Avidbank Holdings (AVBH) Q3 2026 earnings call transcript

Good morning. Thank you for joining us today for the AvidBank Holdings 3rd 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, or 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-GAP financial measures alongside our discussion of GAP results.

We encourage you to review the GAP to non-GAP 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. And 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 we're up 17% over the past year. Growth was broad-based with contributions from CNI, 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 payoffs to remain elevated here in the fourth quarter. We believe we're 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 at $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, we generated approximately $76 million of core deposit growth.

That growth came from relationships across the franchise, and as 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 landlord on non-acrual. 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 also essentially zero during the quarter, and we are not seeing any broad-based credit deterioration across the portfolio.

We also strengthen 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'm 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. Shick it 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'll end my remarks and turn the call over to Pat to walk through the quarter more detail.

Thanks, Mark. Good morning, everyone. For the third quarter, we reported 94 cents per deluded chair compared with 71 cents per deluded chair 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 security portfolio. The 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 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 and 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 nine 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, boldly 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 two-run leverage ratio was 1082 and our total risk-based capital was 1348. Book value per share was 2724, a 4% annualized increase from the second quarter, despite the negative impact of high-run realized losses as long-term interest rates increased. Book value per share has increased 90% since last September.

With that, Mark, 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 you're excluding all these temporary deposits. You know, we're estimating the spot rate at September 30th, which was around 313 up from a 307 last quarter. So about six basis points increase so far. And that was all driven by the September rate increase. You know, obviously we'll see a little more pressure here going forward, but we think that we'll better keep that beta. We're pretty optimistic below 50. How much below that? We'll have to see hopefully quite a bit, but I don't think it'll go below above 50. Hopefully closer to 40 somewhere.

You know, with all this noise, I don't really want to give us a timber margin. That's what kind of all we got at you to that 17 basis point increase. So if you put that on, you know, if you kind of normalize cash balance is right, that margin was probably down a little bit, a couple of basis points here from last quarter.

So, you know, it normalize margin probably is closer to, you know, the low four twenties. Before the rate increase, obviously from the September rate increase.

Morning, Gary.

There's no reason to expect that Q4 shouldn't be a pretty strong quarter for us. It seems, you know, I don't like patterns all that much, but you go back five or six years. It seems Q3, Q4 are always stronger and Q4.

So we feel good about what we're seeing in the pipeline and what can close for the remainder of the year.

Well, that 10 million will mature in the fourth quarter. And then we'll decide if we want to add some four year end up and now, you know, from a funding perspective, feel like it's a good deal to do that as a funding tool, but the existing stuff should all be gone and we'll just make some decisions going forward.

How we use it?

The hiring pipeline for the balance of the year is going to be pretty modest if we still always be opportunistic. But I think the, you know, the focus in SBA right now is we got a reasonable pipeline to focus on becoming a preferred lender. So we expect that to happen, you know, realistically Q one realistically. So, you know, I don't think we're going to sell any, you know, any, any loans or anything of that nature. We're just getting our infrastructure underneath us and getting some, getting these things processed, taking a little bit longer because we're 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.

You know, they'll make an impact on some balances this year, but it'll be pretty modest and next year is the expectation of really getting some traction.

You know, the, especially deposits folks that we have the HOA, they've, they've 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 27 being the year that they are much more impactful and much more impactful on our balance sheet.

Other than that, the bankers that we've hired and, you know, certainly we've, as everyone's aware, we hired a new president. So, you know, we're, we're really building on a team and focusing on the infrastructure for 27. I mean, we've taken care of capital and taking care of facilities. We've taken care of our sub debt. We uplisted. We got some currency to trade and it's about stacking up quarter to quarter year to year and compounding earnings going forward. So, we're pretty focused on, on the production that from our existing bankers, as well as the new bankers.

Well, I think we're really hoping we've set a bar below 50 at this point or around 50 to down. Right. And, you know, it's not going to move down quickly. Right. But I think the ultimate goal is to hopefully leverage obviously all the hiring that we're doing to grow revenue at a good pace off set that expense growth. So we're still going to add people and all that stuff. So hopefully does continue to move down, but I think it'll be a slow incremental move down if it is.

I would agree with that.

Right. So we'll benefit when the Fed increases rates, right? And then outside of that, you're asking what's going to happen with that, you know, it's boy. It's really dependent. You know, loan yield, you can see what it's going to do, right? It'll it'll be flattish and move up with when the increase rates. It's really dependent on deposit costs and how much we do pay up. It's pretty competitive out there. I'm hoping that that gets better, but could there be pressure going forward potentially?

Well, it's really just hard because it's all the funding side that really dictates that and new and the new deposit growth. I think I'm hoping with some of these new initiatives like the HOA and some other things we're working on that we can drive down that deposit costs over time to take some of that pressure away. So I guess my long answer would be, I hope not. I hope we can keep it stable.

You know, it's certainly possible depending on where they go. But I think, you know, most of the companies that we're banking here, you know, have been pretty seasoned and aren't highly leveraged. So, you know, those rate hikes are painful for our clients for sure. But I don't, I don't, we monitor pretty closely. We do sensitivity tests and see where the threshold may happen. But, you know, at this point, we're not concerned about that. You know, I think companies are performing pretty well and they got some margin there. So we feel pretty good about it.

For this year, you know, it's lower than it typically is because of the holding proceeds received at the second quarter kind of drove that down for the year. And I think it'll take back up next year to that, you know, mid 28.

This is Mark. And, you know, one 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 and construction, which were significantly delayed, you know, from getting started. So I think the wild card for actual loan growth of how much that's going to be is going to be what kind of pay off actually materialized in Q4 here. I think we're coming to the end of it, like I mentioned earlier, but that's probably the wild card for Q4.

They've been booking new commitments, but those of you that understand how construction works that we're trading 100% funded loans for 10% funded loans for the new ones that are coming on, because it does take, you know, 18, 24 months to be fully fully drawn on. So just just a little bit of of caution. That's probably the wild card because it's been a two year, two year of consistent payoffs, which is a good thing in construction, but it does impact overall loan growth.

So with that, I'll close it up and say, again, thank you all for your interest in Abbott Bank. If you have any further questions that Pat or I can answer, please feel free to reach out and appreciate your interest. Have a great rest of your day.