Mortgage Servicing Rights

3 Months Ended

Mar. 31, 2022

Transfers and Servicing of Financial Assets [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 approximately $3.4 billion as of March 31, 2022 and December 31, 2021. For certain loans, the originated loans are 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 assets. The associated amortization expense and any changes in the valuation allowance recognized were included as a reduction of mortgage income. Mortgage servicing rights (“MSRs”) 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 are reported in mortgage income and were $2 million for the three month periods ending March 31, 2022 and 2021.

The following table presents changes in the servicing asset during the three months ended March 31, 2022 and 2021:

Servicing Asset

	Three months ended March 31,
dollars in millions	2022		2021
Beginning balance	$	23	$	18
Servicing rights originated	2		4
Servicing rights obtained in CIT Merger	3		—
Amortization	(1)		(2)
Valuation allowance decrease	1		3
Ending balance	$	28	$	23

The following table presents the activity in the servicing asset valuation allowance:

Servicing Asset Valuation Allowance

	Three months ended March 31,
dollars in millions	2022		2021
Beginning balance	$	1	$	4
Valuation allowance decrease	(1)		(3)
Ending balance	$	—	$	1

MSRs 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 MSRs were as follows:

MSRs Valuation Assumptions

	March 31, 2022			December 31, 2021
Discount rate - conventional fixed loans	9.30		%	8.51		%
Discount rate - all loans excluding conventional fixed loans	10.61		%	9.51		%
Weighted average constant prepayment rate	9.56		%	15.69		%
Weighted average cost to service a loan	$	90.57		$	87.58

The fair value of MSRs are 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 700 basis points (“bps”) for conventional fixed loans and 800 bps for all other loans. The 700 and 800 bps are used as a risk premium when calculating the discount rate. The prepayment rate is derived from the Public Securities Association Standard Prepayment model, which is compared to actual prepayment rates annually for reasonableness. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans.