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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, 2015 and
2014, and the results of operations for each of the years in the three-year period ended December 31, 2015. The dis-
cussion 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 state-
ments 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 concerning eco-
nomic 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 materially differ from those
in such forward-looking statements. Risk factors that could cause actual results to differ materially 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 assump-
tions 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 state-
ments incorporate the most recent expectations with regard to those areas.
Summary of Performance
The Company recognized net income of $18.067 million in 2015, relative to $15.240 million in 2014 and $13.369
million in 2013. Net income per diluted share was $1.33 in 2015, as compared to $1.08 in 2014 and $0.94 for 2013.
The Company’s return on average assets and return on average equity were 1.07% and 9.59%, respectively, in 2015, as
compared to 1.03% and 8.18%, respectively, in 2014, and 0.96% and 7.56%, respectively, for 2013. The Company’s
financial performance improved in 2015, due in part to economic conditions that contributed to reductions in nonper-
forming assets, increased lending activity, and strong core deposit growth. Those trends were also evident in 2014 and
2013, but for several years prior to that our financial performance was materially impacted by adverse economic
conditions. The following are some of the major factors impacting the Company’s results of operations for the years
presented in the consolidated financial statements.
•
Net interest income increased by 15% in 2015 and 8% in 2014, due primarily to growth in average interest-
earning assets that was largely funded by low-cost non-maturity deposits, and non-recurring interest
income.
The growth in average earning assets in 2015 resulted from a combination of our acquisition of Santa
Clara Valley Bank in the latter part of 2014, organic growth, and the purchase of residential mortgage loans in the
first quarter of 2015. The positive impact of asset growth was partially offset by a two basis point drop in our net
interest margin for 2015, resulting in part from relatively strong growth in lower-yielding mortgage warehouse
loans and continued competitive pressures on loan yields. Net interest income has been favorably impacted by
non-recurring interest income, which added $825,000 to interest income in 2015 relative to $505,000 in 2014.