JP Morgan Chase 2006 Annual Report Download - page 61

JPMorgan Chase & Co. / 2006 Annual Report 59
The following table shows the common dividend payout ratio based upon
reported Net income :
Common dividend payout ratio
Year ended December 31, 2006 2005 2004
Common dividend payout ratio 34% 57% 88%
For information regarding restrictions on JPMorgan Chase’s ability to pay divi-
dends, see Note 25 on page 129 of this Annual Report.
Stock repurchases
On March 21, 2006, the Board of Directors approved a stock repurchase pro-
gram that authorizes the repurchase of up to $8 billion of the Firm’s common
shares, which supercedes a $6 billion stock repurchase program approved in
2004. The $8 billion authorization includes shares to be repurchased to offset
issuances under the Firm’s employee stock-based plans. The actual number of
shares repurchased is subject to various factors, including: market conditions;
legal considerations affecting the amount and timing of repurchase activity; the
Firm’s capital position (taking into account goodwill and intangibles); internal
capital generation; and alternative potential investment opportunities. The
repurchase program does not include specific price targets or timetables; may
be executed through open market purchases or privately negotiated transac-
tions, or utilizing Rule 10b5-1 programs; and may be suspended at any time.
For the year ended December 31, 2006, under the respective stock repurchase
programs then in effect, the Firm repurchased a total of 91 million shares for $3.9
billion at an average price per share of $43.41. Under the original $6 billion stock
repurchase program, during 2005, the Firm repurchased 94 million shares for $3.4
billion at an average price per share of $36.46.
As of December 31, 2006, $5.2 billion of authorized repurchase capacity remained
under the current stock repurchase program.
The Firm has determined that it may, from time to time, enter into written trading
plans under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate
the repurchase of common stock in accordance with the repurchase program.
A Rule 10b5-1 repurchase plan would allow the Firm to repurchase shares
during periods when it would not otherwise be repurchasing common stock –
for example, during internal trading “black-out periods.” All purchases under a
Rule 10b5-1 plan must be made according to a predefined plan that is estab-
lished when the Firm is not aware of material nonpublic information.
For additional information regarding repurchases of the Firm’s equity securi-
ties, see Part II, Item 5, Market for registrant’s common equity, related stock-
holder matters and issuer purchases of equity securities, on page 11 of
JPMorgan Chase’s 2006 Form 10-K.
OFF–BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Special-purpose entities
JPMorgan Chase is involved with several types of off–balance sheet arrange-
ments, including special purpose entities (“SPEs”), lines of credit and loan
commitments. The principal uses of SPEs are to obtain sources of liquidity for
JPMorgan Chase and its clients by securitizing financial assets, and to create
other investment products for clients. These arrangements are an important
part of the financial markets, providing market liquidity by facilitating
investors’ access to specific portfolios of assets and risks. For example, SPEs
are integral to the markets for mortgage-backed securities, commercial paper
and other asset-backed securities.
The basic SPE structure involves a company selling assets to the SPE. The SPE
funds the purchase of those assets by issuing securities to investors. To insulate
investors from creditors of other entities, including the seller of assets, SPEs
are generally structured to be bankruptcy-remote.
JPMorgan Chase is involved with SPEs in three broad categories: loan securitizations,
multi-seller conduits and client intermediation. Capital is held, as deemed appropri-
ate, against all SPE-related transactions and related exposures, such as derivative
transactions and lending-related commitments. For further discussion of SPEs and
the Firm’s accounting for these types of exposures, see Note 1 on page 94, Note
14 on pages 114–118 and Note 15 on pages 118–120 of this Annual Report.
The Firm has no commitments to issue its own stock to support any SPE trans-
action, and its policies require that transactions with SPEs be conducted at
arm’s length and reflect market pricing. Consistent with this policy, no JPMorgan
Chase employee is permitted to invest in SPEs with which the Firm is involved
where such investment would violate the Firm’s Code of Conduct. These rules
prohibit employees from self-dealing and acting on behalf of the Firm in trans-
actions with which they or their family have any significant financial interest.
For certain liquidity commitments to SPEs, the Firm could be required to
provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A.
were downgraded below specific levels, primarily P-1, A-1 and F1 for Moody’s,
Standard & Poor’s and Fitch, respectively. The amount of these liquidity commit-
ments was $74.4 billion and $71.3 billion at December 31, 2006 and 2005,
respectively. Alternatively, if JPMorgan Chase Bank, N.A. were downgraded, the
Firm could be replaced by another liquidity provider in lieu of providing funding
under the liquidity commitment, or, in certain circumstances, could facilitate the
sale or refinancing of the assets in the SPE in order to provide liquidity.
Of the $74.4 billion in liquidity commitments to SPEs at December 31, 2006,
$74.0 billion was included in the Firm’s other unfunded commitments to extend
credit and asset purchase agreements, as shown in the table on the following
page. Of the $71.3 billion of liquidity commitments to SPEs at December 31,
2005, $38.9 billion was included in the Firm’s other unfunded commitments to
extend credit and asset purchase agreements. Of these commitments, $356 mil-
lion and $32.4 billion have been excluded from the table at December 31, 2006
and 2005, respectively, as the underlying assets of the SPEs have been included
on the Firm’s Consolidated balance sheets due to the consolidation of certain
multi-seller conduits as required under FIN 46R. The decrease from the 2005
year end is due to the deconsolidation during the 2006 second quarter of sever-
al multi-seller conduits administrated by the Firm. For further information, refer
to Note 15 on pages 118–120 of this Annual Report.
The Firm also has exposure to certain SPEs arising from derivative transactions;
these transactions are recorded at fair value on the Firm’s Consolidated balance
sheets with changes in fair value (i.e., mark-to-market (“MTM”) gains and losses)
recorded in Principal transactions. Such MTM gains and losses are not included in
the revenue amounts reported in the following table.
The following table summarizes certain revenue information related to consoli-
dated and nonconsolidated variable interest entities (“VIEs”) with which the
Firm has significant involvement, and qualifying SPEs (“QSPEs”). The revenue
reported in the table below primarily represents servicing and credit fee income.
For further discussion of VIEs and QSPEs, see Note 1, Note 14 and Note 15, on
pages 94, 114–118 and 118–120, respectively, of this Annual Report.
Revenue from VIEs and QSPEs
Year ended December 31,
(in millions) VIEs(c) QSPEs Total
2006 $ 209 $ 3,183 $ 3,392
2005(a) 222 2,940 3,162
2004(a)(b) 154 2,732 2,886
(a) Prior-period results have been restated to reflect current methodology.
(b) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
(c) Includes VIE-related revenue (i.e., revenue associated with consolidated and significant
nonconsolidated VIEs).