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Goodwill and Other Intangible Assets
9 Months Ended
Sep. 30, 2011
Goodwill and Other Intangible Assets [Abstract] 
GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS
For a discussion of accounting policies related to goodwill and other intangible assets, see Note 17 on pages 260–263 of JPMorgan Chase’s 2010 Annual Report.
Goodwill and other intangible assets consist of the following.
(in millions)
September 30, 2011
December 31, 2010
Goodwill
$
48,180

$
48,854

Mortgage servicing rights
7,833

13,649

Other intangible assets:
 
 
Purchased credit card relationships
$
668

$
897

Other credit card-related intangibles
508

593

Core deposit intangibles
662

879

Other intangibles
1,558

1,670

Total other intangible assets
$
3,396

$
4,039


Goodwill
The following table presents goodwill attributed to the business segments.
(in millions)
September 30, 2011
December 31, 2010
Investment Bank
$
5,283

$
5,278

Retail Financial Services
16,489

16,496

Card Services & Auto
14,514

14,522

Commercial Banking
2,864

2,866

Treasury & Securities Services
1,667

1,680

Asset Management
6,986

7,635

Corporate/Private Equity
377

377

Total goodwill
$
48,180

$
48,854


The following table presents changes in the carrying amount of goodwill.
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2011
 
2010
 
2011
 
2010
Balance at beginning of period(a)
$
48,882

 
$
48,320

 
$
48,854

 
$
48,357

Changes during the period from:
 
 
 
 
 
 
 
Business combinations
60

 
381

 
66

 
400

Dispositions
(645
)
 
—

 
(645
)
 
(19
)
Other(b)
(117
)
 
35

 
(95
)
 
(2
)
Balance at September 30(a)
$
48,180

 
$
48,736

 
$
48,180

 
$
48,736

(a)
Reflects gross goodwill balances as the Firm has not recognized any impairment losses to date.
(b)
Includes foreign currency translation adjustments and other tax-related adjustments.
The net reduction in goodwill was predominantly due to AM’s sale of its investment in an asset manager.
Goodwill was not impaired at September 30, 2011, or December 31, 2010, nor was any goodwill written off due to impairment during the nine month periods ended September 30, 2011 or 2010. During the nine months ended September 30, 2011, the Firm reviewed current conditions and prior projections for all of its reporting units. In addition, the Firm updated the discounted cash flow valuations of its consumer lending businesses in RFS and Card, as these businesses continue to have elevated risk for goodwill impairment due to their exposure to U.S. consumer credit risk and the effects of regulatory and legislative changes. As a result of these reviews, the Firm concluded that goodwill for these businesses and the Firm’s other reporting units was not impaired at September 30, 2011.
The Firm’s consumer lending businesses in RFS and Card remain at an elevated risk of goodwill impairment due to their exposure to U.S. consumer credit risk and the effects of economic, regulatory and legislative changes. The valuation of these businesses is particularly dependent upon economic conditions (including new unemployment claims and home prices), regulatory and legislative changes (for example, those related to residential mortgage servicing, foreclosure and loss mitigation activities, and those that may affect consumer credit card use), and the amount of equity capital required. The assumptions used in the discounted cash flow valuation models were determined using management’s best estimates. The cost of equity reflected the related risks and uncertainties, and was evaluated in comparison to relevant market peers. Deterioration in these assumptions could cause the estimated fair values of these reporting units and their associated goodwill to decline, which may result in a material impairment charge to earnings in a future period related to some portion of the associated goodwill.
Mortgage servicing rights
Mortgage servicing rights represent the fair value of expected future cash flows for performing servicing activities for others. The fair value considers estimated future fees and ancillary revenue, offset by estimated costs to service the loans. The fair value of mortgage servicing rights naturally declines over time as net servicing cash flows are received, effectively amortizing the MSR asset against contractual and ancillary fee income. For a further description of the MSR asset, interest rate risk management, and the valuation of MSRs, see Notes 17 on pages 260–263, respectively of JPMorgan Chase’s 2010 Annual Report and Note 3 on pages 104–116 of this Form 10-Q.
The fair value of the MSR decreased $4.4 billion and $5.8 billion during the three and nine months ended September 30, 2011, respectively. This decrease was predominately the result of a decline in market interest rates (which generally increase prepayments and therefore reduce the expected life of the net servicing cash flows that comprise the MSR asset), which resulted in a loss of $4.6 billion and $5.1 billion for the three and nine months ended September 30, 2011, respectively. These losses were offset by gains of $4.6 billion and $5.1 billion for the three and nine months ended September 30, 2011, respectively, on derivatives used to hedge the MSR asset; these derivatives are recognized on the balance sheet separately from the MSR asset. Also contributing to the decline in fair value of the MSR was a $1.1 billion decrease related to revised cost to service assumptions incorporated in the MSR valuation in the first quarter of 2011 to reflect the estimated impact of higher servicing costs to enhance servicing processes, particularly loan modification and foreclosure procedures, including costs to comply with Consent Orders entered into with banking regulators. The increase in the cost to service assumption contemplates significant and prolonged increases in staffing levels in the core and default servicing functions, and specifically considers the higher cost to service certain high-risk vintages. Other than the decrease in market interest rates and the increased cost to service assumption, predominantly all of the changes in the fair value of the MSR asset resulted from the effect of new MSR originations and amortization.
The decrease in the fair value of the MSR results in a lower asset value that will amortize in future periods against contractual and ancillary fee income received in future periods. While there is expected to be higher levels of noninterest expense associated with higher servicing costs in those future periods, there will also be less MSR amortization, which will have the effect of increasing mortgage fees and related income. The amortization of the MSR is reflected in the tables below under “Changes in fair value due to modeled servicing portfolio runoff”.
The following table summarizes MSR activity for the three and nine months ended September 30, 2011 and 2010.
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except where otherwise noted)
2011

 
2010

 
2011

 
2010

Fair value at beginning of period
$
12,243

 
$
11,853

 
$
13,649

 
$
15,531

MSR activity
 
 
 
 
 
 
 
Originations of MSRs
623

 
803

 
1,942

 
2,025

Purchase of MSRs
1

 
9

 
31

 
23

Disposition of MSRs
—

 
(257
)
 
—

 
(262
)
Total net additions
624

 
555

 
1,973

 
1,786

Changes in fair value due to market interest rates
(4,575
)
 
(1,398
)
 
(5,129
)
 
(4,997
)
Changes in fair value due to modeled servicing portfolio runoff(a)
(459
)
 
(606
)
 
(1,503
)
 
(1,835
)
Other changes in valuation due to inputs and assumptions(b)
—

 
(99
)
 
(1,157
)
 
(180
)
Total change in fair value of MSRs(c)
(5,034
)
 
(2,103
)
 
(7,789
)
 
(7,012
)
Fair value at September 30(d)
$
7,833

 
$
10,305

 
$
7,833

 
$
10,305

Change in unrealized gains/(losses) included in income related to MSRs held at September 30
$
(4,575
)
 
$
(1,497
)
 
$
(6,286
)
 
$
(5,177
)
Contractual service fees, late fees and other ancillary fees included in income
$
986

 
$
1,113

 
$
2,994

 
$
3,393

Third-party mortgage loans serviced at September 30 (in billions)
$
932.6

 
$
1,021.2

 
$
932.6

 
$
1,021.2

Servicer advances, net at September 30 (in billions)(e)
$
11.0

 
$
9.3

 
$
11.0

 
$
9.3

(a)
Predominantly represents modeled MSR asset amortization.
(b)
Represents the aggregate impact of changes in model inputs and assumptions such as costs to service, home prices, mortgage spreads, ancillary income, and assumptions used to derive prepayment speeds, as well as changes to the valuation models themselves.
(c)
Includes changes related to commercial real estate of $(3) million and $(2) million for the three months ended September 30, 2011 and 2010, respectively, and $(7) million and $(6) million for the nine months ended September 30, 2011 and 2010, respectively.
(d)
Includes $33 million and $35 million related to commercial real estate at September 30, 2011 and 2010, respectively.
(e)
Represents amounts the Firm pays as the servicer (e.g., scheduled principal and interest to a trust, taxes and insurance), which will generally be reimbursed within a short period of time after the advance from future cash flows from the trust or the underlying loans. The Firm’s credit risk associated with these advances is minimal because reimbursement of the advances is senior to all cash payments to investors. In addition, the Firm maintains the right to stop payment if the collateral is insufficient to cover the advance.
The following table presents the components of mortgage fees and related income (including the impact of MSR risk management activities) for the three and nine months ended September 30, 2011 and 2010.
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2011
 
2010
 
2011
 
2010
RFS mortgage fees and related income
 
 
 
 
 
 
 
Net production revenue:
 
 
 
 
 
 
 
Production revenue
$
1,090

 
$
1,233

 
$
2,536

 
$
2,342

Repurchase losses
(314
)
 
(1,464
)
 
(957
)
 
(2,563
)
Net production revenue
776

 
(231
)
 
1,579

 
(221
)
Net mortgage servicing revenue
 
 
 
 
 
 
 
Operating revenue:
 
 
 
 
 
 
 
Loan servicing revenue
1,039

 
1,153

 
3,102

 
3,446

Changes in MSR asset fair value due to modeled servicing portfolio runoff(a)
(457
)
 
(604
)
 
(1,498
)
 
(1,829
)
Total operating revenue
582

 
549

 
1,604

 
1,617

Risk management:
 
 
 
 
 
 
 
Changes in MSR asset fair value due to market interest rates
(4,574
)
 
(1,398
)
 
(5,127
)
 
(4,997
)
Other changes in MSR asset fair value due to inputs or assumptions in model(b)
—

 
(99
)
 
(1,158
)
 
(180
)
Derivative valuation adjustments and other
4,596

 
1,884

 
5,093

 
6,027

Total risk management
22

 
387

 
(1,192
)
 
850

Total RFS net mortgage servicing revenue
604

 
936

 
412

 
2,467

All other
—

 
2

 
5

 
7

Mortgage fees and related income
$
1,380

 
$
707

 
$
1,996

 
$
2,253

(a)
Predominantly represents modeled MSR asset amortization.
(b)
Represents the aggregate impact of changes in model inputs and assumptions such as costs to service, home prices, mortgage spreads, ancillary income, and assumptions used to derive prepayment speeds, as well as changes to the valuation models themselves.
The table below outlines the key economic assumptions used to determine the fair value of the Firm’s MSRs at September 30, 2011, and December 31, 2010; and it outlines the sensitivities of those fair values to immediate adverse changes in those assumptions, as defined below.
(in millions, except rates)
September 30, 2011
 
December 31, 2010
Weighted-average prepayment speed assumption (“CPR”)
19.81
%
 
11.29
%
Impact on fair value of 10% adverse change
$
(822
)
 
$
(809
)
Impact on fair value of 20% adverse change
(1,584
)
 
(1,568
)
Weighted-average option adjusted spread
4.13
%
 
3.94
%
Impact on fair value of 100 basis points adverse change
$
(336
)
 
$
(578
)
Impact on fair value of 200 basis points adverse change
(645
)
 
(1,109
)
CPR: Constant prepayment rate.
The sensitivity analysis in the preceding table is hypothetical and should be used with caution. Changes in fair value based on variation in assumptions generally cannot be easily extrapolated, because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in this table, the effect that a change in a particular assumption may have on the fair value 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.
Other intangible assets
The $643 million decrease in other intangible assets during the nine months ended September 30, 2011, was due to $641 million in amortization.
The components of credit card relationships, core deposits and other intangible assets were as follows.
 
September 30, 2011
 
December 31, 2010
 
Gross amount(a)
Accumulated amortization(a)
Net
carrying value
 
Gross amount
Accumulated amortization
Net
carrying value
(in millions)
 
Purchased credit card relationships
$
3,823

$
3,155

$
668

 
$
5,789

$
4,892

$
897

Other credit card-related intangibles
838

330

508

 
907

314

593

Core deposit intangibles
4,132

3,470

662

 
4,280

3,401

879

Other intangibles
2,457

899

1,558

 
2,515

845

1,670

(a)
The decrease in the gross amount and accumulated amortization from December 31, 2010, was due to the removal of fully amortized assets.
In addition to the finite lived intangible assets in the previous table, the Firm has intangible assets of approximately $600 million consisting primarily of asset management advisory contracts, which were determined to have an indefinite life and are not amortized.
Amortization expense
The following table presents amortization expense related to credit card relationships, core deposits and other intangible assets.
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2011
 
2010
 
2011
 
2010
Purchased credit card relationships
$
69

 
$
80

 
$
226

 
$
274

All other intangibles:
 
 
 
 
 
 
 
Other credit card-related intangibles
27

 
26

 
80

 
78

Core deposit intangibles
72

 
82

 
216

 
248

Other intangibles
44

 
30

 
119

 
96

Total amortization expense
$
212

 
$
218

 
$
641

 
$
696


Future amortization expense
The following table presents estimated future amortization expense related to credit card relationships, core deposits and other intangible assets.
For the year: (in millions)
Purchased credit card relationships
Other credit
card-related intangibles
Core deposit intangibles
Other
intangibles
Total
2011(a)
$
294

$
105

$
284

$
153

$
836

2012
252

105

240

136

733

2013
212

102

195

129

638

2014
108

100

100

112

420

2015
22

92

25

94

233

(a)
Includes $226 million, $80 million, $216 million, and $119 million of amortization expense related to purchased credit card relationships, other credit card-related intangibles, core deposit intangibles and other intangibles, respectively, recognized during the nine months ended September 30, 2011.