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Mortgage Servicing Rights
 9 Months Ended
Sep. 30, 2019
Mortgage Servicing Rights [Abstract]  
Transfers and Servicing of Financial Assets [Text Block]
Our portfolio of residential mortgage loans serviced for third parties was $3.06 billion and $2.95 billion as of September 30, 2019 and December 31, 2018, respectively. These loans are originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights were recorded as a servicing asset and are reported in other intangible assets on the Consolidated Balance Sheets, and the associated amortization expense and any valuation allowance recognized was included as a reduction of mortgage income in the Consolidated Statements of Income. Mortgage servicing rights are initially recorded at fair value and then carried at the lower of amortized cost or fair value.
Contractually specified mortgage servicing fees, late fees and ancillary fees earned for the three months ended September 30, 2019 and 2018 were $1.9 million and are reported in mortgage income in the Consolidated Statements of Income. For the nine months ended September 30, 2019 and 2018, contractually specified mortgage servicing fees, late fees, and ancillary fees earned were $5.8 million and $5.6 million, respectively.
The following table explains changes in the servicing asset during the three and nine months ended September 30, 2019 and 2018:
 
Three months ended September 30
 
Nine months ended September 30
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Beginning balance
$
20,665

 
$
21,657

 
$
21,396

 
$
21,945

Servicing rights originated
1,532

 
1,396

 
3,943

 
4,026

Amortization
(1,581
)
 
(1,420
)
 
(4,595
)
 
(4,338
)
Valuation allowance (increase) decrease
(45
)
 
—

 
(173
)
 
—

Ending balance
$
20,571

 
$
21,633

 
$
20,571

 
$
21,633


BancShares recorded valuation allowance provision expense of $45.0 thousand and $173.0 thousand for the three and nine months ended September 30, 2019, respectively. There was no provision expense or release recorded for the the three and nine months ended September 30, 2018. Mortgage servicing rights valuations are performed using a pooling methodology where loans with similar risk characteristics are grouped together and evaluated using discounted cash flows to estimate the present value of future earnings. Key economic assumptions used to value mortgage servicing rights were as follows:
 
September 30, 2019
 
December 31, 2018
Discount rate - conventional fixed loans
8.67
%
 
9.69
%
Discount rate - all loans excluding conventional fixed loans
9.67
%
 
10.69
%
Weighted average constant prepayment rate
14.15
%
 
9.26
%
Weighted average cost to service a loan
$
87.09

 
$
87.52

The fair value of mortgage servicing rights is sensitive to changes in assumptions and is determined by estimating the present value of the asset's future cash flows by utilizing discount rates, prepayment rates, and other inputs. The discount rate is based on the 10-year U.S. Treasury rate plus a risk premium of 700 basis points for conventional fixed loans and 800 basis points for all other loans. The prepayment rate is derived from the Public Securities Association Standard Prepayment model. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity. This results in a decrease in fair value. The average cost to service a loan is based on the number of loans serviced and the total cost to service the loans.
Other Servicing Rights
Other servicing rights were acquired as part of a business combination and relate to the sale of the guaranteed portion of government guaranteed loans with servicing retained. The amount of the other servicing rights were $1.9 million and $2.7 million at September 30, 2019 and December 31, 2018, respectively.