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Goodwill and Other Intangible Assets
 9 Months Ended
Sep. 30, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets
NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
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 2017 Annual Report on Form 10-K for additional information regarding the Company's goodwill accounting policy.
In the first, second, and third quarters of 2018, the Company performed qualitative goodwill assessments on its Consumer and Wholesale reporting units, considering changes in key assumptions as well as other events and circumstances occurring since the most recent annual goodwill impairment test performed as of October 1, 2017. 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, 2018.
In the second quarter of 2018, certain business banking clients were transferred from the Wholesale segment to the Consumer segment, resulting in the reallocation of $128 million in goodwill. See Note 18, "Business Segment Reporting," for additional information. The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2018 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, 2017.

(Dollars in millions)
Consumer
 
Wholesale
 
Total
Balance, January 1, 2018

$4,262

 

$2,069

 

$6,331

Reallocation related to intersegment transfer of business banking clients
128

 
(128
)
 
—

Balance, September 30, 2018

$4,390

 

$1,941

 

$6,331



Other Intangible Assets
Changes in the carrying amount of other intangible assets are presented in the following table:
(Dollars in millions)
Residential MSRs - Fair Value
 
Commercial Mortgage Servicing Rights and Other
 
Total
Balance, January 1, 2018

$1,710

 

$81

 

$1,791

Amortization 1
—

 
(13
)
 
(13
)
Servicing rights originated
250

 
10

 
260

Servicing rights purchased
89

 
—

 
89

Changes in fair value:
 
 
 
 

Due to changes in inputs and assumptions 2
198

 
—

 
198

Other changes in fair value 3
(183
)
 
—

 
(183
)
Servicing rights sold
(2
)
 
—

 
(2
)
Balance, September 30, 2018

$2,062

 

$78

 

$2,140

 
 
 
 
 
 
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

1 Does not include expense associated with 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 measurement period adjustment on other intangible assets acquired previously in the Pillar acquisition.


The gross carrying value and accumulated amortization of other intangible assets are presented in the following table:
 
September 30, 2018
 
December 31, 2017
(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

$89

 

($25
)
 

$64

 

$79

 

($14
)
 

$65

Other
19

 
(17
)
 
2

 
32

 
(28
)
 
4

Unamortized other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Residential MSRs
2,062

 
—

 
2,062

 
1,710

 
—

 
1,710

Other
12

 
—

 
12

 
12

 
—

 
12

Total other intangible assets

$2,182

 

($42
)
 

$2,140

 

$1,833

 

($42
)
 

$1,791

1 Excludes other intangible assets that are indefinite-lived, carried at fair value, or fully amortized.

Servicing Rights
The Company acquires servicing rights and retains servicing rights for certain of its sales or securitizations of residential mortgages and commercial loans. Servicing rights on residential and 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, and is presented in the following table.
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2018
 
2017
 
2018
 
2017
Income from residential MSRs 1

$108

 

$100

 

$322

 

$301

1 Recognized in Mortgage servicing related income in the Consolidated Statements of Income.

The UPB of residential mortgage loans serviced for third parties is presented in the following table:
(Dollars in millions)
September 30, 2018
 
December 31, 2017
UPB of loans underlying residential MSRs

$139,955

 

$136,071


The Company purchased MSRs on residential loans with a UPB of $7.0 billion during the nine months ended September 30, 2018; $5.9 billion of which are reflected in the UPB amounts above and the transfer of servicing for the remainder is scheduled for the fourth quarter of 2018. No MSRs on residential loans were purchased during the nine months ended September 30, 2017. During the nine months ended September 30, 2018 and 2017, the Company sold MSRs on residential loans, at a price approximating their fair value, with a UPB of $781 million and $350 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 annually, drawing upon various market and empirical data sources. Changes to valuation model inputs are reflected in the periods' results. See Note 16, “Fair Value Election and Measurement,” for further information regarding the Company's residential MSR valuation methodology.
A summary of the significant unobservable inputs used to estimate the fair value of the Company’s residential MSRs and the uncertainty of the fair values in response to 10% and 20% adverse changes in those inputs at the reporting date, are presented in the following table.
(Dollars in millions)
September 30, 2018
 
December 31, 2017
Fair value of residential MSRs

$2,062

 

$1,710

Prepayment rate assumption (annual)
12
%
 
13
%
Decline in fair value from 10% adverse change

$91

 

$85

Decline in fair value from 20% adverse change
173

 
160

Option adjusted spread (annual)
3
%
 
4
%
Decline in fair value from 10% adverse change

$52

 

$47

Decline in fair value from 20% adverse change
100

 
90

Weighted-average life (in years)
5.8

 
5.4

Weighted-average coupon
4.0
%
 
3.9
%

Residential MSR uncertainties 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 uncertainties. The uncertainties do not reflect the effect of hedging activity undertaken by the Company to offset changes in the fair value of MSRs. See Note 15, “Derivative Financial Instruments,” for further information regarding these hedging activities.
Commercial Mortgage Servicing Rights
Income earned by the Company on its commercial mortgage servicing rights is derived primarily from contractually specified servicing fees and other ancillary fees. The Company also earns income from subservicing certain third party commercial mortgages for which the Company does not record servicing rights. The following table presents the Company's income earned from servicing commercial mortgages.
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2018
 
2017
 
2018
 
2017
Income from commercial mortgage servicing rights 1

$5

 

$6

 

$20

 

$17

Income from subservicing third party commercial mortgages 1
3

 
3

 
9

 
11

1 Recognized in Commercial real estate related income in the Consolidated Statements of Income.

The UPB of commercial mortgage loans serviced for third parties is presented in the following table:
(Dollars in millions)
September 30, 2018
 
December 31, 2017
UPB of commercial mortgages subserviced for third parties

$26,206

 

$24,294

UPB of loans underlying commercial mortgage servicing rights
6,039

 
5,760

Total UPB of commercial mortgages serviced for third parties

$32,245

 

$30,054



No commercial mortgage servicing rights were purchased or sold during the nine months ended September 30, 2018 and 2017.
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 was $64 million and $65 million at September 30, 2018 and December 31, 2017, respectively.
A summary of the significant unobservable inputs used to estimate the fair value of the Company’s commercial mortgage servicing rights and the uncertainty of the fair values in response to 10% and 20% adverse changes in those inputs at the reporting date, are presented in the following table.
(Dollars in millions)
September 30, 2018
 
December 31, 2017
Fair value of commercial mortgage servicing rights

$77

 

$75

Discount rate (annual)
12
%
 
12
%
Decline in fair value from 10% adverse change

$3

 

$3

Decline in fair value from 20% adverse change
6

 
6

Prepayment rate assumption (annual)
6
%
 
7
%
Decline in fair value from 10% adverse change

$1

 

$1

Decline in fair value from 20% adverse change
2

 
2

Weighted-average life (in years)
7.8

 
7.0

Float earnings rate (annual)
1.1
%
 
1.1
%

Commercial mortgage servicing right uncertainties are hypothetical and should be used with caution.