Note 9 Goodwill and Other Intangible Assets

Goodwill

Goodwill by business segment consisted of the following:

Table 89: Goodwill by Business Segment (a)

		June 30		December 31
In millions		2014		2013
Retail Banking		$	5,795	$	5,795
Corporate & Institutional Banking			3,215		3,215
Asset Management Group			64		64
	Total	$	9,074	$	9,074
(a)	The Residential Mortgage Banking and Non-Strategic Assets Portfolio business segments did not have any goodwill allocated to them as of June 30, 2014 and December 31, 2013.

As of January 1, 2014, PNC made an irrevocable election to measure all classes of commercial MSRs at fair value, which precludes the recognition of valuation allowance or accumulated amortization. Refer to the Mortgage Servicing Rights section of this Note 9 for additional information regarding commercial mortgage servicing rights.

The gross carrying amount, accumulated amortization and net carrying amount of other intangible assets by major category consisted of the following:

Table 90: Other Intangible Assets

				June 30		December 31
In millions				2014		2013
Customer-related and other intangibles
	Gross carrying amount			$	1,671	$	1,676
	Accumulated amortization				(1,156)		(1,096)
		Net carrying amount		$	515	$	580
Mortgage servicing rights (a)
	Gross carrying amount			$	1,482	$	2,620
	Valuation allowance						(88)
	Accumulated amortization						(896)
		Net carrying amount		$	1,482	$	1,636
			Total	$	1,997	$	2,216
(a)	Upon the first quarter 2014 irrevocable election of fair value for commercial MSRs, the gross carrying amount of MSRs as of June 30, 2014 represents the fair value of both classes of MSRs.

Table 91: Amortization Expense on Existing Intangible Assets

In millions
Six months ended June 30, 2014		$	65
Six months ended June 30, 2013 (a)			128
Remainder of 2014			62
2015			110
2016			93
2017			79
2018			68
2019			57
(a)	Includes amortization expense recorded during the first six months of 2013 for commercial MSRs. As of January 1, 2014, PNC made an irrevocable election to measure commercial MSRs at fair value, and, accordingly, amortization expense for commercial MSRs is no longer recorded.

Our customer-related and other intangible assets have finite lives. Core deposit intangibles are amortized on an accelerated basis, whereas the remaining other intangible assets are amortized on a straight-line basis. For customer-related and other intangibles, the estimated remaining useful lives range from less than 1 year to 10 years, with a weighted-average remaining useful life of 7 years.

Changes in customer-related and other intangible assets during the first six months of 2014 follow:

Table 92: Summary of Changes in Customer-Related and Other Intangible Assets

	Customer-
In millions	Related
December 31, 2013	$	580
Amortization		(65)
June 30, 2014	$	515

We recognize as an other intangible asset the right to service mortgage loans for others. MSRs are purchased or originated when loans are sold with servicing retained. As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value in order to eliminate any potential measurement mismatch between our economic hedges and the commercial MSRs. The impact of the cumulative-effect adjustment to retained earnings was not material, and the valuation allowance associated with the commercial MSRs was reclassified to the gross carrying amount of commercial MSRs. We will recognize gains/(losses) on changes in the fair value of commercial MSRs as a result of the election. Commercial MSRs are subject to declines in value from actual or expected prepayment of the underlying loans and also from defaults. 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 commercial MSRs accounted for at fair value during the first six months of 2014 follow:

Table 93: Commercial Mortgage Servicing Rights Accounted for at Fair Value

In millions		2014
January 1		$	552
Additions:
	From loans sold with servicing retained		17
	Purchases		16
Changes in fair value due to:
	Time and payoffs (a)		(45)
	Other (b)		(25)
June 30		$	515
Unpaid principal balance of loans serviced for others at June 30		$	143,226
(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.

Prior to 2014, commercial MSRs were initially recorded at fair value and subsequently accounted for at the lower of amortized cost or fair value. These rights were substantially amortized in proportion to and over the period of estimated net servicing income of 5 to 10 years. Commercial MSRs were periodically evaluated for impairment. For purposes of impairment, the commercial MSRs were stratified based on asset type, which characterized the predominant risk of the underlying financial asset. If the carrying amount of any individual stratum exceeded its fair value, a valuation reserve was established with a corresponding charge to Corporate services on our Consolidated Income Statement.

Changes in commercial MSRs during the first six months of 2013, prior to the irrevocable fair value election, follow:

Table 94: Commercial Mortgage Servicing Rights Accounted for Under the Amortization Method

In millions		2013

Commercial Mortgage Servicing Rights – Net Carrying Amount
January 1		$	420
Additions (a)			86
Amortization expense			(54)
Change in valuation allowance			73
	June 30	$	525

Commercial Mortgage Servicing Rights – Valuation Allowance
January 1		$	(176)
Provision			(4)
Recoveries			76
Other			1
	June 30	$	(103)
(a)	Additions for the first six months of 2013 included $31 million from loans sold with servicing retained and $55 million from purchases of servicing rights from third parties.

We recognize mortgage servicing right assets on residential real estate loans when we retain the obligation to service these loans upon sale and the servicing fee is more than adequate compensation. Residential MSRs are subject to declines in value principally from actual or expected prepayment of the underlying loans and also from defaults. 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 economic factors which are determined based on current market conditions.

Changes in the residential MSRs follow:

Table 95: Residential Mortgage Servicing Rights

In millions		2014		2013
January 1		$	1,087	$	650
Additions:
	From loans sold with servicing retained		43		80
	Purchases		17		64
Changes in fair value due to:
	Time and payoffs (a)		(64)		(105)
	Other (b)		(116)		286
June 30		$	967	$	975
Unpaid principal balance of loans serviced for others at June 30		$	110,933	$	115,740
(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.

The fair value of commercial and residential MSRs and significant inputs to the valuation models as of June 30, 2014 are shown in the tables below. 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 below. 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 96: Commercial Mortgage Loan Servicing Rights - Key Valuation Assumptions
		June 30			December 31
Dollars in millions		2014			2013
Fair Value		$	515		$	552
Weighted-average life (years)			5.0			5.3
Weighted-average constant prepayment rate			8.19	%		7.52	%
	Decline in fair value from 10% adverse change	$	11		$	12
	Decline in fair value from 20% adverse change	$	21		$	23
Effective discount rate			6.66	%		6.91	%
	Decline in fair value from 10% adverse change	$	14		$	18
	Decline in fair value from 20% adverse change	$	29		$	35

Table 97: Residential Mortgage Loan Servicing Rights - Key Valuation Assumptions
		June 30			December 31
Dollars in millions		2014			2013
Fair value		$	967		$	1,087
Weighted-average life (years)			7.1			7.9
Weighted-average constant prepayment rate			9.10	%		7.61	%
	Decline in fair value from 10% adverse change	$	37		$	34
	Decline in fair value from 20% adverse change	$	72		$	67
Weighted-average option adjusted spread			10.40	%		10.24	%
	Decline in fair value from 10% adverse change	$	40		$	47
	Decline in fair value from 20% adverse change	$	77		$	91

Fees from mortgage loan servicing, comprised of contractually specified servicing fees, late fees and ancillary fees, follows:

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.