NOTE 5 - LOAN SERVICING

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

Servicing 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 assets is net against loan servicing income. Loan servicing income, net of amortization, totaled $533,000, $504,000, and $541,000 for the three months ended June 30, 2026, March 31, 2026, and June 30, 2025, and $1.0 million and $1.1 million for the six months ended June 30, 2026 and 2025.

When mortgage and SBA loans are sold with servicing retained, servicing assets are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Servicing assets are evaluated for impairment based upon the fair value of the assets 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 table below presents the activity in the servicing assets for the periods indicated:

Fair value is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing assets to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. 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.

The fair value of servicing assets for mortgage loans was $9.5 million and $9.7 million as of June 30, 2026 and  December 31, 2025. This fair value at June 30, 2026 was determined using an average discount rate of 10.06%, average prepayment speed of 7.63%, depending on the stratification of the specific right, and a weighted-average default rate of 0.09%. This fair value at December 31, 2025 was determined using an average discount rate of 10.09%, average prepayment speed of 7.93%, depending on the stratification of the specific right, and a weighted-average default rate of 0.11%

The fair value of servicing assets for SBA loans was $1.9 million and $1.8 million as of June 30, 2026 and  December 31, 2025. This fair value at June 30, 2026 was determined using an average discount rate of 8.5%, average prepayment speed of 28%, depending on the stratification of the specific right, and a weighted-average default rate of 1.04%. This fair value at December 31, 2025 was determined using an average discount rate of 8.5%, average prepayment speed of 27%, depending on the stratification of the specific right, and a weighted-average default rate of 1.13%.