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Note 5 - Loans Held for Sale

3 Months Ended

Mar. 31, 2022

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 March 31, 2022, SBA loans held for sale was $5.8 million, consisting of $1.3 million SBA commercial real estate loans and $4.5 million SBA commercial and industrial loans, respectively. There were $3.1 million of SBA loans held for sale at December 31, 2021, consisting of $2.6 million SBA commercial and industrial loans and $562,000 SBA commercial real estate loans. No SBA loans previously classified as held for sale were transferred to held for investment in the first quarter of 2022. During the three months ended March 31, 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 $31.2 million and $29.6 million at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the servicing asset has a carrying value of $626,000 and $584,000, respectively, and fair value of $660,000 and $617,000, respectively. 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 months ended March 31, 2022 and 2021:

(In thousands)	Three Months Ended March 31,
	2022			2021
Beginning balance	$	584		$	316
Servicing rights capitalized		52			17
Servicing rights amortized		(8	)		(6	)
Servicing rights disposed		(2	)		-
Ending balance	$	626		$	327