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Mortgage Servicing Rights | 3 Months Ended
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Mar. 31, 2021
Mortgage Servicing Rights [Abstract] |
Mortgage Servicing Rights | MORTGAGE SERVICING RIGHTS BancShares originates certain residential mortgages loans to sell in the secondary market. BancShares’ portfolio of residential mortgage loans serviced for third parties was $3.3 billion as of March 31, 2021 and December 31, 2020. These loans are originated and sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights are 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 were $2.1 million for the three months ended March 31, 2021 and 2020, and are reported in mortgage income. The following table presents changes in the servicing asset during the three months ended March 31, 2021 and 2020:
|  |  | Three months ended March 31
(Dollars in thousands) |  |  |  |  | 2021 |  | 2020
Beginning balance |  |  |  |  | $ | 18,426 |  |  | $ | 22,963 |
Servicing rights originated |  |  |  |  | 3,444 |  |  | 1,583 |
Amortization |  |  |  |  | (2,248) |  |  | (1,823) |
Valuation allowance decrease (increase) |  |  |  |  | 3,123 |  |  | (2,967) |
Ending balance |  |  |  |  | $ | 22,745 |  |  | $ | 19,756 |
The following table presents the activity in the servicing asset valuation allowance for the three months ended March 31, 2021 and 2020:
|  |  | Three months ended March 31
(Dollars in thousands) |  |  |  |  | 2021 |  | 2020
Beginning balance |  |  |  |  | $ | 4,365 |  |  | $ | 222 |
Valuation allowance (decrease) increase |  |  |  |  | (3,123) |  |  | 2,967 |
Ending balance |  |  |  |  | $ | 1,242 |  |  | $ | 3,189 |
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, 2021 |  | December 31, 2020
Discount rate - conventional fixed loans | 8.74 | % |  | 7.92 | %
Discount rate - all loans excluding conventional fixed loans | 9.74 | % |  | 8.92 | %
Weighted average constant prepayment rate | 16.54 | % |  | 20.62 | %
Weighted average cost to service a loan | $ | 87.58 |  |  | $ | 87.58 |
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, which results in a decrease in the fair value and may result in the recognition of a valuation allowance. The average cost to service a loan is based on the number of loans serviced and the total cost to service the loans.

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- Definition The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 860 -SubTopic 30 -Section 50 -Paragraph 1A -Subparagraph (c)(3) -URI 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