Avidbank Holdings, Inc. (AVBH) Earnings Call Transcript

[Audio Gap] 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 business material. 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. These statements are intended to be covered by the safe harbor provisions of the center securities law. 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 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 to provide. 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 for sure. Overall, this is another solid quarter for us, albeit a bit noisy. We continue to grow loans and deposits, the margin held up. Our core profit and our core profitability remains strong. As you saw in the release, our reported results for this quarter included 2 discrete items: a charge to settle a litigation matter and a gain on bank-owned life insurance with the net effect reduce 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 and the franchise continue to improve and Pat will take you through that in more detail in a few minutes. Let's talk about the relations settlement. During the quarter, we reached an agreement to settle a litigation matter riding from a fraud wire transfer transfer involving a client account back in the fall of 2024 that was settled this quarter and recorded a pretax charge of $2.6 million. This is an isolated matter and resolving it was the right decision. It puts an issue behind us and avoids the cost and distraction of prolonged litigation and 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 process. As you're all aware, given the sensitivity of these matters, longing to confirm that it's resolved and not going to address it much further. On credit, asset quality continue to move in the right direction. Nonperforming loans declined to 0.65% of total loans. During the quarter, we took a partial charge-off of approximately $1.9 million on 1 construction loan as we work that credit towards resolution. Criticized loans did tick up and are higher than I would like. This is primarily due to a nonowner-occupied real estate relationship with 3 loans only $21 million in very low LTVs. We're proactively risk rated those and are actively managing that. As I said many times before, we never take credit for granted. We want 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 systemic or 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% annually 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 relationship. Growth again 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 the $36 million in construction and land loans of payoffs. We 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 continue -- we're going to continue to target low debt, low double-digit growth in loans and deposits, and we feel good about our position for the balance of the year. A big part of that position in this talent -- we ended the quarter with 162 full-time employees, up from 154 at the end of the first quarter. These additions include 5 senior revenue-generating bankers as well as support functions that 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 expenses in the near term, but it's an investment in the future in the power of the bank. Additionally, as many of you saw, we announced the launch of our new FDA lending division. This is an important and natural expansion of our commercial lending platform. We have brought on experience and experienced purpose built team led by Brian Harper, our new Managing Director of SBA Lending, who brings more than 2 decades of SBA experience, along with the full complement of business development, credit and operations professional. As most of you know, SBA lending allows us to deliver government guaranteed financing to help small and midsized businesses owners fund growth acquisitions, working capital equipment on real estate and it deepens 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. I'll walk you through the quarter in more detail.

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 were up 8 basis points to 3.06% from increased deposit pricing pressure we experienced in Q1 and Q2. Spot rate was 307 at June 30 compared to 303 at March 31 as deposit pricing pressure moderated some during the quarter. The provision for credit losses was $6.8 million, up from $1.4 million in the first quarter, driven primarily by the $1.9 million partial charge-off on the nonperforming construction level. Net charge-offs were 35 basis points of average loans for the quarter. Nonperforming loans declined to 65 basis points of total loans, down from 75 basis points at the end of the first quarter and our allowance of credit losses was 97 basis points, an increase from 96 basis points in the first quarter. Noninterest income was $3.1 million, driven by the $1.3 million only debt benefit proceeds excluding these proceeds, noninterest income was $1.7 million for the quarter compared to $1.5 million in the first quarter. Noninterest expense was $16.5 million including the $2.7 million litigation settlement. Leading the settlement, core expenses decreased to $13.8 million from $14.1 million last quarter primarily from lower credit-related fee to and professional fees. Salary and benefits were flat to $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 ration expenses helped push our recency 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 that around the mid-27s range for the remainder of the year as we benefit from the tax and the proceeds. On capital, Book value per share of $0.64 to 26.7%. Our capital ratios remain strong with a Q1 leverage ratio of 11.50% and a total risk-based capital ratio of 12.79% at quarter end. With that.

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

[Operator Instructions] Your first question comes from the line of Gary Tenner, D.A. Davidson.

It's Gary Tenner. I hope everybody is well. A couple of questions. I guess, first on loan growth. And Mark, you had kind of alluded to the full year guide or target 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. -- growth in the back half of the year. So I just love to hear kind of some of the moving parts there and the bigger picture thoughts on your customer base, both on the regional and the national business lines.

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 land side that we've had is -- 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 million and $300 million of payoffs in literally 24 months. So when you look at the pipelines of the other units as well as construction to that more, they're all pretty robust. I mean I think ventures moving 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, this has a long way to go through a full recovery. But I think the confidence is pretty solid. So I'd like to -- we're always a second half teams. It seems like in quarter 2 and quarter 3 -- excuse me, quarter 3 and quarter 4 are always more significant than the first 2 quarters. And on side, but it's kind of where we are. So I think, again, targeting in low double digits is a tenable -- everything we're seeing is pretty solid at this point for the second half of the year.

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

Yes. 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 of the term this quarter. If we continue to get these pretty good deposit growth, the goal would be that stuff run off. We're in a pretty good spot now with the loan deposit ratios move down. So if we continue this trend, the goal is to have -- be core funded.

Your next question comes from the line of Matthew Clark, Piper Sandler.

This is Adam Kroll on for Matt Clark. Maybe starting off on the margin. 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.

Yes. The key drivers there probably are deposit growth and deposit costs. And 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 green pretty stable. If you all those rates steady and based on the balance sheet, how it ended up 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 in the investment portfolio. So we'll see how it shakes out. But I would not be sized if we get the growth that we're continuing to expect especially deposit side. that, that margin could trend down. But hopefully, interest income moved up nicely because of that. So could move down a little far as 420 yes.

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

On the C&I side, which most of it's floating rate, it's an we're a prime lender, and it's all prime time plus most of it. And that really hasn't changed much. And on the commercial real estate side, obviously, with a steeper yield 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 at least flattish going forward.

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

Yes. This has been a longtime client of the bank. It's a long-time investor. There's some time in debt in the 3 properties. One had a DCR covenant default and that's -- we had to downgrade all 3 of them at that point. So I think it's going to be paid down and as well as work through over the next 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 and he is a proven operator.

So got it. I'll step back.

Your next question comes from the line of Ross Haberman with RLH Investments.

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 point over the next couple of months or so. How does that scenario affect your margin or your spread?

It does benefit us. A little bit of probably not as much as we would see later with -- we do have some floors that we're working through. So we'll live at some of the benefit on the loan side, but we still will obviously see our own portfolio price up. I'm hoping and kind of the conversation we've got internally around deposit cost is that we're not decrease some of those deposit costs obviously for some of our clients. But hopefully, we can limit that a little bit. We do get a little bit of benefit. The first 25 is going to be significant, right? But typically, in those scenarios, clients understand that we're not going to increase deposit cost significantly. So hopefully, we get a little bit of benefit out of it.