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Mortgage Servicing Rights
 3 Months Ended
Mar. 31, 2020
Mortgage Servicing Rights [Abstract]  
Transfers and Servicing of Financial Assets [Text Block]
Our portfolio of residential mortgage loans serviced for third parties was $3.41 billion and $3.38 billion as of March 31, 2020 and December 31, 2019, 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. The associated amortization expense and any valuation allowance recognized were included as a reduction of mortgage 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 March 31, 2020 and 2019 were $2.1 million and $1.9 million, respectively, and are reported in mortgage income.
The following table explains changes in the servicing asset during the three months ended March 31, 2020 and 2019:
 
Three months ended March 31
(Dollars in thousands)
2020
 
2019
Beginning balance
$
22,963

 
$
21,396

Servicing rights originated
1,583

 
859

Amortization
(1,823
)
 
(1,447
)
Valuation allowance increase
(2,967
)
 
(161
)
Ending balance
$
19,756

 
$
20,647


The following table presents the activity in the servicing asset valuation allowance for the three months ended March 31, 2020 and 2019:
 
Three months ended March 31
(Dollars in thousands)
2020
 
2019
Beginning balance
$
222

 
$
—

Valuation allowance increase
2,967

 
161

Ending balance
$
3,189

 
$
161


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:
 
March 31, 2020
 
December 31, 2019
Discount rate - conventional fixed loans
7.67
%
 
8.92
%
Discount rate - all loans excluding conventional fixed loans
8.67
%
 
9.92
%
Weighted average constant prepayment rate
19.38
%
 
13.72
%
Weighted average cost to service a loan
$
87.30

 
$
87.09

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, which occurred during first quarter 2020, resulting in an increase in the valuation allowance of $3.0 million. 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 business combinations and relate to the sale of the guaranteed portion of government guaranteed loans with servicing retained. The amount of the other servicing rights were $1.7 million and $1.9 million at March 31, 2020 and December 31, 2019, respectively. The amortization related to other servicing rights is recorded in other noninterest income.