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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion presents Management’s analysis of the Company’s financial condition as of December 31, 2014 and
2013, and the results of operations for each of the years in the three-year period ended December 31, 2014. The
discussion should be read in conjunction with the Company’s consolidated financial statements and the notes related
thereto presented elsewhere in this Form 10-K Annual Report (see Item 8 below).
Statements contained in this report or incorporated by reference that are not purely historical are forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, including the
Company’s expectations, intentions, beliefs, or strategies regarding the future. All forward-looking statements con-
cerning economic conditions, growth rates, income, expenses, or other values which are included in this document
are based on information available to the Company on the date noted, and the Company assumes no obligation to
update any such forward-looking statements. It is important to note that the Company’s actual results could materi-
ally differ from those in such forward-looking statements. Risk factors that could cause actual results to differ mate-
rially from those in forward-looking statements include but are not limited to those outlined previously in Item 1A.
Critical Accounting Policies
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the
United States. The financial information and disclosures contained within those statements are significantly
impacted by Management’s estimates and judgments, which are based on historical experience and incorporate
various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from
those estimates under divergent conditions.
Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and
have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the
Company’s critical accounting policies deal with the following areas: the establishment of the allowance for loan
and lease losses, as explained in detail in Note 2 to the consolidated financial statements and in the “Provision for
Loan Losses” and “Allowance for Loan and Lease Losses” sections of this discussion and analysis; the valuation of
impaired loans and foreclosed assets, as discussed in Note 2 to the consolidated financial statements; income taxes
and deferred tax assets and liabilities, especially with regard to the ability of the Company to recover deferred tax
assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this discussion and analysis;
and goodwill and other intangible assets, which are evaluated annually for impairment and for which we have
determined that no impairment exists, as discussed in Note 2 to the consolidated financial statements and in the
“Other Assets” section of this discussion and analysis. Critical accounting areas are evaluated on an ongoing basis to
ensure that the Company’s financial statements incorporate the most recent expectations with regard to those areas.
Summary of Performance
The Company recognized net income of $15.240 million in 2014, relative to $13.369 million in 2013 and $8.185
million in 2012. Net income per diluted share was $1.08 in 2014, as compared to $0.94 in 2013 and $0.58 for 2012.
The Company’s return on average assets and return on average equity were 1.03% and 8.18%, respectively, in 2014,
as compared to 0.96% and 7.56%, respectively, in 2013, and 0.59% and 4.74%, respectively, for 2012. The
Company’s financial performance improved in 2014 relative to recent years, due in part to better economic
conditions that contributed to reductions in nonperforming assets, lower credit costs, increased lending activity, and
strong core deposit growth. Those trends were evident to a lesser extent in 2013, but for several years prior to that
our financial performance was materially impacted by adverse economic conditions. Certain regions of California,
including Kern County, have shown strong economic improvement over the past couple of years, although the
recovery has been slower to take hold in many of our other markets. Despite the improvement in 2014, net income
remains well below levels achieved in pre-recession years as competitive pressures continue to take their toll on loan
rates and net interest income, and certain elements of non-interest income are also lower in response to industry-wide
regulatory pressures.
The following are some of the major factors impacting the Company’s results of operations for the years presented in
the consolidated financial statements.
