JP Morgan Chase 2003 Annual Report Download - page 116

Notes to consolidated financial statements
J.P. M organ Chase & Co.
114 J.P. Morgan Chase & Co./ 2003 Annual Report
U.S. federal income taxes have not been provided on the undis-
tributed earnings of certain non-U.S. subsidiaries to the extent
such earnings have been reinvested abroad for an indefinite period
of time. For 2003, such earnings approximated $326 million on a
pre-tax basis. At December 31, 2003, the cumulative amount of
undistributed earnings in these subsidiaries approximated $2.3 bil-
lion. It is not practicable at this time to determine the income tax
liability that w ould result upon repatriation of these earnings.
The tax expense applicable to securities gains and losses for the
years 2003, 2002 and 2001 w as $477 million, $531 million and
$286 million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate
to the effective tax rate for the past three years is show n in the
following table:
Year ended December 31, 2003 2002 2001
Statutory U.S. federal tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:
U.S. state and local income taxes, net of
federal income tax benefit 1.6 11.6(a) 3.0
Tax-exempt income (2.7) (6.8) (5.8)
Non-U.S. subsidiary earnings (1.0) (3.2) (3.1)
General business credits (0.9) (3.5) (1.8)
Other, net 1.0 0.9 5.7
Effective tax rate 33.0% 34.0% 33.0%
(a) The increase in 2002 was principally attributable to the level of income in certain state
and local tax jurisdictions in 2002.
The follow ing table presents the U.S. and non-U.S. components
of income before income tax expense:
Year ended December 31, (in millions) 2003 2002 2001
U.S. $7,333 $1,834 $ 1,258
Non-U.S.(a) 2,695 685 1,308
Income before income tax expense $10,028 $2,519 $ 2,566
(a) For purposes of this table, non-U.S. income is defined as income generated from operations
located outside the United States.
sidiary’s total capital. JPM organ Chase and its affiliates w ere
w ell w ithin these limits throughout the year.
The principal sources of JPM organ Chase’s income (on a parent
company-only basis) are dividends and interest from JPM organ
Chase Bank and the other banking and nonbanking subsidiaries
of JPM organ Chase. In addition to dividend restrictions set
forth in statutes and regulations, the Federal Reserve Board, the
Office of the Comptroller of the Currency (“ OCC” ) and the
Federal Deposit Insurance Corporation (“ FDIC” ) have authority
under the Financial Institutions Supervisory Act to prohibit or to
limit the payment of dividends by the banking organizations
they supervise, including JPM organ Chase and its subsidiaries
that are banks or bank holding companies, if, in the banking
regulator’s opinion, payment of a dividend would constitute an
unsafe or unsound practice in light of the financial condition of
the banking organization.
At January 1, 2004 and 2003, JPM organ Chase’s bank sub-
sidiaries could pay, in the aggregate, $4.4 billion and $1.3 bil-
lion, respectively, in dividends to their respective bank holding
companies w ithout prior approval of their relevant banking reg-
ulators. Dividend capacity in 2004 w ill be supplemented by the
banks’ earnings during the year.
In compliance w ith rules and regulations established by U.S. and
non-U.S. regulators, as of December 31, 2003 and 2002, cash
in the amount of $3.5 billion and $2.1 billion, respectively, and
securities w ith a market value of $3.1 billion and $3.0 billion,
respectively, w ere segregated in special bank accounts for the
benefit of securities and futures brokerage customers.
Capital
There are tw o categories of risk-based capital: core capital
(referred to as Tier 1 capital) and supplementary capital (referred
to as Tier 2 capital). Tier 1 capital includes common stockhold-
ers’ equity, qualifying preferred stock and minority interest less
goodw ill and other adjustments. Tier 2 capital consists of pre-
ferred stock not qualifying as Tier 1, long-term debt and other
instruments qualifying as Tier 2, the aggregate allow ance for
credit losses up to a certain percentage of risk-w eighted assets,
less investments in certain subsidiaries. Under the risk-based
capital guidelines of the Federal Reserve Board, JPM organ Chase
is required to maintain minimum ratios of Tier 1 and total (Tier 1
plus Tier 2) capital to risk-w eighted assets, as well as minimum
leverage ratios (which are defined as Tier 1 capital to average
adjusted on-balance sheet assets). Failure to meet these mini-
mum requirements could result in actions taken by the Federal
Reserve Board. Bank subsidiaries also are subject to these capital
requirements by their respective primary regulators. M anage-
ment believes that as of December 31, 2003, JPM organ Chase
and each of its banking subsidiaries met all capital requirements
to w hich each w as subject and is not aware of any subsequent
events that w ould alter this classification. The Firm revised its
calculation of risk-w eighted assets during the third-quarter of
2003; capital ratios for periods prior to June 2003 have not
been recalculated.
Note 26
Restrictions on cash and
intercompany funds transfers
The Federal Reserve Board requires depository institutions to
maintain cash reserves w ith a Federal Reserve Bank. The average
amount of reserve balances deposited by JPM organ Chase’s
bank subsidiaries with various Federal Reserve Banks w as
approximately $2.6 billion in 2003 and $2.2 billion in 2002.
Restrictions imposed by federal law prohibit JPM organ Chase
and certain other affiliates from borrow ing from banking subsid-
iaries unless the loans are secured in specified amounts. Such
secured loans to JPM organ Chase or to other affiliates generally
are limited to 10% of the banking subsidiary’s total capital, as
determined by the risk-based capital guidelines; the aggregate
amount of all such loans is limited to 20% of the banking sub-
Note 25