American Riviera Bancorp Announces Results for the Second Quarter of 2023

News item July 27, 2023 by Michelle Martinich

Santa Barbara, California (July 27, 2023) – American Riviera Bancorp (“Company”) (OTCQX: ARBV), holding company of American Riviera Bank (“Bank”), announced today unaudited net income of $5.7 million ($0.98 per share) for the six months ended June 30, 2023, consistent with the $5.7 million ($1.00 per share) earned in the same reporting period in the previous year. Unaudited net income was $2.7 million ($0.47 per share) for the three months ended June 30, 2023, compared to $2.6 million ($0.45 per share) earned in the same reporting period in the previous year.

“American Riviera Bank reported stable earnings, continued loan growth, and increased capital ratios despite the elevated interest rate environment. Our clients appreciate the Bank’s relationship business model of providing friendly service to depositors and customized loans on the Central Coast of California as we have for the past 17 years. We experienced stable deposit levels this quarter, and the Bank has paid more interest to our local depositors while maintaining profitability year-over-year.”    

Jeff DeVine, President and CEO

Second Quarter Highlights

• The Bank has the highest “Super Premier” rating for financial performance from the Findley Reports and has maintained a “5 Star - Superior” rating from Bauer Financial as of March 31, 2023.
• The Bank was rated “Outstanding” by the Federal Deposit Insurance Corporation in 2023 for its performance under the Community Reinvestment Act.
• Return on average assets for the second quarter ended June 30, 2023, was 0.85%, and return on average equity was 11.84%.
• Total loans reached $945.4 million at June 30, 2023, an increase of $20.6 million or 2.2% from the prior quarter-end, and $84.6 million or 9.8% from June 30, 2022. The Bank’s loan-to-deposit ratio at June 30, 2023, was 87.3%.
• Non-interest-bearing demand deposits totaled $442.1 million at June 30, 2023, a decrease of $18.6 million or 4.0% from the prior quarter-end, and a decrease of $45.1 million or 9.3% from June 30, 2022. Non-interest-bearing demand deposits at June 30, 2023 represent 40.8% of total deposits, an increase from 38.8% one year ago.
• Interest-bearing deposits totaled $640.4 million at June 30, 2023, an increase of $1.4 million or 0.2% from the prior quarter-end, and a decrease of $127.7 million or 16.6% from June 30, 2022. The Federal Reserve’s actions over the last year to rapidly increase interest rates have caused a shift in interest-bearing depositor behavior as some clients have decided to reinvest their excess cash in non-FDIC insured, external investment products.
• As of July 24, 2023, total deposits have increased $16.5 million or 1.5% subsequent to the most recent June 30, 2023 quarter-end and are at approximately the same level as reported at March 31, 2023.
• During the second quarter of 2023, the Bank opened 802 new deposit accounts, compared to 784 in the last quarter, and 585 in the same quarter last year.
• All of the Bank’s deposits are local, retail deposits. At June 30, 2023, the Bank had no wholesale brokered deposits.
• The Bank maintains a diversified deposit base with no significant industry concentrations and does not engage in cryptocurrency transactions or service cryptocurrency related companies.
• Interest income in the second quarter of 2023 increased by $2.6 million from the same quarter last year and was offset by a $2.6 million increase in interest expense. Interest income for the first six months of 2023 increased by $5.3 million from the same period last year and was offset by a $4.0 million increase in interest expense. The increase in interest expense is due to higher rates paid on deposits and an increase in borrowed funds.
• Total cost of funding sources increased to 1.02% for the second quarter of 2023, compared to 0.59% in the prior quarter, and 0.12% for the same quarter in the prior year. Overall funding costs for the Company have increased due to Federal Reserve policy but remain modest compared to industry averages based on our relationship banking focus.
• On-balance sheet liquidity continues to be substantial with $246.4 million of cash, due from banks, and available-for-sale (“AFS”) securities market value at June 30, 2023.
• Access to available sources of liquidity including fed funds lines of credit with correspondent banks, unused secured borrowing capacity with the Federal Home Loan Bank, and unused secured borrowing capacity with the Federal Reserve totaled $310.2 million at June 30, 2023, an increase from $211.7 million at March 31, 2023.
• Allowance for Credit Losses (“ACL”) was 1.23% of total loans at June 30, 2023, compared with 1.24% at March 31, 2023, and 1.20% at June 30, 2022. Provision for credit losses for the second quarter of 2023 was $0.2 million, compared to zero last quarter, and $0.9 million for the same quarter last year.
• The Bank maintained strong credit quality with no other real estate owned, no loans 90 days or more past due, and only $2.8 million or 0.30% of total loans on non-accrual status, which are well supported by collateral and reserves.
• Tangible book value per share increased by 1.3% to $15.22 at June 30, 2023, up from $15.03 at March 31, 2023, due to a profitable second quarter of 2023.
• All Bank and Company capital ratios increased in the second quarter of 2023. The Bank’s regulatory capital ratios were all above “well-capitalized” standards. The Company’s tangible common equity ratio has increased to 6.86% at June 30, 2023, from 6.68% at March 31, 2023, and 5.78% at June 30, 2022.

Second Quarter Earnings

For the second quarter of 2023, unaudited net income pre-tax, pre-provision, pre-PPP fees (a non-GAAP measure) was $3.9 million, compared to $4.1 million in the first quarter of 2023 and second quarter of 2022. For the second quarter of 2023, unaudited net income was $2.7 million, compared to $3.0 million in the first quarter of 2023, and $2.6 million in the second quarter of 2022.

The Bank continues to grow interest and fees on loans sequentially over the last four quarters from $9.4 million in the second quarter of 2022 to $11.8 million in the second quarter of 2023, representing a $2.4 million or 26.2% increase. However, the cost of funding has also increased sequentially from the historically low levels that existed prior to the Federal Reserve’s aggressive rate increase policy. Interest expense on deposits has increased approximately nine-fold from $0.2 million in the second quarter of 2022 to $2.0 million in the second quarter of 2023.

At the same time, excess cash and due from banks has moved back to a more normalized level as the Federal Reserve has tightened economic conditions, resulting in a decline in interest on cash and due from which was at elevated levels for most of 2022. Interest on cash and due from peaked at $1.3 million for the fourth quarter of 2022, compared to a more normalized level of $0.3 million in the second quarter of 2023 and $0.5 million in the second quarter of 2022.

Non-Interest Income and Expense

Non-interest income was $1.0 million for the second quarter of 2023, compared to $0.5 million for the first quarter of 2023, and $0.7 million for the same quarter last year. Variances between the quarters relate primarily to SBA loan sale premiums, mortgage broker fees, loan swap fees, and loan prepayment fees. Loan swap fees totaled $0.3 million in the second quarter of 2023 as borrowers continue to request fixed-rate loans and the Company can choose to diversify its interest-rate risk profile by offering floating rate loan swaps.

Non-interest expense was $8.0 million for the second quarter of 2023, compared to $8.0 million in the first quarter of 2023, and $7.2 million for the same quarter last year. The increase in non-interest expense in the second quarter of 2023 compared to the same quarter last year is primarily attributable to occupancy expenses, investment in technology projects, and timing of advertising and annual sponsorships. Occupancy expenses were temporarily elevated in the first half of 2023 as the Company was in the process of consolidating Santa Barbara office space which was recently completed, allowing for the termination of two leases, and is expected to decrease occupancy expenses by approximately $70 thousand for the third quarter of 2023 compared to the second quarter of 2023. Additionally, accrual of non-recurring expense for technology upgrades was $80 thousand per month in the second quarter of 2023 and is expected to continue at this level only through October 2023.

Loans and Asset Quality
Total loans reached $945.4 million at June 30, 2023, an increase of $20.6 million or 2.2% from the prior quarter-end, and $84.6 million or 9.8% from June 30, 2022.

The Bank adopted the Current Expected Credit Losses (“CECL”) accounting standard as of January 1, 2023, and recorded a $1.3 million pre-tax reduction to retained earnings upon adoption, including $0.5 million of additional reserve for unfunded loans recorded in other liabilities. The ACL increased $0.2 million to $11.6 million at June 30, 2023, with a resulting coverage ratio of 1.23% of total loans, as compared to $11.5 million or 1.24% at March 31, 2023, and $10.4 million or 1.20% at June 30, 2022.

Loan charge-offs totaled zero and loan recoveries totaled $3 thousand for the second quarter of 2023. As of June 30, 2023, non-accrual loans totaled $2.8 million, down $0.2 million compared to the previous quarter. $2.1 million of the non-accrual total at June 30, 2023, is comprised of one loan which is real estate secured at a 27% loan-to-value based upon a recent appraisal and is paying full principal and interest payments monthly. Credit quality remains strong.

Deposits & Borrowings

Total deposits were $1.1 billion at June 30, 2023, representing a decrease of $17.2 million or 1.6% from March 31, 2023, and a decrease of $172.8 million or 13.8% since June 30, 2022. As a result of the current rate environment, the reduction in deposit balances is primarily due to some clients deciding to reinvest their excess cash in non-FDIC insured, external investment products. The weighted average cost of deposits for the second quarter of 2023 was 0.73%, compared to 0.45% for the previous quarter, and 0.07% for the same quarter last year. Non-interest-bearing demand deposits represent 40.8% of total deposits at June 30, 2023, a decrease from 41.9% at the prior quarter-end, and an increase from 38.8% at June 30, 2022.

At June 30, 2023, the Bank had $60.0 million of short-term, 30 days or less, FHLB advances and another $10.0 million of long-term FHLB advances outstanding. At June 30, 2023, the Company also had $10.0 million drawn on a correspondent bank line of credit at a favorable rate of 3.85% and $18.0 million of subordinated notes outstanding at a favorable rate of 3.75%. The weighted average cost on all borrowings for the quarter was 4.93%, resulting in $1.0 million in interest expense. The $98.0 million level of wholesale funding was consistent at the first and second quarter of 2023.

The Bank’s liquidity position remained strong with a primary liquidity ratio (cash and cash equivalents, deposits held in other banks and unpledged AFS securities as a percentage of total assets) of 19.2% at June 30, 2023, compared to 22.1% at March 31, 2023.

As of June 30, 2023, the Bank had no brokered deposits and no borrowings outstanding from the Federal Reserve’s discount window or its new Bank Term Funding Program. Available and unused, secured borrowing capacity with the Federal Home Loan Bank of San Francisco (“FHLB”) totaled $167.6 million as of June 30, 2023. The Bank also had $100.0 million of unused fed funds lines of credit with correspondent banks at June 30, 2023. Available contingent funding sources remain robust.

Overall uninsured deposits, excluding public agency deposits that are collateralized, are conservatively estimated to be $428.8 million, or 39.6% of total deposit balances as of June 30, 2023. The actual level of uninsured deposits is lower than the percentage stated above, as our knowledgeable bankers have helped clients obtain more than $250 thousand of FDIC insurance with vesting structures such as joint accounts, payable upon death accounts, and revocable trust accounts with multiple beneficiaries. In addition, the Bank can offer up to $50 million of FDIC pass-through insurance to clients via the IntraFi network Insured Cash Sweep (“ICS”) or Certificate of Deposit Account Registry System (“CDARS”) products.

Shareholders’ Equity
Total shareholders’ equity was $92.8 million at June 30, 2023, a $1.2 million or 1.4% increase since March 31, 2023, and an increase of $9.3 million or 11.1% over the prior year. The tax adjusted unrealized loss on securities, which is a component of equity (accumulated other comprehensive income or “AOCI”), increased slightly from $21.1 million at the end of the first quarter of 2023 to $23.4 million at the end of the second quarter of 2023, resulting in a reduction of $2.3 million of shareholders’ equity. The Bank fully expects to receive all principal when the investments mature.

Company Profile

American Riviera Bancorp (OTCQX: ARBV) is a registered bank holding company headquartered in Santa Barbara, California. American Riviera Bank, the 100% owned subsidiary of American Riviera Bancorp, is a full-service community bank focused on serving the lending and deposit needs of businesses and consumers on the Central Coast of California. The state-chartered bank opened for business on July 18, 2006, with the support of local shareholders. Full-service branches are located in Santa Barbara, Montecito, Goleta, Santa Maria, San Luis Obispo, and Paso Robles. The Bank provides commercial business, commercial real estate, residential mortgage, construction, and Small Business Administration lending services as well as convenient online and mobile technology. For thirteen consecutive years, the Bank has been recognized for strong financial performance by the Findley Reports and has received the highest “Super Premier” rating from Findley every year since 2016. The Bank was rated “Outstanding” by the Federal Deposit Insurance Corporation in 2023 for its performance under the Community Reinvestment Act.

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