MORTGAGE SERVICING RIGHTS

Our portfolio of residential mortgage loans serviced for third parties was $2.87 billion and $2.81 billion as of June 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 six months ended June 30, 2018 and 2017 is presented in the following table:



	Three months ended June 30						Six months ended June 30
(Dollars in thousands)	2018			2017			2018			2017
Beginning balance	$	21,659		$	20,771		$	21,945		$	20,415
Servicing rights originated	1,430			1,123			2,630			2,825
Amortization	(1,432		)	(1,370		)	(2,918		)	(2,720		)
Valuation allowance reversal	—			—			—			4
Ending balance	$	21,657		$	20,524		$	21,657		$	20,524

The amortization expense related to mortgage servicing rights is included as a reduction of mortgage income in the Consolidated Statements of Income. Mortgage income for the three and six months ended June 30, 2018 and the three months ended June 30, 2017 did not include any impairment compared to an impairment reversal of $4 thousand for the six months ended June 30, 2017.

Contractually specified mortgage servicing fees, late fees, and ancillary fees earned for both the three months ended June 30, 2018 and 2017 were $1.9 million and reported in mortgage income in the Consolidated Statements of Income. For the six months ended June 30, 2018 and 2017, contractually specified mortgage servicing fees, late fees and ancillary fees earned were $3.8 million and $3.6 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 June 30, 2018 and December 31, 2017 were as follows:



	June 30, 2018			December 31, 2017
Discount rate - conventional fixed loans	9.86		%	9.41		%
Discount rate - all loans excluding conventional fixed loans	10.86		%	10.41		%
Weighted average constant prepayment rate	8.43		%	10.93		%
Weighted average cost to service a loan	$	72.79		$	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.