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2012. The increase in 2014 is the result of additional mailings to customers in conjunction with our core banking
system conversion, the rebranding initiative, and the acquisition. Other miscellaneous costs increased by $32,000, or
5%, in 2014, but fell by $83,000, or 11%, in 2013. The increase in 2014 is primarily due to staff travel and meal
costs, which were higher than normal during the conversion and the acquisition. The drop in 2013 was due to lower
depreciation on operating leases, partially offset by higher recruiting and training costs.
Legal and accounting costs were down $444,000, or 26%, in 2014 relative to 2013, but increased by $436,000, or
35%, in 2013 over 2012. The drop in 2014 is due primarily to lower loan review costs and a drop in lending-related
legal expense incidental to our improvement in credit quality, as well as lower external audit expense. The increase
in 2013 resulted mainly from an increase in legal costs associated with loan collections and higher loan review costs.
Acquisition costs include one-time expenses directly attributable to our acquisition of Santa Clara Valley Bank,
which totaled $2.070 million in 2014. Those expenses are comprised primarily of financial advisor fees, legal costs,
severance and retention amounts paid or expected to be paid to SCVB employees, the write-off of furniture, fixtures
and equipment that will not be utilized by the Company, software conversion costs, and termination fees on certain
SCVB contracts for redundant services.
Other professional services costs include FDIC assessments and other regulatory costs, directors’ costs, certain insur-
ance costs, and professional recruiting fees among other things. This category fell by $344,000, or 14%, in 2014, but
increased by $253,000, or 11%, in 2013. The drop in 2014 includes a $71,000 reduction in regulatory assessments,
but for both 2014 and 2013 the variances were primarily caused by fluctuations in directors deferred compensation
expense, which totaled $197,000 in 2014, $482,000 in 2013 and $187,000 in 2012. As with deferred compensation
accruals for employees, directors’ deferred fee accruals are related to separate account BOLI income and losses, and
the net income impact of all income/expense accruals related to deferred compensation is usually minimal.
Stationery and supply costs increased by $535,000, or 81%, in 2014 over 2013, but were reduced by $81,000, or
11%, in 2013 relative to 2012. Some of the increase in 2014 was due to the rebranding initiative and the conversion,
but the bulk of the increase represents recurring costs incidental to our core system conversion. Our utilization of
forms and supplies has not materially increased, but prior to the conversion the cost of certain forms and supplies was
included with data processing costs. The post-conversion process facilitates the separation of those costs, which are
now reflected more properly with stationery and supplies. The reduction in 2013 was due primarily to a change in
vendors, and would have been even greater if not for the write-off of certain stationery and supplies in anticipation of
the rebranding initiative.
Sundry and teller costs increased by $156,000, or 44%, in 2014, due to an increase in debit card losses and other
operations-related charge-offs. These costs were reduced by $166,000, or 32%, in 2013 relative to 2012 due to a
high level of debit card fraud in 2012.
The Company’s tax-equivalent overhead efficiency ratio increased slightly, to 66.75% in 2014 relative to 66.08% in
2013 and 66.39% in 2012. The overhead efficiency ratio represents total non-interest expense divided by the sum of
fully tax-equivalent net interest and non-interest income, with the provision for loan losses, investment gains/losses,
OREO gains/losses, acquisition costs and certain other non-recurring items excluded from the equation.
Income Taxes
The Company sets aside a provision for income taxes on a monthly basis. As indicated in Note 10 to the
consolidated financial statements, the amount of that provision is determined by first applying the Company’s
statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent
differences between book and taxable income, and then subtracting available tax credits. Permanent differences
include but are not limited to tax-exempt interest income, BOLI income, tax credits, and certain book expenses that
are not allowed as tax deductions. Because of the relatively high portion of the Company’s pretax income that
consists of tax-exempt interest income and BOLI income, and the level of tax credits available in relation to our pre-
credit tax liability as calculated for book purposes, our tax accrual rate is very sensitive to changes in pretax income.
Our income tax provision for 2014 was $6.191 million, or 29% of pre-tax income. The Company’s income tax
provision was $3.093 million, or 19% of pre-tax income in 2013, and we had a tax benefit of $344,000 in 2012. The
