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higher income tax provisioning rate in 2014 is due to an increase in taxable income, and the loss of certain California
state income tax credits and deductions. The negative provision in 2012 was primarily the result of lower taxable
income relative to the Company’s available tax credits.
The Company’s investments in state, county and municipal bonds provided $2.936 million in federal tax-exempt
income in 2014, $2.737 million in 2013, and $2.703 million 2012. Our bank-owned life insurance also generated
$1.278 million in tax-exempt income in 2014, relative to $1.787 million in 2013 and $1.420 million in 2012. Tax
credits currently include California state tax employment credits, as well as those generated by our investments in
low-income housing tax credit funds. We had a total of $5.8 million invested in low-income housing tax credit funds
as of December 31, 2014, which are included in other assets rather than in our investment portfolio. Those
investments have generated substantial tax credits over the past few years, with about $1.0 million in credits available
for the 2014 tax year and $1.3 million in tax credits utilized in 2013. The credits are dependent upon the occupancy
level of the housing projects and income of the tenants, and cannot be projected with certainty. Furthermore, our
capacity to utilize them will continue to depend on our ability to generate sufficient pre-tax income. Because we
have not invested in additional tax credit funds for the past few years, the level of low-income housing tax credits
available for future years will taper off until they are substantially utilized by the end of 2018. That means that even
if taxable income stayed at the same level through 2018, our tax accrual rate would gradually increase. Effective
January 1, 2014, changes in California tax law eliminated certain state tax credits and deductions, which had a
negative impact on our tax accrual rate.
Financial Condition
Assets totaled $1.637 billion at the end of 2014, reflecting an increase of $227 million, or 16%, for the year due to
growth in gross loan balances and investments, partially offset by reductions in foreclosed assets and balances due
from the Federal Reserve Bank. As noted above and outlined in further detail below, the acquisition of Santa Clara
Valley Bank in November 2014 had a material impact on balance sheet growth for the year. Loan volume was
favorably impacted by $62 million in SCVB loans, the purchase of $33 million in residential mortgage loans, and
strong organic growth. Total nonperforming assets continue to trend down, and our allowance for loan and lease
losses was reduced in 2014 due to the improvement in asset quality. Investment balances were up due to the addition
of $44 million in SCVB investment securities, and the purchase of mortgage-backed securities as we deployed excess
liquidity. Total deposits experienced a strong increase in 2014, as a result of the acquisition as well as strong
customer deposit growth in our branches. Non-deposit borrowings also increased during 2014, due in part to the
addition of SCVB’s longer-term Federal Home Loan Bank borrowings.
We have maintained a very strong capital position throughout the recession and in the ensuing years, due to our
registered direct offering in 2010 and private placement in 2009 combined with increases in retained earnings in the
normal course of business. Furthermore, our liquidity position has been exceptionally strong for the past few years
due to robust growth in customer deposits and the runoff of a large volume of wholesale-sourced brokered deposits
and other borrowings, in addition to a substantial increase in unpledged liquid investments. Our healthy capital
position and access to liquidity resources position us to take advantage of potential growth opportunities, although no
assurance can be provided in that regard. The major components of the Company’s balance sheet are individually
analyzed below, along with information on off-balance sheet activities and exposure.
Loan and Lease Portfolio
The Company’s loan and lease portfolio represents the single largest portion of invested assets, substantially greater
than the investment portfolio or any other asset category, and the quality and diversification of the loan and lease
portfolio are important considerations when reviewing the Company’s financial condition. The Company is not
involved with chemicals or toxins that might have an adverse effect on the environment, thus its primary exposure to
environmental legislation is through its lending activities. The Company’s lending procedures include steps to iden-
tify and monitor this exposure in an effort to avoid any related loss or liability. The Selected Financial Data table in
Item 6 above reflects the amount of loans and leases outstanding at December 31
st
for each year from 2010 through
2014, net of deferred fees and origination costs and the allowance for loan and lease losses. The Loan and Lease
Distribution table that follows sets forth by loan type the Company’s gross loans and leases outstanding, and the per-
centage distribution in each category at the dates indicated. The balances for each loan type include nonperforming
loans, if any, but do not reflect any deferred or unamortized loan origination, extension, or commitment fees, or
