Avidbank Holdings (NASDAQ:AVBH) held its second-quarter earnings conference call on Friday. Below is the complete transcript from the call.

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The full earnings call is available at https://events.q4inc.com/attendee/599992664

Summary

Avidbank Holdings reported solid core profitability, with adjusted net income at $8.2 million or $0.76 per share, despite a $2.6 million litigation settlement charge.

Loan growth was strong at $51 million for the quarter, and deposits increased by $123 million, indicating a robust core commercial relationship base.

The company launched a new SBA Lending Division, enhancing its commercial lending platform and anticipating growth in government-guaranteed financing.

Net interest margin decreased slightly to 4.26%, with net interest income rising due to higher average earning assets.

Management remains optimistic about future growth, targeting low double-digit growth in loans and deposits for the rest of the year, and sees potential benefits from market disruptions.

Full Transcript

Gina Thoma Peterson, Chief Operating Officer

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.

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'd like to turn the call over to our Chairman and CEO.

Mark Mordell, Chairman & CEO

Thank you, Gina, and thank you all for joining us this morning. We appreciate your continued interest and support for sure. You know, overall this was another solid quarter for us, albeit a bit noisy. We continue to grow loans and deposits. The margin held up, and our core profitability remains strong. As you saw in the release, reported results for this quarter included two discrete items, a charge to settle a litigation matter and a gain on bank-owned life insurance, with the net effect reducing reported earnings.

Excluding those items, adjusted net income was $8.2 million, or $0.76 a share, and our adjusted return on assets was 1.28%. So underneath the reported numbers, the core earnings and power of the franchise continue to improve, and Pat will take you through that in more detail in a few minutes. Let's talk about the litigation settlement. During the quarter, we reached an agreement to settle a litigation matter arising from a fraudulent wire transfer involving a client account back in the fall of 2024.

That was settled this quarter and recorded a pre-tax charge of $2.6 million. This is an isolated matter, and resolving it was the right decision. It puts the issue behind us and avoids the cost and distraction of prolonged litigation and the ambiguity of the outcome. We obviously take the security of our clients' funds and the integrity of our operational control very seriously, and we've used this experience to reinforce our processes. As you're all aware, given the sensitivity of these matters, I'm only going to confirm that it's resolved and not going to address it much further.

On credit, asset quality continued to move in the right direction. Non-performing loans declined to 0.65% of total loans during the quarter. We took a partial charge-off of approximately $1.9 million on one construction loan as we worked that credit towards resolution. Criticized loans did tick up and are higher than I would like. This is primarily due to a non-owner-occupied real estate relationship with three loans totaling $21 million and very low LTVs, and we proactively risk-graded those and are actively managing them.

As I said many times before, we never take credit for granted. We watch it very closely and stay proactive. It seems we're always going to have a few credits that we need to work through, but we're not seeing anything broad-based deterioration in the portfolio. And our underwriting discipline has not changed. Turning to growth, which is really what we're all about. Loans grew $51 million in the quarter, or about 9% annualized, and are up $312 million, or 16%, over the past year.

Deposits grew $123 million, or 22% annualized, with continued strength in our core commercial relationships. Growth was again broad-based across our lending and deposit teams, and our pipelines remain strong. Our loan growth of $51 million was driven primarily by C&I and CRE. Our overall loan growth was offset by another $36 million in construction and land loan payoffs. We've had consistent payoffs in construction over the past, going on 24 months at this point, and it just seems to be that time of the cycle.

So I think we're getting close to bottoming out on that. We're going to continue to target low double-digit growth in loans and deposits, and we feel good about our positioning for the balance of the year. A big part of that positioning is talent. We ended the quarter with 162 full-time employees, up from 154 at the end of the first quarter. These additions include five senior revenue-generating bankers, as well as support functions spread across nearly all of our business lines.

We continue to be able to attract experienced bankers from a number of other larger institutions to drive our growth. These investments will add some expense in the near term, but it's an investment in the future and the power of the bank. Additionally, as many of you saw, we announced the launch of our new SBA Lending Division. This is an important and natural expansion of our commercial lending platform. We have brought on an experienced, purpose-built team led by Brian Harper, our new Managing Director of SBA Lending, who brings more than two decades of SBA experience, along with a full complement of business development, credit and operations professionals. As most of you know, SBA lending allows us to deliver government-guaranteed financing to help small and mid-sized business owners fund growth, acquisitions, working capital, equipment and real estate, and it deepens the relationship-driven service that defines us. We are excited about the opportunity this creates for our clients as well as the franchise. With that, let me turn it over to Pat. He'll walk you through the quarter in more detail.

Pat, Chief Financial Officer

Thanks, Mark. Good morning, everyone. Let me start off with the margin. The net interest margin for the second quarter was 4.26%, down 12 basis points from 4.38% in the first quarter and in line with the guidance we provided last earnings call. Net interest income was $26.7 million, up $181,000 from the first quarter, as higher average earning assets were partially offset by a lower FHLB dividend and higher deposit costs. Our loan yield was relatively flat at 6.67% compared to 6.68% in the first quarter.

The cost of interest-bearing deposits rose 8 basis points to 3.06% from the increased deposit pricing pressure we experienced in Q1 and early Q2. The spot rate was 3.07% at June 30th compared to 3.03% at March 31st, as deposit pricing pressure moderated some during the quarter. The provision for credit losses was $2.8 million, up from $1.4 million in the first quarter, driven primarily by the $1.9 million partial charge-offs on the non-performing construction loan.

Net charge-offs were 35 basis points of average loans for the quarter. Non-performing loans declined to 65 basis points of total loans, down from 75 basis points at the end of the first quarter, and our allowance for credit losses was 97 basis points, an increase from 96 basis points in the first quarter. Non-interest income was $3.1 million, driven by the $1.3 million BOLI death benefit proceeds. Excluding these proceeds, non-interest income was $1.7 million for the quarter compared to $1.5 million in the first quarter.

Non-interest expense was $16.5 million, including the $2.7 million litigation settlement. Excluding the settlement, core expenses decreased to $13.8 million from $14.1 million last quarter, primarily from lower credit-related legal and professional fees. Salary and benefits were flat at $9.6 million as higher salary expense was offset by lower payroll taxes, lower bonus accruals and higher capitalized loan origination costs. The increase in revenue and decrease in expenses helped push our efficiency ratio lower.

The adjusted efficiency ratio was 48.7% compared to 15.4% last quarter. Our effective tax rate for the quarter was 27%, and we expect it around the mid-27s range for the remainder of the year as we benefit from the tax-exempt BOLI death benefit proceeds. Book value per share increased $0.64 to $26.97. Our capital ratios remain strong, with a Tier 1 leverage ratio of 11.50% and a total risk-based capital ratio of 12.79% at quarter end.

Mark Mordell, Chairman & CEO

Thanks, Pat. So I think we just open it up to questions at this point because I'm sure there's going to be a few out there. So please,

OPERATOR (Moderator)

At this time I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from the line of Jerry Scher, D.A. Davidson. Your line is open. You may go ahead.

Gary Tenner, Analyst at D.A. Davidson

Hey, good morning, it's Gary Tenner. Hope everybody's well. A couple of questions, I guess. First on loan growth, and Mark, you kind of alluded to the full-year guide, or targeted in the low double-digit range. I mean, a lot of banks this quarter have kind of been coming off a strong second quarter, but maybe moderating or being a bit cautious in the back half. But if anything, it sounds like your outlook is for further acceleration of growth in the back half of the year.

So just love to hear kind of some of the moving parts there and, you know, the bigger-picture thoughts on your customer base both in the regional and the national business lines.

Mark Mordell, Chairman & CEO

You know, I think when you look, when you really break down where the growth has been coming from, it's coming from the business units primarily, plus CRE. I think this construction, this construction landslide that we've had is, you know, this is the first time this has happened in this magnitude since we've been in business, and we're really talking about something between $250 and $300 million of payoffs in literally 24 months. So when you look at the pipelines of the other units, as well as construction for that matter, they're all pretty, pretty robust.

I mean, I think Ventures Movement had a good quarter. I think C&I, our corporate banking division, is doing well. The pipelines are robust. I think there's a lot of confidence out there in the market in terms of overall business, as well as the local real estate market here on the peninsula in Northern California has really rebounded substantially. It's now the fifth consecutive quarter of growth in absorption, and rents are finally starting to tick up a little bit.

I mean, it still has a long way to go for a full recovery, but I think the confidence is pretty solid. So, you know, I'd like to, you know, we're always a second-half team, it seems. It seems like quarter three and quarter four are always more significant than the first two quarters. I don't like those cycles, but it's kind of where we are. So I think, you know, I think again, targeting these low double digits is attainable, and everything we're seeing is pretty solid at this point for the second half of the year.

Gary Tenner, Analyst at D.A. Davidson

Thanks, Mark. And then had a follow up just on the deposit side of things. You know, last couple of quarters you've resumed utilization of brokered deposits to kind of augment the overall funding. So I'm just wondering, kind of maybe talk about where you see that going, Pat, and comfort levels with different percentages of brokered, especially if the back half of the year loan growth is going to be that much stronger.

Pat, Chief Financial Officer

Yeah, so I think we put a lot of those brokered on in the first quarter and early in the second, and they're pretty short term. I think most of those—not all of them, but a good portion—mature this quarter. You know, if we continue to get these pretty good deposit growth, the goal would be to kind of let that stuff run off. You know, we're in a pretty good spot now with loan-to-deposit ratios moved down. So if we continue this trend, you know, the goal is to be core funded.

Gary Tenner, Analyst at D.A. Davidson

Okay, thank you.

OPERATOR (Moderator)

Your next question comes from the line of Matthew Clark, Piper Sandler. Your line is now open. Go ahead.

Adam Kroll, Analyst at Piper Sandler

Hey, this is Adam Kroll on for Matthew Clark. Good morning, and thanks for taking my questions. Maybe starting off on the margin, Pat, I'd be curious to hear how you see the margin trending from here. And along with that, obviously funding costs ticked up during the quarter, but maybe just the trajectory within funding costs as well.

Pat, Chief Financial Officer

Yeah, you know, the key drivers there probably are deposit growth and deposit costs, and, you know, obviously we saw a pretty big uptick in deposit costs, but like I said, I think that's moderating here, as you can see where the spot rate was at the end. Look, if you hold all the rates—and look, loan yield is pretty stable—if you hold those rates steady and based on the balance sheet how it ended at the quarter, the margin will be down, primarily because we've got a lot more core funding and the shift in the earning asset base based on that, with more cash and investment portfolio.

So we'll see how it shakes out, but I would not be surprised if we get the growth that we're continuing to expect, especially on the deposit side, that that margin could trend down, but hopefully interest income moves up nicely because of that. So could it move down as far as 4.20%? Yes,

Adam Kroll, Analyst at Piper Sandler

I appreciate the color there. And, you know, just to follow up on that, I guess in terms of pricing on the asset side, specifically loan pricing, you know, how has competition been there and how has it evolved over the last 90 days or so?

Pat, Chief Financial Officer

You know, on the C&I side, which most of it's floating rate, it's hanging in there. You know we're a prime lender and it's all prime, prime plus, most of it, and that really hasn't changed much. And on the commercial real estate side, obviously with the CPU curve, those rates are starting to tick up a little bit. So I think loan yields are hanging in there. That's where we're fairly confident we can keep that loan yield, you know, at least flattish going forward.

Adam Kroll, Analyst at Piper Sandler

Got it. And then maybe moving to credit. I was wondering if you could provide some additional color on the non-owner-occupied loan that drove the increase in criticized, and just any potential timeline towards a resolution there.

Mark Mordell, Chairman & CEO

Yes, this has been a long-time client of the bank, a long-time investor. There's some tie-in debt in three properties. One had a TCR covenant default, and we had to downgrade all three of them at that point. So I think it's going to be paid down and as well as worked through over the next, you know, 24 months. So we're concerned, because we always are. But we feel we're very well collateralized, and they're very low loan-to-values, so. And he's a proven operator, so.

Adam Kroll, Analyst at Piper Sandler

Thanks for taking my questions. I'll step back.

OPERATOR (Moderator)

Your next question comes from the line of Ross Haberman with RLH Investments. Your line is open. Go ahead.

Ross Haberman, Investor at RLH Investments

Morning, gentlemen. Thanks for taking my call. Pat, just a follow up on the margin. If we do see—let's say we see a pickup in rates, they raise rates a quarter of a point over the next couple of months or so—how does that scenario affect your margin or your spread?

Pat, Chief Financial Officer

It does benefit us, you know, a little bit—probably not as much as we would see later. We do have some floors that are working through, so it will limit some of the benefit on the loan side, but we still will obviously see our loan portfolio price up. You know, I'm hoping—and, you know, kind of the conversation we've had internally around deposit costs is we'll have to increase some of those deposit costs, obviously, for some of our clients, but hopefully we can limit that a little bit and we do get a little bit of benefit.

The first 25, it's not going to be significant, right. But, you know, typically in those scenarios, you know, clients understand that we're not going to increase deposit costs significantly. So hopefully we get a little bit of benefit out of it.

Ross Haberman, Investor at RLH Investments

And just one other question. Any other large expenditures expected in the next quarter or two, you think about any, or do you need to redo your data processing or anything like that in the next quarter or two? And any other sort of litigation sort of hanging out there like we saw this quarter that you're working on, or potential liability like that?

Mark Mordell, Chairman & CEO

Well, I think, you know, we are adding people, you know, after that successful offering that we had last year. One of the things is to expand our banker base, and so we have some opportunity out there to attract some talent. So keep tuned over the next few months. That's primarily the biggest area that could shift a little bit.

Ross Haberman, Investor at RLH Investments

I got it. And on the page, still contingent liabilities. Anything else out there that you're working on, or anything potentially out there that we should know about?

Mark Mordell, Chairman & CEO

No, I think that's about all we can say about that at this point. Everything else, okay. We got some things behind us now with this quarter, and now it's about execution, the first quarter with a solid, and take advantage of the opportunities that we have out there with some of the disruption.

Ross Haberman, Investor at RLH Investments

Thank you for your help, guys. The best of luck. Thank you.

OPERATOR (Moderator)

Just a reminder, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Tim Coffey with Brean Capital. Your line is open. Go ahead.

Tim Coffey, Analyst at Brean Capital

Great, thank you. Morning, everybody. If I'm just reading through the tea leaves here—kind of your comments—is it reasonable to think that you feel pretty good about core deposit growth in the second half of the year?

Mark Mordell, Chairman & CEO

I think we're, you know, we're always cautiously optimistic, Tim. I think what we're seeing in our pipelines, the amount of new clients and some of the initiatives that we're undertaking, we feel pretty, pretty confident in the second half of the year to continue a solid trajectory in terms of both loan and deposit growth. I wouldn't expect, okay, we had the second quarter every quarter. Right. That was probably a little bit front-loaded, but ultimately the general trajectory is positive.

Tim Coffey, Analyst at Brean Capital

Right. Okay. And then can you kind of talk about the operational goal for the SBA unit? Is that an originate-to-portfolio or originate-to-sell strategy?

Mark Mordell, Chairman & CEO

Originate to sell. So they're going to be focused on 7(a) production, and obviously we'll be selling. The goal is to sell the guaranteed portion of that.

Tim Coffey, Analyst at Brean Capital

Okay. Any plans to get into 504?

Mark Mordell, Chairman & CEO

So we do some 504 already, and any 504s that we do, we hold. But that's not going to be a significant piece of the business. And we'll continue to do that selectively, yes.

Tim Coffey, Analyst at Brean Capital

Okay, great. And then, Mark, if I could kind of, you know, get your thoughts on the construction cycle that you're in. How do you see it? Because I can see, you know, both sides of the coin on construction loan payoffs, both the good and the bad. How are you seeing it?

Mark Mordell, Chairman & CEO

Well, I think there's a lot of these payoffs of this landslide, if you will. The amount and volume is a lot of—for maybe last year—was a lot of COVID hangover. Some of the delays that took place, that these things, they didn't start the project until much later than they did, or there were delays due to COVID in terms of the workers. So I think when you really look at what our core business is, which are spec single-family homes, that has been really holding up pretty consistently, as it has over the last 20 years.

I think, you know, we've done a lot of these mixed-use things over time, and we've been pretty successful at it. Two big hiccups we had over the last, you know, four, five, four years or so has been both mixed—both of those were mixed-use projects. And I think we're looking at those things a little bit differently going forward. That's a very challenging collateral to perfect, and I think the retail value really has nothing to do with our loan-to-value when we're going into those things, as we experienced when things have been a little bit challenged.

I think the bulk value is the key thing. So are we shifting our underwriting a little bit? I think we're tightening those things up, but I think we're still pretty bullish on our core business, which are the single-family spec homes, because that's a real commodity here in the Bay Area. It's, you know, had zero losses over 20 years being in that space. So this charge that we just took is the first charge we've ever taken in our construction portfolio.

So, you know, when you go through these kind of cycles, you kind of look and you're, you know, what's worked well for us, where have we gotten some drift, and kind of getting back to what our niche really is—out of these spec homes, we're gonna focus primarily on that.

Tim Coffey, Analyst at Brean Capital

Okay. Okay, great. That's great, Kelly. Thank you. And then, can I kind of get your thoughts on the market disruption you talked about a little bit. Obviously the most disruption in your footprint in the last three years. But this one seems a little bit different. This one seems like it has more opportunity for a bank your size and your strategy. Reading that correctly, short answer.

Mark Mordell, Chairman & CEO

Yes, I think most recently it has been. And there's going to be some more disruption, as it was announced earlier this week. And it does center around primarily around talent, which equates to clients later. And so, you know, as you know, whenever there's these merger sales, it works for a certain portion of the bankers and the management of the target bank. But when the bankers are disrupted in the local market, the clients are disrupted as well.

So I think we're going to take advantage of both to the best we can. And we've always been selective in our talent, and I think we've been pretty consistent in our employee retention. People know that in the local market. So we're getting some opportunity that we would not ordinarily get for sure.

Tim Coffey, Analyst at Brean Capital

Right. Okay, great. Those are my questions. Thank you very much.

OPERATOR (Moderator)

I would like to turn the call back over to the presenters.

Mark Mordell, Chairman & CEO

Well, again, as I said at the beginning, we do appreciate your interest and support. And just if you have any further questions, please reach out to Pat or me. We'll be happy to give you any color we can, so appreciate your time and interest.

OPERATOR (Moderator)

This concludes today's conference call. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.