Avidbank NASDAQ: AVBH said its second-quarter results included a litigation settlement charge and a gain from bank-owned life insurance proceeds, while management characterized underlying loan and deposit growth and core profitability as continuing to improve.
Chairman and Chief Executive Officer Mark Mordell said the company recorded a $2.6 million pre-tax charge to settle litigation related to a fraudulent wire transfer involving a client account in fall 2024. The matter was resolved during the quarter. The company also recorded a gain associated with bank-owned life insurance, with the combined effect of the two discrete items reducing reported earnings, Mordell said.
Excluding those items, Avidbank reported adjusted net income of $8.2 million, or $0.76 per share, and an adjusted return on assets of 1.28%.
Credit trends and construction exposure
Asset quality improved in some measures during the quarter. Nonperforming loans declined to 0.65% of total loans from 0.75% at the end of the first quarter, according to Executive Vice President and Chief Financial Officer Pat Oakes.
However, the bank took a partial charge-off of about $1.9 million on a construction loan while working toward a resolution. The charge-off contributed to a $2.8 million provision for credit losses, up from $1.4 million in the prior quarter. Net charge-offs equaled 35 basis points of average loans for the period.
The allowance for credit losses was 0.97% of loans at quarter-end, compared with 0.96% in the first quarter.
Mordell said criticized loans increased, primarily because of a non-owner-occupied real estate relationship consisting of three loans totaling $29 million. He said the loans have low loan-to-value ratios and that the bank had proactively downgraded them. Oakes said one property triggered a debt-service-coverage covenant default, requiring the bank to downgrade all three loans. He said the relationship is expected to be paid down and worked through over the next 24 months.
Management said it was not seeing broad-based deterioration in the loan portfolio. Mordell also said the bank is refining its approach to mixed-use construction projects following recent challenges, while remaining bullish on its core business of financing spec single-family homes in the Bay Area.
Loan and deposit growth
Loans increased $51 million during the quarter, representing annualized growth of about 9%, and were up $312 million, or 16%, over the past year. Growth was primarily driven by commercial and industrial lending and commercial real estate, though it was partly offset by $36 million of construction and land loan payoffs.
Mordell said construction payoffs have been consistent for nearly 24 months but may be nearing a bottom. He described pipelines across the bank’s business units as robust and said the company continues to target low-double-digit loan and deposit growth for the full year.
Deposits rose $123 million in the quarter, or 22% on an annualized basis, led by core commercial relationships. Management said it expects deposit growth to remain positive in the second half, although Oakes cautioned that the second-quarter pace should not be expected every quarter.
During the call, Oakes said the bank added brokered deposits primarily in the first quarter and early in the second quarter, with many of those deposits scheduled to mature during the current quarter. If core deposit growth continues, the company’s objective is to allow much of that funding to run off and remain core funded.
Margin, expenses and capital
Net interest margin was 4.26% in the second quarter, down 12 basis points from 4.38% in the first quarter and in line with prior guidance. Net interest income increased $181,000 from the preceding quarter to $26.7 million, as higher average earning assets partly offset a lower Federal Home Loan Bank dividend and higher deposit costs.
The yield on loans was essentially unchanged at 6.67%, compared with 6.68% in the first quarter. The cost of interest-bearing deposits increased 8 basis points to 3.06%, reflecting deposit pricing pressure experienced in the first quarter and early in the second quarter. Oakes said pressure moderated later in the quarter, with the spot rate at 3.07% at June 30 versus 3.03% at March 31.
Oakes said margin could trend lower, potentially to 4.20%, if the bank continues to add deposits and shifts more earning assets into cash and the investment portfolio. He said loan yields should remain relatively stable, supported by predominantly prime-based floating-rate commercial and industrial loans and improving commercial real estate pricing.
Noninterest income totaled $3.1 million, including $1.3 million in bank-owned life insurance death-benefit proceeds. Excluding those proceeds, noninterest income was $1.7 million, compared with $1.5 million in the first quarter.
Noninterest expense was $16.5 million, including the $2.7 million litigation settlement. Excluding the settlement, core expenses declined to $13.8 million from $14.1 million in the prior quarter, largely due to lower credit-related legal and professional fees. The adjusted efficiency ratio improved to 48.7% from 50.4%.
Book value per share increased $0.64 to $26.97. The Tier 1 leverage ratio was 11.50% and the total risk-based capital ratio was 12.79% at quarter-end.
SBA expansion and hiring plans
Avidbank launched an SBA lending division led by Managing Director of SBA Lending Brian Harper. Mordell said the new unit includes business development, credit and operations personnel and will expand the bank’s commercial lending platform.
Oakes said the division will focus on SBA 7(a) production under an originate-to-sell strategy, with the intention of selling the guaranteed portion of loans. The bank already originates some SBA 504 loans, which it holds selectively, he said.
The company ended the quarter with 162 full-time employees, up from 154 at the end of the first quarter. The additions included five senior revenue-generating bankers and support personnel across business lines. Mordell said the bank expects hiring to add near-term expense but views the investment as supporting future growth, particularly as market disruption creates opportunities to recruit talent and serve clients affected by consolidation.
About Avidbank (NASDAQ:AVBH)
Avidbank Holdings, Inc operates as a bank holding company for Avidbank that provides financial products and services to small and middle-market businesses, professionals, and individuals in the Santa Clara, San Mateo, and San Francisco counties. It offers business and personal deposit products, such as checking, money market, and savings accounts; and certificates of deposit. The company also provides personal lending products include secured and unsecured lines of credit, home equity lines of credit, remodel and new home construction loans, and term loans; corporate banking comprises working capital lines of credit, equipment loans, acquisition financing, shareholder buyouts, ESOP loans, and owner-occupied real estate loans; and commercial real estate lending, such as permanent loans and bridge financing products.
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