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Note 5 - Loans Held for Sale

6 Months Ended

Jun. 30, 2021

Note 5. Loans Held for Sale

Loans held for sale represent the guaranteed portion of SBA loans originated and are reflected at the lower of aggregate cost or market value. As of June 30, 2021, SBA loans held for sale, consisted of $2.5 million SBA commercial real estate loans and $106,000 SBA commercial and industrial loans, respectively. As of December 31, 2020, SBA loans held for sale only consisted of $1.2 million of SBA commercial and industrial loans. During the six months ended June 30, 2021, $281,000 SBA loans previously classified as held for sale were transferred to held for investment.

The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the unguaranteed portion in its portfolio. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets, less the discount of the retained portion of the loan are recognized in income.

Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment will be evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.

Serviced loans sold to others are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by third party, amounted to approximately $21.6 million and $19.4 million at June 30, 2021 and December 31, 2020, respectively. The servicing asset has a carrying value of $380,000 and fair value of $417,000 at June 30, 2021. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets. The servicing asset is included in other assets on the consolidated balance sheets.

The following table presents an analysis of the activity in the SBA servicing assets for the three and six months ended June 30, 2021 and 2020:

(In thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Beginning balance	$	327		$	198		$	316		$	201
Servicing rights capitalized		57			27			74			29
Servicing rights amortized		(4	)		(4	)		(10	)		(9	)
Ending balance	$	380		$	221		$	380		$	221