Avidbank Holdings, Inc.

Good morning. Thank you for joining us today for Avid Bank's fourth quarter 2025 earnings call. Before we begin, let me remind you that today's call is being recorded and is available in the investor relations section of our website at avidbank.com, along with our earnings release and presentation material. Today's call contains forward-looking statements which are subject to certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed. These statements are intended to be covered by safe harbor provisions of the federal securities laws. For a list of factors that may cause actual results to differ materially from expectations, please refer to our earnings release under the heading forward-looking statements, as well as the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release. With that, I'd like to turn the call over to our chairman and CEO, Mark Mordell.

Thank you, Gina. Thank you, Jordan. And thank you all for joining us for our second earnings call from being a public company. And I apologize for my voice. I'm just getting over a little bit of a flu from the beginning of this week. You know, we had a great quarter, I think, a real strong quarter of growth, which is really what we've been striving for really since the crisis in 23. And we're leaning into being that growth bank again. And we've been demonstrating that for the last couple of years at this point. You know, loans were up $190 million for the quarter and $283 million for the year, which is a 15% annualized growth rate. Deposits were up $92 million for the quarter and $241 million for the year. Again, a 13% growth rate for the year. When you look at the loans, they were led significantly by our sponsor finance and corporate banking team for the quarter, but really every vertical with the exception of construction contributed to that growth in terms of loan growth for the quarter. Deposits were similar. It was led by corporate banking and venture lending, but all divisions contributed to those growth in core deposits. which is really setting us up for a strong 2026 for sure, given those balances met our goals and are setting us up for a better earning engine for 2026. Talking about the elephant in the room, MPAs did go up. That's clear. But that centered around, as the earnings release mentioned, around two construction loans and one sponsor finance loan. The good news is that we said that we're well collateralized in those two construction loans, and one is already taking care of itself, or we've taken care of it. It's already been paid off. And that was about a $3.7 million construction loan. Because we were well collateralized, it didn't have to go to MPA, and they took care of that. The other loan is a $16 million construction loan, multi-unit mixed use in Palo Alto. And that's been a hangover from COVID, a lot of delays. We feel we're well collateralized there as well. We have houses and guarantees, and we just have to work through this. It's going to be on our books for anywhere from four to six months, probably, unless we can find a softer landing. So we feel we're well collateralized. So credit migration has not changed all that much when you consider that criticized and classifieds are pretty much holding steady at 37 and 38 million respectively. So we don't see any trends in credit. We don't take credit for granted here, as you all know very well. We're always anxious about credit, but I think the... Where we sit with these loans, we feel that we'll have to work through them, but we'll get out of them, and it shouldn't result in any losses as we can see at this point. I'll turn it over to Pat to talk about some of the income items and some of the metrics.

Thanks, Mark. Good morning, everyone. So we reported net income of $6.9 million, or $0.65 per diluted share for the fourth quarter, and adjusted net income for the full year of $24.9 million, or $2.80. Pre-provision net revenue for the fourth quarter was 12.9 million compared to 10.7 million for the third quarter. The NIM expanded to 413 in the fourth quarter compared to 390 in the third quarter. And net income increased to 25 million from 22.7 million as we benefited from the strong growth in loans and core deposits, the full impact from the IPO and repositioning of the investment portfolio, a 32 basis point decrease in the cost of interest-bearing deposits and the $44 million increase in average non-interest-bearing deposits. These items help offset the impact of the $726,000 interest reversal on the three new non-performing loans. We purchased an additional $62 million in investment securities during the fourth quarter at an average yield of $448, increasing the total available for sale balance to $218 million at the end of the year. with a yield of 461 compared to 255 in the third quarter. The provision of credit losses was 2.8 million in the fourth quarter compared to 1.4 million in the third quarter. The increase in the provision expense was primarily driven by the 190 million in loan growth along with a $1.2 million specific reserve on the downgraded commercial loan. Star jobs totaled 30 basis points in the fourth quarter and seven basis points for all of 2025. Noninterest expense rose to $13.9 billion, an increase of $372,000 from the third quarter. The increase was primarily due to higher credit-related legal fees, an increase in our FDI assessment due to the impact of the net income loss in the third quarter, and an increase in consulting and professional fees. These increases were partially offset by lower salary and benefits expense, driven by an increase in capitalized loan origination costs from the strong loan growth in the quarter and that was offset by a higher incentive accrual. Our adjusted efficiency ratio improved to 51.72% from 55.72% in the third quarter. The tax rate in the fourth quarter increased to 31.1% compared to 28.9% in the third quarter. The increase was primarily due to a decrease in the California tax rate as we finalized the impact from the change in the California tax law earlier this year. Since we reported a loss for 2025, the decrease in the California tax rate caused an increase in our effective rate for the fourth quarter. In 2026, I expect the tax rate to move back to around 28.5%. Mark, turn it back over to you.

Well, I think we're, again, as I mentioned earlier, we're kind of pleased with the progress that we've been making, getting the noise off our balance sheet from the securities restructuring and really looking to have a more of an evened out earnings projection for 26. So with that, I'm sure there are questions out there. We're happy to open it up for questions at this time.

At this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matthew Clark from Piper Sandler. Your line is live.

Hey, good morning. Good morning, Matthew. Yeah, I just wanted to start on the margin, if you had the spot rate on deposits at the end of the year.

I'm sorry? The spot rate on deposits. Oh, the spot rate. Yeah, so for interfering deposits at the year end, it was 291.

Okay, good. Yeah, so your beta, your deposit beta this quarter was 80%, pretty high. And the spot rate is encouraging. So how do you think about your deposit beta from here? I assume you can't hold 80%, but how are you thinking of managing that?

Yeah, so a couple of pieces there, right? We do have some of our deposits, about 20% of our interest-bearing deposits that are indexed that will move down directly. And then with every Fed rate cut, so far we've been pretty successful lowering deposit costs that, you know, kind of higher than what we model, you know, probably 60% beta on the rest of them for the December rate cut. You know, without a rate cut, it's hard to reduce deposit costs. In fact, there could be a risk it could go up a little bit because of where we put our new deposits. But with every Fed rate cut, hopefully we can I don't know if we can get 60% on the non-index, but hopefully we can get it. It appears like continue to get a pretty good deposit data down.

Okay, good, good. And then just update us on the sub-debt that's outstanding and what your plans might be there.

That's a 2026 thing for sure, Matthew. You know, we have been working on getting our investment grade ratings. And we'll do something certainly before another 20% burns off, given where rates have been and what we expect rates to happen. We'll take care of that in 26 years.

Okay, good. And then just on the deposit growth, non-interest bearing, really, really strong. Looks like venture contributed some of it, but Um, you know, where else is that coming from and was there anything lumpy in there or transitory or is it all sticky?

You know, and some of it is, some of it can be a little bit lumpy for us, especially with the growth that we had. I mean, it was across the board, right? So for the fourth quarter, you know, yeah, venture had a good quarter. They had a great year in DDA. Um, so did our fund finance group, Saudi corporate banking. Um, so it was across the board, but you know, this number is going to bounce around for us as a commercial bank. Right. We're not going to get the same level of growth in 26 that we saw in 25. The goal will be hopefully we can grow it at a similar pace to overall growth in deposits. That will be our goal at this point. But it does bounce around quite a bit.

Yep. Okay. Great. Thank you.

Next question comes from the line of Andrew Terrell from Stevens. Your line is live.

Hey, good morning.

Good morning, Andrew.

If I could just stick on the margin quickly, just with the non-accrual migration this quarter, was there any kind of interest reversal headwind that impacted the loan yields in the fourth quarter?

Yeah, so three loans we put on non-accrual, the $726,000 interest reversal, impacted the margin about 12 basis points. So for the quarter, probably would have been closer to $425,000 without that.

Okay. So I guess once you normalize that, if it's kind of 425 level post-normalizing the interest reversal, and then you've got what sounds like really strong repricing into the end of the period that I think should carry forward on the deposit side, I mean, could you help us with maybe near-term margin expectations? I mean, it feels like it should go like 430-ish plus. Is that an unfair assumption or any color on where you think the margin can go kind of near-term, Pat?

So, yeah, I mean, you could put the math together and see that. The headwinds that we just got to be careful of for us is where we're putting on new deposits as we're cutting existing deposit rates. And, you know, look, we're trying to fund loan growth here. So it's possible that new deposits come on at a higher rate than our existing deposit portfolio. It could put a little pressure on the deposit costs. Not significant, but that's a headwind. And then, look, we're benefiting from a lot of flowing floors at this point, right? We have 240 million F floors. know about 60 percent of that are maturing in 2026. so we know when those loans renew um that we're going to be resetting those rates so that's going to put a little bit of pressure on there so there is a few things that are headwinds that'll offset it from going up too much but you know we can keep it that 425 maybe a little bit higher than that that'd be great right but i don't expect to go up significantly from here got it okay now that makes sense i appreciate it um and just overall i mean um

Mark, you touched on it a bit in your comments. You guys have a banner year in growth for the balance sheet, both loans and deposits. Maybe setting yourself a high bar for 2026, but any initial thoughts on pipelines for both loans and deposits and your growth expectations for the year?

I'm not a big believer in cycles, but if you do look historically, Q4 has always been one of our stronger quarters and And first quarter has always been a little bit softer. I think based on the pipeline we saw in the second half of the year and what closed in Q4 and what's closing in Q1, that we do have good momentum and good pipelines throughout the bank, virtually in all divisions going forward. So we're still targeting that double-digit loan and deposit growth. I mean, that's what we are. We need to be that growth bank, you know, you know, bringing everybody back around again. I mean, we have, you know, high velocity and churn in our portfolio. I mean, we have to do almost $2 of new loans to net $1 new loans for the year, given the portfolio churn. This year was exceptional in construction. We had a significant amount of payoffs in our construction division, and that really held our loan growth down. So, you know, I think we always you know, always are targeting this, you know, 10% to 15% type of asset growth, you know, every year. So that's what we're targeting this year and feel that it's very accomplishable.

Great. Thank you for taking the questions.

As a reminder, if you'd like to ask a question, press star and the number one on your telephone keypad. Your next question comes from Ross Haberman from RLH Investments. Your line is live.

Morning, gentlemen. Thanks for taking my call. Pat, could you just talk about your expected loan growth in 26 and how is your backlog today?

I missed that. We're expecting, again, we're expecting loan growth for 26 to be you know, something between 10 and 15%. And we feel that the team that we have as well as what we're seeing in the pipeline and even the things that are cyclical, that that's an achievable number for us.

And just one follow-up question about the loan quality. Anything else on the delinquent or criticized that's keeping you up at night besides the ones you've described earlier?

Ross, they all keep me up at night because they can go one way or the other. And just as we that that criticized and classified is pretty dynamic, both positive and negative. And that's why we keep a pretty strong eye on it. But those ones are obviously, you know, we feel good that we're going to get out of the ones that we mentioned because we are well collateralized. But it is going to be a process. That's a distraction for all of us in order to kind of work through that. So there's nothing else in credit of any trend that we're concerned about. It's kind of business as usual at this point, you know, with migration happening both positive and negatively. But this was a big one. This is a $16 million one that really drove that number significantly up from where it was at the end of Q3. Okay.

Thank you very much, Doug. Best of luck. Thank you.

Next question comes from the line of Timothy Coffey from Jannie. Your line is live.

Okay, thanks. Morning, gentlemen.

Morning, Tim.

Is it a reasonable expectation to think that the loan-to-deposit ratio is either flat or slightly down this next year?

Yes.

Okay.

I think we're going to, I think we'd like to drive it down, but, you know, But I think we'd like to drive it down. You know, we're 100% core funded at this point, which is great. But I don't expect it to come down substantially.

Okay. Yeah, because of the cost that Pat was talking about earlier. Got it? Exactly. Yeah. And then looking at kind of the non-interest expense run rate, these last two quarters obviously elevated for, you know, specific reasons. Is that the kind of go forward run rate we're talking 13 and a half million plus?

Yeah. In fact, you know, the first quarter is always a little bit higher in the first place. So we'll go up from there in the first quarter from where we are in the Q4, right, with higher taxes, insurance costs going up. But, you know, we'll get a little bit of reset on the bonus accruals since that was high in the fourth quarter. And hopefully we'll, you know, legal credit related costs will come down a little bit. But, you know, it will creep up here from the fourth quarter in the first quarter and then hopefully back down a little bit. But Mark Broughton- You know it's it's that run rate is definitely going to be higher than the 13 and a half it'll be you know 14 plus here at this point going forward.

Mark Broughton- Okay that's awful thanks. Mark Broughton- And then mark just kind of talk about the opportunities in the market obviously you've been benefiting from the dislocation that happened almost three years ago now plus we've got America exiting the market. Do you feel more optimistic about the opportunity to take business from other banks than you have in the recent past?

I don't know if it's any more opportunistic, Tim, than it has been over time. I do think we've benefited from a lot of disruption because of our consistency and the way we are this high-touch bank, you know, big bank council with small bank service type of thing. There's going to be opportunity for us, and I think if our bankers are out there doing what they should be doing, they're going to uncover more and more opportunity. But I don't think it's a significant change about the disruption that happened in the second half of last year to what our plan is for this year. We always are opportunistic on people as well as clients.

Okay, great. Those are my questions. Thank you very much.

Thank you. there are no further questions i'd like to turn the call back over to the presenters for their closing remarks well again uh thank you thank you all for attending the earnings call and you know we're pretty optimistic getting going into uh 26 here we're pleased with how we ended the year in in 25 and are gonna do our best to, you know, take advantage of our IPO, take advantage of our restructuring and manage our balance sheets the best way we possibly can and continue to grow at a double digit rate. So hopefully in Q2 that, you know, we have this, or in the Q1 earnings, we have an earnings call that kind of matches up with this. So appreciate everybody's interest and support over time.

This concludes today's conference call. You may disconnect.