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Note 6 - Loan Servicing

12 Months Ended

Dec. 31, 2023

NOTE 6 - LOAN SERVICING

The mortgage loans and SBA loans being serviced for others are not reported as assets in the Company’s consolidated balance sheet. The principal balances of the loans serviced for others are as follows for the dates indicated:

	At December 31,
*(dollars in thousands)*	2023		2022
Loans serviced for others:
Mortgage loans	$	1,014,017	$	1,127,668
SBA loans		100,336		119,893
Commercial real estate loans		3,813		3,991
Construction loans		4,710		3,677

Loan servicing fees, net of amortization, totaled $2.6 million, $2.2 million and $684,000 for the years ended December 31, 2023, 2022 and 2021. Custodial balances maintained in connection with the foregoing loan servicing (including in non-interest bearing deposits) totaled $6.4 million and $7.0 million as of December 31, 2023 and 2022.

When mortgage and SBA loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. During the year ended December 31, 2021, the Company reversed an impairment allowance of $417,000 on mortgage servicing rights, which is included in other income.

The following table presents the activity in serving assets for the years ended December 31, 2023, 2022, and 2021:

	*2023*						*2022*						*2021*
	*Mortgage*			*SBA*			*Mortgage*			*SBA*			*Mortgage*			*SBA*
*(dollars in thousands)*	*Loans*			*Loans*			*Loans*			*Loans*			*Loans*			*Loans*
Servicing assets:
Beginning of period	$	7,354		$	2,167		$	8,748		$	2,769		$	10,529		$	3,436
Additions		176			58			532			239			1,920			441
Disposals		(329	)		(344	)		(794	)		(478	)		(2,129	)		(646	)
Amortized to expense		(692	)		(280	)		(1,132	)		(363	)		(1,989	)		(462	)
Impairment reversal		—			—			—			—			417			—
End of period	$	6,509		$	1,601		$	7,354		$	2,167		$	8,748		$	2,769

Estimates of the loan servicing asset fair value are derived through a DCF analysis. Portfolio characteristics include loan delinquency rates, age of loans, note rate and geography. The assumptions embedded in the valuation are obtained from a range of metrics utilized by active buyers in the market place. The analysis accounts for recent transactions, and supply and demand within the market.

The fair value of servicing assets for mortgage loans was $12.1 million and $18.3 million as of December 31, 2023 and 2022, respectively. Fair value at December 31, 2023 was determined using a discount rate of 11.23%, average prepayment speed of 7.91%, depending on the stratification of the specific right, and a weighted-average default rate of 0.10%. Fair value at December 31, 2022 was determined using a discount rate of 11.10%, average prepayment speed of 7.73%, depending on the stratification of the specific right, and a weighted-average default rate of 0.10%.

The fair value of servicing assets for SBA loans was $2.8 million and $3.5 million as of December 31, 2023 and 2022, respectively. Fair value at December 31, 2023 was determined using a discount rate of 8.5%, average prepayment speed of 17.68%, depending on the stratification of the specific right, and a weighted-average default rate of 0.73%. Fair value at December 31, 2022 was determined using a discount rate of 8.5% and average prepayment speed of 16.79%, depending on the stratification of the specific right and a weighted-average default rate of 0.37%.