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by $345,000, or 14%, in 2014. The drop in 2015 was due to reductions in regulatory assessments, deferred compensa-
tion expense for directors, and stock option expense for directors. For 2014, the drop includes reductions in regulatory
assessments and deferred compensation expense. 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. Directors’ deferred compensation
expense accruals totaled $57,000 in 2015, $197,000 in 2014, and $482,000 in 2013.
Stationery and supply costs increased by $104,000, or 9%, in 2015 over 2014, and by $535,000, or 81%, in 2014 over
2013. The increases for both 2015 and 2014 are primarily due to recurring costs stemming from our whole-bank
acquisition and core conversion in 2014, but the increase in 2014 was also impacted by the rebranding initiative. Sundry
and teller costs increased by $349,000, or 68%, in 2015 and by $156,000, or 44%, in 2014, due to an increase in debit
card losses and other operations-related charge-offs. We are hopeful that our conversion to EMV technology, being
phased in over the fourth quarter of 2015 and the first quarter of 2016, will help reduce debit card fraud, but no assurance
can be provided in that regard.
The Company’s tax-equivalent overhead efficiency ratio improved to 63.98% in 2015, from 66.48% in 2014 and
65.95% in 2013. 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 and investment gains/losses excluded
from the equation.
Income Taxes
Our income tax provision was $9.071 million, or 33% of pre-tax income in 2015, relative to a provision of $6.191
million, or 29% of pre-tax income in 2014 and a provision of $3.093 million, or 19% of pre-tax income in 2013. Higher
taxable income and a declining level of available tax credits were the primary factors impacting the increase in our tax
accrual rate in 2015.
The Company sets aside a provision for income taxes on a monthly basis. 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, and then subtracting available tax credits. Permanent differences include but are
not limited to tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax
deductions. The Company’s investments in state, county and municipal bonds provided $2.953 million in federal tax-
exempt income in 2015, $2.936 million in 2014, and $2.737 million in 2013. Our bank-owned life insurance also
generated $907,000 in tax-exempt income in 2015, down from $1.278 million in 2014 and $1.787 million in 2013.
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. Tax credits currently include any remaining 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 $4.9
million invested in low-income housing tax credit funds as of December 31, 2015, 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 $770,000 in credits available for the 2015 tax year, $1.0 million in tax credits utilized in 2014, 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 con-
tinue 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 will taper off in future years 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.
Financial Condition
Assets totaled $1.797 billion at the end of 2015, reflecting an increase of $159 million, or 10%, for the year due to
growth in loans that was partially offset by slightly lower cash balances and investments. Loan volume was favorably
impacted by increased utilization on mortgage warehouse lines, the first quarter purchase of residential mortgage loans,
and strong organic growth. Total nonperforming assets continued to trend down in 2015, including a significant reduc-
tion in the fourth quarter pursuant to the sale of our single largest remaining nonperforming loan, and our allowance
for loan and lease losses was reduced due to the improvement in asset quality. Total deposits experienced a large