Operator
Good morning, my name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the Avid Bank Holdings Incorporated 3rd Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I'd like to introduce the presenters, Chairman and CEO Mark Mordell, Chief Financial Officer Pat Oakes, and Chief Operating Officer Gina Tomah-Peterson. You may begin your conference.
Speaker 0
Good morning. Thank you for joining us today for Avid Bank Holdings third quarter 2025 earnings 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 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 securities laws. 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 statement as well as the disclosures contained within our sec filing we will also reference non-gap financial measures alongside our discussion of gap results we encourage you to review the gap to non-gap reconciliations provided in our earnings release 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 attending our first public earnings call.
Hopefully we'll get this right today. You know, our third quarter was certainly significant for us. It marked a milestone as we completed our initial public offering, as most people are aware, and netting approximately $61 million. And the objectives of the IPO were multifaceted. It allowed us to research our securities portfolio that significantly enhances our profitability. It's spread out our tightly share ownership, along with 100% participation from our board, executive management, and our existing investors. We brought in approximately 40 new investors into being shareholders for Avid Bank. It gives us better currency to trade, and it's really put us on a platform to take this bank to the next level. We're really excited about the enhanced footings that we have at this point. As I mentioned, this IPO closed on August 8th, essentially mid-quarter. Therefore, there's a lot of moving parts and a lot of, quote-unquote, noise on our income statement and our balance sheet for the quarter. Pat's going to give more detail on that when he takes it over. Overall, from a core operations perspective, we had a solid Q3. We had a loan growth $46 million or 10% on an annualized basis. Deposits grew by 72 million or 15% on an annual basis. Both solid metrics for us going forward. Credit continues to hold up with 12 basis points. MPAs at 12 basis points slightly up from Q2 due to one credit. Credit quality has always been a top concern for us. And we're going forward. We're just going to continue to focus on that. We've enjoyed a nice run of solid credit and are going to continue to actively manage those credits going forward. I'd like to now just turn it over to Pat and then highlight the financial highlights for the quarter and then open it up to questions after that.
Hey, thanks, Mark. Good morning, everyone. Let me start by providing some details into the impact of our recent IPO and then and the repositioning of the investment portfolio we did. In August, we completed our IPO as Mark mentioned, issuing just over 3 million shares at $23 per share, generate net proceeds of $61.3 million. And then during August and September, we sold 275 million in available for sale securities, realizing a pre-tax loss of 62.4 million. And we began the process of reinvesting a portion of those proceeds into new securities. During the quarter, we have reinvested $163 million, primarily in mortgage-backing CMOs, with an average yield of $454. Due to this loss on the security sale, we reported a gap net loss of $37.7 million for the third quarter. To exclude this charge, adjusted that income was $6.7 million, or $0.72 per share. So we saw immediate benefits from this repositioning. with our margin expanding to 390, up from 360 in Q2, our adjusted ROA improved to 113 compared to 1% last quarter. The fourth quarter will include the full impact for the repositioning, leading to further improvements in profitability. This repositioning was an important step to improve our long term profitability. The margin improvement was also supported by a four basis point decline in interest bearing deposit costs and 11 basis point decrease in total deposit costs. driven by a $58 million increase in average non-interest-faring deposits. Deposit growth is not only strong, but also high quality, with this meaningful increase in DDA balances. Since the Fed began cutting rates in 2024, our deposit beta has been approximately 59 percent, contributing to the margin expanding from 335 in the third quarter of 2024. As of September 30th, 48 percent of our loan portfolio is floating rate, with approximately 13 percent of these loans at their floor rate our liquidity position remains strong with the ipo proceeds and deposit growth we fully repaid all short-term borrowings including broker tds our knowledge expense rose to 13.5 million an increase of 869 000 from the previous core quarter this did include approximately 300 000 one-time ipo red expenses the additional increase in expenses were primarily driven by higher compensation expense and lower capitalized loan origination costs. As Mark mentioned, credit quality remained strong, non-performance were just 14 basis points, criticized loans declined to 1 in 48 basis points down from 187 basis points in Q2. Capital ratios improved meaningfully with consolidated total risk-based capital rising to 13.48, up from 12.76 in Q2, reflecting the strength of our balance sheet post-IPO. With that, I'll turn it back over to Mark.
Thanks, Pat. And, you know, a lot of people on the call know us pretty well, so I think at this point, I want to hear what's on your mind, and we're open for any questions at this point.
Operator
At this time, I would like to remind everyone, in order to ask a question, please press star, followed by the number one on your telephone keypad. Your first question comes from the line of Andrew Terrell with Stevens. Please go ahead.
Hey, maybe just to start, thank you guys for hosting this call. I appreciate it. Maybe just to start, just on the margin, you know, as you guys mentioned, lots of moving pieces in the quarter and really got kind of a partial quarter impact from the securities restructure and some of the higher cost funding pay down. I'm just hoping maybe you could help us out in a little bit with what the kind of fully loaded margin is post those actions either, you know, in the month of September or how the margin is kind of trending in the fourth quarter so far. It seems like it should go above 4%, but I just want to kind of check in and see have you had expectations there?
Yeah, no, you know, it obviously should go well about 4%. You know, if you kind of just back out all the IPO-related activities, we kind of estimate the margin was just from the core margin expand to about 370. And if you add in all the impact of, you know, restructuring this bond portfolio, it'll be well over 4%. I'm not sure if one disclosure was in September, because that's kind of a one-time month.
But, you know, it should be 410 plus, right at this point maybe even higher than that depending on how things shake out perfect okay um and yeah i did also want to ask just it feels like or looks like you guys got a little more asset sensitive um post restructure we're obviously looking at a few more cuts potentially or a couple more cuts in in 4q and maybe some in 2026 just you know your your your thoughts on on kind of go forward margin do you feel like four plus is uh is achievable acknowledging we've got maybe a few more cuts in the curve than previously expected yeah um yes you know yeah yes obviously especially at quarter end i think you'll see in our 10q we're going to show ourselves
more asset sensitive not a big piece of that because we're sitting on a lot of cash at this point as we reinvest some of that cash um that will take some of that down but we are going to be more asset sensitive because we're also have more dda now um so you know you know i would think at minus 100, at this point, as of 930, an interest income would drop about 4%, right? That's not significant, even with all the cash that we have. So, I think it's manageable at this point. I don't think there's much we need to do, but I think that margin will still stay at a good, reasonable level.
Yeah. Okay. And then I also want to ask on the floors, you give a disclosure, I think it's 13% of floating rate loans that are at floor rates right now, I was just wondering if you guys had any kind of schedule, how material those floors become, you know, if we do get another 25, 50, 100 basis points of rate cuts, just any color on how the floors pick up as a percentage of the total floating?
Yeah, so I can give you a little bit of detail on that, but you need to also realize that at some point, so at another 25 basis points, another 40 million hits that, another 25 basis points it's close to 100 million so as rates get lower we get more and more clients hit the floors we know at some point we're going to hear back from these clients and how sustainable are some of these floors so we may lose some of them as rates go to offset some of the clients hitting those floors so uh we'll get a benefit but i'll be curious to see how much is that benefit is as rates decrease but it definitely helps if they go further south it won't be a one-to-one that's yep got it okay um i'll step back thank you for taking the questions and congrats on the
ipo this quarter your next question comes from the line of matthew clark with piper sandler please go ahead hey good morning everyone um on the uh deposit cost side your your beta at least interest bearing has been running you know cycle to date around 59 percent i guess what are your thoughts with the additional rate cuts that are potentially coming you know your ability to kind of mitigate some of that asset sensitivity you think you can maintain a beta in that 55 60 range through the cycle do you think i'm sure it'll get more difficult you know with more rate
cuts but just want to get your thoughts there yeah so we model a 50 beta and obviously we've been able to beat that right which has helped especially with the loans floors that we have um So I'm hoping the next few, we can keep that 50% plus beta. You're right. As rates continue to move down, it's going to get a little more difficult. But it feels like at least the next one or two rate cuts, hopefully we can keep that somewhere close to that 59% beta.
Okay, great. And then do you have the spot rate on deposits, on deposit costs at the end of September, just to give us the ability?
Yeah, 930 interest bearing was 336.
Okay, great. And then on the deposit growth this quarter, you know, nice increase in non-interest bearing, could you give us some color on, you know, where that came from and where your venture deposits stand at the end of September? I think they were, you know, $754 million at the end of June.
Yeah, so the venture and fund finance together was $798 million or so.
Great. And then just in terms of the pipeline for loans and deposits going forward, I assume you're sticking to the kind of double-digit loan and deposit growth guidance, but just wanted to get a sense for how the pipelines look.
The pipelines on both loans and deposits look strong. We have typically been a second-half company, if you look historically over years, and Q4s have been always pretty strong for us. So what we're seeing going into Q4 looks real solid. I mean, very optimistic. We should have a solid quarter.
Okay. And then just a nitpicky question, the small uptick in non-performers this quarter, just if you could describe the type of credit it is and whether or not the reserve build was related to that, or was that just more macro-driven?
The uptick in MPAs was one credit. It's a venture client. It's a million four, if I'm not mistaken. Those kind of credits are kind of binary, so we took a full reserve on it. And that's one of the reasons for the uptake in the ACL.
Operator
Your next question comes from the line of Gary Tenner with DA Davidson. Please go ahead.
Thanks. Good morning. I wanted to ask about kind of longer term balance sheet management, how you kind of alluded to it a bit, you know, that you might be, you know, you may continue to deploy some of that cash.
Just as you're thinking about the securities portfolio, the size as it is today versus pre-IPO, where would you like to manage that to as a percentage of assets or earning assets over time? yeah no it'll be a smaller percent of earning assets i would think we don't need as big of a portfolio um you know it's hard to say right it depends on deposit growth and loan growth and everything else but i think you know that probably 10 percent of a small side maybe 15 percent of large side um you'll probably see us add some additional securities here in the fourth quarter but you know maybe that's 50 million or so 75 million it won't be a significant amount you know, get us to that 10% number. Then we'll go from there.
Okay, great. And then follow up on the kind of loan pipeline question, you know, the growth this quarter was pretty broad across the different lending segments. Where are you seeing as you look at the pipeline fourth quarter and maybe even early into 26 from what you're hearing, where are you seeing kind of the opportunity set that is out there for you? from a segment perspective?
Well, certainly fund finance and real estate are having a significant year this year. And it seems that the, you know, CRE has been a strong pipeline there. Excuse me. And then also, you know, venture doesn't have a whole lot of outs, although they're doing business because we're primarily early stage. So I think the significant growth on the loan side is going to come from fund finance, CRE, and specialty and ABL. So sponsor and asset-based lending, they have pretty robust pipelines going into Q4.
And how is the pricing competition developing in those segments?
You know, it seems that a lot of banks are having a hard time growing. So there's some larger banks are, you know, from a CRE perspective, are going down into the fives. And so pricing is an issue and it's competitive. I think the transactional sponsor finance and fund finance, you know, the competition is pretty stiff. And, you know, most of everything we're doing is prime plus. So I think it's, you know, I think it's balanced. You know, one of the big impediments we've had this year in terms of growth is this is probably the biggest year that we've ever had of construction loan payoffs. We have an excess of like $130 million, $140 million this year of construction payoffs. And so that portfolio is going to take a while to build back up again. And we don't view construction as a growth animal for us. We just like that $250,000 plus or minus million because it's a great earner for us. So this year, there was a pretty good landslide of construction payoffs.
Do you think the second quarter, $205 million on construction is the bottom, and the third quarter was up a few million? But do you think the mid part of this year was effectively the bottom?
I think the majority of the proverbial pig is through the Python at this point. We'll still have payoffs because it's going to happen, but not the amount and the size that have paid off in 2025 thus far. Great. Thanks very much.
Operator
Your next question comes from the line of Timothy Coffey with Jenny. Please go ahead.
As we look at the lower deposit ratio, would your anticipation that it would kind of stay in that mid-90s going forward?
You know, I personally would still like to drive that down and get to a stabilized, you know, plus or minus 90%. But given where we're going, I think the 95% number is a pretty good number for us. Given our planned growth for next year, I don't think unless something significant happens on the liability side of the balance sheet, I don't think it gets down, you know, it may get down a couple of basis points or a couple of percentage points, but I think something around 95% is probably okay for us at this point.
Okay, feels good. And then, Pat, what's a good expense number next quarter? Is the run rate closer to $13 million?
Yeah. So if you take out the one-time expenses of $300,000, that's probably a good run rate, that low $14 million-ish. So that's how I would think about it, probably.
Okay. And then I had a couple of market-related questions for you, though. So about a year ago, we started seeing customer outflows from the old First Republic franchise. I'm wondering, is that still occurring?
Yes, is the short answer. I think a lot of those folks are still trying to find homes, and there's not really a bank to replicate what they had at First Republic. So there's a significant amount of frustration out there. So those clients are recalibrating their expectations. And so we picked up a fair amount of personal banking from our existing business clients because of the service and the attention. But, you know, they're not getting the other things they liked, which is the lowest, you know, low mortgage rates and high interest rates on deposits. So there's still a lot of turmoil that's out there. And with Comerica getting purchased, that's going to create additional turmoil. out there that's going to be opportunistic for us, both from a client perspective as well as a talent perspective.
Okay. Just related to the First Republic piece, is that kind of outflows included in your growth outlooks?
You know, we don't segment it to that extent, Tim. I think we just see that there is opportunity and there's a lot of movement or inquiries by former First Republic clients.
Okay, yeah, I guess I was just trying to ask you whether or not you saw that as kind of a bonus to what you see as your line of sight on the pipeline. It sounds like you kind of did.
Yeah, I think it's just in the mix, and it's a portion of the mix as we try and evaluate all opportunities out there.
And then you brought up Comerica, right? They're about to go through some stuff. Is there anything on the venture banking side that they do that you like?
There's nothing they do that we like. I mean, we compete against them every now and again. You know, we are focused significantly on the earlier stage investing. So it's not anything that they do that's special that we want to take advantage of. I just think there's going to be one less player that's going to be out there that's not going to be at full strength. and that's going to cause some people looking around a little bit more both from a client perspective as well as from a talent perspective okay great incredibly helpful thanks those are my questions as a reminder if you'd like to ask a question at this time please press star followed by the number one on your telephone keypad your next question comes from the line of Ross Haberman with RLH Investments.
Operator
Please go ahead.
Morning, guys. Thanks for taking the call. Just a quick question for you, Mark, on the new money you brought in. Are you making adjustments to the size of the loans you're doing now with the new capital? And are you doing any sort of participation?
Thank you. Bye now. But as far as the new capital goes, of course, it does raise our legal lending limit. You know, our balance sheet has not grown significantly over the last couple of years due to the turmoil in the industry and the liquidity, I don't want to say crunch that we had in 23, but we had to obviously strengthen our balance sheet back to where it needs to um so we're a firm believer in building a port building portfolios and so you know when you consider a two billion dollar loan portfolio we don't want to do a lot of 25 million dollars in north deals just because of downgrade risk and overall credit risk so um so we're still focused primarily in that $25 million and under level, even though our legal lending limits are much higher. So we will be opportunistic, keeping credits that have been with us a while, and we will go higher on those because we know those credits well, and we don't feel the risk is anything greater. So not until we grow our balance sheet significantly will we start doing larger deals. And that's one of our biggest challenges for the verticals in which we're competing is our balance sheet size. And we've been doing a pretty good job of it over the years of participating out a portion of it to keep clients. So I don't see a bunch of movement in the overall portfolio management doing a lot of larger deals. As far as participations go, you know, we will do some participations primarily on the fund finance side. I think we have about $70 million that's out there in terms of syndication. You know, that's a pretty good deal with very low risk. we'll do those to solidify ourselves in the venture community as well as deploy capital with acceptable risk for a higher yield.
Okay. Thank you very much.
Operator
There are no further questions at this time. I'd now like to turn the call back over to the presenters.
Well, this is our first public earnings call. We appreciate everybody uh uh showing up and your interest and your confidence and um if there's further follow-up you need uh obviously feel free to reach out to us and and contact us ladies and gentlemen this concludes today's call thank you all for joining and you may
