Loan Servicing Assets

6 Months Ended

Jun. 30, 2026

Note 5. Loan Servicing Assets

The Company’s servicing assets consist primarily of the right to service the guaranteed portion of government guaranteed loans sold to others. The fair value of the servicing asset is essentially a valuation of the net future income stream, which is based on the rate of the fee, the estimated repayment speed of the loan and the estimated cost to service the loan.

The amount allocated to the loan servicing assets is recorded at fair value at the time of sale, as calculated by a third-party consulting firm specializing in government guaranteed loan matters.

The fair value of the servicing asset is calculated for each loan using the following valuation variables:



·	Servicing fee: This is the amount of the fee charged to a third-party buyer to service the loan. It is generally one percent (1%) of the loan balance for SBA loans and two percent (2%) for USDA loans on a declining basis as the loan repays principal.

·	Prepayment assumption: This is an estimate of the repayment speed of the loan using a constant prepayment rate (“CPR”) based on pools of similar government guaranteed loans.

·	Servicing costs: The internal rates of return (IRR) are the pre-tax yield rates used to discount the expected future cash flow stream from servicing the government guaranteed loan portfolios.

·	Internal rate of return: The internal rates of return (IRR) are the pre-tax yield rates used to discount the expected future cash flow stream from servicing the government guaranteed loan portfolios.

The loan servicing asset is amortized over the period of estimated servicing income, generally five to seven years, with the amortization recorded against loan servicing fee income.

The balance of loans owned by third parties that are being serviced by the Company was $1.2 billion and $1.0 billion as of June 30, 2026 and December 31, 2025, respectively.

The following table presents a reconciliation of loan servicing rights as of the periods indicated:


(Dollars in thousands)	Six Months Ended June 30, 2026			Year Ended December 31, 2025
Balance, beginning of period	$	11,140		$	8,976
Additions - servicing rights related to loans sold		4,167			7,798
Reductions - write-off of servicing assets		-			-
Reductions - amortization and early payoff		(3,037	)		(5,634	)
Balance, end of period	$	12,270		$	11,140

In the event of an early repayment of a serviced loan, the unamortized balance of the loan servicing asset for that loan is charged off against loan servicing fee income.

The aggregate balance of loan servicing rights is evaluated for impairment to ensure that the recorded balance is at the lower of amortized cost or fair value. There was no allowance for impairment recorded as of June 30, 2026 or December 31, 2025.