NOTE 9 – COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance-Sheet Risk

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet client financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. We manage our liquidity position to make sure we have adequate liquidity and funding if there are significant draws on our unfunded commitments.

The Company has some commitments that are unconditionally cancellable at its discretion, and these amounts are not included in the totals below. The contractual amounts of financial instruments with off-balance-sheet credit risk at March 31, 2026 and December 31, 2025 were as follows:

Commitments to extend credit consist primarily of unfunded single-family residential and commercial real estate, construction loans and commercial revolving lines of credit. Construction loans are established under standard underwriting guidelines and policies and are secured by deeds of trust, with disbursements made over the course of construction. Commercial revolving lines of credit have a high degree of industry diversification. Commitments to make loans are generally made for periods of 10 years or less. The fixed rate loan commitments have interest rates ranging from 0% to 15.00% and maturities ranging primarily from 1 year to 23 years.

Standby letters of credit are generally secured and are issued by the Bank to guarantee the performance of a client to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to clients. The unamortized fees received for issuing the letters of credit were $159 thousand and $152 thousand at  March 31, 2026 and December 31, 2025, respectively. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.

Significant Concentrations of Credit Risk

The Company grants real estate mortgage, real estate construction, commercial and consumer loans primarily to clients in the California counties of San Mateo, San Francisco and Santa Clara. Although the Company has a diversified loan portfolio, a substantial portion of its portfolio is secured by commercial and residential real estate. Management believes the loans within this concentration have no more than the normal risk of collectability. However, a substantial decline in real estate values in the Company's primary market area could have an adverse impact on the collectability of these loans. Personal and business income represent the primary sources of repayment for a majority of these loans and management believes the risks presented by the concentration are further mitigated by diversification of property types within the Company's real estate portfolio and by conservative underwriting.

At March 31, 2026 and December 31, 2025, in management’s judgment, a concentration of loans existed in construction and commercial real estate related loans. At  March 31, 2026 and December 31, 2025, approximately 50% and 49%, respectively, of the Company's loans were construction and commercial real estate related, representing 9% and 41% of total outstanding loans at March 31, 2026, and 9% and 40%, respectively, at December 31, 2025.

Contingencies

The Company and the Bank are routinely involved in legal actions and claims which arise in the ordinary course of business. The outcome of these matters and the timing of ultimate resolution is inherently difficult to predict.

In accordance with Accounting Standards Codification Topic 450, the Company establishes accruals for contingencies, including any litigation, regulatory, or tax matters (but excluding standard business-related legal fees), when the Company believes it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We evaluate our outstanding legal and regulatory proceedings and other matters each quarter to assess our loss contingency accruals and make adjustments in such accruals, upward or downward, as appropriate, in light of additional information and based on management’s best judgment. For claims and legal actions where it is not probable that a loss may be incurred, or where we are not currently able to reasonably estimate the loss or range of loss, we do not establish an accrual. As of March 31, 2026, the Company did not record an accrued contingent liability for any legal proceedings. However, a loss is possible in future quarters, but is currently not probable and reasonably estimable, due to a lawsuit filed against the Company and the Bank in the Superior Court of California, County of Santa Clara, in November 2025 (Klearnow Corporation v. Avidbank and Avidbank Holdings, Inc., Case No. 25CV480309) in connection with a $4.5 million wire sent by the Bank on behalf of a client whose email was allegedly fraudulently compromised.

We do not believe that the ultimate resolution of any currently pending legal proceedings will have a material adverse effect on our business, financial condition or results of operations. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company or the Bank could have a material adverse effect on our business, financial condition or results of operations.