SACRAMENTO, CA – July 26, 2017—River City Bank (the Bank) reported net income of $6.4 million, or $4.42 per diluted share, for the three-month period ending June 30, 2017, which compares to the $3.3 million, or $2.30 per diluted share, for the same period in 2016. Net income was $10.6 million, or $7.35 per diluted share, for the six months ending June 30, 2017, which compares to the $6.1 million, or $4.22 per diluted share, for the six months ending June 30, 2016.
The two largest factors affecting the relative performance of the two periods pertain to the sale of other real estate owned (OREO) properties and the mark-to-market (MTM) of the Bank’s interest rate swap contracts (swaps). In the second quarter of 2017, the Bank sold an office building in Clovis, California, which resulted in a pre-tax gain of $3.4 million. Similarly, in the second quarter of 2016, the Bank recorded a $464,000 pre-tax gain on sale of an OREO property located in Arvin, California. These two properties were acquired via foreclosure and relate to loans originated in 2004 and 2008, respectively. The Bank no longer has any OREO on its balance sheet.
The Bank reported the MTM on the swaps resulting in a loss of $187,000 and a gain of $83,000 for the three- and six- month periods ending June 30, 2017, respectively, compared to MTM losses of $686,000 and $2.35 million for the same periods in 2016. Medium term interest rates changed minimally since the prior year end, resulting in a modest MTM swap gain for the six months ending June 30, 2017. This compared favorably to the large MTM swap loss of $2.35 million in the prior year period due to the pronounced decline in medium-term interest rates between December 31, 2015, and June 30, 2016. The Bank entered these swap agreements to hedge the interest rate risk associated with its ongoing origination of medium-term fixed rate loans. Because these swaps were not designed to receive hedge accounting treatment, these swaps must be carried on the balance sheet at fair market value with any changes in value recorded in the income statement.
Total gross loans increased $139 million, or 11 percent, from December 31, 2016, and $312 million, or 28 percent, from the prior year quarter end. “The Bay Area and Southern California commercial real estate markets continued to provide excellent opportunities for loan growth during the first half of 2017,” stated Steve Fleming, president and chief executive officer of River City Bank. “However, we believe that this commercial real estate refinancing cycle is approaching its conclusion. As such, we expect a significant slowdown in our loan growth going forward.”
This loan growth propelled net interest income $3.6 million higher for the first six months of 2017 versus the same period in 2017. The net interest income growth would have exceeded $4 million had the prior year period not benefited from an interest recovery of $596,000 from a nonaccrual loan that was fully repaid. The superior loan growth has also been essential in mitigating the negative impact of the recent flattening of the interest rate yield curve. Our net interest margin declined from 2.96 percent to 2.86 percent for the six-month periods ending June 30, 2016 and 2017, respectively, after adjusting for the non-recurring interest recovery noted above.
Asset quality is exceptional with nonperforming loans and OREO to total gross loans declining from an already low 0.46 percent as of June 30, 2016, to 0.06 percent as of June 30, 2017.
“With the ongoing historically low interest rate environment continuing to pressure our revenues, we have remained vigilant in managing our expenses,” stated Anker Christensen, chief financial officer of River City Bank. “Our efficiency ratio was 39 percent and 54 percent for the six months ending June 30, 2017 and 2016, respectively. After excluding the gains on sale of OREO and the mark-to-market adjustments on the interest rate swap contracts for both periods, our efficiency ratio declined to a very low 44 percent from 48 percent for the six month periods ending June 30, 2017 and 2016, respectively.”
Shareholders’ equity for River City Bank on June 30, 2017, increased almost $10 million to $181 million when compared to the $171 million as of December 31, 2016. The increase was driven by retained earnings. The Bank’s capital ratios remain well above the regulatory definitions for being Well Capitalized. Common Equity Tier 1, Tier 1 Leverage and Total Risked-Based Capital Ratios were, 10.9 percent, 9.4 percent and 12.8 percent, respectively, as of June 30, 2017.
