Avidbank Holdings, Inc. ($AVBH)

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Avidbank Holdings, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I'd like to introduce the presenters Chairman and CEO, Mark Mordell; Chief Financial Officer, Patrick Oakes; and Chief Operating Officer, Gina Thoma-Peterson. You may begin your conference.

Good morning. Thank you for joining us today for the Avidbank Holding's Quarter First Quarter 2026 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. Those statements are intended to be covered in 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.

Thanks, Gina. And thank you all for attending our Q1 earnings call. We appreciate your interest as well as your support. As we stated in the release overall, we're pleased with what we've accomplished not only for Q1 but certainly what we've done over the last several quarters, and putting ourselves in a -- in a more profitable metrics situation. I'm not a big believer in seasonality, but as far as first quarters go, this was a pretty good quarter for us. We usually have some pullback in shrinkage, and we were able to grow loans by about $25 million, and our core deposits were reasonably flat. Although Pat is going to give you certainly some more metric information and we're going to follow it up with some questions after that, so at this point, I'd like to turn it over to Pat to kind of go through the quarter, the high-level metrics, and we'll open up for questions.

Thanks, Mark. Good morning, everyone. Let me start with the headline numbers. So in the first quarter, we earned net income of $9 million or $0.84 per diluted share. That was up from $6.9 million or $0.65 per diluted share in the fourth quarter. Return on assets improved to 1.46% from 1.12%, and return on average equity increased to 12.7%. Turning to the balance sheet. As Mark said, loans grew $24 million in the first quarter. That was driven mainly by a $26 million increase in nonowner-occupied CRE loans, partially offset by a $9 million decline in C&I balances due to higher payoffs and pay downs. Overall, loans are up $332 million or 18% since March 31, 2025. Deposits also moved higher, up $13 million in the first quarter, and they're up $270 million or 14% since March 31, '25. We reported a net interest margin of 4.38% in the first quarter, up 25 basis points from the fourth quarter. Loan yields were essentially flat and our interest-bearing deposit costs came down 20 basis points. And just a reminder, the fourth quarter included a $726,000 interest reversal on nonperforming loans, which reduced our margin in the fourth quarter by 12 basis points. And in the first quarter, we also had the benefit of a special FHLB dividend, which added about 4 basis points to the margin. During the first quarter, we did see some upward pressure on our cost of interest-bearing deposits. The average cost for the quarter was $2.98 and the spot rate was $3.03 at March 31. The provision for credit losses was $1.4 million in the first quarter, down from $2.8 million in the fourth quarter. Net charge-offs for the quarter were $2.8 million or 52 basis points of average loans, primarily driven by the charge-off of two C&I credits. Nonperforming loans declined to $16.3 million or 75 basis points of loans, mainly reflecting the payoff of a construction loan and the charge-off of those two C&I credits. Noninterest income was $1.5 million compared to $1.8 million in the fourth quarter. We saw higher core banking fee income, including service charges, FX and credit card income. That was offset by lower warrant and success fee income and fund investment income. On the expense side, noninterest expense totaled $14.1 million, up $231,000 for the fourth quarter, mainly due to higher credit-related legal and professional fees. We also saw another improvement in our efficiency ratio, which came down to 15.4%. Salary and benefits were flat at $9.6 million. Lower salary and bonus expense was offset by higher payroll taxes and benefits expense, along with fewer capitalized loan origination costs. We added 3 people in the first quarter, bringing total head count to 154, and we expect to hire additional bankers in the second quarter. Book value per share increased to 26.33 and Tier 1 capital increased to 11.39. During the quarter, we also repurchased 25,000 shares at an average price of $27.69 for a total of $693,000. The effective tax rate for the quarter was 27.5%. That included a discrete tax benefit related to equity toward vesting and we continue to expect the tax rate to be in the mid-28% for the remainder of '26. With that, Mark, back to you.

Thanks, Pat. As you all can see, we've had a lot of improvements in our profitability metrics, which we mentioned earlier. And at this point, I just like to open it up for questions because that's what's really on your mind, so please.

[Operator Instructions] Your first question comes from the line of Andrew Terrell with Stephens.

I wanted to start off asking just a question around the SaaS exposure in venture lending. I appreciate the commentary you put in the presentation, it's about $165 million of exposure, it looks like. Can you just talk about -- it looks like you conducted a review in the quarter, and there's obviously a lot of headlines out there right now, but just maybe sum up for us what the conclusions around this review were? If you could talk about just kind of the -- any reserves specifically against this pool, whether you're worried about loss content? And then how should we think about your interest in this space, software specifically going forward? Are you pulling back the reins a bit modifying underwriting standards? Just kind of wondering on the gamut on the SaaS exposure.

Well, from a 30,000 feet, the SaaS exposure has evolved. So we did do a kind of a deep dive and really looked at where we were exposed. And what we're finding is that companies that -- it's just not SaaS. It's how they're dealing with AI. And so a lot of these companies that have a good space that are SaaS-based have been utilizing AI or starting to utilize it more in their business plan in order to compete. And those companies are going to be the top end of the food chain. It's the companies that aren't adapting that are going to be more suspect as we go forward. And if they're not able to get those funding -- the funding that's necessary because their metrics are off, because their platform is just not going to be as competitive as people anticipated, those are the ones that we're concerned about. So Pat can give some kind of the detail of how much dollar exposure we do have, but what we found is that the vertical integration of AI and SaaS model is really where we want to be. Those are much more specialized in workflow versus the horizontal pipe, which is kind of encompassing more broad-based aspects of it. Doesn't mean one is necessarily better than the other, but one just has a little bit more legs to it than the other at this point. And so we've done a strong analysis, talked to VCs, is there going to be additional losses embedded, I don't know. The -- when we're talking about early-stage investing, it's really are we going to let the -- their cash balances crossover to loan balances. And so it gives us another factor that we have to monitor months ahead before that cash gets -- approaches their loan balance. So we know if we need to pull investor abandonment clause or something of that nature. Are we going to let them borrow or are we going to let that cash cross over, and we're being pretty critical that from across the board from a credit perspective. You got any additional color there?

So as you can see from the schedule, we provided, right, with the breakdown we did with the venture group. It was really that horizontal stuff, smaller piece of that, that's more general that I think is the most concerned that are they going to better raise funds going forward. That portfolio is small. There's two loans in there that are either criticized or classified, it's about $4 million total, okay. In fact, one of those is cash flow positive, right? So so far, the portfolio is doing well. I mean the concern is what's going to happen 6, 12 months from now, right? So I think between our bankers and I think the investors and everybody else, I think everybody is on this and tracking this quite closely.

Great. Okay. And so I guess it sounds like important bifurcation of horizontal versus vertical. It sounds like within the vertical space, you're still going to be lending and forming new relationships, picking up new clients in that specific vertical. So no kind of change there just still being critical and diligent from a credit standpoint?

Well, I think there -- everybody is looking at it a little bit differently in terms of new fundings. Obviously, there's a lot more funding going into the AI space in the venture community at this point. So if there is a -- the new funding, you could argue you have a very strong model going forward. because they started off with integrating AI. Some of these companies that are 2, 3, 4 years old are needing to pivot and they needed to pivot just not today, but months or quarters ago in order to be more competitive given the explosive growth that the AI has had on the industry. So I think it all pours into the underwriting for everything that we're looking at. And it's very similar to what we've done for the last several years is how viable is the -- are these early-stage companies and what is their backing like and how strong is their business plan? And so it's just another factor that we're taking into account. And yes, we do have some legacy credits, and we're monitoring those pretty closely.

Okay. Great. I appreciate it. If I could move over as on the margin. You obviously outperformed a bit this quarter, even normalizing for BF HLB special. It sounds like maybe some deposit cost pressure into period end. But just talk about relative to that $2.99 interest-bearing costs, and I think you said $3.03 on the spot rate. Just where you're bringing on new deposits at on a weighted average basis and kind of general expectations for the margin as we move forward?

Yes. I think that's why to want to throw that $3.03 out there because look, we're a growth bank. We we're having to put some deposit costs on at a higher cost than we'd like at this point, right, which is probably in the low $3s at this point on average. I think hopefully, we can drive that do over time. But at this point, we want to grow deposits, right? So I would assume that, that's going to stay above 3% at this point, cost of interest-bearing deposits. Could it creep up a little bit? Yes, potentially short term. So that will -- that's going to take the margin down a little bit from where it is today. I would realize that loan yields, I'm not worried about. I think that loan yield will be relatively stable. Could it go up or down a few basis points? Sure, with loan fees and the mix change and all that stuff. But so you'll see that margin move down a little bit here. That's for sure. And one other factor too is just to keep in mind, DDA. DDA was probably a little bit high at $3.31. We had some clients bringing some money late in the quarter, that moved to the DDA account that change as we moved into April. So I wouldn't count on that DDA remaining as high as it is today. That's a little bit of pressure to that we're seeing is to grow that. Hopefully, we can keep it in the mid-20s, but it is probably a little bit elevated.

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

This is Adam Cole on for Matthew Clark. Maybe just if we could get your updated thoughts on loan and deposit growth expectations for the year. I think your previous target was in the low double-digit range. So I was just curious if that's changed at all? And maybe more broadly, what you're hearing from your borrowers given some of the macro uncertainty?

Well, I think there were -- we did experience a little softness in the quarter in terms of people making decisions and fundraising and that aspect of it. But I don't think our outlook has really changed. I think it's low double digits going forward. We have some work to do on the deposit side, as Pat had mentioned, but feel pretty good about the overall pipeline that we're seeing across the -- all verticals as far as loans go. And in terms of deposits, we have a strong pipeline, but I think timing is an issue at this point a little bit more because I think fundings are seemingly taking a little bit longer. People are doing a little extra diligence. There's geopolitical noise that's been out there, which is constantly out there. So I don't know why that should be as much of a factor in this quarter as it was historically every quarter in the last several years. So our outlook hasn't changed. I think we should -- we are built for a growth bank, and we should be low double digits for the year, and we do have some work to do on the liability side of the balance sheet, as I mentioned.

Got it. I appreciate the color there. Maybe switching to expenses. They were really well managed during the quarter. So I was just curious how you're thinking about maybe a 2Q run rate and overall growth for the year?

So what I would say is I kind of mentioned that we've been doing some hiring here. Mark can talk a little bit more detail around that in the first quarter, then more in the second quarter. So that's going to put pressure on the growth in expenses here along with Q1 merit increase and some other things. So it's really -- the variable here is really that personnel expense. It was $9.5 million-ish. I could see that creeping up to closer to $10 million for the quarter when you factor in everything. We did have a little bit of higher legal and professional fees that could come down a little bit to offset some of that. But expenses will definitely be up in the second quarter. But hopefully, that's all investment in growth here.

Yes. I think Pat's spot on, on that. I think we have -- with the successful IPO that we had and our profitability metrics on where they are and with our plan -- long-term plan of scaling our operation, I think we will likely add more bankers this year than we have in the last several years. So as we mentioned, we brought on, I think, 3 in Q1, and we're probably going to have 2 to 4 in -- more in Q2 and probably a couple more after that as we look down the road. So I think there's some opportunity out there. There's been some consolidation, and we're going to take advantage of it given our overall business plan.

Your next question comes from the line of Gary Tenner with D.A. Davidson.

I wanted to kind of follow up on the SaaS conversation earlier, just kind of broaden it to the larger venture lending business. Obviously, SaaS is a big part of that business. But just curious about kind of the pace of what you're seeing in the pace of venture investment into startups at this point? Has that -- have you seen much diminution of that flow and then how that impacts both the venture lending and potential the capital call business?

Well, as far as venture lending goes, I think it has gained a lot more momentum over the last couple of quarters as SaaS apocalypse or whatever they're calling at this point. So I think everyone is doing the homework that's necessary because nobody wants to throw good money after bad. And so there's no question that the new fundings are better valuations than a company that's 2 or 3 years old. And the question is how can they pivot? Do they need to pivot? And so I think the VCs and the entrepreneurs out there are looking at it very analytically and -- but when this kind of transition or disruption happens, they really choose -- decide to pick their horses. And so for us, again, we monitor everything on a monthly basis in terms of growth, in terms of metrics and if they're not on plan, if they're falling off plan, we know that ahead of time. We're having these conversations way ahead of time. So I do think just like any time a vertical gets really hot, which AI is, just like Cyber was a few years ago, there's more money going into AI-based investments than most anything else at this point. So we just got to use solid judgment across the board. And as far as the new investments are being made and really be ultra-critical on the investments that we do have at this point, determining do they have an opportunity for new funding or are they going to die on the vine and are we going to let that cash cross over, like I mentioned earlier, our loan balance because that's our only Savior at that point, to not let them borrow or sweep the account if necessary, because investors are not going to continue to support the company.

Got it. And I'm sure you would have flagged this. I just wanted to confirm the $3.1 million construction loan that paid off in the quarter, there was no related interest recovery or benefit from that, correct?

No, we were -- we had everything that was owed to us on that one.

[Operator Instructions] Your next question comes from the line of Tim Coffey with Brean Capital.

Mark, if I can just kind of follow back up on the SaaS discussion. I appreciate the details in the deck, kind of parsing through the loans and deposit stuff. It looks like the SaaS portfolio, both vertical and horizontal have loan-to-deposit ratios somewhere around 45%, whereas the total venture portfolio is somewhere around 30% loan to deposit ratio. I'm wondering, historically speaking, has the SaaS book always kind of been there in that kind of 45% ratio?

No, I would say, look, I think what I would hear from our bankers is these companies are still getting funding, right? I would say it's at a slower pace than it was previously, right? This is almost like '22, right, where the rounds of funding shrink a little bit, they're not getting that much, right? So I would just be a little bit more careful, I think, as we've given out funding, especially in some of the horizontal stuff, right? So it probably is a little bit less than it has been historically. We do run that analysis, I haven't got it, but that would -- my gut would tell me that a little bit.

I think what Pat is saying does make sense. I think when you do have a little stress in a vertical, they do tend to spoon feed it as opposed to give it 2 years of runway, which is what has typically happened in a more less concerning vertical. And so I think companies are getting funded, but it's more metric based. So they may just fund it for the next 4 to 6 months as opposed to 2 years see where they end up on that, see if they're making -- getting the traction that's necessary. And that's kind of typical when there's this kind of disruption in the market.

And that's why we're taking a closer look at these 60-plus counts, right? Watch them very, very carefully.

Right, right. It sounds like a topic, I should follow up with the next quarter to kind of see how things are playing out.

Probably will happen in the next couple of quarters.

I'll mark that down. Mark, as you talk to clients in the technology space in the interest space, do you get a sense that there's been any material slowdown in planned IPOs or takeout activity?

Yes. I think the IPO market has been certainly quiet at death for a period of time. So -- and M&A, given some of the disruption is slowing down at this point until people kind of figure out what's viable and what's not. I think there's going to be a lot of companies out there that are going to be looking for soft landings that aren't going to find a soft landing. So whenever there's this kind of disruption, people are pretty cautious at this point because I think with this kind of disruption, there's -- some people feel there's bound to be more opportunities, the more stress there is in the marketplace as opposed to getting too far ahead of it. And I think we got to just continue to monitor the overall space like we do. But certainly, with this disruption, we have to really pay attention to where money is flowing and what's happening there from an M&A perspective. Because the IPO market just I think, is not something we're focused on at this point.

Okay. All right. I appreciate that color. And then, Mark, as you go look to add bankers, is there specific geographies or business lines you're looking to support?

I think the overall feeling has continued to be the same that the bankers that we're adding are going to be more in the business lines than real estate. We do a good job in commercial real estate, a good job in construction. But as far as the number of employees go, you can run that -- those two verticals with a lot less employees than we're talking about in the business lines and venture and traditional C&I, asset-based, sponsor, search. So I think what you're going to see those bankers are going to be more in the business lines of the overall strategy because we feel that adds more to our franchise value of that.

Okay. Great. And then, Pat, a question about the margin. So coming end of the quarter, I think we were kind of looking for margin in the fourth quarter to be somewhere around 4.20, 4.25 million. Does that still seem reasonable given all the puts and takes we've discussed today?

Yes. That probably -- it's going to be below -- my guess is below that 4.30%, maybe 4.25%-ish , right, in that general range, my guess. Hopefully, we can say above 4.25%. But it's probably that 4.25% to 4.30% range, I would guess. -- certainly moving pieces to it, right?

Right. Yes, deposit costs being the kind of the biggest one. It sounds like.

Yes.

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

Maybe just a follow-up on credit quality. I was wondering if you could just provide some additional color on what drove the increase in criticized loans during the quarter and if there's any concern there?

We're always concerned about credit for sure. So I think the -- I think the biggest increase was a criticized real estate loan, which drove that up. And we think it's a money good loan again, but it's performing but there's some concerns about a near-term tenant vacating. So low loan to value, I think it's fine. I think we're going to get through it. So that's the main reason for the increase was a relationship that needed to be downgraded that consisted of 2 buildings in the South Bay here.

There are no further questions at this time. I would like to turn the call back over to the presenters.

Well, again, we certainly do appreciate everyone's interest and support, and I appreciate you attending our Q1 earnings release and earnings call and look forward to following up with a solid quarter for Q2.

This concludes today's conference call. You may now disconnect.