JP Morgan Chase 2005 Annual Report Download - page 116

Notes to consolidated financial statements
JPMorgan Chase & Co.
114 JPMorgan Chase & Co. /2005 Annual Report
Note 15 – Goodwill and other intangible assets
Goodwill is not amortized but instead tested for impairment in accordance
with SFAS 142 at the reporting-unit segment, which is generally one level
below the six major reportable business segments (as described in Note 31
on pages 130–131 of this Annual Report); plus Private Equity (which is
included in Corporate). Goodwill is tested annually (during the fourth quarter)
or more often if events or circumstances, such as adverse changes in the busi-
ness climate, indicate there may be impairment. Intangible assets determined
to have indefinite lives are not amortized but instead are tested for impairment
at least annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test compares
the fair value of the indefinite-lived intangible asset to its carrying amount.
Other acquired intangible assets determined to have finite lives, such as core
deposits and credit card relationships, are amortized over their estimated useful
lives in a manner that best reflects the economic benefits of the intangible
asset. In addition, impairment testing is performed periodically on these
amortizing intangible assets.
Goodwill and other intangible assets consist of the following:
December 31, (in millions) 2005 2004
Goodwill $ 43,621 $ 43,203
Mortgage servicing rights 6,452 5,080
Purchased credit card relationships 3,275 3,878
December 31, (in millions) 2005 2004
All other intangibles:
Other credit card–related intangibles $ 124 $ 272
Core deposit intangibles 2,705 3,328
All other intangibles 2,003 2,126
Total All other intangible assets $ 4,832 $ 5,726
Goodwill
As of December 31, 2005, goodwill increased by $418 million compared with
December 31, 2004, principally in connection with the establishment of the
business partnership with Cazenove, as well as the acquisitions of Vastera,
Neovest and the Sears Canada credit card business. These increases to
Goodwill were partially offset by the deconsolidation of Paymentech. Goodwill
was not impaired at December 31, 2005 or 2004, nor was any goodwill
written off due to impairment during the years ended December 31, 2005,
2004 or 2003.
Goodwill attributed to the business segments was as follows:
Dec. 31, Dec. 31, Goodwill resulting
(in millions) 2005 2004 from the Merger
Investment Bank $ 3,531 $ 3,309 $ 1,179
Retail Financial Services 14,991 15,022 14,576
Card Services 12,984 12,781 12,802
Commercial Banking 2,651 2,650 2,599
Treasury & Securities Services 2,062 2,044 465
Asset & Wealth Management 7,025 7,020 2,539
Corporate (Private Equity) 377 377 —
Total goodwill $ 43,621 $ 43,203 $ 34,160
Mortgage servicing rights
JPMorgan Chase recognizes as intangible assets mortgage servicing rights, which
represent the right to perform specified residential mortgage servicing activities
for others. MSRs are either purchased from third parties or retained upon sale or
securitization of mortgage loans. Servicing activities include collecting principal,
interest, and escrow payments from borrowers; making tax and insurance
payments on behalf of the borrowers; monitoring delinquencies and executing
foreclosure proceedings; and accounting for and remitting principal and interest
payments to the investors of the mortgage-backed securities.
The amount capitalized as MSRs represents the amount paid to third parties to
acquire MSRs or is based on fair value, if retained upon the sale or securitization
of mortgage loans. The Firm estimates the fair value of MSRs using a
discounted future cash flow model. The model considers portfolio characteristics,
contractually specified servicing fees, prepayment assumptions, delinquency
rates, late charges, other ancillary revenues and costs to service, as well as
other economic factors.
During the fourth quarter of 2005, the Firm enhanced its valuation of MSRs
by utilizing an option-adjusted spread (“OAS”) valuation approach. An OAS
approach projects MSR cash flows over multiple interest rate scenarios in
conjunction with the Firm’s proprietary prepayment model, and then discounts
these cash flows at risk-adjusted rates. Prior to the fourth quarter of 2005,
MSRs were valued using cash flows and discount rates determined by a “static”
or single interest rate path valuation model. The initial valuation of MSRs
under OAS did not have a material impact on the Firm’s financial statements.
The Firm compares fair value estimates and assumptions to observable market
data where available and to recent market activity and actual portfolio
experience. Management believes that the assumptions used to estimate fair
values are supportable and reasonable.
The Firm accounts for its MSRs at the lower of cost or fair value, in accordance
with SFAS 140. MSRs are amortized as a reduction of the actual servicing
income received in proportion to, and over the period of, the estimated future
net servicing income stream of the underlying mortgage loans. For purposes of
evaluating and measuring impairment of MSRs, the Firm stratifies the portfolio
on the basis of the predominant risk characteristics, which are loan type and
interest rate. Any indicated impairment is recognized as a reduction in revenue
through a valuation allowance, which represents the extent that the carrying
value of an individual stratum exceeds its estimated fair value.