Note 6 - Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans serviced for others were $288.6 and $280.4 million at December 31, 2017 and 2016, respectively.

The balance of capitalized servicing rights included in other assets at December 31, 2017 and 2016, was $2.3 and $2.2 million, respectively. The capitalized addition of servicing rights is included in net gain on sale of loans on the consolidated statement of income.

The fair market value of the capitalized servicing rights as of December 31, 2017 and 2016 was $3.1 million and $2.5 million, respectively. The valuations were completed by stratifying the loans into like groups based on loan type and term. Impairment was measured by estimating the fair value of each stratum, taking into consideration an estimated level of prepayment based upon current market conditions. An average constant prepayment rate of 10.4% and 14.3% were utilized for 2017 and 2016, respectively. All stratums showed positive values compared to carrying value using a discount yield of 6.07% for 2017 and 5.38% for 2016.

The following summarizes mortgage servicing rights capitalized and amortized during each year:


	(In Thousands)
	2017			2016
Beginning Year	$	2,192		$	2,056
Capitalized Additions		460			555
Amortization		(353	)		(419	)
Valuation Allowance		—			—

End of Year	$	2,299		$	2,192