including those related to tariffs, could result in inflationary pressures and/or adversely impact global supply chains, which could increase the costs of doing business for our banking

Changes in U.S.

social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the countries where our banking customers currently sell products,

including agricultural products, and any resulting negative sentiments towards the U.S.

businesses as a result of such changes, could also have a material adverse effect on our banking customers’ business, financial condition, results of

operations and cash flows.

If these events negatively affect our banking clients, or general economic conditions nationally, in California, or in our local markets, our business, financial condition and results of operations could be adversely

The success of a small to medium-sized business often depends on the management skills, talents and efforts of one or a small number of people, and the death, disability or resignation of one or more of these people

could have a material adverse impact on the business and its ability to repay its loan.

If general economic conditions negatively affect California and small to medium-sized businesses are adversely affected or our clients are otherwise affected by

adverse business conditions or developments, our business, financial condition and operations could be adversely affected.

Our profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates.

Our profitability depends in

substantial part on our net interest income.

Our net interest income depends on many factors that are partly or completely outside of our control, including competition, monetary and fiscal policies, and economic conditions generally.

interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments.

An inverted yield curve, such as the one that has

existed in recent years, places further stress on interest rate risk management.

In addition, an increase in interest rates could adversely affect clients’ ability to pay the principal or interest on existing loans or reduce their borrowings.

may lead to an increase in our non-performing assets, a decrease in loan originations, or a reduction in the value of and income from our loans, any of which could have a material and negative effect on our operations.

Asset liability mismatches

caused by normal fluctuations in market interest rates could also materially and adversely impact profitability.

Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may adversely affect our

financial condition and earnings.

Since 2022, inflationary pressures have affected many aspects of the U.S.

economy, including gasoline and fuel prices, and global and domestic supply-chain issues have also had a disruptive effect on many industries,

including the agricultural industry.

In January 2022, due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced after several periods of historically low federal funds rates and yields on

Treasury notes that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time.

The FOMC increased the target range 11 times or 525 basis points from March 2022 to July 2023.

range remained unchanged through much of 2024 until the FOMC decreased the rate 100 basis points during the last four months of the year.

The target range remained unchanged through much of 2025 until the FOMC decreased the rate 75 basis points

during the last four months of the year.

As of December 31, 2025, the federal funds rate decreased to 3.75%.

It remains uncertain whether the FOMC will further decrease the target range for the federal funds rate to attain a monetary policy

sufficiently restrictive to return inflation to more normalized levels, begin to increase the federal funds rate or leave the rate at its current elevated level for a lengthy period of time.

As noted previously, the current Trump Administration has

taken steps to increase tariffs on goods imported to the U.S.

from certain countries.

As a consequence, other countries, in retaliation to the U.S.’s announced tariff measures, announced the imposition of increased levels of tariffs on goods

exported to such countries by companies in the U.S.

The imposition of increased tariffs on imports and exports is believed by some economists to entail the possibility of increased inflationary pressures on the U.S.

President Trump imposed

many of these tariffs by invoking authority under the International Emergency Economic Powers Act (IEEPA).

On February 20, 2026, the U.S.

Supreme Court ruled that President Trump could not invoke the IEEPA to unilaterally set tariffs on imports,

thereby invalidating those tariffs implemented using IEEPA.

The Trump Administration responded by announcing the imposition of new tariffs under alternative legal authorities to replace the IEEPA tariffs, including an executive order imposing a

global surcharge (tariff) of 10% on most imports, effective for 150 days.

While the President, on February 21, 2026, announced that the tariff rate would be increased to the maximum tariff rate of 15%, U.S.

Customs and Border Protection issued

guidance on February 23, 2026, confirming that the tariff rate is 10%.The impact of these developments on the business of our clients and on our business cannot be predicted with certainty but could present challenges in 2026 and beyond.

We face strong competition from banks, credit unions and other financial services providers that offer banking services, which may limit our ability to attract and

retain banking clients.

Competition in the banking industry generally, and in our geographic market specifically, is strong.

Competitors include banks, as well as other financial services providers, such as savings and loan institutions,

consumer finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries.

Our competitors include several larger national and regional financial institutions whose greater resources may

afford them a marketplace advantage inasmuch as they may offer a wider array of banking services at better rates and be able to target a broader client base through more extensive promotional and advertising campaigns.

Moreover, larger competitors

may not be as vulnerable as we are to downturns in the local economy and real estate market since they have a broader geographic area and their loan portfolio is more diversified.

While our deposit base has increased, several banks have grown their

deposit market share in our markets faster than we have resulting in a declining relative deposit market share for us in our existing markets.

We believe our declining relative market share in deposits has resulted primarily from aggressive

marketing and advertising, in-migration of more competitors, expanded delivery channels and more attractive rates offered by larger bank competitors.

We also compete against community banks, credit unions and non-bank financial services companies

that have strong local ties.

These smaller institutions are likely to cater to the same small to medium-sized businesses that we target.

Additionally, non-traditional financial services firms, such as financial technology companies, are less

regulated and continue to expand their offerings of services traditionally provided by financial institutions.

In 2025, the OCC announced its conditional approval of five national trust bank charter applications to either newly charter or convert

existing institutions into national trust banks that propose to offer digital asset products and services.

While national trust banks generally do not take insured deposits or engage in commercial lending, the proposed activities of the five

institutions include digital asset custody, settlement, clearing, transfer, escrow, staking, trade execution, and brokerage services;

fiduciary, exchange, and payment agent services;

stablecoin issuance;

and the provision of services, including

reserve asset custody, to affiliated stablecoin issuers.

These new non-traditional trust banks offer deposit-like products, although lacking FDIC insurance and core consumer protections, and they are not subject to the same capital, liquidity or

supervisory standards as banks.

Emerging technologies, such as artificial intelligence (including machine learning and generative artificial intelligence) and quantum computing, have the potential to intensify competition and accelerate disruption

in the financial services industry.

If we are unable to attract and retain customers, we may be unable to continue to grow our loan and deposit portfolios and our operations and financial condition may otherwise be adversely affected.

we may be unable to compete successfully against current and future competitors.

Our financial results may be impacted by the cyclicality and seasonality of our agricultural lending business.

The Company has provided financing to

agricultural customers in the mid Central Valley of California throughout its history.

We recognize the cyclical nature of the industry, often caused by fluctuating commodity prices, changing climatic conditions and the availability of seasonal

labor, and manage these risks accordingly.

The Company remains committed to providing credit to agricultural customers and will always have a material exposure to this industry.

Although the Company’s loan portfolio is believed to be well

diversified, at various times during 2025 a significant portion of the Company’s loans (as much as 28.9%) were outstanding to agricultural borrowers.

The Company’s service areas can also be significantly impacted by the seasonal operations of the agricultural industry.

As a result, the Company’s financial results can be influenced by the banking needs of its

agricultural customers.

Generally speaking, during the spring and summer customers draw down their deposit balances and increase loan borrowings to fund the purchase of equipment and the planting of crops.

Deposit balances are replenished and loans

repaid in late fall and winter as crops are harvested and sold.

As previously noted, increased tariffs by foreign countries on goods exported to such countries from the U.S.

could adversely impact agricultural producers in the U.S., including the Company’s customers in the

agricultural sector.

The impact of climate change and governmental and societal responses to climate change, including on the availability of water and the transition to a low-carbon

economy, could adversely affect our business and our clients’ businesses.

California has experienced drought conditions at times over the past several years.

These weather patterns reinforce the fact that the long-term risks associated

with the availability of water are significant.

The farming belt of the Central Valley is often cited as an example of an area that experienced extreme drought.

However, not all areas of the state are impacted equally, and this is particularly true

in the Central Valley, which stretches some 450 miles from Bakersfield in the south to Redding in the north.

The vast majority of the Company’s agricultural customers are located in the mid Central Valley, an area that benefits from the drainage of

the Sacramento, American, Mokelumne and Stanislaus rivers.

In addition to the impact that climate has on the availability of water, State and Federal regulators ultimately manage this resource, which may also impact the access of our customers’ water.

For example, in 2014,

the State of California passed the Sustainable Groundwater Management Act.

All Water Districts must develop plans to comply with the Act, including groundwater recharge programs.

Although the exact impact of compliance is not currently known, and

even prior to 2014 most of the water districts in the Bank’s service area had been developing and implementing management plans, it is possible that some water districts will have to ultimately fallow some ground to achieve compliance with the Act.

In recent years, the federal banking agencies have increased their focus on climate-related risks impacting the operations of banks, the communities they serve and the broader financial system.

Accordingly, the

agencies have begun to enhance their supervisory expectations regarding the climate risk management practices of larger banking organizations, including by encouraging such banks to:

ensure that management of climate-related risk exposures has been

incorporated into existing governance structures;

evaluate the potential impact of climate-related risks on the bank’s financial condition, operations and business objectives as part of its strategic planning process;

account for the effects of

climate change in stress testing scenarios and systemic risk assessments;

revise expectations for credit portfolio concentrations based on climate-related factors;

consider investments in climate-related initiatives and lending to communities

disproportionately impacted by the effects of climate change;

evaluate the impact of climate change on the bank’s borrowers and consider possible changes to underwriting criteria to account for climate-related risks to mortgaged properties;

incorporate climate-related financial risk into the bank’s internal reporting, monitoring and escalation processes;

and prepare for the transition risks to the bank associated with the adjustment to a low-carbon economy and related changes in laws,

regulations, governmental policies, technology, and consumer behavior and expectations.

On October 21, 2021, the Financial Stability Oversight Council published a report identifying climate-related financial risks as an “emerging threat” to financial stability.

As climate-related supervisory guidance is

formalized, and relevant risk areas and corresponding control expectations are further refined, we may be required to expend significant capital and incur compliance, operating, maintenance and remediation costs in order to conform to such

requirements.

Climate-related physical changes and hazards, such as wildfires, could also pose credit risks for us.

For example, our borrowers may have collateral properties or operations located in areas at risk of wildfires or

subject to the risk of drought in California.

The properties pledged as collateral on our loan portfolio could also be damaged by wildfires, earthquakes or other natural disasters, and thereby the recoverability of loans could be impaired.

of factors can affect credit losses, including the extent of damage to the collateral, the extent of damage not covered by insurance, the extent to which unemployment and other economic conditions caused by the natural disaster adversely affect the

ability of borrowers to repay their loans, and the cost of collection and foreclosure to us.

Additionally, there could be increased insurance premiums and deductibles, or a decrease in the availability of coverage, due to severe losses resulting

from wildfires or other climate-related physical hazards.

The ultimate outcome on our business of a natural disaster, whether or not caused by climate change, is difficult to predict but could have a material adverse effect on financial condition,

results of operations or profitability.

Additional legislation and regulatory requirements and changes in consumer preferences, including those associated with the transition to a low-carbon economy, could increase expenses of, or otherwise adversely

impact, the Company, its businesses or its customers.

We and our customers may face cost increases, asset value reductions, operating process changes, reduced availability of insurance, and the like, as a result of governmental actions or societal

responses to climate change.

New and/or more stringent regulatory requirements relating to climate change or environmental sustainability could materially affect the Company’s results of operations by increasing our compliance costs.

changes or market shifts to low-carbon products could also impact the creditworthiness of some of our customers or reduce the value of assets securing loans, which may require the Company to adjust our lending portfolios and business strategies.

Risks Related to Our Growth

If we are not able to manage our growth effectively, our future prospects and competitive position could be diminished and our profitability could be reduced.

may also incur higher than anticipated costs, and our ability to execute our growth strategy could be impaired.

It is our objective to continue to grow our assets and deposits by increasing our product and service offerings and expanding

our operations organically.

Our ability to manage growth successfully will depend on our ability to (i) identify suitable markets for expansion;

(ii) attract and retain qualified management;

(iii) attract funding to support additional growth;

maintain asset quality and cost controls;

(v) maintain adequate regulatory capital and profitability to support our lending activities;

and (vi) may include finding attractive acquisition targets and successfully acquire and integrate the

acquisitions in an efficient manner.

If we do not manage our growth effectively, we may be unable to realize the benefit from our investments in technology, infrastructure, and personnel that we have made to support our expansion.

In addition, we

may incur higher costs and realize less revenue growth, which would reduce our earnings and diminish our future prospects.

Failing to maintain effective financial and operational controls as we grow, such as appropriate loan underwriting

procedures, adequate allowances for credit losses and compliance with regulatory requirements, could have a negative effect on our financial condition and operations, such as increased credit losses, reduced earnings and potential regulatory

restrictions on growth.

Entering new market areas, new lines of business, or new products and services may subject us to additional risks.

A failure to successfully manage these risks may

have a material adverse effect on our business.

As part of our growth strategy, we have implemented and may continue to enter new market areas and new lines of business.

We have expanded into the East Bay area of San Francisco and Napa,

which are relatively new market areas for us.

We introduced commercial equipment leasing as a new product line a few years ago.

There are risks and uncertainties associated with these efforts, particularly in instances where such product lines are

not fully mature.

In developing and marketing new lines of business and/or new products and services and/or shifting the focus of our asset mix and/or expanding into new markets, we may invest significant time and resources.

Initial timetables may

not be achieved and price and profitability targets may not prove feasible.

External factors, such as compliance with regulations, competitive alternatives in these markets and shifting market preferences, may also affect or limit their successful

implementation.

Failure to successfully manage these risks could have an adverse effect on our business, financial condition and results of operations.

Risks Related to Our Personnel

We may have difficulty attracting additional necessary personnel, which may divert resources and limit our ability to successfully expand our operations.

business plan includes, and is dependent upon, our hiring and retaining highly qualified and motivated associates at every level.

We have experienced, and expect to continue to experience, substantial competition in identifying, hiring and

retaining top-quality associates due to low unemployment rate and new financial institutions entering our markets.

If we are unable to hire and retain qualified personnel, we may be unable to successfully execute our business strategy and manage

The unexpected loss of key officers would materially and adversely affect our ability to execute our business strategy, and diminish our future prospects.

success to date and our prospects for success in the future depend substantially on our senior management team.

The loss of key members of our senior management team could materially and adversely affect our ability to successfully implement our

business plan and, as a result, our future prospects.

The loss of senior management without qualified successors who can execute our strategy would also have an adverse impact on us.

As a community bank, our ability to maintain our positive reputation is critical to the success of our business.

The failure to maintain that reputation may

materially and adversely affect our financial performance.

Our reputation is one of the most valuable components of our business.

As such, we strive to conduct our business in a manner that enhances our reputation.

This is done, in part,

by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our clients.

If our reputation is negatively affected by the actions of our employees or

otherwise, our business and, therefore, our operating results may be materially and adversely affected.

Risks Related to Our Financial Practices

Our allowance for credit losses may not be adequate to cover actual losses.

A significant source of risk arises from the possibility that we could sustain

losses due to adverse economic conditions which, among other factors, could cause loan defaults and non-performance on loans.

We maintain an allowance for credit losses in accordance with U.S.

generally accepted accounting principles to provide for

such defaults and other non-performance.

The determination of the appropriate level of this allowance is an inherently difficult process and is based on numerous assumptions.

The amount of future losses is susceptible to changes in economic,

operating and other conditions, including changes in interest rates, which may be beyond our control.

In addition, our underwriting policies, adherence to credit monitoring processes, and risk management systems and controls may not prevent

unexpected losses.

Our allowance for credit losses may not be adequate to cover actual credit losses.

Moreover, any increase in our allowance for credit losses will adversely affect our earnings.

Our financial and accounting estimates and risk management framework rely on analytical forecasting and models, and our risk exposures and losses could be

significantly greater than our models indicated.

The processes we use to estimate our inherent credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing

interest rates and other market measures on our financial condition and operations, depend upon the use of analytical and forecasting models.

Some of our tools and metrics for managing risk are based upon our use of observed historical market

We rely on quantitative models to measure risks and to estimate certain financial values.

Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and

other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items.

Poorly designed or implemented models present the risk that our business decisions based on information incorporating such models will be adversely affected due to the inadequacy of that information.

Moreover, our

models may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not sufficiently comparable to actual events as they occur.

We seek to incorporate appropriate historical data in our models, but the range of market values and behaviors reflected in any period of historical data is not at all times predictive of future developments in any

particular period and the period of data we incorporate into our models may prove to be inappropriate for the period being modeled.

In such case, our ability to manage risk would be limited and our risk exposure and losses could be significantly

greater than our models indicated.

This could harm our reputation as well as our revenues and profits.

Finally, information we provide to our regulators based on poorly designed or implemented models could also be inaccurate or misleading.

the decisions that our regulators make, including those related to capital distributions to our shareholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is

insufficient.

Impairment of investment securities could require charges to earnings, which would negatively affect our operations.

We maintain a significant amount of

our assets in investment securities, and must periodically evaluate investment securities for current expected credit losses as required by ASC 326.

We evaluate our investment securities portfolio for impairment as of each reporting date.

December 31, 2025, we had no investment securities that were impaired.

Changes in accounting standards could materially affect our financial statements.

The Company’s consolidated financial statements are presented in

accordance with accounting principles generally accepted in the United States of America, called GAAP.

The financial information contained within our consolidated financial statements is, to a significant extent, financial information that is based

on approximate measures of the financial effects of transactions and events that have already occurred.

A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or

relieving a liability.

Other estimates that we use are fair value of our securities and expected useful lives of our depreciable assets.

From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the

preparation of our financial statements or new interpretations of existing standards emerge.

These changes can be difficult to predict and operationally complex to implement and can materially affect how we record and report our financial condition

and results of operations.

In some cases, we could be required to apply a new or revised standard retrospectively, resulting in our restating prior period financial statements.

Risks Related to Our Access to Capital

We may be unable to, or choose not to, pay dividends on our common shares.

We have consistently declared an annual cash dividend for the last 90 years.

ability to continue to pay dividends depends on various factors.

The Company is a legal entity separate and distinct from the Bank, and does not conduct stand-alone operations, which means that the Bank must first pay dividend(s) to the

The FDIC, the DFPI and California corporate and banking laws may, under certain circumstances, prohibit the Bank’s payment of dividends to the Company.

Federal Reserve policy requires bank holding companies to pay cash dividends on common

shares only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.

The Company’s Board of Directors may determine that, even

though funds are available for dividend payments, retaining the funds for other internal uses, such as expansion of our operations, is necessary or appropriate in light of our business plan and objectives.

A failure to pay dividends may negatively

affect your investment.

The price of our common shares may fluctuate significantly particularly given the illiquid nature of our common stock and our stock may have low trading volumes,

which may make it difficult for a shareholder to resell common shares owned at times or prices they find attractive.

The stock market and, in particular, the market for financial institution stocks, has experienced significant

The markets may produce downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength.

As a result, the trading volume in our common shares may fluctuate and cause significant price

variations to occur.

The low trading volume in our common shares on the OTCQX, under the symbol “FMCB,” means that our shares may have less liquidity than other companies, whose shares are more broadly traded.

We cannot ensure that the

volume of trading in our common shares or the price of our common shares will be maintained or will increase in the future.

Our stock price can fluctuate significantly in response to a variety of factors discussed in this section, including, among

other things:

actual or anticipated variations in quarterly results of operations;

operating and stock price performance of other companies that investors deem comparable to our Company;

news reports relating to trends, concerns and other issues in

the financial services industry;

available investment liquidity in our market area since our stock is not listed on any exchange;

and perceptions in the marketplace regarding our Company and/or its competitors.

If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable.

We may need to raise

additional capital in the future to support our continued growth and to maintain our capital levels.

Our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of

financial markets at that time.

Accordingly, we may not be able to obtain additional capital in the amounts or on terms satisfactory to us.

Our growth may be constrained if we are unable to generate or raise additional capital as needed.

Our funding sources may prove insufficient to provide liquidity, replace deposits and support our future growth.

We rely on customer deposits, advances

from the Federal Home Loan Bank of San Francisco (“FHLB”), lines of credit at other financial institutions and the Federal Reserve Bank (“FRB”) to fund our operations.

Although we have historically been able to replace maturing deposits and

advances if desired, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB or market conditions were to change.

Our financial flexibility will be severely constrained if we are unable

to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates.

Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our

revenues may not increase proportionately to cover our costs.

In this case, our profitability would be adversely affected.

FHLB borrowings and other current sources of liquidity may not be available or, if available, may not be sufficient to

provide adequate funding for operations.

Furthermore, our own actions could result in a loss of adequate funding.

For example, our borrowing capacity at the FHLB could be reduced if we are deemed to have poor documentation or processes.

Accordingly, we may be required to seek additional higher-cost debt in the future to achieve our long-term business objectives.

Additional borrowings, if sought, may not be available to us or, if available, may not be available on favorable terms.

If additional financing sources are unavailable or are not available on reasonable terms, our growth and future prospects could be adversely affected.

We may be adversely affected by the lack of soundness of other financial institutions or financial market utilities.

Financial institutions are

interrelated because of trading, clearing, counterparty or other relationships.

Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions.

The rapid contraction of the money supply in 2022 and the first quarter of 2023 materially impacted liquidity levels at many financial institutions.

The high-profile bank failures of Silicon Valley Bank, Signature

Bank and First Republic Bank in 2023, and related negative media attention, also generated significant market trading volatility among publicly-traded bank holding companies and, in particular, regional and community banks.

These developments

negatively impacted customer confidence in the safety and soundness of regional and community banks.

These events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies, enhanced regulatory supervision and examination policies and priorities, and/or the

imposition of restrictions through regulatory supervisory or enforcement activities, including higher capital requirements and/or an increase in the Bank’s deposit insurance assessments.

Although these legislative and regulatory actions cannot be

predicted with certainty, any of these potential legislative or regulatory actions could, among other things, subject us to additional costs, limit the types of financial services and products we may offer, and reduce our profitability, any of

which could materially and adversely affect our business, results of operations or financial condition.

Defaults by, or even rumors or questions about, one or more financial institutions or financial market utilities, or the financial services

industry generally, may lead to market-wide liquidity problems and losses of client, creditor and counterparty confidence and could lead to losses or defaults by us or by other financial institutions.

Risks Related to Cybersecurity and Information Technology

Cyber-attacks or other security breaches could have a material adverse effect on our business.

In the normal course of business, we collect, process, and

retain sensitive and confidential information regarding our clients.

We also have arrangements in place with other third parties through which we share and receive information about their clients who are or may become our clients.

devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of third-party service providers, are vulnerable to

external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events.

Information security risks for financial institutions have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct

financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, nation-state adversaries, and others any of which may see their effectiveness increase as a

result of artificial intelligence, including the use of generative AI to conduct more sophisticated social engineering attacks on us or our clients, further increasing risks in this area, including by making fraud detection more difficult.

not able to anticipate or implement effective preventive measures against all potential security breaches, because the techniques used change frequently and because attacks can originate from a wide variety of sources.

We employ detection and

response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.

We also face risks related to cyber-attacks and other security breaches in connection with credit and debit card transactions that typically involve the transmission of sensitive information regarding our clients

through various third parties, including merchant acquiring banks, payment processors, payment card networks and our core processors.

Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the

transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some

cases, we may have exposure and suffer losses for breaches or attacks relating to them.

We also rely on numerous other third-party service providers to conduct other aspects of our business operations and face similar risks relating to them.

we regularly conduct security assessments on these third parties, we cannot be sure that their information security protocols are sufficient at all times to withstand a cyber-attack or other security breach.

The access by unauthorized persons to,

or the improper disclosure by us of, confidential information regarding our clients or our own proprietary information, software, methodologies, and business secrets could result in significant legal and financial exposure, supervisory liability,

damage to our reputation or a loss of confidence in the security of our systems, products and services, which could have a material adverse effect on our financial condition or operations.

In the past several years, there have been a number of

well-publicized attacks or breaches affecting others in our industry that have heightened concern by consumers and have resulted in increased regulatory focus.

Furthermore, cyber-attacks or other breaches in the future, whether affecting others or

us, could intensify consumer concern and regulatory focus and result in reduced use of our cards and increased costs, all of which could have a material adverse effect on our business.

To the extent we are involved in any future cyber-attacks or

other breaches, our brand and reputation could be affected, and this could have a material adverse effect on our financial condition and operations.

If we experience a cyber-attack, our insurance coverage may not cover all losses, and furthermore,

we may experience a loss of reputation.

We rely on our information technology and telecommunications systems and third-party servicers, and the failure of these systems could adversely affect our

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers.

We rely on these systems to process deposit services,

electronic funds transfer services (including wires and ACH), new and renewal loans, provide client service, facilitate collections and share data across our organization.

The failure of these systems, or the termination of a third-party software

license or service agreement on which any of these systems is based, could interrupt our operations.

Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service

denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions.

If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process deposit

services, electronic funds transfer services (including wires and ACH), new and renewal loans and provide client service or compromise our ability to collect loan payments in a timely manner.

Our ability to adopt new information technology and

technological products needed to meet our clients’ banking needs may be limited if our third-party servicers are slow to adopt or choose not to adopt such new technology and products.

Furthermore, the widespread adoption of new technologies by

competitors, including artificial intelligence, could require us to make additional substantial investments to modify or adapt our existing products and services or alter the way we conduct business.

These and other capital investments in the

Company's business may not produce the growth in earnings anticipated at the time of the expenditure, and we may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and

services to our customers.

Such a failure to provide this technology and products to our clients could result in a loss of clients, which would negatively affect our financial condition and operations.

Implementation of certain new technologies,

such as those related to artificial intelligence, automation and algorithms, also may have unintended consequences, including fraud or cybersecurity risk, due to their limitations, potential manipulation, or our failure to use them effectively.

Other Operational Risks

Our risk management framework may not be effective in mitigating risks and losses to us.

Our risk management framework is comprised of various processes,

systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance.

Our framework also includes financial or other modeling methodologies

that involve management assumptions and judgment.

Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk of loss to us.

If our framework is not effective, we could suffer unexpected

losses and our financial condition, operations or business prospects could be materially and adversely affected.

We may also be subject to potentially adverse regulatory consequences.

We are subject to certain operating risks, related to client or employee fraud, which could harm our reputation and business.

Employee error, or employee

or client misconduct, could subject us to financial losses or regulatory sanctions and seriously harm our reputation.

Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of

our clients or improper use of confidential information.

It is not always possible to prevent employee error and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.

Employee error could

also subject us to financial claims for negligence.

If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured, excess insurance coverage is denied or not available, it could have a material adverse

effect on our financial condition and operations.

We depend on the accuracy and completeness of information about clients and counterparties, and our financial condition, operations, financial reporting and

reputation could be negatively affected if this information is materially misleading, false, inaccurate or fraudulent.

In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on

information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information.

We also may rely on representations of clients and counterparties as to the accuracy and completeness of that

information and, with respect to financial statements, on reports of independent auditors.

In deciding whether to extend credit, we may rely upon our clients’ representations that their financial statements conform to U.S.

generally accepted

accounting principles, or GAAP, and present fairly, in all material respects, the financial condition, operations and cash flows of the client.

We also may rely on client representations and certifications, or other auditors’ reports, with respect

to the business and financial condition of our clients.

Our financial condition, operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information provided

by or about clients and counterparties.

Catastrophic events including, but not limited to, hurricanes, tornadoes, earthquakes, fires, floods, prolonged drought, and pandemics may adversely affect the

general economy, financial and capital markets, specific industries, and the Bank.

The Bank has significant operations and a significant customer base in regions where natural and other disasters may

These regions are known for being vulnerable to natural disasters and other risks, such as earthquakes, fires, floods, and prolonged drought.

These types of natural catastrophic events at times have disrupted the local economy, the Bank’s

business and clients, and could pose physical risks to the Bank’s property.

In addition, catastrophic events, such as natural disasters or global pandemics, occurring in other regions of the world may have an impact on the Bank’s clients and in

turn on the Bank.

Although we have business continuity and disaster recovery programs in place, a significant catastrophic event could materially adversely affect the Bank’s operating results.

Risks Related to Our Regulatory Environment

We are subject to regulation, which increases the cost and expense of regulatory compliance, and may restrict our growth and our ability to acquire other financial

institutions.

Supervision, regulation, and examination of the Company and the Bank by the bank regulatory agencies are intended primarily for the protection of consumers, bank clients and the DIF of the FDIC, rather than holders of our

common shares.

As a bank holding company under federal law, we are subject to regulation under the BHCA, and the examination and reporting requirements of the Federal Reserve.

In addition to supervising and examining us, the Federal Reserve,

through its adoption of regulations implementing the BHCA, places certain restrictions on the permissible activities for bank holding companies.

Changes in the number or scope of permissible activities could have an adverse effect on our ability to

realize our strategic goals.

As a California state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately subject to regulation by both the FDIC and the DFPI.

The FDIC and DFPI regulate numerous aspects of the

Bank’s operations, including adequate capital and financial condition, permissible types and amounts of extensions of credit and investments, permissible non-banking activities and restrictions on dividend payments.

We may be required to invest

significant management attention and resources to evaluate and make any changes necessary to comply with applicable laws and regulations.

This allocation of resources, as well as any failure to comply with applicable requirements, may negatively

affect our operations and financial condition.

Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any regulatory

actions to which we become subject because such examinations could materially and adversely affect us.

The DFPI, the FDIC, and the Federal Reserve periodically conduct examinations of our business, including compliance with laws and

Accommodating such examinations may require management to reallocate resources that would otherwise be used in the day-to-day operation of other aspects of our business.

If, as a result of an examination, the DFPI or a federal banking

agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of our operations had become unsatisfactory, or that we or our management were in violation of any

law or regulation, it may take a number of different remedial actions as it deems appropriate.

These actions could include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from

any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, our officers or directors, to remove officers

and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to clients, to terminate our deposit insurance.

FDIC deposit insurance is critical to the continued operation of the Bank.

become subject to such regulatory actions, our business operations could be materially and adversely affected.

Changes in laws, government regulation and monetary policy may have a material adverse effect on our operations.

Financial institutions have been the

subject of significant legislative and regulatory changes (including the Dodd-Frank Act) and may be the subject of further significant legislation or regulation in the future, none of which is within our control.

This may result in repeals of or

amendments to, existing laws, treaties, regulations, guidance, reporting, recordkeeping requirements, and other government policies.

Significant new laws or regulations or changes in, or repeals of, existing laws or regulations, including those

with respect to federal and state taxation, may cause our results of operations to differ materially.

In addition, the costs and burden of compliance could adversely affect our ability to operate profitably.

Further, federal monetary policy

significantly affects the Bank’s credit conditions, as well as the Bank’s clients, particularly as implemented through the Federal Reserve, primarily through open market operations in U.S.

government securities, the discount rate for bank

borrowings and reserve requirements.

A material change in any of these conditions could have a material impact on us, the Bank and the Bank’s clients, and therefore on our financial condition and operations.

We are subject to stringent capital requirements.

Pursuant to the Dodd-Frank Act, the federal banking agencies adopted final rules, or the U.S.

Capital Rules, to update their general risk-based capital and leverage capital requirements to incorporate agreements reflected in the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III Capital Standards, as well

as the requirements of the Dodd-Frank Act.

Basel III Capital Rules are described in more detail in “Supervision and Regulation — Capital Standards” in this Form 10-K.

The failure to meet the established capital requirements could result in one or more of our regulators placing limitations or conditions on our activities or restricting the commencement of new activities.

failure could subject us to a variety of enforcement remedies available to the federal regulatory authorities, including limiting our ability to pay dividends, issuing a directive to increase our capital and terminating our FDIC deposit insurance.

FDIC deposit insurance is critical to the continued operation of the Bank.

Our failure to meet applicable regulatory capital requirements, or to maintain appropriate capital levels in general, could affect client and investor confidence, our

ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common shares, our ability to make acquisitions, and our operations and financial condition, generally.

We may be required to contribute capital or assets to the Bank that could otherwise be invested or deployed more profitably elsewhere.

Federal law and

regulatory policy impose a number of obligations on bank holding companies designed to reduce potential loss exposure to the clients of insured depository subsidiaries and to the FDIC’s DIF.

For example, a bank holding company is required to serve

as a source of financial strength to its FDIC-insured depository subsidiaries and to commit financial resources to support such institutions where it might not do so otherwise.

These situations include guaranteeing the compliance of an

“undercapitalized” bank with its obligations under a capital restoration plan.

A capital injection into the Bank may be required at times when we do not have the resources to provide it at the holding company level;

therefore, we may be required to issue common shares or debt to obtain the

required capital.

Issuing additional common shares would dilute our current shareholders’ percentage of ownership and could cause the price of our common shares to decline.

Any debt would be entitled to a priority of payment over the claims of the

Company’s general unsecured creditors or equity holders.

Thus, any Company borrowing to make the required capital injection may be expensive and adversely affect our cash flows, financial condition, operations, and business prospects.

We face a risk of non-compliance and enforcement actions with respect to the Bank Secrecy Act (“BSA”) and other anti-money laundering statutes and regulations.

financial institutions, we are subject to monitoring requirements under federal law, including anti-money laundering, or AML, and BSA matters.

Since September 11, 2001, banking regulators have intensified their focus on AML and BSA

compliance requirements, particularly the AML provisions of the USA Patriot Act.

There is also increased scrutiny of compliance with the rules enforced by the U.S.

Treasury Department’s OFAC, which involve sanctions for dealing with certain persons

or countries.

While the Bank has adopted policies, procedures and controls to comply with the BSA, other AML statutes and regulations and OFAC regulations, this aggressive supervision and examination and increased likelihood of enforcement actions

may increase our operating costs, which could negatively affect our operations and reputation.

We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair

lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose non-discrimination lending requirements on financial institutions.

The FDIC, the Department of Justice, the CFPB and other federal and state

agencies are responsible for enforcing these laws and regulations.

Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

A successful challenge to our

performance under the fair lending laws and regulations could adversely impact our rating under the CRA, and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition

of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, financial condition and operations.

Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and

adversely affect our business opportunities.

We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and these laws could negatively affect us.

Federal law imposes requirements for the safeguarding of certain client information.

Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual,

consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach.

Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data

protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee

information, and some of our current or planned business activities.

This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives.

Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting client or employee data to which we are subject could result

in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our financial conditions or operations.

Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage

to our reputation, which could have a material adverse effect on our financial condition or operations.

Possible changes in the U.S.

tax laws could adversely affect our business and result of operations in a variety of ways.

We are subject to changes in tax

law that could increase our effective tax rates.

These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance.

In particular, the Tax Cuts and Jobs Act, which was

signed into law in December 2017, includes a number of provisions impacting the banking industry and the borrowers and the market for residential and commercial real estate.

Changes include a lower limit on the deductibility of interest on

residential mortgage loans and home equity loans;

a limitation on the deductibility of business interest expense;

and a limitation on the deductibility of property taxes and state and local income taxes.

The law's limitation on the mortgage

interest deduction and state and local tax deduction for individual taxpayers has increased the after-tax cost of owning a home for many of our existing clients.

The Inflation Reduction Act, which was signed into law in the United States in August

2022, among other things, imposes a surcharge on stock repurchases.

The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase

in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

Further, these changes implemented by these tax laws could make some

businesses and industries less inclined to borrow, potentially reducing demand for our commercial loan products.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business