Avidbank Holdings, Inc. Q2 FY2026 earnings call

• Overall Core Performance & Discrete Items

  • Management reports a solid second quarter, with growing loan and deposit balances, stable net interest margin, and strong core profitability
  • Two discrete items impacted reported earnings: a $2.6 million pre-tax charge for a litigation settlement, and a gain from bank-owned life insurance death benefit proceeds, with a net negative impact on reported net income
  • The litigation resolved an isolated fraudulent wire transfer incident from 2024; management confirmed the matter is closed, and has updated internal controls to reinforce operational security

• Balance Sheet & Credit Quality

  • Asset quality is improving overall: non-performing loans declined to 0.65% of total loans from 0.75% at the end of Q1
  • A $1.9 million partial charge-off was taken on one non-performing construction loan during the quarter, as the bank works toward full resolution of the credit
  • Criticized loans ticked up slightly, driven by three non-owner-occupied commercial real estate loans totaling $21 million with low loan-to-value ratios; the loans were proactively risk-rated and are being actively managed, with no broad-based credit deterioration observed across the portfolio

• Growth Strategy & Operational Investments

  • The bank grew full-time headcount to 162 from 154 at the end of Q1, adding five senior revenue-generating bankers, mostly poached from larger competing institutions; near-term expense increases from this hiring are framed as long-term investments in franchise growth
  • A new dedicated SBA lending division was launched, led by an experienced managing director with over 20 years of SBA experience, supported by a full specialized business development, credit, and operations team; the division expands the bank's commercial lending platform and deepens relationship-driven service for small and mid-sized business clients

The transcript does not break out financial performance for distinct formal product segments. Aggregate company-level results for Q2 are as follows: net interest income was $26.7 million, up $181,000 from Q1; non-interest income was $3.1 million (including $1.3 million in death benefit proceeds, $1.7 million excluding the proceeds, up from $1.5 million in Q1); non-interest expense was $16.5 million including a $2.7 million litigation settlement charge; core expenses (excluding the settlement) were $13.8 million, down from $14.1 million in Q1. Adjusted net income was $8.2 million, or $0.76 per share, with an adjusted return on assets of 1.28% and an adjusted efficiency ratio of 48.7%. Loans grew $51 million in the quarter (9% annualized), with growth driven primarily by CNI (corporate and industrial banking) and CRE (commercial real estate), offset by $36 million in paydowns/payoffs of construction and land loans. Deposits grew $123 million in the quarter (22% annualized), led by core commercial relationships. Non-performing loans declined to 0.65% of total loans, net charge-offs were 35 basis points of average loans, and the allowance for credit losses was 97 basis points of total loans.

• Management maintains its full-year target of low-double-digit percentage growth for both total loans and total deposits, and expects this target to be attainable in 2024 despite 24 months of consistent construction loan payoffs
• The net interest margin is expected to trend modestly downward from Q2's 426 basis points, with a possible floor around 420 basis points, if expected loan and deposit growth materializes; even with margin compression, net interest income is projected to increase due to a larger base of earning assets
• The effective tax rate for the remainder of 2024 is expected to hold around the mid-20% range
• SBA lending will follow an originate-to-sell strategy focused on 7A program production, where the guaranteed portion of loans is sold to third parties; 504 program loans will continue to be held on-balance sheet only on a selective, limited basis, and will not be a core focus of the new division
• Core deposit growth is expected to continue on a solid positive trajectory in the second half of 2024, though Q2's 22% annualized growth rate is not expected to be sustained every quarter

• Deposit pricing pressure increased in Q1 and early Q2, raising interest costs on interest-bearing deposits, though pressure moderated somewhat by the end of Q2
• Criticized loans are higher than management prefers, driven by a small set of non-owner occupied commercial real estate loans that require active management over the next 24 months
• Construction lending has seen sustained payoffs over 24 months, which has offset loan growth from other segments; the bank recorded its first ever loss in its 20-year construction lending history this quarter, prompting a strategic shift back to its historical niche of single-family spec construction
• Broad industry and regional market disruption from bank mergers can create volatility, though management frames this disruption as a net opportunity to attract talent and new clients
• There is ongoing uncertainty around the path of interest rates, which can impact both net interest margin and funding costs
• The bank faces competitive pressure on loan pricing, though yields have remained relatively stable to date

Q: Many banks are moderating growth outlooks for the second half of 2024. What is the outlook for AbbottBank's loan growth, and what drivers support the low double-digit target? / A: Growth has been led by CNI and CRE, with large construction loan payoffs over 24 months offsetting overall gains, but management expects construction payoffs are near a bottom. All business units have robust pipelines, the Northern California commercial real estate market has seen five straight quarters of improving absorption and growth, and business confidence is solid. Management confirms the low double-digit target is attainable, and the bank typically sees stronger growth in the second half of the year anyway. (297 characters)

Q: What is the trajectory for net interest margin and funding costs, and how has competitive loan pricing evolved recently? / A: Deposit cost increases moderated by the end of Q2, and management expects margin will trend modestly lower to as low as 420 basis points with expected growth. On the asset side, floating-rate C&I loan pricing has remained stable, while commercial real estate loan yields have ticked up slightly due to the steep yield curve. Overall, management expects loan yields will remain at least flattish going forward. (299 characters)

Q: Can you share details on the non-owner occupied CRE loans that pushed criticized loans higher, including their expected resolution timeline? / A: The three loans are tied to a long-term client and experienced a single covenant default on one property that required all three to be downgraded. The loans are very well collateralized with low loan-to-value ratios, and the borrower is a proven operator. Management expects the credits will be paid down and fully worked out over the next 24 months. (258 characters)

Q: What is the SBA division's core operating strategy, and will it focus on originating to hold or originate to sell loans? / A: The new division will follow an originate-to-sell strategy, focused primarily on 7A SBA program production, where the guaranteed portion of each loan will be sold to third parties. The bank already does a small amount of 504 SBA lending, which it holds on-balance sheet, but 504 lending will remain a small, selective part of the business and will not be a core focus going forward. (296 characters)