NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

As discussed in Note 20, "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," for additional information regarding the Company's goodwill accounting policy.

The Company performed goodwill impairment analyses for its Wholesale and Consumer reporting units as of October 1, 2017, 2016, and 2015. Based on the results of the impairment analyses, the Company concluded that the fair values of the reporting units exceed their respective carrying values; therefore, there was no goodwill impairment. The Company monitored events and circumstances during the fourth quarter of 2017 and did not observe any factors that would more-likely-than-not reduce the fair value of a reporting unit below its respective carrying value.

Changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2017 are presented in the following table. There were no material changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 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
Sale of PAC	—		(7		)	(7		)
Balance, December 31, 2017		$4,262		$2,069			$6,331

Other Intangible Assets

Changes in the carrying amounts of other intangible assets for the years ended December 31 are presented in the following table:



(Dollars in millions)	Residential MSRs - Fair Value			Commercial Mortgage Servicing Rights and Other			Total
Balance, January 1, 2017		$1,572			$85			$1,657
Amortization ¹	—			(20		)	(20		)
Servicing rights originated	394			17			411
Changes in fair value:
Due to changes in inputs and assumptions ²	(22		)	—			(22		)
Other changes in fair value ³	(226		)	—			(226		)
Servicing rights sold	(8		)	—			(8		)
Other ⁴	—			(1		)	(1		)
Balance, December 31, 2017		$1,710			$81			$1,791

Balance, January 1, 2016		$1,307			$18			$1,325
Amortization ¹	—			(9		)	(9		)
Servicing rights originated	312			—			312
Servicing rights purchased	200			—			200
Servicing rights acquired in Pillar acquisition	—			62			62
Other intangible assets acquired in Pillar acquisition ⁵	—			14			14
Changes in fair value:
Due to changes in inputs and assumptions ²	(13		)	—			(13		)
Other changes in fair value ³	(232		)	—			(232		)
Servicing rights sold	(2		)	—			(2		)
Balance, December 31, 2016		$1,572			$85			$1,657

¹ Does not include expense associated with non-qualified community development investments. See Note 10, "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.

⁵ The majority of other intangible assets acquired from Pillar relate to indefinite-lived agency licenses.

The gross carrying amount and accumulated amortization of other intangible assets are presented in the following table:



	December 31, 2017							December 31, 2016
(Dollars in millions)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Amortized other intangible assets ¹:
Commercial mortgage servicing rights		$79		($14	)		$65		$62		$—			$62
Other (definite-lived)	32		(28		)	4		35		(22		)	13
Unamortized other intangible assets:
Residential MSRs (carried at fair value)	1,710		—			1,710		1,572		—			1,572
Other (indefinite-lived)	12		—			12		10		—			10
Total other intangible assets		$1,833		($42	)		$1,791		$1,679		($22	)		$1,657

¹ Excludes fully amortized other intangible assets.

The Company's estimated future amortization of intangible assets at December 31, 2017 is presented in the following table:



(Dollars in millions)
2018		$13
2019	10
2020	9
2021	8
2022	6
Thereafter	23
Total ¹		$69

¹ Does not include indefinite-lived intangible assets of $12 million.

Servicing Rights

The Company acquires servicing rights and retains servicing rights for certain of its sales or securitizations of residential mortgages and commercial loans. MSRs on residential mortgages and servicing rights on commercial mortgages are the only material servicing assets capitalized by the Company and are classified as 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 years ended December 31, 2017, 2016, and 2015 totaled $403 million, $366 million, and $347 million, respectively. These amounts are reported in Mortgage servicing related income in the Consolidated Statements of Income.

At December 31, 2017 and 2016, the total UPB of residential mortgage loans serviced was $165.5 billion and $160.2 billion, respectively. Included in these amounts at December 31, 2017 and 2016 were $136.1 billion and $129.6 billion, respectively, of loans serviced for third parties. The Company purchased MSRs on residential loans with a UPB of $19.7 billion during the year ended December 31, 2016. No MSRs on residential loans were purchased during the year ended December 31, 2017. During the years ended December 31, 2017 and 2016, the Company sold MSRs on residential loans, at a price approximating their fair value, with a UPB of $1.1 billion and $575 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 18, “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 December 31, 2017 and 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)	December 31, 2017			December 31, 2016
Fair value of residential MSRs		$1,710			$1,572
Prepayment rate assumption (annual)	13		%	9		%
Decline in fair value from 10% adverse change		$85			$50
Decline in fair value from 20% adverse change	160			97
Option adjusted spread (annual)	4		%	8		%
Decline in fair value from 10% adverse change		$47			$63
Decline in fair value from 20% adverse change	90			122
Weighted-average life (in years)	5.4			7.0
Weighted-average coupon	3.9		%	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 17, “Derivative Financial Instruments,” for further information regarding these hedging activities.

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.

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 year ended December 31, 2017 totaled $22 million and is reported in Commercial real estate related income in the Consolidated Statements of Income. Income earned on commercial mortgage servicing rights for the year ended December 31, 2016 was immaterial and there was no such income earned for the year ended December 31, 2015.

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 year ended December 31, 2017 totaled $14 million and is reported in Commercial real estate related income in the Consolidated Statements of Income. Income earned from such subservicing arrangements for the year ended December 31, 2016 was immaterial and there was no such income earned for the year ended December 31, 2015.

At December 31, 2017 and 2016, the total UPB of commercial mortgage loans serviced for third parties was $30.1 billion and $27.7 billion, respectively. Included in these amounts at December 31, 2017 and 2016 were $5.8 billion and $4.8 billion, respectively, of loans serviced for third parties for which the Company records servicing rights, and $24.3 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 years ended December 31, 2017 and 2016 (other than those that were acquired as part of the Pillar acquisition).

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 $65 million and $62 million at December 31, 2017 and December 31, 2016, respectively.

A summary of the key inputs used to estimate the fair value of the Company’s commercial mortgage servicing rights are presented in the following table.



(Dollars in millions)	December 31, 2017			December 31, 2016
Fair value of commercial mortgage servicing rights		$75			$62
Discount rate (annual)	12		%	12		%
Prepayment rate assumption (annual)	7			6
Float earnings rate (annual)	1.1			0.5
Weighted-average life (in years)	7.0			7.0