PLUMAS BANCORP (PLBC) Business

ITEM 1. BUSINESS

References in this report to the “Company,” “we,” “us” and “our” refer to Plumas Bancorp and its consolidated subsidiary, unless the context indicates otherwise. References to the “Bank” refer to Company’s wholly-owned subsidiary, Plumas Bank. References to “Management” refer to the members of the Company’s management and references to the “Board of Directors” or the “Board” refer to the Company’s Board of Directors.

General

The Company. Plumas Bancorp is a bank holding company headquartered in Reno, Nevada.  Substantially all of the Company's operations are conducted through its subsidiary, Plumas Bank, which is also the principal source of the Company’s revenue.

At December 31, 2025, the Company had consolidated assets of $2.2 billion, deposits of $1.8 billion, other liabilities of $168 million and shareholders’ equity of $261 million.  The Company’s other liabilities include $21 million in borrowings, $29 million in lease liabilities and $98 million in repurchase agreements. These items are described in detail later in this Form 10-K.

The Company is a California corporation incorporated in 2002 for the purpose of becoming the holding company for the Bank, which it acquired in a bank holding company reorganization the same year.

Our common stock trades on the Nasdaq Stock Market under the symbol “PLBC.”  We file annual, quarterly, and other reports required under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (the “SEC”).  These reports are available at no cost on our website, www.plumasbank.com, as soon as reasonably practicable after filing with the SEC. These reports are also available through the SEC’s website at www.sec.gov.   The address of our headquarters is 5525 Kietzke Lane, Suite 100, Reno, Nevada, 89511.

The Bank. The Bank is a California state-chartered bank that was incorporated and commenced business in 1980.  The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. The Bank is a member of the Federal Reserve System. At December 31, 2025, the Bank had approximately $2.2 billion in assets, $1.5 billion in net loans and $1.8 billion in deposits (including deposits of $9.4 million from the Company), other liabilities of $146 million and shareholders’ equity of $273 million.  The Bank’s other liabilities include $29 million in lease liabilities and $98 million in repurchase agreements.  It is currently the largest bank headquartered in Plumas County, California. The Bank’s operations are conducted through its administrative office in Quincy, California.

The Bank primarily generates revenue from loans and investment securities in its portfolio and, to a lesser extent, service fees.  With a predominant focus on personal service, the Bank positions itself as a multi-community independent bank serving the financial needs of individuals and businesses within the Bank’s geographic footprint.  The Bank’s primary business is servicing the banking needs of these communities.

Our business has a modest seasonal component due to the heavy agricultural and tourism orientation of some of the communities we serve.

Our Markets

The Bank’s primary service area covers the Northeastern portion of California, with Lake Tahoe to the south and the Oregon border to the north, and the Northwestern portion of Nevada. The Bank operates seventeen branches in California, including branches in Alturas, Anderson, Chester, Chico, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Red Bluff, Redding, Susanville, Tahoe City, Truckee and Yuba City. On July 1, 2025, we acquired our Anderson and Red Bluff branches and two branches in Redding with the acquisition of Cornerstone Community Bank ("Cornerstone"). In December 2015 the Bank opened a branch in Reno, Nevada, its first branch outside of California, and in 2018 the Bank purchased a branch located in Carson City, Nevada.

The Bank maintains 23 automated teller machines (“ATMs”) tied in with major statewide and national networks. In addition to its branch network, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California with an additional lending officer in Southern California, a lending officer in Chandler, Arizona and a commercial/agricultural lending office located in Klamath Falls, Oregon. The Bank’s primary business is servicing the banking needs of these communities. Its marketing strategy emphasizes its local ownership and commitment to serve the banking needs of individuals living and working in the Bank’s primary service areas.

Strategy

The Bank’s marketing strategy emphasizes its local ownership and management and commitment to serve the banking needs of individuals living and working in the Bank’s primary service areas.

Our strategy is to counter rising competition by providing our own style of community-oriented, personalized service.  We rely on local promotional activity, personal contacts by our officers, directors, employees, and shareholders, automated 24-hour banking, and the individualized service that we can provide through our flexible policies.  This approach appears to be well-received by our customers who appreciate a more personal and customer-oriented environment in which to conduct their financial transactions. To meet the needs of customers who prefer to bank electronically, we offer telephone banking, mobile banking, remote deposit, mobile deposit, and internet banking with bill payment capabilities.  This high tech and high touch approach allows customers to tailor their access to our services based on their particular preferences.

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Lending

The Bank provides Small Business Administration (SBA) loans to qualified borrowers mostly in Northern California, through its government-guaranteed lending center headquartered in Auburn, California. In addition to its Auburn location the Bank has an SBA lender based in each of Atascadero, California and Chandler, Arizona.  In 2007 the Bank was granted nationwide Preferred Lender status with the U.S. Small Business Administration,

which enables our customers to obtain SBA funding without the potentially lengthy SBA approval process necessary of lenders than are not SBA Preferred Lenders. We expect government-guaranteed lending to continue to be an important part of our overall lending operation.  We offer a SBA 7(a) loan product with a variable interest rate in which the guaranteed portion is salable in the secondary market, but we have seen a significant decline in interest in this product during the last several years. However, we have successfully pivoted to producing fixed rate SBA 7(a) loans, which we generally hold in our loan portfolio.

At
December 31, 2025 fixed rate SBA 7(a) loans totaling $104 million with guaranteed portions totaling $78 million were included in our commercial and commercial real estate loan portfolio.  The weighted rate of these loans was 8.0%.  Once demand for variable rate SBA 7(a) loans returns to an acceptable level, we plan to move most of our production efforts back to this product.

The Agricultural Credit Centers located in Alturas, Chico, Red Bluff, and Yuba City, California and Klamath Falls, Oregon provide an array of credit services supporting the agricultural activities that are key to the continued economic development of these communities.  “Ag lending” clients include a full range of individual farming customers, small to medium-sized business farming organizations and corporate farming units.

As of December 31, 2025, the principal areas to which we have directed our lending activities, and the percentage of our total loan portfolio comprised by each, were as follows: (i) commercial real estate – 66.3%; (ii)  commercial and industrial loans – 11.1%,  (iii) agricultural loans (including agricultural real estate loans) – 10.4%, (iv) consumer loans (including residential equity lines of credit and automobile loans) – 7.3%; (v) construction and land development – 2.7%; and (vi) residential real estate – 2.2% .  We discontinued our auto loan program in the fourth quarter of 2023.

We have established loan concentration guidelines as a percentage of capital and evaluate loan concentration levels within a single industry or group of related industries on a quarterly basis, or more frequently as loan conditions change.

Deposit Products

In addition to our lending activities, we offer a wide range of deposit products for the commercial and retail banking markets including checking, money market checking, business sweep, public funds sweep, savings, time deposit and retirement accounts, as well as remote deposit, telephone and mobile banking, including mobile deposit and internet banking with bill-pay options. Interest bearing deposits include higher yielding sweep accounts designed for our commercial customers and for public entities such as municipalities. As of December 31, 2025, the Bank had 47,667 deposit accounts with balances totaling approximately $1.8 billion, compared to 38,188 deposit accounts with balances totaling approximately $1.4 billion at December 31, 2024. We attract deposits through our customer-oriented product mix, competitive pricing, convenient locations, mobile and internet banking and remote deposit operations, all provided with a high level of customer service.

Most of the Bank’s deposits are attracted from individuals, business-related sources, and smaller municipal entities.  This mix of deposit customers resulted in a relatively modest average deposit balance of approximately $38 thousand at December 31, 2025.  We believe this broad and diverse deposit base makes us less vulnerable to adverse effects from the loss of depositors who may be seeking higher yields in other markets or who may otherwise draw down balances for cash needs.

We also offer a variety of other products and services complementing our lending and deposit services.  These include cashier’s checks, bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds transfers, FedNow®-receive Service and other customary banking services. We offer a Remote Deposit product that allows our business customers to make non-cash deposits remotely from their physical location. This product enables us to extend our service area because we can now meet the deposit needs of customers who may not be located within a convenient distance of one of our branch offices.

We are not dependent on a single customer or group of related customers for a material portion of our deposits.

Other Products and Services

We also offer a variety of other products and services complementing our lending and deposit services.  These include cashier’s checks, bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds transfers, FedNow®-receive Service and other customary banking services. We offer a Remote Deposit product that allows our business customers to make non-cash deposits remotely from their physical location. This product enables us to extend our service area by meeting the deposit needs of customers who may not be located within a convenient distance of one of our branch offices.

We devote a substantial amount of time and capital to the improvement of existing bank services. During 2022 we upgraded and replaced our fleet of ATM machines, enhanced incoming wire notifications and developed electronic tracking and monitoring for ACH origination and Remote Deposit Capture services and implemented the ability for our commercial online banking clients to originate one-time ACH payments.  In 2023 we provided enhanced security features and monitoring to detect and rapidly notify clients of potential fraudulent debit card transactions and created the ability for clients to dispute debit card transactions utilizing an online interface. In 2024, we upgraded our branch deposit acceptance system, entered real-time payments by implementing FedNow®-receive, optimized our outgoing wire transfer capabilities, and launched Payee Match for Positive Pay to aid in combatting the rising trend of check fraud.  Additionally, beginning in 2024 we began accepting through our website applications for our Business Exxpress product. In 2025, we enhanced international wire transfers, ACH origination, and treasury management solutions, and developed the ability for clients to automatically enroll business accounts in online banking, download multiple digital statements, and electronically notify the bank of loan payment notice errors.

The officers and employees of the Bank are continually engaged in marketing activities, including the evaluation and development of new products and services, to enable the Bank to retain and improve its competitive position in its service area.

Commitment to our Communities. The Board of Directors and management believe that the Company plays an important role in the economic well-being of the communities we serve. Our Bank has a continuing responsibility to provide a wide range of lending and deposit services to both individuals and businesses. We strive to tailor these services to meet the needs of the communities we serve.

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We offer various loan products which encourage job growth and support community economic development. Types of loans offered range from personal and commercial loans to real estate, construction, agricultural, and government-guaranteed loans. Many banking decisions are made locally with the goal of maintaining customer satisfaction through the timely delivery of high-quality products and services.

Recent Expansion Activities. As part of our business strategy, we may regularly review opportunities to enhance the value of our franchise, including through acquisitions. On July 1, 2025, we completed the acquisition of Cornerstone Community Bancorp and its subsidiary, Cornerstone Community Bank, which merged with and into the Bank the same day. The estimated fair value of assets acquired at July 1, 2025 was $659.4 million consisting of $51.9 million in cash, $88.1 million in investment securities, $462.5 million in net loans, $11.6 million in core deposit intangible, $12.6 million in bank premises and equipment, $16.4 million in Bank Owned Life Insurance, and $16.3 million in other assets. The estimated fair value of deposits assumed totaled $580.9 million consisting of $88.6 million in non-interest bearing transaction accounts, $21.8 million in savings accounts, $334.3 million in money market accounts and $136.2 million in time deposits.

Dividends and Stock Repurchase Program. It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends, subject to the approval of the Board of Directors.  The Company paid a quarterly cash dividend of $0.30 per shares each quarter in 2025, a quarterly cash dividend of $0.27 per share each quarter in 2024, and a quarterly cash dividend of $0.25 per share each quarter in 2023.

On February 2, 2026, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to $25 million of its common stock through the fourth quarter of 2026.

The Company’s principal source of cash is dividends from the Bank. The ability of the Company to pay dividends and repurchase common stock is therefore dependent on the Bank’s ability to generate net income and pay dividends to the Company.

Business Concentrations.  No individual or single group of related customer accounts is considered material in relation to the Bank's assets or deposits, or in relation to our overall business. However, at December 31, 2025, approximately 82% of the Bank's total loan portfolio consisted of real estate-secured loans, including real estate mortgage loans, real estate construction loans, consumer equity lines of credit, and agricultural loans secured by real estate. Approximately 66% of our loans were commercial real estate loans as of December 31, 2025. Moreover, the business activities of the Company currently are focused in the California counties of Butte, Lassen, Modoc, Nevada, Placer, Plumas, Shasta Sutter, and Tehama and in Washoe and Carson City Counties in Northern Nevada. Consequently, our results of operations and financial condition are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in these areas of California and Nevada exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires, drought and floods in these regions in California and Nevada.

Competition. The banking business is highly competitive. The business is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area.  These banks have, among other advantages, a greater ability to invest in technology, to finance wide-ranging marketing campaigns and to allocate their resources to regions of highest yield and demand.  Many of the major banks operating in the area offer certain services that we do not offer directly but may offer indirectly through correspondent institutions.  By virtue of their greater total capitalization, such banks also have substantially higher lending limits than we do.  For customers whose loan demands exceed our legal lending limit, we attempt to arrange for such loans on a participation basis with correspondent or other banks.

In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions such as finance companies, leasing companies, insurance companies, brokerage firms, internet-based fintech lenders and investment banking firms.  In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal financial software.  Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are offered to customers.  Mergers between financial institutions have placed additional competitive pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues.  In addition, competitive conditions have intensified as banks have increasingly affiliated with securities firms, insurance companies, and other financial companies.

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As of June 30, 2025, within towns in which the Bank had a branch as of this same date there were 131 banking branch offices of competing institutions (excluding credit unions, but including savings banks), including 100 branches of 14 banks having assets more than $10 billion. As of June 30, 2025, the FDIC estimated the Bank’s market share of deposits within the communities it serves to be as follows: Greenville, Quincy and Portola 100%, Alturas 67%, Susanville 59%, Kings Beach 52%, Chester 44%, Fall River Mills 38%, Tahoe City 32%, Truckee 18%, Yuba City 3%, Carson City 3%, Redding 2% and Reno and Chico less than 1%.

Technological innovations have also resulted in increased competition in financial services markets.  Such innovation has, for example, made it possible for non-depository institutions to offer customers loans or automated transfer payment services that previously were considered traditional banking products.  In addition, many customers now expect a choice of delivery systems and channels, including home computer, mobile, remote deposit, telephone, ATMs, mail, full-service branches and/or in-store branches.  The sources of competition in such products include traditional banks as well as savings associations, credit unions, brokerage firms, money market and other mutual funds, asset management groups, finance and insurance companies, fintechs and mortgage banking firms.

Human Capital Resources. At December 31, 2025, we employed 246 persons. On a full-time equivalent basis, we employed 234 persons.  None of our employees are represented by a labor union, and management considers its employee relations to be good.

While we expect to hire additional employees as we grow or as a result of attrition, we believe our human capital resources are adequate to support our current business.  To attract and retain employees, we offer a competitive total compensation package that includes a comprehensive benefit program.  We have adopted incentive compensation programs that are designed to retain and motivate employees and to align with our performance, including an incentive compensation plan, a 401K retirement plan, and an employee rewards plan. We regularly review our compensation and benefits and make adjustments to stay competitive.  We continually invest in our work force through employee development, education and training.

Code of Ethics. Our Board of Directors has adopted a code of business conduct and ethics for directors, officers (including the Company’s principal executive officer and principal financial officer) and financial personnel, known as the Corporate Governance Code of Ethics. This policy is available on our website at www.plumasbank.com. Shareholders may request a free copy of this policy from Plumas Bancorp, Ms. Jamie Huynh, Assistant Corporate Secretary, 5525 Kietzke Lane, Suite 100, Reno, Nevada, 89511.

Supervision and Regulation

General. As a banking organization, we are extensively regulated under federal and state law. These laws and regulations are generally intended to protect our customers and the financial system and not our shareholders. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. Any change in applicable laws or regulations may have a material effect on our business and prospects. We cannot accurately predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state legislation may have in the future. The following summaries of statutes and regulations are qualified in their entirety by reference to the particular statute or regulation.

Holding Company Regulation. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “FRB”). We are required to file reports with the FRB and the FRB periodically examines the Company. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support its subsidiary bank. FRB regulations and policies require the Company to meet or exceed certain capital requirements and regulate provisions of certain bank holding company debt. The Company is also a bank holding company for purposes of the California Financial Code, so the Company and its subsidiaries are also subject to supervision and examination by the California Department of Financial Protection and Innovation (“DFPI”).

The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies that qualify and register as “financial holding companies” are also able to engage in certain additional financial activities, such as merchant banking and securities and insurance underwriting, subject to limitations set forth in federal law. The Company has not elected to become a financial holding company. As a bank holding company, the Company must obtain prior approval of the FRB before taking any action that causes a bank to become a controlled subsidiary of the bank holding company, acquiring direct or indirect ownership of 5% of the outstanding shares of any class of voting securities of another bank or bank holding company, acquiring all or substantially all the assets of a bank or merging or consolidating with another bank holding company.

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Federal and State Bank Regulation. As a California-chartered commercial bank that is a member of the Federal Reserve System, the Bank is subject to the supervision and regulation of the DFPI and the FRB, as well as certain of the regulations of the FDIC and the Consumer Financial Protection Bureau (“CFPB”). The DFPI and the FRB regularly examine the Bank and may prohibit the Bank from engaging in what they believe constitutes unsafe or unsound banking practices or violations of law.

As a member of the Federal Reserve System, the Bank is required to purchase and maintain stock in the Federal Reserve Bank of San Francisco in an amount equal to 3.00% of the paid-up capital stock and surplus of the Bank and have available another 3.00% in reserves. At December 31, 2025, the Bank had $3.6 million in stock of the Federal Reserve Bank of San Francisco in compliance with this requirement.

Capital Adequacy. The federal banking agencies have adopted risk-based capital adequacy guidelines intended to measure capital relative to the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans.

A banking organization’s risk-based capital ratios are calculated by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against common equity Tier 1 capital, Tier 1 capital and total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital).  Common equity Tier 1 capital generally consists of common stock and retained earnings.  Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for credit losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies.

If a bank does not maintain the required capital levels, federal banking regulators, as well as the DFPI, may issue a capital directive or take other enforcement measures to ensure the maintenance of required capital levels. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At each successive lower capital category, a bank is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company and any other company deemed to control the bank must guarantee the performance of that plan.

The federal bank regulatory agencies’ risk-based capital adequacy guidelines, sometimes called “Basel III,” establish minimum regulatory capital requirements for bank holding companies and depository institutions. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%.  In addition, the Basel III capital rules require that banking organizations maintain a capital conservation buffer of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered “well capitalized”: a common equity Tier 1 capital ratio of 7.0%; a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At December 31, 2025, the Company’s and the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.

Under the FRB’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the Basel III consolidated capital rules. The Company qualifies for treatment under this policy and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The Basel III capital rules continue to apply to the Bank.

For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Standards.”

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Dividends and Stock Repurchases. The Company’s ability to pay cash dividends is limited by California law and is dependent on dividends it may receive from the Bank. The California General Corporation Law permits a California corporation such as the Company to make a distribution to its shareholders' if its retained earnings equal at least the amount of the proposed distribution or if after giving effect to the distribution, the value of the corporation’s assets exceeds the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met.

It is the FRB’s policy that bank holding companies should generally pay dividends on common stock only out of current income and only if prospective earnings support the organization’s expected future needs and financial condition. Further, it is the FRB’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries. The FRB also discourages dividend payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

The Bank is a legal entity that is separate and distinct from its holding company. The Company depends on the performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of the Company and the ability of the Company to pay dividends to shareholders. Future cash dividends by the Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors.

The California Financial Code restricts the dividends that the Bank may pay to the Company to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the DFPI, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of December 31, 2025, the maximum amount available for dividend distribution under this restriction was approximately $46 million.  In addition, the Bank is subject to the Basel III capital rules and the capital conservation buffer discussed above.

The foregoing restrictions and limitations on dividends similarly restrict the Company’s ability to repurchase shares of its common stock.

Loans-to-One Borrower.  Under California law, the Bank’s ability to make aggregate secured and unsecured loans-to-one-borrower is limited to 25% and 15%, respectively, of unimpaired capital and surplus.  At December 31, 2025, the Bank’s limit on aggregate secured loans-to-one-borrower was $67 million and unsecured loans-to-one borrower was $40 million.  The Bank has established internal loan limits that are lower than its legal lending limits.

The Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires the federal banking regulators to evaluate the record of depository institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Federal banking regulators consider the Bank’s CRA performance in evaluating applications for mergers, acquisitions and to establish new branches. A less than “Satisfactory” rating would likely result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. The Bank’s most recent CRA rating was “Satisfactory.”

Transactions with Affiliates. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders (including the Company) or any related interest of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral, as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not affiliated with the Bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.

The Federal Reserve Act and the FRB’s Regulation W limit the amount of certain loan and investment transactions between the Bank and its affiliates, require certain levels of collateral for such loans, and limit the amount of advances to third parties that may be collateralized by the securities of the Company or its subsidiaries. Regulation W requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies.

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Safety and Soundness Standards. The federal banking regulators have adopted non-capital safety and soundness standards for institutions. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory enforcement actions, including civil money penalties.

Concentrations in Commercial Real Estate Lending. The federal banking regulators have issued guidance to identify institutions that may be exposed to potential significant commercial real estate lending risks and may therefore warrant greater supervisory scrutiny. The guidance includes the following numerical tests:

● total reported loans for construction, land development and other land represent 100% or more of the institution’s total risk-based capital, or

● total commercial real estate loans represent 300% or more of the institution’s total risk-based capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more during the previous 36 months.

The guidance does not limit a bank’s levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. Banking regulators expect banks with concentrations of commercial real estate loans to maintain appropriate underwriting discipline, risk-management and capital commensurate with the level and nature of their commercial real estate risks.

Federal Deposit Insurance. The FDIC insures the Bank’s deposits, up to prescribed statutory limits, through the Deposit Insurance Fund, currently up to $250,000 per depositor per institution. The Deposit Insurance Fund is funded primarily by FDIC assessments paid by the insured depository institution. The amount of FDIC assessments paid by a depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. The Bank’s FDIC insurance expense totaled $871 thousand for 2025.

While the FRB is the Bank’s primary federal regulator, as a federally insured depository institution, the Bank is also subject to certain regulations of and supervision by the FDIC.  The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the Deposit Insurance Fund or that may prejudice the interest of the institution’s depositors. Under California law, the termination of the Bank’s deposit insurance would result in a termination of the Bank’s charter.

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Consumer Protection Laws and Regulations. The bank regulatory agencies continue to focus greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to carefully monitor compliance with such laws and regulations. The Company is subject to many federal and state consumer protection and privacy statutes and regulations, including but not limited to the following:

Penalties for noncompliance or violations under the above laws may include enforcement actions, fines, customer reimbursement and other penalties. Violations of consumer laws may also adversely affect the Bank’s CRA rating.  Due to heightened regulatory expectations related to compliance generally, the Company may incur additional compliance costs.

The Dodd-Frank Act created the CFPB as an independent federal agency with broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions, including the Bank, are generally subject to rules promulgated by the CFPB but continue to be examined and supervised by their primary federal banking regulators for consumer compliance purposes.

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Anti-Money Laundering Laws. A series of banking laws and regulations beginning with the Bank Secrecy Act require banks to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the US PATRIOT Act of 2001 (the “Patriot Act”), financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high-risk customers, foreign financial institutions, and foreign individuals and entities.  These rules also mandate a variety of record keeping, reporting and employee training requirements. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank acquisition or merger.

Privacy and Data Security. The Gramm-Leach Bliley Act of 1999 (“GLBA”) imposes requirements on financial institutions with respect to consumer privacy. The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. The Bank is required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal of information that is no longer needed. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused.

Potential Enforcement Actions; Supervisory Agreements. Under federal law, the Company, the Bank and their institution-affiliated parties may be the subject of potential enforcement actions by the federal banking regulators for unsafe and unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties, the payment of restitution and removal and prohibition orders against institution-affiliated parties. The DFPI also has authority to bring similar enforcement actions against the Bank.

Legislation and Proposed Changes. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Typically, the intent of this type of legislation is to strengthen the banking industry, even if it may on occasion prove to be a burden on management’s plans. No prediction can be made as to the likelihood of any major changes or the impact that new laws or regulations might have on us.

Effects of Government Monetary Policy. Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the FRB. The FRB implements national monetary policy for such purposes as curbing inflation and combating recession, through its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the FRB, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The Company’s profitability, like most financial institutions, is primarily dependent on interest rate spreads. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on interest-earning assets, such as loans extended to customers and securities held in the investment portfolio, will comprise the major portion of the Company’s earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB, and the impact which future changes in domestic and foreign economic conditions might have on us cannot be predicted. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

Recent Accounting Pronouncements

See Note 2 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K for information related to recent accounting pronouncements.