1
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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
J.P. MORGAN & CO. INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-5885 13-2625764
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
60 Wall Street, New York, NY 10260-0060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 483-2323
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes..X.. No.....
Number of shares outstanding of each of the registrant's classes of common stock
at April 28, 2000:
Common Stock, $2.50 Par Value 162,338,748 Shares
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2
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following financial statement information as of and for the three months
ended March 31, 2000, is set forth within this document on the pages indicated:
Page(s)
-------
Three month Consolidated statement of income
J.P. Morgan & Co. Incorporated .................................... 3
Consolidated balance sheet
J.P. Morgan & Co. Incorporated .................................... 4
Consolidated statement of changes in stockholders' equity
J.P. Morgan & Co. Incorporated .................................... 5
Consolidated statement of cash flows
J.P. Morgan & Co. Incorporated .................................... 6
Consolidated statement of condition
Morgan Guaranty Trust Company of New York ......................... 7
Notes to Consolidated financial statements
J.P. Morgan & Co. Incorporated .................................... 8-23
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial highlights .............................................. 24
Segment results .................................................. 24-25
Financial review .................................................. 26
Capital and Risk management ....................................... 27-33
Consolidated average balances and net interest earnings .................... 34-35
Cross-border and local outstandings under the regulatory basis ............. 36
PART II -- OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 37
Item 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 38
SIGNATURES ............................................................. 39
3
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
In millions, except share data
Three months ended
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March 31 March 31 Increase/ December 31 Increase/
2000 1999 (Decrease) 1999 (Decrease)
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NET INTEREST REVENUE
Interest revenue $3,031 $ 2,757 $ 274 $ 2,717 $314
Interest expense 2,578 2,368 210 2,379 199
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Net interest revenue 453 389 64 338 115
Provision for loan losses -- -- -- -- --
Reversal of provision for loan losses -- -- -- (25) 25
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Net interest revenue after loan loss
provisions 453 389 64 363 90
NONINTEREST REVENUES
Trading revenue 950 1,134 (184) 754 196
Advisory and underwriting fees 543 390 153 385 158
Investment management fees 276 246 30 259 17
Fees and commissions 284 214 70 235 49
Investment securities revenue/(loss) 157 (41) 198 131 26
Other revenue 173 159 14 62 111
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Total noninterest revenues 2,383 2,102 281 1,826 557
Total revenues, net 2,836 2,491 345 2,189 647
OPERATING EXPENSES
Employee compensation and benefits 1,300 1,096 204 937 363
Net occupancy 82 82 -- 55 27
Technology and communications 258 247 11 240 18
Other expenses 215 142 73 185 30
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Total operating expenses 1,855 1,567 288 1,417 438
Income before income taxes 981 924 57 772 209
Income taxes 353 324 29 263 90
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Net income 628 600 28 509 119
PER COMMON SHARE
Net income:
Basic $ 3.62 $ 3.24 $0.38 $ 2.83 $0.79
Diluted 3.37 3.01 0.36 2.63 0.74
Dividends declared 1.00 0.99 0.01 1.00 --
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See notes to consolidated financial statements.
4
CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated
March 31 December 31
In millions, except share data 2000 1999
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ASSETS
Cash and due from banks $ 1,901 $ 2,463
Interest-earning deposits with banks 5,198 2,345
Debt investment securities available-for-sale 8,600 14,286
Equity investment securities 1,938 1,734
Trading account assets:
U.S. and foreign governments 59,646 42,663
Corporate debt and equity and other securities 32,227 31,271
Derivative receivables 47,194 43,658
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Total trading account assets 139,067 117,592
Securities purchased under agreements to resell ($42,491 at March 2000 and $34,470 at December 1999)
and federal funds sold 42,916 35,970
Securities borrowed 33,690 34,716
Loans, net of allowance for loan losses of $290 at March 2000 and $281 at December 1999 26,870 26,568
Accrued interest and accounts receivable 6,979 10,119
Premises and equipment, net of accumulated depreciation of $1,325 at March 2000 and
$1,319 at December 1999 2,005 1,997
Other assets 15,398 13,108
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Total assets 284,562 260,898
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LIABILITIES
Deposits (including interest-bearing deposits of $45,715 at March 2000 and $43,922 at December 1999) 47,334 45,319
Trading account liabilities:
U.S. and foreign governments 25,146 19,378
Corporate debt and equity and other securities 18,514 16,063
Derivative payables 46,235 44,976
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Total trading account liabilities 89,895 80,417
Securities sold under agreements to repurchase ($73,811 at March 2000 and $58,950 at December 1999)
and federal funds purchased 74,641 59,693
Commercial paper 8,734 11,854
Other liabilities for borrowed money 10,140 10,258
Accounts payable and accrued expenses 9,977 10,621
Long-term debt not qualifying as risk-based capital 20,126 19,048
Other liabilities, including allowance for credit losses of $126 at March 2000 and $125 at December 1999 5,883 5,897
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266,730 243,107
Liabilities qualifying as risk-based capital:
Long-term debt 5,059 5,202
Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 1,150
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Total liabilities 272,939 249,459
STOCKHOLDERS' EQUITY
Preferred stock (authorized shares: 10,000,000)
Adjustable rate cumulative preferred stock, $100 par value (issued and outstanding: 2,444,300) 244 244
Variable cumulative preferred stock, $1,000 par value (issued and outstanding: 250,000) 250 250
Fixed cumulative preferred stock, $500 par value (issued and outstanding: 400,000) 200 200
Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,998,455 at March 2000
and December 1999) 502 502
Capital surplus 1,247 1,249
Common stock issuable under stock award plans 1,951 2,002
Retained earnings 11,354 10,908
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 119 44
Foreign currency translation, net of taxes (16) (18)
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15,851 15,381
Less: treasury stock (38,495,608 shares at March 2000 and 36,200,897 shares at December 1999) at cost 4,228 3,942
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Total stockholders' equity 11,623 11,439
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Total liabilities and stockholders' equity 284,562 260,898
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See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
J.P. Morgan & Co. Incorporated
2000 1999
------------------------ -----------------------
Compre- Compre-
Stockholders' hensive Stockholders' hensive
In millions: Three months ended March 31 Equity Income Equity Income
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PREFERRED STOCK
Adjustable-rate cumulative preferred stock balance, January 1 and
March 31 $ 244 $ 244
Variable cumulative preferred stock balance, January 1 and
March 31 250 250
Fixed cumulative preferred stock, January 1 and March 31 200 200
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Total preferred stock, March 31 694 694
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COMMON STOCK
Balance, January 1 and March 31 502 502
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CAPITAL SURPLUS
Balance, January 1 1,249 1,252
Shares issued or distributed under dividend reinvestment plan,
various employee benefit plans, and income tax benefits
associated with stock options (2) (3)
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Balance, March 31 1,247 1,249
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COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 2,002 1,460
Deferred stock awards, net (51) (21)
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Balance, March 31 1,951 1,439
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RETAINED EARNINGS
Balance, January 1 10,908 9,614
Net income 628 $ 628 600 $ 600
Dividends declared on preferred stock (9) (9)
Dividends declared on common stock (163) (175)
Dividend equivalents on common stock issuable (10) (8)
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Balance, March 31 11,354 10,022
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized gains on investment securities:
Balance, net of taxes, January 1 44 147
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Net unrealized gains/(losses) arising during the period,
before taxes ($109 in 2000 and ($149) in 1999, net of taxes) 176 (247)
Reclassification adjustment for net (gains)/losses included in net income,
before taxes ($35 in 2000 and ($15) in 1999, net of taxes) (55) 26
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Change in net unrealized gains/(losses) on investment securities,
before taxes 121 (221)
Income tax (expense)/benefit (46) 84
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Change in net unrealized gains/(losses) on investment securities,
net of taxes 75 75 (137) (137)
Balance, net of taxes, March 31 119 10
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Foreign currency translation:
Balance, net of taxes, January 1 (18) (46)
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Translation adjustment arising during the period, before taxes -- --
Income tax benefit/(expense) 2 (1)
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Translation adjustment arising during the period, net of taxes 2 2 (1) (1)
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Balance, net of taxes, March 31 (16) (47)
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Total accumulated other comprehensive income,
net of taxes, March 31 103 (37)
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LESS: TREASURY STOCK
Balance, January 1 3,942 2,362
Purchases 601 109
Shares issued/distributed, primarily related to various employee benefit plans (315) (232)
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Balance, March 31 4,228 2,239
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TOTAL STOCKHOLDERS' EQUITY 11,623 11,630
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TOTAL COMPREHENSIVE INCOME 705 462
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See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENT OF CASH FLOWS
J.P. Morgan & Co. Incorporated
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In millions Three months ended
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March 31 March 31
2000 1999
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NET INCOME $ 628 $ 600
Adjustments to reconcile to cash provided by operating activities:
Noncash items: provisions for credit losses, depreciation, amortization,
deferred income taxes, stock award plans, and write-downs on investment
securities 608 452
Net (increase)/decrease in assets:
Trading account assets (21,531) (6,045)
Securities purchased under agreements to resell (8,029) 3,340
Securities borrowed 1,026 (8,458)
Loans held for sale 176 1,090
Accrued interest and accounts receivable 3,138 1,464
Net increase/(decrease) in liabilities:
Trading account liabilities 9,434 5,817
Securities sold under agreements to repurchase 14,853 (1,063)
Accounts payable and accrued expenses (861) (2,041)
Other changes in operating assets and liabilities, net (188) (1,191)
Net investment securities losses/(gains), excluding SBICs, included in cash
flows from investing activities (58) 18
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CASH (USED IN) OPERATING ACTIVITIES (804) (6,017)
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Net (increase) decrease in interest-earning deposits with banks (2,857) 181
Debt investment securities:
Proceeds from sales 6,040 13,202
Proceeds from maturities, calls, and mandatory redemptions 865 2,762
Purchases (1,155) (12,175)
Net decrease (increase) in federal funds sold 1,075 (1,055)
Net (increase) in loans (497) (1,879)
Payments for premises and equipment (53) (97)
Other changes, net (1,415) 204
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CASH PROVIDED BY INVESTING ACTIVITIES 2,003 1,143
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Net increase (decrease) in noninterest-bearing deposits 223 (408)
Net increase in interest-bearing deposits 1,762 2,131
Net increase (decrease) in federal funds purchased 87 (410)
Net (decrease) increase in commercial paper (3,120) 2,896
Other liabilities for borrowed money proceeds 2,201 2,377
Other liabilities for borrowed money payments (3,136) (3,910)
Long-term debt proceeds 1,621 3,119
Long-term debt payments (520) (2,194)
Capital stock issued or distributed 30 44
Capital stock purchased (601) (109)
Dividends paid (176) (182)
Other changes, net (128) 1,782
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CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,757) 5,136
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Effect of exchange rate changes on cash and due from banks (4) (15)
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(DECREASE) INCREASE IN CASH AND DUE FROM BANKS (562) 247
Cash and due from banks at December 31, 1999 and 1998 2,463 1,203
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Cash and due from banks at March 31, 2000 and 1999 1,901 1,450
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Cash disbursements made for:
Interest $ 2,860 $ 2,348
Income taxes 193 190
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See notes to consolidated financial statements.
7
CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York
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March 31 December 31
In millions, except share data 2000 1999
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ASSETS
Cash and due from banks $ 1,769 $ 2,382
Interest-earning deposits with banks 5,094 2,266
Debt investment securities available-for-sale 2,503 4,992
Trading account assets 97,091 84,786
Securities purchased under agreements to resell and federal funds sold 18,803 19,094
Securities borrowed 10,188 9,700
Loans, net of allowance for loan losses of $289 at March 2000 and $280 at December 1999 25,126 26,072
Accrued interest and accounts receivable 5,728 4,426
Premises and equipment, net of accumulated depreciation of $1,125 at March 2000 and
$1,113 at December 1999 1,785 1,810
Other assets 14,885 12,138
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Total assets 182,972 167,666
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LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 912 907
In offices outside the U.S. 721 501
Interest-bearing deposits:
In offices in the U.S. 3,010 4,256
In offices outside the U.S. 44,476 42,052
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Total deposits 49,119 47,716
Trading account liabilities 79,141 72,066
Securities sold under agreements to repurchase and federal funds purchased 18,198 13,610
Other liabilities for borrowed money 7,214 5,482
Accounts payable and accrued expenses 6,787 6,310
Long-term debt not qualifying as risk-based capital (includes $954 at March 2000 and
$727 at December 1999 of notes payable to J.P. Morgan) 6,050 6,224
Other liabilities, including allowance for credit losses of $126 at March 2000
and $125 at December 1999 2,913 2,719
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169,422 154,127
Long-term debt qualifying as risk-based capital (includes $2,853 at March 2000 and
December 1999 of notes payable to J.P. Morgan) 2,891 2,944
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Total liabilities 172,313 157,071
STOCKHOLDER'S EQUITY
Preferred stock, $100 par value (authorized shares: 2,500,000) -- --
Common stock, $25 par value (authorized shares: 11,000,000; issued and
outstanding 10,599,027) 265 265
Surplus 3,305 3,305
Undivided profits 7,069 6,975
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 35 67
Foreign currency translation, net of taxes (15) (17)
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Total stockholder's equity 10,659 10,595
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Total liabilities and stockholder's equity 182,972 167,666
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Member of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
See notes to consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan & Co. Incorporated (J.P. Morgan) is the holding company for a group
of subsidiaries that provide a range of financial services.
We serve a broad client base that includes corporations, governments,
institutions, and individuals. We also enter into transactions for our own
account.
J.P. Morgan and its subsidiaries use accounting and reporting policies and
practices that conform with U.S. generally accepted accounting principles.
Basis of presentation
Our consolidated financial statements include the accounts of J.P. Morgan and of
subsidiaries in which we have more than 50% ownership. All material intercompany
accounts and transactions are eliminated during consolidation.
For companies in which we have significant influence over operating and
financing decisions (generally defined as owning a voting or economic interest
of 20% to 50%), we use the equity method of accounting. These investments are
included in Other assets, and our share of income or loss is included in Other
revenue, with the exception of such investments held in our Equity Investments
segment, where our share of income or loss is recorded in Investment securities
revenue.
Assets that we hold in an agency or fiduciary capacity are not assets of J.P.
Morgan. They are therefore not included in our "Consolidated balance sheet."
The financial information as of and for the periods ended March 31, 2000 and
1999 is unaudited. All adjustments which, in the opinion of management, are
necessary for a fair presentation have been made and were of a normal, recurring
nature. These unaudited financial statements should be read in conjunction with
the audited financial statements included in J.P. Morgan's Annual report on Form
10-K for the year ended December 31, 1999. The nature of J.P. Morgan's business
is such that the results of any interim period are not necessarily indicative of
results for a full year. Certain prior year amounts have been reclassified to
conform with the current presentation.
Accounting developments
Accounting for derivative instruments and hedging activities
In June 1998 the FASB issued SFAS No. 133, which will require us to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through earnings. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings or be recognized in Other
comprehensive income until the hedged item affects earnings. If the change in
fair value or cash flows of a derivative designated as a hedge is not
effectively offset, as defined, by the change in value or cash flows of the item
it is hedging, this difference will be immediately recognized in earnings. Based
on our current hedging strategies, the activities that would be most affected by
the new standard would be those of our Proprietary Investing and Trading
segment, which uses derivatives to hedge its investment portfolio, deposits, and
issuance of debt, as well as those in our Credit Portfolio segment, which uses
credit derivatives to hedge credit risk, and to a lesser extent, other
derivatives to hedge interest rate risk.
Pursuant to SFAS No. 137, we are required to adopt SFAS No. 133 effective
January 1, 2001. At the time these financial statements were issued, the FASB
was preparing to issue an amendment to SFAS No. 133. A final amendment is not
expected to be issued until June 2000. As such, we cannot estimate the impact of
SFAS No. 133 on our earnings and financial position until the final rules are
available.
9
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying value and fair value of J.P. Morgan's
financial instruments as of March 31, 2000 and December 31, 1999 in accordance
with SFAS No. 107. Accordingly, certain amounts which are not considered
financial instruments, including premises and equipment as well as investments
under the equity method of accounting, are excluded from the table. Refer to
note 1, "Summary of significant accounting policies," of our 1999 Annual report
for detailed information on how we estimate the fair value of financial
instruments.
March 31, December 31,
2000 1999
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Carrying Fair Appreciation / Carrying Fair Appreciation /
In billions value value (Depreciation) value value (Depreciation)
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FAIR VALUE THROUGH EARNINGS
Financial assets:
Trading account assets:
Cash securities $91.9 $91.9 $ -- $73.9 $73.9 $ --
Derivative receivables 47.2 47.2 -- 43.7 43.7 --
Equity investments - SBICs 0.7 0.7 -- 0.6 0.6 --
Financial liabilities:
Trading account liabilities:
Cash securities 43.7 43.7 -- 35.4 35.4 --
Derivative payables 46.2 46.2 -- 45.0 45.0 --
FAIR VALUE THROUGH EQUITY
Financial assets:
Debt investment securities 8.6 8.6 -- 14.3 14.3 --
Equity investments - marketable securities 0.6 0.6 -- 0.6 0.6 --
CARRIED AT COST (APPROXIMATES FAIR VALUE)
Financial assets:
Securities purchased under agreements to resell and
federal funds sold 42.9 42.9 -- 36.0 36.0 --
Securities borrowed 33.7 33.7 -- 34.7 34.7 --
Loans, net 8.4 8.4 -- 8.2 8.2 --
Other financial assets, including cash and due from
banks, accrued interest and accounts receivable, and
other assets 15.2 15.2 -- 17.8 17.8 --
Financial liabilities:
Noninterest-bearing deposits 1.6 1.6 -- 1.4 1.4 --
Securities sold under agreements to repurchase and
federal funds purchased 74.6 74.6 -- 59.7 59.7 --
Other financial liabilities, including securities lent,
accounts payable and other liabilities 18.7 18.7 -- 18.7 18.7 --
CARRIED AT COST
Financial assets:
Interest-earnings deposits with banks 5.2 5.2 -- 2.3 2.3 --
Loans, net 18.5 18.6 0.1 18.3 18.4 0.1
Related derivatives -- -- -- -- 0.1 0.1
Equity investments - nonmarketable securities 0.7 0.8 0.1 0.5 0.6 0.1
Other financial assets 7.6 7.6 -- 6.4 6.4 --
Financial liabilities:
Interest-bearing deposits 45.7 45.9 (0.2) 43.9 44.2 (0.3)
Related derivatives -- (0.2) 0.2 -- (0.1) 0.1
Commercial paper 8.7 8.7 -- 11.9 11.9 --
Other liabilities for borrowed money 6.9 6.9 -- 7.2 7.2 --
Long-term debt 25.2 25.0 0.2 24.3 24.1 0.2
Related derivatives -- 0.3 (0.3) -- 0.3 (0.3)
Other financial liabilities -- -- -- 0.7 0.7 --
Allowance - lending commitments 0.1 -- 0.1 0.1 -- 0.1
Company-obligated mandatorily redeemable preferred
securities of subsidiaries 1.2 1.1 0.1 1.2 1.1 0.1
Related derivatives -- 0.1 (0.1) -- 0.1 (0.1)
Lending commitments -- (0.2) (0.2) -- (0.2) (0.2)
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Net depreciation before considering income taxes -- (0.1)
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10
3. SEGMENTS
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in assessing
performance. In accordance with SFAS No. 131, we have presented results based on
the segments as reviewed separately by the chief operating decision maker, our
chairman and chief executive officer, as well as other members of senior
management. Each segment is defined by the products and services it provides
globally to our clients or the activities it undertakes solely for our own
account.
J.P. Morgan's segments, or activities, are Investment Banking, Equities,
Interest Rate and Foreign Exchange Markets, Credit Markets, Credit Portfolio,
Asset Management Services, Equity Investments, and Proprietary Investing and
Trading. In addition to the activities of our proprietary positioning group, the
Proprietary Investing and Trading segment comprises the following separately
managed investments: a proprietary emerging markets portfolio, a credit
investment securities portfolio, and our investment in Long-Term Capital
Management, L.P. - the first two of these have been discontinued and our
remaining investment in Long-Term Capital Management, L.P. was substantially
repaid in the quarter.
The assessment of segment performance by senior management includes a review for
each segment of pretax economic value added, pretax income, revenues, and
expenses, as well as related trends among these items. We define economic value
added (EVA) as operating income, adjusted to reflect certain segments on a total
return basis, less preferred stock dividends and a charge for the cost of equity
capital. At the business level, EVA is currently evaluated on a pretax basis,
while at the firm level EVA is assessed after the impact of taxes. To arrive at
the charge for equity capital for each segment, we multiply its allocated
required economic capital by its market-based cost of equity (or hurdle rate),
with the exception of our Credit Portfolio segment whose cost of equity is based
on market pricing for credit risk. The cost of equity for each business activity
is separately determined from observable market returns of publicly held
investments. To arrive at the charge for equity capital for J.P. Morgan
consolidated, we multiply the firm's equity by its market-based cost of equity,
which is currently estimated at 10.5%.
Our management reporting system and policies were used to determine income
(revenues minus expenses) attributable to each segment. Earnings on
stockholders' equity were allocated based on management's estimate of the
economic capital of each segment. Overhead, which represents costs associated
with various support functions that exist for the benefit of the firm as a
whole, is allocated to each segment based on that segment's expenses.
Transactions between segments are recorded within segment results as if
conducted with a third party and are eliminated in consolidation.
The accounting policies of our segments are, in all material respects,
consistent with those described in note 1, "Summary of Significant Accounting
Policies," of our 1999 Annual report, except for management reporting policies
related to the tax-equivalent adjustment and reporting certain segments on a
total return basis. For purposes of comparability, segment results include an
adjustment to gross-up tax-exempt revenue to a taxable basis; this adjustment is
eliminated in consolidation. In addition, in arriving at pretax EVA an
adjustment is made to record certain segments on a total return basis; the
Proprietary Investing and Trading segment is the only segment significantly
affected by this adjustment (see footnote d to the segment results table below.)
Our economic capital allocation model estimates the amount of equity required by
each business activity and the firm as a whole. Business economic capital is
estimated as if each activity were conducted as a standalone operating entity.
This estimate is based, to the extent possible, on observations of the capital
structures and risk profiles of public companies or benchmarks. In particular,
for our markets and asset management activities, required economic capital is
based on the revenue volatility and fixed expenses of public U.S. investment
banks and asset management companies, respectively; for Credit Portfolio,
capital is based on a simulation of unexpected credit losses; and, for Equity
Investments, capital is equal to the carrying value of the portfolio.
Diversification of Morgan's portfolio of businesses is reflected as a reduction
to the consolidated level of required equity and is a factor in assessing the
appropriate level of capitalization of the firm. The benefit of diversification
is not allocated to the segments.
The following table presents segment results for the three months ended March
31, 2000 and 1999, respectively.
11
Interest
Rate Asset
Invest- and Foreign Manage-
ment Exchange Credit Credit ment
In millions Banking Equities Markets Markets Portfolio Services
- --------------------------------------------------------------------------------------------------------
MARCH 31, 2000
Net interest revenues $ 3 $ 45 $ 140 $ 56 $ 99(b) $ 40
- --------------------------------------------------------------------------------------------------------
Trading revenue 63 301 247 193 74 17
Advisory and underwriting fees 300 95 12 114 8 15
Investment management fees 2 -- -- -- -- 275
Fees and commissions (8) 173 43 7 20 33
Investment securities revenue -- -- -- 12 -- --
Other revenue 4 22 47 5 (2) 27
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Total noninterest revenues 361 591 349 331 100 367
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Total revenues 364 636 489 387 199 407
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Total operating expenses 294 347 334 253 38 303
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Total pretax income 70 289 155 134 161 104
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Pretax EVA 52 243 32 65 97 83
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Total assets at period end
(in billions) -- 28 103 26 59 11
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Avg. required economic capital 486 821 1,732 1,249 2,516 576
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MARCH 31, 1999
Net interest revenues 1 16 79 106 103(b) 26
- --------------------------------------------------------------------------------------------------------
Trading revenue 39 113 490 471 18 7
Advisory and underwriting fees 219 37 10 118 -- 6
Investment management fees -- -- -- -- -- 240
Fees and commissions (1) 107 42 -- 35 22
Investment securities revenue -- -- 2 2 -- --
Other revenue -- 14 26 7 1 8
- --------------------------------------------------------------------------------------------------------
Total noninterest revenues 257 271 570 598 54 283
- --------------------------------------------------------------------------------------------------------
Total revenues 258 287 649 704(a) 157 309
- --------------------------------------------------------------------------------------------------------
Total operating expenses 210 230 359 258 45 257
- --------------------------------------------------------------------------------------------------------
Total pretax income 48 57 290 446 112 52
- --------------------------------------------------------------------------------------------------------
Pretax EVA 34 23 185 389 (22) 35
- --------------------------------------------------------------------------------------------------------
Total assets at period end
(in billions) -- 25 84 23 67 8
- --------------------------------------------------------------------------------------------------------
Avg. required economic capital 358 601 2,098 1,119 3,666 545
- --------------------------------------------------------------------------------------------------------
Proprietary
Equity Investing
Invest- and Consol-
In millions ments Trading Corporate idated
- ------------------------------------------------------------------------------------------
MARCH 31, 2000
Net interest revenues $ (5) $ 48(c) $ 27 $ 453
- ------------------------------------------------------------------------------------------
Trading revenue (8) 49 14 950
Advisory and underwriting fees (1) -- -- 543
Investment management fees 2 -- (3) 276
Fees and commissions 2 1 13 284
Investment securities revenue 161 (19) 3 157
Other revenue 2 109 (41) 173
- ------------------------------------------------------------------------------------------
Total noninterest revenues 158 140 (14) 2,383
- ------------------------------------------------------------------------------------------
Total revenues 153 188(d) 13 2,836
- ------------------------------------------------------------------------------------------
Total operating expenses 45 56 185 1,855
- ------------------------------------------------------------------------------------------
Total pretax income 108 132 (172)(e) 981
- ------------------------------------------------------------------------------------------
Pretax EVA 78 150 (240)(f) 560
- ------------------------------------------------------------------------------------------
Total assets at period end
(in billions) 2 41 15 285
- ------------------------------------------------------------------------------------------
Avg. required economic capital 1,882 496 (1,244)(g) 8,514
- ------------------------------------------------------------------------------------------
MARCH 31, 1999
Net interest revenues (4) 84(c) (22) 389
- ------------------------------------------------------------------------------------------
Trading revenue 1 3 (8) 1,134
Advisory and underwriting fees -- -- -- 390
Investment management fees 7 -- (1) 246
Fees and commissions -- 1 8 214
Investment securities revenue (17) (37) 9 (41)
Other revenue (1) 76 28 159
- ------------------------------------------------------------------------------------------
Total noninterest revenues (10) 43 36 2,102
- ------------------------------------------------------------------------------------------
Total revenues (14) 127(d) 14 2,491
- ------------------------------------------------------------------------------------------
Total operating expenses 14 32 162 1,567
- ------------------------------------------------------------------------------------------
Total pretax income (28) 95 (148)(e) 924
- ------------------------------------------------------------------------------------------
Pretax EVA (59) (93) (46)(f) 446
- ------------------------------------------------------------------------------------------
Total assets at period end
(in billions) 1 48 13 269
- ------------------------------------------------------------------------------------------
Avg. required economic capital 1,278 3,595 (1,592)(g) 11,668
- ------------------------------------------------------------------------------------------
(a) Revenues related to the structuring of tax-advantaged loans and
structured credit products for Credit Portfolio was $18 million for the
three months ended March 31, 1999.
(b) The adjustment to gross up Credit Portfolio's revenue to a taxable
basis was $8 million and $6 million for the three months ended March
31, 2000 and 1999, respectively. These amounts are eliminated in
consolidation.
(c) The adjustment to gross up Proprietary Investing and Trading's
tax-exempt revenues to a taxable basis was $75 million and $36 million
for the three months ended March 31, 2000 and 1999, respectively.
(d) Total return revenues, which combine reported revenues and the change
in net unrealized appreciation/depreciation, were $235 million and $91
million for the three months ended March 31, 2000 and 1999,
respectively.
(e) We classify the revenues and expenses of Corporate into three broad
categories:
- Corporate research and development initiatives that involve
strategic investments in new client segments or services, but
are managed separately from existing business lines. Expenses
related to this area totaled $48 million for the three months
ended March 31, 2000.
- Other corporate revenues and expenses that are recurring but
unallocated to the business segments, including but not
limited to: the results of hedging anticipated net foreign
currency revenues and expenses across all business segments;
corporate-owned life insurance; certain equity earnings in
affiliates; and consolidation and management reporting offsets
to certain revenues and expenses recorded in the business
segments. Excluding consolidation and management reporting
offsets, recurring revenues were $22 million and $23 million
for the three months ended March 31, 2000 and 1999,
respectively. Consolidating and management reporting offsets -
which comprises offsets to certain amounts recorded in the
segments, including the allocation of earnings on equity out
of Corporate into the segments, adjustments to bring segments
to a tax-equivalent basis, and other management accounting
adjustments - were ($87) million and ($70) million for the
three months ended March 31, 2000 and 1999, respectively.
- Nonrecurring items not allocated to segments - including gains
on the sale of businesses, revenues and expenses associated
with businesses that have been sold or are in the process of
being discontinued, including revenues and expenses related to
Euroclear activities, special charges, and other one-time
corporate items. Nonrecurring revenues were $3 million and
($6) million for the three months ended March 31, 2000 and
1999, respectively. Corporate includes revenues, expenses and
pretax income related to Euroclear activities for the three
months ended March 31, 2000 and 1999, respectively, as
follows: revenues - $76 million and $65 million; expenses - $9
million and $9 million; and pretax income - $67 million and
$56 million.
(f) Pretax EVA for Corporate includes the cost of equity adjustment related
to the following items, among others: assets and investments not
allocated to the segments [note (g)1], the diversification effect, and
excess/shortfall capital.
(g) The following table provides a reconciliation of average common equity
to required capital for the three months ended March 31, 2000 and 1999,
respectively.
- -------------------------------------------------------------------------------
In millions March 31, 2000 March 31, 1999
- -------------------------------------------------------------------------------
Average common equity $10,631 $10,756
Trust preferred securities 1,150 1,150
Fixed and adjustable preferred stock 444 444
Other adjustments (49) (164)
- -------------------------------------------------------------------------------
Total available capital 12,176 12,186
- -------------------------------------------------------------------------------
Total required capital of business
segments 9,758 13,260
Corporate (1) 1,292 1,477
Diversification (2,536) (3,069)
- -------------------------------------------------------------------------------
Total required capital 8,514 11,668
- -------------------------------------------------------------------------------
Excess available capital 3,662 518
- -------------------------------------------------------------------------------
(1) Includes capital related to goodwill, Euroclear, retirement plans and other
corporate assets.
12
4. BUSINESS CHANGES AND DEVELOPMENTS
Euroclear
Effective January 1, 2000, J.P. Morgan and the Boards of Euroclear Clearance
System PLC and Euroclear Clearance System Societe Cooperative executed a
definitive agreement to create a new, market-owned European bank to operate all
aspects of the Euroclear system. This agreement anticipates the formation of a
bank, based in Brussels and to be known as Euroclear Bank, to succeed J.P.
Morgan as operator and banker for the Euroclear System. J.P. Morgan will remain
as operator and banker of Euroclear until the successor bank is established and
is ready to take over the operations from J.P. Morgan, a process that is
expected to take from 12 to 18 months from January 1, 2000. The management and
staff of Euroclear, comprising approximately 1,200 J.P. Morgan employees, will
transfer to the new entity.
Under the existing Operating Agreement, income from clearance and settlement
operations is earned by Euroclear Clearance System Societe Cooperative, while
J.P. Morgan retains earnings from providing banking services to the System's
participants. Under the definitive agreement, J.P. Morgan will continue to
receive pretax banking income for three years from January 1, 2000, with a
minimum of $195 million and maximum of $295 million per year, whether the income
is earned by J.P. Morgan prior to the changeover to the new bank or thereafter
by the new bank. After the new bank becomes operational, it will also pay J.P.
Morgan for certain assets and know-how transferred to it.
Until the new bank becomes operational, J.P. Morgan will continue to record
pretax banking income over the period during which it is earned. Upon the
changeover to the new bank, J.P. Morgan will recognize as income on that date
all expected amounts due over the remaining part of the three-year contract
period, plus any gain on assets transferred to the new bank. This amount will be
subsequently adjusted based on the determination of the final pretax banking
income of Euroclear as specified in the definitive agreement.
Prior to the changeover to the successor bank, all banking income due to J.P.
Morgan under the agreement will be received as earned. Following the changeover,
50% of all banking income due to J.P. Morgan will be paid as earned and the
remaining 50% will be paid in monthly installments over the period starting the
next succeeding year and ending December 31, 2005. The successor bank will have
the option of prepaying its obligation for the remaining portion of the
three-year contract period at the higher of $245 million per year or the average
of the actual annual income (subject to the floor and cap noted above) for the
portion of the three-year period preceding the prepayment.
Pre-tax income from Euroclear-related activities reported by J.P. Morgan was $67
million for the first three months of 2000, $216 million for the full year 1999,
and $261 million for 1998.
5. INTEREST REVENUE AND EXPENSE
The table below presents an analysis of interest revenue and expense obtained
from on- and off-balance-sheet financial instruments. Interest revenue and
expense associated with derivative financial instruments are included with
related balance sheet instruments. These derivative financial instruments are
used as hedges or to modify the interest rate characteristics of assets and
liabilities and include swaps, forwards, futures, options, and debt securities
forwards.
13
First quarter
-----------------------------
In millions 2000 1999
- --------------------------------------------------------------------------------
INTEREST REVENUE
Deposits with banks $78 $ 81
Debt investment securities (a) 219 459
Trading account assets 1,101 861
Securities purchased under agreements to
Resell and federal funds sold 517 426
Securities borrowed 513 448
Loans 461 430
Other sources 142 52
- --------------------------------------------------------------------------------
Total interest revenue 3,031 2,757
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 542 616
Trading account liabilities 394 274
Securities sold under agreements to
Repurchase and federal funds purchased 808 743
Other borrowed money 453 355
Long-term debt 381 380
- --------------------------------------------------------------------------------
Total interest expense 2,578 2,368
- --------------------------------------------------------------------------------
Net interest revenue 453 389
- --------------------------------------------------------------------------------
(a) Interest revenue from debt investment securities included taxable revenue of
$197 million and $429 million and revenue exempt from U.S. income taxes of $22
million and $30 million for the three months ended March 31, 2000 and 1999,
respectively.
Net interest (expense) revenue associated with derivatives used for purposes
other-than-trading was approximately ($6) million for the three months ended
March 31, 2000, compared with approximately $26 million for the three months
ended March 31, 1999. As of March 31, 2000, approximately $42 million of net
deferred gains on closed derivative contracts used for purposes
other-than-trading were recorded on the "Consolidated balance sheet." These
amounts primarily relate to closed hedge contracts included in the amortized
cost of the debt investment portfolio as of March 31, 2000. The amount of net
deferred gains or losses on closed derivative contracts changes from period to
period, primarily due to the amortization of such amounts to Net interest
revenue. These changes are also influenced by the execution of our investing
strategies, which may result in the sale of the underlying hedged instruments
and/or termination of hedge contracts. Net deferred gains on closed derivative
contracts as of March 31, 2000, are expected to amortize into Net interest
revenue as follows: $1 million - remainder of 2000; $1 million in 2001; $4
million in 2002; $4 million in 2003; $5 million in 2004; and approximately $27
million thereafter.
6. TRADING REVENUE
The following table presents trading revenue by principal product grouping for
the three months ended March 31, 2000 and 1999.
First quarter
--------------------
In millions 2000 1999
- --------------------------------------------------------------------------------
Fixed income $ 552 $ 561
Equities 363 160
Foreign exchange 35 413
- --------------------------------------------------------------------------------
Total trading revenue 950 1,134
Trading-related net interest revenue 200 215
- --------------------------------------------------------------------------------
Combined total 1,150 1,349
- --------------------------------------------------------------------------------
Fixed-income trading revenue includes the results of making markets in both
developed and emerging countries in government securities, U.S. government
agency securities, corporate debt securities, money market instruments, interest
rate and currency swaps, and options and other derivatives. Equities trading
revenue includes the results of making markets in global equity securities;
equity derivatives such as swaps, options, futures, and forward contracts; and
convertible debt securities. Foreign exchange trading revenue includes the
results of making markets in spot, forward, and option contracts, and in
short-term interest rate products in order to help clients manage their foreign
currency exposure. Foreign exchange also includes the results from commodity
transactions in spot, forward, and option contracts, and in swaps.
14
7. ADVISORY AND UNDERWRITING FEES
First quarter
------------------
In millions 2000 1999
- -----------------------------------------------------------------------------
Advisory fees $236 $173
Underwriting revenue and syndication fees 307 217
- -----------------------------------------------------------------------------
Total 543 390
- -----------------------------------------------------------------------------
Advisory fees include revenues earned from advising clients on such corporate
strategies as mergers and acquisitions, privatizations, and changes in capital
structures. Underwriting revenue includes fees from both debt and equity
underwriting. Syndication fees include revenue earned from the arrangement and
syndication of credit facilities.
8. INVESTMENT SECURITIES REVENUE
First quarter
-----------------
In millions 2000 1999
- ------------------------------------------------------------------------------------------
DEBT INVESTMENT SECURITIES
Gross realized gains from sales of securities $ 70 $ 34
Gross realized losses from sales of securities (87) (60)
- ------------------------------------------------------------------------------------------
Net debt investment securities (loss) (17) (26)
- ------------------------------------------------------------------------------------------
EQUITY INVESTMENT SECURITIES
Gross realized gains from marketable available-for-sale securities 72 -
Gross realized gains from nonmarketable securities 3 8
Net appreciation in SBIC securities 103 10
Write-downs for other-than-temporary impairments in value (12) (38)
Dividend and other income 8 5
- ------------------------------------------------------------------------------------------
Net equity investment securities revenue (loss) 174 (15)
- ------------------------------------------------------------------------------------------
Total investment securities revenue (loss) 157 (41)
- ------------------------------------------------------------------------------------------
9. OTHER REVENUE AND OTHER EXPENSES
Other revenue
First quarter
------------------
In millions 2000 1999
- ---------------------------------------------------------------------------------------------------
Foreign currency hedging gains (a) $65 $93
Equity earnings in certain affiliates, including related goodwill amortization 22 46
Provision for credit losses (1) --
Other 87 20
- ---------------------------------------------------------------------------------------------------
Total other revenue 173 159
- ---------------------------------------------------------------------------------------------------
(a) Includes gains and losses on hedges of anticipated foreign currency revenues
and expenses. These gains and losses are partially offset by the impact of
exchange rate movements on reported revenues and expenses over the year.
Other expenses
First quarter
------------------
In millions 2000 1999
- ----------------------------------------------------------------------------
Professional services $ 43 $ 28
Marketing and business development 70 40
Other outside services 58 39
Other 44 35
- ----------------------------------------------------------------------------
Total other expenses 215 142
- ----------------------------------------------------------------------------
10. INVESTMENT IN AMERICAN CENTURY COMPANIES, INC.
In January 1998, we completed the purchase of a 45% economic interest in
American Century Companies, Inc. (American Century) for $965 million. American
Century is a no-load U.S. mutual fund company selling directly to individuals.
The investment is accounted for under the equity method of accounting and
recorded in Other assets. The excess of our investment over our share of equity
(i.e., goodwill) in American Century was approximately $795 million at the time
of purchase. This amount is being amortized on a straight-line basis over a
period of 25 years resulting in annual amortization expense of approximately $32
million. As of March 31, 2000 and 1999, goodwill totaled $723 million and $751
million, respectively. Our share of equity income in American Century and the
amortization of goodwill related to this investment is recorded in Other
revenue. The results of this investment are included in the Asset Management
Services segment.
15
11. INVESTMENT SECURITIES
DEBT INVESTMENT SECURITIES
The following table presents the gross unrealized gains and losses and a
comparison of the cost, along with the fair and carrying value of our
available-for-sale debt investment securities as of March 31, 2000. The gross
unrealized gains or losses on each debt investment security include the effects
of any related hedge. See note 13 for additional detail of gross unrealized
gains and losses associated with open derivative contracts used to hedge debt
investment securities.
Gross Gross Fair and
unrealized unrealized carrying
In millions: March 31, 2000 Cost gains losses value
- ---------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 546 $ 12 $ 1 $ 557
U.S. government agency, principally mortgage-backed 6,605 30 194 6,441
U.S. state and political subdivision 1,152 134 63 1,223
U.S. corporate and bank debt 69 -- -- 69
Foreign government 187 -- -- 187
Foreign corporate and bank debt 5 -- -- 5
Other 108 10 -- 118
- ---------------------------------------------------------------------------------------------------------------
Total debt investment 8,672 186 258 8,600
securities
- ---------------------------------------------------------------------------------------------------------------
EQUITY INVESTMENT SECURITIES
Equity investment securities are generally owned by J.P. Morgan Capital
Corporation, a wholly owned nonbank subsidiary of J.P. Morgan. Many of these
equity investment securities are subject to legal, regulatory, and contractual
restrictions that limit our ability to dispose of them freely.
The following table shows gross unrealized gains and losses, a comparison of the
cost, fair value and carrying value of marketable, nonmarketable, and SBIC
securities portfolios of J.P. Morgan consolidated. A substantial portion of
these are included in our Equity Investments segment.
In millions: March 31, 2000 Marketable Nonmarketable SBIC securities
- -----------------------------------------------------------------------------------------------------------------
Accounting (a) Fair value through equity Cost Fair value through earnings
- -----------------------------------------------------------------------------------------------------------------
Cost $340 $664 $290
- -----------------------------------------------------------------------------------------------------------------
Gross unrealized gains 205 97 444
Gross unrealized losses (5) (5) --
- -----------------------------------------------------------------------------------------------------------------
Net unrealized gains 200 (b) 92 (c) 444 (d)
- -----------------------------------------------------------------------------------------------------------------
Fair value 540 756 734
- -----------------------------------------------------------------------------------------------------------------
Carrying value on balance sheet 540 664 734
- -----------------------------------------------------------------------------------------------------------------
(a) See note 1, "Summary of Significant Accounting Policies," of our 1999
Annual Report.
(b) Primarily relates to investments in the telecommunications and
financial services industries.
(c) Primarily relates to investments in the financial services and basic
industries.
(d) Primarily relates to investments in the telecommunications industry.
16
12. TRADING ACCOUNT ASSETS AND LIABILITIES
The following table presents the fair and carrying value of trading account
assets and trading account liabilities as of March 31, 2000. It also includes
the average balances for the three months ended March 31, 2000.
Carrying Average
value balance
------------ -------------
March 31 First quarter
In millions: 2000 2000
- ------------------------------------------------------------------------------
TRADING ACCOUNT ASSETS
U.S. Treasury $ 9,602 $ 6,713
U.S. government agency 19,703 15,936
Foreign government 30,341 23,132
Corporate debt and equity 24,357 22,704
Other securities 7,870 8,243
Interest rate and currency swaps 17,944 15,670
Credit derivatives 560 638
Foreign exchange contracts 2,767 2,280
Interest rate futures and forwards (11) 37
Equity and commodity contracts 5,585 6,369
Purchased option contracts 20,349 19,117
- ------------------------------------------------------------------------------
139,067 120,839
- ------------------------------------------------------------------------------
TRADING ACCOUNT LIABILITIES
U.S. Treasury 8,203 7,914
Foreign government 16,943 13,021
Corporate debt and equity 14,059 10,675
Other securities 4,455 5,292
Interest rate and currency swaps 16,233 14,874
Credit derivatives 836 617
Foreign exchange contracts 2,203 1,955
Interest rate futures and forwards 47 13
Equity and commodity contracts 4,525 4,606
Written option contracts 22,391 21,313
- ------------------------------------------------------------------------------
89,895 80,280
- ------------------------------------------------------------------------------
Trade date receivables/payables
Amounts receivable and payable for securities that have not reached their
contractual settlement dates in our trading and investing activities are
recorded net in the "Consolidated balance sheet." Amounts receivable for
securities sold of $24.9 billion were netted against amounts payable for
securities purchased of $23.5 billion. This produced a net trade date receivable
of $1.4 billion, recorded in Accrued interest and accounts receivable as of
March 31, 2000.
13. DERIVATIVES
In general, derivatives are contracts or agreements whose values are derived
from changes in interest rates, foreign exchange rates, credit spreads, prices
of securities, or financial or commodity indices. The timing of cash receipts
and payments for derivatives is generally determined by contractual agreement.
Derivatives are either standardized contracts executed on an exchange or
privately negotiated contracts. Futures and option contracts are examples of
standard exchange-traded derivatives. Forward, swap, and option contracts are
examples of privately negotiated derivatives. Privately negotiated derivatives
are generally not traded like securities. In the normal course of business,
however, they may be terminated or assigned to another counterparty if the
original holder agrees. We use derivatives for trading or other-than-trading
purposes. Other-than-trading purposes are primarily related to our investing
activities.
Interest rate swaps are contractual agreements to exchange periodic interest
payments at specified intervals. The notional amounts of interest rate swaps are
not exchanged; they are used solely to calculate the periodic interest payments.
Currency swaps generally involve exchanging principal (the notional amount) and
periodic interest payments in one currency for principal and periodic interest
payments in another currency.
Credit derivatives include credit default swaps and related swap and option
contracts. Credit default swaps are contractual agreements that provide
insurance against a credit event of one or more referenced credits. The nature
of the credit event is established by the protection buyer and seller at the
inception of the transaction. Events include bankruptcy, insolvency, and failure
to meet payment obligations when due. The protection buyer pays a periodic fee
in return for a contingent payment by the protection seller following a credit
event. The contingent payment is typically the loss - the difference between the
notional and the recovery amount incurred by the creditor of the reference
credit as a result of the event.
Foreign exchange contracts involve an agreement to exchange one country's
currency for another at an agreed-upon price and settlement date. Most of the
contracts reported in the following table are forward contracts.
17
Interest rate futures are standardized exchange-traded agreements to receive or
deliver a specific financial instrument at a specific future date and price.
Forward rate agreements provide for the payment or receipt of the difference
between a specified interest rate and a reference rate at a future settlement
date. Debt security forwards include to-be-announced and when-issued securities
contracts.
Equity and commodity contracts include swaps and futures in the equity and
commodity markets and commodity forward agreements. Equity swaps are contractual
agreements to receive the appreciation or depreciation in value based on a
specific strike price on an equity instrument in return for paying another rate,
which is usually based on equity index movements or interest rates. Commodity
swaps are contractual commitments to exchange the fixed price of a commodity for
a floating price. Equity and commodity futures are exchange-traded agreements to
receive or deliver a financial instrument or commodity at a specific future date
and price. Equity and commodity forwards are privately negotiated agreements to
purchase or sell a specific amount of a financial instrument or commodity at an
agreed-upon price and settlement date.
An option provides the option purchaser, for a fee, the right - but not the
obligation - to buy or sell a security at a fixed price on or before a specified
date. The option writer is obligated to buy or sell the security if the
purchaser chooses to exercise the option. These options include contracts in the
interest rate, foreign exchange, equity, and commodity markets. Interest rate
options include caps and floors.
The following table presents notional amounts for trading and other-than-trading
derivatives, based on management's intent and ongoing usage. A summary of the
on-balance-sheet credit exposure, which is represented by the net positive fair
value associated with trading derivatives and recorded in Trading account
assets, is also included in the following table. Our on-balance-sheet credit
exposure takes into consideration $89.6 billion of master netting agreements in
effect as of March 31, 2000.
On-balance-sheet
In billions: March 31, 2000 Notional amounts credit exposure
- -------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps:
Trading $4,707.2
Other-than-trading (a)(b) 55.0
- -------------------------------------------------------------------------------------------------------------------
Total interest rate and currency swaps 4,762.2 $ 17.9
- -------------------------------------------------------------------------------------------------------------------
Credit derivatives:
Trading 154.2
Other-than-trading (a) 21.6
- -------------------------------------------------------------------------------------------------------------------
Total credit derivatives 175.8 0.6
- -------------------------------------------------------------------------------------------------------------------
Foreign exchange spot, forward, and futures contracts:
Trading 553.0
Other-than-trading (a) 19.4
- -------------------------------------------------------------------------------------------------------------------
Total foreign exchange spot, forward, and futures contracts 572.4 2.8
- -------------------------------------------------------------------------------------------------------------------
Interest rate futures, forward rate agreements, and debt securities forwards:
Trading 944.3
Other-than-trading 13.1
- -------------------------------------------------------------------------------------------------------------------
Total interest rate futures, forward rate agreements,
and debt securities forwards 957.4 --
- -------------------------------------------------------------------------------------------------------------------
Equity and commodity swaps, forward and futures contracts, all trading 110.6 5.6
- -------------------------------------------------------------------------------------------------------------------
Purchased options: (c)
Trading 1,299.6
Other-than-trading (a) 3.6
- -------------------------------------------------------------------------------------------------------------------
Total purchased options 1,303.2 20.3
- -------------------------------------------------------------------------------------------------------------------
Written options, all trading (d) 1,522.0 --
- -------------------------------------------------------------------------------------------------------------------
Total on-balance-sheet credit exposure 47.2
- -------------------------------------------------------------------------------------------------------------------
(a) Derivatives used as hedges of other-than-trading positions may be transacted
with third parties through independently managed J.P. Morgan derivative dealers
that function as intermediaries for credit and administrative purposes. In such
cases, the terms of the third-party transaction - notional, duration, currency,
etc. - are matched with the terms of the internal trade to ensure the hedged
risk has been offset with a third party. If such terms are not matched or a
third-party trade is not transacted, the intercompany trade is eliminated in
consolidation.
(b) The notional amounts of derivative contracts used for purposes
other-than-trading, conducted in the foreign exchange markets, primarily forward
contracts, amounted to $25.3 billion at March 31, 2000, and were primarily
denominated in the following currencies: Japanese yen $7.9 billion, Euro $6.0
billion, Canadian dollar $2.7 billion, Swiss franc $2.5 billion, British pound
$2.0 billion, and Australian dollar $1.3 billion.
(c) At March 31, 2000, purchased options used for trading purposes included
$981.8 billion of interest rate options, $121.6 billion of foreign exchange
options, and $196.2 billion of commodity and equity options. Options used for
purposes other-than-trading are primarily interest rate options. Purchased
options executed on an exchange amounted to $217.2 billion and those negotiated
over-the-counter amounted to $1,086.0 billion at March 31, 2000.
18
(d) At March 31, 2000, written options included $1,171.2 billion of interest
rate options, $150.6 billion of foreign exchange options, and $200.2 billion of
commodity and equity options. Written option contracts executed on an exchange
amounted to $201.1 billion and those negotiated over-the-counter amounted to
$1,320.9 billion at March 31, 2000.
Derivatives are used to hedge or modify the interest rate characteristics of
debt investment securities, loans, deposits, other liabilities for borrowed
money, long-term debt, and other financial assets and liabilities. Net
unrealized losses associated with such derivatives contracts amounted to $146
million as of March 31, 2000. Gross unrealized gains and gross unrealized losses
associated with open derivatives contracts used for these purposes as of March
31, 2000, are presented in the following table. Such amounts primarily relate to
interest rate and currency swaps used to hedge or modify the interest rate
characteristics of long-term debt; debt investment securities, principally
mortgage-backed securities; deposits; and other financial instruments.
Gross Gross Net
unrealized unrealized unrealized
In millions: March 31, 2000 gains (losses) gains (losses)
- --------------------------------------------------------------------------------
Long-term debt $ 277 $ (595) $ (318)
Debt investment securities 138 (53) 85
Deposits 189 (43) 146
Other financial instruments 292 (351) (59)
- --------------------------------------------------------------------------------
Total 896 (1,042) (146)
- --------------------------------------------------------------------------------
14. LOANS
Included in Loans are loans held for sale of approximately $3.0 billion at March
31, 2000. These loans are recorded on the balance sheet at lower of cost or fair
value and are primarily to borrowers in the U.S. in various industries.
During the first quarter of 2000, we revised the terms of a $77 million loan to
a Latin American steel company under a troubled debt restructuring. At March 31,
2000, this loan was considered performing.
15. OTHER CREDIT-RELATED PRODUCTS
Lending commitments include commitments to extend credit, standby letters of
credit and guarantees. The contractual amounts of these instruments represent
the amount at risk should the contract be fully drawn upon, the client default,
and the value of the collateral become worthless.
The total contractual amount of credit-related financial instruments does not
represent the future liquidity requirements, since we expect a significant
amount of commitments to expire or mature without being drawn. The credit risk
associated with these instruments varies according to each client's
creditworthiness and the value of any collateral held. Commitments to extend
credit generally require clients to meet certain credit-related terms and
conditions before drawdown. Market risk for commitments to extend credit,
standby letters of credit, and guarantees, while not significant, may arise as
availability of and access to credit markets change.
The following table summarizes the contractual amount of credit-related
instruments as of March 31.
In billions: March 31, 2000
- --------------------------------------------------------
Commitments to extend credit $66.8
Standby letters of credit and guarantees 16.8
- --------------------------------------------------------
Total lending commitments 83.6
- --------------------------------------------------------
We also have securities lending indemnifications associated with our
Euroclear-related activities of $8.8 billion as of March 31, 2000. As of March
31, 2000, J.P. Morgan held cash and other collateral in full support of these
securities lending indemnifications.
PURCHASE OF CREDIT PROTECTION
Since December 1997, we have entered into three Synthetic Collateralized Loan
Obligations that has allowed us to reduce the credit risk on a portfolio of
counterparties totaling approximately $20 billion in notional amount. This was
accomplished using credit default swaps, whereby the credit risk is transferred
into the capital markets via a special purpose entity, without us having to sell
the assets or change their composition. The structures provide protection at the
counterparty level, that is, protection is provided on all exposures to a
referenced counterparty versus on a specific loan, commitment or derivative
transaction to that counterparty. We have retained the first risk of loss equity
tranche in these transactions totaling $224 million. As a result of these
structures, we were able to reduce economic capital by approximately $428
million as of March 31, 2000. These structures have also allowed us to reduce
our risk-adjusted assets
19
by approximately $2.8 billion as of March 31, 2000, thereby increasing our Tier
I and Total risk-based capital ratios by 18 basis points (0.18%) and 26 basis
points (0.26 %), respectively. In particular, these transactions have allowed us
to convert the credit risk associated with $20 billion of diversified exposure
on our balance sheet - as described in the following table - from various lower
credit ratings to that we believe is equivalent to a AAA+ counterparty.
Counterparty rating Notional exposure
- ------------------------------------------
AAA $ 669
AA 3 167
A 9 507
BBB 4 726
BB 888
B 260
CCC and below 994
- ------------------------------------------
Total 20 211
- ------------------------------------------
The notional exposures in the above table are diversified by counterparty in the
following industries: banks - $2,733 million; nonbank financial institutions -
$2,898 million; governments - $855 million; commercial and industrial - $5,213
million; cyclical $4,593 million; and non-cyclical - $3,919 million.
16. IMPAIRED LOANS
Total impaired loans, organized by the location of the counterparty - net of
charge-offs - at March 31, 2000 are presented in the following table.
- ---------------------------------------------------
In millions: March 31
- ---------------------------------------------------
COUNTERPARTIES IN THE U.S.
Commercial and industrial $ 26
Other 13
- ---------------------------------------------------
39
- ---------------------------------------------------
COUNTERPARTIES OUTSIDE THE U.S.
Commercial and industrial 91
Other 10
- ---------------------------------------------------
101
- ---------------------------------------------------
TOTAL IMPAIRED LOANS 140
- ---------------------------------------------------
Allowance for impaired loans 46
- ---------------------------------------------------
Impaired loans for which no SFAS No. 114 reserve was deemed necessary were $22
million as of March 31, 2000. As of March 31, 2000, approximately 65% of
impaired loans were measured using the fair value of collateral, 30% of impaired
loans were measured for impairment using observable market prices, and the
remainder using the present value of future cash flows.
The following table presents an analysis of the changes in impaired loans.
- ----------------------------------------------------------------------------
First Quarter
In millions 2000
- ----------------------------------------------------------------------------
IMPAIRED LOANS, BEGINNING PERIOD $ 77
- ----------------------------------------------------------------------------
Additions to impaired loans 66
Less:
Repayments of principal, net of additional advances (2)
Impaired loans returning to accrual status -
Charge-offs:
Commercial and industrial -
Banks -
Other -
Interest and other credits (1)
- ----------------------------------------------------------------------------
IMPAIRED LOANS, MARCH 31 140
- ----------------------------------------------------------------------------
20
An analysis of the effect of impaired loans - net of charge-offs - on interest
revenue for the three months ended March 31, 2000 is presented in the following
table.
- -----------------------------------------------------------------------------
First Quarter
In millions 2000
- -----------------------------------------------------------------------------
Interest revenue that would have been recorded if accruing $3
Net interest revenue recorded related to the current period -
- -----------------------------------------------------------------------------
Negative impact of impaired loans on interest
revenue 3
- -----------------------------------------------------------------------------
For the three months ended March 31, 2000, the average recorded investments in
impaired loans was $92 million. As of March 31, 2000, loans of $20 million were
over 90 days past due (principal or interest) and still accruing interest, but
not considered impaired. Lending commitments to counterparties considered
impaired totaled $56 million at March 31, 2000.
17. ALLOWANCES FOR CREDIT LOSSES
The following table summarizes the activity of our allowance for loan losses.
- ----------------------------------------------------------------------------
First Quarter
In millions 2000
- ----------------------------------------------------------------------------
BEGINNING BALANCE $281
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Provision for loan losses in the U.S. 18
(Reversal of provision) for loan losses outside the U.S. (18)
- ----------------------------------------------------------------------------
-
- ----------------------------------------------------------------------------
Recoveries:
Counterparties in the U.S. -
Counterparties outside the U.S. 9
- ----------------------------------------------------------------------------
9
- ----------------------------------------------------------------------------
Charge-offs:
Counterparties in the U.S., primarily other financial
institutions -
Counterparties outside the U.S.:
Commercial and industrial -
Banks -
Other -
- ----------------------------------------------------------------------------
Net recoveries 9
- ----------------------------------------------------------------------------
ENDING BALANCE, MARCH 31 290
- ----------------------------------------------------------------------------
The following table displays our allowance for loan losses by component as of
March 31, 2000.
In millions
- -------------------------------------------------------------
Specific counterparty components in the U.S. $ 13
Specific counterparty components outside the U.S. 33
- -------------------------------------------------------------
Total specific counterparty 46
Expected loss 244
- -------------------------------------------------------------
Total 290
- -------------------------------------------------------------
The following table summarizes the activity of our allowance for credit losses
on lending commitments.
- -------------------------------------------------------------------------
First Quarter
In millions 2000
- -------------------------------------------------------------------------
BEGINNING BALANCE $125
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
(Reversal of provision) for credit losses in the U.S. (5)
Provision for credit losses outside the U.S. 6
- -------------------------------------------------------------------------
1
- -------------------------------------------------------------------------
ENDING BALANCE, MARCH 31 126
- -------------------------------------------------------------------------
21
The following table displays our allowance for credit losses on lending
commitments by component as of March 31, 2000.
In millions
- -------------------------------------------------------------
Specific counterparty components in the U.S. $ 19
Specific counterparty components outside the U.S. 4
- -------------------------------------------------------------
Total specific counterparty 23
Expected loss 103
- -------------------------------------------------------------
Total 126
- -------------------------------------------------------------
18. INCOME TAXES
The effective tax rate for the three months ended March 31, 2000 and 1999 was
36% and 35%, respectively. The increase in the effective tax rate reflects
higher pretax income over the prior year quarter. The income tax expense /
(benefit) related to net realized gains / (losses) and write-downs for
other-than-temporary impairments in value on debt and equity investment
securities, excluding securities in SBICs, was approximately $16 million for the
three months ended March 31, 2000, compared to ($22) million for the three
months ended March 31, 1999. The applicable tax rate used to compute the income
tax expense / (benefit) related to net gains / (losses) on debt and equity
investment securities for the three months ended March 31, 2000 and 1999 was
approximately 35% and 39%, respectively.
19. CAPITAL REQUIREMENTS
J.P. Morgan, its subsidiaries, and certain foreign branches of its bank
subsidiary Morgan Guaranty Trust Company of New York are subject to regulatory
capital requirements of U.S. and foreign regulators. Our primary federal banking
regulator, the Board of Governors of the Federal Reserve System (Federal Reserve
Board), establishes minimum capital requirements for J.P. Morgan, the
consolidated bank holding company, and some of our subsidiaries, including
Morgan Guaranty. These requirements ensure that banks and bank holding companies
meet specific guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under generally
accepted accounting principles. Failure to meet these requirements can result in
actions by regulators that could have a direct material impact on our financial
statements. The capital of J.P. Morgan and our principal subsidiaries, Morgan
Guaranty and J.P. Morgan Securities Inc. (JPMSI), exceeded the minimum
requirements set by each regulator as of March 31, 2000.
J.P. Morgan's risk-based capital ratios are calculated in accordance with the
Federal Reserve Board's market risk capital guidelines. These guidelines require
our risk-based capital ratios to take into account general market risk and
specific issuer risk of our debt and equity trading portfolios, as well as
general market risk associated with all trading and nontrading foreign exchange
and commodity positions. The guidelines, however, continue to exclude the effect
of SFAS No. 115. The calculation of risk-based capital ratios for J.P. Morgan,
the bank holding company, includes the capital and assets of JPMSI, our U.S.
broker-dealer.
Capital ratios and amounts
The following tables show the risk-based capital and leverage ratios and amounts
for J.P. Morgan and Morgan Guaranty as of March 31, 2000.
Dollars in millions Amounts Ratios(b)
- -------------------------------------------------------------
Tier 1 capital(a)
J.P. Morgan $11,644 8.3%
Morgan Guaranty 10,604 8.7
- -------------------------------------------------------------
Total risk-based capital(a)
J.P. Morgan $16,842 12.0%
Morgan Guaranty 13,914 11.4
- -------------------------------------------------------------
Leverage
J.P. Morgan 4.5%
Morgan Guaranty 6.4
- -------------------------------------------------------------
(a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required
minimum tier 1 capital of $5.6 billion and $4.9 billion, respectively. For
capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum
total risk-based capital of $11.2 billion and $9.8 billion, respectively.
(b) Pursuant to Federal Reserve Board guidelines, the minimum tier 1 capital,
total risk-based capital, and leverage ratios are 4%, 8%, and 3%, respectively,
for bank holding companies and banks.
22
Capital categories
Bank regulators use five capital category definitions for regulatory supervision
purposes. The categories range from "well capitalized" to "critically
undercapitalized." A bank is considered well capitalized if it has minimum tier
1 capital, total capital, and leverage ratios of 6%, 10%, and 5%, respectively,
under standards provided by the regulatory framework for prompt corrective
action and the Federal Reserve Board.
Bank holding companies also have guidelines that determine the capital levels at
which they shall be considered well capitalized. According to these guidelines,
a bank holding company is considered well capitalized if it has minimum tier 1
capital, total capital, and leverage ratios of 6%, 10%, and 3%, respectively.
At March 31, 2000, the ratios of J.P. Morgan and Morgan Guaranty exceeded the
minimum standards required for a well capitalized bank holding company and bank,
respectively. Management is aware of no conditions or events that have occurred
since March 31, 2000, that would change J.P. Morgan's and Morgan Guaranty's well
capitalized status.
20. EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding, which includes
contingently issuable shares for which all necessary conditions for issuance
have been satisfied. Diluted EPS includes the determinants of basic EPS and, in
addition, takes into account dilutive potential common shares that were
outstanding during the period.
The following table presents the computation of basic and diluted EPS for the
three months ended March 31, 2000 and 1999.
First quarter
------------------------------------
Dollars in millions, except share data 2000 1999
- ---------------------------------------------------------------------------------------------
Net income $ 628 $ 600
Preferred stock dividends and other (9) (9)
- ---------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings
per share - income available to
common stockholders $619 $591
- ---------------------------------------------------------------------------------------------
Denominator for basic earnings per share -
weighted-average shares 170,854,461 182,740,896
Effect of dilutive securities:
Options (a) 3,853,844(b) 4,663,826(c)
Other stock awards (d) 8,881,595 8,978,013
- ---------------------------------------------------------------------------------------------
12,735,439 13,641,839
- ---------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
weighted-average number of common
shares and dilutive potential common
shares 183,589,900 196,382,735
- ---------------------------------------------------------------------------------------------
Basic earnings per share $ 3.62 $ 3.24
Diluted earnings per share 3.37 3.01
- ---------------------------------------------------------------------------------------------
Earnings per share amounts are based on actual numbers before rounding.
(a) The dilutive effect of stock options was computed using the treasury stock
method. This method computes the number of incremental shares by assuming the
issuance of outstanding stock options, reduced by the number of shares assumed
to be repurchased from the issuance proceeds, using the average market price of
our common stock for the period. The related tax benefits are also considered.
(b) The following options to purchase shares of our common stock were
outstanding at March 31, 2000, but were not included in the computation of
diluted EPS:
For the three months ended March 31, 2000: 4,699,078 shares at $130.94 per share
expiring July 15, 2008; 100,000 shares at $128.21 per share expiring January 20,
2009; 75,000 shares at $134.88 per share expiring December 12, 2009; 5,959,000
shares at $135.72 per share expiring July 19, 2009; 188,475 shares at $123.28
per share expiring January 18, 2010; and 100,000 shares at $145.28 per share
expiring January 18, 2010.
The inclusion of such options using the treasury stock method would have an
antidilutive effect on the diluted EPS calculation because the options' exercise
price was greater than the average market price of our common shares for the
respective period.
(c) Options to purchase 5,003,500 and 100,000 shares of our common stock at
$130.94 and $128.21, respectively, per share were outstanding at March 31, 1999,
but were not included in the computation of diluted EPS. The inclusion of such
options using the treasury stock method would have an antidilutive effect on the
diluted EPS calculation because the options' exercise price was greater than the
average market price of our common shares for the respective period. These
options expire on July 15, 2008 and January 19, 2009, respectively.
(d) Weighted-average incremental shares for other stock awards include
restricted stock and stock bonus awards. The related tax benefits are also
considered.
23
21. COMMITMENTS AND CONTINGENT LIABILITIES
Excluding mortgaged properties, assets on our "Consolidated balance sheet" of
approximately $123.9 billion at March 31, 2000, were pledged as collateral for
borrowings, to qualify for fiduciary powers, to secure public monies as required
by law, and for other purposes.
At March 31, 2000 we had commitments to enter into future resale and repurchase
agreements totaling $5.5 billion and $0.8 billion, respectively.
22. INTERNATIONAL OPERATIONS
For financial reporting purposes, we divide our operations into domestic and
international components. As these operations are highly integrated, estimates
and subjective assumptions have been made to apportion revenue and expense
between domestic and international components. In 1999, we changed our estimates
and assumptions to be consistent with the allocations used for our business
segments as reported in note 3. Prior period amounts have been restated to
reflect this allocation methodology.
Revenues and expenses
- - Client-focused revenues are allocated between the regions responsible for
managing the client relationship and the regions responsible for product
execution and risk management
- - Revenues from proprietary investing and trading activities and equity
investments are allocated based on the location of the risk taker
- - Expenses are allocated based on the estimated cost associated with
servicing each region's client base. Corporate revenues and expenses are
allocated primarily to the region in which they are recorded. Certain
centrally managed expenses are allocated based on the underlying activity.
The results for the three months ended March 31, 2000 and 1999 were distributed
among domestic and international operations, as presented in the following
table.
- -------------------------------------------------------------------------------------------
Income
Pretax tax Net
Total Total income/ expense/ income/
In millions revenues(a) expenses (loss) (benefit) (loss)
- -------------------------------------------------------------------------------------------
FIRST QUARTER 2000
Europe (b) $ 997 $ 518 $ 479 $ 194 $ 285
Asia-Pacific 209 153 56 23 33
Latin America (c) 112 55 57 23 34
- -------------------------------------------------------------------------------------------
Total international operations 1,318 726 592 240 352
Domestic operations (d) 1,518 1,129 389 113 276
- -------------------------------------------------------------------------------------------
Total 2,836(e) 1,855 981 353 628
- -------------------------------------------------------------------------------------------
FIRST QUARTER 1999
Europe (b) 940 492 448 181 267
Asia-Pacific 181 148 33 14 19
Latin America (c) 443 92 351 142 209
- -------------------------------------------------------------------------------------------
Total international operations 1,564 732 832 337 495
Domestic operations (d) 927 835 92 (13) 105
- -------------------------------------------------------------------------------------------
Total 2,491 1,567 924 324 600
- -------------------------------------------------------------------------------------------
(a) Includes net interest revenue and noninterest revenues.
(b) Includes the Middle East and Africa.
(c) Includes Mexico, Central America, and South America.
(d) Includes the United States, Canada, and the Caribbean. Total revenues and
expenses relate substantially to United States operations.
(e) Includes March, 2000 provision for credit losses of $1 million, which was
recorded in Europe.
24
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
J.P. Morgan reported record quarterly net income of $628 million for the first
quarter of 2000, up from $600 million in the first quarter of 1999. Earnings per
share were $3.37, an increase of 12% from $3.01 a year ago. Return on common
equity was 23% in the quarter, compared with 22% in the first quarter of 1999.
OTHER HIGHLIGHTS FOR THE FIRST QUARTER:
- - Economic value added (EVA) rose 26% to $358 million from a year ago
- - Revenues of $2.836 billion were up 14% from a very strong first quarter in
1999
- - Strong momentum in Equities, Investment Banking, and Asset Management Services
fueled top-line growth
- - Expenses increased 18% because of higher performance-driven compensation
accruals and investment in the expansion of key client activities
- - The efficiency ratio (expenses divided by revenues) was 65%, within our target
range
ACCELERATION OF FIRMWIDE E-FINANCE INITIATIVES
During the quarter we significantly accelerated efforts to launch digital,
commercial applications of Morgan capabilities and technologies, frequently
partnering with firms that are leaders in their industries. To that end, we
established LabMorgan, a new e-finance unit that aims to be a destination of
choice for entrepreneurs and a hub for innovation within the firm. These
initiatives have important benefits: They provide our clients and us with
improved service and extend our client reach by capturing scale and drawing on
the resources of partner companies. They also unlock equity value from
leading-edge technologies that we have developed to support existing business
activities. Major initiatives in the quarter included:
- Launch of Morgan OnLine, comprehensive, integrated wealth management
advice and services delivered to affluent individuals via the Internet
- Participation in Sony Net Bank, a new consumer e-banking venture in
Japan that will utilize J.P. Morgan's on-line private banking expertise
- Formation of Arcordia, an Internet-based derivative operations and settlement
company
- Participation in Securities.Hub, an e-commerce company that will host a
series of on-line portals linking securities firms and dealers with
institutional investors worldwide
- Formation of Market Axess, a multi-dealer fixed income transaction
platform providing on-line access to research, new-issue, and secondary
markets
- Creation of Cygnifi, an independent, Internet-based derivatives
services company delivering market, credit, and collateral risk
management expertise
Since the beginning of April we have announced three additional initiatives:
- Formation of TransactPlus, an independent firm that allows companies to
identify, validate, and connect with each other in a 24x7, secure, globally
available environment
- Creation of SwapsWire, a network and protocol for on-line trading and
negotiation of interest rate derivative transactions
- Creation of Gold Avenue, an independent company that will be the first to
offer a comprehensive range of products and services to the gold market over
the Internet.
SEGMENT RESULTS
Total revenues were $2.836 billion in the first quarter of 2000, up 14% from the
same period a year ago.
25
Investment Banking revenues rose 41% to $364 million in the first quarter. The
increase was fueled by robust advisory results and record revenues from equity
underwriting and derivatives. Revenues from European clients and the technology
and biotechnology sectors were particularly strong. For the first quarter,
Thompson Financial Securities Data Corporation ranked J.P. Morgan fifth
worldwide in completed mergers and acquisitions, with a market share of 18%.
This includes strong gains in the United States, where we ranked third with a
similar market share.
Equities revenues increased more than twofold to $636 million over the prior
year. Equity derivative revenues were sharply higher, reflecting increased
client demand and significant trading gains. Results from equity underwriting
more than doubled as we maintained our top-three lead manager ranking for
transactions larger than $500 million and gained share overall. We ranked fifth
among lead underwriters of U.S. transactions with a market share of 8.9%,
compared with seventh and a market share of 5.6% for all of 1999. Brokerage
commission revenues also increased sharply as a result of higher volumes and
market share gains, particularly in Europe.
Interest Rate and Foreign Exchange Markets revenues declined 25% to $489 million
from the first quarter of 1999, primarily due to lower trading results and
client activity in interest rate derivatives. Less investor demand for
yield-enhancing transactions in the rising interest rate environment globally,
combined with a shift in interest toward equities, depressed client flows.
Government securities revenues were strong in the quarter, although down from a
year ago when results in Asia were exceptional. Foreign exchange activities were
in line with last year's quarter.
Credit Markets revenues were $387 million in the first quarter. This compares
with revenues of $704 million a year ago, which included significant gains on
hedges of our economic exposures to Brazil. This quarter saw continued momentum
in structured finance and benefited from improved emerging market conditions in
both underwriting and trading.
Credit Portfolio revenues increased 27% to $199 million while overall risk in
our credit portfolio was flat compared with the fourth quarter and significantly
down from the first quarter of 1999. The increase in revenues reflected higher
mark-to-market values of credit derivatives used as economic hedges of our
exposures. It also resulted from an increase in the value of our derivatives
portfolio brought about by narrower credit spreads. Income associated with our
traditional loan portfolio rose as the proportion of higher-yielding assets
increased.
The allowances for credit losses totaled $416 million at March 31, 2000,
consistent with year-end levels. Impaired loans rose from $77 million to $140
million, which was primarily accounted for by a single industrial counterparty
in Europe. Reflecting overall risk levels in the portfolio, average economic
capital for the segment was $2.5 billion in both the first quarter of 2000 and
the fourth quarter of 1999, down approximately 30% from $3.7 billion in last
year's first quarter.
Asset Management Services revenues increased 32% to $407 million compared with a
year ago. The increase included significant growth in revenues in our private
banking activities. It also included a rise in investment management fees,
reflecting asset growth and a shift in asset mix towards higher-fee alternative
investment disciplines. Assets under management increased 17% from a year ago to
approximately $370 billion at March 31, 2000. Earnings from our equity
investment in American Century also rose.
Equity Investments reported revenues of $153 million in the first quarter,
primarily reflecting gains in investments in the telecommunications industry.
Gains of $68 million were realized through sales, with the remainder due to
appreciation in fair value. Deal flow was strong as we invested approximately
$120 million, two-thirds of which was committed to the rapidly expanding
technology and e-commerce sectors. Equity investments recorded a loss of $14
million in the first quarter of 1999, primarily reflecting write-downs of
Brazilian investments.
Proprietary Investing and Trading revenues were $188 million in the quarter, up
from $127 million a year ago. Total return - reported revenues and the change in
net unrealized value - was $235 million in the quarter compared with $91 million
a year ago. The increases were achieved on significantly lower market risk
levels. Reported revenues and total return in the first quarter of 2000
reflected strong results across our U.S. portfolios. This compares with the
year-ago period, which reflected very strong results in our European portfolio
and losses in our investment securities and Asian portfolios. Average economic
capital for the segment declined from $3.6 billion last year to $0.5 billion in
this quarter.
Corporate revenues were $13 million in the first quarter, essentially unchanged
from the 1999 period. They included $76 million and $65 million of revenues from
activities related to Euroclear in this year's and last year's quarter,
respectively.
26
FINANCIAL REVIEW
REVENUES
Revenues were $2.836 billion in the first quarter of 2000, up 14% from the 1999
period.
Net interest revenue in the first quarter of 2000 was $453 million compared to
$389 million in the year ago quarter. This increase primarily reflected higher
net interest revenue from our interest rate markets activities and increased
equities securities borrowing, partially offset by a decrease in higher yielding
positions in local markets in Latin America.
Total trading revenue was $950 million in the first quarter of 2000. This
compares with revenue of $1,134 million a year ago, which included significant
gains on positions in Brazil taken in association with hedging our economic
exposures. This quarter reflected strong results in equity derivatives and
trading for our own account, partially offset by lower results in the interest
rate markets.
Advisory and underwriting fees grew 39% to $543 million in the first quarter of
2000 from $390 million in the first quarter of 1999. Advisory fees grew 36% to
$236 million, reflecting robust activity, particularly with European clients.
For the first three months of 2000, Thompson Financial Securities Data Company,
Inc. ranked J.P. Morgan fifth in completed mergers and acquisitions worldwide,
with a market share of 18%. Underwriting revenue and syndication fees rose 41%
to $307 million driven by record revenues from equity underwriting.
Investment management fees increased 12% to $276 million in the 2000 first
quarter from a year ago, reflecting asset growth and a shift in asset mix
towards higher-fee alternative investment disciplines. Assets under management
were $370 billion at March 31, 2000, compared with $315 billion a year ago.
Fees and commissions were $284 million, up 33% from $214 million in the year-ago
quarter. The increase reflects higher equities brokerage commissions related to
higher volumes and market share gains, particularly in Europe.
Investment securities revenue was $157 million in the first quarter of 2000.
This reflects gains of $178 million from equity investments primarily in the
telecommunications industry of which $80 million were realized through sales,
with the remainder due to appreciation in fair value. These gains were offset by
write-downs of $12 million primarily related to equity investments in the
consumer/retail industry and net losses of $17 million on the sale of debt
investment securities. The current quarter results compares with negative (loss)
investment securities revenue of $41 million in the first quarter of 1999. The
loss reflected write-downs of $38 million primarily on Brazilian equity
investments, and net losses of $26 million on the sale of debt investment
securities. These losses were partially offset by gains of $10 million related
to our equity investments portfolio.
Other revenue was $173 million in the first quarter of 2000, compared with $159
million a year earlier.
OPERATING EXPENSES
Operating expenses were $1.855 billion in the first quarter, an increase of 18%
from the year-ago quarter. The rise reflected higher performance-driven
compensation as well as investments to expand capacity in our investment banking
and equity businesses. We also invested in corporate e-commerce initiatives,
particularly Morgan OnLine and LabMorgan. The firm's efficiency ratio was 65% in
the first quarter of 2000, consistent with the full year of 1999 and our
corporate target.
At March 31, 2000, staff totaled 15,622 employees, compared with 15,512 at
December 31, 1999 and 15,100 employees at March 31, 1999.
Income-tax expense in the first quarter totaled $353 million, based on an
effective tax rate of 36%, compared with $324 million in the year-earlier
quarter. The increase in expense reflects higher pretax income.
27
CAPITAL AND RISK MANAGEMENT
We seek to increase shareholder value through a firmwide discipline that links
capital allocation, risk management, performance measurement, investment
decisions, and incentive compensation into one integrated framework. This
framework buttresses our day-to-day operations at all levels of the firm and
employs consistent economic value added (EVA) and capital allocation
methodologies. EVA integrates traditional operating earnings with capital and
risk management by subtracting from income a charge for the equity used in
support of our business. Please refer to our 1999 Annual report filed on Form
10-K for a detailed discussion of capital and risk management.
CAPITAL
Our economic capital allocation model estimates the amount of equity required by
each business activity and the firm as a whole. Business economic capital is
estimated as if each activity were conducted as a standalone entity. This
estimate is based, to the extent possible, on observations of the capital
structures and risk profiles of public companies or benchmarks. Diversification
of Morgan's portfolio of businesses lowers the consolidated level of required
equity and is a factor in assessing the appropriate level of capitalization of
the firm. The benefit of diversification is not allocated to the businesses.
The related cost of equity for each business activity is based on observable
market returns of publicly held investments, with the exception of our Credit
Portfolio segment, whose cost of equity is based on market pricing for credit
risk. To arrive at the charge for equity capital for each segment, we multiply
its allocated required economic capital by its market-based cost of equity (or
hurdle rate). To arrive at the consolidated charge for equity capital for J.P.
Morgan, we multiply the firm's common equity by its market-based cost of equity,
which currently is estimated at 10.5%.
Required versus available capital
J.P. Morgan's total required economic capital is compared with available capital
to evaluate overall capital utilization. It is our policy to maintain an
appropriate excess of capital to provide for growth and as additional protection
against losses. The following table compares average required versus available
capital for the periods ended March 31, 2000 and December 31, 1999,
respectively.
Three months Twelve months
ended ended December 31,
Average (billions) March 31, 2000 1999
- -----------------------------------------------------------------------------
Common stockholder's equity $10.6 $11.0
Preferred stock, excluding variable 0.4 0.4
Trust preferred securities 1.2 1.2
Other adjustments - (0.1)
- -----------------------------------------------------------------------------
Total available capital 12.2 12.5
- -----------------------------------------------------------------------------
Required economic capital:
Credit Portfolio 2.5 3.0
Equity Investments 1.9 1.5
Interest Rate Markets and FX 1.7 2.0
Credit Markets 1.2 1.1
Equities 0.8 0.7
Asset Management Services 0.6 0.6
Proprietary Investing and Trading 0.5 1.8
Investment Banking 0.5 0.4
- -----------------------------------------------------------------------------
Total business segments 9.7 11.1
Corporate 1.3 1.5
Diversification (2.5) (2.7)
- -----------------------------------------------------------------------------
Total required economic capital 8.5 9.9
- -----------------------------------------------------------------------------
Excess available capital 3.7 2.6
- -----------------------------------------------------------------------------
It is our policy to maintain an appropriate excess of capital to provide for
growth and as additional protection against losses. Excess available capital
averaged $3.7 billion in the quarter compared with $2.6 billion for the 1999
full year, primarily reflecting lower economic capital requirements in our
Proprietary Investing and Trading and Credit Portfolio segments as we continued
to reduce risk. This decrease was partially offset by higher average economic
capital requirements of our Equity Investments segment reflecting net new
investments and appreciation.
28
RISK MANAGEMENT
Risk is inherent in our business, and sound risk management is key to our
success. The major types of risks to which we are exposed are market, credit,
liquidity, and operating risk. We have developed and implemented comprehensive
policies and procedures to identify, mitigate, and monitor risk across the firm.
DAILY EARNINGS AT RISK
Our tool for the systematic measuring and monitoring of market and credit risk
is the daily earnings at risk (DEaR) calculation. DEaR for each business is a
key input to our EVA calculation and capital allocation. DEaR is a statistical
measure used to estimate the firm's exposure in non-stressed markets to market
risk and credit risk in our trading derivatives portfolio.
DEaR is an upperband estimate of the potential loss in the value of our
portfolios, at a 95% confidence level, over a one-day time horizon. The firm's
DEaR measure is based on a model that uses historical simulations. It makes
assumptions about market behavior and takes into account numerous variables that
may cause a change in the value of our portfolios, including interest rates,
foreign exchange rates, equity and commodity prices and their volatilities, and
correlations among these variables.
STRESS TESTING
We regularly supplement our DEaR calculations with stress testing at both the
firmwide and business-specific levels. Stress testing measures the impact of
abnormal movements on the firm's portfolios. Some of the stress test assumptions
are very specific to businesses' specialized risks, while others are conducted
in conformity with firmwide stress scenarios that are distributed by our
Corporate Risk Management group. This provides senior management with an
analysis of the potential impact on the firm's revenue.
VULNERABILITY IDENTIFICATION
In 1999 we introduced vulnerability identification (VID) as a discipline to
highlight material risks which may or may not be captured by measures such as
DEaR. The discipline systemically captures potential "worst-case" losses
identified by traders and other risk takers. Once identified, these losses - or
VIDs - may be quantified through specific stress tests and assist senior
management in focusing on specific risks.
MARKET RISK PROFILES
DeaR
- --------------------------------------------------------------------------------
Trading Investing Aggregate
------------------------ ----------------------- ------------------------
March 31 December 31 March 31 December 31 March 31 December 31
In millions 2000 1999 2000 1999 2000 1999
- --------------------------------------------- ------------------------ -------------------------
Period end $27(a) $29(a) $ 7 $ 9 $32 $26
- --------------------------------------------- ------------------------ -------------------------
12 month average 24(b) 29(b) 18 26 $33(b) $42(b)
- --------------------------------------------- ------------------------ -------------------------
(a) This reflects, before diversification benefits, market risk DEaR of $24
million at March 31, 2000 ($26 million at December 31, 1999), and derivatives
credit risk DEaR of $13 million at March 31, 2000 ($12 million at December 31,
1999).
(b) The averages for the twelve month periods ended March 31, 2000 and December
31, 1999 do not include derivative credit risk DEaR because we only began to
incorporate derivative credit risk into our DEaR measurement as of June 30,
1999.
29
CREDIT EXPOSURES
The following section provides detailed information regarding the firm's
significant credit exposures.
Credit exposure and related economic capital
- --------------------------------------------------------------------------------
Mar. 31, 2000 Dec. 31, 1999 Economic capital
-------------------- ---------------------- --------------------
Carrying Fair Carrying Fair Mar. 31 Dec. 31
IN BILLIONS value Value value value 2000 1999
- ---------------------------------------------------- ---------------------- --------------------
Derivatives $47.2(a) $47.2 $43.7(a) $43.7 $1.0 $0.9
Loans and lending commitments 26.8(b) 26.8 26.4(b) 26.5 2.1 1.8
- ---------------------------------------------------- ---------------------- --------------------
Total credit exposures(c) 74.0 74.0 70.1 70.2 3.1 2.7
- ---------------------------------------------------- ---------------------- --------------------
(a) Carried at fair value on the balance sheet with changes in fair value
recorded in the income statement. Includes credit valuation adjustment as
of March 31, 2000 and December 31, 1999 of $667 million and $670 million,
respectively.
(b) Amount net of allowances for credit losses of $416 million as of March 31,
2000 and $406 million as of December 31, 1999. Carrying value excludes the
notional value of lending commitments, which are off-balance-sheet
instruments.
(c) Substantially all credit risk related to derivatives, loans, and lending
commitment exposures are managed by the Credit Portfolio segment. Economic
capital includes the impact of purchased credit protection and other credit
risk hedges.
Credit exposure before and after collateral
- --------------------------------------------------------------------------------
Mar. 31, 2000 Dec. 31, 1999
---------------------------- ----------------------------
Net exposure Net exposure
Gross after Gross after
IN BILLIONS exposure collateral(b) exposure collateral(b)
- ----------------------------------------------------------- --------------------------
Derivatives $47.2(a) $42.2(a) $43.7(a) $37.7(a)
Loans 27.2 20.0 26.8 18.9
Lending commitments(c) 83.6 82.5 83.1 82.3
- ------------------------------------------------------------------------------------------
(a) Includes the benefit of master netting agreements of $89.6 billion and
$94.0 billion as of March 31, 2000 and December 31, 1999, respectively.
(b) Collateral held consisting of highly rated liquid securities (U.S.
government securities) and cash was as follows: derivatives - $5 billion
(March 2000) and $6 billion (December 1999); loans - $7.2 billion (March
2000) and $7.9 billion (December 1999); and lending commitments - $1.1
billion (March 2000) and $0.8 billion (December 1999).
(c) Before allowance for credit losses.
TRADITIONAL CREDIT PRODUCTS
The majority of credit risk from traditional credit products relates to
exposures managed by our Credit Portfolio segment. Exposures not managed by this
segment, primarily associated with our private banking activities, are largely
secured. The maximum credit risk for our traditional credit products is measured
by their contractual amounts, net of collateral. For example, the risk of a loan
is the amount of money lent to the client. For lending commitments, the risk is
the amount that would be owed should the contract be drawn upon, the client
default, and the collateral becomes worthless. A significant number of our
commitments expire, however, without being drawn upon. Moreover, commitments
usually include financial covenants and/or material adverse change clauses that,
if triggered, enable us to withdraw from the obligation to lend.
IMPAIRED LOANS
The following table presents impaired loans, net of charge-offs, as of March 31,
2000 and December 31, 1999.
Impaired loans
- ----------------------------------------------------------
March 31, December 31,
In millions 2000 1999
- ------------------------------------------- ------------
Commercial and industrial $117 $54
Other 23 23
- ----------------------------------------------------------
Total impaired loans 140 77
- ----------------------------------------------------------
Impaired loans were $140 million as of March 31, 2000, compared with $77 million
as of December 31, 1999. The increase in commercial and industrial loans was
primarily due to the addition of one European counterparty.
30
ALLOWANCES FOR CREDIT LOSSES
We maintain allowances for credit losses to absorb losses inherent in our
traditional extensions of credit that we believe are probable and can be
reasonably estimated. We determine the appropriateness of our allowances on a
quarterly basis. This review is performed separately for each allowance
classification - loans and lending commitments. The actual amount of credit
losses or charge-offs, when they occur, may vary from estimated losses at each
period end, due to changing economic conditions or exposure management
decisions. Our process includes procedures to limit differences between
estimated and actual credit losses, which include detailed quarterly assessments
by senior management and model inputs that reflect current market indicators of
credit quality.
The following table summarizes the activity of our allowances for credit losses
for the three months ended March 31, 2000 and 1999, respectively.
=============================================================================-==========================================
ALLOWANCE FOR CREDIT LOSSES ON
ALLOWANCE FOR LOAN LOSSES LENDING COMMITMENTS
- ------------------------------------------------------------------------------------------------------------------------
First First First First
Quarter Quarter Quarter Quarter
In millions 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 281 $ 470 $ 125 $ 125
- ------------------------------------------------------------------------------------------------------------------------
Provision for credit losses -- -- 1 --
Reversal of provision for credit losses -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Recoveries 9 5 -- --
Charge-offs:
Commercial and industrial -- (3) -- --
Banks -- -- -- --
Other, primarily financial institutions in 1999 -- (25) -- --
- ------------------------------------------------------------------------------------------------------------------------
Net recoveries/(charge-offs) 9 (23) -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31 290 447 126 125
=============================================================================-==========================================
The following table summarizes the period-end information of our allowances for
credit losses as of March 31, 2000 and December 31, 1999, respectively.
=============================================================================-============
ALLOWANCE FOR CREDIT LOSSES ON
ALLOWANCE FOR LOAN LOSSES LENDING COMMITMENTS
- ------------------------------------------------------------------------------------------
March 31 December 31 March 31 December 31
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------
Components:
Specific counterparty $ 46 $ 24 $ 23 $ 22
Expected loss 244 257 103 103
- ------------------------------------------------------------------------------------------
Total allowance 290 281 126 125
=============================================================================-============
The allowance for loan losses increased to $290 million at March 31, 2000 from
$281 million at December 31, 1999. The specific counterparty component of the
allowance for loan losses was $46 million and $24 million at March 31, 2000 and
December 31, 1999, respectively. The increase in the specific counterparty
component from the prior quarter primarily reflects a new allocation to an
industrial counterparty in Europe. The expected loss component of the allowance
for loan losses decreased 5% to $244 million as of March 31, 2000, primarily
reflecting improved market spreads globally which are used as a current
indicator of credit quality. The allowance for credit losses on lending
commitments was $126 million essentially unchanged from December 31, 1999.
31
CAPITAL
STOCKHOLDERS' EQUITY
At March 31, 2000, stockholders' equity of $11.6 billion included $119 million
of net unrealized appreciation on investment securities, net of the related tax
liability of $58 million. This compares with $44 million of net unrealized
appreciation at December 31, 1999, net of the related tax liability of $12
million. The net unrealized depreciation on debt investment securities was $72
million at March 31, 2000 compared with a net unrealized depreciation of $129
million at December 31, 1999. The decrease primarily related to the realization
of losses on sales of investment securities during the quarter. The net
unrealized appreciation on marketable equity investment securities was $200
million at March 31, 2000, and $169 million at December 31, 1999. The net
unrealized appreciation on investment securities held by unconsolidated
affiliates was $49 million and $16 million, respectively. Included in the table
below are selected ratios based upon stockholders' equity.
March 31, December 31, March 31,
Dollars in billions, except share data 2000 1999 1999
- ------------------------------------------------------------------------------------------
Total stockholders' equity $11.6 $11.4 $11.6
Rate of return on average common stockholders'
equity 23.4% 18.1% 22.3%
As percent of period-end total assets:
Common equity 3.8% 4.1% 4.1%
Total equity 4.1% 4.4% 4.3%
Book value per common share $59.82 $57.83 $56.66
- ------------------------------------------------ -----------------------------------------
During the first quarter of 2000, the firm purchased approximately $600 million
of its common stock or 5.2 million shares under its October 1999 authorization
to repurchase up to $3 billion of common stock. As of March 31, 2000, $2 billion
of this authorization had been utilized; we intend to use the remaining $1
billion over the next nine to 12 months, subject to market conditions, business
considerations, and other factors.
REGULATORY CAPITAL REQUIREMENTS
At March 31, 2000, the capital of J.P. Morgan and Morgan Guaranty Trust Company
of New York (Morgan Guaranty) remained well above the minimum standards set by
regulators. Further, the capital ratios of J.P. Morgan and Morgan Guaranty
exceeded the minimum standards for a well capitalized bank holding company and
bank, respectively, at March 31, 2000.
At March 31, 2000, under the Federal Reserve Board market risk capital
guidelines for calculation of risk-based capital ratios, J.P. Morgan's tier 1
and total risk-based capital ratios were 8.3% and 12.0%, respectively; the
leverage ratio was 4.5%. At December 31, 1999, J.P. Morgan's tier 1 and total
risk-based capital ratios were 8.8% and 12.9%, respectively, and the leverage
ratio was 4.7%. Refer to note 19, Capital Requirements, for further information.
Risk-adjusted assets represent the total of all on- and off-balance sheet
exposures adjusted for risk-based factors as prescribed by the Federal Reserve
Board. J.P. Morgan's risk-adjusted assets as of March 31, 2000 were $140.1
billion, compared with $131.4 billion at December 31, 1999.
32
EXPOSURES TO EMERGING COUNTRIES
The following tables present exposures to certain emerging markets based on
management's view of total exposure as of March 31, 2000.
The management view takes into account the following cross-border and local
exposures: the notional or contract value of loans, commitments to extend
credit, securities purchased under agreements to resell, interest-earning
deposits with banks; the fair values of trading account assets (cash securities
and derivatives, excluding any collateral we hold to offset these exposures) and
investment securities; and other monetary assets. It also considers the impact
of credit derivatives, at their notional or contract value, where we have bought
or sold credit protection outside of the respective country. Trading assets
reflect the net of long and short positions of the same issuer. Management's
view differs from bank regulatory rules, which are established by the Federal
Financial Institutions Examination Council (FFIEC), because of its treatment of
credit derivatives, trading account short positions, and the use of fair values
versus cost of investment securities. In addition, management does not net local
funding or liabilities against local exposures as allowed by the FFIEC.
By type of financial instrument
=============================================================================-==============================================
Credit Total
In billions Deriva- Other out- deriva- Commit- cross- Local Total
March 2000 Loans tives standings tives ments border exposure exposure
- ----------------------------------------------------------------------------------------------------------------------------
China $ - $ 0.1 $ 0.1 ($0.2) $ - $ - $ - $ -
Hong Kong 0.1 0.2 0.1 (0.1) 0.1 0.4 0.1 0.5
Indonesia 0.1 - 0.1 - - 0.2 - 0.2
Malaysia - - 0.2 - - 0.2 - 0.2
Philippines - - 0.2 - - 0.2 - 0.2
Singapore - 0.5 0.1 - - 0.6 0.1 0.7
South Korea 0.2 0.2 1.0 (0.3) - 1.1 0.7 1.8
Taiwan - - 0.1 - - 0.1 - 0.1
Thailand - 0.2 0.1 - - 0.3 - 0.3
Other - - - - - - 0.1 0.1
- ----------------------------------------------------------------------------------------------------------------------------
Total Asia, excluding Japan 0.4 1.2 2.0 (0.6) 0.1 3.1 1.0 4.1
- ----------------------------------------------------------------------------------------------------------------------------
Argentina 0.1 0.2 1.2 (0.3) - 1.2 0.3 1.5
Brazil 0.1 - 0.1 0.1 - 0.3 1.0 1.3
Chile 0.4 - 0.1 (0.1) - 0.4 - 0.4
Colombia 0.2 - 0.1 - - 0.3 - 0.3
Mexico 0.4 0.1 0.5 (0.4) - 0.6 1.4 2.0
Other 0.2 - 0.3 (0.1) - 0.4 - 0.4
- ----------------------------------------------------------------------------------------------------------------------------
Total Latin America, excluding the
Caribbean 1.4 0.3 2.3 (0.8) - 3.2 2.7 5.9
- ----------------------------------------------------------------------------------------------------------------------------
33
FORWARD-LOOKING STATEMENTS
J.P. Morgan and its subsidiaries operate in an intensely competitive industry.
We compete globally with investment banks, commercial banks, and a wide range of
nonbank financial institutions. Our non-U.S. competitors may have advantages in
their home markets. We have also seen new competitors such as insurance
companies and Internet companies compete with us for clients, market share, and
people. We anticipate further competitive pressures from industry consolidation,
which we expect to accelerate in the wake of the November 1999 passage of the
Gramm-Leach-Bliley Act. In addition to a competitive marketplace, we also
operate in an unpredictable global market environment. Our results are directly
affected by factors outside our control, including general economic and market
conditions; volatility of market prices, rates, and indices; and legislative and
regulatory developments. They are also dependent on our ability to attract and
retain skilled individuals and our ability to develop and support technology and
information systems that are critical to our operations. Consequently, our
results may vary significantly from period to period, and we may not be able to
achieve our strategic objectives.
Certain sections of our Form 10-Q contain forward-looking statements. We use
words such as expect, believe, anticipate, and estimate to identify these
statements. In particular, disclosures made in the sections "Financial
Highlights" and "Financial Review," contain forward-looking statements. Such
statements are based on our current expectations and are subject to the risks
and uncertainties discussed above, which could cause actual results to differ
materially from those currently anticipated. J.P. Morgan claims the protection
afforded by the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
34
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
Dollars in millions, Three months ended
Interest and average rates ------------------------------------------------------------------------
on a taxable-equivalent basis March 31, 2000 March 31, 1999
------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
------------------------------------------------------------------------
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 3,527 $ 78 8.89% $ 2,937 $ 81 11.18%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 327 7 8.61 619 13 8.52
U.S. state and political subdivision 1,206 40 13.34 1,653 47 11.53
Other 9,356 170 7.31 29,056 387 5.40
Debt investment securities in offices
outside the U.S. (a) 1,795 18 4.03 2,504 31 5.02
Trading account assets:
In offices in the U.S. 36,204 643 7.14 29,704 393 5.37
In offices outside the U.S. 26,501 458 6.95 28,649 469 6.64
Securities purchased under agreements to resell:
In offices in the U.S. 27,742 381 5.52 22,016 265 4.88
In offices outside the U.S. 12,003 136 4.56 13,240 161 4.93
Securities borrowed,
mainly in offices in the U.S. 34,891 513 5.91 36,948 448 4.92
Loans:
In offices in the U.S. 15,387 295 7.71 5,766 104 7.31
In offices outside the U.S. 11,267 167 5.96 21,747 327 6.10
Other interest-earning assets (b):
In offices in the U.S. 4,465 85 * 1,430 20 *
In offices outside the U.S. 890 57 * 974 32 *
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 185,561 3,048 6.61 197,243 2,778 5.71
Cash and due from banks 615 2,156
Other noninterest-earning assets 74,282 70,764
- -----------------------------------------------------------------------------------------------------------------------------
Total assets 260,458 270,163
- -----------------------------------------------------------------------------------------------------------------------------
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the three months ended March 31, 2000 and 1999.
(a) For the three months ended March 31, 2000 and 1999, average debt investment
securities are computed based on historical amortized cost, excluding the
effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance-sheet
transactions.
* Not meaningful
35
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
Dollars in millions, Three months ended
Interest and average rates -----------------------------------------------------------------
on a taxable-equivalent basis March 31, 2000 March 31, 1999
-----------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
-----------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. $ 3,530 $ 59 6.72% $ 9,018 $ 110 4.95%
In offices outside the U.S. 40,037 483 4.85 47,617 506 4.31
Trading account liabilities:
In offices in the U.S. 11,884 214 7.24 6,650 113 6.89
In offices outside the U.S. 12,322 180 5.88 12,840 161 5.09
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 62,421 808 5.21 61,171 743 4.93
Commercial paper, mainly in offices
in the U.S. 11,923 177 5.97 9,661 121 5.08
Other interest-bearing liabilities:
In offices in the U.S. 6,511 191 11.79 10,917 185 6.87
In offices outside the U.S. 3,396 85 10.07 3,994 49 4.98
Long-term debt,
mainly in offices in the U.S. 24,280 381 6.31 28,548 380 5.40
- -------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 176,304 2,578 5.88 190,416 2,368 5.04
Noninterest-bearing deposits:
In offices in the U.S. 951 882
In offices outside the U.S. 510 812
Other noninterest-bearing
liabilities 71,368 66,603
- -------------------------------------------------------------------------------------------------------
Total liabilities 249,133 258,713
Stockholders' equity 11,325 11,450
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 260,458 270,163
Net yield on interest-earning assets 1.02 0.84
- -------------------------------------------------------------------------------------------------------
Net interest earnings 470 410
- -------------------------------------------------------------------------------------------------------
36
CROSS-BORDER AND LOCAL OUTSTANDINGS UNDER THE REGULATORY BASIS
For financial reporting purposes only, the following table presents our
cross-border and local outstandings under the regulatory basis established by
the Federal Financial Institutions Examination Council (FFIEC). Bank regulatory
rules differ from management's view in the treatment of credit derivatives,
trading account short positions, and the use of fair value versus cost of
investment securities. In addition, management does not net local funding or
liabilities against any local exposures as allowed by the FFIEC. Refer to page
32 for more information on exposures based on the management view.
In accordance with the regulatory rules, cross-border outstandings include,
regardless of currency:
- - all claims of our U.S. offices against foreign residents
- - all claims of our foreign offices against residents of other foreign countries
Local outstandings include all claims of our foreign offices with residents of
the same foreign country, net of local funding.
All outstandings are primarily based on the location of the ultimate
counterparty; that is, if collateral or a formal guarantee exists, the country
presented is determined by the location where the collateral is held and
realizable, or the location of the guarantor. Cross-border and local
outstandings include the following: interest-earning deposits with banks;
investment securities; trading account assets including derivatives; securities
purchased under agreements to resell; loans; accrued interest; investments in
affiliates; and other monetary assets. Commitments include all cross-border
commitments to extend credit, standby letters of credit, and guarantees, and
securities lending indemnifications.
The following table shows each country where cross-border and local outstandings
exceed 0.75% of total assets, as of March 31, 2000.
Total out-
standings
Net local Total % of and
In millions Govern- out- out- total Commit- commit-
March 31, 2000 Banks ments Other(a) standings standings assets ments ments
- ----------------------------------------------------------------------------------------------------------------
Germany $7,554 $11,345 $3,574 $- $22,473 7.90% $2,656 $25,129
Italy 3,156 9,272 1,916 - 14,344 5.04 284 14,628
Netherlands 3,671 2,715 3,777 - 10,163 3.57 1,350 11,513
United Kingdom 4,754 366 3,124 - 8,244 2.90 1,678 9,922
France 2,772 2,076 2,347 - 7,195 2.53 1,193 8,388
Japan 2,402 1,803 2,266 - 6,471 2.27 903 7,374
Switzerland 1,750 240 1,612 147 3,749 1.32 747 4,496
Spain 766 1,419 1,187 193 3,565 1.25 426 3,991
Belgium 666 1,313 757 - 2,736 0.96 813 3,549
Mexico (b) 74 1,512 848 - 2,434 0.86 100 2,534
South Africa 173 1,303 278 388 2,142 0.75 67 2,209
- ----------------------------------------------------------------------------------------------------------------
(a) Includes nonbank financial institutions and commercial and industrial
entities.
(b) See page 32 for exposure to this country under the management view.
37
Part II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SUMMARY OF J.P. MORGAN'S ANNUAL MEETING
The 2000 annual meeting of stockholders of J.P. Morgan & Co. Incorporated was
held on Wednesday, April 12, 2000 at the company's 60 Wall Street headquarters;
83.84% of the 164,265,059 shares of common stock outstanding and eligible to be
voted was represented either in person or by proxy, constituting a quorum.
Douglas A. Warner III, Chairman of the Board, presided.
The stockholders took the following actions:
1. Elected all 15 nominees to one-year terms as members of the Board of
Directors. The directors are:
Percent of Shares Percent of
Director Shares in favor shares voting withheld shares voting
- ----------------------------------------------------------------------------------------------------------
Douglas A. Warner III * 134,494,654 97.66% 3,217,110 2.34%
Paul A. Allaire 134,526,682 97.69% 3,185,082 2.31%
Riley P. Bechtel 134,458,657 97.64% 3,253,107 2.36%
Lawrence A. Bossidy 134,559,381 97.71% 3,152,383 2.29%
Martin Feldstein 134,549,711 97.70% 3,162,053 2.30%
Ellen V. Futter 134,473,143 97.65% 3,238,621 2.35%
Hanna H. Gray 134,444,573 97.63% 3,267,191 2.37%
Walter A. Gubert ** 134,551,151 97.71% 3,160,613 2.29%
James R. Houghton 134,499,462 97.67% 3,212,302 2.33%
James L. Ketelsen 134,440,213 97.62% 3,271,551 2.38%
John A. Krol 134,496,854 97.67% 3,214,910 2.33%
Michael E. Patterson ** 134,538,498 97.70% 3,173,266 2.30%
Lee R. Raymond 134,472,441 97.65% 3,239,323 2.35%
Lloyd D. Ward 134,542,696 97.70% 3,169,068 2.30%
Douglas C. Yearley 134,516,708 97.68% 3,195,056 2.32%
* Chairman of the Board
** Vice Chairman of the Board
2. Approved the appointment of PricewaterhouseCoopers LLP as independent
accountants to perform auditing functions during 2000. There were 136,071,592
shares in favor, or 98.81% of shares voting; 293,937 shares against, or 0.21% of
shares voting; 1,346,235 shares abstained; and no shares reflecting broker
nonvotes.
3. Defeated the stockholder proposal relating to director share ownership. There
were 95,006,156 shares against, or 84.27% of shares voting; 12,726,869 shares
for, or 11.29% of shares voting; 5,013,953 shares abstained; and 24,964,786
shares reflecting broker nonvotes.
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. Statement re computation of ratios (incorporated by reference to
exhibit 12 to J.P. Morgan's report on Form 8-K, dated April 6,
2000)
27. Financial data schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended March 31, 2000:
March 30, 2000 (Items 5 and 7)
Reported the issuance of a press release announcing its partnership with
Sony and Sakura Bank with the purpose of establishing an Internet
bank in Japan.
Reported the issuance of a press release announcing the launching, in
partnership with EDS, of Arcordia, the world's first independent
internet-based derivative management and settlement company. Arcordia
will provide transaction management and settlement services via the
Internet for derivative products to financial institutions and
corporations worldwide.
March 13, 2000 (Items 5 and 7)
Reported the issuance of a press release announcing the introduction of
Morgan OnLine, a new Internet service delivering the firm's trusted
private client services to today's growing number of millionaire
clients.
Reported the issuance of a press release announcing that continued
momentum in a robust business environment produced strong performance
in the first two months of 2000.
March 9, 2000 (Items 5 and 7)
Reported the issuance of a press release announcing the introduction of
LabMorgan, the firm's new e-finance unit. J.P. Morgan intends to
commit up to $1 billion to electronic business initiatives in 2000,
the majority of which will be invested as capital in promising
ventures.
January 18, 2000 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing its
earnings for the three and twelve month periods ended December 31,
1999. Disclosed the statement of consolidated average balances and
net interest earnings for the three and twelve-month periods ended
December 31, 1999.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J.P. MORGAN & CO. INCORPORATED
(Registrant)
/s/ DAVID H. SIDWELL
-----------------------------------
NAME: DAVID H. SIDWELL
TITLE: MANAGING DIRECTOR AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
DATE: May 15, 2000