AVBH — Q2 2026 Financial Report Analysis

Avidbank, a San Jose business bank that lends mostly to Bay Area companies (including venture-backed tech firms), earned $7.6 million, or $0.71 per diluted share, in the second quarter of 2026. Net income was 32% higher than a year earlier, but earnings per share fell 5% because the bank sold about 3 million new shares in its August 2025 IPO, so the profit is now split across roughly 40% more shares. Underneath, the business grew: loans rose 16% and deposits 16% from a year ago, and the bank earns a much wider spread on its money than it did in 2025. The quarter was muddied by a $2.6 million lawsuit settlement, a $1.3 million life-insurance payout, and a rise in loans the bank itself flags as weak.

At a glance

• Net interest income $26.7M, up 31%. This is the bank's core earnings line (interest it collects on loans and securities minus interest it pays depositors), and it grew far faster than the loan book because of a securities overhaul done in 2025.
• Net interest margin 4.26%, down from 4.38% last quarter. The bank's spread is still well above the 3.60% of a year ago, but it slipped for the first time in several quarters as deposit costs edged up.
• Criticized loans 2.16% of total loans, up from 1.57% in March. Management said it sees no "systemic or broad-based deterioration," but the share of loans its own examiners flag for weakness is the highest of the last five quarters.

Key figures

Source: Avidbank Holdings Form 10-Q for the quarter ended June 30, 2026 and the Q2 2026 earnings release (Exhibit 99.1, July 23, 2026). The CET1 ratio is the company's estimate as stated in the release. Avidbank has no goodwill or intangible assets, so its tangible equity equals its reported equity; it does not report a separate return-on-tangible-equity figure.

Why the core earnings line grew so fast

A bank's main product is the gap between what it earns on loans and securities and what it pays for deposits and borrowings. That gap, in dollars, is net interest income; as a percentage of the bank's interest-earning assets it is the net interest margin (NIM). Avidbank's NIM jumped from 3.60% to 4.26% in a year, which is why net interest income (+31%) grew about twice as fast as loans (+16%).

Three things drove it, all spelled out in the filing:

• The 2025 securities overhaul. In the third quarter of 2025 Avidbank sold low-yielding bonds at a $62.4 million pre-tax loss (which caused a $37.7 million net loss that quarter) and bought higher-yielding ones. The yield on its securities went from 2.34% to 4.68%. Interest on securities rose to $2.56 million from $1.70 million even though the average securities portfolio shrank from $294 million to $220 million.
• Cheaper deposits. Following Federal Reserve rate cuts, the bank's average cost of deposits fell 49 basis points to 2.29% (a basis point is one-hundredth of a percentage point). Interest paid on deposits dropped to $12.6 million from $13.7 million despite 12% more average deposits.
• Paying off expensive borrowing. The IPO cash and deposit growth let the bank cut short-term borrowings from $145 million a year ago to zero at June 30. Interest on those borrowings fell to $196 thousand from $1.24 million.

Working the other way, loan yields fell 34 basis points to 6.67% because most of Avidbank's loans float with the Prime rate, which moved down with the Fed.

Why NIM dipped versus last quarter (4.38% to 4.26%): the bank cites higher deposit costs (interest-bearing deposits cost 3.06%, up 8 basis points) and a smaller dividend from the Federal Home Loan Bank, its wholesale lender. That dividend fell to $20 thousand from $426 thousand in Q1, which had included a one-time $241 thousand special payment, and the FHLB cut its dividend rate for banks with no borrowings outstanding.

The quarter's two one-offs

• $2.6 million lawsuit settlement (Klearnow Corporation v. Avidbank), booked in other operating expenses, which jumped to $3.9 million from $1.0 million a year ago.
• About $1.3 million of tax-free income from bank-owned life insurance death benefits, which more than doubled non-interest income to $3.1 million.

Strip both out and the company's adjusted net income is $8.2 million, or $0.76 a share, still below Q1's $0.84. So the step down from the first quarter is not only the lawsuit: a $2.8 million provision for loan losses (versus $1.4 million in Q1) also weighed on it.

The efficiency ratio (operating costs as a share of revenue; lower is better, and it shows how many cents the bank spends to earn each dollar) was 55.41% as reported and 48.73% on the company's adjusted basis, versus 57.77% a year ago. Staff grew to 162 full-time equivalents from 149 as the bank hired lenders and opened a new SBA (Small Business Administration) lending division.

What the headline numbers hide

Credit is the thing to watch. A year ago only 0.07% of Avidbank's loans were non-performing (no longer paying as agreed). Now it is 0.65%, all of it construction and land loans ($14.4 million). That is down from a peak of 1.14% at December 31, 2025, but mostly because problem loans were resolved through losses rather than repaid in full: the bank charged off two commercial loans totaling $3.2 million in Q1 and $1.9 million of one construction loan in Q2. A charge-off is the bank formally writing a loan down as unrecoverable. Net charge-offs ran at 0.35% of loans annualized in Q2 and 0.43% for the half-year, after essentially zero in the first half of 2025.

More telling for what comes next: criticized loans (loans the bank's own reviewers grade as showing weakness, a step before "classified" loans with a real risk of loss) rose to 2.16% of total loans from 1.57% in March and 1.87% a year ago. Classified loans edged up to 0.96% from 0.92%. The CEO acknowledged the increase while saying it isn't broad-based. The reserve the bank holds against expected losses covers 1.09% of loans including unfunded commitments, slightly lower than the 1.15% of a year ago even though problem loans are higher. That is thin if the criticized bucket keeps growing.

The loan mix is shifting toward riskier-but-higher-yield business lending. Commercial and industrial loans grew $70.9 million in the quarter and $256.6 million over the year, to about 50% of the book. Within that, venture loans (to young tech companies whose repayment often depends on raising more money from investors) grew to $323.5 million, or 15% of loans, from 13% at year-end. Construction and land loans, where the current problem loans sit, were cut by $36.1 million in the quarter.

Deposit growth came partly from rented money. Period-end deposits jumped $122.6 million in the quarter, but $27.0 million of that was brokered deposits (money placed by intermediaries, which tends to be pricier and less loyal than a local customer's account), now $65.5 million versus none at year-end. Non-interest-bearing checking, the cheapest funding, fell $8.6 million. The filing also notes that one depositor, a venture-backed software company, holds $133.4 million (about 6% of deposits), and that roughly 40% of deposits are uninsured. Average loans are 99% of average deposits, so the bank is close to fully lent out.

Cash and the EPS math check out. Operating cash flow for the first half was $24.1 million against net income of $16.7 million, so profits are backed by cash. The reason EPS fell while net income rose is entirely the IPO: average diluted shares went from 7.69 million to 10.78 million. Nothing in EPS came from buybacks (none in Q2; 25,000 shares in Q1). The tax rate fell to 27.0% from 30.1%, mostly because the insurance payout isn't taxed, which flattered reported earnings slightly.

Takeaway: Avidbank's earnings power has moved up a level: the 2025 bond sale and cheaper deposits lifted its margin from 3.60% to 4.26%, and that is why net interest income grew 31% on 16% loan growth. The open question is credit. Problem loans went from almost none to 0.65% of the book, charge-offs have become a regular line item, and the "watch list" of criticized loans grew again this quarter, while the cushion set aside for losses is slightly thinner than a year ago.

What to watch next

Avidbank does not give earnings guidance. Its own disclosures point to what matters in the coming quarters:

• Rates. The bank is "asset-sensitive": its model shows a 100 basis point rate cut would lower net interest income by about 2.0% over 12 months, and a 100 basis point rise would add about 4.2%. More Fed cuts would keep squeezing loan yields faster than deposit costs fall, so the 4.38% Q1 margin may prove the high point.
• Funding cost after the quarter. On August 26, 2026 the company sold $30 million of 7.00% subordinated notes due 2036 to buy back and redeem its $22 million of 5.000% notes due 2029. That adds capital that counts toward regulatory requirements, but at a higher interest rate on a larger balance, a modest extra cost from Q3 onward.
• Credit trend. Whether criticized loans (2.16%) keep rising, and whether the remaining $14.4 million of non-performing construction loans resolves without further large write-downs.
• Funding mix. Whether loan growth can keep being funded by core customer deposits rather than brokered money, given loans already roughly equal deposits.

Our view: with capital at an 11.35% CET1 ratio (common equity as a share of risk-weighted assets, the main regulatory measure of a bank's loss cushion) and a 4%+ margin, the bank has room to absorb a few more bad loans. But this quarter's $2.8 million provision already absorbed about a fifth of the $13.3 million the bank earned before provisions and tax, and return on equity was a modest 10.4%. If provisions stay at that level while criticized loans keep rising, credit, not loan growth, will decide how much of the restructuring's margin gain reaches shareholders.