49 / 146
33
Certain expenses associated with our ICA relationship have also been eliminated, however, and the net financial impact
on the Company is not material. The drop in other non-interest income in 2015 also includes the disposition of certain
fixed assets at a $62,000 loss. The decline in this category in 2014 includes a $52,000 drop in ICA income, a $71,000
reduction in gains on the disposition of equipment and other fixed assets resulting from gains in 2013, and a $397,000
reduction in life insurance proceeds due to insurance income received in 2013.
Total operating expense, or non-interest expense, increased by $4.328 million, or 9%, in 2015 over 2014, and by $1.560
million, or 3%, in 2014 relative to 2013. The increase in 2015 is comprised in large part of ongoing operating costs
incidental to our November 2014 acquisition and February 2014 core banking system conversion, debit card losses, and
higher net expenses associated with foreclosed assets. The increase for 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. Non-interest expense includes the following items of a non-recurring nature: for
2015, net OREO expense of $153,000 and one-time acquisition costs totaling $101,000; for 2014, acquisition costs of
$2.070 million, certain marketing expenses related to our acquisition and a rebranding initiative, a net OREO expense
reversal of $1.420 million due to gains on the sale of OREO, commissions totaling $290,000 paid with regard to the
sale of certain nonperforming loans, and credits totaling $155,000 for incorrect telecommunications billings in prior
periods; and, for 2013, net OREO expense of $1.529 million. Non-interest expense declined to 3.28% of average
earning assets for 2015 from 3.45% in 2014 and 3.60% in 2013, due to a sizeable increase in the denominator.
The largest component of operating expense, namely salaries and employee benefits, was up $1.945 million, or 8%, in
2015 over 2014, and increased by $1.006 million, or 5%, in 2014 over 2013. The increase for 2015 is due primarily to
personnel increases associated with our acquisition, regular annual salary increases, higher group health insurance
premiums, and an increased accrual for Company contributions to the employee 401(k) retirement plan. Those
increases were partially offset by a higher level of deferred salaries directly related to successful loan originations in
2015, in addition to lower deferred compensation expense, reduced incentive compensation accruals and a drop in
temporary help and overtime costs due to inflated costs in 2014 stemming from our core banking system conversion
and acquisition. In 2014, compensation expense was impacted by regular annual salary increases as well as staffing
costs associated with the acquisition. 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 non-recurring
temporary help and overtime costs related to our core conversion and acquisition. Lower stock option expense in 2014
partially offset the aforementioned increases. 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 $3.058 million for 2015, $2.673 million for 2014, and $2.804 million in 2013, with the
fluctuations due to variability in successful organic loan origination activity. Employee deferred compensation expense
accruals totaled $37,000 in 2015, relative to $239,000 in 2014 and $451,000 in 2013. As noted above in our discussion
of BOLI income, employee deferred compensation plan accruals are related to separate account BOLI income and
losses, as are directors deferred compensation accruals that are included in “other professional services,” and the net
income impact of all income/expense accruals related to deferred compensation is usually minimal. Salaries and
benefits were 49.05% of total operating expense in 2015, relative to 49.44% in 2014 and 48.91% in 2013. The number
of full-time equivalent staff employed by the Company totaled 417 at the end of 2015, 420 at the end of 2014, and 389
at the end of 2013. The increase in 2014 over 2013 is due to the addition of Santa Clara Valley Bank staff.
Total rent and occupancy expense, including furniture and equipment costs, increased by $555,000, or 9%, in 2015
over 2014, and by $70,000, or 1%, in 2014 over 2013. The increase in 2015 is due primarily to the three branches
added via our acquisition in November 2014 and our loan production office that opened in May 2015, with associated
expenses including but not limited to rent and depreciation, utilities, janitorial, and security. In 2014, premises costs
increased relative to 2013 due to higher utilities expense and costs associated with our newly-acquired branches.
Advertising and marketing costs were up by $114,000, or 5%, in 2015 over 2014, and by $245,000, or 13%, in 2014
over 2013. The increase for 2015 is due primarily to promotional expenses associated with our newer branches, while
the increase in 2014 was due to non-recurring costs incurred in conjunction with our 2014 rebranding efforts and the
acquisition, as well as an increase in charitable donations.