January 23, 2023

River City Bank Provides Financing for Ventura Energy Project

Ventura Energy logo
Ventura Energy Logo

River City Bank’s Clean Energy Division provided financing for the construction, installation, and operation of five Tesla Powerpack battery energy storage projects.

 

Ventura Energy‘s battery energy storage systems enable water pumps to keep working even when an emergency public safety power shutoff occurs. These projects and others are critical to keeping California safe as the climate changes.

December 2, 2022

Supply-and-Demand Imbalance Creates Industrial Real Estate Frenzy

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By Dan Franklin, Director of Commercial Real Estate, River City Bank

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Often operating in the background, the industrial real estate sector is in the midst of monumental shifts.

The pandemic radically changed the way consumers receive goods and services. Increased online ordering and an explosion in data streaming have resulted in increased demand for warehouse space fulfilling retail orders direct to consumers and data storage centers to support streaming services.

At the same time, warehousing and production operations, which for many years functioned based on “just-in-time” delivery models, have shifted toward much larger supply inventories to function in the unpredictable supply chain environment revealed by the pandemic. And logistics providers now need more distribution centers to move goods around. All of this has contributed to a tight industrial real estate market and record-setting growth in rental rates.

Just ask Chuckie Lyons, owner of El Segundo-based real estate development and management company Lyons and Lyons Properties, which manages approximately 70 industrial properties spanning more than 800,000 square feet, all in the Los Angeles region. Although Lyons has been in business for decades, he’s still surprised by the strength of the industrial real estate sector today, particularly in his region, where the aforementioned trends are the most pronounced.

“I’ve never seen rental growth like this,” he told me recently. “I see it as population and internet-driven retail demand, coupled with a limited supply of industrial-zoned land due to decades of cities downzoning their industrial-zoned land to retail and residential.”

Just how hot is this industrial real estate market? Consider that vacancy rates are the lowest in the nation at close to zero, and rents and sale prices have seen double-digit increases over the past several years. Research shows a 19.1% increase in price per square foot year-over-year in Los Angeles County alone, according to a report from CoStar Group.

Properties close to the major West Coast ports like Oakland, Los Angeles, and Long Beach have been primary beneficiaries and have seen the biggest gains. But there are spillover effects for industrial properties outside these core markets, too.

Unprecedented Tight Supply

Lyons established his firm in 1979, right after the 1976 passage of California Proposition 13. He remembers the property tax rate in the city of Los Angeles being 2.7% in the mid-1970s. Prop. 13 cut that rate to 1% – a huge cut to the government property tax base – plus it drastically limited future increases in California property taxes. That led to cities forming redevelopment agencies to incentivize developers to build more retail and residential to increase those cities’ retail sales tax to replace the lost property tax revenue. Since 1976, Lyons estimates there is 25% less industrial-zoned land left in the greater LA/Orange County/Inland Empire area cities, and yet the population there has more than doubled.

This situation isn’t likely to improve anytime soon. In general, new development takes a year or two before it’s ready for occupancy, and given the demand dynamics, any new construction is quickly absorbed. Desirable areas like Southern California lack land that could be developed for industrial use, given zoning laws. And because of the specific physical requirements that industrial tenants have, like necessary space for loading and unloading, it’s hard to retrofit older buildings to meet those demands.

Developers are working hard to increase supply where they can, but most of those new development sites are in the outlying areas such as the eastern Inland Empire. Very few are in the more populated and port-adjacent coastal California areas where there is the most demand.

Insatiable Demand for Space

Demand for industrial real estate started to outpace the available supply well before the pandemic. Call it the “Amazon effect.” The shift toward e-commerce has meant that companies need more warehouse space to accommodate more goods being shipped. COVID-19 accelerated that trend beyond expectations. In the first quarter of 2021, e-commerce sales jumped 46.7% over the year prior and have continued to grow from these elevated levels.

From an industrial real estate standpoint, that means the economy needs more industrial spaces to support this additional online activity, everything from warehouses to distribution centers to data storage, and even flex spaces that can accommodate a range of activities. At the moment, there just isn’t enough supply to meet this surge in demand.

Worker driving lift on warehouse floor

An Overheated Rental Market

Naturally, the tight supply of industrial real estate coupled with huge demand means that rents are rising rapidly, creating an unusual rental market.

“There are last-mile area industrial properties in LA with lease contracts now expiring that were written five years ago. Those leases typically called for fixed rent increases of 3% a year. The current market lease rate in most of those buildings is close to double over the last month’s contract rent of those five-year deals,” Lyons said.

Tenants have responded in a number of ways. For example, some tenants are trying to make commitments to lease space earlier in the process, or they might be leasing more space than they need today as a cushion against future supply constraints. “I’ve also seen current tenants attempting to lock in leases as long as possible well in advance of the expiration of their current leases,” Lyons mentioned.

Landlords have responded with strategies of their own. For example, some are moving away from the industry practice of pre-leasing space that is coming available. Instead, they might try to wait until a building is almost ready for occupancy before setting rental rates in case market rates are higher at the time of delivery.

Lyons also uses different incentives to get tenants to renew leases early. “We sometimes do that to increase our borrowing capacity so that we generate capital to do new deals,” he explained.

But not all landlords are in a position to pass on inflated asset prices to tenants. When purchasing an occupied industrial building, current tenants are already locked into existing leases, typically three to five years, and they may not have the same relationship with tenants to get them to renew early. In those instances, property owners might have to wait until those leases roll over to institute rental rate increases. Will these tenants be willing to pay such elevated rents as their leases roll over, or will they consider moving to smaller markets where they can rent for less?

Near-Perfect Conditions for Appreciation

Rapid rental growth fueled by lack of new supply and incredible demand – coupled with tremendous liquidity remaining in the markets following the enormous federal stimulus during the pandemic – has caused market cap rates in this region to fall 23% over the past year to just 4.15% based on current market rent, according to reports from CoStar Group. And what makes this trend even more impressive is that it occurred during a time when the 10-year Treasury yield essentially doubled from ~1.5% to ~3%. This would normally cause cap rates to rise to allow CRE investors to maintain the same equity risk return premium. The fact that it went the opposite direction suggests industrial real estate investors see minimal downside and a lot of upside potential in industrial rents.

“Everybody is seeing how quickly industrial rents are going up, and there is no vacant industrial land, so they’re betting on that and buying up existing buildings,” Lyons told me.

Other Industrial Markets Also Performing Well

Photo of Lyons & Lyons Properties signage

For developers like Lyons who’ve been in the business for many years, the past few years have been very good. The investments they made several decades ago are paying off with higher rents as tenants have fewer choices. Lyons is close to 100% leased for his properties. But it’s a different story for those looking to add to their portfolios. Finding properties that aren’t environmentally challenged or overvalued has become a Herculean task.

As prices continue to soar in preeminent areas of Southern California, smaller markets are starting to see an uptick in demand. The Inland Empire, near Los Angeles County, has been a primary beneficiary. But so, too, have other Western locations like Phoenix and Salt Lake City, which are farther from ports but have more affordable spaces.

Not surprisingly, prices have increased. In the Inland Empire, where absorption rates are low because of a dearth of supply, asking rents more than doubled over the past year and rose 13.7% in the second quarter alone. In Salt Lake City, average asking rents were up 25.5% since the start of the pandemic as of this year’s second quarter as total vacancies dropped and are now hovering at just more than 2%.

Proceed with Caution

The market dynamics driving the frenzy in industrial real estate show no signs of letting up, and industrial investors should have no problem leasing space in the near term.

But a career banker would be remiss to not also call out the risks. The future is always uncertain and trends can reverse, sometimes abruptly and dramatically. A recession induced by inflationary concerns could slow down or reverse these trends, and rising interest rates could materially increase cap rates and, therefore, deflate values.

Many industrial properties being purchased today already have negative operating leverage whereby the cap rate is lower than the interest rate on the debt. Without rental rate growth, this type of investment is destined to be a dog in the portfolio.

Buyers should tread carefully. They’d be prudent to be selective in their tenant mix and build in appropriate rent increases to cover these elevated prices. And when it comes to debt, it’s key to avoid overleveraging in this unique market and consider mitigating interest rate increases, perhaps by financing assets with long-term, fixed-rate debt.

Dan Franklin manages all of River City Bank’s commercial real estate origination activity throughout California and the western United States. Since joining the bank in 2008, Dan has served in various commercial banking roles, including years as Commercial Banking Director, Business Development Officer, and Relationship Manager. A recipient of the Chartered Financial Analyst designation, Dan received his undergraduate and MBA degrees from the University of California at Davis.

December 1, 2022

BCE: Powering California and Beyond

Barnum Celillo Electric logo
Barnum Celillo Electric logo

Fred Barnum began his career after moving from his hometown of Auburn to the Bay Area to start his electrical apprenticeship. Four years later, he returned to Auburn and took a job with a Sacramento contractor and helped them manage that company for six years.

At the age of 29, he decided to branch out on his own. Barnum wanted to provide exceptional customer value while enhancing his employees’ professional and personal lives. He set out to build a business based on these principles. He reached out to his old bay area boss, Paul Celillo, a contractor and accomplished electrician, and Celillo agreed to partner with him. In 1990, Barnum & Celillo Electric, Inc. (BCE) was born.

Fred Barnum and Paul Celillo built BCE with the intent of becoming one of the premier electrical contractors in the industry. It was founded on three core principles: integrity, dedication, and craftsmanship.

Measuring success.

BCE believes success cannot be measured simply by a financial statement. It measures its success through its most valued assets; its employees, clients, vendors, community, and the environment.

Clients:

The success of its clients has allowed BCE to grow from a concept between friends to becoming one of the largest electrical contractors in the western United States. Clients have come to rely on BCE’s commitment and stability, enabling BCE to retain and add to its base even through the most challenging economic times. Whether designing a million-square-foot e-commerce distribution facility or simply changing a couple of light fixtures, BCE has provided its customers with unwavering dedication, quality workmanship, and unparalleled integrity.

Employees:

The success of its clients has allowed BCE to grow from a concept between friends to becoming one of the largest electrical contractors in the western United States. Clients have come to rely on BCE’s commitment and stability, enabling BCE to retain and add to its base even through the most challenging economic times. Whether designing a million-square-foot e-commerce distribution facility or simply changing a couple of light fixtures, BCE has provided its customers with unwavering dedication, quality workmanship, and unparalleled integrity.

The enhancement of its employees’ personal and professional lives represents the heart and soul of BCE. Each member of the BCE team strives to ensure that the company’s core values are at the forefront of its work. Its entire field staff is either a California State Certified journeyman or enrolled in a State-approved training program. Employee development never stops, and the company continually refines its craft by staying at the forefront of technology and the latest code revisions.

“I believe in creating opportunities. If you take care of your people, they will take care of the company,” says Barnum. “The current workforce is transient, but we don’t have those issues.”

Barnum Celillo Electric building front

Community:

BCE understands the importance of giving back to the community and proudly supports many worthwhile charities and organizations. Contributing to the community is not an obligation but an opportunity. They support many nonprofit organizations, including Lilliput, the Children’s Miracle Network at UC Davis, and the Children’s Receiving Home of Sacramento, to name a few.

Environment:

When BCE first decided to enter into the renewable energy sphere in 2004, clean energy was still considered cutting edge. Fast forward nearly twenty years, and BCE continues its dedication to assisting customers to use alternative energy sources and achieve the most aggressive energy conservation and efficiency. BCE’s building has over 40,000 square feet of solar panels on its roof, providing 257.6 kW (over a quarter megawatt) of power. From concept to design to permitting to construction to installation, they ensure their clients get the best technology and the best value for their projects.

“I believe in creating opportunities. If you take care of your people, they will take care of the company,” says Barnum. “The current workforce is transient, but we don’t have those issues.”

Relationships are key to growing.

During the time of this interview, Barnum and his wife eagerly awaited their fifth grandchild’s birth. He reflected on two pieces of advice that his father gave him:

  1. If you learn a trade and you are good at it, you or your family will never go hungry, and
  2. Don’t make it about the money.

Barnum continues to heed these words and appreciates the growth this wisdom has afforded him. With the help of Celillo and BCE’s incredible team members, he took a one-person shop and built it into a company that employs 300-400 people at any given time. BCE now services both California and Nevada with projects ranging from updating local businesses’ LED lighting to providing its services on high-tech distribution center projects.

For Barnum, loyalty is the tie that binds and is essential in growing personally and professionally. Long-standing relationships are meaningful, and this is why BCE chose River City Bank. The company wanted to work with a community-based bank emphasizing relationships and loyalty.

“River City Bank truly cares about their clients,” says Barnum. “Any day of the week, I know that I can pick up the phone and reach out to Charice (Huntley) or Steve (Fleming) with a question and get a response quickly.”

“It’s all about developing and cherishing the relationships you have,” says Barnum. “If you don’t, they are fleeting.”

December 1, 2022

River City Bank Goes Solar

River City Bank Solar Panels
River City Bank Solar Panels

When it comes to Clean Energy, River City Bank doesn’t just talk the talk; we shout it from the rooftops!

With the help and expertise of Barnum & Celillo Electric (BCE) and its team of Marc Davis, Matthew Evans, and Jon Evans, River City Bank installed 550 solar panels (250 kW system size) on the roof of its Corporate headquarters. The BCE team joined RCB’s Rosa Cucicea, Director of the Clean Energy Division, and Controller Brian Killeen to examine the solar arrays that will power the building with renewable energy. The Bank has plans to install another 120 panels (54 kW system size) on the roof of its Woodland Branch location.

River City Bank is committed to clean energy and proud to be a part of making California a cleaner and greener place to work and live.

December 1, 2022

River City Bank’s Executive Forum Series Returns

Executive-Forum

River City Bank’s Executive Forum Series is back after a two-year hiatus!

With sponsors Bender Insurance SolutionsBFBA, LLP, and Murphy Austin Adams Schoenfeld LLP, the event made its return to the historic Sutter Club to discuss “The Future of the Workplace: In-Person, Hybrid, or Remote – What really works?

A distinguished group of business leaders and consultants weighed in on their experiences and what they have seen in the marketplace. The panel included Sacramento Metro Chamber‘s Amanda Blackwood, Craig Boyce of BFBA, and Aurora Vega of Lux Bus America. Along with moderator River City Bank’s President and CEO Steve Fleming, the group spoke on their company’s return-to-work policies and how their decisions affected culture, recruiting, and talent retention.

The networking event allowed attendees to make new business connections and catch up with a few familiar faces.

November 28, 2022

Protect Yourself from Wire Fraud

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Wire Fraud is on the rise, but it is preventable. Whether you’re managing business or personal accounts,  verification is key to making sure the right person is receiving your money.

Before you initiate a transaction, ask yourself these questions:

  • Is this an entity or person you normally make payments to via wire?
  • Are the payment instructions different than in the past?
  • Have you spoken directly with your payee regarding the change/request? It’s the best way to ensure the change/payment request is valid.

Creating and following a wire verification process is essential to protecting yourself and your business. Do not take shortcuts and fall victim to fraudsters. You can outsmart them by carefully reviewing wire requests and following the process.

Customers cumulatively lost almost $200,000 this month alone by not following a wire fraud verification process. In all cases, the customers did not call back the beneficiary with the phone number on file to verify the wire transaction.

 

We’re all in this together to prevent electronic transaction fraud. We can only win this battle by implementing various layers of internal controls throughout the funds transfer process. If you believe you or your business is a victim of wire or ACH fraud, contact us immediately to halt additional fraudulent transactions. Also, consider reporting the incident to law enforcement, which helps your business and others avoid similar fraud attempts.

Should you have any questions regarding your personal or financial information at the Bank, please do not hesitate to contact a Customer Service Representative at (916) 567-2899 or (800) 564-7144 or by email at [email protected].

October 21, 2022

River City Bank Reports a Quarterly Cash Dividend on Common Shares

SACRAMENTO, CASteve Fleming, president and chief executive officer of River City Bank (the Bank), announced that the Bank’s board of directors has approved, in connection with the Bank’s recently reported net income of $11.0 million or $7.43 diluted earnings per share for the quarter ending September 30, 2022, a cash dividend of $0.33 per common share to shareholders of record as of November 1, 2022, and payable on November 15, 2022.

October 19, 2022

River City Bank Reports Net Income of $11.0 Million for the Third Quarter of 2022 and $36.3 Million Year to Date

SACRAMENTO, CA — River City Bank (the Bank) reported net income of $11.0 million, or $7.43 per diluted share, for the quarter ending September 30, 2022, which was $663,000 less than the $11.7 million, or $7.92 per diluted share, for the same period in 2021. Net income was $36.3 million or $24.51 per diluted share for the nine months ending September 30, 2022, more than the $34.7 million or $23.51 per diluted share for the nine months ending September 30, 2021. Significant items impacting quarterly net income for September 30, 2022 and 2021 include the following:

  • Higher loan balances – Average loan outstandings were $538 million higher than the prior year quarter, thereby increasing net interest income.
  • The provision for loan losses for the current quarter of $3.73 million was higher than the $2.0 million for the prior year quarter.
  • The Bank recorded an elevated level ($1.9 million) of prepayment premium income on commercial real estate loans that paid off prior to their maturity dates for the quarter ending September 30, 2021 compared to only $124,000 for the current quarter.
  • Deferred loan fee income associated with Paycheck Protection Program (PPP) loans was lower in the current quarter with $50,000 compared to the significantly higher $1.4 million for the quarter ending September 30, 2021.

“We are very pleased with the $416 million or 15% loan growth during the nine months ending September 30, 2022 (after excluding the $32 million reduction in PPP loans),” said Steve Fleming, president and chief executive officer of River City Bank.  “Our asset quality remains strong with virtually no delinquencies or non-performing loans; however, we remain cautious about the impact to the office segment of commercial real estate due to the reduction in demand as employers provide work-from-home opportunities.”

“Operational efficiency remains a core competency for the Bank, as evidenced by our 28 percent efficiency ratio, after excluding the interest rate swap mark-to-market gain of $7 million and the $3.9 million realized loss on sale of investment securities for the nine months ending September 30, 2022,” said Anker Christensen, chief financial officer of River City Bank.

Shareholders’ equity for River City Bank on September 30, 2022 increased $32 million to $340 million, when compared to the $308 million as of December 31, 2021. The increase was driven by current year retained earnings, partially offset by a $6.5 million increase in accumulated other comprehensive loss as the increase in short and medium-term interest rates resulted in unrealized losses in the Bank’s investment securities portfolio. The Bank’s capital ratio remains well above the regulatory definition for being Well Capitalized with a Tier 1 Leverage Ratio of 9.0% as of September 30, 2022.

October 12, 2022

Healthcare and Banking: A Prescription for Success

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By Pat Lewis, EVP, Chief Operating Officer, at River City Bank.

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The healthcare industry, once relatively predictable and staid, underwent wrenching changes during the pandemic. As elective surgeries were canceled and many medical offices closed, healthcare practices of all kinds had to adapt to a new reality of virtual appointments, revenue pressures, staffing shortages, and unexpected expenses for personal protective equipment and technology.

As the Sacramento area emerges from the darkest days of the pandemic, and the local economy once again finds its footing, new opportunities in the sector abound. Medical practices are seeing patients return for checkups and elective surgeries. Veterinarian practices are swamped with handling the medical needs of pets adopted during the pandemic. Dentists and physical therapists are busy with appointments that had to be rescheduled. Some practices are expanding.

“Healthcare executives must now lead their institutions, designed for methodical and slow change, in a way that reinvents their business with the speed of the market,” McKinsey & Co. wrote in an article about healthcare business building in the wake of the pandemic.

The pandemic challenges lead to new opportunities

I couldn’t agree more. In my 20 years at River City Bank, I’ve met dozens of owners of healthcare businesses, many of whom had kept to the same formula for years. The pandemic changed that overnight. Practices had to immediately pivot to telehealth, even if they weren’t quite ready. They had to navigate government grants for help. And owners of small to medium-size medical practices must now embrace a new way of strategic thinking to stay competitive in the years ahead.

River City Bank’s Riley Gardner with Randy Paragary

As a financial partner to our clients, it’s critical that we understand the complex economics of medical billing, insurance reimbursements, and cash flow, and we are working together with independent medical practices to take advantage of the new environment.

Providers are opening up new facilities in new geographic areas, and they’re also enhancing and upgrading their facilities and bringing those back into play. To facilitate this growth, many healthcare practices are turning to local community banks, where they know a relationship banker can prioritize their needs and help walk them through the myriad of loans, financing, and credit lines they can access now and in the future.

Four key ways that financial partnerships promote growth

In particular, here are four ways that lenders can provide medical groups with the tools they need to help them prosper in the post-Covid environment:

1. Equipment financing

The pandemic ushered in a new wave of technology for healthcare practices as they were forced to quickly get up to speed on ways to deliver care virtually. To stay competitive with hospital-owned groups and other larger practices, independent physician groups often need to invest in more sophisticated equipment, from the front desk to the treatment room. As the pandemic eases, elective surgeries and regular screening have increased the volume at outpatient surgical centers. Local lenders can provide term loans and working capital lines of credit for equipment financing, sometimes at 100 percent.

2. Facilities remodeling

patient in videocall with doctor on a tablet.

3. Cash flow and liquidity management

River City Bank’s clients in healthcare span from the central coast to Northern California and the Sacramento region. Despite the geographic differences, each of the practices confronts similar challenges, from billing and reimbursement pressures to balancing cash flow and expenditures. Many have current expansion plans, while others are finally returning to other business strategies they were forced to put on hold.

4. Expansion capabilities

The Sacramento area, and other suburban and exurban regions around the state’s population centers, benefited from an influx of people fleeing city downtowns during the pandemic. Thanks to virtual and hybrid work, many of those new residents are staying. Even smaller independent physician groups are contemplating an increase in their facilities. Local lenders that understand medical financing can help medical practices expand when and where they want. Some growing practices might be increasing the number of locations to better serve an expanding clientele. Medical practice loans can cover the costs of both construction and renovation, as well as the new equipment needed to open another office.

How healthcare practices can be well positioned for the future

Medical practices that want to thrive in the years ahead will need to address a growing list of challenges, including capital financing for new equipment, funds needed to remodel facilities to maintain high-quality services, cash flow management to ensure liquidity, and access to funding for expansion to keep up with increasing demand.

Practices have choices to make when considering financing. Community banks with dedicated healthcare experts can give them guidance and innovative solutions they can’t get elsewhere.

With over 25 years of financial-services experience, Pat Lewis ensures compliance with policies and procedures while overseeing the premier level of client services upon which River City Bank has established its reputation. Pat has almost 20 years of experience with River City Bank holding positions including Senior Vice President, Commercial Banking Director, and Cash Management Director.