| Note 10 Goodwill and Other Intangible Assets | ||||||||||||||||||||
| Changes in goodwill by business segment during 2013 and 2012 follow: | ||||||||||||||||||||
| Table 95: Changes in Goodwill by Business Segment (a) | ||||||||||||||||||||
| Corporate & | Asset | Residential | ||||||||||||||||||
| Retail | Institutional | Management | Mortgage | |||||||||||||||||
| In millions | Banking | Banking | Group | Banking | Other (b) | Total | ||||||||||||||
| December 31, 2011 | $ | 5,394 | $ | 2,763 | $ | 69 | $ | 43 | $ | 16 | $ | 8,285 | ||||||||
| RBC Bank (USA) acquisition | 429 | 473 | 2 | 46 | 950 | |||||||||||||||
| SmartStreet divestiture | (46) | (46) | ||||||||||||||||||
| Residential Mortgage Banking impairment charge | (45) | (45) | ||||||||||||||||||
| Other (c) | (29) | (22) | (5) | (16) | (72) | |||||||||||||||
| December 31, 2012 | $ | 5,794 | $ | 3,214 | $ | 64 | $ | - | $ | - | $ | 9,072 | ||||||||
| Other | 1 | 1 | 2 | |||||||||||||||||
| December 31, 2013 | $ | 5,795 | $ | 3,215 | $ | 64 | $ | - | $ | - | $ | 9,074 | ||||||||
| (a) | The Non-Strategic Assets Portfolio business segment does not have any goodwill allocated to it. | |||||||||||||||||||
| (b) | Includes goodwill related to BlackRock. | |||||||||||||||||||
| (c) | Primarily related to correction of amounts for an acquisition affecting prior periods. | |||||||||||||||||||
Assets and liabilities of acquired entities are recorded at estimated fair value as of the acquisition date.
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 is determined by using discounted cash flow and, when applicable, market comparability methodologies. Based on the results of our 2013 analysis, there were no impairment charges related to goodwill.
During 2012, our residential mortgage banking business, similar to other residential mortgage banking businesses, experienced higher operating costs and increased uncertainties such as elevated indemnification and repurchase liabilities and foreclosure related issues. Our annual impairment analysis indicated that goodwill related to our Residential Mortgage Banking reporting unit was greater than the implied fair value of its goodwill. An impairment charge of $45 million was recorded during the fourth quarter of 2012 which wrote down the entire balance of goodwill in the Residential Mortgage Banking reporting unit.
The gross carrying amount, accumulated amortization and net carrying amount of other intangible assets by major category consisted of the following:
| Table 96: Other Intangible Assets | |||||||||
| December 31 | December 31 | ||||||||
| In millions | 2013 | 2012 | |||||||
| Customer-related and other intangibles | |||||||||
| Gross carrying amount | $ | 1,676 | $ | 1,676 | |||||
| Accumulated amortization | (1,096) | (950) | |||||||
| Net carrying amount | $ | 580 | $ | 726 | |||||
| Mortgage and other loan servicing rights | |||||||||
| Gross carrying amount | $ | 2,620 | $ | 2,071 | |||||
| Valuation allowance | (88) | (176) | |||||||
| Accumulated amortization | (896) | (824) | |||||||
| Net carrying amount (a) | $ | 1,636 | $ | 1,071 | |||||
| Total | $ | 2,216 | $ | 1,797 | |||||
| (a) | Included mortgage servicing rights for other loan portfolios of less than $1 million at December 31, 2013 and $1 million at December 31, 2012, respectively. | ||||||||
Our other intangible assets have finite lives and are amortized primarily on a straight-line basis. Core deposit intangibles are amortized on an accelerated 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.
Amortization expense on existing intangible assets follows:
| Table 97: Amortization Expense on Existing Intangible Assets (a) (b) | |||||
| In millions | |||||
| 2011 | $ | 324 | |||
| 2012 | 310 | ||||
| 2013 | 243 | ||||
| 2014 | 127 | ||||
| 2015 | 110 | ||||
| 2016 | 93 | ||||
| 2017 | 79 | ||||
| 2018 | 68 | ||||
| (a) | Included mortgage servicing rights for other loan portfolios of $1 million at both December 31, 2011 and 2012 and less than $1 million at December 31, 2013. | ||||
| (b) | Amounts for 2011, 2012 and 2013 include amortization expense related to commercial MSRs. As of January 1, 2014, PNC made an irrevocable election to subsequently measure all classes of commercial MSRs at fair value. Accordingly, the estimated aggregate amortization expense for each of the five succeeding fiscal years presented excludes amortization expense related to commercial MSRs. For additional information regarding the election of commercial MSRs at fair value, see Note 1 Accounting Policies for more detail. | ||||
| Changes in customer-related intangible assets during 2013 and 2012 follow: | ||||||
| Table 98: Summary of Changes in Customer-Related and Other Intangible Assets | ||||||
| Customer- | ||||||
| In millions | Related | |||||
| December 31, 2011 | $ | 742 | ||||
| RBC Bank (USA) Acquisition | 164 | |||||
| SmartStreet divestiture | (13) | |||||
| Amortization | (167) | |||||
| December 31, 2012 | $ | 726 | ||||
| Amortization | (146) | |||||
| December 31, 2013 | $ | 580 | ||||
| Changes in commercial mortgage servicing rights (MSRs) follow: | ||||||||||||
| Table 99: Commercial Mortgage Servicing Rights | ||||||||||||
| In millions | 2013 | 2012 | 2011 | |||||||||
| Commercial Mortgage Servicing Rights - Net Carrying Amount | ||||||||||||
| January 1 | $ | 420 | $ | 468 | $ | 665 | ||||||
| Additions (a) | 138 | 73 | 120 | |||||||||
| Amortization expense (b) | (97) | (142) | (160) | |||||||||
| Change in valuation allowance | 88 | 21 | (157) | |||||||||
| December 31 | $ | 549 | $ | 420 | $ | 468 | ||||||
| Commercial Mortgage Servicing Rights - Valuation Allowance | ||||||||||||
| January 1 | $ | (176) | $ | (197) | $ | (40) | ||||||
| Provision | (21) | (46) | (166) | |||||||||
| Recoveries | 108 | 43 | 9 | |||||||||
| Other (b) | 1 | 24 | ||||||||||
| December 31 | $ | (88) | $ | (176) | $ | (197) | ||||||
| (a) | Additions for 2013 included $53 million from loans sold with servicing retained and $85 million from purchases of servicing rights from third parties. | |||||||||||
| Comparable amounts were $45 million and $28 million, respectively, for 2012 and $55 million and $65 million, respectively, for 2011. | ||||||||||||
| (b) | Includes a direct write-down of servicing rights for $24 million recognized in the first quarter of 2012 primarily due to market-driven changes in interest rates. | |||||||||||
We recognize as an other intangible asset the right to service mortgage loans for others. Commercial MSRs are purchased or originated when loans are sold with servicing retained. Commercial MSRs are initially recorded at fair value. These rights are subsequently accounted for at the lower of amortized cost or fair value, and are substantially amortized in proportion to and over the period of estimated net servicing income of 5 to 10 years.
Commercial MSRs are periodically evaluated for impairment. For purposes of impairment, the commercial MSRs are stratified based on asset type, which characterizes the predominant risk of the underlying financial asset. If the carrying amount of any individual stratum exceeds its fair value, a valuation reserve is established with a corresponding charge to Corporate services on our Consolidated Income Statement.
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 residential MSRs follow: | ||||||||||||
| Table 100: Residential Mortgage Servicing Rights | ||||||||||||
| In millions | 2013 | 2012 | 2011 | |||||||||
| January 1 | $ | 650 | $ | 647 | $ | 1,033 | ||||||
| Additions: | ||||||||||||
| From loans sold with servicing retained | 158 | 117 | 118 | |||||||||
| RBC Bank (USA) acquisition | 16 | |||||||||||
| Purchases | 110 | 175 | 65 | |||||||||
| Sales | (4) | |||||||||||
| Changes in fair value due to: | ||||||||||||
| Time and payoffs (a) | (193) | (167) | (163) | |||||||||
| Other (b) | 366 | (138) | (406) | |||||||||
| December 31 | $ | 1,087 | $ | 650 | $ | 647 | ||||||
| Unpaid principal balance of loans serviced for others at December 31 | $ | 113,994 | $ | 119,262 | $ | 118,058 | ||||||
| (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. | |||||||||||
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. MSRs are subject to declines in value principally from actual or expected prepayment of the underlying loans and also defaults. We manage this risk by economically hedging the fair value of MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of MSRs declines (or increases).
The fair value of residential MSRs is estimated by using a 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.
The fair value of commercial and residential MSRs and significant inputs to the valuation models as of December 31, 2013 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 101: Commercial Mortgage Loan Servicing Rights - Key Valuation Assumptions | |||||||||||
| December 31 | December 31 | ||||||||||
| Dollars in millions | 2013 | 2012 | |||||||||
| Fair Value | $ | 552 | $ | 427 | |||||||
| Weighted-average life (years) | 5.3 | 4.8 | |||||||||
| Weighted-average constant prepayment rate | 7.52 | % | 7.63 | % | |||||||
| Decline in fair value from 10% adverse change | $ | 12 | $ | 8 | |||||||
| Decline in fair value from 20% adverse change | $ | 23 | $ | 16 | |||||||
| Effective discount rate | 6.91 | % | 7.70 | % | |||||||
| Decline in fair value from 10% adverse change | $ | 18 | $ | 12 | |||||||
| Decline in fair value from 20% adverse change | $ | 35 | $ | 23 | |||||||
| Table 102: Residential Mortgage Loan Servicing Rights - Key Valuation Assumptions | |||||||||||
| December 31 | December 31 | ||||||||||
| Dollars in millions | 2013 | 2012 | |||||||||
| Fair value | $ | 1,087 | $ | 650 | |||||||
| Weighted-average life (years) | 7.9 | 4.3 | |||||||||
| Weighted-average constant prepayment rate | 7.61 | % | 18.78 | % | |||||||
| Decline in fair value from 10% adverse change | $ | 47 | $ | 45 | |||||||
| Decline in fair value from 20% adverse change | $ | 91 | $ | 85 | |||||||
| Weighted-average option adjusted spread | 10.24 | % | 11.15 | % | |||||||
| Decline in fair value from 10% adverse change | $ | 47 | $ | 26 | |||||||
| Decline in fair value from 20% adverse change | $ | 91 | $ | 49 | |||||||
Fees from mortgage and other loan servicing, comprised of contractually specified servicing fees, late fees and ancillary fees, follows:
| Table 103: Fees from Mortgage and Other Loan Servicing | ||||||||||||
| In millions | 2013 | 2012 | 2011 | |||||||||
| Fees from mortgage and other loan servicing | $ | 544 | $ | 557 | $ | 641 | ||||||
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 MSRs, residential MSRs and other loan servicing are reported on our Consolidated Income Statement in the line items Corporate services, Residential mortgage, and Consumer services, respectively.