2023-11-27 12:02:04 ET
Summary
- Avidbank Holdings, a commercial bank based in the Bay Area, initially looks attractive because of its low valuation relative to earnings.
- The bank engages in various banking activities, including venture lending, specialty financing, and commercial real estate financing.
- While the bank has exhibited growth in revenue and profits, there are concerns about the decline in non-interest income and net profits, as well as its high percentage of uninsured deposits.
- These issues prevent the bank from being particularly attractive at this point in time.
This year has not been particularly pleasant for the banking industry. In addition to dealing with general volatility driven by inflation and high interest rates, there was the banking crisis that began in March of this year. Some of the financial institutions that were most impacted by that were ones located in California. But just as some of the greatest pain in the sector came from there, some of the greatest opportunities exist there as well because of that initial pain. One bank that deserves attention because of how cheap it is relative to earnings is Avidbank Holdings ( OTC:AVBH ), a rather sizable commercial bank that is based in the Bay Area. Earlier this year, deposits at the bank plummeted. Since then, the ride has been a bit lumpy. The good news is that management is making some positive steps aimed at reducing risk in the long run. For investors who don't mind accepting some additional risk, this might make the company an interesting opportunity to consider. But as for me, I think that a ‘hold’ rating makes the most sense until we see where the dust settles.
A rollercoaster of a ride
As I mentioned already, Avidbank Holdings is a commercial bank that is located in the Bay Area. It's technically headquartered in San Jose, but from there, it has grown to have loan production offices in both San Francisco and Redwood City. Even though the institution is small in that respect, it has grown its business in a way that gives it national exposure. This has been made possible by expanding its business into multiple verticals. For instance, it engages in venture lending activities that involve banking and financing solutions for technology sector entrepreneurs and the investors in those firms. It also engages in specialty financing activities such as asset-based lending, accounts receivable financing, and even sponsor financing from mergers and acquisitions activities.
This is not to say that the bank does not engage in more traditional banking activities. In the Bay Area, for instance, the company not only accepts deposits like it does from its national accounts. It also loans that money out for the purpose of financing the purchase of commercial real estate. It engages in commercial and industrial corporate banking activities and even construction lending. The latter of these includes lending for the purpose of acquiring land, engaging in development or pre-development activities, and more.
Prior to the 2023 fiscal year, Avidbank Holdings had exhibited attractive growth on both its top and bottom lines. Net interest income skyrocketed from $43.2 million in 2020 to $70.6 million in 2022. Non-interest income nearly doubled from $2.6 million to $4.7 million. And net profits skyrocketed from $9.6 million to $25 million. This is not to say that everything has been great as 2023 is looking to be slightly different for the bank. For the first nine months of the year, net interest income is higher than it was the same time last year. But both non-interest income and net profits have declined slightly. This pain is particularly pronounced for the third quarter, with net profits falling from $7 million last year to only $5.4 million this year.
The general trend higher in revenue and profits for the enterprise was made possible by a balance sheet that was continuing to expand. Take, as an example, the value of loans on the company's books. These grew from $993.5 million in 2020 to $1.55 billion in 2022. Loans have continued to grow since then, hitting a high of $1.67 billion by the end of the third quarter of this year. Now would be a good time to talk about the composition of these loans. The largest amount of exposure for the bank is to commercial real estate that is non-owner occupied. This might be a bit concerning since office properties often fall under this category and that is a space that many investors are justifiably worried about at the moment. And yes, the bank does have exposure to office properties. But only about 9% of its total loan portfolio involves these assets. Frankly, that's a bit higher than I would like. But it's far from disastrous. 13% of its loans involve the construction industry, while another 13% are cash flow term loans. I understand some of the concern regarding venture lending. But that is fairly restricted at only 7% of the company's loan portfolio.
Other assets have also grown. And the value of securities on its books, for instance, increased from $163.6 million in 2020 to $444.7 million in 2022. We have seen a slight decline to $345.5 million as of the end of the most recent quarter. But that's nothing compared to the drop in cash seen since peaking at $493.3 million in 2021. Since that point, the value of cash has dropped, hitting only $80 million by the end of the most recent quarter. I wish I could say that the decline in cash was because management was paying down debt. But that doesn't seem to be the case. While debt has fallen so far this year compared to the first quarter, it is still at $321.9 million compared to the $151.8 million it was at the end of 2022.
We should also touch on the value of deposits. After all, it's only by accepting deposits that the bank has been able to lend out as much capital as it has. Back in 2020, the institution had $1.25 billion in deposits on its books. These grew to $1.82 billion by the end of last year. But then, we saw a plunge to $1.68 billion in the first quarter. The second quarter saw a recovery of sorts to $1.75 billion. But even as things were looking up, a subsequent drop to $1.71 billion occurred in the third quarter. Part of the struggle on the deposit front recently has been management's desire to get exposure to uninsured deposits down. You see, in 2022, 85% of the deposits at the bank, by value, were uninsured. That is truly astronomical and it is in the same range as some of the other banks that collapsed. Management was able to decrease this to 59% by the end of the first quarter. And by the end of the third quarter, it had fallen further to 35%. This is still higher than the 30% threshold that I like to see. But at least management is making great progress.
In terms of valuing the company, the stock looks quite attractive. Earnings are virtually flat so far this year compared to the same time last year, so we don't really need to worry about projecting out what the price of the stock might be. Right now, using data from last year, the firm is trading at a price to earnings multiple of 6.4. I have seen other banks at or below this level. But the average in the sector at the moment seems to be around 10.4. So that is definitely encouraging. On the other hand, the stock is a bit pricey compared to others that I have seen on a price to book basis. That comes in at a premium of 9.8% over book value. In the grand scheme of things, that's not a large amount and, so long as the bank continues growing, it should experience upside potential. But there are many banks that I have seen so far this year that trade at discounts to book value and even some that trade at discounts to tangible book value.
Takeaway
Based on the data provided, Avidbank Holdings is doing a decent job. Management has had a lot of work to do in order to reduce exposure to uninsured deposits. That certainly created a drag of some sort on the deposit picture. Overall loan values continue to grow and the value of securities remains robust. Debt has increased recently, but is not at a level that I would be terribly worried about. The stock is attractively priced, but I am concerned about the total value of deposits as they stand today. Until we see that stabilize and start to grow on a consistent basis, and until we see uninsured deposit exposure drop to or below 30%, I believe that a ‘hold’ rating is appropriate at this time.
For further details see:
Avidbank Holdings: What's Stopping It From Being A Buy