Goodwill and Mortgage Servicing Rights

9 Months Ended

Sep. 30, 2021

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND MORTGAGE SERVICING RIGHTS Goodwill

Allocations of Goodwill by business segment during 2021 and 2020 follow:

Table 59: Goodwill by Business Segment


In millions	Retail Banking		Corporate & Institutional Banking		Asset Management Group		Total
September 30, 2021 (a)	$	6,459	$	4,239	$	187	$	10,885
December 31, 2020	$	5,795	$	3,374	$	64	$	9,233

(a)Includes $1.6 billion of goodwill from the BBVA acquisition.

Goodwill increased during the nine months ended September 30, 2021 primarily as a result of the acquisition of BBVA. Goodwill was recorded and allocated to each segment on a preliminary basis and is subject to change based on new information obtained related to the close date or reallocation of assets and liabilities to each segment. See Note 2 Acquisition and Divestiture Activities for additional information.

We review goodwill in each of our reporting units for impairment at least annually, in the fourth quarter, or more frequently if events occur or circumstances have changed significantly from the annual test date. Based on results of our review for triggering events, there were no impairment charges related to goodwill in the first nine months of 2021 or in 2020.

Mortgage Servicing Rights

We recognize the right to service mortgage loans for others as an intangible asset when the servicing income we receive is more than our projected servicing costs. MSRs are purchased or originated when loans are sold with servicing retained. MSRs totaled $1.8 billion and $1.2 billion at September 30, 2021 and December 31, 2020, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

MSRs are subject to declines in value from actual or expected prepayment of the underlying loans and defaults, as well as market driven changes in interest rates. We manage this risk by economically hedging the fair value of MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of MSRs decreases (or increases).

See the Sensitivity Analysis section of this Note 6 for more detail on our fair value measurement of MSRs. See Note 15 Fair Value and Note 6 Goodwill and Mortgage Servicing Rights in the Notes to Consolidated Financial Statements included in Item 8 of our 2020 Form 10-K for more detail on our fair value measurement and our accounting of MSRs.

Changes in the commercial and residential MSRs follow:

Table 60: Mortgage Servicing Rights


	Commercial MSRs				Residential MSRs
In millions	2021		2020		2021		2020
January 1	$	569	$	649	$	673	$	995
Additions:
BBVA Acquisition					35
From loans sold with servicing retained	61		65		61		34
Purchases	26		31		400		113
Changes in fair value due to:
Time and payoffs (a)	(87)		(87)		(242)		(136)
Other (b)	134		(143)		203		(408)
September 30	$	703	$	515	$	1,130	$	598
Related unpaid principal balance at September 30	$	263,862	$	234,897	$	139,154	$	119,158
Servicing advances at September 30	$	445	$	363	$	139	$	107

(a)Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.

(b)Represents MSR value changes resulting primarily from market-driven changes in interest rates.

Sensitivity Analysis

The fair value of commercial and residential MSRs and significant inputs to the valuation models as of September 30, 2021 and December 31, 2020 are shown in Tables 61 and 62. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.

A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented in Tables 61 and 62. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.

The following tables set forth the fair value of commercial and residential MSRs and the sensitivity analysis of the hypothetical effect on the fair value of MSRs to immediate adverse changes of 10% and 20% in those assumptions.

Table 61: Commercial Mortgage Servicing Rights – Key Valuation Assumptions


Dollars in millions	September 30 2021			December 31 2020
Fair value	$	703		$	569
Weighted-average life (years)	4.4			4.4
Weighted-average constant prepayment rate	5.46		%	4.87		%
Decline in fair value from 10% adverse change	$	10		$	9
Decline in fair value from 20% adverse change	$	20		$	18
Effective discount rate	7.55		%	7.33		%
Decline in fair value from 10% adverse change	$	19		$	15
Decline in fair value from 20% adverse change	$	39		$	31

Table 62: Residential Mortgage Servicing Rights – Key Valuation Assumptions


Dollars in millions	September 30 2021				December 31 2020
Fair value	$	1,130			$	673
Weighted-average life (years)	5.9				3.8
Weighted-average constant prepayment rate	11.49		%		21.13		%
Decline in fair value from 10% adverse change	$	47			$	41
Decline in fair value from 20% adverse change	$	94			$	82
Weighted-average option adjusted spread	909			bps	922			bps
Decline in fair value from 10% adverse change	$	37			$	20
Decline in fair value from 20% adverse change	$	72			$	38

Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees were $0.2 billion for the three months ended September 30, 2021 and 2020 and $0.4 billion for the nine months ended September 30, 2021 and 2020. We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset. Fees from commercial and residential MSRs are reported within Noninterest income on our Consolidated Income Statement in Corporate services and Residential mortgage, respectively.