KBRA Affirms Ratings for Avidbank Holdings, Inc.

KBRA affirms the senior unsecured debt rating of BBB-, the subordinated debt rating of BB+, and the short-term debt rating of K3 for San Jose, California-based Avidbank Holdings, Inc. (OTCPK: AVBH) (“the company”) ("Avid"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB, the subordinated debt rating of BBB-, and the short-term debt and deposit ratings of K3 for its subsidiary, Avidbank ("the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported AVBH's solid profitability metrics which have benefitted from the rising interest rate environment as AVBH maintains an asset sensitive balance sheet with~70% of total loans that are either floating (~50%) or adjustable (21%) rate. As such, the increase in average loan yields and volumes have supported NIM expansion to ~3.55% during 2023 (3.54% during 1Q24). However, funding costs are slowly climbing and could have an impact on earnings over the medium term as total funding costs reached ~2.00% during 2023, an increase of over 150 bps from the previous year. Positively, AVBH's deposit franchise still is inclusive of the NIB portion of ~25% of total deposits as of 1Q24. Avid pledged a portion of its investment securities portfolio to the Federal Reserve Bank Term Funding Program (outstanding balance of ~$240 million as of 1Q24) and sustains another $140 million brokered deposits as of 1Q24 (~8% of total deposits), and as such, wholesale funding utilization represents nearly 20% of total liabilities as of 1Q24. The bank’s net available borrowing capacity and available liquidity total is $1.5 billion including on balance sheet cash as of 1Q24, representing approximately 60% of total assets, more than double the uninsured deposit portion (33% as of 1Q24). Regarding credit quality, NPA levels materially improved during 2H23 as a result of the sale of a large nonperforming asset consisting of a single $14.1 million construction loan credit relating to a completed condominium project occuring in 4Q23. The reserve coverage appears ample at 1.10% of total loans, covering NPLs by nearly 10x. Additionally, AVBH also reflects 8% in non-owner-occupied office real estate loans with the concentration largely in the San Jose, CA MSA. Classified loans balances are low at near 40 bps of total loans as of 1Q24. Avid’s ratings are constrained by the limited level of diversified revenue sources outside of the interest income, with noninterest income historically contributing less than 10% of the company’s revenues. Within the bank’s legacy operations, AVBH's market focus is rather concentrated in a single MSA (San Jose/San Francisco). Furthermore, KBRA acknowledges a declining trend in the capital profile since the assignment of the ratings relative to peer averages. AVBH does not pay a dividend and share repurchase activity has been muted. Therefore, KBRA anticipates overall capital levels to improve over the medium term, trending closer in line with the peer group.

Rating Sensitivities

Positive rating momentum could occur with greater deposit inflows, lessening the reliance on wholesale funding, stabilized asset quality metrics without material charge-off activity, and capital levels closer to higher rated peers. KBRA expects capital to migrate toward peer averages or at least be maintained at current levels. Downward pressure on the ratings could ensue given additional deterioration within the deposit base, resulting in higher non-core funding utilization or if asset quality metrics impact profitability metrics, limiting capital generation ability.

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