NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill is required to be tested for impairment on an annual basis, which is performed by the Company during the third quarter, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount or indicate that it is more likely than not that a goodwill impairment exists when the carrying amount of a reporting unit is zero or negative. The fair value of the reporting unit is determined by using discounted cash flow analyses and, when applicable, guideline company information. When the reporting unit is not a legal entity with a stand-alone equity balance, the carrying value of the reporting unit is determined using an equity allocation methodology that allocates the total equity of the Company to each of its reporting units considering both regulatory risk-based capital and tangible assets relative to tangible equity. See Note 1, "Significant Accounting Policies," for further information regarding the Company's goodwill accounting policy. The Company performed a goodwill impairment analysis for all of its reporting units with goodwill balances at September 30, 2013 and determined that the fair values were in excess of the respective carrying values by the following percentages:
Consumer Banking and Private Wealth Management 56%
Wholesale Banking 14%
RidgeWorth Capital Management 141%
The Company monitored events and circumstances during the fourth quarter of 2013 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. During the second quarter of 2013, branch-managed business banking clients were transferred from Wholesale Banking to Consumer Banking and Private Wealth Management, resulting in the reallocation of $300 million in goodwill. Additionally, during the first quarter of 2012, the Company reorganized its segment reporting structure and goodwill reporting units. For additional information on the Company's segment reporting structure, see Note 20, "Business Segment Reporting."
The changes in the carrying amount of goodwill by reportable segment for the years ended December 31 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Retail
Banking | | Diversified
Commercial
Banking | | CIB | | W&IM | | Consumer Banking and Private Wealth Management | | Wholesale Banking | | Total |
Balance, January 1, 2013 |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
| |
| $3,962 |
| |
| $2,407 |
| |
| $6,369 |
|
Intersegment transfers | — |
| | — |
| | — |
| | — |
| | 300 |
| | (300 | ) | | — |
|
Balance, December 31, 2013 |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
| |
| $4,262 |
| |
| $2,107 |
| |
| $6,369 |
|
Balance, January 1, 2012 |
| $4,854 |
| |
| $928 |
| |
| $180 |
| |
| $382 |
| |
| $— |
| |
| $— |
| |
| $6,344 |
|
Intersegment transfers | (4,854 | ) | | (928 | ) | | (180 | ) | | (382 | ) | | 3,930 |
| | 2,414 |
| | — |
|
Acquisition of FirstAgain, LLC | — |
| | — |
| | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
Impairment of GenSpring | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
Balance, December 31, 2012 |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
| |
| $3,962 |
| |
| $2,407 |
| |
| $6,369 |
|
Other Intangible Assets
Changes in the carrying amounts of other intangible assets for the years ended December 31 are as follows:
|
| | | | | | | | | | | | | | | |
(Dollars in millions) | Core Deposit
Intangibles | | MSRs -
Fair Value | | Other | | Total |
Balance, January 1, 2013 |
| $17 |
| |
| $899 |
| |
| $40 |
| |
| $956 |
|
Amortization | (13 | ) | | — |
| | (10 | ) | | (23 | ) |
MSRs originated | — |
| | 352 |
| | — |
| | 352 |
|
Changes in fair value: | | | | | | | |
Due to changes in inputs and assumptions 1 | — |
| | 302 |
| | — |
| | 302 |
|
Other changes in fair value 2 | — |
| | (252 | ) | | — |
| | (252 | ) |
Sale of MSRs | — |
| | (1 | ) | | — |
| | (1 | ) |
Balance, December 31, 2013 |
| $4 |
| |
| $1,300 |
| |
| $30 |
| |
| $1,334 |
|
Balance, January 1, 2012 |
| $38 |
| |
| $921 |
| |
| $58 |
| |
| $1,017 |
|
Amortization | (21 | ) | | — |
| | (18 | ) | | (39 | ) |
MSRs originated | — |
| | 336 |
| | — |
| | 336 |
|
Changes in fair value: | | | | | | | |
Due to changes in inputs and assumptions 1 | — |
| | (112 | ) | | — |
| | (112 | ) |
Other changes in fair value 2 | — |
| | (241 | ) | | — |
| | (241 | ) |
Sale of MSRs | — |
| | (5 | ) | | — |
| | (5 | ) |
Balance, December 31, 2012 |
| $17 |
| |
| $899 |
| |
| $40 |
| |
| $956 |
|
1 Primarily reflects changes in discount rates and prepayment speed assumptions, due to changes in interest rates.
2 Represents changes due to the collection of expected cash flows, net of accretion, due to the passage of time.
The estimated future amortization expense for intangible assets is as follows:
|
| | | | | | | | | | | |
| | | | | |
(Dollars in millions) | Core Deposit Intangibles | | Other | | Total |
2014 |
| $4 |
| |
| $7 |
| |
| $11 |
|
2015 | — |
| | 5 |
| | 5 |
|
2016 | — |
| | 2 |
| | 2 |
|
2017 | — |
| | 2 |
| | 2 |
|
2018 | — |
| | 2 |
| | 2 |
|
Thereafter | — |
| | 3 |
| | 3 |
|
Total 1 |
| $4 |
| |
| $21 |
| |
| $25 |
|
1 Estimated future amortization expense is less than the intangible asset balance at December 31, 2013, due to the anticipated sale of RidgeWorth, including its intangible assets, in 2014. See additional discussion of the planned sale in Note 20, “Business Segment Reporting.”
Mortgage Servicing Rights
The Company retains MSRs from certain of its sales or securitizations of residential mortgage loans. MSRs on residential mortgage loans are the only servicing assets capitalized by the Company and are classified within intangible assets on the Company's Consolidated Balance Sheets.
Income earned by the Company on its 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, 2013, 2012, and 2011 was $317 million, $333 million, and $364 million, respectively. These amounts are reported in mortgage servicing related income in the Consolidated Statements of Income.
At December 31, 2013 and 2012, the total UPB of mortgage loans serviced was $136.7 billion and $144.9 billion, respectively. Included in these amounts were $106.8 billion and $113.2 billion at December 31, 2013 and 2012, respectively, of loans serviced for third parties. During the years ended December 31, 2013 and 2012, the Company sold MSRs, at a price approximating their fair value, on residential loans with a UPB of $2.8 billion and $2.1 billion, respectively.
At the end of each quarter, the Company determines the fair value of the MSRs using a valuation model that calculates the present value of the estimated future net servicing income. The model incorporates a number of assumptions as MSRs do not trade in an active and open market with readily observable prices. The Company determines fair value using market based prepayment rates, discount rates, and other assumptions that are compared to various sources of market data including independent third party valuations and industry surveys. Senior management and the STM valuation committee review all significant assumptions quarterly since many factors can affect the fair value of MSRs. Changes to the valuation model inputs and assumptions are reflected in the periods' results.
A summary of the key characteristics, inputs, and economic assumptions used to estimate the fair value of the Company’s MSRs at December 31, 2013 and 2012, and the sensitivity of the fair values to immediate 10% and 20% adverse changes in those assumptions are shown in the table below. The overall change in MSRs during the year ended December 31, 2013 was primarily due to originations and an increase in prevailing interest rates during the period.
|
| | | | | | | |
(Dollars in millions) | December 31, 2013 | | December 31, 2012 |
Fair value of retained MSRs |
| $1,300 |
| |
| $899 |
|
Prepayment rate assumption (annual) | 8 | % | | 16 | % |
Decline in fair value from 10% adverse change |
| $38 |
| |
| $50 |
|
Decline in fair value from 20% adverse change | 74 |
| | 95 |
|
Discount rate (annual) | 12 | % | | 11 | % |
Decline in fair value from 10% adverse change |
| $66 |
| |
| $37 |
|
Decline in fair value from 20% adverse change | 126 |
| | 70 |
|
Weighted-average life (in years) | 7.7 |
| | 4.9 |
|
Weighted-average coupon | 4.4 | % | | 4.8 | % |
The above sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Additionally, the sensitivities above do not include the effect of hedging activity undertaken by the Company to offset changes in the fair value of MSRs. See Note 16, “Derivative Financial Instruments,” for further information regarding these hedging activities.
