Avidbank Holdings, Inc. (AVBH) Q3 2026 Earnings Report, Transcript and Summary

Good morning. My name is Ben, and I will be your conference operator today. At this time, I would like to welcome everyone to the Avid Bank Holdings Inc. Third Quarter 26 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, will be a question and answer session. If you would like to ask a question during this time, simply press Star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press Star 1 again. Thank you. I would like to introduce the presenters Chairman and CEO, Mark D. Mordell; Chief Financial Officer, Patrick Oakes; and Chief Operating Officer, Gina Thoma Peterson. You may begin your conference.

Good morning. Thank you for joining us today for the Avid Bank Holdings third Quarter 26 Earnings Conference 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 materials. 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 the Safe Harbor provisions of the Federal Securities Laws. 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 would like to turn the call over to our Chairman and CEO, Mark D. Mordell.

Thank you, Gina. Thank you all for joining us this morning. We appreciate your continued interest and support in our company and our story. Overall, the third quarter was very strong for us. Profitability improved, We continue to grow loans our bankers generated meaningful core deposit growth across the franchise. Net income increased to 10.2 million for the quarter Return on average assets improved to 1.42%, our efficiency ratio was below 50%. I think these results demonstrate the improvement in the earnings power of our franchise and the benefit of the investments we have made in our people and business lines. Turning to growth. Loans increased approximately 58 million for the quarter or 10% annualized and were up 17% over the past year. Growth was broad based with contributions from C&I, multifamily, and owner occupied commercial real estate being the chief drivers. Our loan pipelines continue to be healthy, into Q4 and, hopefully, into next year. Our construction and land portfolio continues to decline because of the elevated payoffs, so the growth we generated across the rest of the bank was particularly encouraging. As mentioned earlier, our loan pipelines continue to be strong, and we do expect construction paths to remain elevated here in the fourth quarter. We believe we are getting closer to the point where that headwind begins to moderate and becomes more normalized, as it has over the last 15 years. On deposits, reported increase included approximately a $270 million deposit from an existing client following the sale from a portion of their business. We knew from the beginning that these funds would be temporary. And we expect them to leave over the course of the fourth quarter. More importantly, excluding that temporary inflated balance, and broker deposits, generated approximately 76 million of core deposit growth. That growth came from relationships across the franchise and is a good indication of the progress our bankers are making on the funding side of the balance sheet. Turning to credit. Nonperforming loans increased modestly to 70 basis points of total loans after we placed a $1.5 million landlord on nonaccrual. You know, as I said many times before, we never take credit for granted. We continue to monitor the portfolio closely. And actively manage the credits that require additional attention. At the same time, net charge offs were essentially zero during the quarter, and we are not seeing any broad based deterioration credit deterioration across the portfolio. We also strengthened our capital during the quarter by issuing $30 million of new subordinated debt and redeeming our existing $22 million issuance. That provided additional support for continued organic growth while maintaining strong capital ratios. Overall, I am pleased with the quarter. We are generating better profitability, maintaining solid growth across diversified commercial banking platform, and are continuing to invest in the franchise. there is always more work to do around the funding and the credits we are actively managing, but I believe we are well positioned to move into the fourth quarter. With that, I will end my remarks and turn the call over to Patrick to walk through the quarter in more detail.

Thanks, Mark. Good morning, everyone. For the third quarter, we recorded $0.94 per diluted share compared with $0.71 per diluted share in the second quarter. Net interest income increased $2 million to 28.7 million benefiting from higher cash balance related to the increase in deposits. Higher loan balances, and a larger investment securities portfolio. Net interest margin was 4.07% in the third quarter, down 19 basis points from the second quarter. We estimate that 17 basis points of the decline resulted from average interest earning balance, cash balances that were $2.00 $5 million higher during the quarter. Including the impact from the temporary deposits Mark mentioned earlier along with the overall strong growth in deposit average balances. The September increase in the Fed funds rate occurred late in the quarter, so it only had a minimal impact on the third quarter margin. Looking ahead, we anticipate that our asset sensitive balance sheet will benefit from the rate increase in the fourth quarter. The cost of our interest bearing deposits decreased 9 basis points to 0.97 in the quarter, primarily because of the impact of the temporary deposits. Excluding those deposits, the spot rate at September 30 increased to 3.13 from 3.07 at June 30. Primarily due to the September increase in the Fed funds rate. Noninterest income was 1.7 million compared with 3.1 million in the second quarter. The second quarter included approximately $1.3 million of tax exempt BOLI death benefit proceeds. Noninterest expense was 15.1 million compared with $16.5 million in the second quarter. The prior quarter included a $2.6 million litigation settlement Without that settlement, expenses increased 1.3 million driven primarily by higher compensation expense and credit related legal expenses and professional fees. We ended the quarter with 171 full-time equivalent employees, compared with 162 at June 30 and 151 at year end. Turning to capital, At quarter end, our tier 1 leverage ratio was 10.82, and our total risk based capital was 13.48. Book value per share was $27.24. A 4% annualized increase from the second quarter despite the negative impact of higher unrealized losses. As long term interest rates increased. Book value per share has increased 9% since last September. With that, Mark, I will turn it back to you.

Alright. Thank you, Patrick. That kind of summarizes the quarter. Now I think we are ready to open up to questions, please.

At this time, I would like to remind everyone in order to ask a question, press Star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question from the line of Matthew Clark with Piper Sandler. Your line is open. Please go ahead.

Hey, good morning, everyone. Just round out the margin discussion, Patrick, I think you gave a spot margin, but you have the spot rate on deposit at the end of September, maybe even an adjusted spot rate, assuming those balances that 270 leaves. And then what kind of beta are you trying to manage toward through the cycle here?

Sure. So we are excluding all these temporary deposits. You know, we are estimating the spot rate at September 30 was around $3.13. You know, up from a $30.07 last quarter. So about 6 basis points increase so far. And that was all driven by the you know, September rate increase. You know, obviously, we will see the more pressure you are going forward, but we think that you know, we will be able to keep that beta. We. You know, we are pretty optimistic below 50. How much below that? We will have to see. Hopefully, quite a bit, but I do not think it will go above 50. Hopefully, you know, closer to 40 somewhere.

Okay. And maybe-- sorry. I missed that earlier. And then just the adjusted margin in September, you know, I know it is 17 basis points impact from the temporary balances. But, I guess, in the month of September, how did that adjusted margin look?

You know, I with all this noise, I do not really wanna give a September margin. I-- that is kind of what we guided you to 17 basis point increase. So if you put that on you know, if you kinda normalize cash balances, right, that margin was probably down a little bit, couple of basis points here from last quarter. So a normalized margin probably is closer to, you know, the low 420s. before the rate increase, obviously, or the September rate increase. Yep. Yep. Understood. Okay.

Then just on expenses, the run rate here you expect going forward on operating expenses?

You know, we will probably still see salary and benefits increase here. But I think that is gonna be pretty much offset by some of these higher legal and professional fees that we saw in the quarter. So, you know, my best guess is flattish to maybe up slightly for the fourth quarter. Okay.

Okay. Thank you.

Your next question from the line of Gary Tenner with D. A. Davidson. Your line is open. Please go ahead.

Thanks. Good morning.

Good morning, Gary.

I wanted to-- hey. I wanted to just ask a question on the loan front. Mark, you gave some color, obviously, in construction book, and this quarter's growth overall was good. I know historically, the fourth quarter has been a good quarter for C and I. As you look at the pipelines now and think about the fourth quarter, any reason to think that will not be kind of the typical outcome in the fourth quarter?

there is no reason to expect it Q4 should not be a pretty strong quarter for us. It seems, you know, I do not like patterns all that much, but you go back 5 or 6 years, it seems Q3, Q4 are always stronger, and Q4 is a-- you know, so we feel good about what we are seeing in the pipeline and what we closed for the remainder of the year. Okay. Appreciate that.

And then just a minor question on the broker deposits I think, down to about 10 million at the end of September. Patrick, will those go to zero in the fourth quarter? Or will any linger into 2027?

Well, that 10 million will mature in the fourth quarter. And then we will decide if we wanna add some for year end depending how from a funding perspective, feel like it is a good deal to do that as a funding tool, but the existing stuff should all be gone, and we will just make some decisions going forward. How we use it. Okay.

Thank you. Thank you.

Again, if you would like to ask a question, press star then the number 1 on your telephone keypad. Your next question from the line of Andrew Terrell with Stephens. Your line is open. Please go ahead.

Hey, good morning. Patrick or Mark, maybe just to start, can you just talk about some of the new hires you have made? It did not seem like an early quarter from a hiring standpoint. I would be curious on just the HOA group, SBA team, and then just give us maybe an update or refresh on kind of the hiring pipeline more broadly?

The hiring pipeline for the balance of the year is going to be pretty modest if we will still always be opportunistic. But I think the, you know, the focus in SBA right now is We got a reasonable pipeline. We are focused on becoming a preferred lender. So we expect that to happen you know, realistically, Q1 realistically. So, you know, I do not think we are going to sell any, you know, any 7. Any loans or anything of that nature. We are just getting our infrastructure underneath us and getting some. Getting these things processed, taking a little bit longer because we are not a preferred lender at this point. So I think the HOA guys. HOA team is doing what they need to be doing, pretty focused, know, they will make an impact on some balances this year, but it will be pretty modest. And next year is the expectation of really getting some traction. You know, the specialty deposits folks that we have, the HOA, they have been pretty active. Again, they have goals for this year, but really getting their legs underneath them and getting some credibility in the marketplace and having 2027 being the year that they are much more impactful much more impactful on our balance sheet. Other than that, the bankers that we have hired and, you know, certainly, we have as everyone's aware, we hired a new president. So you know, we are we are really building on a team and focusing on the infrastructure for 2027. I mean, we have taken care of capital, we have taken care of facilities, we have taken care of our sub-debt, we have uplisted, we have got some currency to trade, and it is about stacking up quarter to quarter and year to year in compounding earnings going forward. So we are pretty focused on the production from our existing bankers as well as the new bankers.

Great. I really appreciate it. And then just to ask on maybe more of a question on kinda longer term expense growth. If I look at the efficiency ratio, I mean, the past. This is the kinda second quarter in a row, it is sub-50%. You guys are holding the line and revenue growth obviously helps. But when we think about longer term efficiency ratio, is mid to high 40%, is that a reasonable bar just as you look out and you think about the expense growth and investments you need to make? Or do you think it can go, you know, further below that? Or just any thoughts on longer term efficiency.

Well, I think we are really hoping we have set a bar below 50 at this point or around 50 to down. Right? And, you know, it is not gonna move down quickly. Right? But I think the ultimate goal is to hopefully leverage, obviously, all the hiring that we are doing grow revenue at a good pace to offset that expense growth. We are still gonna add people and all that stuff. So hopefully, it does continue to move down, but I think it will be a slow incremental move down if it is. Right. I would agree with that. Okay. Great.

Thank you for taking the questions.

Your next question from the line of Andrew Liesch with Stonex Financial. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Just question, Patrick, if you have handy what new loan yields were coming on it during the quarter, maybe a blended average?

Yeah. So, you know, this is without fees. Right? This is just the core loan yield. Yeah. You know, it is more like 6.82 or so. in the 6.80s. Got it. So maybe a little bit higher with some fees.

So I think just then looking at the margin going forward, certainly, you will get some benefit from the rate hike. But net, just given that you are very much in growth mode, do you think the margin maybe will trail off a little bit over time even with some rate hikes. I mean, still, profitability gets better, but just, like, net, the margin might kinda get lower.

You know, we will. So, right. So we will benefit when the Fed increases rates. Right? And then outside of that, you are asking what is going to happen with that? You know, boy, it is really depending. You know, loan yield, you can see what it is gonna do. Right? It will be flattish and move up with. When they. When they increase rates. Really dependent on deposit cost and how much we need to pay up. it is pretty competitive out there. I am hoping that gets better, but could there be pressure going forward potentially Boy, it is really just hard because it is all on the funding side that really dictates that and new and the new deposit growth. I think I am hoping with some of these new initiatives like the HOA and some other things we are working on that we can drive down the deposit cost over time. Take some of that pressure away. So I guess my long answer would be I hope not. I hope we can keep it stable. Got it.

No. that is very helpful. You have covered all my other questions. I will step back.

Your next question from the line of Timothy Coffey with Green Capital. Your line is open. Please go ahead.

Hey, good morning, everybody. Mark, you are with, you know, looking into, you know, the face of the rate hiking cycle here, how resilient do you think your customers and your markets are to higher rates? Is there a point where we see a certain number of rate hikes and at that point, it starts to stall?

it is certainly possible depending on where they go. But I think you know, most of the companies that we are banking here, you know, have been are pretty seasoned and are not highly leveraged. So, you know, those rate hikes are painful for our clients for sure. But I do not I do not we monitor it pretty closely. We do sensitivity tests and see where the threshold is. The thresholds may happen, but you know, at this point, not concerned about that. I think companies have performed pretty well. And they got some margin there. So we feel pretty good about it. Great. Thank you for that.

And then, Patrick, is the right tax rate somewhere between 27% and 28%?

For this year. Know, I it is lower than it typically is because of the BOLI proceeds received in second quarter kind of drove that down for the year. And I think it will tick back up next year to, you know, mid-28. Okay.

Great. That was my questions. Thank you.

With no further questions, I would like to turn the call back over to the presenters.

This is Mark. And, you know, 1 of the things that I did fail to maybe clarify a little bit when we talked about the loan growth, We have really solid pipelines across, including construction. But we do have those elevated payoffs in construction, which were significantly delayed, you know, getting started. So I think the wildcard for actual loan growth for how much that is gonna be is gonna be what kind of payoffs actually materialize in Q4 here. I think we are coming to the end of it like I mentioned earlier. But that is probably the wildcard for Q4. We have been booking new commitments, but those of us that understand how construction works that we are trading 100% funded loans for 10% funded loans for the new ones that are coming on. It does take, you know, 18, 24 months to be fully drawn on. So just a little bit of caution, that is probably the wild card because it is been 2 years of consistent payoffs. is a good thing in construction, but it does impact our overall loan growth. So with that, I will close it up and say, again, thank you all for your interest in Avidbank. If you have any further questions that Patrick or I can answer, please feel free to reach out, and, appreciate your interest. Have a great rest of your day.

This concludes today's call. Thank you for attending. You may now disconnect.