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Note 6 - Loan Servicing

9 Months Ended

Sep. 30, 2023

NOTE 6 - LOAN SERVICING

Mortgage and SBA loans serviced for others are not reported as assets. The principal balances at September 30, 2023 and December 31, 2022 were as follows:

	*September 30,*		*December 31,*
*(dollars in thousands)*	*2023*		*2022*
Loans serviced for others:
Mortgage loans	$	1,041,352	$	1,127,668
SBA loans		102,605		119,893
Commercial real estate loans		3,933		3,991
Construction loans		4,388		3,677

Under the prepayment rate assumption of 7.59% and 7.71%, mortgage par rate of 7.28% and 6.48% and the actual weighted average interest rate of servicing portfolio at 4.23% and 4.14%, at September 30, 2023 and at December 31, 2022, respectively, the fair value of servicing assets for mortgage loans was $16.6 million and $18.3 million at September 30, 2023 and December 31, 2022, respectively. The fair value of servicing assets for SBA loans was $2.9 million and $3.5 million at September 30, 2023 and December 31, 2022, respectively. Estimates of the loan servicing asset fair value are derived through a discounted cash flow 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 marketplace. The analysis accounts for recent transactions, and supply and demand within the market.

Servicing fees net of servicing asset amortization totaled $623,000 and $724,000 for the three months ended September 30, 2023 and 2022, respectively, and $2.0 million and $1.6 million for the nine months ended September 30, 2023 and 2022, respectively.

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 sales 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.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal. The amortization of mortgage servicing rights is netted against loan servicing fee income.

	*Three Months Ended*
	*September 30, 2023*						*September 30, 2022*
	*Mortgage*			*SBA*			*Mortgage*			*SBA*
*(dollars in thousands)*	*Loans*			*Loans*			*Loans*			*Loans*
Servicing assets:
Beginning of period	$	6,856		$	1,846		$	7,966		$	2,490
Additions		112			46			49			46
Disposals		(82	)		(103	)		(151	)		(28	)
Amortized to expense		(171	)		(65	)		(229	)		(89	)
End of period	$	6,715		$	1,724		$	7,635		$	2,419

	*Nine Months Ended*
	*September 30, 2023*						*September 30, 2022*
	*Mortgage*			*SBA*			*Mortgage*			*SBA*
*(dollars in thousands)*	*Loans*			*Loans*			*Loans*			*Loans*
Servicing assets:
Beginning of period	$	7,354		$	2,167		$	8,748		$	2,769
Additions		139			47			497			230
Disposals		(255	)		(274	)		(715	)		(299	)
Amortized to expense		(523	)		(216	)		(895	)		(281	)
End of period	$	6,715		$	1,724		$	7,635		$	2,419