Avidbank Holdings (NASDAQ:AVBH) Q1 2026 Earnings Call

0:00 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 twenty twenty six Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Thank you. I'd like to introduce the presenters, Chairman and CEO, Mark Mordell Chief Financial Officer, Pat Oaks and Chief Operating Officer, Gina Tomah Peterson.

0:49 You may begin your conference. Good morning. Thank you for joining us today for the Avidbank's holding quarter first quarter twenty twenty six 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.

1:40 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 in putting ourselves in more metric situation. I'm not a big believer in seasonality, but as far as first quarters goes, this was a pretty good quarter for us.

2:28 We usually have some pullback in shrinkage, and we were able to grow loans by about 25,000,000, and our core deposits were reasonably flat. Although Pat's 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 $9,000,000 or $0.84 per diluted share. That was up from $6,900,000 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%.

3:16 Turning to the balance sheet. As Mark said, loans grew $24,000,000 in the first quarter. That was driven mainly by a $26,000,000 increase in non owner occupied CRE loans, partially offset by a $9,000,000 decline in C and I balances due to higher payoffs and paydowns. Overall, loans are up $332,000,000 or 18% since 03/31/2025. Deposits also moved higher, up $13,000,000 in the first quarter, and they're up $270,000,000 or 14% since 03/31/2025. We reported a net interest margin of four thirty eight 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.

4:02 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 four 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 $1,400,000 in the first quarter, down from $2,800,000 in the fourth quarter. Net charge offs for the quarter were $2,800,000 or 52 basis points of average loans, primarily driven by the charge off of two C and I credits.

4:50 Nonperforming loans declined $16,300,000 or 75 basis points of loans, mainly reflecting the payoff of a construction loan and the charge off of those two C and I credits. Noninterest income was $1,500,000 compared to $1,800,000 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 $14,100,000 up $231,000 from 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 50.4%.

5:35 Salary and benefits were flat at $9,600,000 Lower salary and bonus expense was offset by higher payroll taxes and benefits expense, along with fewer capitalized loan origination costs. We added three people in the first quarter, bringing total headcount to 154, and we expect to hire additional bankers in the second quarter. Book value per share increased to $26.33 and Tier one 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 award vesting, and we continue to expect the tax rate to be in the mid-28s for the remainder of 'twenty six.

6:25 With that, Mark, I'll turn it 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'd just like to open it up for questions because that's what's really on your mind. Please. Your first question comes from the line of Andrew Terrell with Stephens. Your line is open. Hey, good morning. Good morning, Andrew. Hey, 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 $165,000,000 of exposure, it looks like.

7:24 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 lost 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 kinda wanna run the gambit on the SaaS exposure. Well, open from a 30,000 feet, the the SaaS exposures evolved. So we did we did do 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.

8:15 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 those companies are gonna be the top end of the food chain. It's the companies that aren't adapting that that are gonna be more suspect as we go forward. And if they're not if they're not able to get those funding the the funding that's necessary because their metrics are off, because their their platform is just not gonna be as competitive as people anticipated, those are the ones that we're concerned about. So Pat can get into some kind of the detail of how much dollar exposure we do have, But what what we found is that vertical integration of of AI and SaaS model is really where we wanna be. Those are much more specialized in workflow versus the horizontal type, which is kinda encompassing more broad based aspects of it. Doesn't mean one's necessarily better than the other, but one just has a little bit more legs to it than than the other at this point. And so we've done a strong analysis, talked to VCs.

9:35 Is there gonna be additional losses embedded? I don't know. When we're talking about early stage investing, it's really are we gonna let their cash balances cross over 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 an investor abandonment clause or something of that nature, are we going to let them borrow, or are we going to let that cash crossover? And we're being pretty critical of that from across the board from a credit perspective. You got any additional color there? 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, the smaller piece of that that's more general that I think is the most concern, that are they going to better raise funds going forward?

10:27 That portfolio is small. There's two loans in there that are either criticized or classified, and it's about $4,000,000 total. In fact, one of those is cash flow positive. So far, the portfolio is doing well. The concern is what's going to happen six to twelve months from now. I think, between our bankers and I think the investors and everybody else, I think everybody's 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 in that specific vertical? So no no kind of change there, just still being, you know, critical and diligent from a credit standpoint?

11:19 Well, I think they're everybody's looking at it a little bit differently in terms of new fundings. Obviously, there's a lot more fundings going into the AI space in the venture community at this point. So if there isn't a the new funding, you know, you could argue have a have a a very strong model going forward, you know, because they started off with integrating AI. Some of these companies that are two, three, four years old are needing to pivot, and they've needed to pivot, just not today, but months or quarters ago in order to be more competitive given the explosive growth that AI's 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. It's how viable is the are these, early stage companies, and what's their backing like and, you know, how strong is their business plan. And so it's just another factor that we're taking into account.

12:21 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, Pat, just on the margin. You obviously outperformed a bit this quarter even, you know, normalizing for the FHLB special. It sounds like maybe some deposit cost pressure into period end, but just talk about relative to that $2.99 interest bearing cost, and I think you said $3.3 on the spot rate. Just, you know, 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? Yeah, I think that's why I wanted to throw that three zero three out there. Because, look, we're a growth bank. 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 threes at this point on average.

13:17 I think, hopefully, we can drive that down 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. That's going to take the margin down a little bit from where it is today. I would realize that. Loan yield, I'm not as 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. 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 threethirty one. We had some clients bringing some money late in the quarter that moved to the DDA account. That change has moved in April.

14:05 I wouldn't count on that DDA remaining as high as it is today. That's a little bit of pressure, too, that we're seeing, is to grow that. So hopefully, we can keep it in the mid-20s, but it is probably a little bit elevated. Yep. Okay, great. Thank you guys for taking the questions. Your next question comes from the line of Matthew Clark with Piper Sandler. Your line is open. Hey, good morning. This is Adam Kroll on for Matthew Clark. And thanks for taking my question. Hello. Good morning. 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 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?

15:04 Well, I think there were we did experience a little softness in the quarter in terms of people making decisions and fundraising and and that aspect of it. But, you know, I don't think our outlook has really changed. I think it's a 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 pipelines that we're seeing across all verticals as far as loans go. 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.

15:53 So our outlook hasn't changed. Changed. I think we are built for a growth bank, 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 little pressure on the growth in expenses here, along with Q1 merit increases and other things.

16:43 It's really the variable here is really that personnel expense. It was $9,500,000 ish. I could see that creeping up to closer to $10,000,000 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 and growth here. Yeah, I think Pat's spot on on that. I think we have, with the successful IPO that we had and our profitability metrics going where they are, and with our 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, three in Q1, and we're probably gonna have two to four in more in q two, and probably a couple more after that as we look down the road. So I think there's some opportunity out there, and some consolidation, and we're gonna take advantage of it given given the given our overall business plan.

17:57 Got it. Thanks for taking my questions. I'll step back. Thank you. Your next question comes from the line of Gary Tenner with D. A. Davidson. Your line is open. Thanks. Good morning, everybody. I wanted to kind of follow-up on the SaaS conversation earlier and 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 start ups at this point? Has that you know, have you seen much diminution of that, flow? And and then how that impacts both the venture lending, and potentially the capital call business?

18:45 Well, as far as venture lending goes, I think it has, you know, gained a lot more momentum over the last couple of quarters, this, you know, fastpocalypse or whatever they're calling it at this point. So I think everyone's doing the homework that's necessary because nobody wants to throw good money after bad, and and so there's no question that the new fundings are a better valuation than than a company that's two or three years old. And the question is how they how can they pivot? Do they need to pivot? And so I think the VCs and the entrepreneurs out there are looking at it, you know, very analytically. And 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, you know, in terms of growth, in terms of metrics. And 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 so I do think, just 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 than most anything else at this point. So, So we just gotta use solid judgment across the board, and as far as the new investments are are being made, and really be ultra critical on the investments that we do have at this

20:15 point and, you know, determining do they have an opportunity for new funding, or are they gonna die on the vine, and are we gonna let that cash cross over, like I mentioned earlier, our loan balance? Because that's our only savior at that point. It's to not let them not let them borrow and or sweep the account if if necessary because, investors are not gonna continue to support the company. Got it. Thank you for that. And I'm sure you would have flagged this. I just wanted to confirm the $3,100,000 construction loan that paid off in the quarter, there was no related interest recovery or benefit from that. Correct? No, we had everything that was owed to us on that one. Okay. Thank you.

21:11 Your next question comes from the line of Tim Coffey with Breen Capital. Line is open. Thank you. Good morning, everybody. Good morning, Tim. Mark, if I can just kind of follow back up on the SaaS discussion. I appreciate the details of 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 a 30% loan to deposit ratio. I'm wondering, historically speaking, has the FAST 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.

22:08 Right? This is almost like 'twenty two, right, where the rounds of funding shrink a little bit, they're not getting as much, right? So I think there's people a little bit more careful, I think, if they're giving out funding, especially in some of the horizontal stuff, right? So it probably is a little bit less than it has been historically. We can run that analysis. Haven't done it, but that would my gut would've told me that a little bit. I think what what Pat's 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 two years of runway, which is what is typically happening in a 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 four to six months as opposed to two years, see where they end up on that, see if they're getting the traction that's necessary, And and that's kinda typical when there's this kinda disruption in the market.

23:09 And that's why we're taking a closer look at these, you know, 60 plus counts. Right? Watch them very, very carefully. Right. Right. It sounds like a topic I should follow-up with next quarter to kinda see how things are playing out. Probably next couple of quarters. I'll mark that down. Mark, as you talk to clients in the technology space and in the venture space, do you get a sense that there's been any material slowdown in planned IPOs or takeout activity? Yeah. I think the the IPO market has been, you know, certainly quiet at best for a period of time. So and m and a, given some of the disruption, is is is slowing down at this point until people kinda figure out what's viable and what's not. I think there's gonna be a lot of companies out there that are gonna be looking for soft landings that aren't gonna find a soft landing.

24:05 So whenever there's this kind of disruption, people are pretty cautious at this point, because I think with this kind of disruption, 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. I think we've to just continue to monitor the overall space like we do, but certainly with this disruption, we ought to really pay attention to money's flowing and what's happening there from an M and A perspective. Because the IPO market just, I think, is not something we're focused on at this point. Okay. All right. 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?

24:57 I think, you know, the overall, feeling is continue to be the same, that the bankers that we're adding are gonna be more in the business lines than than real estate. You know, we're 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 in the business lines and venture and traditional c and I, asset based, sponsor, search. So I think what you're gonna see, those bankers are gonna be more in the business lines of the overall strategy because we feel that adds more to our franchise value. Okay. Okay. Great. And then, Pat, a question about the margin. So coming into the quarter, I think we were kind of looking for margin in the fourth quarter to be somewhere around four twenty, four twenty five.

25:48 Does that still seem reasonable, given all the puts and takes we've discussed today? Yeah. That probably it's going to be below my guess is below that four thirty, maybe four twenty five ish, right, in that general range, I believe, my guess. Hopefully, we can stay above $4.25, but it's probably not $4.25 to $4.30 range, I would guess. So many moving pieces to it. Right? Right. Deposit cost being the kind of the biggest one, sounds like. Yes. All right. Well, are my questions. Thank you very much. Thanks, Tim. Your next question comes from the line of Matthew Clark with Piper Sandler. Your line is open. Hi guys.

26:33 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. You know, we're always concerned about credit, for sure. So I think the I think the 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 it's it's performing. But there's some there's some concerns about a near term tenant vacating.

27:18 So low loan to value, I think it's fine. I think we're gonna get through it. So that's the main reason for the increase was was a relationship that needed to be downgraded that consisted of two buildings in the South Bay here. Got it. Appreciate it for taking my question. 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 appreciate you attending our our q one earnings release and earnings call, you know, look forward to following up with a solid quarter for q two.

28:14 This concludes today's conference call. You may now disconnect.