NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

As discussed in Note 16, "Business Segment Reporting," the Company realigned its business segment structure from three segments to two segments in the second quarter of 2017. As a result, the Company reassessed the composition of its goodwill reporting units and combined the Consumer Banking and Private Wealth Management reporting unit and Mortgage Banking reporting unit into a single Consumer goodwill reporting unit. The Mortgage Banking reporting unit did not have any associated goodwill prior to this change. The composition of the Wholesale Banking reporting unit was not impacted by the business segment structure realignment.

The Company conducts a goodwill impairment test at the reporting unit level at least annually, or more frequently as events occur or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. See Note 1, "Significant Accounting Policies," to the Company's 2016 Annual Report on Form 10-K for additional information regarding the Company's goodwill accounting policy.

The Company performed qualitative goodwill assessments in the first, second, and third quarters of 2017, considering changes in key assumptions, other events, and circumstances occurring since the most recent annual goodwill impairment test performed as of October 1, 2016. The Company concluded, based on the totality of factors observed, that it is not more-likely-than-not that the fair values of its reportable segments are less than their respective carrying values. Accordingly, goodwill was not required to be quantitatively tested for impairment during the nine months ended September 30, 2017.

Changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2017 are presented in the following table. There were no material changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2016.



(Dollars in millions)	Consumer		Wholesale		Total
Balance, January 1, 2017		$4,262		$2,075		$6,337
Measurement period adjustment related to the acquisition of Pillar	—		1		1
Balance, September 30, 2017		$4,262		$2,076		$6,338

Other Intangible Assets

Changes in the carrying amounts of other intangible assets for the nine months ended September 30 are presented in the following table:



(Dollars in millions)	Residential MSRs - Fair Value			Other			Total
Balance, January 1, 2017		$1,572			$85			$1,657
Amortization ¹	—			(16		)	(16		)
Servicing rights originated	252			10			262
Changes in fair value:
Due to changes in inputs and assumptions ²	(27		)	—			(27		)
Other changes in fair value ³	(168		)	—			(168		)
Servicing rights sold	(1		)	—			(1		)
Other ⁴	—			(1		)	(1		)
Balance, September 30, 2017		$1,628			$78			$1,706

Balance, January 1, 2016		$1,307			$18			$1,325
Amortization ¹	—			(6		)	(6		)
Servicing rights originated	198			—			198
Servicing rights purchased	104			—			104
Changes in fair value:
Due to changes in inputs and assumptions ²	(328		)	—			(328		)
Other changes in fair value ³	(160		)	—			(160		)
Servicing rights sold	(2		)	—			(2		)
Balance, September 30, 2016		$1,119			$12			$1,131

¹ Does not include expense associated with non-qualified community development investments. See Note 8, "Certain Transfers of Financial Assets and Variable Interest Entities," for additional information.

² Primarily reflects changes in option adjusted spreads and prepayment speed assumptions, due to changes in interest rates.

³ Represents changes due to the collection of expected cash flows, net of accretion due to the passage of time.

⁴ Represents the first quarter of 2017 measurement period adjustment on other intangible assets acquired previously in the Pillar acquisition.

Servicing Rights

The Company acquires servicing rights and retains servicing rights for certain of its sales or securitizations of residential mortgage, consumer indirect, and commercial loans. MSRs on residential mortgage loans and servicing rights on commercial and consumer indirect loans are the only servicing assets capitalized by the Company and are classified within other intangible assets on the Company's Consolidated Balance Sheets.

Residential Mortgage Servicing Rights

Income earned by the Company on its residential MSRs is derived primarily from contractually specified mortgage servicing fees and late fees, net of curtailment costs. Such income earned for the three and nine months ended September 30, 2017 was $100 million and $301 million, respectively, and $94 million and $272 million for the three and nine months ended September 30, 2016, respectively. These amounts are reported in mortgage servicing related income in the Consolidated Statements of Income.

At September 30, 2017 and December 31, 2016, the total UPB of residential mortgage loans serviced was $165.3 billion and $160.2 billion, respectively. Included in these amounts at September 30, 2017 and December 31, 2016 were $135.4 billion and $129.6 billion, respectively, of loans serviced for third parties. The Company purchased MSRs on residential loans with a UPB of $10.9 billion during the nine months ended September 30, 2016. No MSRs on residential loans were purchased during the nine months ended September 30, 2017. During the nine months ended September 30, 2017 and 2016, the Company sold MSRs on residential loans, at a price approximating their fair value, with a UPB of $350 million and $464 million, respectively.

The Company measures the fair value of its residential MSRs using a valuation model that calculates the present value of estimated future net servicing income using prepayment projections, spreads, and other assumptions. The Consumer Valuation Committee reviews and approves all significant assumption changes at least quarterly, evaluating these inputs compared to various market and empirical data sources. Changes to valuation model inputs are reflected in the periods' results. See Note 14, “Fair Value Election and Measurement,” for further information regarding the Company's residential MSR valuation methodology.

A summary of the key inputs used to estimate the fair value of the Company’s residential MSRs at September 30, 2017 and December 31, 2016, and the sensitivity of the fair values to immediate 10% and 20% adverse changes in those inputs, are presented in the following table.



(Dollars in millions)	September 30, 2017			December 31, 2016
Fair value of residential MSRs		$1,628			$1,572
Prepayment rate assumption (annual)	13		%	9		%
Decline in fair value from 10% adverse change		$91			$50
Decline in fair value from 20% adverse change	167			97
Option adjusted spread (annual)	4		%	8		%
Decline in fair value from 10% adverse change		$41			$63
Decline in fair value from 20% adverse change	80			122
Weighted-average life (in years)	5.2			7.0
Weighted-average coupon	4.0		%	4.0		%

These residential MSR sensitivities are hypothetical and should be used with caution. Changes in fair value based on variations in assumptions generally cannot be extrapolated because (i) the relationship of the change in an assumption to the change in fair value may not be linear and (ii) changes in one assumption may result in changes in another, which might magnify or counteract the sensitivities. The sensitivities do not reflect the effect of hedging activity undertaken by the Company to offset changes in the fair value of MSRs. See Note 13, “Derivative Financial Instruments,” for further information regarding these hedging activities.

Consumer Loan Servicing Rights

In June 2015, the Company completed the securitization of $1.0 billion of indirect auto loans, with servicing rights retained, and recognized a $13 million servicing asset at the time of sale. See Note 8, “Certain Transfers of Financial Assets and Variable Interest Entities,” for additional information on the Company's securitization transactions.

Income earned by the Company on its consumer loan servicing rights is derived primarily from contractually specified servicing fees and other ancillary fees. Such income earned was immaterial for both the three and nine months ended September 30, 2017, and was $2 million and $5 million for the three and nine months ended September 30, 2016, respectively, reported in other noninterest income in the Consolidated Statements of Income.

At September 30, 2017 and December 31, 2016, the total UPB of consumer indirect loans serviced for third parties was $337 million and $512 million, respectively. No consumer loan servicing rights were purchased or sold during the nine months ended September 30, 2017 and 2016.

Consumer loan servicing rights are accounted for at amortized cost and are monitored for impairment on an ongoing basis. The Company calculates the fair value of consumer servicing rights using a discounted cash flow model. At September 30, 2017 and December 31, 2016, the amortized cost of the Company's consumer loan servicing rights was $2 million and $4 million, respectively.

Commercial Mortgage Servicing Rights

In December 2016, the Company completed the acquisition of substantially all of the assets of the operating subsidiaries of Pillar, and as a result, the Company recognized a $62 million servicing asset. See Note 2, "Acquisitions/Dispositions," to the Company's 2016 Annual Report on Form 10-K for additional information on the Pillar acquisition.

Income earned by the Company on its commercial mortgage servicing rights is derived primarily from contractually specified servicing fees and other ancillary fees. Such income earned for the three and nine months ended September 30, 2017 was $6 million and $17 million, respectively, and is reported in commercial real estate related income in the Consolidated Statements of Income. There was no income earned on commercial mortgage servicing rights for the three and nine months ended September 30, 2016.

The Company also earns income from subservicing certain third party commercial mortgages for which the Company does not record servicing rights. Such income earned for the three and nine months ended September 30, 2017 was $3 million and $11 million, respectively, and is reported in commercial real estate related income in the Consolidated Statements of Income. There was no income earned from such subservicing arrangements for the three and nine months ended September 30, 2016.

At September 30, 2017 and December 31, 2016, the total UPB of commercial mortgage loans serviced for third parties was $30.2 billion and $27.7 billion, respectively. Included in these amounts at September 30, 2017 and December 31, 2016 were $5.3 billion and $4.8 billion, respectively, of loans serviced for third parties for which the Company records servicing rights, and $24.9 billion and $22.9 billion, respectively, of loans subserviced for third parties for which the Company does not record servicing rights. No commercial mortgage servicing rights were purchased or sold during the nine months ended September 30, 2017 and 2016.

Commercial mortgage servicing rights are accounted for at amortized cost and are monitored for impairment on an ongoing basis. The Company calculates the fair value of commercial servicing rights based on the present value of estimated future net servicing income, considering prepayment projections and other assumptions. Impairment, if any, is recognized when the carrying value of the servicing asset exceeds the fair value at the measurement date. The amortized cost of the Company's commercial mortgage servicing rights were $61 million and $62 million at September 30, 2017 and December 31, 2016, respectively.

A summary of the key inputs used to estimate the fair value of the Company’s commercial servicing rights at September 30, 2017 and December 31, 2016, are presented in the following table.



(Dollars in millions)	September 30, 2017			December 31, 2016
Fair value of commercial mortgage servicing rights		$69			$62
Discount rate (annual)	12		%	12		%
Prepayment rate assumption (annual)	7			6
Float earnings rate (annual)	1.0			0.5
Weighted-average life (in years)	7.1			7.0