Goodwill and Other Intangible Assets

3 Months Ended

Mar. 31, 2011

Goodwill and Other Intangible Assets [Abstract]

NOTE 16 — GOODWILL AND OTHER INTANGIBLE ASSETS

For a discussion of accounting policies related to goodwill and other intangible assets, see Note 17 on pages 260–273 of JPMorgan Chase’s 2010 Annual Report.

Goodwill and other intangible assets consist of the following.


(in millions)	March 31, 2011		December 31, 2010

Goodwill	$	48,856	$	48,854
Mortgage servicing rights		13,093		13,649

Other intangible assets:
Purchased credit card relationships	$	820	$	897
Other credit card–related intangibles		582		593
Core deposit intangibles		806		879
Other intangibles		1,649		1,670

Total other intangible assets	$	3,857	$	4,039

Goodwill

The following table presents goodwill attributed to the business segments.


(in millions)	March 31, 2011		December 31, 2010

Investment Bank	$	5,249	$	5,278
Retail Financial Services		16,490		16,496
Card Services & Auto		14,564		14,522
Commercial Banking		2,864		2,866
Treasury & Securities Services		1,669		1,680
Asset Management		7,643		7,635
Corporate/Private Equity		377		377

Total goodwill	$	48,856	$	48,854

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


	Three months ended March 31,
(in millions)	2011			2010

Balance at January 1,^(a)	$	48,854		$	48,357
Changes during the period from:
Business combinations		(5	)		9
Dispositions		—			(19	)
Other^(b)		7			12

Balance at March 31,^(a)	$	48,856		$	48,359


(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.

Goodwill was not impaired at March 31, 2011, or December 31, 2010, nor was any goodwill written off due to impairment during the three month periods ended March 31, 2011 or 2010. During the three months ended March 31, 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 March 31, 2011.

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 revenues, 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 94–105 of this Form 10-Q.

In the first quarter of 2011, the Firm determined that the fair value of the MSR asset had declined, reflecting higher estimated future servicing costs related to enhanced servicing processes, particularly loan modification and foreclosure procedures, including costs to comply with Consent Orders entered into with the 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. These higher estimated future costs resulted in a $1.1 billion decrease in the fair value of the MSR asset during the three months ended March 31, 2011. This decrease partially offset by an increase in fair value due to the effects of higher market interest rates (which tend to decrease prepayments and therefore extend the expected life of the net servicing cash flows that comprise the MSR asset).

The decrease in the fair value of the MSR in the current quarter 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 in the row “Other changes in fair value.”

The following table summarizes MSR activity for the three months ended March 31, 2011 and 2010.


	Three months ended March 31,
(in millions, except where otherwise noted)	2011			2010

Fair value at January 1,	$	13,649		$	15,531
MSR activity
Originations of MSRs		757			689
Purchase of MSRs		1			14
Disposition of MSRs		—			—

Total net additions		758			703
Change in valuation due to inputs and assumptions^(a)		(751	)		(96	)
Other changes in fair value^(b)		(563	)		(607	)

Total change in fair value of MSRs^(c)		(1,314	)		(703	)

Fair value at March 31^(d)	$	13,093		$	15,531

Change in unrealized gains/(losses) included in income related to MSRs held at March 31	$	(751	)	$	(96	)

Contractual service fees, late fees and other ancillary fees included in income	$	1,025		$	1,132

Third-party mortgage loans serviced at March 31 (in billions)	$	963		$	1,084

Servicer advances, net at March 31 (in billions)^(e)	$	10.8		$	9.0


(a)		Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the valuation model.

(b)		Includes changes in MSR value due to modeled servicing portfolio runoff (i.e., amortization or time decay).

(c)		Includes changes related to commercial real estate of $(2) million for both the three months ended March 31, 2011 and 2010, respectively.

(d)		Includes $38 million and $39 million related to commercial real estate at March 31, 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 months ended March 31, 2011 and 2010.


	Three months ended March 31,
(in millions)	2011			2010

RFS mortgage fees and related income
Net production revenue:
Production revenue	$	679		$	433
Repurchase losses		(420	)		(432	)

Net production revenue		259			1

Net mortgage servicing revenue
Operating revenue:
Loan servicing revenue		1,052			1,107
Other changes in MSR asset fair value^(a)		(563	)		(605	)

Total operating revenue		489			502

Risk management:
Changes in MSR asset fair value due to inputs or assumptions in model^(b)		(751	)		(96	)
Derivative valuation adjustments and other		(486	)		248

Total risk management		(1,237	)		152

Total RFS net mortgage servicing revenue		(748	)		654

All other^(c)		2			3

Mortgage fees and related income	$	(487	)	$	658


(a)		Includes changes in the MSR value due to modeled servicing portfolio runoff (i.e., amortization or time decay).

(b)		Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the MSR valuation model.

(c)		Primarily represents risk management activities performed by the Chief Investment Office (“CIO”) in the Corporate sector.

The table below outlines the key economic assumptions used to determine the fair value of the Firm’s MSRs at March 31, 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)	March 31, 2011			December 31, 2010

Weighted-average prepayment speed assumption (“CPR”)		10.15	%		11.29	%
Impact on fair value of 10% adverse change	$	(727	)	$	(809	)
Impact on fair value of 20% adverse change		(1,407	)		(1,568	)

Weighted-average option adjusted spread		3.94	%		3.94	%
Impact on fair value of 100 basis points adverse change	$	(592	)	$	(578	)
Impact on fair value of 200 basis points adverse change		(1,136	)		(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 $182 million decrease in other intangible assets during the three months ended March 31, 2011, was predominantly due to $217 million in amortization.

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

March 31, 2011

December 31, 2010

Net

Gross

Accumulated

carrying

Gross

Accumulated

carrying

(in millions)

amount^(a)

amortization^(a)

value

amount

amortization

value

Purchased credit card relationships

3,829

3,009

820

5,789

4,892

897

Other credit card–related intangibles

858

276

582

907

314

593

Core deposit intangibles

4,132

3,326

806

4,280

3,401

879

Other intangibles

2,466

817

1,649

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.

Intangible assets of approximately $600 million consisting primarily of asset management advisory contracts, 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 March 31,
(in millions)	2011		2010

Purchased credit card relationships	$	80	$	97
All other intangibles:
Other credit card–related intangibles		26		26
Core deposit intangibles		72		83
Other intangibles		39		37

Total amortization expense	$	217	$	243

Future amortization expense

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


			Other credit
	Purchased credit		card related		Core deposit		Other
For the year: (in millions)	card relationships		intangibles		intangibles		intangibles		Total

2011	$	294	$	106	$	284	$	142	$	826
2012		254		109		240		135		738
2013		213		106		195		128		642
2014		110		105		100		111		426
2015		24		97		25		94		240

- Definition

Discloses the aggregate amount of goodwill and a description of intangible assets, may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain or loss on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss. This element may be used as a single block of text to include the entire intangible asset disclosure including data and tables.

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