Form 10-Q COMMUNITY WEST BANCSHARE For: Sep 30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.� 20549

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FORM 10-Q

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(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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For the quarterly period ended September 30, 2014 or

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�	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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For the transition period from _________ to _________

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Commission File Number:� 000-23575

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COMMUNITY WEST BANCSHARES

(Exact name of registrant as specified in its charter)

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(805) 692-5821

(Registrant's telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.�x YES� ��� o NO

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (�232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES����� o�NO

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.� See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.� (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).� Yes �� No x

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Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

Common stock of the registrant issued and outstanding of 8,202,733 as of October 31, 2014.

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Table of Contents

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PART I  FINANCIAL INFORMATION

Item 1.� Financial Statements

COMMUNITY WEST BANCSHARES

CONSOLIDATED BALANCE SHEETS

See the accompanying notes.

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COMMUNITY WEST BANCSHARES

CONSOLIDATED INCOME STATEMENTS (unaudited)

See the accompanying notes.

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COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

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See the accompanying notes.

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COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)

See the accompanying notes.

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COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

See the accompanying notes.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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Nature of operations

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Community West Bancshares (CWBC), incorporated under the laws of the state of California, is a bank holding company providing full service banking through its wholly-owned subsidiary Community West Bank, N.A. (CWB or the Bank).� These entities are collectively referred to herein as the Company.

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Basis of presentation

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The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (GAAP) and conform to practices within the financial services industry.� The accounts of the Company and its consolidated subsidiary are included in these Consolidated Financial Statements.� All significant intercompany balances and transactions have been eliminated.

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Use of estimates

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.� Actual results could differ from those estimates.� Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses and fair value of other real estate owned.� Although management believes these estimates to be reasonably accurate, actual amounts may differ.� In the opinion of management, all adjustments considered necessary have been reflected in the financial statements during their preparation.

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Interim financial information

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The accompanying unaudited consolidated financial statements as of September 30, 2014 and 2013 have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by GAAP for complete financial statements.� These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

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The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented.� Such adjustments are of a normal recurring nature.� The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year.� The interim financial information should be read in conjunction with the Companys audited consolidated financial statements.

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Reclassifications

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Certain amounts in the consolidated financial statements as of December 31, 2013 and for the three and nine months ended September 30, 2013 have been reclassified to conform to the current presentation.� The reclassifications have no effect on net income, comprehensive income or stockholders equity as previously reported.

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Loans Held For Sale

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Loans which are originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an aggregate basis.� Valuation adjustments, if any, are recognized through a valuation allowance by charges to lower of cost or fair value provision.� Loans held for sale are mostly comprised of SBA, commercial agriculture and single family residential loans.� The Company did not incur any lower of cost or fair value provision in the three and nine months ended September 30, 2014 and 2013.

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Loans Held for Investment�and Interest and Fees from Loans

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Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off.� Unearned income includes deferred loan origination fees reduced by loan origination costs.� Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method.

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Interest income on loans is accrued daily using the effective interest method and recognized over the terms of the loans.� Loan fees collected for the origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income.� If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan.� If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment.� Commitment fees based on a percentage of a customers unused line of credit and fees related to standby letters of credit are recognized over the commitment period.

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When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs and premiums and discounts paid on purchased loans are accounted for through interest income.

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Nonaccrual loans:� For all loan types, when a borrower discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest.� Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has become delinquent by more than 90 days or when management determines that the full repayment of principal and collection of interest is unlikely.� The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if they are well secured by collateral and in the process of collection.� Other personal loans are typically charged off no later than 180 days delinquent.

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For all loan types, when a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period in which the status is changed.� Subsequent payments received from the customer are applied to principal and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required.� The Company occasionally recognizes income on a cash basis for non-accrual loans in which the collection of the remaining principal balance is not in doubt.

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Impaired loans:� A loan is considered impaired when, based on current information; it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.� Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.� Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired.� Management determines the significance of payment delays or payment shortfalls on a case-by-case basis.� When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.� For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment.� The collateral-dependent loans that recognize impairment are charged down to the fair value less costs to sell.� All other loans are measured for impairment either based on the present value of future cash flows or the loans observable market price.

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Troubled debt restructured loan (TDR): A TDR is a loan on which the Company, for reasons related to the borrowers financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. These concessions included but are not limited to term extensions, rate reductions and principal reductions.� Forgiveness of principal is rarely granted and modifications for all classes of loans are predominately term extensions.� A TDR loan is also considered impaired.� Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.

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Allowance for Loan Losses and Provision for Credit Losses

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The Company maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan losses (ALL).� The ALL is based on estimates and is intended to be appropriate to provide for probable losses inherent in the loan portfolio.� This process involves deriving probable loss estimates that are based on migration analysis and historical loss rates, in addition to qualitative factors that are based on managements judgment.� The migration analysis and historical loss rate calculations are based on the annualized loss rates utilizing a twelve-quarter loss history.� Migration analysis is utilized for the Commercial Real Estate (CRE), Commercial, Commercial Agriculture, Small Business Administration (SBA), Home Equity Line of Credit (HELOC), Single Family Residential, and Consumer portfolios.� The historical loss rate method is utilized primarily for the Manufactured Housing portfolio.� The migration analysis takes into account the risk rating of loans that are charged off in each loan category.� Loans that are considered Doubtful are typically charged off.� The following is a description of the characteristics of loan ratings.� Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual basis.

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Outstanding  This is the highest quality rating that is assigned to any loan in the portfolio.� These loans are made to the highest quality borrowers with strong financial statements and unquestionable repayment sources.� Collateral securing these types of credits are generally cash deposits in the bank or marketable securities held in custody.

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Good  Loans rated in this category are strong loans, underwritten well, that bear little risk of loss to the Company.� Loans in this category are loans to quality borrowers with very good financial statements that present an identifiable strong primary source and good secondary source of repayment.� Generally, these credits are well collateralized by good quality and liquid assets or low loan to value market real estate.

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Pass - Loans rated in this category are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company.� Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.� In the case of individuals, borrowers with this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment.

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Watch  Acceptable credit that requires a temporary increase in attention by management.� This can be caused by declines in sales, margins, liquidity or working capital.� Generally the primary weakness is lack of current financial statements and industry issues.

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Special Mention - A Special Mention loan has potential weaknesses that require management's close attention.� If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date.� Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

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Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.� These loans have a well-defined weakness or weaknesses that jeopardize full collection of amounts due.� They are characterized by the distinct possibility that the Company will sustain some loss if the borrowers deficiencies are not corrected.

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Doubtful - A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.� The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined.� Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

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Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.� This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future.� Losses are taken in the period in which they are considered uncollectible.

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The Companys ALL is maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans.� The allowance is charged for losses when management believes that full recovery on the loan is unlikely.� The following is the Companys policy regarding charging off loans.

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Commercial, CRE and SBA Loans

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Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible.� A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.� Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.� Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Generally, loan balances are charged-down to the fair value of the collateral, if, based on a current assessment of the value, an apparent deficiency exists.� In the event there is no perceived equity, the loan is charged-off in full.� Unsecured loans which are delinquent over 90 days are also charged-off in full.

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Single Family Real Estate, HELOCs and Manufactured Housing Loans

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Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which principal or interest is due and unpaid for 90 days, are evaluated for impairment.� Loan balances are charged-off to the fair value of the property, less estimated selling costs, if, based on a current appraisal, an apparent deficiency exists.� In the event there is no perceived equity, the loan is generally fully charged-off.� Other consumer loans which are not secured and unpaid over 90-120 days are charged-off in full.

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Consumer Loans

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All consumer loans (excluding real estate mortgages, HELOCs and savings secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or five payments delinquent.

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The ALL calculation for the different loan portfolios is as follows:

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Commercial Real Estate, Commercial, Commercial Agriculture, SBA, HELOC, Single Family Residential, and Consumer  Migration analysis combined with risk rating is used to determine the required ALL for all non-impaired loans.� In addition, the migration results are adjusted based upon qualitative factors that affect this specific portfolio category.� Reserves on impaired loans are determined based upon the individual characteristics of the loan.

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Manufactured Housing  The ALL is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency.� In addition, the loss results are adjusted based upon qualitative factors that affect this specific portfolio.

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The Company evaluates and individually assesses for impairment loans generally greater than $500,000, classified as substandard or doubtful in addition to loans either on nonaccrual, considered a TDR or when other conditions exist which lead management to review for possible impairment.�� Measurement of impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans.� The amount of impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods:

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The expected future cash flows are estimated and then discounted at the effective interest rate.

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The value of the underlying collateral net of selling costs.� Selling costs are estimated based on industry standards, the Companys actual experience or actual costs incurred as appropriate.� When evaluating real estate collateral, the Company typically uses appraisals or valuations, no more than twelve months old at time of evaluation.� When evaluating non-real estate collateral securing the loan, the Company will use audited financial statements or appraisals no more than twelve months old at time of evaluation.� Additionally, for both real estate and non-real estate collateral, the Company may use other sources to determine value as deemed appropriate.

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Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.

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The Company determines the appropriate ALL on a monthly basis.� Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the appropriate ALL determination and adjusted as deemed necessary.� The review of the appropriateness of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental conditions that may affect the borrowers' ability to pay and/or the value of the underlying collateral.� Additional factors considered include: geographic location of borrowers, changes in the Companys product-specific credit policy and lending staff experience.� These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.

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Another component of the ALL considers qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the loan pools is based on the following factors:

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Concentrations of credit

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International risk

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Trends in volume, maturity, and composition

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Volume and trend in delinquency

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Economic conditions

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Outside exams

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Geographic distance

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Policy and changes

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Staff experience and ability

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Off Balance Sheet and Credit Exposure

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In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit.� Such financial instruments are recorded in the consolidated financial statements when they are funded.� They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets.� Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made.� Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.� Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.� The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default.� Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.� The Company evaluates each customers creditworthiness on a case-by-case basis.� The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the party.� The commitments are collateralized by the same types of assets used as loan collateral.

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As with outstanding loans, the Company applies qualitative and quantitative factors and utilization rates to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations.� The estimate for loan losses on off-balance sheet instruments is included within other liabilities and the charge to income that establishes this liability is include in non-interest expense.

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Foreclosed Real Estate and Repossessed Assets

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Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell.� Any excess of loan balance over the fair value less estimated costs to sell of the other assets is charged-off against the allowance for loan losses.� Any excess of the fair value less estimated costs to sell over the loan balance is recorded as a loan loss recovery to the extent of the loan loss previously charged-off against the allowance for loan losses; and, if greater, recorded as a gain on foreclosed assets.� Subsequent to the legal ownership date, management periodically performs a new valuation and the asset is carried at the lower of carrying amount or fair value less estimated costs to sell.� Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.

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Income Taxes

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The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable amounts that have been recognized in the consolidated financial statements.� Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting.� These items represent temporary differences.� Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.� A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized.� Any interest or penalties assessed by the taxing authorities is classified in the financial statements as income tax expense.� Deferred tax assets are included in other assets on the consolidated balance sheets.

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Management evaluates the Companys deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Companys historical profitability and projections of future taxable income.� The Company is required� to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.

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The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740).� ASC 740 prescribes a more-likely-than-not threshold for the financial statement recognition of uncertain tax positions.� ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.� On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.

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Earnings Per Share

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Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income available to common shareholders.� Diluted earnings per share include the effect of all dilutive potential common shares for the period.� Potentially dilutive common shares include stock options and warrants.

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Recent Accounting Pronouncements

In July 2013, the FASB issued guidance within ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in ASU 2013-11 to Topic 740, Income Taxes, updates the presentation of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.� However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.� The adoption of this standard did not have a material impact on the Companys consolidated financial statements.

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In January 2014, the FASB issued guidance within ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.� The amendments in ASU 2014-04, Subtopic 310-40, Receivables -Troubled Debt Restructurings by Creditors, clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.� Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.�� ASC 2014-04 are effective for the Company using either a modified retrospective transition method or a prospective transition method for reporting periods beginning after December 15, 2014.� The adoption of this standard is not expected to have a material impact on the Companys consolidated financial statements.

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In May 2014, the FASB issued guidance codified within ASU 2014-09, Revenue Recognition - Revenue from Contracts with Customers, which amends the guidance in former Topic 605, Revenue Recognition.� The Company is currently evaluating the impact of the provisions in this standard on the Companys consolidated financial statements.

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2.	INVESTMENT SECURITIES

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The amortized cost and estimated fair value of investment securities are as follows:

At September 30, 2014 and December 31, 2013, $31.0 million and $28.0 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (FHLB), as collateral for current and future advances.

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The Company had no investment security sales in the first nine months of 2014 or 2013.

The maturity periods and weighted average yields of investment securities at September 30, 2014 and December 31, 2013 were as follows:

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The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:

Actual maturities may differ from contractual maturities as borrowers or issuers have the right to prepay or call the investment securities.� Changes in interest rates may also impact prepayments.

The following tables show all securities that are in an unrealized loss position:

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As of September 30, 2014 and December 31, 2013, there were twelve and nine securities, respectively, in an unrealized loss position.

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Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.� In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost (ii) the financial condition and near-term prospects of the issuer and (iii) the Companys intent to sell an impaired security and if it is not more likely than not it will be required to sell the security before the recovery of its amortized basis.

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The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were purchased.� The fair value is expected to recover as the bonds approach their maturity date, repricing date or if market yields for such investments decline.� Management does not believe any of the securities are impaired due to reasons of credit quality.� Accordingly, as of September 30, 2014 and December 31, 2013, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Companys consolidated income statements.

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3.	LOAN SALES AND SERVICING

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SBA and Agriculture Loans

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The Company periodically sells the guaranteed portion of selected SBA loans into the secondary market, on a servicing-retained basis.� The Company retains the unguaranteed portion of these loans and services the loans as required under the SBA programs to retain specified yield amounts.

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On certain SBA loan sales that occurred prior to 2003, the Company retained interest only strips (I/O strips), which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees.� The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.

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Historically, the Company elected to use the amortizing method for the treatment of servicing assets and measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.� In connection with the sale of a group of SBA loans in 2012, the Company recorded a servicing asset and elected to measure this asset at fair value in accordance with ASC 825-10  Fair Value Option to better reflect the impact of subsequent changes in interest rates.

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The SBA program stipulates that the Company retains a minimum of 5% of the loan balance, which is unguaranteed.� The percentage of each unguaranteed loan in excess of 5% may be periodically sold to a third party, typically for a cash premium.� The Company records servicing liabilities for the sold unguaranteed loans.� These servicing liabilities are calculated based on the present value of the estimated future servicing costs associated with each loan.� The balance of the remaining servicing liabilities at September 30, 2014 was not material to the Companys financial position or results of operations.

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The Company may also periodically sell certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.� As of September 30, 2014 and December 31, 2013, the Company had approximately $42.1 million and $47.6 million, respectively, of SBA loans included in loans held for sale.� As of September 30, 2014 and December 31, 2013, the principal balance of SBA loans serviced for others was $25.4 million and $30.7 million, respectively.

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The Companys agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock.� The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program.

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As of September 30, 2014 and December 31, 2013, the Company had $24.1 million and $16.8 million of USDA loans included in loans held for sale, respectively. As of September 30, 2014 and December 31, 2013, the principal balance of USDA loans serviced for others was $1.4 million and $2.5 million, respectively.

The following table presents the I/O strips activity as of the periods presented:

The key data assumptions used in estimating the fair value of the I/O strips as of the periods presented were as follows:

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A sensitivity analysis of the fair value of the I/O strips to changes in certain key assumptions is presented in the following table:

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The following is a summary of the activity for servicing assets accounted for under the amortization method:

The following is a summary of the activity for servicing assets accounted for under the fair value method:

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The key data and assumptions used in estimating the fair value of servicing rights as of the periods presented were as follows:

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A sensitivity analysis of the fair value of servicing assets to change in certain key assumptions is presented in the following table:

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This sensitivity analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Companys servicing rights usually is not linear.� In addition, the effect of changing one key assumption without changing other assumptions is not a viable option.

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Mortgage Loans

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From time to time, the Company enters into mortgage loan rate lock commitments (normally for 30 days) with potential borrowers.� In conjunction therewith, the Company enters into a forward sale commitment to sell the locked loan to a third party investor.� This forward sale agreement requires delivery of the loan on a best efforts basis but does not obligate the Company to deliver if the mortgage loan does not fund.

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The mortgage rate lock agreement and the forward sale agreement qualify as derivatives.� The value of these derivatives is generally equal to the fee, if any, charged to the borrower at inception but may fluctuate in the event of changes in interest rates.� These derivative financial instruments are recorded at fair value if material.� Although the Company does not attempt to qualify these transactions for the special hedge accounting, management believes that changes in the fair value of the two commitments generally offset and create an economic hedge.� At September 30, 2014, the Company had $1.5 million in outstanding mortgage loan interest rate lock commitments.� The value of related derivative instruments was not material to the Companys financial position or results of operations.� The Company had no commitments of this nature at December 31, 2013.� At September 30, 2014 the Company had $1.2 million of mortgage loans held for sale.

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4.	LOANS HELD FOR INVESTMENT

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The composition of the Companys loans held for investment loan portfolio follows:

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The following table presents the contractual aging of the recorded investment in past due held for investment loans by class of loans: