Avidbank Holdings, Inc.

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 Avid Bank Holdings, Inc. first 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, 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 Toma-Peterson. You may begin your conference.

Good morning. Thank you for joining us today for the Avid Bank's 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 filing. 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, Tina, 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 a more profitable position. profitable metrics situation. I'm not a big believer in seasonality, but as far as first quarters goes, this was a pretty good quarter for us. We usually have some pullback and shrinkage, and we were able to grow loans by about $25 million, 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 with some questions after that. So at this point, I'd like to turn over to Pat and 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 $146 from $112 and return on average equity increased to 12.7%. Turning to the balance sheets, as Mark said, loans grew $24 million in the first quarter. That was driven mainly by a $26 million increase in non-owner-occupied CRE loans, partially offset by a $9 million decline in C&I balances due to higher payoffs and paydowns. 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 438 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 non-performing 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 298, and the spot rate was 303 at March 31. The provision of 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. Non-performing 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. Non-interest 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, non-interest expense totaled $14.1 million, 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%. 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 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 board vesting, and we continue to expect the tax rate to be in the mid-28s for the remainder of 26. With that, Mark, right 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, you know, that's what's really on your mind. So, 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 comes from the line of Andrew Terrell with Stevens. Your line is open.

Hey, good morning. Morning, Andrew.

Hey, I wanted to start off asking just a question around the SAS 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 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 things? Underwriting standards, just kind of want to run the gambit on the SaaS exposure.

Well, from 30,000 feet, the SaaS exposure has evolved. So 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. 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 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 get into 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 models is really where we want to be. Those are much more specialized in workflow versus the horizontal type, which is kind of 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 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. When we're talking about early stage investing, it's really, are we going to 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 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 cross over? And we're being pretty critical of that from across the board from a credit perspective. You got any additional color there?

Yeah. 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, this 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? That portfolio is small. There's two loans in there that are either criticized or classified. It's about $4 million 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 12 months from now. So I think turn out bankers and I think the investors and everybody else, I think everybody's on this and, and tracking this quite closely. So.

Great. Okay. And so I, I guess it sounds like important bifurcation of horizontal versus vertical. It sounds like, you know, within the vertical space, you're still going to, you know, 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 critical and diligent from a credit standpoint?

Well, I think everybody's looking at it a little bit differently in terms of new funding. Obviously, there's a lot more funding going into the AI space in the venture community at this point. So if there isn't a new funding, you could argue have a very strong model going forward 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 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'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. 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 VFHLB special, you know, it sounds like maybe some deposit cost pressure into period end, but just talk about, you know, relative to that $299 interest-bearing cost, and I think you said $303 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 $303 out there, because, you know, look, we're a growth bank. We're... 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. 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 interfering deposits. Could it creep up a little bit? Yes, potentially short term. So, you know, that's going to take the margin down a little bit from where it is today. We realize that, you know, loan deals I'm not as worried about. think that loan yield be you know relatively stable could it get go up or down a few basis points sure with loan fees and the mix change and all that stuff but um so you know you'll see that margin move down a little bit here um that's for sure and one other factor too is just to keep in mind dda dda was probably a little bit high at 331. we had some clients bringing some money late in the quarter uh that moved to the dda account that change has moved in april so 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. 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 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 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 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. 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 are built for a growth bank and we should be you know, low double digits for the year. And, you know, 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, you know, 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, you know, What I would say is, you know, 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 a little pressure on the growth and expenses here, along with Q and merit increases and other things. So, you know, it's really the variable here is really that personnel expense. You know, it was 9.5 million-ish. You know, I could see that creeping up to closer to 10 for the quarter when you factor in everything. You know, 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, you know, 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, you know, with the successful IPO that we had and our profitability metrics going where they are, and with our plan, long-term plan of scaling our operation, I think we will likely have more bankers this year than we have you know, in the last several years. So as we mentioned, we brought on, I think, three in Q1, and we're probably going to have, you know, two to four 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 some consolidation, and we're going to take advantage of it given our overall business plan.

Got it. Thanks for taking my questions. I'll step back. Thank you.

Your next question comes from the line of Gary Tenner with VA Davidson. Your line is open.

Thanks. Good morning, everybody. I wanted to kind of follow up on the SAS conversation earlier and just kind of broaden it to the larger venture lending business. Obviously, SAS is a big part of that business, but just curious about kind of the pace of uh what what you're seeing in the pace of venture investment into startups at this point has that you know have you seen much diminution of that uh flow and and then how that impacts both the venture lending uh and potentially the capital call business well as far as venture lending goes i think it has uh you know gained a lot more momentum over the last couple of quarters this uh

you know, fast apocalypse 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 better valuations 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 PCs and the entrepreneurs out there are looking at it, you know, very analytically when, and, But when this kind of transition or disruption happens, they really 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 if they're not on plan or 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, you know, we just got to use solid judgment across the board. And, you know, as far as the new investments are being made and really be ultra critical on the investments that we do have at this point and, you know, 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, is to not let them borrow or sweep the account if necessary, because the investors are not going to 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 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. Okay, thank you.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Tim Coffey with Breen Capital. Your line is open.

Thank you. Morning, everybody. Morning, Tim. Mark, if I could just kind of, you know, follow back up on the SAS discussion. You know, I appreciate the details of the deck. Kind of parsing through the loans and deposits stuff, it looks like the SAS portfolio, both vertical and horizontal, have loan and deposit ratios somewhere around 45%, whereas the total venture portfolio is somewhere around a 30% loan and deposit ratio. I'm wondering, historically speaking, has the SAS book always kind of been there in that kind of, you know, 45% ratio?

No, you know, I would say, you know, look, I think what I would hear from our bankers is, you know, these companies are still getting funding, right? I would say it's at a slower pace than it was previously, right? You know, this is almost like 22, right, where the rounds of funding, you know, shrink a little bit. They're not getting as much, right? So I think just being 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 could run that analysis. I haven't done it, but my gut would tell me that a little bit.

I think 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 more, you know, 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 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? Watching them very, very carefully.

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

Probably have the 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 IPO market has been certainly quiet at best for a period of time. 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, 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's 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. Appreciate that, Collar. And then, Mark, as you go look to add bankers, is there specific geographies or business lines you're looking to support?

I think, you know, the overall feeling is continue to be the same, that the bankers that we're adding are going to be more in the business lines than real estate. You know, 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 those two verticals with a lot less employees than we're talking about in the business lines, in venture and traditional CNI, asset base, 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. Okay, great.

And then, Pat, a question about the margin. So coming into the quarter, I think, you know, we were kind of looking for margin in the fourth quarter to be somewhere around 420, 425. Does that still seem reasonable given all the puts and takes we've discussed today?

Yeah, you know, that probably – it's going to be below – my guess is below that 430, maybe 425-ish, right, in that general range. That would be my guess. Hopefully we can stay above 425. um but it's probably not 425 to 430 range i would guess you know so many moving pieces to it right but right yeah deposit costs being the kind of the biggest one sounds like yeah yeah yep all right well those are my questions thank you very much thanks jim your next question comes from the line of matthew clark with piper sandler your line is open

Hi, guys. Maybe just to follow up on credit quality, I was wondering if you could just provide some additional color on, you know, what drove the increase in the 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 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 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.

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

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