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participant gains and losses on deferred compensation balances, thus their impact on taxable income tends to be
neutral.
Gains on the sale of loans dropped to immaterial levels in 2014 since the Company has been retaining almost all of
the loans it originates. Loan servicing income has likewise dropped to insignificant levels in recent periods. We did,
however, realize $667,000 in gains on the sale of investments in 2014 relative to only $6,000 for 2013. Investment
gains totaled $1.762 million in 2012, due to the sale of approximately $49 million in mortgage-backed and municipal
securities to provide additional liquidity for loan growth.
The next line item reflects pass-through losses associated with our investments in low-income housing tax credit
funds and other limited partnership investments. Those costs, which are netted out of revenue, increased by $98,000,
or 9%, in 2014 over 2013, and by $668,000, or 169%, in 2013 over 2012. Costs were lower in 2012 due to
cumulative accrual adjustments that are not expected to be repeated.
Other non-interest income includes gains and losses on the disposition of assets other than OREO, rent on bank-
owned property other than OREO, life insurance proceeds, and other miscellaneous income. Other non-interest
income was down $525,000 in 2014 relative to 2013 but increased by $356,000 in 2013 over 2012, due primarily to
life insurance proceeds of $397,000 received in 2013. There was also a reduction of $71,000 in non-recurring gains
on the disposition of equipment and other fixed assets in 2014. Income generated through the Company’s alliance
with Investment Centers of America (“ICA”) has been included in this line item, but the Company terminated its
affiliation with ICA effective July 31, 2014 so related income was down $52,000 in 2014. While non-interest income
will continue to be negatively impacted in future periods, certain expenses associated with our ICA relationship will
also be eliminated and the net financial impact on the Company is not expected to be material.
Total operating expense, or non-interest expense, increased by $1.560 million, or 3%, in 2014 over 2013, but
declined by $1.841 million, or 4%, in 2013 relative to 2012. The increase in 2014 is centered in non-recurring
acquisition costs, expenses associated with our core system conversion, and compensation costs, partially offset by
substantial gains on the sale of foreclosed assets. The drop in 2013 was primarily due to lower net costs associated
with foreclosed assets, partially offset by higher compensation costs. Non-interest expense includes the following
items of a non-recurring nature: direct acquisition costs totaling $2.070 million in 2014; certain marketing expenses
related to our acquisition and the rebranding initiative in 2014; a net OREO expense reversal of $1.420 million in
2014 due to gains on the sale of OREO; commissions totaling $290,000 paid with regard to the sale of certain
nonperforming loans in 2014; credits totaling $155,000 received in 2014 for incorrect telecommunications billings in
prior periods; net OREO expense of $1.529 million for 2013 and $4.914 million in 2012; and a $75,000 non-
recurring expense offset in 2012 in conjunction with the renewal of our contract for debit transaction processing.
Due to a higher level of earning assets in 2014, non-interest expense declined to 3.45% of average earning assets for
2014 from 3.60% in 2013 and 3.79% in 2012.
The largest component of operating expense, namely salaries and employee benefits, was up by $1.006 million, or
5%, in 2014 over 2013, and by $1.186 million, or 6%, in 2013 over 2012. In 2014, compensation expense was
impacted by regular annual salary increases, as well as staffing associated with our acquisition which is ultimately
expected to add around $2 million to annual compensation expense. Furthermore, increases in our accrual for officer
bonuses, group health insurance premiums, and the Company’s matching contribution to its 401(k) plan added to
expenses in 2014, as did approximately $190,000 in non-recurring overtime costs related to our core conversion,
acquisition, and rebranding initiative. Those increases were partially offset by lower stock option expense in 2014.
For 2013, the increase includes normal annual salary adjustments and strategic staff additions, and a higher accrual
for officer bonuses. Additional components of compensation expense that can experience significant variability and
are typically difficult to predict include salaries associated with successful loan originations, which are accounted for
in accordance with Financial Accounting Standards Board (“FASB”) guidelines on the recognition and measurement
of non-refundable fees and origination costs for lending activities, and accruals associated with employee deferred
compensation plans. Loan origination salaries that were deferred from current expense for recognition over the life
of related loans totaled $2.673 million for 2014, $2.804 million in 2013, and $2.745 million in 2012, with the
fluctuations due to variability in successful organic loan origination activity. Employee deferred compensation
expense accruals totaled $239,000 in 2014, relative to $451,000 in 2013 and $188,000 in 2012. As noted above in
our discussion of BOLI income, employee deferred compensation plan accruals are related to separate account BOLI
