Farmers & Merchants Bancorp: Form 10-Q for the period ended Mar 31, 2026

The following discussion is intended to provide a comprehensive review of the Company’s operating results and financial condition. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the accompanying Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act. These forward-looking statements reflect our current views and are not historical facts. These statements may include statements regarding projected performance for periods following the date of this report. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations, and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and other parts of this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 (“Form 10-K”), and our actual results may differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements in this Quarterly Report on Form 10-Q:

• changes in general economic conditions, either nationally, in California, or in our local markets;
• inflation, changes in interest rates, securities market volatility and monetary fluctuations;
• increases in competitive pressures among financial institutions and businesses offering similar products and services;
• impacts of tariff policies by U.S. and foreign governments;
• risks associated with negative events in the banking industry, and any legislative and/or bank regulatory actions, that could potentially impact earnings, liquidity and/or the availability of capital or which could increase the cost of our deposit insurance by the FDIC;
• higher defaults in our loan and lease portfolio than we expect;
• changes in management’s estimate of the adequacy of the allowance for credit losses;
• risks associated with our growth and expansion strategy and related costs;
• increased lending risks associated with our high concentration of real estate loans or agricultural loans;
• legislative or regulatory changes, changes in monetary and fiscal policies or changes in accounting principles, policies or guidelines;
• technological changes;
• operational risks, including processing, information systems, cybersecurity, vendor problems, business interruption, and fraud;
• regulatory or judicial proceedings; and
• other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the Company’s 2025 Form 10-K.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, or believed. Please take into account that forward-looking statements speak only as of the date of this Form 10-Q (or documents incorporated by reference, if applicable).

The Company does not undertake any obligation to publicly correct or update any forward-looking statements if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statements, except as required by law.

Overview

Farmers & Merchants Bancorp (the “Company” or “FMCB”) is a Delaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by the 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 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. Over 109 years ago, August 1, 1916, marked the first day of business for Farmers & Merchants Bank, later renamed Farmers & Merchants Bank of Central California. The Bank was incorporated under the laws of the State of California and licensed as a state-chartered bank. The Bank’s first venture out of Lodi occurred when the Galt office opened in 1948. Since then, the Bank has opened full-service branches in Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Walnut Grove, Oakland, Napa, and Danville. 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.

The Company’s outstanding common stock as of March 31, 2026, consisted of 693,043 shares of common stock, $0.01 par value. No shares of preferred stock were issued or outstanding as of March 31, 2026. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”

The primary source of funding for the Company’s growth has been the generation of deposits, which the Company raises through its existing branch locations, newly opened branch locations, or through acquisitions. Loan growth over the years is the result of organic growth generated by the Company’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to the Company’s clients.

The Company’s results of operations are largely dependent on net interest income. Net interest income is the difference between interest income earned on interest earning assets, which are comprised of loans and leases, investment securities, short-term investments and interest-bearing deposits at other banks, and the interest the Company pays on interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest-bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

The Company measures its performance by calculating the net interest margin, return on average assets, return on average equity and the efficiency ratio. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is the Company’s largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. The return on average assets is calculated by dividing the Company’s net income by its total average assets and the return on average equity is calculated by dividing the Company’s net income by its shareholders’ equity. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.

Critical Accounting Policies and Estimates

Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. Our critical accounting policy relates to the allowance for credit losses on loans and leases held for investment. Further details are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2025 Form 10-K.

Impact of Recently Issued Accounting Standards

See Note 1. “Basis of Presentation and Significant Accounting Policies” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Information” in this Quarterly Report on Form 10-Q.

Non-GAAP Measurements

We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-Q:

• Tangible common equity ratio and tangible book value per common share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP measures of return on average equity and book value per common share. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.

(Dollars in thousands, except share and per share amounts)

(1) Tangible common equity divided by tangible assets.

(2) Total common equity divided by common shares outstanding.

(3) Tangible common equity divided by common shares outstanding.

Results of Operations

The following discussion and analysis is intended to provide a better understanding of the Company’s performance during each of the three-month periods ended March 31, 2026 and 2025 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying unaudited consolidated financial statements. Information related to the comparison of the results of operations for the years ended December 31, 2025, and 2024 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2025 Form 10-K.

Factors that determine the level of net income include the volume of earning assets and interest-bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the sale of investment securities, and gains/losses on deferred compensation plan investments. Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing, deposit insurance, marketing, professional services, and other expenses. The efficiency ratio is calculated by dividing non-interest expense by net interest income plus non-interest income.

Earnings Performance

The following table presents performance metrics for the periods indicated:

(Dollars in thousands, except share and per share amounts)

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Average Balance and Yields

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances.

(Dollars in thousands)

(1) Excludes average unrealized losses of $2.0 million and $23.6 million for the three months ended March 31, 2026, and 2025, respectively, which are included in non-interest earning assets.

(2) Yield and interest income are calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

(3) Loan interest income includes loan fees of $2.2 million and $1.7 million for the three months ended March 31, 2026 and 2025, respectively.

(4) Net interest margin is computed by dividing net interest income by average interest earning assets.

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Interest-bearing deposits with banks and FRB balances are earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 3.57% and 4.44% for the three months ended March 31, 2026 and 2025, respectively. The decrease was primarily the result of the Federal Reserve decreasing rates by 75 basis points from September 2025 to December 2025. Average interest-bearing deposits with banks was $146.0 million and $241.3 million for the three months ended March 31, 2026 and 2025, respectively. Interest income on interest bearing deposits with banks was $1.3 million and $2.6 million for the three months ended March 31, 2026 and 2025, respectively. The decrease was due to lower average interest-bearing deposits with banks and the decline in interest rates.

The investment portfolio is also a component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans and leases, the yield earned on investments is generally less than that of loans and leases.

Average total investment securities were $1.66 billion and $1.28 billion for the three months ended March 31, 2026 and 2025, respectively. The average yield on total investment securities was 3.70% and 3.20% for the three months ended March 31, 2026 and 2025, respectively. The increase in the yield reflects the higher interest rates on investment securities based on the yield curve and the higher yields on investment purchases made during 2025.

Average loans and leases held for investment were $3.65 billion and $3.61 billion for the three months ended March 31, 2026 and 2025, respectively. The average yield on the loan and lease portfolio was 6.08% and 6.07% for the three months ended March 31, 2026 and 2025, respectively.

Average interest-bearing deposits were $3.43 billion and $3.24 billion for the three months ended March 31, 2026 and 2025, respectively. The average rate paid on interest bearing deposits was 1.73% for the three months ended March 31, 2026 and 2025. Total interest expense on interest- bearing deposits was $14.6 million and $13.8 million for the three months ended March 31, 2026 and 2025, respectively, with the increase driven by an increase in average balances. The average rate paid on total funding costs was 1.20% for the three months ended March 31, 2026 and 2025.

Rate/Volume Analysis

The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.

(Dollars in thousands)

39

Comparison of Results of Operations for the Three Months Ended March 31, 2026 and 2025

(Dollars in thousands)

For the three months ended March 31, 2026 and 2025, net income was $24.1 million compared with $23.0 million, respectively. The increase in net income was primarily the result of higher net interest income of $3.8 million. This increase was offset by an increase in non-interest expense of $3.7 million during the three months ended March 31, 2026, compared to the same period in the prior year, and a $0.5 million provision for credit losses during the first quarter of 2026 compared to a $0.3 million provision in 2025.

Net Interest Income and Net Interest Margin

For the three months ended March 31, 2026 and 2025, net interest income was $56.9 million compared with $53.1 million, respectively. The increase in net interest income is primarily the result of the net interest margin (tax equivalent basis) increasing 5 basis points to 4.25% compared with 4.20% for the same period a year earlier. The increase in the net interest margin was primarily the result of the increase in investment securities income of $5.1 million as the average balance increased $375.9 million compared to the first quarter of 2025. The investment securities yield during the first quarter of 2026 increased 50 basis points from 3.20% to 3.70% compared to the first quarter of 2025. The loan yield increased 1 basis point from 6.07% to 6.08% compared to the first quarter of 2025. The yield on interest-bearing deposits remained flat at 1.73% for the first quarter of 2026 and 2025. The cost of average total deposits was also flat at 1.18% for the first quarter of 2026 and 2025.

Provision for Credit Losses

The provision for credit losses in each period is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb expected credit losses over the life of the loans and leases, unfunded loan commitments and HTM securities portfolios.

Based on the Company’s evaluation of the credit quality of the loan and lease portfolio and the calculations of the allowance for credit losses under the current expected credit losses (“CECL”) methodology, the Company recorded a $0.5 million provision for credit losses during the first three months of 2026 compared to a $0.3 million provision for credit losses during the first three months of 2025. Net recoveries for the three months ended March 31, 2026 were $43,000 compared to net charge-offs of $161,000 for the same period a year earlier.

Non-interest Income

(Dollars in thousands)

Non-interest income increased $138,000, or 2.8%, to $5.2 million for the three months ended March 31, 2026, compared with $5.0 million for the same period a year earlier. The year-over-year increase in non-interest income was primarily due to a $0.8 million increase in other income due to a gain on the sale of other real estate owned of $340,000 and a net gain on equity investments of $283,000.

The Company’s deferred compensation plans were terminated and frozen effective November 29, 2024, and all of the components of the plans were liquidated and paid out to eligible participants on December 10, 2025. The Company recorded net gains on deferred compensation plan investments of $0.8 million for the three months ended March 31, 2025, due to market value changes in underlying assets and increases in interest and dividends. See Note 10, “Employee Benefit Plans,” located in Item 8. “Financial Statements and Supplementary Data” in the Company’s 2025 Form 10-K for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

Non-interest Expense

(Dollars in thousands)

Non-interest expense increased $3.7 million, or 14.38%, to $29.2 million for the three months ended March 31, 2026, compared with $25.5 million for the same period a year ago. This year-over-year increase was primarily due to an increase in salaries and employee benefits which included an increase in compensation expense of $2.8 million due to an increase in employee headcount of eleven, annual increases in salaries, an increase in payroll taxes and three months of stock compensation expense in 2026 versus two months in 2025 since the first ever restricted stock awards were issued in February 2025. Professional services increased $0.2 million due to higher legal and consulting services while most expenses continued to rise due in part to ongoing inflation.

The Company’s deferred compensation plans were terminated and frozen effective November 29, 2024, and all of the components of the plans were liquidated and paid out to eligible participants on December 10, 2025. Net gains on deferred compensation plan obligations were $0.8 million for the three months ended March 31, 2025, due to market value changes in underlying assets and increases in interest and dividends. See Note 10 “Employee Benefit Plans,” located in “Item 8. Financial Statements and Supplementary Data” in the Company’s 2025 Form 10-K for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Income Tax Expense

For the three months ended March 31, 2026, income tax expense was $8.3 million compared to $9.3 million for the same period a year earlier. For the three months ended March 31, 2026, the Company’s effective tax rate was 25.67% compared to 28.88% for the same period a year earlier. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning assets. The effective rates were lower than the combined Federal and State statutory rate of 30% primarily due to credits associated with low-income housing tax credit investments (“LIHTC”); and tax-exempt interest income on municipal securities and loans.

The Company files U.S. and state income tax returns in jurisdictions with various statutes of limitations. The 2022 through 2025 federal tax years and the 2021 through 2025 state tax years remain subject to selection for examination as of March 31, 2026. The IRS is in the process of reviewing the Company’s 2023 tax return including inquiries related to certain leasing investment tax credits. The timing related to when the IRS review will be complete remains uncertain.

Balance Sheet Analysis

Total assets were $5.8 billion at March 31, 2026, compared with $5.7 billion at December 31, 2025, an increase of $146.6 million, or 2.58%. Total cash and cash equivalents increased $239.4 million from $144.9 million as of December 31, 2025 to $384.2 million as of March 31, 2026.The net investment portfolio decreased by $59.6 million, or 3.57%, to $1.6 billion at March 31, 2026, compared to $1.7 billion at December 31, 2025. Total loans and leases held for investment were $3.62 billion at March 31, 2026, compared with $3.65 billion at December 31, 2025, a decrease of $32.1 million, or 0.88%. Total deposits were $5.1 billion at March 31, 2026, compared with $5.0 billion at December 31, 2025, an increase of $138.4 million, or 2.78%. Our loan to deposit ratio was 71.04% and 73.67% as of March 31, 2026 and December 31, 2025, respectively.

Cash and Cash Equivalents

The Company’s cash and cash equivalents consist of interest-bearing deposits with banks and overnight investments in Federal Reserve balances. Interest-bearing deposits with banks consisted primarily of FRB deposits. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest-bearing deposits with banks totaled $318.1 million at March 31, 2026 and $84.2 million at December 31, 2025. The increase in cash was primarily due to the increase in deposits of $138.4 million. The Company’s total cash and cash equivalents as of March 31, 2026 represented 6.6% of the Company’s total assets as compared to 2.6% of total assets as of December 31, 2025.

Investment Securities

The Company’s net investment portfolio decreased by $59.6 million, or 3.57%, to $1.61 billion at March 31, 2026, compared to $1.67 billion at December 31, 2025. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company’s total investment portfolio as of March 31, 2026 represents 27.59% of the Company’s total assets as compared to 29.35% of total assets at December 31, 2025.

Available-for-sale securities are carried at fair value and held-to-maturity securities are carried at amortized cost under GAAP. The carrying value of our portfolio of investment securities for the dates indicated are as follows:

(Dollars in thousands)

(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

(Dollars in thousands)

(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

The following tables show the carrying value for final contractual maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities:

(Dollars in thousands)

(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

(Dollars in thousands)

(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

(Dollars in thousands)

(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

(Dollars in thousands)

(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without penalties. The Company evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Loans and Leases

Loans and leases can be categorized by borrowing purpose and use of funds. For detailed descriptions of the various loan types offered by the Company see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2025 Form 10-K.

The Company’s loan and lease portfolio at March 31, 2026 totaled $3.6 billion, a decrease of $32.1 million, or 0.88%, from December 31, 2025, due partially to seasonality in the agricultural portfolio and due to lower loan production as the Company continued to prioritize appropriate loan pricing and loan structure over loan growth.

The following table sets forth the distribution of the loan and lease portfolio by type and percent at the dates indicated:

(Dollars in thousands)

The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company at March 31, 2026.

(Dollars in thousands)

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The following table summarizes the loans for which the accrual of interest has been discontinued and OREO (as hereinafter defined) at the dates indicated:

(Dollars in thousands)

Non-Accrual Loans and Leases – Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in management’s judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. The Company had $730,000 in non-accrual loans at March 31, 2026, compared to $750,000 in non-accrual loans at December 31, 2025.

Although management believes that non-performing loans and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 3. “Loans and Leases”, located in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for an allocation of the allowance classified to collateral dependent loans and leases.

Other Real Estate Owned – OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. The Company records all OREO properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The Company reported no OREO at March 31, 2026 and December 31, 2025.

Loan Modifications to Borrowers Experiencing Financial Difficulties – In the normal course of business, the Company may execute loan modifications to borrowers experiencing financial difficulties. Some of these modifications include: term extension, principal forgiveness, rate reduction, other-than-insignificant payment delay, or any combination of those. ASU 2022-02 requires certain disclosure of loans and leases that have been modified within the past 12 months and the effects that those modifications had on the modified loans and leases. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses and because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectable; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

The Company modified four loans in the aggregate amount of $5.0 million, during the first three months of March 31, 2026. There was one loan modified within the last twelve months that had a payment default and was past due at of March 31, 2026.

The Company modified nine loans, with five borrowers, in the aggregate amount of $7.0 million, during the year ended December 31, 2025. These loans were current at December 31, 2025.

Allowance for Credit Losses—Loans and Leases

The Company maintains an allowance for credit losses (“ACL”) under ASC Topic 326, *Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“*CECL”). The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan and lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components: specific reserves related to individually evaluated loans and leases and general reserves comprised of both quantitative and qualitative factors for current expected credit losses related to loans and leases that are not individually evaluated. The Company uses the Weighted Average Remaining Maturity (“WARM”) methodology to calculate the ACL, as this method is deemed the most appropriate given the Company’s size and complexity. See Note 1 “Summary of Significant Accounting Policies - Allowance for Credit Losses – Loans and Leases” in our 2025 Form 10-K.

The allowance for credit losses is the combination of the allowance for credit losses on loan and lease losses and the allowance for credit losses on unfunded loan commitments. The ACL for unfunded loan commitments is included within “Interest payable and other liabilities” on the consolidated balance sheets.

The following table sets forth the activity in our ACL on loans and leases held for investment and unfunded loan commitments for the periods indicated:

(Dollars in thousands)

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The following table indicates management’s allocation of the ACL for loans and leases by loan type as of each of the following dates:

(Dollars in thousands)

Deposits

The following table shows the deposit balances as of the dates indicated:

(Dollars in thousands)

Total deposits were $5.1 billion and $5.0 billion as of March 31, 2026 and December 31, 2025, respectively, an increase of $138.4 million or 2.78%. The increase was primarily due to an increase in savings and money market accounts of $125.7 million or 7.02%, and an increase in certificates of deposit of $56.1 million or 7.56% from December 31, 2025 to March 31, 2026, respectively. The increase in certificates of deposit reflects a $50.0 million increase in public time deposits related to the State of California which matures in June 2026. These increases were partially offset by a decrease of $26.7 million or 1.63% in non-interest bearing demand deposits and a decrease of $16.7 million or 2.1% in interest-bearing demand deposits from December 31, 2025 to March 31, 2026. The increases were primarily from an increase in the number of client accounts and fluctuations in client balances along with shifts from lower yielding demand deposits into higher yielding savings and money market accounts and certificates of deposit. Conversely, this shift contributed to the decrease in interest-bearing demand deposits. Non-interest bearing deposits were 31.57% and 32.99% of total deposits, at March 31, 2026 and December 31, 2025, respectively.

The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented:

(Dollars in thousands)

Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. The Company reduced interest rates during the last four months of 2025 after the Federal Reserve cut interest rates by 75 basis points between September and December. The average cost of total deposits, including non-interest bearing deposits, remained flat at 1.18% for the three months ended March 31, 2026, compared to the same period a year ago.

The following table shows deposits with a balance greater than $250,000 at March 31, 2026 and December 31, 2025:

(Dollars in thousands)

Refer to the Year-To-Date Average Balance and Yield Schedule located in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on separate deposit categories.

The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. As of March 31, 2026 the Bank had $53.0 million of such deposits compared to $3.0 million at December 31, 2025.

Total estimated uninsured deposits based on our regulatory reporting amounted to $2.7 billion and $2.6 billion at March 31, 2026 and December 31, 2025, respectively.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

Lines of Credit with the Federal Home Loan Bank and FRB are other key sources of funds to support earning assets and liquidity. These sources of funds are also used to manage the Company’s interest rate risk exposure and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB advances at March 31, 2026 or December 31, 2025. There were no Federal Funds purchased or advances from the FRB at March 31, 2026 or December 31, 2025.

Long-Term Subordinated Debentures

On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance-sheet trust and its sale of trust-preferred securities. See Note 9. “Long-Term Subordinated Debentures” located in “Item 8. Financial Statements and Supplementary Data” in our 2025 Form 10-K. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our Trust Preferred Securities continue to qualify as regulatory capital.

These securities accrue interest at a variable rate based upon 3-month SOFR plus 2.85%. Interest rates reset quarterly and the rate was 6.79% at March 31, 2026 (the next reset is June 17, 2026). The average rate paid for these securities was 6.92% for the first three months of 2026 and 7.55% for the first three months of 2025. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited by the terms of the debentures from paying cash dividends on the Company’s common stock.

Capital Resources

The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ equity totaled $656.1 million at March 31, 2026, an increase of $10.5 million, or 1.63%, from $645.5 million at December 31, 2025 due primarily to net income of $24.1 million during the first quarter of 2026 offset by dividends of $3.7 million and a decrease in other comprehensive income of $6.8 million.

The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

As of March 31, 2026, the Company was in compliance with all of these capital requirements and there were no restrictions on the Company’s business activity. As of March 31, 2026 the Bank met the requirements to be categorized as “well-capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” the Bank must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables as of March 31, 2026 and December 31, 2025.

The Company’s and Bank’s actual and required capital amounts and ratios are as follows:

(Dollars in thousands)

(Dollars in thousands)

On September 10, 2024 the Board of Directors authorized a new share repurchase program (the “Repurchase Plan”) in which the Company may repurchase up to $55.0 million of the Company’s common stock, which represented approximately 9% of outstanding shareholders’ equity at the time of approval. On August 14, 2025, the Board of Directors authorized an increase of $45.0 million to the existing share repurchase program along with an extension of the program through December 31, 2027.

Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted. Among other things, the IRA imposes an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions.

During the first three months of 2026, the Company repurchased 181 shares under the Repurchase Plan, for a total of $202,000, inclusive of the excise tax. As of March 31, 2026, there remains $30.1 million authorized for repurchases under the Repurchase Plan.

On August 13, 2025, the Company announced that it changed its dividend policy related to the frequency of cash dividend payments from semi-annually to quarterly. On February 12, 2026, the Company declared a quarterly cash dividend of $5.10 per share which was paid on April 1, 2026, to shareholders of record on March 11, 2026.

Off-Balance-Sheet Arrangements

Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company.

The following table sets forth our off-balance-sheet lending commitments as of March 31, 2026:

(Dollars in thousands)

The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer’s creditworthiness are performed on a case-by-case basis. Additionally, the Company maintains an allowance for credit losses for unfunded loan commitments, which totaled $3.3 million at March 31, 2026 and December 31, 2025.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Outstanding standby letters of credit at March 31, 2026 had maturity dates ranging from 1 to 48 months with final expiration in some cases up to April 1, 2030. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Liquidity

The ability to have readily available funds sufficient to repay maturing and non-maturing liabilities is of primary importance to depositors, creditors and regulators. In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have access to immediate liquid resources in the form of cash, which totaled $384.2 million, or 6.6% of total assets, as of March 31, 2026. The majority of cash is on deposit with the FRB and amounted to $318.1 million. Potential sources of liquidity also include our ability to sell or pledge our available-for-sale securities portfolio, our ability to pledge for borrowing purposes our held-to-maturity portfolio, our ability to sell loans in the secondary market, and our ability to borrow from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a long-term source of stable low-cost funding. Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Our liquidity, represented by cash borrowing lines, federal funds and available-for-sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting the amount of funds that will be required and we maintain relationships with a diversified client base. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We actively monitor our liquidity on a daily basis and manage our liquidity and overall balance sheet positions through both our management and Board-level Asset and Liability Management committees (“ALCO”), which meet regularly during the year.

We had the following borrowing lines available at March 31, 2026:

(Dollars in thousands)

We continued our focus on maintaining a strong liquidity position throughout the first three months of 2026, and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawals for the foreseeable future. As of March 31, 2026, we had $1.2 billion in internal sources of liquidity comprised of $384.2 million in cash and $829.0 million unencumbered investment securities, which represented in the aggregate 20.8% of total assets. We also had $2.2 billion in external sources of liquidity as outlined in the table above, bringing our total available liquidity to $3.4 billion at March 31, 2026. Our pledged collateral on short-term borrowing lines is comprised of $2.6 billion in loans and $1.3 million in investment securities held at market value at March 31, 2026. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs.

On a long-term basis, we can, as needed, meet our liquidity needs by changing the relative distribution of our asset portfolios by reducing our investment or loan and lease volumes, or selling or encumbering assets. Further, we can increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the Federal Reserve and FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan and lease originations and commitments and deposit withdrawals.

We believe we can meet all of these needs from existing liquidity sources. Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities. Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other amortization and depreciation. Our net cash provided by operating activities for the first three months of 2026 was $40.7 million, driven by net income of $24.1 million.

Our primary investing activities are the origination of loans and leases and purchases and sales of investment securities. Net cash provided by investing activities was $70.4 million during the first three months of 2026, driven by $52.0 million in proceeds from maturities, calls, and pay downs of investment securities and a net decrease in loans and leases of $32.2 million offset by $10.0 million decrease of premises and equipment.

Net cash provided by financing activities totaled $128.3 million in the first three months of 2026, driven by an increase in deposits of $138.4 million partially offset by a restricted stock vesting distribution of $6.3 million and $3.7 million in cash dividends paid to shareholders.

The Company’s assessment of market risk at March 31, 2026 indicates there have been no material changes in the quantitative and qualitative disclosures from those made in the Company’s 2025 Form 10-K.

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. We do not have any market-risk sensitive instruments entered into for trading purposes. In monitoring interest rate risk, we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates.

Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are considered to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.

Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and Executive Officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates. ALCO and management utilize a third party to assist with asset liability management including the use of simulation models.

Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, Management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits.

Net Interest Income Simulation. In order to measure interest rate risk, we use a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current Treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index.

Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses various proprietary models to estimate these prepayments and assumes the reinvestment of the proceeds at current yields. Our non-term deposit products generally re-price more slowly, usually changing less than the change in market rates and at our discretion.

This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet size remains static throughout the simulation horizon by replacing existing cash flows/amortization into similar products at current rates to try and capture the ongoing activity of the balance sheet without forecasting any level of growth. It does not account for all factors that affect this analysis, including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.

Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points. We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from the changes in interest rates on interest earning assets and interest-bearing liabilities is modeled using various assumptions of assets and liabilities. EVE measures the period-end present value of assets minus the present value of liabilities. Management uses this value to measure the changes in the economic value of the Company under various interest rate scenarios.

Based on our quarterly simulations, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by ALCO. In the rising rate scenarios, the simulation model indicates the Company is slightly liability sensitive, as interest-bearing liabilities reprice more quickly than interest-bearing assets. This results in a modest decline in net interest income. In the falling rate scenarios, the Company exhibits mixed sensitivity. It remains liability sensitive in the -100 bps scenario, but becomes asset sensitive in the -200 bps and -300 bps scenarios. Asset sensitivity in declining rate environments leads to reduced net interest income, as interest-bearing assets reprice downward more rapidly than liabilities. The primary driver of this shift in sensitivity at deeper rate cuts (-200 bps and -300 bps) is the presence of rate floors on interest-bearing liabilities, which limit further repricing. At the same time, interest-bearing assets experience increased prepayment activity, accelerating cash flows into lower-yielding reinvestments. This combination compresses net interest income.

The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically priced based on a specific term of the Treasury Curve for comparable maturities, plus a margin. The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate changes to have a greater impact on our net interest margin. As of March 31, 2026, our loan and lease portfolio was comprised of 57.84% fixed rate and 42.16% variable rate loans. An additional component of managing our interest rate risk is the use of loan floors when structuring our variable loan products. At loan origination, a loan floor rate, typically equal to or slightly below the initial rate on the loan, is established. This is particularly beneficial in a declining interest rate environment.

The following table presents the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at March 31, 2026, that would occur upon an immediate change in interest rates based on the models discussed above, but without giving effect to any steps that management might take to counteract such change:

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Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this Report, the disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.

Changes in Internal Controls

There have been no material changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2026, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

We are subject to various risks and uncertainties, which could materially affect our business, results of operations, financial condition, future results, and the trading price of our common stock. There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our 2025 Form 10-K. These risk factors, as well as our condensed consolidated financial statements and notes thereto and the other information appearing in this Report, should be reviewed carefully for important information regarding risks that affect us.