JP Morgan Chase 2005 Annual Report Download - page 123

JPMorgan Chase & Co. /2005 Annual Report 121
Restrictions imposed by federal law prohibit JPMorgan Chase and certain
other affiliates from borrowing from banking subsidiaries unless the loans are
secured in specified amounts. Such secured loans to the Firm or to other
affiliates are generally 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 subsidiary’s total capital.
The principal sources of JPMorgan Chase’s income (on a parent company-only
basis) are dividends and interest from JPMorgan Chase Bank and the other
banking and nonbanking subsidiaries of JPMorgan Chase. In addition to
dividend restrictions set forth in statutes and regulations, the FRB, the OCC
and the 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 JPMorgan 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, 2006 and 2005, JPMorgan Chase’s bank subsidiaries could pay,
in the aggregate, $7.4 billion and $6.2 billion, respectively, in dividends to their
respective bank holding companies without prior approval of their relevant
banking regulators. Dividend capacity in 2006 will be supplemented by the
banks’ earnings during the year.
In compliance with rules and regulations established by U.S. and non-U.S.
regulators, as of December 31, 2005 and 2004, cash in the amount of
$6.4 billion and $4.3 billion, respectively, and securities with a fair value of
$2.1 billion and $2.7 billion, respectively, were segregated in special bank
accounts for the benefit of securities and futures brokerage customers.
Note 24 – Capital
There are two categories of risk-based capital: Tier 1 capital and Tier 2 capital.
Tier 1 capital includes common stockholders’ equity, qualifying preferred stock
and minority interest less goodwill and other adjustments. Tier 2 capital consists
of preferred stock not qualifying as Tier 1, subordinated long-term debt and
other instruments qualifying as Tier 2, and the aggregate allowance for credit
losses up to a certain percentage of risk-weighted assets. Total regulatory
capital is subject to deductions for investments in certain subsidiaries. Under
the risk-based capital guidelines of the FRB, JPMorgan Chase is required to
maintain minimum ratios of Tier 1 and Total (Tier 1 plus Tier 2) capital to risk-
weighted 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 minimum requirements could cause the FRB to take action. Bank
subsidiaries also are subject to these capital requirements by their respective
primary regulators. As of December 31, 2005 and 2004, JPMorgan Chase
and all of its banking subsidiaries were well-capitalized and met all capital
requirements to which each was subject.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was
signed into law. The Act creates a temporary incentive for U.S. companies to
repatriate accumulated foreign earnings at a substantially reduced U.S. effective
tax rate by providing a dividends received deduction on the repatriation of
certain foreign earnings to the U.S. taxpayer (the “repatriation provision”).
The new deduction is subject to a number of limitations and requirements.
In the fourth quarter of 2005, the Firm applied the repatriation provision to
$1.9 billion of cash from foreign earnings, resulting in a net tax benefit of
$55 million. The $1.9 billion of cash will be used in accordance with the Firm’s
domestic reinvestment plan pursuant to the guidelines set forth in the Act.
The tax expense (benefit) applicable to securities gains and losses for
the years 2005, 2004 and 2003 was $(536) million, $126 million and
$477 million, respectively.
A reconciliation of the applicable statutory U.S. income tax rate to the
effective tax rate for the past three years is shown in the following table:
Year ended December 31,(a) 2005 2004 2003
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 0.6(b) 2.1
Tax-exempt income (3.0) (4.1) (2.4)
Non-U.S. subsidiary earnings (1.4) (1.3) (0.7)
Business tax credits (3.6) (4.1) (0.9)
Other, net 2.0 1.8 (0.1)
Effective tax rate 30.6% 27.9% 33.0%
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(b) The lower rate in 2004 was attributable to changes in the proportion of income subject to
different state and local taxes.
The following table presents the U.S. and non-U.S. components of income
before income tax expense:
Year ended December 31, (in millions)(a) 2005 2004 2003
U.S. $ 8,959 $ 3,817 $ 7,333
Non-U.S.(b) 3,256 2,377 2,695
Income before income tax expense $ 12,215 $ 6,194 $ 10,028
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(b) For purposes of this table, non-U.S. income is defined as income generated from operations
located outside the United States of America.
Note 23 – Restrictions on cash and
intercompany funds transfers
JPMorgan Chase Bank’s business is subject to examination and regulation by
the Office of the Comptroller of the Currency (“OCC”). The Bank is a member
of the Federal Reserve System and its deposits are insured by the Federal
Deposit Insurance Corporation (“FDIC”).
The Federal Reserve Board requires depository institutions to maintain cash
reserves with a Federal Reserve Bank. The average amount of reserve balances
deposited by the Firm’s bank subsidiaries with various Federal Reserve Banks
was approximately $2.7 billion in 2005 and $3.8 billion in 2004.