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Mortgage Servicing Rights
 9 Months Ended
Sep. 30, 2018
Mortgage Servicing Rights [Abstract]  
Transfers and Servicing of Financial Assets [Text Block]
MORTGAGE SERVICING RIGHTS

Our portfolio of residential mortgage loans serviced for third parties was $2.91 billion and $2.81 billion as of September 30, 2018 and December 31, 2017, respectively. These loans were originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained. These retained servicing rights are recorded as a servicing asset and reported in other intangible assets on the Consolidated Balance Sheets. The mortgage servicing rights are initially recorded at fair value and then carried at the lower of amortized cost or fair market value.
The activity of the servicing asset for the three and nine months ended September 30, 2018 and 2017 is presented in the following table:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2018
 
2017
 
2018
 
2017
Beginning balance
$
21,657

 
$
20,524

 
$
21,945

 
$
20,415

Servicing rights originated
1,396

 
2,896

 
4,026

 
5,721

Amortization
(1,420
)
 
(1,417
)
 
(4,338
)
 
(4,137
)
Valuation allowance reversal
—

 
—

 
—

 
4

Ending balance
$
21,633

 
$
22,003

 
$
21,633

 
$
22,003



The amortization expense related to mortgage servicing rights is included as a reduction of mortgage income in the Consolidated Statements of Income.
Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for the three months ended September 30, 2018 and 2017 were $1.9 million and $1.7 million, respectively, and reported in mortgage income in the Consolidated Statements of Income. For the nine months ended September 30, 2018 and 2017, contractually specified mortgage servicing fees, late fees and ancillary fees earned were $5.6 million and $5.2 million, respectively.
Valuation of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and evaluated on a discounted earnings basis to determine the present value of future earnings. Key economic assumptions used to value mortgage servicing rights as of September 30, 2018 and December 31, 2017 were as follows:
 
September 30, 2018
 
December 31, 2017
Discount rate - conventional fixed loans
10.06
%
 
9.41
%
Discount rate - all loans excluding conventional fixed loans
11.06
%
 
10.41
%
Weighted average constant prepayment rate
8.38
%
 
10.93
%
Weighted average cost to service a loan
$
72.67

 
$
64.03


The discount rate is based on the 10-year U.S. Treasury rate plus 700 basis points for conventional fixed loans and 800 basis points for all other loans. The 700 and 800 basis points are used as a risk premium when calculating the discount rate. The repayment rate is derived from the Public Securities Association Standard Prepayment model. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans.