26
•
Our loan loss provision totaled only $350,000 in 2014, relative to $4.350 million in 2013 and $14.210
million in 2012.
During the recession and for several years thereafter, our loan loss provision was unusually
high due to the establishment of specific reserves for impaired loans, the replenishment of reserves subsequent to
loan charge-offs, and the buildup of general reserves for performing loans due to higher historical loss factors.
The reduction of $4.000 million in the loan loss provision in 2014 had the single largest impact on our
improvement in net income, and was enabled by a lower level of impaired loans, reduced loan losses, and de-
clining general reserves for non-impaired loans consistent with improved credit quality.
•
Net interest income increased by 8% in 2014 due to growth in average interest-earning assets that was
funded primarily by low-cost non-maturity deposits, but net interest income fell by 4% in 2013 relative to
2012 due to net interest margin compression.
Average interest-earning assets were up in 2014 due to strong
growth in the average balance of real estate loans and additions to our investment portfolio. The Company’s net
interest margin has been declining in recent periods, however, due in large part to competitive pressures on loan
yields and disproportionate increases in lower-yielding investment balances.
•
Non-interest income fell by $1.232 million, or 7%, in 2014 relative to 2013, and was down $1.063 million,
or 6%, in 2013 compared to 2012.
The largest unfavorable variances within this category in 2014 include a
drop in overdraft income and certain other deposit fee income, lower income on bank-owned life insurance
(“BOLI”) associated with deferred compensation plans, and lower merchant fees. Non-recurring life insurance
proceeds received in 2013 also contributed to the drop in non-interest income in 2014. These unfavorable
changes were partially offset by $667,000 in gains on the sale of investment securities in 2014, relative to only
$6,000 in gains in 2013. The most significant factor in the drop in non-interest income in 2013 was investment
gains totaling $1.762 million in 2012.
•
Operating expense had been trending down due to lower costs associated with other real estate owned
(“OREO”) and other credit-related expenses, but was up by $1.560 million, or 3%, in 2014 relative to 2013
mainly as a result of non-recurring acquisition costs.
Direct costs incurred or accrued in conjunction with our
acquisition of SCVB totaled $2.070 million in 2014, and other significant unfavorable non-interest expense
variances include higher personnel costs, ongoing and non-recurring costs associated with our core system
conversion, and costs associated with our rebranding project. These increases were partially offset by net gains
on the sale of OREO. The drop of $1.841 million, or 4%, in total operating expense in 2013 is mainly due to
lower net costs on foreclosed assets, partially offset by higher salaries and benefits.
•
The Company had tax provisions of $6.191 million, or 29% of pre-tax income in 2014, and $3.093 million,
or 19% of pre-tax income in 2013, and a tax benefit of $344,000 in 2012.
The higher tax provisioning rate in
2014 and 2013 was due to higher taxable income relative to the Company’s available tax credits, and the tax
benefit in 2012 was primarily the result of lower taxable income relative to the Company’s available tax credits.
The Company’s assets totaled $1.637 billion at December 31, 2014, relative to total assets of $1.410 billion at
December 31, 2013. Total liabilities were $1.450 billion at the end of 2014 compared to $1.229 billion at the end of
2013, and shareholders’ equity totaled $187 million at December 31, 2014 relative to $182 million at December 31,
2013. The acquisition of Santa Clara Valley Bank (“SCVB”) in November 2014 had a significant impact on balance
sheet growth for the year, including increases in loans, investments, and deposits as noted below, as well as the
addition of a $1.064 million core deposit intangible and an increase of $1.364 million in goodwill. The following is a
summary of key balance sheet changes during 2014.
•
Total assets increased by $227 million, or 16%.
The increase in total assets resulted from higher loan balances
and growth in investments, partially offset by reductions in foreclosed assets, balances due from the Federal
Reserve Bank, and cash.
•
Gross loans and leases were up $167 million, or 21%, for the year in 2014.
Loan growth was favorably
impacted by the purchase of $33 million in residential mortgage loans, strong organic growth in agricultural real
estate loans, mortgage warehouse loans, commercial real estate loans, and commercial loans, and $62 million in
loans from our acquisition of SCVB. Growth in performing loan balances in 2014 was partially offset by a $17
million reduction in nonperforming loans. In 2013, loan volume was negatively impacted by a $97 million
decline in mortgage warehouse loans resulting from lower credit line utilization, and a $16 million reduction in
nonperforming loans.
