What Avidbank (AVBH) Said on Its Q3 Earnings Call

Key Points

• Strong third-quarter performance: Net income rose to $10.2 million, or $0.94 per diluted share, while return on average assets improved to 1.42% and the efficiency ratio fell below 50%.
• Loan and core deposit growth continued: Loans grew by about $58 million, or 10% annualized, and core deposits increased approximately $76 million excluding temporary and brokered deposits. However, elevated construction-loan payoffs are expected to remain a headwind in the fourth quarter.
• Margin and credit remain key watch points: Net interest margin declined to 4.07% due partly to higher cash balances, though management expects its asset-sensitive balance sheet to benefit from September’s rate hike. Nonperforming loans rose modestly to 0.70%, but charge-offs were nearly zero and management reported no broad-based credit deterioration.

Avidbank NASDAQ: AVBH reported higher third-quarter profitability, loan growth and core deposit growth, while executives said the company is preparing for elevated construction loan payoffs and continued competition for deposits.

Net income rose to $10.2 million in the third quarter, with diluted earnings per share of $0.94, compared with $0.71 in the second quarter. Return on average assets improved to 1.42%, while the efficiency ratio fell below 50%, according to Chairman and CEO Mark Mordell.

“Overall, the third quarter was very strong for us,” Mordell said. “Profitability improved. We continued to grow loans, and our bankers generated meaningful core deposit growth across the franchise.”

Loan Growth Offset by Construction Payoffs

Loans increased about $58 million during the quarter, representing a 10% annualized growth rate, and were up 17% from a year earlier. Growth was led by commercial and industrial lending, multifamily lending and owner-occupied commercial real estate.

Mordell said loan pipelines remain healthy entering the fourth quarter and into next year. However, construction and land lending continues to face elevated payoffs, which have reduced the size of that portfolio. He said the company expects those payoffs to remain elevated during the fourth quarter, although management believes the headwind is nearing a more normal level.

In response to an analyst question, Mordell said the fourth quarter has historically been a strong period for the bank and that current pipelines support that outlook. Still, he cautioned that the amount of construction loan payoffs will be a key variable for reported loan growth.

“They have been booking new commitments,” Mordell said, noting that new construction loans are typically less drawn at inception than maturing projects. “We are trading 100% funded loans for 10% funded loans for the new ones that are coming on.”

Deposits and Margin

Reported deposits included roughly $270 million from an existing customer following the sale of part of that customer’s business. Management said it knew the funds would be temporary and expects them to leave during the fourth quarter.

Excluding the temporary deposit balance and brokered deposits, Avidbank generated approximately $76 million of core deposit growth during the quarter. Mordell said the increase reflected relationship growth across the company’s franchise.

Net interest income increased $2 million from the second quarter to $28.7 million, aided by higher cash balances, loan balances and investment securities. The net interest margin was 4.07%, down 19 basis points sequentially.

Chief Financial Officer Pat Oakes said approximately 17 basis points of the margin decline resulted from average interest-earning cash balances that were $205 million higher during the quarter, including the temporary deposit balance. Excluding the impact of those balances, Oakes said normalized margin was likely in the low 4.20% range before the September increase in the federal funds rate.

Avidbank’s interest-bearing deposit cost declined 9 basis points to 0.97% in the quarter, primarily because of the temporary deposits. Excluding those deposits, the September 30 spot rate was about 3.13%, compared with 3.07% at the end of June. Oakes said the company aims to keep its deposit beta below 50%, and preferably closer to 40%.

Management expects its asset-sensitive balance sheet to benefit in the fourth quarter from the September rate increase. Oakes said new loan yields, excluding fees, were in the 6.80% range during the third quarter. He added that future margin performance will depend largely on deposit costs and the pricing required to support deposit growth.

Expenses, Hiring and Credit

Noninterest income was $1.7 million, down from $3.1 million in the second quarter, which included approximately $1.3 million in tax-exempt bank-owned life insurance death-benefit proceeds.

Noninterest expense declined to $15.1 million from $16.5 million in the prior quarter. The second-quarter figure included a $2.6 million litigation settlement. Excluding that settlement, expenses increased $1.3 million, driven mainly by compensation, credit-related legal costs and professional fees.

Oakes said he expects fourth-quarter expenses to be flat to modestly higher, as higher salary and benefit expenses are expected to be largely offset by lower legal and professional fees.

The company ended the quarter with 171 full-time-equivalent employees, compared with 162 at June 30 and 151 at year-end. Mordell said hiring for the balance of the year will be modest, though the company will remain opportunistic.

Management said its SBA team is focused on becoming a preferred lender, which Mordell expects to occur in the first quarter. The company’s homeowners association and specialty deposit teams are expected to have a modest impact this year, with a more meaningful contribution anticipated in 2027.

On credit quality, nonperforming loans increased modestly to 0.70% of total loans after Avidbank placed a $1.5 million land loan on nonaccrual status. Net charge-offs were essentially zero during the quarter, and Mordell said the company is not seeing broad-based deterioration in the portfolio.

Capital Position

Avidbank issued $30 million of new subordinated debt during the quarter and redeemed an existing $22 million issuance. Mordell said the transaction provides additional support for organic growth while maintaining capital levels.

At quarter-end, the Tier 1 leverage ratio was 10.82% and total risk-based capital was 13.48%. Book value per share was $27.24, representing a 4% annualized increase from the second quarter and a 9% increase from September of the prior year, despite the effect of higher unrealized losses as long-term interest rates rose.

Looking ahead, Mordell said the company is focused on building its team, strengthening infrastructure and compounding earnings through continued production from both existing and newly hired bankers.

About Avidbank (NASDAQ:AVBH)

Avidbank, the banking subsidiary of Avidbank Holdings, Inc NASDAQ: AVBH, is a commercial bank headquartered in Silicon Valley. Founded in 2003, the company provides banking services to businesses, entrepreneurs, and professionals, with a particular focus on technology, life sciences, venture capital, private equity, and other innovation-driven industries.

Avidbank offers commercial lending, business checking and savings accounts, treasury management, cash management, and other deposit services.

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