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Note 5 - Loan Servicing

12 Months Ended

Dec. 31, 2024

NOTE 5 - LOAN SERVICING

The loans being serviced for others are not reported as assets in our consolidated balance sheet. The table below presents the underlying principal balances of the loans serviced for others, by class of loans, as of the dates indicated:

	*December 31,*
	*2024*		*2023*
Loans serviced for others:	*(dollars in thousands)*
Single-family residential mortgages	$	922,183	$	1,014,017
SBA		92,678		100,336
Commercial real estate		3,761		3,813
Construction and land development		7,315		4,710

Loan servicing fees, net of amortization, totaled $2.3 million, $2.6 million and $2.2 million for the years ended December 31, 2024, 2023 and 2022. Custodial balances maintained in connection with the foregoing loan servicing (included in noninterest-bearing deposits) totaled $8.3 million and $6.4 million as of December 31, 2024 and 2023.

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 we later determine 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.

The following table presents the activity in servicing assets for the years ended December 31, 2024, 2023, and 2022:

	*2024*						*2023*						*2022*
	*Mortgage*			*SBA*			*Mortgage*			*SBA*			*Mortgage*			*SBA*
	*Loans*			*Loans*			*Loans*			*Loans*			*Loans*			*Loans*
Servicing assets:	*(dollars in thousands)*
Beginning of period	$	6,509		$	1,601		$	7,354		$	2,167		$	8,748		$	2,769
Additions		290			143			176			58			532			239
Payoffs		(443	)		(187	)		(329	)		(344	)		(794	)		(478	)
Amortization		(700	)		(228	)		(692	)		(280	)		(1,132	)		(363	)
End of period	$	5,656		$	1,329		$	6,509		$	1,601		$	7,354		$	2,167

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 $11.4 million and $12.1 million as of December 31, 2024 and 2023. Fair value at December 31, 2024 was determined using a discount rate of 11.16%, average prepayment speed of 7.52%, depending on the stratification of the specific right, and a weighted-average default rate of 0.10%. 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%.

The fair value of servicing assets for SBA loans was $2.3 million and $2.8 million as of December 31, 2024 and 2023. Fair value at December 31, 2024 was determined using a discount rate of 8.5%, average prepayment speed of 19.46%, depending on the stratification of the specific right, and a weighted-average default rate of 1.04%. Fair value at December 31, 2023 was determined using a discount rate of 8.5% and average prepayment speed of 17.68%, depending on the stratification of the specific right, and a weighted-average default rate of 0.73%.