Goodwill and Mortgage Servicing Rights

12 Months Ended

Dec. 31, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Mortgage Servicing Rights

GOODWILL AND MORTGAGE SERVICING RIGHTS

Assets and liabilities of acquired entities are recorded at estimated fair value as of the acquisition date.

Goodwill

Allocations of Goodwill by business segment during 2017, 2016 and 2015 follow:

Table 60: Goodwill by Business Segment (a)



In millions	Retail Banking		Corporate & Institutional Banking		Asset Management Group		Total
December 31, 2015	$	5,795	$	3,244	$	64	$	9,103
December 31, 2016	$	5,795	$	3,244	$	64	$	9,103
December 31, 2017 (b)	$	5,795	$	3,314	$	64	$	9,173


(a)	The BlackRock business segment did not have any allocated goodwill during 2017, 2016 and 2015.


(b)	Corporate & Institutional Banking's goodwill balance as of December 31, 2017 includes the impact of $70 million from business acquisitions in 2017.

We conduct a goodwill impairment test on our reporting units at least annually, in the fourth quarter, or more frequently if events occur or circumstances have changed significantly from the annual test date. The fair value of our reporting units with goodwill is determined by using discounted cash flow and market comparability methodologies. Based on the results of our analysis, there were no impairment charges related to goodwill in 2017, 2016 or 2015.

Mortgage Servicing Rights

We recognize the right to service mortgage loans for others when we recognize it as an intangible asset and the servicing income we receive is more than adequate compensation. MSRs are purchased or originated when loans are sold with servicing retained. MSRs totaled $1.8 billion at both December 31, 2017 and December 31, 2016, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

Commercial Mortgage Servicing Rights

We recognize gains/(losses) on changes in the fair value of commercial MSRs. Commercial MSRs are subject to changes 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 commercial MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of commercial MSRs declines (or increases).

The fair value of commercial MSRs is estimated by using a discounted cash flow model incorporating inputs for assumptions as to constant prepayment rates, discount rates and other factors determined based on current market conditions and expectations.

Changes in the commercial MSRs follow:

Table 61: Commercial Mortgage Servicing Rights



In millions	2017			2016			2015
January 1	$	576		$	526		$	506
Additions:
From loans sold with servicing retained	88			61			63
Purchases	69			36			55
Changes in fair value due to:
Time and payoffs (a)	(111		)	(92		)	(89		)
Other (b)	46			45			(9		)
December 31	$	668		$	576		$	526
Related unpaid principal balance at December 31	$	162,182		$	143,139		$	145,823
Servicing advances at December 31	$	217		$	265		$	251


(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.

Residential Mortgage Servicing Rights

Residential MSRs are subject to changes 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 residential MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of residential MSRs declines (or increases).

The fair value of residential MSRs is estimated by using a discounted cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other factors which are determined based on current market conditions.

Changes in the residential MSRs follow:

Table 62: Residential Mortgage Servicing Rights



In millions	2017			2016			2015
January 1	$	1,182		$	1,063		$	845
Additions:
From loans sold with servicing retained	55			62			78
Purchases	185			188			316
Changes in fair value due to:
Time and payoffs (a)	(175		)	(168		)	(178		)
Other (b)	(83		)	37			2
December 31	$	1,164		$	1,182		$	1,063
Unpaid principal balance of loans serviced for others at December 31	$	126,769		$	125,381		$	123,466
Servicing advances at December 31	$	201		$	302		$	411


(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 from market-driven changes in interest rates and changes in model assumptions.

Sensitivity Analysis

The fair value of commercial and residential MSRs and significant inputs to the valuation models as of December 31, 2017 are shown in Tables 63 and 64. 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 63 and 64. 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 (for example, 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 63: Commercial Mortgage Loan Servicing Rights –Key Valuation Assumptions



Dollars in millions	December 31 2017			December 31 2016
Fair value	$	668		$	576
Weighted-average life (years)	4.4			4.6
Weighted-average constant prepayment rate	8.51		%	8.61		%
Decline in fair value from 10% adverse change	$	12		$	11
Decline in fair value from 20% adverse change	$	23		$	21
Effective discount rate	7.81		%	7.52		%
Decline in fair value from 10% adverse change	$	18		$	16
Decline in fair value from 20% adverse change	$	36		$	31

Table 64: Residential Mortgage Loan Servicing Rights – Key Valuation Assumptions



Dollars in millions	December 31 2017			December 31 2016
Fair value	$	1,164		$	1,182
Weighted-average life (years)	6.4			6.8
Weighted-average constant prepayment rate	10.04		%	9.41		%
Decline in fair value from 10% adverse change	$	44		$	45
Decline in fair value from 20% adverse change	$	85		$	86
Weighted-average option adjusted spread	830		bps	850		bps
Decline in fair value from 10% adverse change	$	35		$	37
Decline in fair value from 20% adverse change	$	67		$	72

Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees were $.5 billion for each of 2017, 2016 and 2015. 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 on our Consolidated Income Statement in the line items Corporate services and Residential mortgage, respectively.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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