Goodwill and Other Intangible Assets

12 Months Ended

Dec. 31, 2012

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets

Goodwill and other intangible assets consist of the following.

December 31, (in millions)	2012		2011		2010
Goodwill	$	48,175	$	48,188	$	48,854
Mortgage servicing rights	7,614		7,223		13,649
Other intangible assets:
Purchased credit card relationships	$	295	$	602	$	897
Other credit card-related intangibles	229		488		593
Core deposit intangibles	355		594		879
Other intangibles	1,356		1,523		1,670
Total other intangible assets	$	2,235	$	3,207	$	4,039

Goodwill

Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of the net assets acquired. Subsequent to initial recognition, goodwill is not amortized but is tested for impairment during the fourth quarter of each fiscal year, or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment.

The goodwill associated with each business combination is allocated to the related reporting units, which are determined based on how the Firm’s businesses are managed and how they are reviewed by the Firm’s Operating Committee. The following table presents goodwill attributed to the business segments.

December 31, (in millions)	2012		2011		2010
Consumer & Community Banking	$	31,048	$	30,996	$	31,018
Corporate & Investment Bank	6,895		6,944		6,958
Commercial Banking	2,863		2,864		2,866
Asset Management	6,992		7,007		7,635
Corporate/Private Equity	377		377		377
Total goodwill	$	48,175	$	48,188	$	48,854

The following table presents changes in the carrying amount of goodwill.

Year ended December 31, (in millions)	2012			2011			2010
Balance at beginning of period(a)	$	48,188		$	48,854		$	48,357
Changes during the period from:
Business combinations	43			97			556
Dispositions	(4		)	(685		)	(19		)
Other(b)	(52		)	(78		)	(40		)
Balance at December 31,(a)	$	48,175		$	48,188		$	48,854

(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 from 2010 to 2011 was predominantly due to AM’s sale of its investment in an asset manager.

Impairment testing

Goodwill was not impaired at December 31, 2012 or 2011, nor was any goodwill written off due to impairment during 2012, 2011 or 2010.

The goodwill impairment test is performed in two steps. In the first step, the current fair value of each reporting unit is compared with its carrying value, including goodwill. If the fair value is in excess of the carrying value (including goodwill), then the reporting unit’s goodwill is considered not to be impaired. If the fair value is less than the carrying value (including goodwill), then a second step is performed. In the second step, the implied current fair value of the reporting unit’s goodwill is determined by comparing the fair value of the reporting unit (as determined in step one) to the fair value of the net assets of the reporting unit, as if the reporting unit were being acquired in a business combination. The resulting implied current fair value of goodwill is then compared with the carrying value of the reporting unit’s goodwill. If the carrying value of the goodwill exceeds its implied current fair value, then an impairment charge is recognized for the excess. If the carrying value of goodwill is less than its implied current fair value, then no goodwill impairment is recognized.

The Firm uses the reporting units’ allocated equity plus goodwill capital as a proxy for the carrying amounts of equity for the reporting units in the goodwill impairment testing. Reporting unit equity is determined on a similar basis as the allocation of equity to the Firm’s lines of business, which takes into consideration the capital the business segment would require if it were operating independently, incorporating sufficient capital to address regulatory capital requirements (including Basel III), economic risk measures and capital levels for similarly rated peers. Proposed line of business equity levels are incorporated into the Firm’s annual budget process, which is reviewed by the Firm’s Board of Directors. Allocated equity is further reviewed on a periodic basis and updated as needed.

The primary method the Firm uses to estimate the fair value of its reporting units is the income approach. The models project cash flows for the forecast period and use the perpetuity growth method to calculate terminal values. These cash flows and terminal values are then discounted using an appropriate discount rate. Projections of cash flows are based on the reporting units’ earnings forecasts, which include the estimated effects of regulatory and legislative changes (including, but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the CARD Act, and limitations on non-sufficient funds and overdraft fees), and which are reviewed with the Operating Committee of the Firm. The discount rate used for each reporting unit represents an estimate of the cost of equity for that reporting unit and is determined considering the Firm’s overall estimated cost of equity (estimated using the Capital Asset Pricing Model), as adjusted for the risk characteristics specific to each reporting unit (for example, for higher levels of risk or uncertainty associated with the business or management’s forecasts and assumptions). To assess the reasonableness of the discount rates used for each reporting unit management compares the discount rate to the estimated cost of equity for publicly traded institutions with similar businesses and risk characteristics. In addition, the weighted average cost of equity (aggregating the various reporting units) is compared with the Firms’ overall estimated cost of equity to ensure reasonableness.

The valuations derived from the discounted cash flow models are then compared with market-based trading and transaction multiples for relevant competitors. Trading and transaction comparables are used as general indicators to assess the general reasonableness of the estimated fair values, although precise conclusions generally cannot be drawn due to the differences that naturally exist between the Firm’s businesses and competitor institutions. Management also takes into consideration a comparison between the aggregate fair value of the Firm’s reporting units and JPMorgan Chase’s market capitalization. In evaluating this comparison, management considers several factors, including (a) a control premium that would exist in a market transaction, (b) factors related to the level of execution risk that would exist at the firmwide level that do not exist at the reporting unit level and (c) short-term market volatility and other factors that do not directly affect the value of individual reporting units.

While no impairment of goodwill was recognized, the Firm’s mortgage lending business in CCB remain at an elevated risk of goodwill impairment due to its exposure to U.S. consumer credit risk and the effects of economic, regulatory and legislative changes. The valuation of this business 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 the amount of equity capital required. In addition, the earnings or estimated cost of equity of the Firm’s capital markets businesses could also be affected by regulatory or legislative changes. 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 servicing fees and ancillary revenue, offset by estimated costs to service the loans, and generally declines over time as net servicing cash flows are received, effectively amortizing the MSR asset against contractual servicing and ancillary fee income. MSRs are either purchased from third parties or recognized upon sale or securitization of mortgage loans if servicing is retained.

As permitted by U.S. GAAP, the Firm elected to account for its MSRs at fair value. The Firm treats its MSRs as a single class of servicing assets based on the availability of market inputs used to measure the fair value of its MSR asset and its treatment of MSRs as one aggregate pool for risk management purposes. The Firm estimates the fair value of MSRs using an option-adjusted spread (“OAS”) model, which projects MSR cash flows over multiple interest rate scenarios in conjunction with the Firm’s prepayment model, and then discounts these cash flows at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, costs to service, late charges and other ancillary revenue, and other economic factors. The Firm compares fair value estimates and assumptions to observable market data where available, and also considers recent market activity and actual portfolio experience.

The fair value of MSRs is sensitive to changes in interest rates, including their effect on prepayment speeds. MSRs typically decrease in value when interest rates decline because declining interest rates tend to increase prepayments and therefore reduce the expected life of the net servicing cash flows that comprise the MSR asset. Conversely, securities (e.g., mortgage-backed securities), principal-only certificates and certain derivatives (i.e., those for which the Firm receives fixed-rate interest payments) increase in value when interest rates decline. JPMorgan Chase uses combinations of derivatives and securities to manage changes in the fair value of MSRs. The intent is to offset any interest-rate related changes in the fair value of MSRs with changes in the fair value of the related risk management instruments.

The following table summarizes MSR activity for the years ended December 31, 2012, 2011 and 2010.

As of or for the year ended December 31, (in millions, except where otherwise noted)	2012				2011			2010
Fair value at beginning of period	$	7,223			$	13,649		$	15,531
MSR activity
Originations of MSRs	2,376				2,570			3,153
Purchase of MSRs	457				33			26
Disposition of MSRs	(579		)	(e)	—			(407		)
Changes due to modeled amortization	(1,228		)		(1,910		)	(2,386		)
Net additions and amortization	1,026				693			386
Changes due to market interest rates	(589		)		(5,392		)	(2,224		)
Other changes in valuation due to inputs and assumptions(a)	(46		)		(1,727		)	(44		)
Total change in fair value of MSRs(b)	(635		)		(7,119		)	(2,268		)
Fair value at December 31(c)	$	7,614			$	7,223		$	13,649
Change in unrealized gains/(losses) included in income related to MSRs held at December 31	$	(635	)		$	(7,119	)	$	(2,268	)
Contractual service fees, late fees and other ancillary fees included in income	$	3,783			$	3,977		$	4,484
Third-party mortgage loans serviced at December 31 (in billions)	$	867			$	910		$	976
Servicer advances at December 31 (in billions)(d)	$	10.9			$	11.1		$	9.9

(a) 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.

(b) Includes changes related to commercial real estate of $(8) million, $(9) million and $(1) million for the years ended December 31, 2012, 2011 and 2010, respectively.

(c) Includes $23 million, $31 million and $40 million related to commercial real estate at December 31, 2012, 2011 and 2010, respectively.

(d) 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 to investors if the collateral is insufficient to cover the advance.

(e) Includes excess mortgage servicing rights transferred to an agency-sponsored trust in exchange for stripped mortgage backed securities (“SMBS”). A portion of the SMBS was acquired by third parties at the transaction date; the Firm acquired and has retained the remaining balance of those SMBS as trading assets.

During the year ended December 31, 2011, the fair value of the MSR decreased by $6.4 billion. This decrease was predominately due to a decline in market interest rates, which resulted in a loss in fair value of $5.4 billion. These losses were offset by gains of $5.6 billion on derivatives used to hedge the MSR asset; these derivatives are recognized on the Consolidated Balance Sheets separately from the MSR asset. Also contributing to the decline in fair value of the MSR asset was a $1.7 billion decrease related to revised cost to service and ancillary income assumptions incorporated in the MSR valuation. The increased cost to service assumptions 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. The decreased ancillary income assumption is similarly related to a reassessment of business practices in consideration of the Consent Orders and the existing industry-wide regulatory environment, which is broadly affecting market participants.

Also in the fourth quarter of 2011, the Firm revised its OAS assumption and updated its proprietary prepayment model; these changes had generally offsetting effects. The Firm’s OAS assumption is based upon capital and return requirements that the Firm believes a market participant would consider, taking into account factors such as the pending Basel III capital rules. Consequently, the OAS assumption for the Firm’s portfolio increased by approximately 400 basis points and decreased the fair value of the MSR asset by approximately $1.2 billion.

Since 2009, the Firm has continued to refine its proprietary prepayment model based on a number of market-related factors, including a downward trend in home prices, a general tightening of credit underwriting standards and the associated impact on refinancing activity. In the fourth quarter of 2011, the Firm further enhanced its proprietary prepayment model to incorporate: (i) the impact of the Home Affordable Refinance Program (“HARP”) 2.0, and (ii)assumptions that will limit modeled refinancings due to the combined influences of relatively strict underwriting standards and reduced levels of expected home price appreciation. In the aggregate, these refinements increased the fair value of the MSR asset by approximately $1.2 billion.

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 above under “Changes due to modeled amortization.”

The following table presents the components of mortgage fees and related income (including the impact of MSR risk management activities) for the years ended December 31, 2012, 2011 and 2010.

Year ended December 31, (in millions)	2012			2011			2010
Mortgage fees and related income
Net production revenue:
Production revenue	$	5,783		$	3,395		$	3,440
Repurchase losses	(272		)	(1,347		)	(2,912		)
Net production revenue	5,511			2,048			528
Net mortgage servicing revenue
Operating revenue:
Loan servicing revenue	3,772			4,134			4,575
Changes in MSR asset fair value due to modeled amortization	(1,222		)	(1,904		)	(2,384		)
Total operating revenue	2,550			2,230			2,191
Risk management:
Changes in MSR asset fair value due to market interest rates	(587		)	(5,390		)	(2,224		)
Other changes in MSR asset fair value due to inputs or assumptions in model(a)	(46		)	(1,727		)	(44		)
Change in derivative fair value and other	1,252			5,553			3,404
Total risk management	619			(1,564		)	1,136
Net mortgage servicing revenue	3,169			666			3,327
All other	7			7			15
Mortgage fees and related income	$	8,687		$	2,721		$	3,870

(a) 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 December 31, 2012 and 2011, and outlines the sensitivities of those fair values to immediate adverse changes in those assumptions, as defined below.

December 31, (in millions, except rates)	2012			2011
Weighted-average prepayment speed assumption (“CPR”)	13.04		%	18.07		%
Impact on fair value of 10% adverse change	$	(517	)	$	(585	)
Impact on fair value of 20% adverse change	(1,009		)	(1,118		)
Weighted-average option adjusted spread	7.61		%	7.83		%
Impact on fair value of 100 basis points adverse change	$	(306	)	$	(269	)
Impact on fair value of 200 basis points adverse change	(591		)	(518		)

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 are often highly inter-related and may not be linear. 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 would either magnify or counteract the impact of the initial change.

Other intangible assets

Other intangible assets are recorded at their fair value upon completion of a business combination or certain other transactions, and generally represent the value of customer relationships or arrangements. Subsequently, the Firm’s intangible assets with finite lives, including core deposit intangibles, purchased credit card relationships, and other intangible assets, are amortized over their useful lives in a manner that best reflects the economic benefits of the intangible asset. The $972 million decrease in other intangible assets during 2012 was due to $957 million in amortization, which included a $214 million impairment write-off of purchased credit card relationships and other credit card-related intangibles, as projected cash flows associated with a non-strategic credit card relationship within CCB had deteriorated.

The components of credit card relationships, core deposits and other intangible assets were as follows.

	2012						2011
	Gross amount(a)		Accumulated amortization(a)		Net carrying value		Gross amount		Accumulated amortization		Net carrying value
December 31, (in millions)
Purchased credit card relationships	$	3,775	$	3,480	$	295	$	3,826	$	3,224	$	602
Other credit card-related intangibles	850		621		229		844		356		488
Core deposit intangibles	4,133		3,778		355		4,133		3,539		594
Other intangibles(b)	2,390		1,034		1,356		2,467		944		1,523

(a) The decrease in the gross amount and accumulated amortization from December 31, 2011, was due to the removal of fully amortized assets.

(b) Includes 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.

December 31, (in millions)	2012		2011		2010
Purchased credit card relationships	$	309	$	295	$	355
Other credit card-related intangibles	265		106		111
Core deposit intangibles	239		285		328
Other intangibles	144		162		142
Total amortization expense	$	957	$	848	$	936

Future amortization expense

The following table presents estimated future amortization expense related to credit card relationships, core deposits and other intangible assets at December 31, 2012.

Year ended December 31, (in millions)	Purchased credit card relationships		Other credit card-related intangibles		Core deposit intangibles		Other intangibles		Total
2013	$	192	$	57	$	196	$	132	$	577
2014	91		49		102		116		358
2015	7		39		26		96		168
2016	4		34		14		89		141
2017	1		29		13		88		131

Impairment testing

The Firm’s intangible assets are tested for impairment annually or more often if events or changes in circumstances indicate that the asset might be impaired.

The impairment test for a finite-lived intangible asset compares the undiscounted cash flows associated with the use or disposition of the intangible asset to its carrying value. If the sum of the undiscounted cash flows exceeds its carrying value, then no impairment charge is recorded. If the sum of the undiscounted cash flows is less than its carrying value, then an impairment charge is recognized in amortization expense to the extent the carrying amount of the asset exceeds its fair value.

The impairment test for indefinite-lived intangible assets compares the fair value of the intangible asset to its carrying amount. If the carrying value exceeds the fair value, then an impairment charge is recognized in amortization expense for the difference.