Avidbank Holdings, Inc. Common stock 2026 Q3 Earnings Call

Good morning. Thank you for joining us today for the Avidbank Holdings third quarter 2026 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. 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 would like to turn the call over to our Chairman and CEO, Mark 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 continued to grow loans, and 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%, and our efficiency ratio was below 50%. I think these results demonstrate the improvement 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 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 payoffs 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, the 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 brokered deposits, we 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, non-performing loans increased modestly to 70 basis points of total loans after we placed a $1.5 million land loan on non-accrual. 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 credit deterioration across the portfolio. We also strengthened our capital during the quarter by issuing the $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, particularly 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 Pat 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. The net interest margin was 407 basis points 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 cash balances that were $205 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 97 in the quarter, primarily because of the impact of the temporary deposits. Excluding those deposits, the spot rate at September 30 increased to 313 from 307 at June 30, primarily due to the September increase in the Fed funds rate. Non-interest 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. Non-interest 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 turn it back to you.

All right. Thank you, Pat. That kind of summarizes the quarter. Now I think we're ready to open up to questions, please.

Sure. So, excluding all these temporary deposits, we estimate the spot rate at September 30th was around 3.13%, up from a 3.07% last quarter. So about six basis points increase so far. That was all driven by the September rate increase. Obviously, we will see a little more pressure here going forward, but we think that we will be able to keep that beta. 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, closer to 40 somewhere.