NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS
The table below displays the components of goodwill, other intangible assets and MSRs as of December 31, 2013 and 2012. Goodwill is presented separately on our consolidated balance sheets. Other intangible assets and MSRs are included in other assets on our consolidated balance sheets.
Table 7.1: Components of Goodwill and Other Intangible Assets
| December 31, | ||||||||
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(Dollars in millions) |
2013 | 2012 | ||||||
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Goodwill |
$ | 13,978 | $ | 13,904 | ||||
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Other intangible assets: |
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Purchased credit card relationship intangibles(1) |
1,341 | 1,864 | ||||||
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Core deposit intangibles |
331 | 496 | ||||||
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Other(2) |
177 | 211 | ||||||
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Total other intangible assets |
1,849 | 2,571 | ||||||
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Total goodwill and other intangible assets |
$ | 15,827 | $ | 16,475 | ||||
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MSRs: |
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Consumer MSRs(3) |
73 | 55 | ||||||
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Commercial MSRs(4) |
132 | — | ||||||
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Total MSRs |
$ | 205 | $ | 55 | ||||
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| (1) |
During 2013, purchased credit card relationship intangibles with a net carrying value of $89 million related to the Best Buy loan portfolio, which was acquired in the 2012 U.S. card acquisition and sold in 2013. See “Note 4—Loans” for further discussion of the Portfolio Sale. |
| (2) |
Consists of brokerage relationship intangibles, partnership and other contract intangibles, trademark/name intangibles and other intangibles. Also includes certain indefinite-lived intangibles of $4 million as of December 31, 2013. |
| (3) |
Represent MSRs related to our consumer business that are carried at fair value on our consolidated financial statements. |
| (4) |
Represent MSRs related to our commercial business that are subsequently measured under the amortization method and periodically assessed for impairment. We recorded $3 million amortization expense for the year ended December 31, 2013. None of these MSRs were impaired and no valuation allowance was recorded as of December 31, 2013. |
Goodwill
The following table presents goodwill attributable to each of our business segments as of December 31, 2013 and 2012.
Table 7.2: Goodwill Attributable to Business Segments
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(Dollars in millions) |
Credit Card |
Consumer Banking |
Commercial Banking |
Total | ||||||||||||
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Balance as of December 31, 2011 |
$ | 4,691 | $ | 4,583 | $ | 4,318 | $ | 13,592 | ||||||||
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Acquisitions |
304 | 0 | 0 | 304 | ||||||||||||
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Other adjustments |
8 | 0 | 0 | 8 | ||||||||||||
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Balance as of December 31, 2012 |
$ | 5,003 | $ | 4,583 | $ | 4,318 | $ | 13,904 | ||||||||
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Acquisitions |
0 | 3 | 70 | 73 | ||||||||||||
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Other adjustments |
2 | (1 | ) | 0 | 1 | |||||||||||
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Balance as of December 31, 2013 |
$ | 5,005 | $ | 4,585 | $ | 4,388 | $ | 13,978 | ||||||||
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Goodwill was not impaired at December 31, 2013 or 2012, nor was any goodwill written off due to impairment during 2013, 2012 or 2011. The goodwill impairment test, performed at October 1 of each year, is a two-step test. The first step identifies whether there is potential impairment by comparing the fair value of a reporting unit to the carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any impairment loss.
The fair value of reporting units is calculated using a discounted cash flow model, a form of the income approach. The model projects cash flows based on each reporting unit’s internal forecast and uses the perpetuity growth method to calculate terminal values. These cash flows and terminal values are then discounted using appropriate discount rates, which are largely based on our external cost of equity with adjustments for risk inherent in each reporting unit. Cash flows are adjusted, as necessary, in order to maintain each reporting unit’s equity capital requirements. Our discounted cash flow analysis requires management to make judgments about future loan and deposit growth, revenue growth, credit losses, and capital rates. Discount rates used in 2013 for the reporting units ranged from 8.0% to 12.5%. The key inputs into the discounted cash flow analysis were consistent with market data, where available, indicating that assumptions used were within a reasonable range of observable market data. Based on our analysis, fair value exceeded the carrying amount for all reporting units as of our annual testing date, therefore, the second step of impairment testing was unnecessary.
As part of the annual goodwill impairment test, we also assess our market capitalization based on the average market price relative to the aggregate fair value of our reporting units and determined that any excess fair value in our reporting units at that time could be attributed to a reasonable control premium compared to historical control premiums seen in the industry.
We calculate the carrying values of our reporting units using an economic capital approach based on each reporting unit’s specific regulatory capital requirements (reflective of the final Basel III rules released during 2013) and risks. Total reporting unit carrying values for the October 1, 2013 annual goodwill impairment test were $33.6 billion, compared to total equity of $41.8 billion as of September 30, 2013. The $8.2 billion remaining equity is primarily attributable to the following items: capital allocated to our Other segment; preferred stock; and capital that was reserved for dividends and share buy-backs that occurred during the fourth quarter of 2013. The remaining equity, which represented approximately 5% of our total equity, is reserved for potential future capital needs.
We will continue to regularly monitor our market capitalization and capital allocations in 2014, overall economic conditions and other events or circumstances that may result in an impairment of goodwill in the future.
Other Intangible Assets
In connection with our acquisitions, we recorded intangible assets which include purchased credit card relationship intangibles, core deposit intangibles, brokerage relations intangibles, partnership contract intangibles, other contract intangibles, trade mark/ name intangibles and other intangibles, which are subject to amortization. At acquisition, the purchased credit card relationship intangibles reflect the estimated value of existing credit card holder relationships and the core deposit intangibles reflect the estimated value of deposit relationships. None of our intangibles were impaired and no valuation allowance was recorded as of December 31, 2013 and 2012.
The following table summarizes our intangible assets subject to amortization as of December 31, 2013 and 2012:
Table 7.3: Intangible Assets
| December 31, 2013 | ||||||||||||||||
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(Dollars in millions) |
Carrying Amount of Assets |
Accumulated Amortization (1) |
Net Carrying Amount |
Remaining Amortization Period |
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Purchased credit card relationship intangibles |
$ | 2,125 | $ | (784 | ) | $ | 1,341 | 6.9 years | ||||||||
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Core deposit intangibles |
1,771 | (1,440 | ) | 331 | 4.7 years | |||||||||||
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Other(2) |
312 | (139 | ) | 173 | 10.2 years | |||||||||||
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Total. |
$ | 4,208 | $ | (2,363 | ) | $ | 1,845 | 6.8 years | ||||||||
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| December 31, 2012 | ||||||||||||||||
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(Dollars in millions) |
Carrying Amount of Assets |
Accumulated Amortization |
Net Carrying Amount |
Remaining Amortization Period |
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Purchased credit card relationship intangibles |
$ | 2,242 | $ | (378 | ) | $ | 1,864 | 7.8 years | ||||||||
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Core deposit intangibles |
1,771 | (1,275 | ) | 496 | 5.6 years | |||||||||||
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Other(2) |
354 | (143 | ) | 211 | 10.3 years | |||||||||||
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Total |
$ | 4,367 | $ | (1,796 | ) | $ | 2,571 | 7.6 years | ||||||||
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| (1) |
During 2013, accumulated amortization was reduced by $104 million primarily related to purchased credit card relationships (“PCCR”) intangibles related to the Best Buy loan portfolio which was sold in 2013 and certain fully amortized intangible assets that were removed from our balance sheet. See “Note 4—Loans” for further discussion of the Portfolio Sale. |
| (2) |
Consists of brokerage relationship intangibles, partnership and other contract intangibles, trademark/name intangibles and other intangibles. |
Intangible assets are typically amortized over their respective estimated useful lives on either a straight-line or an accelerated basis. The following table summarizes the actual amortization expense recorded for the years ended December 31, 2013, 2012 and 2011 and the estimated future amortization expense for intangible assets as of December 31, 2013:
Table 7.4: Amortization Expense
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(Dollars in millions) |
Amortization Expense |
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Actual for the year ended December 31, |
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2011 |
$ | 222 | ||
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2012 |
609 | |||
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2013 |
671 | |||
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Estimated future amounts for the year ended December 31, |
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2014 |
$ | 532 | ||
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2015 |
430 | |||
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2016 |
333 | |||
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2017 |
239 | |||
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2018 |
154 | |||
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Thereafter |
157 | |||
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Total estimated future amounts |
$ | 1,845 | ||
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