Oak Valley Bancorp

NOTE1 — SUMMARY OF ACCOUNTING POLICIES

Nature of Operations

Oak Valley Bancorp (“the Company”, “us”, “our”) is the parent holding company for Oak Valley Community Bank (the “Bank”), a California state-chartered bank. The consolidated financial statements include the accounts of the parent company and its wholly-owned bank subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank. All material intercompany transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. There wasno effect on net income or shareholders’ equity as previously reported as a result of reclassifications. In the opinion of Management, the consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in shareholders’ equity and cash flows. All adjustments are of a normal, recurring nature.

The Company was incorporated under the laws of the State of California on* May31,* 1990 and began operations in Oakdale on* May28,* 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, Escalon, Sacramento, and Roseville, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for credit losses, accounting for income taxes, fair value measurements and goodwill impairment. Actual results could differ from these estimates.

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

*Subsequent events — *The Company has evaluated events and transactions subsequent to December 31, 2023through the date of the filing for potential recognition or disclosure.

Cash and cash equivalents— The Company has defined cash and cash equivalents to include cash, due from banks, certificates of deposit with original maturities ofthree months or less, and federal funds sold. Generally, federal funds are sold forone-day periods. At times throughout the year, balances can exceed FDIC insurance limits.

Securities available for sale— Available-for-sale securities consist of bonds, notes, and debenturesnot classified as trading securities or held-to-maturity securities. Available-for-sale securities with unrealized holding gains and losses are reported as an amount in accumulated other comprehensive income, net of tax. Gains and losses on the sale or call of available-for-sale securities are determined using the specific identification method. The amortization of premiums and accretion of discounts are recognized as adjustments to interest income over the period to maturity, except for premiums on securities with call dates which are amortized to the earliest call date.

Consistent with ASU2016-01, equity securities consist of those securities with readily determinable fair value and are carried at fair value with the changes in fair value recognized in the consolidated statements of income.

For available-for-sale debt securities in an unrealized loss position, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in ratings by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for credit loss (“ACL”) is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between the fair value and amortized cost balance of the security in question. Any unrealized loss that hasnot been recorded through an ACL is recognized in other comprehensive income.

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The unrealized losses are due primarily to rising market yields andnot due to credit deterioration. As such,no ACL on available-for-sale securities has been established as of* December 31, 2023.The Company doesnot* intend to sell the securities and it isnot likely that the Company will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

**Other real estate owned— Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value of the property at the date of foreclosure less estimated selling costs. Subsequent to foreclosure, valuations are periodically performed and any subject revisions in the estimate of fair value are reported as adjustment to the carrying value of the real estate, provided the adjusted carrying amount doesnot exceed the original amount at foreclosure. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses.

Loans originated— Loans are reported at the principal amount outstanding, net of unearned income, deferred loan fees, and the allowance for credit losses. Unearned discounts on installment loans are recognized as income over the terms of the loans. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.

Loan fees net of certain direct costs of origination are deferred and amortized, as an adjustment to interest yield, over the estimated life of the loan.

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due byninety days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, butnot collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

Allowance for credit losses (“ACL”)— As required by ASU2016-13, on* January 1, 2023the Company implemented CECL and increased our ACL, previously the allowance for loan losses, with a $346,000 cumulative adjustment. Under ASU2016*-13, the allowance for credit losses is deducted from the amortized cost basis to present the net amount expected to be collected on the loans. The measurement of expected credit losses is based on relevant information, which includes experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount over the remaining contractual life. The Company’s ACL is calculated monthly, with any difference in the calculated ACL and the recorded ACL trued-up through an entry to the provision for credit losses. Management calculates the quantitative portion of collectively evaluated reserves for all loan categories, using a discounted cash flow (“DCF”) methodology. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics together, however management has grouped loans in selected call codes together in determining portfolio segments, due to similar risk characteristics and reserve methodologies used for certain call code classifications.

The DCF quantitative reserve methodology incorporates the consideration of probability of default (“PD”) and loss given default (“LGD”) estimates to calculate expected lifetime losses. The PD estimates are derived using reasonable and supportable economic forecasts and historical loss rate data from both the bank and a selected peer group. The historical loss rate data is compared to identified benchmark economic indicators to create a regression model that is updated annually. Reasonable and supportable forecasts for the identified economic indicators are then incorporated to arrive at expected default rates for the various loan categories. The reasonable and supportable forecasts are based on the National Unemployment Rate and Real Gross Domestic Product. The expected default rates are then applied to expected monthly loan balances estimated through the consideration of contractual terms and expected prepayments. The Company utilizes afour-quarter forecast period, after which the expected default rates revert to the historical average, over afour-quarter reversion period, on a straight-line basis. The prepayment assumptions are estimated based on historical experience of the bank. The prepayment assumptions are updated quarterly and* may*be subject to additional updates by Management in the event that changing conditions impact Management’s estimate. LGD utilized in the DCF is derived from the application of models that correlate LGD and PD based on historical peer data.

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Management recognizes that there are additional factors impacting risk of loss in the loan portfolio beyond what is captured in the quantitative portion of collectively evaluated reserves. As current and expected conditions,* mayvary compared with conditions over historical periods, which are utilized in the calculation of quantitative reserves, management considers whether additional or reduced reserve levels on collectively evaluated loans may*be warranted given the consideration of a variety of qualitative factors. Several of the following qualitative factors (“Q-factors”) considered by management reflect regulatory guidance on Q-factors, whereas several others represent factors unique to the Company or unique to the current time period.

The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of numeric frameworks, matrices defining reserve rate based on specified metrics, and management judgement, to determine risk categorizations in each of the Q-factors presented above. The amount of qualitative reserves is also contingent upon the relative weighting of Q-factors according to management’s judgement.

Loans identified as losses by management and internal loan review are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

Accrued interest receivable for loans is included in the “Interest receivable and other assets” line item on the Company’s Consolidated Balance Sheet. The Company electednot to measure an allowance for accrued interest receivable and instead elected to reverse accrued interest income on loans that are placed on nonaccrual status. The Company believes this policy results in the timely reversal of uncollectible interest.

The method for calculating the allowance for unfunded loan commitments is based on applying an estimated funding rate to the unfunded loan commitment balance to determine a projected cashflow schedule. Then the quantitative loan loss rate from each loan pool as calculated in the DCF model described above is used to calculate the allowance for unfunded loan commitments which is recorded included in interest payable and other liabilities on the consolidated balance sheet.

Premises and equipment— Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line basis. The estimated lives used in determining depreciation and amortization are:

The Company adopted ASUNo. 2016-02, Leases (Topic842*)on the effective date of January 1, 2019.All of the Company’s leases were determined to be operating leases. The Company determined the operating lease liability as of January 1, 2019,by calculating the present value of remaining base rent cash payments on each of its leases, excluding any renewal options regardless of the likelihood that the option would be exercised. The resulting operating lease liability recorded as of January 1, 2019was $5,246,000, which is included in interest payable and other liabilities in the consolidated balance sheet. The ROU asset was then determined by adjusting the operating lease liability by deferred rent and unamortized tenant improvement allowance. The ROU asset recorded on January 1, 2019*was $4,817,000, which is included in interest receivable and other assets on the consolidated balance sheet.

Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease. The straight-line method of depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax purposes. Deferred income taxes have been provided for the resulting temporary differences.

Income taxes— Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

F-12

The Company files income tax returns in the U.S. federal jurisdiction, and the State of California. With few exceptions, the Company isno longer subject to U.S. federal tax examinations by tax authorities for years before2020 or to state/local income tax examinations by tax authorities for years before2019.

**Transfers of financial assets— Transfers of an entire financial asset, a group of financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that contain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company doesnot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Advertising costs— The Company expenses advertising costs as they are incurred. Advertising expense was $371,000 and $355,000 for the years ended December31, 2023 and2022, respectively.

Comprehensive income — Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items previously recorded directly to shareholders’ equity, such as unrealized gains and losses on securities available for sale. Comprehensive income is presented in the statements of comprehensive income and as a component of shareholders’ equity. For the years ended* December**31,* 2023 and2022, $110,000 and $0, net of tax, respectively, was reclassified from comprehensive income into net income related to gains on called and sold available for sale securities.

**Federal Reserve Bank Stock — Federal Reserve Bank stock represents the Company’s investment in the stock of the Federal Reserve Bank (“FRB”) and is carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there isno market for the FRB stock. Therefore, the shares are considered as restricted equity securities. Management periodically evaluates FRB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FRB as compared to the capital stock amount for the FRB and the length of time this situation has persisted, (2) commitments by the FRB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FRB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FRB, and (4) the liquidity position of the FRB. This investment is reflected as a component of interest receivable and other assets on the consolidated balance sheets.

**Federal Home Loan Bank Stock — Federal Home Loan Bank stock represents the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”) and is carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there isno market for the FHLB stock. Therefore, the shares are considered as restricted equity securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. This investment is reflected as a component of interest receivable and other assets on the consolidated balance sheets.

Earnings per common share (“EPS”) — EPS is based upon the weighted average number of common shares outstanding during each year. The table in footnote12 shows: (1) weighted average basic shares, (2) effect of dilutive securities related to stock options and non-vested restricted stock, and (3) weighted average diluted shares. Basic EPS are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding dilutive stock options and unvested restricted stock awards. Diluted EPS are calculated using the weighted average diluted shares. The total dilutive shares included in annual diluted EPS is a year-to-date weighted average of the total dilutive shares included in each quarterly diluted EPS computation under the treasury stock method. We havetwo forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under thetwo-class method, the difference in EPS isnot significant for these participating securities.

Stock based compensation— **The Company recognizes in the consolidated statements of income the grant-date fair value of restricted stock, stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period). The Company uses the straight-line recognition of expenses for awards with graded vesting. The fair value of each restricted stock grant is based on the closing market price of the Company’s stock on the date of grant. The Company issued restricted stock grants totaling 43,446 and 27,047 shares in2023 and2022, respectively.

F-13

Fair values of financial instruments— The consolidated financial statements include various estimated fair value information as of* December**31,* 2023 and2022. Such information, which pertains to the Company’s financial instruments, doesnot purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change.

Fair value measurements—** *The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company bases the fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may*be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting.

The Company has established and documented a process for determining fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. Whenever there isno readily available market data, Management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of Management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these financial consolidated statements.

Revenue recognition — Revenue from deposit account-related fees, including general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer or overdraft activities, is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services. Investment advisory service fees are received from athird-party broker-dealer as part of a revenue sharing agreement for fees earned from customers that the Company refers to thethird party for services that include custody of assets, investment management, trust services, and other fiduciary activities. Revenue is recognized when the performance obligation is completed, which is generally monthly.

**Reclassifications — Certain prior year amounts have been reclassified to conform to the current year presentation. There wasno effect on net income or shareholders’ equity as a result of reclassifications.

Goodwill and other intangible assets*** — As of December 31, 2023intangible assets are comprised of goodwill of $3,313,000 and core deposit intangibles of $159,000, which were acquired through a business combination, as compared to goodwill of $3,313,000 and core deposit intangible of $245,000 as of December 31, 2022.Intangible assets with definite useful lives are amortized over their respective estimated useful lives. If an event occurs that indicates the carrying amount of an intangible asset may**not* be recoverable, management reviews the asset for impairment. Any goodwill and any intangible asset acquired in a purchase business combination determined to have an indefinite useful life isnot amortized, but is evaluated for impairment, at a minimum, on an annual basis.

The core deposit intangible represents the estimated future benefits of acquired deposits and is booked separately from the related deposits. The value of the core deposit intangible asset was determined using a discounted cash flow approach to arrive at the cost differential between the core deposits (non-maturity deposits such as transaction, savings and money market accounts) and alternative funding sources. The core deposit intangible is amortized on an accelerated basis over an estimatedten-year life, and it is evaluated periodically for impairment. No impairment loss was recognized as of* December 31, 2023.At December 31, 2023,*the core deposit intangibles future estimated amortization expense is as follows:

The Company applies a qualitative analysis of conditions in order to determine if it is more likely thannot that the carrying value is impaired. In the event that the qualitative analysis suggests that the carrying value of goodwill* maybe impaired, the Company uses several quantitative valuation methodologies in evaluating goodwill for impairment that includes assumptions made concerning the future earnings potential of the organization, and a market-based approach that looks at values for organizations of comparable size, structure and business model. The current year's review of qualitative factors didnot* indicate that impairment has occurred, as suchno quantitative analysis was performed at* December**31,* 2023.

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Recently Issued Accounting Standards—

In* June2016,* the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. 2016-13, Financial Instruments–* Credit Losses (Topic326).* This update revises the methodology used by financial institutions under GAAP to recognize credit losses in the financial statements. Previously, GAAP required the use of an “incurred loss” model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet. The “incurred loss” methodology for recognizing credit losses delayed recognition until it is probable that a loss has been incurred. ASU2016-13 replaces such incurred loss impairment model with a new methodology that requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU guidance results in a new model for estimating the allowance for credit losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings. The amendments within the update were initially effective for fiscal years and all interim periods beginning after* December15,* 2019. In* October 2019,FASB approved an amendment that delayed the adoption of this ASU forthree* years for certain entities including the Company since we are classified as a Smaller Reporting Company. The Company adopted these standards as required on* January 1, 2023using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. There wasno* cumulative effect adjustment related to our available-for-sale investment portfolio upon adoption and the Company hadno securities designated as held-to-maturity as of* January 1, 2023.*

Results for reporting periods beginning after* January 1, 2023*are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss method accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $346,000, an increase of $547,000 to the reserve for unfunded commitments, a $629,000 decrease to retained earnings, and a $264,000 tax benefit recorded as part of the deferred tax asset in the Company’s Consolidated Balance Sheet.

In* March 2020,FASB issued ASU2020*-04 -Reference Rate Reform (Subtopic848*): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.* This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU was effective for all entities as of* March 12, 2020through December 31, 2022.In December 2022,FASB Issued ASU2022*-06 to defer the sunset date from* December 31, 2022to December 31, 2024.The ASU didnot* have a material impact on our consolidated financial statements. As a result of the phase out of LIBOR immediately after* June 30, 2023,*our loans that were indexed to LIBOR have transitioned to CME Term SOFR.

In* March 2022,the FASB issued ASUNo.* 2022-02, Financial Instruments - Credit Losses (Topic326*): Troubled Debt Restructurings and Vintage Disclosures* (“ASU2022-02”). ASU2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) Subtopic310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU2022-02 became effective on* January 1, 2023.The adoption of ASU2022*-02 didnot have a significant impact on our consolidated financial statements.

In* March 2023,the FASB issued ASUNo.* 2023-02, Investments-Equity Method and Joint Ventures (Topic323*): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force). The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting entity maymake an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. Previously, only Low-Income Housing Tax Credit investments were eligible to apply the proportional amortization method. This ASU becomes effective on January 1, 2024,with early adoption permitted and can be adopted using either a retrospective or modified retrospective transition method. The Company intends to adopt this standard but doesnot* expect it will have a material impact on the consolidated financial statements.

NOTE2 — CASH AND DUE FROM BANKS

Cash and due from banks includes balances with the Federal Reserve Bank and other correspondent banks. Prior to* March 2020,the Federal Reserve Bank required the Company to maintain a minimum reserve balance based on a percentage of the Company’s deposit liabilities. Effective March 26, 2020,the Federal Reserve Bank reduced the reserve requirement ratios tozero* percent, which eliminated the reserve requirements for all depository institutions. As of* December 31, 2023and2022,* the Company had Federal Reserve Bank balances of $147,379,000 and $225,366,000, respectively. In addition, the Company maintains other cash equivalent balances, of which insured balances totaled $45,968,000 and uninsured balances totaled $23,221,000 as of* December 31, 2023.*

NOTE3 — SECURITIES

Equity Securities

The Company held equity securities with fair values of $3,132,000 and $2,990,000 at* December 31, 2023and December 31, 2022,respectively. There wereno sales of equity securities during the year ended December 31, 2023or2022.* Consistent with ASU2016-01, these securities are carried at fair value with the changes in fair value recognized in the consolidated statements of income. Accordingly, the Company recognized an unrealized gain of $41,000 and an unrealized loss of $475,000 during the years ended* December 31, 2023and2022,* respectively.

Debt Securities

Debt securities have been classified in the financial statements as available for sale. The amortized cost and estimated fair values of debt securities as of* December 31, 2023*are as follows:

The following tables detail the gross unrealized losses and fair values aggregated of debt securities by investment category and length of time that individual securities have been in a continuous unrealized loss position at* December**31,* 2023.

For available-for-sale debt securities in an unrealized loss position, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in ratings by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for credit loss (“ACL”) is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between the fair value and amortized cost balance of the security in question. Any unrealized loss that hasnot been recorded through an ACL is recognized in other comprehensive income.

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The unrealized losses are due primarily to rising market yields andnot due to credit deterioration. As such,no ACL on available-for-sale securities has been established as of* December 31, 2023.The Company doesnot* intend to sell the securities and it isnot likely that the Company will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

The amortized cost and estimated fair value of debt securities at* December**31,* 2023, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers* may*have the right to call or prepay obligations with or without call or prepayment penalties.

Debt securities have been classified in the financial statements as available for sale. The amortized cost and estimated fair values of debt securities as of* December 31, 2022*are as follows:

F-17

The following tables detail the gross unrealized losses and fair values aggregated of debt securities by investment category and length of time that individual securities have been in a continuous unrealized loss position at* December**31,* 2022.

The Company recognized gross realized gains of $13,000 and $0 during2023 and2022, respectively, on certain available-for-sale securities that were called. The Company sold twenty-four available-for-sale securities in2023 and recorded a corresponding gain on sale of $143,000, as compared tono sales in2022.

Securities carried at $288,199,000 and $242,023,000 at* December**31,* 2023 and2022, respectively, were pledged to secure deposits of public funds.

NOTE4 — LOANS

The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Sacramento, Placer, Inyo, and Mono Counties. As of* December 31, 2023,*approximately 88% of the Company’s loans are commercial real estate loans which includes construction loans. Approximately 6% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally,3% of the Company’s loans are for residential real estate and other consumer loans. The remaining 3% are agriculture loans.

Loan totals were as follows:

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however,* may**not* be as expected and the collateral securing these loans* mayfluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and mayincorporate a personal guarantee; however, some short-term loans maybe made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may*be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans* maybe more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizesthird*-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At* December**31,* 2023, approximately 35% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

F-19

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company* mayoriginate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates maybe inaccurate. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may*be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans follow bank policy, which include, but arenot limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.

The Company maintains an independent loan review function that validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments havenot been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower* maybe unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans maybe placed on non-accrual status regardless of whether ornot* such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

As of* December 31, 2023and2022,* there wereno loans classified as non-accrual loans.

The following table analyzes past due loans, segregated by class of loans, as of* December**31,* 2023 (in thousands):

F-20

The following table analyzes past due loans, segregated by class of loans, as of* December**31,* 2022 (in thousands):

Collateral Dependent Loans.Management’s evaluation as to the ultimate collectability of loans includes estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers. Prior to January 1, 2023,before CECL was adopted, collateral dependent loans are loans in which repayment is expected to be provided solely by the underlying collateral and there areno other available and reliable sources of repayment. Under CECL, loans can be determined to be collateral dependent if foreclosure of the loan’s underlying collateral is probable or as a practical expedient if the borrower is experiencing financial difficulties and the repayment is expected to be provided substantially through the operation or sale of the collateral. Loans are written down to the lower of cost or fair value of underlying collateral, less estimated costs to sell. The Company hadno collateral dependent loans as of* December 31, 2023.Prior to the adoption of ASU2016*-13 on* January 1, 2023,there wereno* impaired loans as of* December 31, 2022.*

Loan Modification Disclosures Pursuant to ASU 2022-02 - The Company* mayagree to different types of concessions when modifying a loan. There wereno* loan modifications to borrowers experiencing financial difficulty, including principal forgiveness, rate reductions, payment deferral or term extension, during the year ended* December 31, 2023.*

TDR Disclosures Prior to the Adoption of ASU2022*-02* - At* December 31, 2022,there wereno loans classified as troubled debt restructurings, and therefore there wereno loans modified as troubled debt restructurings within the previoustwelve* months and for which there was a payment default during thetwelve months ended* December 31, 2022.*A loan is considered to be in payment default once it isninety days contractually past due under the modified terms.

Loan Risk Grades– Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

The Company grades loans using the following letter system:

1 Exceptional Loan

2 Quality Loan

3A Better Than Acceptable Loan

3B Acceptable Loan

3C Marginally Acceptable Loan

4 (W) Watch Acceptable Loan

5 Special Mention Loan

6 Substandard Loan

7 Doubtful Loan

8 Loss

F-21

1. Exceptional Loan** **- Loans with A+ credits that contain very little, if any, risk. Grade1 loans are considered Pass. To qualify for this rating, the following characteristics must be present:

2. Quality Loan** **- Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified.No credit or collateral exceptions. Grade2 loans are considered Pass. Other factors include:

3A. Better than Acceptable Loan** **- In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade3 category intothree classifications. The distinction between thethree are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade3 loan. Grade3A is characterized by:

3B. Acceptable Loan** **-3B loans are simply defined as all loans that are less qualified than3A loans and are stronger than3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and donot represent repayment risk. These loans:

3C. Marginally Acceptable Loan** **-3C loans have similar characteristics as that of3Bs with the following additional characteristics:

4(W). Watch Acceptable Loan** *- Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may*include:

F-22

5. Special Mention Loan** *- A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may,*at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:

6. Substandard Loan** **- A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies arenot corrected. Loss potential, while existing in the aggregate amount of substandard credits, doesnot have to exist in individual extensions of credit classified as substandard.

7. Doubtful Loan** - An extension of credit classified as “doubtful” has all the weaknesses inherent inone classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that maywork to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status maybe determined. Pending factors mayinclude a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan neednot be classified as doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to unsecured creditors, including the Bank. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the25 percent difference between40 and65 percent.

A proper classification of such a credit would show 40 percent substandard,25 percent doubtful, and 35 percent loss. A credit classified as doubtful should be resolved within a ‘reasonable’ period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified as doubtful at an examination should be cleared up before the next exam. However, there* may*be situations that warrant continuation of the doubtful classification a while longer.

8. Loss** - Extensions of credit classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets isnot warranted. This classification doesnot mean that the credit has absolutelyno recovery or salvage value, but rather that it isnot practical or desirable to defer writing off, even though partial recovery maybe affected in the future. It shouldnot be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.

As of* December 31, 2023and2022,* there areno loans that are classified with risk grades of**8*- Loss.*

The risk grades are reviewed every month, at a minimum and on an as-needed basis depending on the specific circumstances of the loan.

F-23

The following table summarizes loan risk grade totals by class and year of origination as of* December 31, 2023.Risk grades1* through4(W) have been aggregated in the “Pass” line.

F-24

The following table summarizes loan risk grade totals by class and year of origination as of* December 31, 2022.Risk grades1* through4(W) have been aggregated in the “Pass” line.

F-25

The following table details activity in the ACL by portfolio segment for the years ended* December**31,* 2023 and2022. Allocation of a portion of the allowance toone category of loans doesnot preclude its availability to absorb losses in other categories.

The following table details the allowance for credit losses and ending gross loan balances as of* December 31, 2023and2022,* summarized by collective and individual evaluation methods of impairment.

F-26

The following table presents gross charge-offs for the year ended* December 31, 2023*by portfolio class and origination year (dollars in thousands):

Changes in the allowance for undisbursed loan commitments were as follows:

The method for calculating the allowance for unfunded loan commitments is based on applying an estimated funding rate to the unfunded loan commitment balance to determine a projected cashflow schedule. Then the quantitative loan loss rate from each loan pool, as calculated in the DCF model described above, is used to calculate the allowance for unfunded loan commitments which is recorded included in interest payable and other liabilities on the consolidated balance sheet.

At* December**31,* 2023 and2022, loans carried at $1,016,579,000 and $915,758,000, respectively, were pledged as collateral on advances from the Federal Home Loan Bank.

NOTE5 — PREMISES AND EQUIPMENT

Major classifications of premises and equipment are summarized as follows:

Depreciation expense was $1,329,000 and $1,312,000 for the years ended* December 31, 2023and2022,* respectively.

NOTE6 — INTEREST RECEIVABLE AND OTHER ASSETS

Interest receivable and other assets are summarized as follows:

NOTE7 — DEPOSITS

Deposit totals were as follows:

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Time deposits issued and their remaining maturities at* December**31,* 2023, are as follows (in thousands):

NOTE8 — FHLB ADVANCES

At* December31,* 2023, the Company hadno outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and available advances totaled $333,083,000 at* December31,* 2023. Loans carried at $1,016,579,000 as of* December**31,* 2023, were pledged as collateral on advances from the Federal Home Loan Bank.

At* December31,* 2022, the Company hadno outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and available advances totaled $322,369,000 at* December31,* 2022. Loans carried at $915,758,000 as of* December**31,* 2022, were pledged as collateral on advances from the Federal Home Loan Bank.

NOTE9 — INTEREST ON DEPOSITS

Interest on deposits was comprised of the following:

NOTE10 — INCOME TAXES

The provision for income taxes consists of the following:

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The components of the Company’s deferred tax assets and liabilities (included in accrued interest and other assets on the consolidated balance sheets), is shown below:

Management has assessed the realizability of deferred tax assets and believes it is more likely thannot that all deferred tax assets will be realized in the normal course of operations. Accordingly, these assets havenot been reduced by a valuation allowance.

The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions.

The Company hadno liabilities for unrecognized tax benefits as of* December 31, 2023and2022.*

F-30

The effective tax rate for2023 and2022 differs from the current Federal statutory income tax rate as follows:

Oak Valley Bancorp files a consolidated return in the U.S. Federal tax jurisdiction and a combined report in the State of California tax jurisdiction.None of the entities are subject to examination by taxing authorities for years before 2020 for U.S. federal or for years before 2019 for California.

NOTE11 — STOCK OPTION PLAN

The Company currently hasone equity based incentive plan, the Oak Valley Bancorp2018 Stock Plan. The2018 Stock Plan provides for awards in the form of incentive stocks, non-statutory stock options, stock appreciation rights and restrictive stocks. Under the2018 Plan, the Company is authorized to issue 607,500 shares of its common stock to key employees and directors as incentive and non-qualified stock options, respectively, at a price equal to the fair value on the date of grant. The Plan provides that the options are exercisable in equal increments over afive-year period from the date of grant or over any other schedule approved by the Board of Directors. All incentive stock options expireno later thanten years from the date of grant. As of* December 31, 2023,463,199 shares were available to be issued under the2018* Stock Plan pursuant to new grants.

For the years ended* December**31,* 2023 and2022, there wereno stock options outstanding at any time and thereforeno stock option exercises in either year. All outstanding stock options became fully vested during2014 and therefore there isno remaining unrecognized stock option compensation expense.

A summary of the status of the Company’s restricted stock and changes during the years ended* December 31, 2023and2022* are presented below.

The Company issued 43,446 shares of restricted stock in2023 with a weighted average fair value of $26.46 per share. For the year ended* December 31, 2023,total compensation expense recorded in the consolidated statements of income related to restricted stock awards was $533,000, with an offsetting tax benefit of $158,000, as this expense is deductible for income tax purposes. The Company recorded a tax benefit of $73,000 to income tax expense to adjust for the full tax deduction of the vested restricted stock, which is equal to the fair value on the vesting date, as the tax benefit from the restricted stock expense is based on the grant date fair value. As of December**31,* 2023, there was $1,647,000 of total unrecognized compensation cost related to restricted stock awards which is expected to be recognized over a weighted-average period of 3.67 years. During2023, shares of restricted stock awards totaling 32,178 with a fair value of $861,000, based on the vested date of each award, were vested and became unrestricted.

F-31

The Company issued 27,047 shares of restricted stock in2022 with a weighted average fair value of $18.86 per share. For the year ended* December 31, 2022,total compensation expense recorded in the consolidated statements of income related to restricted stock awards was $622,000, with an offsetting tax benefit of $184,000, as this expense is deductible for income tax purposes. The Company recorded an additional tax expense of $3,000 to income tax expense to adjust for the full tax deduction of the vested restricted stock, which is equal to the fair value on the vesting date, as the tax benefit from the restricted stock expense is based on the grant date fair value. As of December**31,* 2022, there was $1,037,000 of total unrecognized compensation cost related to restricted stock awards which is expected to be recognized over a weighted-average period of 3.23 years. During2022, shares of restricted stock awards totaling 31,074 with a fair value of $582,000, based on the vested date of each award, were vested and became unrestricted.

NOTE12 — EARNINGS PER SHARE

EPS are based upon the weighted average number of common shares outstanding during each year. The following table shows: (1) weighted average basic shares, (2) effect of dilutive securities related to stock options and non-vested restricted stock, and (3) weighted average diluted shares. Basic EPS are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding dilutive stock options and unvested restricted stock awards. Diluted EPS are calculated using the weighted average diluted shares. The total dilutive shares included in annual diluted EPS is a year-to-date weighted average of the total dilutive shares included in each quarterly diluted EPS computation under the treasury stock method. We havetwo forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under thetwo-class method the difference in EPS isnot significant for these participating securities.

The Company’s calculation of EPS including basic EPS, which doesnot consider the effect of common stock equivalents and diluted EPS, which considers all dilutive common stock equivalents is as follows:

NOTE13 — COMMITMENTS AND CONTINGENT LIABILITIES

The Company is obligated for rental payments under certain operating lease agreements, some of which contain renewal options and escalation clauses that provide for increased rentals. Total rental expense for the years ended* December**31,* 2023 and2022, was $1,523,000 and $1,295,000, respectively.

We have historically entered into a number of lease arrangements under which we are the lessee. We have elected the practical expedient to rely on our original lease classification at the commencement of each lease contract, andnot reassess the lease classifications upon the adoption of ASUNo. 2016-02, Leases (Topic842*)on the effective date of January 1, 2019.Therefore, all of the Company’s leases are determined to be operating leases. The other practical expedients the Company adopted are: (1) combining lease and non-lease components into a single liability amount and (2) leases with fair values of less than$5,000* werenot included as they arenot considered to be material. The Company doesnot have any short-term leases in which the original term at commencement istwelve months or less and therefore there isno impact of short-term leases on the initial ROU or lease liability recorded on* January 1, 2019.*

Most of our office leases includeone or more optional renewal periods. The Company hasnot elected the hindsight practical expedient and therefore potential payments related to future lease renewal options arenot reflected in the ROU asset and lease liability. Generally, all of the lease contracts have annual rent payment increases, some of which are based on the Consumer Price Index and others are fixed increases that are set forth within the contracts. The majority of our lease contracts are gross leases, in which a single monthly payment includes the lessor’s property and casualty insurance costs, property taxes, and common area maintenance associated with the property.

The Company determined the operating lease liability for new lease agreements and renewal options in2022 and2023 by calculating the present value of future cash payments, excluding any future renewal options as it wasnot reasonably certain that they will be exercised. A discount rate was applied to the cash obligation schedule to calculate the present value of the operating lease liability. The discount rate was based on our incremental borrowing rate through our line of credit with the FHLB, for the borrowing term that was equal to the term of each lease. As of* December 31, 2023,the weighted average remaining term of the lease contracts was 7.5 years, and the weighted average discount rate used to calculate the present value of the operating lease liability was 2.94%. As of December 31, 2022,the weighted average remaining term of the lease contracts was 8.2 years, and the weighted average discount rate used to calculate the present value of the operating lease liability was 2.80%. The operating lease liability totaled $7,159,000 and $8,007,000 as of December 31, 2023and2022,* respectively, and is included in interest payable and other liabilities in the condensed consolidated balance sheet. The ROU asset totaled $6,853,000 and $7,755,000 as of* December 31, 2023and2022,* respectively, is recorded in interest receivable and other assets on the condensed consolidated balance sheet.

At* December**31,* 2023, the future minimum commitments under these operating leases are as follows (in thousands):

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

F-33

Financial instruments at* December 31, 2023*whose contract amounts represent credit risk:

Commitments to extend credit, including undisbursed loan commitments and equity lines, are agreements to lend to a customer as long as there isno violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and* mayrequire payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts donot* necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but* may*include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.

Checking reserves are lines of credit associated consumer deposit accounts that meet qualification standards for extension of credit if the deposit account were to become overdraft.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to athird party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

NOTE14 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Fair values of financial instruments— The consolidated financial statements include various estimated fair value information as of* December**31,* 2023 and2022. Such information, which pertains to the Company’s financial instruments, doesnot purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change.

We determine the fair values of our financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value:

Level1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

In certain cases, the inputs used to measure fair value* mayfall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There wereno* transfers between levels during the years ended* December 31, 2023and2022.*

F-34

Following is a description of valuation methodologies used for assets and liabilities in the tables below:

Restricted Equity Securities-* The carrying amounts of the stock the Company owns in Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) approximate their fair value and are considered a level2* valuation.

Deposit liabilities — The fair values estimated for demand deposits (interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits. The fair value of deposits is determined by the Company’s internal assets and liabilities modeling system that accounts for various inputs such as decay rates, rate floors, FHLB yield curve, maturities and current rates offered on new accounts. Fair value on deposits is considered a level3 valuation.

Off-balance-sheet instruments — Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties. The Company considers the Bank’s off balance sheet instruments to be a level3 valuation.

The estimated fair values of the Company’s financial instrumentsnot measured at fair value as of* December 31, 2023*were as follows:

The estimated fair values of the Company’s financial instrumentsnot measured at fair value as of* December 31, 2022*were as follows:

F-35

The following table presents the carrying value of recurring and nonrecurring financial instruments that were measured at fair value and that were still held in the consolidated balance sheets at each respective period end, by level within the fair value hierarchy as of* December 31, 2023and2022.*

Available-for-sale and equity securities* -Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices arenot* available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level3 include asset-backed securities in less liquid markets where significant inputs are unobservable.

F-36

Loans Evaluated Individually - The Company doesnot record portfolio loans at fair value on a recurring basis. However, periodically, a loan is evaluated individually and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. If the collateral value isnot sufficient, a specific reserve is recorded. Collateral values are estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized discounting criteria. Due to the significance of unobservable inputs, fair values of individually evaluated collateral dependent loans have been classified as Level3.

There have beenno significant changes in the valuation techniques during the year ended* December 31, 2023.*

NOTE15 — RELATED PARTY TRANSACTIONS

The Company, in the normal course of business, makes loans and receives deposits from its directors, officers, principal shareholders, and their associates. In management’s opinion, these transactions are on substantially the same terms as comparable transactions with other customers of the Company. Loans to directors, officers, shareholders, and affiliates are summarized below:

Related party deposits totaled $10,533,000 and $13,564,000 at* December**31,* 2023 and2022, respectively.

From time to time, some of the Company’s Directors, directly or through affiliates,* mayperform services for the Bank. These activities are performed in the ordinary course of the Bank’s business and are subject to strict compliance with the policies outlined below. In2023,* the Company made payments totaling $250,000 to Crown Painting and Design Studio120, companies affiliated with a Director’s daughter, for renovation and design work performed in connection with various projects and maintenance on the Bank’s branches. In2022, the Company made payments totaling $782,000 to these same related party companies for similar services. Except for such payments,no other material services or activities were performed for purposes of Item404(a) of Regulation S-K under the Exchange Act.

NOTE16 — PROFIT SHARING PLAN

The profit sharing plan to which both the Company and eligible employees contribute was established in1995. To be eligible, employees must completesix months of service and be 21 years of age or older. Bank contributions are voluntary and at the discretion of the Board of Directors. Contributions were approximately $1,060,000 and $921,000 for the years ended* December 31, 2023and2022,* respectively.

NOTE17 — RESTRICTIONS ON DIVIDENDS

Under current California State banking laws, the Bank* may**not* pay cash dividends in an amount that exceeds the lesser of retained earnings of the Bank or the Bank’s net earnings for its lastthree fiscal years (less the amount of any distributions to shareholders made during that period). If the above requirements arenot met, cash dividends* mayonly be paid with the prior approval of the Commissioner of the Department of Financial Protection and Innovation, in an amountnot* exceeding the Bank’s net earnings for its last fiscal year or the amount of its net earnings for its current fiscal year. Accordingly, the future payment of cash dividends will depend on the Bank’s earnings and its ability to meet its capital requirements.

NOTE18 — OTHER POST-RETIREMENT BENEFIT PLANS

Certain officers have entered into salary continuation agreements with the Company (the “Salary Continuation Agreements”). Under the Salary Continuation Agreements, the participants will be provided with a fixed annual retirement benefit forten totwenty years after retirement. The Company is also responsible for certain pre-retirement death benefits under the Salary Continuation Agreements. In connection with the implementation of the Salary Continuation Agreements, the Company purchased single premium life insurance policies on the life of each of the officers covered under the Salary Continuation Agreements. The Company is the owner and partial beneficiary of these life insurance policies. The assets of the Salary Continuation Agreements, under Internal Revenue Service regulations, are owned by the Company and are available to satisfy the Company’s general creditors. In connection with the purchase of the life insurance policies, the Company entered into split-dollar life insurance agreements with each of the insured officers, which pays the officers’ beneficiaries a pre-determined death benefit amount as set forth in the agreement, with the remainder of the death benefit paid to the Company.

During* December**2001,* the Company adopted a director retirement plan (“DRP”). Under the DRP, the participants will be provided with a fixed annual retirement benefit forten years after retirement. The Company is also responsible for certain pre-retirement death benefits under the DRP. In connection with the implementation of the DRP, the Company purchased single premium life insurance policies on the life of each director covered under the DRP. The Company is the owner and partial beneficiary of these life insurance policies. The assets of the DRP, under Internal Revenue Service regulations, are the property of the Company and are available to satisfy the Company’s general creditors.

Future compensation under both types of arrangements is earned for services rendered through retirement. The Company accrues for the salary continuation liability based on anticipated years of service and vesting schedules provided under the arrangements. The Company’s current benefit liability is determined based on vesting and the present value of the benefits at a corresponding discount rate. The discount rate used is an equivalent rate for investment-grade bonds with lives matching those of the service periods remaining for the salary continuation contracts, which average approximatelyten years. At* December**31,* 2023 and2022, $5,808,000 and $5,413,000, respectively, has been accrued to date, and is included in other liabilities on the consolidated balance sheets.

The combined cash surrender value of all Bank-owned life insurance policies was $31,506,000 and $30,218,000 at* December**31,* 2023 and2022, respectively.

NOTE19 — REGULATORY MATTERS

The Company is regulated by the FRB and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. As a California state-chartered bank, the Company’s banking subsidiary is subject to primary supervision, examination and regulation by the California Department of Financial Protection and Innovation (DFPI) and the Federal Reserve Board. The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law. Management isnot aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on the Company’s or Bank’s liquidity, capital resources, or operations.

The U.S. Basel III rules contain capital standards regarding the composition of capital, minimum capital ratios and counter-party credit risk capital requirements. The Basel III rules also include a definition of common equity Tier1 capital and require that certain levels of such common equity Tier1 capital be maintained. The rules also include a capital conservation buffer, which imposes a common equity requirement above the new minimum that can be depleted under stress and could result in restrictions on capital distributions and discretionary bonuses under certain circumstances, as well as a new standardized approach for calculating risk-weighted assets. Under the Basel III rules, we must maintain a ratio of common equity Tier1 capital to risk-weighted assets of at least 4.5%, a ratio of Tier1 capital to risk-weighted assets of at least 6%, a ratio of total capital to risk-weighted assets of at least 8% and a minimum Tier1 leverage ratio of 4.0%. In addition to the preceding requirements, all financial institutions subject to the Rules, including both the Company and the Bank, are required to establish a "conservation buffer," consisting of common equity Tier1 capital, which is at least 2.5% above each of the preceding common equity Tier1 capital ratio, the Tier1 risk-based ratio and the total risk-based ratio. An institution that doesnot meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The conservation buffer became fully effective on* January 1, 2019.*

F-38

Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on the Company’s financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that rely on quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Company and Bank’s actual capital amounts and ratios at* December**31,* 2023 and2022, are presented in the following table.

NOTE20 – PARENT ONLY CONDENSED FINANCIAL STATEMENTS

CONDENSED BALANCE SHEETS

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NOTE20 – PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)

CONDENSED STATEMENTS OF INCOME

F-41

NOTE20 – PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)

CONDENSED STATEMENTS OF CASH FLOWS