Good morning.

My name is Ben and I will be your conference operator today. At this time, I would like to welcome everyone to the Avid Bank Holdings, Inc., third quarter 2026 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 Peterson. You may begin your conference.

Good morning. Thank you for joining us today for the Avid Bank Holdings third quarter 2026 earnings 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 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 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.

Thank you, Gina, and thank you all for joining us this morning. We appreciate your continued interest and support in our company and our story. Overall, the third quarter was very strong for us. Profitability improved, we continued to grow loans, and our bankers generated meaningful core deposit growth across the franchise. Net income increased to $10.2 million for the quarter, return on average assets improved to 1.42%, and our efficiency ratio was below 50%. I think these results demonstrate the improvement in earnings power of our franchise and the benefit of the investments we have made in our people and business lines. Turning to growth, loans increased approximately $58 million for the quarter or 10% annualized and were up 17% over the past year. Growth was broad-based with contributions from CNI, multifamily, and owner-occupied commercial real estate being the chief drivers. Our loan pipelines continue to be healthy into Q4 and hopefully into next year. Our construction and land portfolio continues to decline because of the elevated payoffs, so the growth we generated across the rest of the bank was particularly encouraging. As mentioned earlier, our loan pipelines continue to be strong, and we do expect construction payoffs to remain elevated here in the fourth quarter. We believe we're getting closer to the point where that headwind begins to moderate and becomes more normalized as it has over the last 15 years. On deposits, Reported increase included approximately a $270 million deposit from an existing client following the sale from a portion of their business. We knew from the beginning that these funds would be temporary, and we expect them to leave over the course of the fourth quarter. More importantly, excluding that temporary inflated balance and broker deposits, we generated approximately $76 million of core deposit growth. That growth came from relationships across the franchise and is a good indication of the progress our bankers are making on the funding side of the balance sheet. Turning to credit, non-performing loans increased modestly to 70 basis points of total loans after we placed a $1.5 million landlord on non-accrual. As I said many times before, we never take credit for granted. We continue to monitor the portfolio closely and actively manage the credit to require additional attention. At the same time, net charges are essentially zero during the quarter, and we are not seeing any broad-based credit deterioration across the portfolio. We also strengthened our capital during the quarter by issuing $30 million of new subordinated debt and redeeming our existing $22 million issuance. That provided additional support for continued organic growth while maintaining strong capital ratios. I'm pleased with the quarter. We are generating better profitability, maintaining solid growth across diversified commercial banking platform, and are continuing to invest in the franchise. There's always more work to do, particularly around the funding and the credits we are actively managing, but I believe we are well positioned to move into the fourth quarter. With that, I'll end my remarks and turn the call over to Pat to walk through the quarter in more detail. Thanks, Mark. Good morning, everyone.

For the third quarter, we reported $0.94 per diluted share compared with $0.71 per diluted share in the second quarter. Net interest income increased $2 million to $28.7 million, benefiting from higher cash balance related to the increase in deposits, higher loan balances, and a larger investment securities portfolio. The net interest margin was $4.07 in the third quarter, down 19 basis points from the second quarter. average interest earning cash balances that were $205 million higher during the quarter, including the impact from the temporary deposits Mark mentioned earlier, along with the overall strong growth in deposit average balances. The September increase in the Fed funds rate occurred late in the quarter, so it only had a minimal impact on the third quarter margin. Looking ahead, we anticipate that our asset-sensitive balance sheet will benefit from the rate increase in the fourth quarter. The cost of our interest-bearing deposits decreased nine basis points to $297 in the quarter, primarily because of the impact of the temporary deposits. Excluding those deposits, the spot rate at September 30th increased to $313 from $307 at June 30th, primarily due to the September increase in the Fed funds rate. Non-interest income was $1.7 million, compared with $3.1 million in the second quarter. The second quarter included approximately $1.3 million of tax-exempt Boley death benefit proceeds. Non-interest expense was $15.1 million, compared with $16.5 million in the second quarter. The prior quarter included a $2.6 million litigation settlement. Without that settlement, expenses increased $1.3 million, driven primarily by higher compensation expense and credit-related legal expenses and professional fees. We ended the quarter with 171 full-time equivalent employees compared with 162 at June 30th and 151 at year end. Turning to capital, at quarter end, our tier one leverage ratio was 1082 and our total risk-based capital was 1348. Book value per share was 2724, a 4% annualized increase from the second quarter, despite the negative impact of higher unrealized losses as long-term interest rates increased. Book value per share has increased 9% since last September. With that, Mark, I'll turn it back to you.

All right. Thank you, Pat. That kind of summarizes the quarter. Now I think we're ready to open up to questions, please.

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&A roster. Your first question from the line of Matthew Clark with Piper Sandler. Your line is open. Please go ahead.

Hey, good morning, everyone. Just to round out the margin discussion, Pat, I think you gave a spot margin, but do you have the spot rate on deposit at the End of September, maybe even an adjusted spot rate, assuming those balances, that 270 leaves. And then what kind of beta are you trying to manage through the cycle here?

Sure. So excluding all these temporary deposits, we're estimating the spot rate at September 30th was around 313, up from a 307 last quarter. So about six basis points increase so far. And that was all driven by the September rate increase. You know, obviously we'll see a little more pressure here going forward, but we think that, you know, we'll better keep that beta, you know, we're pretty optimistic below 50. How much below that? We'll have to see, hopefully quite a bit, but I don't think it'll go below, you know, above 50, hopefully closer to 40 somewhere.

Okay. And maybe, sorry, I missed that earlier. And then just the adjusted margin in September, I know it's 17 basis points impact from the temporary balances, but I guess in the month of September, how did that adjusted margin look?

With all this noise, I don't really want to give a September margin. That's kind of what we guided you to, that 17 basis point increase. So if you put that on, you know, if you kind of normalize cash balances, right, that margin was probably down a little bit, a couple of basis points here from last quarter. So, you know, that normalized margin probably is closer to, you know, the low 420s. before the rate increase, obviously, or the September rate increase.

Yep, yep, understood, okay. And then just on expenses, the run rate here, do you expect going forward on operating expenses?

Um... You know, we'll probably still see salary and benefits increase here, but I think that's going to be pretty much offset by some of these higher legal and professional fees as we saw in the quarter. So, you know, my best get is flattish to maybe up slightly for the fourth quarter.

Okay. Okay. Thank you.

Your next question from the line of Gary Tenner with DA Davidson. Your line is open. Please go ahead.

Thanks. Good morning. Morning, Gary. Hey, I wanted to just ask a question on the loan front. Mark, you gave some color, obviously, in the construction book, and this quarter's growth overall was good. I know historically the fourth quarter has been a good quarter for C&I. As you look at the pipelines now and think about the fourth quarter, any reason to think that that will not be kind of the typical outcome in the fourth quarter?

There's no reason to expect that Q4 shouldn't be a pretty strong quarter for us. It seems, you know, I don't like patterns all that much, but you go back five or six years, it seems Q3, Q4 are always stronger, and Q4 is, you know, the top quarter. So we feel good about what we're seeing in the pipeline and what we close for the remainder of the year.

Okay, appreciate that. And then just a minor question on the broker deposits, I think down to about $10 million. at the end of September. Pat, will those go to zero in the fourth quarter, or will any linger into 2027?

Well, that $10 million will mature in the fourth quarter, and then we'll decide if we want to add some before year end, depending on how, you know, from a funding perspective, we feel like it's a good deal to do that as a funding tool. But the existing stuff should all be gone, and we'll just make some decisions going forward how we use it.

Okay. Thank you. Thank you.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question from the line of Andrew Terrell with Stevens. Your line is open. Please go ahead.

Hey, good morning. Pat or Mark, maybe just to start, can you just talk about some of the new hires you've made? It seemed like really a quarter of a hiring standpoint. I'd be curious on just the HOA group, SBA team, and then can you give us an update or refresh on kind of the hiring pipeline more broadly?

The hiring pipeline for the balance of the year is going to be pretty modest. It will still always be opportunistic. But I think the focus in SBA right now is we've got a reasonable pipeline. The focus is on becoming a preferred lender. So we expect that to happen soon. Realistically, Q1, realistically. So I don't think we're going to sell any loans or anything of that nature. We're just getting our infrastructure underneath us and getting these things processed, taking a little bit longer because we're not a preferred lender at this point. So I think the HOA team is doing what they need to be doing, pretty focused. You know, they'll make an impact on some balances this year, but it'll be pretty modest. And next year is the expectation of really getting some traction. You know, the specialty deposits folks that we have, the HOA, they've been pretty active. Again, they have goals for this year, but really getting their legs underneath them and getting some credibility in the marketplace and having 27 being the year that they are much more impactful and much more impactful on our balance sheet. Other than that, the bankers that we've hired and, you know, certainly we've, as everyone's aware, we hired a new president. So, you know, we're really building on a team and focusing on the infrastructure for 27. I mean, we've taken care of capital, we've taken care of facilities, we've taken care of our sub-debt, we uplisted, we got some currency to trade, and it's about stacking up quarter to quarter and year to year in compounding earnings going forward. So We're pretty focused on the production from our existing bankers as well as the new bankers.

Great. I really appreciate it. And then just to ask on maybe more of a question on kind of longer-term expense growth, if I look at the efficiency ratio, I mean, this is the second quarter in a row, sub-50%. You guys are holding the line, and revenue growth obviously helps. But when we think about longer-term efficiency ratio, Is mid to high 40%, is that a reasonable bar? Just as you look at it and you think about the expense growth and investments you need to make, do you think it can go further below that or just any thoughts on longer term efficiency?

Well, I think we're really hoping we've set a bar below 50 at this point or around 50 to down, right? And it's not going to move down quickly, right? But I think the ultimate goal is to hopefully leverage, obviously, all the hiring that we're doing to grow revenue at a good pace to offset that expense growth. We're still going to add people and all that stuff, so hopefully it does continue to move down, but I think it'll be a slow incremental move down if it is. I would agree with that.

Okay, great. Thank you for taking the questions.

Your next question from the line of Andrew Leisch with Stonex Financial. Your line is open. Please go ahead.

Good morning, everyone. Just a question, Pat, if you have handy, what new loan yields were coming on it during the quarter? Maybe a blended average.

Yeah, so, you know, this is without fees, right? This is just the core loan yield. You know, it's more like 682 or so in the 680s.

Got it. Maybe a little bit higher with some fees. So I think just then looking at the margin going forward, certainly you'll get some benefit from the rate hike, but net-net, just given that you're very much in growth mode, do you think the margin maybe will trail off a little bit over time, even with some rate hikes? I mean, still, profitability gets better, but just like net-net, the margin might kind of get lower?

Right. So we'll benefit when the Fed increases rates, right? And then outside of that, you're asking... What's going to happen with that? You know, boy, it's really dependent. You know, loan yield, you can see what it's going to do, right? It'll be flattish and move up with an increased rate. It's really dependent on deposit costs and how much we need to pay up. It's pretty competitive out there. I'm hoping that that gets better, but could there be pressure going forward potentially? Boy, it's really just hard because it's all the funding side that really dictates that and the new deposit growth. I think I'm hoping with some of these new initiatives like the HOA and some other things we're working on that we can drive down that deposit cost over time to take some of that pressure away. So I guess my long answer would be I hope not. I hope we can keep it stable.

Got it. Nope, that's very helpful. You've covered all my other questions. I'll step back.

Your next question from the line of Sim Coffee with Green Capital. Your line is open. Please go ahead.

Mark, looking into the face of the rate hiking cycle here, how resilient do you think your customers and your markets are to higher rates? Is there a point where we see a certain number of rate hikes and at that point things start to stall?

It's certainly possible depending on where they go, but I think most of the companies that we're banking here are pretty seasoned and aren't highly leveraged. Those rate hikes are painful for our clients for sure, but we monitor pretty closely. We do sensitivity tests and see where the thresholds may happen, but At this point, we're not concerned about that. I think companies are performing pretty well, and they got some margin there. So we feel pretty good about it.

Great. Thank you for that. And then Patrick, is the right tax rate somewhere between 27% and 28%?

For this year. It's lower than it typically is because of the Bowling proceeds received in the second quarter. Kind of drove that down for the year. And I think it'll tick back up next year to that, you know, mid-28s.

Okay, great. Those are my questions. Thank you.

With no further questions, I would like to turn the call back over to the presenters.

This is Mark, and one of the things that I did fail to maybe clarify a little bit when we talked about the loan growth, we have really solid pipelines across, including construction. But we do have those elevated payoffs in construction, which were significantly delayed from getting started. So I think the wild card for actual loan growth of how much that's going to be is going to be what kind of payoffs actually materialize in Q4 here. I think we're coming to the end of it, like I mentioned earlier, but that's probably the wild card for Q4. There have been booking new commitments, but those of you that understand how construction works, that we're trading 100% funded loans for 10% funded loans for the new ones that are coming on because it does take 18, 24 months to be fully drawn on. So just a little bit of caution. That's probably the wild card because it's been a two-year of consistent payoffs, which is a good thing in construction, but it does impact overall loan growth. So with that, I'll close it up and say, again, thank you all for your interest in Avid Bank. If you have any further questions that Pat or I can answer, please feel free to reach out and appreciate your interest. Have a great rest of your day.

This concludes today's call. Thank you for attending.