1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2001 COMMISSION FILE NUMBER 1-5805
J.P. MORGAN CHASE & CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2624428
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
270 PARK AVENUE, NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 270-6000
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
------- ------
COMMON STOCK, $1 PAR VALUE 1,985,208,610
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK ON
APRIL 30, 2001.
2
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1
Financial Statements - J.P. Morgan Chase & Co.:
Consolidated Statement of Income for three months ended
March 31, 2001 and March 31, 2000 3
Consolidated Balance Sheet at March 31, 2001 and
December 31, 2000 4
Consolidated Statement of Changes in Stockholders' Equity for
the three months ended March 31, 2001 and March 31, 2000 5
Consolidated Statement of Cash Flows for the three months
ended March 31, 2001 and March 31, 2000 6
Notes to Consolidated Financial Statements 7-14
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 15-46
Glossary of Terms 47
Item 3 Quantitative and Qualitative Disclosures About Market Risk 48
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings 48-49
Item 2 Sales of Unregistered Common Stock 49
Item 6 Exhibits and Reports on Form 8-K 49
The Management's Discussion and Analysis contains statements that are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements are based upon the current beliefs and expectations
of J.P. Morgan Chase & Co.'s management and are subject to significant risks and
uncertainties. Actual results may differ from those set forth in the
forward-looking statements. Factors that could cause J.P. Morgan Chase & Co.'s
results to differ materially from those described in the forward-looking
statements can be found in the 2000 Annual Report on Form 10-K of J.P. Morgan
Chase & Co. filed with the Securities and Exchange Commission.
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3
Part I
Item 1
J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
FIRST QUARTER
-----------------------
2001 2000
- --------------------------------------------------------------------------------
REVENUE
Investment Banking Fees $ 941 $ 1,191
Trading Revenue 2,001 1,971
Fees and Commissions 2,065 2,197
Private Equity - Realized Gains 412 392
Private Equity - Unrealized Gains (Losses) (285) 282
Securities Gains (Losses) 455 (3)
Other Revenue 246 325
- --------------------------------------------------------------------------------
Total Noninterest Revenue 5,835 6,355
- --------------------------------------------------------------------------------
Interest Income 9,180 8,440
Interest Expense 6,762 6,026
- --------------------------------------------------------------------------------
Net Interest Income 2,418 2,414
- --------------------------------------------------------------------------------
Revenue before Provision for Loan Losses 8,253 8,769
Provision for Loan Losses 447 342
- --------------------------------------------------------------------------------
Total Net Revenue 7,806 8,427
- --------------------------------------------------------------------------------
EXPENSE
Compensation Expense 3,357 3,340
Occupancy Expense 348 308
Technology and Communications 654 580
Merger and Restructuring Costs 328 --
Amortization of Intangibles 177 93
Other Expense 1,062 1,032
- --------------------------------------------------------------------------------
Total Noninterest Expense 5,926 5,353
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT
OF ACCOUNTING CHANGE 1,880 3,074
Income Tax Expense 656 1,086
- --------------------------------------------------------------------------------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE $ 1,224 $ 1,988
Net Effect of Change in Accounting Principle (25) --
- --------------------------------------------------------------------------------
NET INCOME $ 1,199 $ 1,988
- --------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 1,178 $ 1,963
- --------------------------------------------------------------------------------
NET INCOME PER SHARE (a)
Basic $ 0.60 $ 1.06
Diluted $ 0.58 $ 1.01
- --------------------------------------------------------------------------------
(a) Basic and diluted earnings per share have been reduced by $(0.01) in
the first quarter of 2001 due to the impact of the adoption of SFAS 133
relating to the Accounting for Derivative Instruments and Hedging
Activities.
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
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4
Part I
Item 1 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
MARCH 31, December 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 22,371 $ 23,972
Deposits with Banks 7,979 8,333
Federal Funds Sold and Securities Purchased under Resale Agreements 71,147 69,474
Securities Borrowed 37,264 32,371
Trading Assets: Debt and Equity Instruments 138,270 139,249
Derivative Receivables 78,907 76,373
Securities:
Available-for-Sale 69,166 73,106
Held-to-Maturity (Fair Value: $575 at March 31, 2001
and $593 at December 31, 2000) 565 589
Loans (Net of Allowance for Loan Losses of $3,672 at March 31, 2001
and $3,665 at December 31, 2000) 213,116 212,385
Goodwill and Other Intangibles 15,351 15,833
Private Equity Investments 10,877 11,428
Accrued Interest and Accounts Receivable 15,352 20,618
Premises and Equipment 7,085 7,087
Other Assets 26,174 24,530
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 713,624 $ 715,348
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-Bearing $ 59,686 $ 62,713
Interest-Bearing 212,886 216,652
------------ -----------
Total Deposits 272,572 279,365
Federal Funds Purchased and Securities Sold under Repurchase Agreements 145,703 131,738
Commercial Paper 16,281 24,851
Other Borrowed Funds 28,716 19,840
Trading Liabilities: Debt and Equity Instruments 52,501 52,157
Derivative Payables 73,312 76,517
Accounts Payable, Accrued Expenses and Other Liabilities (including the
Allowance for Credit Losses of $283 at March 31, 2001 and
December 31, 2000) 33,575 40,754
Long-Term Debt 42,609 43,299
Guaranteed Preferred Beneficial Interests in the Firm's
Junior Subordinated Deferrable Interest Debentures 4,439 3,939
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 669,708 672,460
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK OF SUBSIDIARY 550 550
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 1,362 1,520
Common Stock (Authorized 4,500,000,000 Shares, Issued 1,984,652,408
Shares at March 31, 2001 and 1,940,109,081 Shares at December 31, 2000) 1,984 1,940
Capital Surplus 11,663 11,598
Retained Earnings 28,592 28,096
Accumulated Other Comprehensive Income (Loss) (214) (241)
Treasury Stock, at Cost (416,771 Shares at March 31, 2001
and 11,618,856 Shares at December 31, 2000) (21) (575)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 43,366 42,338
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 713,624 $ 715,348
- ------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
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5
Part I
Item 1 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS)
THREE MONTHS ENDED MARCH 31, 2001 2000
- ---------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at Beginning of Year $ 1,520 $ 1,622
Redemption of Stock (158) --
- ---------------------------------------------------------------------------------------------
Balance at End of Period 1,362 1,622
- ---------------------------------------------------------------------------------------------
COMMON STOCK
Balance at Beginning of Year 1,940 1,625
Issuance of Common Stock 42 --
Issuance of Common Stock for (Purchase Accounting) Acquisitions 2 --
- ---------------------------------------------------------------------------------------------
Balance at End of Period 1,984 1,625
- ---------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at Beginning of Year 11,598 12,724
Issuance of Common Stock for (Purchase Accounting) Acquisitions 79 --
Shares Issued and Commitments to Issue Common Stock for
Employee Stock-Based Awards and Related Tax Effects (14) (444)
- ---------------------------------------------------------------------------------------------
Balance at End of Period 11,663 12,280
- ---------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at Beginning of Year 28,096 28,455
Net Income 1,199 1,988
Cash Dividends Declared:
Preferred Stock (21) (25)
Common Stock ($0.34 and $0.32 per share) (682) (570)
- ---------------------------------------------------------------------------------------------
Balance at End of Period 28,592 29,848
- ---------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at Beginning of Year (241) (1,428)
Other Comprehensive Income 27 162
- ---------------------------------------------------------------------------------------------
Balance at End of Period (214) (1,266)
- ---------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance at Beginning of Year (575) (7,942)
Purchase of Treasury Stock -- (1,673)
Reissuance of Treasury Stock 554 1,102
- ---------------------------------------------------------------------------------------------
Balance at End of Period (21) (8,513)
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 43,366 $ 35,596
- ---------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net Income $ 1,199 $ 1,988
Other Comprehensive Income 27 162
- ---------------------------------------------------------------------------------------------
Comprehensive Income $ 1,226 $ 2,150
- ---------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
-5-
6
Part I
Item 1 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
THREE MONTHS ENDED MARCH 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 1,199 $ 1,988
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in)
Operating Activities:
Provision for Loan Losses 447 342
Merger and Restructuring Costs 328 --
Depreciation and Amortization 730 393
Net Change in:
Trading-Related Assets (1,555) (21,978)
Securities Borrowed (4,893) 1,026
Accrued Interest and Accounts Receivable 5,266 3,275
Other Assets (2,157) (3,999)
Trading-Related Liabilities (3,063) 6,742
Accounts Payable, Accrued Expenses and Other Liabilities (7,719) 1,194
Other, Net 1,001 (866)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (10,416) (11,883)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net Change in:
Deposits with Banks 354 22,227
Federal Funds Sold and Securities Purchased under Resale Agreements (1,673) (15,930)
Loans Due to Sales and Securitizations 9,942 6,005
Other Loans, Net (9,777) (5,913)
Other, Net 1,358 (1,559)
Held-to-Maturity Securities: Proceeds 24 122
Purchases -- (55)
Available-for-Sale Securities: Proceeds from Maturities 2,135 3,769
Proceeds from Sales 46,843 21,462
Purchases (45,869) (21,636)
Cash Used in Acquisitions (1,677) --
Proceeds from Divestitures of Nonstrategic Businesses and Assets 47 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 1,707 8,492
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Change in:
Domestic Deposits (900) 826
Foreign Deposits (5,893) (28,925)
Federal Funds Purchased and Securities Sold under
Repurchase Agreements 13,965 34,001
Commercial Paper and Other Borrowed Funds 306 (5,281)
Other, Net 114 (52)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 4,983 5,514
Repayments of Long-Term Debt (5,287) (1,380)
Proceeds from the Issuance of Stock and Stock-Related Awards 582 375
Redemption of Preferred Stock (158) --
Treasury Stock Purchased -- (1,673)
Cash Dividends Paid (631) (530)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 7,081 2,875
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Due from Banks 27 (17)
Net Decrease in Cash and Due from Banks (1,601) (533)
Cash and Due from Banks at December 31, 2000 and 1999 23,972 18,692
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at March 31, 2001 and 2000 $ 22,371 $ 18,159
Cash Interest Paid $ 7,286 $ 5,606
Taxes Paid $ 438 $ 636
- ------------------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
-6-
7
Part I
Item 1 (continued)
See Glossary of Terms on page 47 for definition of terms used throughout the
Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MERGER WITH J.P. MORGAN & CO. INCORPORATED
On December 31, 2000, J.P. Morgan & Co. Incorporated ("J.P. Morgan") merged with
and into The Chase Manhattan Corporation ("Chase"). Upon consummation of the
merger, Chase changed its name to J.P. Morgan Chase & Co. ("JPMorgan Chase",
"JPMC" or "the Firm"). The merger was accounted for as a pooling of interests
and, accordingly, the information included in the financial statements and
consolidated notes of JPMorgan Chase reflects the combined results of Chase and
J.P. Morgan as if the merger had been in effect for all periods presented. In
addition, certain amounts have been reclassified to conform to the current
presentation.
NOTE 2 - BASIS OF PRESENTATION
The accounting and financial reporting policies of JPMorgan Chase and its
subsidiaries conform to U.S. generally accepted accounting principles ("GAAP")
and prevailing industry practices for interim reporting. Additionally, where
applicable, the policies conform to the accounting and reporting guidelines
prescribed by bank regulatory authorities. The unaudited consolidated financial
statements prepared in conformity with GAAP require management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expense, and disclosure of contingent assets and liabilities. In the opinion
of management, all necessary adjustments have been included for a fair
presentation of this interim financial information. These unaudited financial
statements should be read in conjunction with the audited financial statements
included in JPMorgan Chase's 2000 Annual Report on Form 10-K ("2000 Annual
Report"), with the exception of Note 3 below, "Accounting for Derivative
Instruments and Hedging Activities."
NOTE 3 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, JPMorgan Chase adopted SFAS 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and used for hedging
activities. All derivatives, whether designated for hedging relationships or
not, are required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, all changes in the fair value of
the derivative and changes in the fair value of the hedged item attributable to
the hedged risk are recognized in earnings. If the derivative is designated as a
cash flow hedge, the effective portions of the changes in the fair value of the
derivative are recorded in other comprehensive income and are recognized in the
income statement when the hedged item affects earnings. The ineffective portions
of both fair value and cash flow hedges are immediately recognized in earnings.
The majority of JPMorgan Chase's derivatives are entered into for trading
purposes and were not impacted by the adoption of SFAS 133. The Firm also uses
derivatives as an end user to hedge market exposures, modify the interest rate
characteristics of related balance sheet instruments or meet longer-term
investment objectives. Both trading and end-user derivatives are recorded in
trading assets and liabilities. For further discussion of the Firm's use of
derivative instruments, see Note 25 and page 50 of the JPMorgan Chase 2000
Annual Report.
The adoption of SFAS 133 resulted in an after-tax reduction to net income of $25
million and an after-tax reduction to other comprehensive income of $36 million.
The impact of reclassifying certain SFAS 115 securities from available-for-sale
to trading was not material at the adoption date.
Due to SFAS 133, JPMorgan Chase changed certain hedging strategies and elected
not to designate some derivatives utilized to manage economic exposure as
accounting hedges. In particular, the mortgage business began using
available-for-sale ("AFS") securities as economic hedges of mortgage servicing
rights, with gains on sales of the securities, which are recorded in securities
gains (losses), offsetting impairment losses on the mortgage servicing rights,
which are recorded in fees and commissions. Certain interest rate derivatives
are recorded in trading revenue due to operational and cost constraints of
applying hedge accounting. Changes in value of credit derivatives used to manage
the Firm's credit risk are recorded in trading revenue because of the
difficulties in designating such contracts as hedges of loans and commitments.
Because of hedge ineffectiveness and management's decision no longer to apply
hedge accounting but to continue to enter into economic hedges to support
certain business strategies, adoption of SFAS 133, in the future, may cause
volatility in quarterly earnings and equity.
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8
Part I
Item 1 (continued)
JPMorgan Chase's fair value hedges primarily include hedges of fixed rate
long-term debt, loans, available-for-sale securities and mortgage servicing
rights. Interest rate swaps are the most common type of derivative contract used
to modify exposure to interest rate risk by converting fixed rate assets and
liabilities to a floating rate. During the quarter ended March 31, 2001,
JPMorgan Chase recognized a net gain of $6 million related to the ineffective
portion of its hedging instruments and the portion of hedging instruments
excluded from the assessment of hedge effectiveness. All amounts have been
included in earnings consistent with the hedged transaction, primarily net
interest income, fees and commissions and other revenue. JPMorgan Chase did not
recognize any gains or losses during the first quarter of 2001 on firm
commitments that no longer qualify as fair value hedges.
JPMorgan Chase enters into derivative contracts to hedge exposure to variability
in cash flows for floating rate financial instruments and forecasted
transactions, which primarily include the rollover of short-term assets and
liabilities, loan sales and anticipated securities transactions. Interest rate
swaps, futures and options are the most common instruments used to reduce the
impact of interest rate changes on future earnings. During the quarter ended
March 31, 2001, JPMorgan Chase recognized a net loss of $4 million related to
the ineffective portion of its hedging instruments and the portion of the
hedging instrument excluded from the assessment of hedge effectiveness. All
amounts have been included in earnings consistent with the hedged transaction,
primarily net interest income. The Firm recognized gains of $40 million in net
interest income during the quarter ended March 31, 2001 for cash flow hedges of
AFS security purchases that were discontinued because the forecasted transaction
did not occur. Over the next 12 months, JPMorgan Chase expects to reclassify
approximately $41 million (after-tax) of net losses on derivative instruments
from accumulated other comprehensive income to earnings, primarily to offset
variable interest on floating-rate instruments, forecasted rollovers of
short-term transactions and proceeds from anticipated loan sales. The net
derivative amounts included in other comprehensive income as of March 31, 2001
are expected to be reclassified into earnings through 2011.
JPMorgan Chase uses forward foreign exchange contracts and foreign currency
denominated floating rate debt to protect the value of its investments in its
foreign subsidiaries in foreign currencies. The portion of the hedging
instruments excluded from the assessment of hedge effectiveness (forward points)
is recorded in net interest income. During the quarter ended March 31, 2001, the
Firm recognized $17 million of net losses related to the forward foreign
exchange contracts.
NOTE 4 - MERGER AND RESTRUCTURING COSTS
The following table shows the activity in the merger liability in the 2001 first
quarter:
(dollars in millions)
MERGER LIABILITY 2001
-----------
Liability Balance at December 31, 2000 $ 917
Liability Utilized in First Quarter 2001 (162)
-----------
Liability Balance at March 31 $ 755
===========
Employee Reductions as a result of the Merger (includes attrition)
during First Quarter 2001 2,868
Cumulative Employee Reductions as a result of the Merger 3,023
Additionally, during the first quarter of 2001, the Firm incurred $328 million
of costs relating to previously announced actions ($274 million) and relocation
and other business initiatives ($54 million). Under current accounting
pronouncements, these costs (primarily system integration costs, facilities
costs and retention payments) are not recognized until incurred. For a
discussion of JPMorgan Chase's merger and restructuring costs, refer to Note 7
and page 42 of JPMorgan Chase's 2000 Annual Report.
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9
Part I
Item 1 (continued)
NOTE 5 - TRADING ASSETS AND LIABILITIES
For a discussion of the accounting policies relating to trading assets and
liabilities, see Note 1 of JPMorgan Chase's 2000 Annual Report.
The following presents trading assets and trading liabilities for the dates
indicated.
(in millions) MARCH 31, December 31,
2001 2000
-------- -----------
TRADING ASSETS
Debt and Equity Instruments:
U.S. Government, Federal Agencies and
Municipal Securities $ 49,713 $ 43,251
Certificates of Deposit, Bankers' Acceptances
and Commercial Paper 6,445 7,258
Debt Securities Issued by Foreign Governments 43,777 41,631
Corporate Securities and Other 38,335 47,109
-------- --------
Total Trading Assets - Debt and Equity Instruments $138,270 $139,249
======== ========
Derivative Receivables:
Interest Rate Contracts $ 34,948 $ 41,124
Foreign Exchange Contracts 17,304 15,484
Debt, Equity, Commodity and Other Contracts 26,655 19,765
-------- --------
Total Trading Assets - Derivative Receivables $ 78,907 $ 76,373
======== ========
TRADING LIABILITIES
Debt and Equity Instruments:
Securities Sold, Not Yet Purchased $ 52,100 $ 51,762
Structured Notes 401 395
-------- --------
Total Trading Liabilities - Debt and Equity Instruments $ 52,501 $ 52,157
======== ========
Derivative Payables:
Interest Rate Contracts $ 30,484 $ 27,968
Foreign Exchange Contracts 16,445 17,759
Debt, Equity, Commodity and Other Contracts 26,383 30,790
-------- --------
Total Trading Liabilities - Derivative Payables $ 73,312 $ 76,517
======== ========
In accordance with SFAS 140, debt and equity instruments pledged as collateral
that can be sold or repledged by the secured party amounted to $53.6 billion at
March 31, 2001 and December 31, 2000.
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10
Part I
Item 1 (continued)
NOTE 6 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note 1
of JPMorgan Chase's 2000 Annual Report.
The following table presents realized gains and losses from available-for-sale
securities.
(in millions) FIRST QUARTER
------------------------
2001 2000
----- -----
Realized Gains $ 651 $ 109
Realized Losses (196) (112)
----- -----
Net Realized Gains (Losses) $ 455 $ (3)
===== =====
The amortized cost and estimated fair value of securities were as follows for
the dates indicated:
(in millions) MARCH 31, 2001 December 31, 2000
--------------------------------- -----------------------------
AMORTIZED FAIR Amortized Fair
AVAILABLE-FOR-SALE SECURITIES COST VALUE Cost Value
----------- ----------- ----------- -----------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 37,351 $ 36,976 $ 38,107 $ 37,168
Collateralized Mortgage Obligations 4,103 4,104 5,130 5,215
U.S. Treasuries 13,650 13,668 16,250 16,294
Obligations of State and Political Subdivisions 1,279 1,357 896 967
Debt Securities Issued by Foreign Governments 10,810 10,851 10,749 10,800
Corporate Debt Securities 828 823 1,080 1,072
Equity Securities 970 979 1,111 1,323
Other (a) 366 408 243 267
----------- ----------- ----------- -----------
Total Available-for-Sale Securities $ 69,357 $ 69,166 $ 73,566 $ 73,106
=========== =========== =========== ===========
HELD-TO-MATURITY SECURITIES (b) $ 565 $ 575 $ 589 $ 593
=========== =========== =========== ===========
(a) Includes collateralized mortgage obligations ("CMO") of private
issuers, which generally have underlying collateral consisting of
obligations of U.S. government and federal agencies and corporations.
(b) Primarily mortgage-backed securities.
In accordance with SFAS 140, AFS securities pledged as collateral that can be
sold or repledged by the secured party amounted to $29.9 billion and $28.7
billion at March 31, 2001 and December 31, 2000, respectively.
NOTE 7 - MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in residential mortgage servicing
rights ("MSRs"):
(in millions) FIRST QUARTER
-----------------------------------
2001 2000
---------- ---------
Balance at Beginning of Period $ 6,362 $ 5,187
Originations and Purchases of MSRs 853 562
Sales (75) (159)
Pre-SFAS 133 Hedging Activities -- 85
Amortization of MSRs (248) (156)
SFAS 133 Hedge Valuation Adjustments (495) --
Change in Valuation Allowance (335) --
---------- ---------
Balance at March 31, $ 6,062 $ 5,519
========== =========
Estimated Fair Value at March 31, $ 6,100
==========
WEIGHTED-AVERAGE PREPAYMENT SPEED ASSUMPTION 13.10% CPR
WEIGHTED-AVERAGE DISCOUNT RATE 10.78%
CPR - Constant Prepayment Rate
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11
Part I
Item 1 (continued)
Various interest rate derivatives are designated as fair value hedges of
residential mortgage servicing rights. SFAS 133 hedge valuation
adjustments are adjustments to the carrying value of the MSRs. For the quarter
ended March 31, 2001, the SFAS 133 hedge valuation adjustments of $495 million,
which includes the impact of adopting SFAS 133, were substantially offset by
derivative gains of $479 million. In addition, certain AFS securities are used
as economic hedges of the MSRs with gains on sales of the securities offsetting
impairment losses on the MSRs. During the first quarter, the $335 million change
in valuation allowance was substantially offset by $315 million of realized AFS
security gains.
NOTE 8 - SUBORDINATED DEFERRABLE INTEREST DEBENTURES
At March 31, 2001, 11 wholly owned Delaware statutory business trusts
established by JPMorgan Chase had issued an aggregate $4,439 million in capital
securities, net of discount. For a discussion of the business trusts, see page
78 of JPMorgan Chase's 2000 Annual Report. During the 2001 first quarter,
JPMorgan Chase Capital IX Trust issued $500 million of capital securities having
a stated maturity of February 15, 2031 and bearing an interest rate of 7.50%,
payable quarterly commencing on April 30, 2001. There were no other issuances or
redemptions of capital securities during the first quarter 2001.
NOTE 9 - EARNINGS PER SHARE
For a discussion of JPMorgan Chase's earnings per share ("EPS"), see Note 17 of
the 2000 Annual Report. For the calculation of basic and diluted EPS for the
first quarter ended March 31, 2001 and 2000, see Exhibit 11 on page 52.
-11-
12
Part I
Item 1 (continued)
NOTE 10 - COMPREHENSIVE INCOME
Comprehensive income is composed of net income and other comprehensive income,
which includes the after-tax change in unrealized gains and losses on AFS
securities, cash flow hedging activities and foreign currency translation
adjustments.
THREE MONTHS ENDED MARCH 31,
(in millions)
2001
----------------------------------------------------------------------------------------
ACCUMULATED
CASH OTHER
UNREALIZED TRANSLATION FLOW COMPREHENSIVE
GAINS(LOSSES) ADJUSTMENTS HEDGES INCOME
------------- ----------- ------ ------
Beginning Balance $ (244) $ 3 $ -- $ (241)
Change during Period 155 4 (b) (132) (d) 27
----------- ---------- ---------- --------
Ending Balance $ (89)(a) $ 7 (c) $ (132) $ (214)
=========== ========== ========== ========
2000
----------------------------------------------------------------------------------------
Accumulated
Cash Other
Unrealized Translation Flow Comprehensive
Gains(Losses) Adjustments Hedges Income
Beginning Balance $ (1,427) $ (1) $ N/A $ (1,428)
Change during Period 160 2 N/A 162
----------- ---------- ---------- --------
Ending Balance $ (1,267)(a) $ 1 (c) $ N/A $ (1,266)
=========== ========== ========== ========
(a) Primarily represents the after-tax difference between the fair value
and amortized cost of the available-for-sale securities portfolio.
(b) Includes $244 million of after-tax losses on foreign currency
translation from operations for which the functional currency is other
than the U.S. dollar, which are offset by $248 million of after-tax
gains on hedges.
(c) Includes after-tax gains and losses on foreign currency translation
from operations for which the functional currency is other than the
U.S. dollar.
(d) Includes $13 million of after-tax losses reclassified to income and
$145 million of after-tax losses representing the net change in
derivative fair values and the impact of the adoption of SFAS 133 that
were recorded in comprehensive income.
N/A - Not Applicable.
NOTE 11 - CAPITAL
For a discussion of the calculation of risk-based capital ratios, see Note 23 of
JPMorgan Chase's 2000 Annual Report.
The following table presents the risk-based capital ratios for JPMorgan Chase
and its significant banking subsidiaries. At March 31, 2001, the Firm and each
of its depository institutions, including those listed in the table below, were
"well-capitalized" as defined by banking regulators.
SIGNIFICANT BANKING SUBSIDIARIES
-----------------------------------------------------------
MARCH 31, 2001 THE CHASE MORGAN
(in millions, except ratios) JPMORGAN CHASE (a) MANHATTAN BANK GUARANTY TRUST CO. CHASE USA
-------------- -------------- ------------------ ---------
Tier 1 Capital $ 39,303 $ 21,233 $ 10,869 $ 3,186
Total Capital 55,447 29,063 13,351 4,950
Risk-Weighted Assets (b) 450,552 270,413 117,466 42,365
Adjusted Average Assets 721,986 390,653 177,420 41,793
Tier 1 Capital Ratio 8.72% 7.85% 9.25% 7.52%
Total Capital Ratio 12.31% 10.75% 11.37% 11.68%
Tier 1 Leverage Ratio 5.44% 5.44% 6.13% 7.62%
(a) Assets and capital amounts for JPMorgan Chase's banking subsidiaries
reflect intercompany transactions, whereas the respective amounts for
JPMorgan Chase reflect the elimination of intercompany transactions.
(b) Risk-weighted assets include off-balance sheet risk-weighted assets in
the amounts of $152,152 million, $88,170 million, $56,524 million and
$2,830 million, respectively.
-12-
13
Part I
Item 1 (continued)
NOTE 12 - INTEREST INCOME AND INTEREST EXPENSE
The following table details the components of interest income and interest
expense.
(in millions) FIRST QUARTER
---------------------------------------
INTEREST INCOME 2001 2000
- --------------- ---------- ----------
Loans $ 4,468 $ 3,941
Securities 1,053 1,152
Trading Assets 1,831 1,517
Federal Funds Sold and Securities
Purchased under Resale Agreements 1,196 1,090
Securities Borrowed 493 528
Deposits with Banks 139 212
---------- ----------
TOTAL INTEREST INCOME 9,180 8,440
INTEREST EXPENSE
- ----------------
Deposits 2,636 2,507
Short-Term and Other Liabilities 3,382 2,784
Long-Term Debt 744 735
---------- ----------
TOTAL INTEREST EXPENSE 6,762 6,026
---------- ----------
NET INTEREST INCOME 2,418 2,414
Provision for Loan Losses 447 342
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 1,971 $ 2,072
========== ==========
NOTE 13 - COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of JPMorgan Chase's fair value methodologies, see Note 28 of
JPMorgan Chase's 2000 Annual Report. The following table presents the financial
assets and liabilities valued under SFAS 107.
MARCH 31, 2001 December 31, 2000
--------------------------------------------- -----------------------------------------
CARRYING ESTIMATED APPRECIATION/ Carrying Estimated Appreciation/
(in billions) VALUE FAIR VALUE (DEPRECIATION) Value Fair Value (Depreciation)
Total Financial Assets $ 682.9 $ 686.4 $ 3.5 $ 691.0 $ 693.1 $ 2.1
========= =========== ========== ==========
Total Financial Liabilities $ 669.1 $ 670.3 (1.2) $ 670.3 $ 670.3 --
========= =========== -------- ========== ========== -------
Estimated Fair Value in Excess
of Carrying Value $ 2.3 $ 2.1
======== =======
-13-
14
Part I
Item 1 (continued)
NOTE 15 - SEGMENT INFORMATION
JPMorgan Chase is organized into five major businesses: Investment Bank,
Investment Management & Private Banking, Treasury & Securities Services,
JPMorgan Partners and Retail & Middle Market Financial Services. These
businesses are segmented based on the products and services provided, or the
type of customer serviced, and reflect the manner in which financial information
is currently evaluated by the Firm's management. For a further discussion
concerning JPMorgan Chase's business segments, see Lines of Business Results in
the Management's Discussion and Analysis ("MD&A") section of this Form 10-Q on
pages 18 through 25.
JPMorgan Chase uses Shareholder Value Added ("SVA"), Operating Earnings and Cash
Operating Earnings as its principal measures of franchise profitability. The
Firm implemented an integrated cost of capital during the first quarter of 2001.
A 12% cost of capital has been used for all businesses except JPMorgan Partners,
which has a 15% cost of capital. All prior periods have been restated. See
Management Performance Measurements in the MD&A on page 25 and Note 29 of
JPMorgan Chase's 2000 Annual Report for a further discussion of performance
measurements and policies for cost allocation. The following table provides the
Firm's segment results.
INVESTMENT RETAIL &
MANAGEMENT TREASURY & MIDDLE MARKET CORPORATE/
INVESTMENT & PRIVATE SECURITIES JPMORGAN FINANCIAL RECONCILING
(in millions) BANK BANKING SERVICES PARTNERS SERVICES ITEMS (a) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 2001
- ------------------
Operating Revenue (b) $ 4,466 $ 807 $ 907 $ 57 $ 2,565 $ (308) $ 8,494
Intersegment Revenue (b) (57) 27 38 23 7 (38) --
Operating Earnings (e) 1,021 32 159 (27) 409 (158) 1,436
Cash Operating Earnings (c)(e) 1,060 102 177 (22) 443 (147) 1,613
Average Managed Assets (d) 514,153 35,213 17,276 13,167 157,275 10,593 747,677
SVA 475 (81) 91 (275) 197 (37) 370
Cash Return on Common
Equity (f) 21.9% 6.6% 24.9% NM 21.8% NM 15.6%
----------------------------------------------------------------------------------------------------
FIRST QUARTER 2000
- ------------------
Operating Revenue (b) $ 4,482 $ 806 $ 867 $ 601 $ 2,400 $ (133) $ 9,023
Intersegment Revenue (b) (109) 46 52 (1) 2 10 --
Operating Earnings 1,162 139 141 307 310 (71) 1,988
Cash Operating Earnings (c) 1,179 150 157 309 347 (61) 2,081
Average Managed Assets (d) 462,382 25,718 16,121 13,118 141,298 11,189 669,826
SVA 676 75 68 35 92 121 1,067
Cash Return on Common
Equity (f) 28.5% 24.4% 21.3% 17.0% 16.4% NM 24.9%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Corporate/Reconciling Items includes LabMorgan, Support Units,
Corporate and the net effect of management accounting policies.
(b) Operating Revenue includes Intersegment Revenue, which includes
intercompany revenue and revenue sharing agreements, net of
intersegment expenses. Transactions between business segments are
primarily conducted at fair value.
(c) Cash Operating Earnings exclude the impact of restructuring costs,
special items, and amortization of goodwill and certain other
intangibles.
(d) Excludes the impact of credit card securitizations.
(e) Excludes the after-tax impact of SFAS 133 cumulative transition
adjustment for the Investment Bank ($19) million, Retail & Middle
Market Financial Services ($3) million and Corporate ($3) million
after-tax.
(f) Based on annualized amounts.
NM - Not meaningful.
The table below presents a reconciliation of the combined segment information to
the Firm's reported net income as included in the Consolidated Statement of
Income.
FIRST QUARTER
----------------------
2001 2000
------- -------
SEGMENTS' CASH OPERATING EARNINGS $ 1,760 $ 2,142
Corporate/Reconciling Items (147) (61)
------- -------
CONSOLIDATED CASH OPERATING EARNINGS 1,613 2,081
Amortization of Intangibles (177) (93)
------- -------
CONSOLIDATED OPERATING EARNINGS 1,436 1,988
Special Items and Restructuring Costs (212) --
Net Effect of Change in Accounting Principle (25) --
------- -------
CONSOLIDATED NET INCOME $ 1,199 $ 1,988
======= =======
-14-
15
Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Results for all periods give effect to the merger of The Chase Manhattan
Corporation and J.P. Morgan & Co. Incorporated on December 31, 2000.
FIRST QUARTER
------------------------------------------------------------
(in millions, except per share Over(Under)
and ratio data) 2001 2000 1Qtr 2000
----------- --------- ----------
REPORTED BASIS
Revenue $ 8,253 $ 8,769 (6)%
Net Income 1,199 1,988 (40)
Diluted Net Income per Share 0.58 1.01 (43)
Return on Average
Common Equity ("ROCE") 11.6% 23.8% (1,220) bp
Tier 1 Capital Ratio 8.7 8.5 20
Total Capital Ratio 12.3 12.2 10
Tier 1 Leverage 5.4 5.8 (40)
- --------------------------------------------------------------------------------------------------------------------
OPERATING BASIS (a)
(INCLUDING JPMORGAN PARTNERS)
Revenue $ 8,494 $ 9,023 (6)%
Earnings 1,436 1,988 (28)
Diluted Earnings per Share ("EPS") 0.70 1.01 (31)
ROCE 13.9% 23.8% (990) bp
CASH OPERATING BASIS (b)
Earnings $ 1,613 $ 2,081 (22)%
Diluted Cash EPS 0.78 1.06 (26)
Cash ROCE 15.6% 24.9% (930) bp
OPERATING BASIS (a)
(EXCLUDING JPMORGAN PARTNERS)
Revenue $ 8,437 $ 8,422 --
Cash Earnings 1,635 1,772 (8)%
Diluted Cash EPS 0.80 0.90 (11)
Cash ROCE 19.0% 27.2% (820) bp
- --------------------------------------------------------------------------------------------------------------------
(a) Operating basis excludes the impact of credit card securitizations,
merger and restructuring costs, special items and the net effect of a
change in accounting principle.
(b) Cash operating basis excludes the impact of the amortization of
goodwill and certain other intangibles. For a further discussion, see
Glossary of Terms on page 47.
bp - Denotes basis points; 100 bp equals 1%.
FINANCIAL RESULTS: Reported net income was $1,199 million, or $0.58 per share,
in the first quarter of 2001. This compares with $1,988 million, or $1.01 per
share, in the first quarter of 2000.
In addition to disclosing its results on a reported basis, JPMorgan Chase
reviews and discloses the financial performance of the Firm on an operating
basis. In the view of JPMorgan Chase's management, "operating basis" excludes
the impact of merger and restructuring costs, the effect of credit card
securitizations, nonrecurring gains and losses and the net effect of changes in
accounting principle. The following discussion in the Management's Discussion
and Analysis ("MD&A") relates to the Firm's performance on an operating basis,
unless otherwise noted. For a reconciliation between reported results and
results on an operating basis, see page 26.
JPMorgan Chase's diluted operating earnings for the first quarter of 2001 were
$0.70 per share, compared with $1.01 in the first quarter of 2000. Operating
earnings were $1,436 million, compared with $1,988 million one year ago.
-15-
16
Part I
Item 2 (continued)
The impact from the amortization of intangibles was $0.08 per share in the first
quarter of 2001 and $0.05 per share one year ago. The annualized cash operating
return on common equity was 15.6% for the first quarter of 2001.
Management tracks the operating performance of JPMorgan Chase both including and
excluding JPMorgan Partners' results. Over the past few years, volatile stock
markets have yielded significant fluctuations in the market values of the
securities held by JPMorgan Partners, resulting in unrealized valuation
adjustments for a given period which have significantly affected, both favorably
and unfavorably, the Firm's operating results.
OPERATING HIGHLIGHTS FOR THE FIRST QUARTER OF 2001:
JPMorgan Chase's diversified product capabilities enabled the Firm to gain
market share during the competitive market environment of the first quarter of
2001. Disciplined expense management efforts are reflected in the overall
decline in expenses during the first quarter of 2001.
- The Investment Bank, Treasury & Securities Services and Retail
& Middle Market Financial Services posted solid results in a
weak environment, while JPMorgan Partners and Investment
Management & Private Banking were adversely affected by the
stock market decline.
- Total operating expenses declined by 3% from the fourth
quarter and by 5% from the first quarter of 2000 on a pro
forma basis (pro forma results assume that the purchase of
Flemings occurred at the beginning of 2000).
- The Investment Bank continued to gain market share in global
mergers and acquisitions ("M&A") advisory and high-grade bond
and syndicated loan underwriting; however, there was a decline
in market share in equity underwriting.
Nonperforming assets totaled $2.23 billion at March 31, 2001, compared with
$1.92 billion and $1.84 billion at December 31, 2000 and March 31, 2000,
respectively. The increase from December 31, 2000 primarily related to three
domestic commercial loans. The allowance for loan losses as of March 31, 2001
was $3.67 billion, substantially unchanged from December 31, 2000. The reported
provision for loan losses and net charge-offs in the first quarter of 2001 were
each $447 million.
Total assets as of March 31, 2001 were $714 billion, compared with $715 billion
as of December 31, 2000 and $676 billion at March 31, 2000. JPMorgan Chase's
Tier One Capital ratio grew to 8.7% at March 31, 2001, compared with 8.5% at
December 31, 2000.
JPMorgan Chase's first quarter 2001 special items were $212 million (after-tax)
of merger and restructuring costs and the cumulative effect of a transition
adjustment of negative $25 million (after-tax) related to the adoption of SFAS
133 relating to the accounting for derivative instruments and hedging
activities. There were no special items in the first quarter of 2000.
KEY BUSINESS SEGMENT HIGHLIGHTS FOR THE FIRST QUARTER OF 2001:
- JPMORGAN PARTNERS ("JPMP") had private equity gains of $132
million in the first quarter. Realized gains of $412 million
on sales of public and private investments were partially
offset by net unrealized losses of $280 million. The
unrealized losses represented both revaluation writedowns in
the private portfolio and a net decline in the value of the
public portfolio. Realized gains included write-offs in the
private portfolio.
- The INVESTMENT BANK'S operating revenues were $4.47 billion in
the first quarter of 2001. Investment Banking fees totaled
$939 million, and trading revenues increased 64% from the
fourth quarter of 2000. JPMorgan Chase ranked No. 3 in global
announced M&A transactions at the end of the first quarter of
2001, up from No. 6 in full-year 2000, and finished the first
quarter ranked No. 2 in U.S. investment grade bond
underwriting. The Firm, however, experienced a decline to No.
9 in its ranking in U.S. equity underwriting.
- RETAIL & MIDDLE MARKET FINANCIAL SERVICES' operating revenues
were $2.57 billion in the first quarter of 2001. The business
experienced record origination volumes in mortgage and auto, a
24% increase in credit card earnings (compared with the first
quarter of 2000) reflecting higher revenue from an increase in
new accounts during the last three quarters, and deposit
growth of 5% in both retail and middle market.
-16-
17
Part I
Item 2 (continued)
- INVESTMENT MANAGEMENT & PRIVATE BANKING had operating revenues
of $807 million and achieved net positive cash flows in the
first quarter of 2001. However, market conditions led to a
decline in assets under management from $685 billion at March
31, 2000, on a pro forma basis, to $608 billion at the end of
the first quarter.
- TREASURY & SECURITIES SERVICES' operating revenues in the
first quarter of 2001 were $907 million, reflecting lower
asset-based fees and declining short-term interest rates.
Offsetting these pressures were new business generated and
higher volumes in the Institutional Trust Services and
Treasury Services businesses.
MERGER UPDATE:
- The merger of Chase Securities Inc. and J.P. Morgan
Securities, Inc. occurred on May 1, 2001. The merger of The
Chase Manhattan Bank and Morgan Guaranty Trust Company of New
York currently is scheduled to occur in October 2001.
- JPMC's management remains confident about merger progress to
date. Merger integration is going well, and client receptivity
to the Firm's expanded product capabilities has been
encouraging. Because of the lead-time between mandate and
transaction execution, this progress is only partially
evidenced by the market share gains achieved by the Firm
during the first quarter of 2001.
- Because realization of revenue synergies from the merger was
dependent upon more "normalized" markets, JPMC's management
anticipates that revenue synergies from the merger for full
year 2001 are likely to be lower than previously estimated if
merger and acquisition and equity underwriting activity
continue throughout the remainder of the year at the same
levels as that for the 2001 first quarter.
-17-
18
Part I
Item 2 (continued)
LINES OF BUSINESS RESULTS
The table below provides summary financial information on a cash operating basis
for the five major business segments. All periods below have been restated on a
comparable basis to reflect the changes in capital allocation adopted in the
first quarter of 2001; restatements may occur in future periods to reflect
further alignment of management accounting policies.
The information that follows generally discusses the lines of business
results comparing the first quarter of 2001 with the first quarter of 2000.
However, as the Investment Bank's results for the first quarter of 2001 were
significantly different from the fourth quarter of 2000, the discussion that
follows provides comparative information from fourth quarter, as well as from
2000 first quarter, results.
During the first quarter of 2001, JPMorgan Chase adopted a new framework for
capital allocation and for business performance measurement across the Firm. The
SVA framework now utilizes a 12% cost of equity capital for each business, with
the exception of JPMorgan Partners. This business is charged a 15% cost of
equity capital, which is equivalent to a representative after-tax hurdle rate
for private equity investments. Overall, the effective cost of equity capital
used in the SVA framework for JPMorgan Chase is 12%. See Management Performance
Measurements in the MD&A on page 25 and Note 29 of JPMorgan Chase's 2000 Annual
Report for a further discussion of performance measurements and policies for
cost allocation.
(in millions, except ratios) INVESTMENT BANK INVESTMENT MANAGEMENT & PRIVATE BANKING
----------------------------------------------- -----------------------------------------------
Pro Forma (a) Pro Forma (a)
1Q 2000 1Q 2000 1Q 2000 1Q 2000
1Q 2001 % Change % Change 1Q 2001 % Change % Change
---------------------------------------------------------------------------------------------------
Operating Revenue $ 4,466 -- % (7)% $ 807 -- % (23)%
Cash Expense 2,663 5 (4) 682 20 (6)
Cash Operating Earnings 1,060 (10) (14) 102 (32) (51)
Average Common Equity 19,451 18 4 6,082 150 1
Average Managed Assets (b) 514,153 11 8 35,213 37 2
Shareholder Value Added (c) 475 (30) (29) (81) (208) (412)
Cash Return on Common Equity 21.9% (660) bp (430) bp 6.6% (1,780) bp (720) bp
Cash Overhead Ratio 60 400 200 85 1,500 1,600
RETAIL & MIDDLE MARKET OPERATING RESULTS
TREASURY & SECURITIES SERVICES FINANCIAL SERVICES EXCLUDING JPMP (d)
------------------------------ ---------------------------- --------------------------
1Q 2000 1Q 2000 1Q 2000
1Q 2001 % Change 1Q 2001 % Change 1Q 2001 % Change
---------------------------------------------------------------------------------------------------
Operating Revenue $ 907 5% $ 2,565 7% $ 8,437 -- %
Cash Expense 630 1 1,294 -- 5,326 4
Cash Operating Earnings 177 13 443 28 1,635 (8)
Average Common Equity 2,853 (2) 8,158 (2) 34,508 33
Average Managed Assets (b) 17,276 7 157,275 11 734,510 12
Shareholder Value Added (c) 91 34 197 114 645 (37)
Cash Return on Common Equity 24.9% 360 bp 21.8% 540 bp 19.0% (820) bp
Cash Overhead Ratio 69 (300) 50 (400) 63 200
JPMORGAN PARTNERS TOTAL
------------------------------- -------------------------------------------------------
Pro Forma (a)
1Q 2000 1Q 2000 1Q 2000
1Q 2001 % Change 1Q 2001 % Change % Change
-------------------------------------------------------------------------------------------------
Operating Revenue $ 57 (91)% $ 8,494 (6)% (12)%
Cash Expense 95 (22) 5,421 3 (5)
Cash Operating Earnings (22) (107) 1,613 (22) (27)
Average Common Equity 6,757 (6) 41,265 24 6
Average Managed Assets (b) 13,167 -- 747,677 9 7
Shareholder Value Added (c) (275) NM 370 (65) (63)
Cash Return on Common Equity NM NM 15.6% (930) bp (680) bp
Cash Overhead Ratio NM NM 64 600 400
(a) Pro forma results assume that the purchase of Robert Fleming Holdings
Limited ("Flemings") occurred at the beginning of 2000.
(b) Excludes the impact of credit card securitizations.
-18-
19
Part I
Item 2 (continued)
(c) SVA is JPMorgan Chase's primary performance measure of its
businesses. SVA represents operating earnings excluding the
amortization of goodwill and certain other intangibles (i.e.
cash operating earnings), minus preferred dividends and an
explicit charge for capital.
(d) Column includes LabMorgan, Support Units and the effects
remaining at the corporate level after the implementation of
management accounting policies.
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
-19-
20
Part I
Item 2 (continued)
INVESTMENT BANK
For a discussion of the business profile of the Investment Bank, see pages 28-29
of the JPMorgan Chase 2000 Annual Report. The following table sets forth
selected financial data of the Investment Bank.
(in millions)
PRO FORMA (a)
1Q 2000 1Q 2000
1Q 2001 % CHANGE % CHANGE
---------- -------- -------------
Trading-Related Revenue $ 2,085 (1)% (3)%
Investment Banking Fees 939 (20) (24)
Net Interest Income 782 8 3
Fees and Commissions 457 21 (13)
All Other Revenue 203 107 41
----------
OPERATING REVENUE 4,466 -- (7)
Compensation Expense 1,756 -- (10)
Noncompensation Expense 907 16 8
----------
CASH EXPENSE 2,663 5 (4)
CASH OPERATING EARNINGS $ 1,060 (10) (14)
==========
(a) Pro forma results assume that the purchase of Flemings occurred at the
beginning of 2000.
The Investment Bank's operating revenues were $4.47 billion in the first quarter
of 2001, reflecting a 7% decline from the first quarter of 2000 pro forma for
Flemings and a 21% increase from the fourth quarter of 2000. Cash operating
expenses declined 4% from pro forma results for the first quarter of 2000 and 6%
from the fourth quarter of 2000, benefiting from reduced levels of incentive
compensation. When compared with the fourth quarter of 2000, the Investment
Bank's cash operating expense also reflected lower levels of noncompensation
expense. Cash operating earnings were $1.06 billion in the first quarter of
2001, compared with $1.23 billion in the first quarter of 2000 pro forma for
Flemings and $498 million in the fourth quarter of 2000.
Trading revenues (including related net interest income ("NII")) of $2.09
billion in the first quarter declined by 3% from the strong trading results in
the pro forma first quarter of 2000. Higher trading revenues in the Firm's
interest rate derivatives and government securities businesses offset lower
results in emerging markets and foreign exchange. Trading revenues rose 64% or
$816 million from the fourth quarter, reflecting higher revenues across
virtually all of the Firm's trading activities. Equity revenues of $555 million
in the first quarter of 2001 more than doubled from the fourth quarter of 2000.
Higher equity derivative revenues from an increase in client transactions and
higher market volatility was the primary reason for the increase from the fourth
quarter of 2000.
Investment banking fees totaled $939 million, which represented a 24% and 10%
decline from the pro forma first quarter and fourth quarter of 2000,
respectively. Weak market conditions in equity capital markets and M&A (in
contrast with extremely strong markets during the first quarter of 2000)
resulted in lower equity underwriting and advisory fees. These declines were
partially offset by higher bond underwriting and loan syndication fees.
Fees and commissions of $457 million in the first quarter of 2001 were 13% below
pro forma first quarter 2000. The decline reflected lower equity brokerage
commissions as a result of lower market volume.
Included in all other revenue were securities gains of $166 million in the first
quarter of 2001 reflecting the successful execution of the Firm's
asset/liability management activities in a declining interest rate environment.
Management of the Investment Bank intends to reduce the Investment Bank's
expenses in 2001 from the pro forma 2000 level (pro forma includes expenses of
Flemings for fiscal year 2000) and, given the current revenue outlook for one
year, is committed to taking more aggressive expense management steps than
previously planned.
-20-
21
Part I
Item 2 (continued)
JPMORGAN PARTNERS
For a discussion of the business profile of JPMorgan Partners, see pages 32-33
of the JPMorgan Chase 2000 Annual Report. The following table sets forth
selected financial data of JPMorgan Partners.
(in millions)
1Q 2000
1Q 2001 % CHANGE
---------- --------
Private Equity:
Realized Gains $ 412 5%
Unrealized Gains (Losses) (280) NM
Net Interest Income (89) 46
Fees and Commissions 13 (7)
All Other Revenue 1 NM
---------
OPERATING REVENUE 57 (91)
Compensation Expense 42 (26)
Noncompensation Expense 53 (18)
---------
CASH EXPENSE 95 (22)
CASH OPERATING EARNINGS (LOSS) $ (22) NM
=========
NM - Not meaningful.
JPMORGAN PARTNERS generated net private equity gains of $132 million in the
first quarter of 2001, compared with gains of $654 million in the first quarter
of 2000. Included in the first quarter 2001 results were $412 million in
realized gains from public and private positions, compared with realized gains
of $392 million in the first quarter of 2000. The realized gains were partially
offset by net unrealized losses in the first quarter of $280 million,
representing both revaluation writedowns in the private portfolio and a net
decline in the value of the public portfolio.
The first quarter of 2001 was characterized by a challenging market that
provided limited exit opportunities. Successful investment realizations in the
energy and power sector were significant contributors to JPMP's performance in
this environment.
The Firm's management believes that JPMP's private equity business has
established a strong track record of providing substantial contributions to
JPMC's earnings over time. However, because of the volatile nature of the public
equities market, and that of the NASDAQ market in particular, JPMP's reported
results may include significant unrealized valuation adjustments, both favorable
and unfavorable, at any given period. In 2001, JPMP may experience further
unrealized losses in both the publicly-held and privately-held portions of its
portfolio because the current environment for financings and valuation levels,
particularly for telecommunications companies, may require JPMP to write down
such investments.
The amount of realized gains recognized by JPMP in 2001 will depend upon JPMP's
ability to implement its various "exit" strategies, which will be affected by a
number of conditions, including the liquidity of the financial markets, the
level and volatility of the public equities markets, and investor sentiment.
Management believes that under current market conditions, net realized gains for
JPMP for full year 2001 are likely to be lower than net realized gains in 2000.
Net realized gains include gains realized on the sale of investments, as well as
realized losses recognized upon write-offs of investments.
-21-
22
Part I
Item 2 (continued)
JPMORGAN PARTNERS INVESTMENT PORTFOLIO
The following table presents the carrying values and costs of the JPMP
investment portfolio for the dates indicated.
(in millions) MARCH 31, 2001 March 31, 2000
---------------------------- --------------------------
CARRYING Carrying
VALUE COST Value Cost
----------- ----------- ----------- ----------
Public Securities (213 companies) (a) (b) $ 1,611 $ 1,018 $ 3,845 $ 1,148
Private Direct Securities (983 companies) (b) 7,144 7,318 6,193 6,150
Private Fund Investments (342 funds) (b) 2,122 2,141 2,314 2,316
----------- ----------- ----------- ----------
Total Investment Portfolio $ 10,877 $ 10,477 $ 12,352 $ 9,614
=========== =========== =========== ==========
(a) Publicly traded positions only.
(b) Represents the number of companies and funds at March 31, 2001.
The following table presents information about the 10 largest holdings of public
securities in the JPMP investment portfolio.
PUBLIC SECURITIES INVESTMENTS AT MARCH 31, 2001 (a)
(in millions) QUOTED
SYMBOL SHARES PUBLIC VALUE COST
------ ------ ------------ ----------
Triton PCS Holdings, Inc. TPCS 20.2 $ 674 $ 89
Telecorp PCS TLCP 11.4 172 8
Northern Border Partners, L.P. NBP 3.1 114 24
American Tower Corp. AMT 5.8 107 15
Fisher Scientific FSH 3.0 104 27
Guitar Center Inc. GTRC 4.7 83 51
Encore Acquisition Company EAC 6.4 82 44
Crown Media Holdings Inc. CRWN 2.7 53 40
Praecis Pharmaceuticals Inc. PRCS 2.5 50 17
Wesco International, Inc. WCC 4.4 40 47
---------- ----------
TOP 10 PUBLIC SECURITIES $ 1,479 $ 362
Other Public Securities (203 companies) 703 656
---------- ----------
TOTAL PUBLIC SECURITIES (213 companies) $ 2,182 $ 1,018
========== ==========
(a) Policy: Public securities held by JPMorgan Partners are
marked-to-market at the quoted public value less liquidity discounts,
with the resulting unrealized gains/losses included in the income
statement. JPMorgan Partners' valuation policy for public securities
incorporates the use of liquidity discounts and price averaging
methodologies in certain circumstances to take into account the fact
that JPMorgan Partners cannot immediately realize the quoted public
values as a result of the regulatory, corporate and contractual sales
restrictions generally imposed on these holdings. Private investments
are initially carried at cost, which is viewed as an approximation of
fair value. The carrying value of private investments is adjusted to
reflect valuation changes resulting from unaffiliated party
transactions and for evidence of a decline in value.
The carrying values of the equity investments recorded on JPMC's financial
statements are net of interests of investors other than JPMC. JPMP has sold
interests in certain of its fund investments to unaffiliated third parties and
is in the process of offering interests in a new investment fund that will
co-invest with JPMP in its direct investments. As a result, JPMC's proportional
ownership share of investments made, and to be made by JPMP in the future, will
be reduced.
The Firm believes JPMP's equity-related investments will continue to
create long-term value for JPMC. The Firm has invested $0.3 billion in JPMP
investments in the first quarter of 2001, and is prepared to commit up to an
additional $1.7 billion of its own capital for investment by JPMP this year. In
addition, the Firm has committed at least $1.5 billion of its own capital to
JPMP in each of the next four years.
-22-
23
Part I
Item 2 (continued)
INVESTMENT MANAGEMENT & PRIVATE BANKING
For a description of Investment Management & Private Banking ("IMPB") and a
discussion of the profiles for each business, see page 30 of JPMorgan Chase's
2000 Annual Report.
The following table reflects selected financial data for IMPB.
(in millions)
PRO FORMA (a)
1Q 2000 1Q 2000
1Q 2001 % CHANGE % CHANGE
-------- -------- -------------
Fees and Commissions $ 598 24% (10)%
Net Interest Income 133 (19) (21)
All Other Revenue 54 (43) (64)
Trading-Related Revenue 22 (66) (66)
--------
OPERATING REVENUE 807 -- (23)
Compensation Expense 377 14 (11)
Noncompensation Expense 305 29 2
--------
CASH EXPENSE 682 20 (6)
CASH OPERATING EARNINGS $ 102 (32) (51)
========
(a) Pro forma results assume that the purchase of Flemings occurred at the
beginning of 2000.
IMPB had operating revenues of $807 million, down 23% from the pro forma first
quarter of 2000. This decline reflected both the record performance of Flemings
and Hambrecht & Quist ("H&Q") brokerage in the first quarter of 2000 and the
pressures in the 2001 first quarter market environment on commissions, mutual
fund loads and management fees.
IMPB's cash operating expenses of $682 million declined 6% from the pro forma
level in the first quarter of 2000. Cash operating earnings were $102 million,
down from the pro forma level of $207 million in the first quarter of 2000.
The table below reflects the assets under management in IMPB as of March 31,
2001 and 2000, respectively.
ASSETS UNDER MANAGEMENT
(in billions) MARCH 31,
----------------------------
Pro Forma (a)
2001 2000
-------- ---------
Institutional/Retail $ 462 $ 532
Private Bank 146 153
-------- ---------
Total $ 608 $ 685
======== =========
(a) Pro forma results assume that the purchase of Flemings occurred at the
beginning of 2000.
Market conditions in the first quarter of 2001 led to an 11% decline in assets
under management from the first quarter of 2000 pro forma level. This excludes
assets managed in other lines of business and assets attributable to the Firm's
45% interest in American Century.
-23-
24
Part I
Item 2 (continued)
TREASURY & SECURITIES SERVICES
For a discussion of the profiles for each business within Treasury & Securities
Services ("T&SS"), see page 31 of JPMorgan Chase's 2000 Annual Report.
The following table sets forth selected financial data of Treasury & Securities
Services.
(in millions)
1Q 2000
1Q 2001 % CHANGE
--------- --------
Fees and Commissions $ 503 9%
Net Interest Income 362 5
All Other Revenue 42 (32)
---------
OPERATING REVENUE 907 5
Compensation Expense 296 10
Noncompensation Expense 334 (5)
---------
CASH EXPENSE 630 1
CASH OPERATING EARNINGS $ 177 13
=========
Treasury & Securities Services' operating revenues rose to $907 million in the
first quarter, a 5% increase from last year's first quarter. The first quarter
of 2000 was itself a strong quarter reflecting high transaction volume
following completion of Y2K efforts. The Institutional Trust business showed
particular strength this year as revenues advanced 17%, driven by higher fees
related to new and existing business and increased balances. Cash expenses
increased 1% year-over-year. The combination of modest revenue growth and
expense management led to cash operating earnings of $177 million, 13% higher
than in the first quarter of 2000.
Management expects continued revenue growth in the three businesses constituting
T&SS for full year 2001. Under current market conditions revenue growth in the
securities businesses of T&SS may be slower in 2001 than in 2000. Expense
discipline will continue, and management has targeted a cash overhead ratio,
over time, of approximately 65%.
RETAIL & MIDDLE MARKET FINANCIAL SERVICES
For a description of Retail & Middle Market Financial Services ("RMMFS") and a
discussion of the profiles for each business, see pages 34-35 of JPMorgan
Chase's 2000 Annual Report.
The following table reflects selected financial data for RMMFS.
(in millions)
1Q 2000
1Q 2001 % CHANGE
----------- --------
Net Interest Income $ 1,609 8%
Fees and Commissions 477 (41)
Securities Gains (Losses) 316 NM
All Other Revenue 163 63
-----------
OPERATING REVENUE 2,565 7
Compensation Expense 563 (1)
Noncompensation Expense 731 --
-----------
CASH EXPENSE 1,294 --
CASH OPERATING EARNINGS $ 443 28
===========
NM - Not meaningful.
Operating revenues for RMMFS increased to $2.57 billion, an increase of 7% over
the first quarter of 2000. Cash operating expenses were flat from the first
quarter of 2000. Cash operating earnings totaled $443 million in the first
quarter, an increase of 28% from the first quarter of 2000, reflecting the
benefit of favorable operating leverage.
Management has a goal of double-digit cash operating earnings growth for RMMFS
for 2001. However, current volatility in mortgage rates may adversely affect
the financial results of RMMFS.
-24-
25
Part I
Item 2 (continued)
The following table sets forth certain key financial performance measures of the
businesses within RMMFS.
OPERATING REVENUE CASH OPERATING EARNINGS
--------------------------------- --------------------------------
% Change % Change
(in millions) 1Q 2001 1Q 2000 1Q 2001 1Q 2000
---------- -------- -------- --------
Cardmember Services $ 990 8% $ 117 24%
Regional Banking Group 771 1 139 (3)
Home Finance 344 7 83 22
Middle Markets 281 3 72 7
Auto Finance 110 NM 22 NM
Other 69 NM 10 NM
---------- --------
Total $ 2,565 7 $ 443 28
========== ========
NM - Not meaningful.
CARDMEMBER SERVICES
Cardmember Services' cash operating earnings for the first quarter of 2001 were
up 24%, when compared with the first quarter of 2000, reflecting higher revenue
from an increase in new accounts during the last three quarters. Credit card
outstandings of $36.5 billion were more than $4 billion greater than in the same
period a year ago.
REGIONAL BANKING GROUP
Regional Banking Group's revenues were essentially flat with the first quarter
of 2000, and cash operating earnings declined by 3%. These results reflect a 5%
growth in deposit levels in consumer banking and the small business sector,
offset by the adverse effects of declining interest rates on deposit margins and
lower investment brokerage volume due to market conditions.
HOME FINANCE
Home Finance's operating revenues and cash operating earnings increased 7% and
22%, respectively, for the first quarter of 2001 over the same period in the
prior year. Doubling of origination volume, a 21% growth in servicing balances,
higher net interest margin and revenue generated by the acquisition of Advanta's
mortgage business were the primary factors driving these results. Mortgage
servicing fees in the first quarter of 2001 were reduced by approximately $335
million in servicing impairment. This reduction was largely offset by the
realization of $315 million in securities gains used to economically hedge the
servicing asset. Originations (residential, home equity and manufactured
housing) for the first quarter of 2001 were $32 billion and included
originations from the retail, wholesale and correspondent (traditional and
negotiated) channels. The mortgage servicing portfolio was $392 billion at March
31, 2001.
MIDDLE MARKETS
Middle Markets' operating revenues were $281 million, an increase of 3% from the
first quarter of 2000. Cash operating earnings increased in the period by 7% to
$72 million. These results reflect deposit growth of 5%. Narrowing spreads on
deposits were offset by better spreads on loans. Fee growth was nearly 6% ahead
of last year as the declining value of deposits resulted in higher fees in lieu
of balances. Expenses were essentially flat.
AUTO FINANCE
Auto Finance's operating revenue and cash operating earnings were $110 million
and $22 million, respectively, in the first quarter of 2001. Growth was
positively affected by a record number of auto originations, the impact of lower
interest rates, and the impact of a $100 million decrease in the estimated auto
lease residual value recognized in the 2000 first quarter.
SUPPORT UNITS AND CORPORATE
JPMorgan Chase's support units include LabMorgan, Enterprise Technology Services
and Corporate Business Services. For a further discussion of the business
profiles of these Support Units as well as a description of Corporate, see page
36 of JPMorgan Chase's 2000 Annual Report.
For the first quarter of 2001, Support Units and Corporate had a cash operating
loss of $147 million, compared with a cash operating loss of $61 million in the
first quarter of 2000. Included in the first quarter of 2001 was a net loss of
$50 million at LabMorgan primarily as a result of investment write-offs of
approximately $50 million (pre-tax). Prior periods have been restated to reflect
refinements in management reporting policies or changes to the management
organization.
-25-
26
Part I
Item 2 (continued)
RESULTS OF OPERATIONS
The following section provides a discussion of JPMorgan Chase's results of
operations both on an as reported basis and on an operating basis. The table
below provides a reconciliation between the Firm's reported and operating
results.
(in millions, except per share data) REPORTED CREDIT SPECIAL OPERATING
RESULTS CARD ITEMS BASIS
FIRST QUARTER 2001: (a) (b) (c)
- ------------------ ------------- -------- ---------- ---------
INCOME STATEMENT
Revenue $ 8,253 $ 241 $ -- $ 8,494
Cash Expense 5,421 -- -- 5,421
Amortization of Intangibles 177 -- -- 177
--------- -------- --------- ---------
Operating Margin 2,655 241 -- 2,896
Credit Costs 447 241 -- 688
--------- -------- --------- ---------
Income before Merger and Restructuring Costs 2,208 -- -- 2,208
Merger and Restructuring Costs 328 -- (328) --
--------- -------- --------- ---------
Income before Income Tax Expense and
Effect of Accounting Change 1,880 -- 328 2,208
Tax Expense 656 -- 116 772
--------- -------- --------- ---------
Income before Effect of Accounting Change 1,224 -- 212 1,436
Net Effect of Change in Accounting Principle (25) -- 25 --
---------- -------- --------- ---------
Net Income $ 1,199 $ -- $ 237 $ 1,436
Add Back: Amortization of Intangibles 177 -- -- 177
--------- -------- --------- ---------
Cash Earnings $ 1,376 $ -- $ 237 $ 1,613
========= ======== ========= =========
NET INCOME PER SHARE
Basic $ 0.60 (d) $ 0.72
Diluted 0.58 (d) 0.70
CASH EARNINGS PER SHARE
Basic $ 0.69 (d) $ 0.81
Diluted 0.67 (d) 0.78
- -------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 2000:
- ------------------
INCOME STATEMENT
Revenue $ 8,769 $ 254 $ -- $ 9,023
Cash Expense 5,260 -- -- 5,260
Amortization of Intangibles 93 -- -- 93
--------- -------- --------- ---------
Operating Margin 3,416 254 -- 3,670
Credit Costs 342 254 -- 596
--------- -------- --------- ---------
Income before Merger and Restructuring Costs 3,074 -- -- 3,074
Merger and Restructuring Costs -- -- -- --
--------- -------- --------- ---------
Income before Income Tax Expense 3,074 -- -- 3,074
Tax Expense 1,086 -- -- 1,086
--------- -------- --------- ---------
Net Income $ 1,988 $ -- $ -- $ 1,988
Add Back: Amortization of Intangibles 93 -- -- 93
--------- -------- --------- ---------
Cash Earnings $ 2,081 $ -- $ -- $ 2,081
========= ======== ========= =========
NET INCOME PER SHARE
Basic $ 1.06 $ 1.06
Diluted 1.01 1.01
CASH EARNINGS PER SHARE
Basic $ 1.11 $ 1.11
Diluted 1.06 1.06
- -------------------------------------------------------------------------------------------------------------------------------
(a) Represents condensed results as reported in JPMorgan Chase's financial
statements.
(b) This column excludes the impact of credit card securitizations. For
receivables that have been securitized, amounts that would have been
reported as net interest income and as provision for loan losses are
instead reported as components of noninterest revenue.
(c) Includes merger and restructuring costs and special items. The 2001
first quarter includes $328 million (pre-tax) in merger and
restructuring expenses.
(d) Includes the effect of the accounting change. Excluding the accounting
change, basic and diluted net income per share were $0.61 and $0.59,
respectively; basic and diluted cash earnings per share were $0.70 and
$0.68, respectively.
-26-
27
Part I
Item 2 (continued)
REVENUES
(in millions)
FIRST QUARTER PRO FORMA (a)
------------------------------ FIRST QUARTER
OPERATING REVENUE: 2001 2000 2000
----------- ----------- ------------
Investment Banking Fees $ 941 $ 1,191 $ 1,235
Trading-Related Revenue (including Trading NII) 2,116 2,192 2,230
Fees and Commissions 2,016 2,128 2,525
Private Equity - Realized Gains 412 392 392
Private Equity - Unrealized Gains (Losses) (285) 282 282
Securities Gains (Losses) 455 (3) (3)
Other Revenue 251 320 412
Net Interest Income (excluding Trading NII) 2,588 2,521 2,553
---------- ---------- -----------
TOTAL OPERATING REVENUE $ 8,494 $ 9,023 $ 9,626
========== ========== ===========
(a) Pro forma revenue assumes that the purchase of Flemings occurred at the
beginning of 2000.
INVESTMENT BANKING FEES
Investment banking fees totaled $941 million, representing a decline of 21% from
the first quarter of 2000. The decline reflected the effect of weak market
conditions in the equity capital markets and in M&A activity, resulting in lower
equity underwriting and advisory fees. These declines were partially offset by
higher bond underwriting and loan syndication fees.
(in millions) FIRST QUARTER
----------------------------------
2001 2000
-------- ----------
Advisory $ 340 $ 362
Underwriting and Other Fees 601 829
-------- ----------
TOTAL INVESTMENT BANKING FEES $ 941 $ 1,191
======== ==========
TRADING-RELATED REVENUE
For the first quarter of 2001, trading-related revenue, including related net
interest income, declined only slightly from the strong results of the same
period a year ago. Revenue in the 2001 first quarter was favorably affected by
the reduction in U.S. interest rates, which provided volatility and liquidity,
particularly in the markets for equities and interest rate contracts.
(in millions)
FIRST QUARTER
----------------------------------
TRADING-RELATED REVENUE: 2001 2000
-------- ----------
Equities (a) $ 577 $ 566
Debt Instruments (b) 299 398
Foreign Exchange Revenue (c) 249 342
Interest Rate Contracts, Commodities and Other (d) 876 665
-------- ----------
TRADING REVENUE (e) 2,001 1,971
Net Interest Income Impact (f) 115 221
-------- ----------
TOTAL TRADING-RELATED REVENUE $ 2,116 $ 2,192
======== ==========
(a) Includes equity securities and equity derivatives revenue.
(b) Includes instruments such as bonds and commercial paper issued by U.S.
and non-U.S. entities, as well as credit derivatives revenue.
(c) Includes foreign currencies and foreign currency derivatives revenue.
(d) Includes various types of interest rate swaps and interest rate
derivatives revenue, coupled with commodities and all other trading
revenues.
(e) Derivative and foreign exchange contracts are marked-to-market and
valuation adjustments are included in trading revenue.
(f) Includes interest recognized on interest-earning and interest-bearing
trading-related positions, as well as management allocations,
reflecting the funding costs or benefits associated with trading
positions. These amounts are included in net interest income on the
Consolidated Statement of Income.
-27-
28
Part I
Item 2 (continued)
- Equities revenues of $577 million increased 2% from the first
quarter of 2000.
- Revenues related to debt instruments declined to $299 million
in the first quarter of 2001 from $398 million in the
comparable period a year earlier. The decline reflected the
relatively less active environment for debt instruments in
2001.
- Foreign exchange trading revenues were $249 million in 2001,
compared with $342 million in the first quarter of 2000,
reflecting a slower market for foreign exchange in the current
quarter.
- First quarter 2001 revenues of $876 million in interest rate
contracts, commodities and other showed a significant gain of
32% over first quarter 2000. These gains were primarily the
result of strong profits from the trading of interest rate
contracts. This market was favorably affected by the liquidity
resulting from the reduction in interest rates during the
first quarter.
FEES AND COMMISSIONS
Fees and commissions for first quarter 2001 decreased 5%, when compared with
first quarter 2000. The table below provides the significant components of fees
and commissions.
(in millions) FIRST QUARTER
--------------------------------
2001 2000
----------- ---------
Investment Management, Custody and Processing Services $ 974 $ 798
Credit Card Revenue - Operating 384 328
Brokerage and Investment Services 363 326
Mortgage Servicing Fees, Net of Amortization and Writedowns (233) 150
Other Lending-Related Service Fees 130 150
Deposit Service Charges 226 221
Other Fees 172 155
---------- ---------
Total Fees and Commissions - Operating $ 2,016 $ 2,128
========== =========
Investment Management, Custody and Processing Services
Investment management, custody and processing services fees in the first quarter
of 2001 rose 22% from the prior year's quarter to $974 million. The increase in
investment management fees for first quarter 2001, up $144 million from the
first quarter of 2000, is primarily attributable to the increase in the level of
funds under management as a result of the Flemings acquisition. Custody and
processing services also were higher in first quarter of 2001 than in the same
quarter of the previous year. This increase was due to the higher value of
securities under custody and the increase in flows of investments to foreign
markets.
Credit Card Revenue
Credit card fees on an operating basis for the 2001 first quarter increased $56
million, when compared with the prior year's first quarter. This increase
reflected higher interchange income due to stronger customer purchase volume,
increased late charges as a result of a rise in delinquencies, and higher
overlimit and balance consolidation fees as a result of new pricing initiatives.
The following table reconciles JPMorgan Chase's reported credit card revenue and
operating credit card revenue (which excludes the impact of credit card
securitizations).
(in millions) FIRST QUARTER
-----------------------------------
2001 2000
--------- -----------
Reported Credit Card Revenue $ 433 $ 397
Less Impact of Credit Card Securitizations (49) (69)
-------- ----------
Operating Credit Card Revenue $ 384 $ 328
======== ==========
Brokerage and Investment Services
In comparison with the first quarter of 2000, brokerage and investment services
fees in the first quarter of 2001 increased $37 million reflecting the effects
of the Flemings acquisition, partly offset by lower commissions associated with
the weaker market environment.
-28-
29
Part I
Item 2 (continued)
Mortgage Servicing Fees
Mortgage servicing fees declined $383 million from the first quarter of 2000,
reflecting impairment writedowns and a higher amortization level for mortgage
servicing revenue due to declining interest rates.
Other Lending-Related Service Fees
The decline in other lending-related service fees of 13% from the first quarter
of last year was partly attributable to lower commissions on trade financing
activities as a result of lower market volume and to more modest sales programs
for letters of credit.
PRIVATE EQUITY GAINS
Private equity gains in the first quarter of 2001 were $127 million, compared
with gains of $674 million in the same quarter of 2000 which is presently driven
from the JPMP business unit. Included in the first quarter of 2001 were $412
million of realized gains from the sale of public and private securities,
compared with $392 million in the first quarter of 2000. The realized gains
in the first quarter of 2001 were partially offset by net unrealized
mark-to-market losses of $285 million, representing both revaluation writedowns
in the private portfolio and a net decline in the value of the public portfolio.
(in millions) FIRST QUARTER
----------------------------------
2001 2000
--------- --------
Realized Gains $ 412 $ 392
Unrealized Gains (Losses) (285) 282
-------- --------
Private Equity Gains (Losses) $ 127 $ 674
======== ========
SECURITIES GAINS
Securities gains realized in the first quarter of 2001 were $455 million,
compared with losses of $3 million in the prior year's quarter. The results in
the first quarter of 2001 reflected gains of $315 million on the sale of
securities used as economic hedges for the value of mortgage servicing rights.
Also contributing to the favorable results were higher gains on U.S. and Euro
securities sales in line with the Firm's strategy to realign its asset/liability
positions.
OTHER REVENUE
(in millions) FIRST QUARTER
----------------------------------
2001 2000
--------- ----------
Residential Mortgage Origination/Sales Activities $ 99 $ 44
All Other Revenue 152 276
-------- ----------
Operating Other Revenue 251 320
Other Revenue - Credit Card Securitizations (5) 5
-------- ----------
Reported Other Revenue $ 246 $ 325
======== ==========
Greater revenue from residential mortgage activities (which include
originations, sales of loans, and selective dispositions of mortgage servicing
rights) in the 2001 first quarter reflected significantly higher gains on the
sale of mortgage loans resulting from higher sold-loan volume.
All other revenue decreased 45% in the first quarter of this year, when compared
with the same period in 2000, primarily due to mark-to-market gains realized in
the first quarter of 2000 on economic hedges for anticipated overseas revenues.
These gains were partly offset by gains on the sale in the current quarter of a
custody business and several former retail properties in New York, as well as a
retail business in Texas.
NET INTEREST INCOME
OPERATING NII adjusts reported NII for the impact of credit card securitizations
and trading-related NII that is considered part of total trading-related
revenue. The following table reconciles reported and operating NII.
(in millions) FIRST QUARTER
-----------------------------------------------
NET INTEREST INCOME 2001 2000 Change
------------ ----------- ------
Reported NII $ 2,418 $ 2,414 --%
Add Impact of Credit Card Securitizations 285 328
Less Trading-Related NII (115) (221)
----------- ----------
Operating NII $ 2,588 $ 2,521 3%
=========== ==========
-29-
30
Part I
Item 2 (continued)
Reported NII was $2.4 billion in the first quarter of 2001, flat when compared
with the first quarter of 2000. Reported average interest earning assets rose
12% to $547.6 billion while the reported net yield on interest-earning assets
declined 20 basis points to 1.80%. Operating NII increased 3% to $2.6 billion
when compared with the first quarter of 2000. Operating NII in the first quarter
of 2001 was affected favorably by the addition of Flemings. Included in both
reported and operating NII in the first quarter of 2000 was a $100 million
decrease in the estimated auto lease residual value, which was accounted for as
a reduction in NII.
NONINTEREST EXPENSE
Total operating noninterest expense was $5.60 billion, up 5% from the first
quarter of 2000. The increase over the first quarter of 2000 reflected the
higher investments in resources to build the platform of the Investment Bank,
including the acquisition of Flemings. Total noninterest expenses for the first
quarter of 2001 was 5% less than pro forma first quarter 2000. The decrease in
operating noninterest expenses from pro forma first quarter 2000 reflected the
overall reduction in operating expenses due to merger-related savings as well as
expense management. The following table presents the components of noninterest
expense on a cash, operating and reported basis.
(in millions, except ratios) FIRST QUARTER PRO FORMA (a)
------------------------------ FIRST QUARTER
2001 2000 2000
----------- ----------- -------------
Compensation Expense $ 3,357 $ 3,340 $ 3,689
Occupancy 348 308 327
Technology and Communications 654 580 607
Other Expense 1,062 1,032 1,100
---------- ---------- ----------
CASH OPERATING NONINTEREST EXPENSE 5,421 5,260 5,723
Amortization of Intangibles 177 93 183
---------- ---------- ----------
OPERATING NONINTEREST EXPENSE 5,598 5,353 5,906
Merger and Restructuring Costs 328 -- --
---------- ---------- ----------
REPORTED NONINTEREST EXPENSE $ 5,926 $ 5,353 $ 5,906
========== ========== ==========
Operating Overhead Ratio (b) 66% 59% 61%
Cash Operating Overhead Ratio (b) 64% 58% 59%
(a) Pro forma expense assumes that the purchase of Flemings occurred at the
beginning of 2000.
(b) The overhead ratio is noninterest expense as a percentage of the total
of net interest income and noninterest revenue (excluding merger and
restructuring costs and special items). The cash overhead ratio also
excludes the impact of amortization of intangibles.
Management of JPMC is targeting cash operating expenses for full-year 2001 to be
lower than cash operating expenses for full year 2000 (pro forma including
expenses of Flemings for full-year 2000).
COMPENSATION EXPENSE
Compensation expense of $3.4 billion increased 1% from the first quarter of
2000, reflecting higher salaries and benefits, offset by lower incentive costs.
FULL-TIME EQUIVALENT EMPLOYEES MARCH 31,
----------------------
2001 2000
------ ------
Domestic Offices 70,105 68,222
Foreign Offices 28,413 21,747
------ ------
Total Full-Time Equivalent Employees 98,518 89,969
====== ======
The increase in full-time equivalent employees was attributable to the
acquisition of Flemings and the mortgage business of Advanta Corp. ("Advanta").
OCCUPANCY EXPENSE
Occupancy expense increased from the first quarter of 2000 due to additional
leasing costs in New York, and leasing costs for office space occupied by
Flemings.
TECHNOLOGY AND COMMUNICATIONS
Technology and communications expense increased over the prior-year first
quarter period due to the amortization of software related to the implementation
of sophisticated product systems used in JPMorgan Chase's businesses. The higher
amount also reflects the acquisition of Flemings.
-30-
31
Part I
Item 2 (continued)
OTHER EXPENSE
Other expense rose 3% from the first quarter of 2000. The following table
presents the components of other expense.
(in millions) FIRST QUARTER
----------------------------------
2001 2000
--------- ----------
Professional Services $ 295 $ 282
Outside Services 166 159
Marketing 141 117
Travel and Entertainment 122 112
All Other 338 362
--------- ----------
Total Other Expense $ 1,062 $ 1,032
========= ==========
- The increase in PROFESSIONAL SERVICES for the first quarter of
2001 over the first quarter of 2000 was primarily attributable
to higher costs associated with applications and systems
consulting services.
- The increase in OUTSIDE SERVICES was principally driven by
higher outside data processing fees related to the rise in
volume of activities at Investor Services, as well as offsite
contingency fees for investment banking operations.
- MARKETING increased due to the higher number of direct
marketing initiatives at Cardmember Services.
- The increase in TRAVEL AND ENTERTAINMENT is attributable to
the increase in travel and hotel expenses associated with the
heightened levels of business activities at the Investment
Bank as well as activities related to the merger.
- All Other expenses decreased by $24 million primarily as a
result of a decline in operating losses.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles for the first quarter of 2001 increased from the
same quarter a year ago as a result of the acquisitions of Flemings and Beacon
in the third quarter of 2000.
MERGER AND RESTRUCTURING COSTS
During the first quarter of 2001, the Firm incurred $328 million of
restructuring costs relating to previously announced merger actions ($274
million) and relocation and other business initiatives ($54 million). Under
current accounting pronouncements, these costs (primarily systems integration
costs, facilities costs and retention payments) are not recognized until
incurred. For a further discussion of JPMorgan Chase's merger and restructuring
costs, refer to Note 7 and page 42 of JPMorgan Chase's 2000 Annual Report.
CREDIT COSTS
Credit costs on an operating basis are composed of the provision for loan losses
related to loans on the Consolidated Balance Sheet and to the credit costs
associated with credit card receivables that have been securitized.
(in millions) FIRST QUARTER
------------------------------
2001 2000
---------- --------
Provision for Loan Losses $ 447 $ 342
Credit Costs Associated with Credit Card Securitizations 241 254
---------- --------
Operating Credit Costs $ 688 $ 596
========== ========
Credit costs increased in the first quarter of 2001, when compared with first
quarter of 2000 as a result of the increases in charge-offs in the retained
portfolio, partially offset by the impact of a decrease in charge-offs on
securitized credit cards. See page 36 for a discussion of the allowance for
credit losses.
INCOME TAXES
JPMorgan Chase recognized income tax expense of $656 million on income before
effect of accounting change in the first quarter of 2001, compared with $1.09
billion in the first quarter of 2000. The effective tax rates were 35.0% and
35.3%, respectively.
-31-
32
Part I
Item 2 (continued)
RISK MANAGEMENT
JPMorgan Chase is in the business of managing risk to create shareholder value.
The major risks to which the Firm is exposed are credit, market, operational and
liquidity risk. For a discussion of these risks and definitions of terms
associated with managing these risks, please refer to the Glossary of Terms on
page 47 of this Form 10-Q and pages 43-59 of JPMorgan Chase's 2000 Annual
Report.
CREDIT RISK MANAGEMENT
The following discussion of JPMorgan Chase's credit risk management focuses
primarily on developments since December 31, 2000 and should be read in
conjunction with pages 46-53 and 67-68 of JPMorgan Chase's 2000 Annual Report.
The following table presents the Firm's credit-related information for the dates
indicated.
PAST DUE 90 DAYS
CREDIT-RELATED ASSETS NONPERFORMING ASSETS (c) & OVER AND ACCRUING
--------------------------- ------------------------- ---------------------
MARCH 31, Dec 31, MARCH 31, Dec 31, MARCH 31, Dec 31,
(in millions) 2001 2000 2001 2000 2001 2000
------------ ----------- ---------- --------- --------- -------
Commercial Loans $ 113,217 $ 119,460 $ 1,637 $ 1,434 $ 114 $ 99
Derivative and FX Contracts (a) 78,907 76,373 109 37 -- --
Consumer Loans (b) 120,196 114,461 377 384 799 788
------------ ----------- ---------- --------- --------- -------
TOTAL MANAGED CREDIT-RELATED $ 312,320 $ 310,294 $ 2,123 $ 1,855 $ 913 $ 887
============ =========== ========= =======
Assets Acquired as Loan Satisfactions 111 68
---------- ---------
TOTAL NONPERFORMING ASSETS $ 2,234 $ 1,923
========== =========
NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (d)
----------------------------- ---------------------------------------
(in millions, except ratios) FIRST QUARTER FIRST QUARTER
----------------------------- ---------------------------------------
2001 2000 2001 2000
-------- -------- ----- -----
Commercial Loans $ 148 $ 63 0.50% 0.22%
Consumer Loans 540 524 1.83 1.98
-------- --------
TOTAL MANAGED CREDIT-RELATED $ 688 $ 587 1.17 1.06
======== ========
(a) Charge-offs for derivative receivables are included in trading revenue.
(b) Includes credit card receivables that have been securitized.
(c) Nonperforming assets have not been reduced for credit protection
(single name credit default swaps and collateralized loan obligations)
aggregating $107 million related to nonperforming counterparties.
(d) Annualized.
JPMorgan Chase's managed credit-related assets of $312 billion at March 31, 2001
increased 1% when compared with year-end 2000. Commercial loans decreased $6.2
billion reflecting the Firm's discipline of originating loans for distribution
and its portfolio hedging activities. Derivative and foreign exchange
instruments increased a modest 3%. Consumer managed credit-related assets
increased $5.7 billion, largely in the 1-4 family residential mortgage
portfolio. JPMorgan Chase's credit-related portfolio continues to be relatively
well-balanced between commercial and consumer assets, with consumer assets
comprising approximately 38% of JPMorgan Chase's managed credit-related
portfolio, compared with 37% at year-end 2000. The portion of the commercial
portfolio considered investment grade was 65% at March 31, 2001, down from 67%
at year-end 2000.
The increase in nonperforming assets was primarily related to three domestic
commercial credits. Management currently believes that credit conditions in the
United States will remain challenging over the remainder of the year, causing
nonperforming assets to increase further in 2001. However, management believes
that JMPC's credit performance this year will continue to be better than the
industry average.
Net charge-offs in the managed portfolio were $688 million in the first quarter
of 2001, an increase of $101 million from the first quarter of 2000, reflecting
increased net charge-offs in the commercial loan portfolio.
-32-
33
Part I
Item 2 (continued)
For full-year 2001, management expects the commercial net charge-off rate to
fall within the targeted range of 40-60 basis points of JPMC's commercial loan
portfolio.
COMMERCIAL PORTFOLIO
(in millions) PAST DUE 90 DAYS & OVER
CREDIT-RELATED ASSETS NONPERFORMING ASSETS (b) AND ACCRUING
-------------------------- ------------------------ -----------------------
MARCH 31, Dec 31, MARCH 31, Dec 31, MARCH 31, Dec 31,
COMMERCIAL LOANS: 2001 2000 2001 2000 2001 2000
------------ ----------- --------- ------- ---------- --------
Domestic Commercial:
Commercial and Industrial $ 65,231 $ 64,031 $ 877 $ 727 $ 98 $ 95
Commercial Real Estate 4,573 4,834 62 65 16 3
Financial Institutions 3,242 7,342 270 29 -- --
------------ ----------- --------- ------- --------- -------
Total Domestic Commercial Loans 73,046 76,207 1,209 821 114 98
Foreign Commercial:
Commercial and Industrial 35,253 37,002 374 556 -- 1
Commercial Real Estate 2,175 1,470 9 9 -- --
Financial Institutions 2,092 3,976 11 13 -- --
Foreign Governments 651 805 34 35 -- --
------------ ----------- --------- ------- --------- -------
Total Foreign Commercial Loans 40,171 43,253 428 613 -- 1
------------ ----------- --------- ------- --------- -------
TOTAL COMMERCIAL LOANS 113,217 119,460 1,637 1,434 114 99
DERIVATIVE AND FX CONTRACTS (a) 78,907 76,373 109 37 -- --
------------ ----------- --------- ------- --------- -------
TOTAL COMMERCIAL CREDIT-RELATED $ 192,124 $ 195,833 $ 1,746 $ 1,471 $ 114 $ 99
============ =========== ========= ======= ========= =======
NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (c)
------------------------ ---------------------------------------
(in millions, except ratios) FIRST QUARTER FIRST QUARTER
------------------------ ---------------------------------------
COMMERCIAL LOANS: 2001 2000 2001 2000
-------- -------- ----- -----
Domestic Commercial:
Commercial and Industrial $ 114 $ 36 0.61% 0.19%
Commercial Real Estate (1) (2) NM NM
Financial Institutions 13 8 1.50 1.20
------- -------
Total Domestic Commercial 126 42 0.62 0.20
Foreign Commercial:
Commercial and Industrial 22 18 0.26 0.25
Commercial Real Estate -- -- -- --
Financial Institutions -- 2 -- 0.35
Foreign Governments -- 1 -- 0.39
------- -------
Total Foreign Commercial 22 21 0.24 0.26
------- -------
TOTAL COMMERCIAL LOANS $ 148 $ 63 0.50 0.22
======= =======
(a) Charge-offs for derivative receivables are included in trading revenue.
(b) Nonperforming assets have not been reduced for credit protection
(single name credit default swaps and collateralized loan obligations)
aggregating $107 million related to nonperforming counterparties.
(c) Annualized.
NM - Not meaningful
Commercial net charge-offs in the first quarter of 2001 were $148 million,
compared with $63 million in the first quarter of 2000, primarily reflecting an
increase in charge-offs in North America.
COMMERCIAL AND INDUSTRIAL: The domestic commercial and industrial portfolio
increased $1.2 billion from 2000 year-end, reflecting general business activity.
Net charge-offs in the 2001 first quarter amounted to $114 million, compared
with $36 million in the 2000 first quarter. Nonperforming domestic commercial
and industrial loans were $877 million, an increase of $150 million from the
2000 year-end. The foreign commercial and industrial portfolio totaled $35.3
billion at March 31, 2001, a decrease of 5% from the 2000 year-end level.
Nonperforming foreign commercial and industrial loans were $374 million, a
decrease of $182 million from year-end 2000 due in large part to a continuing
improvement in the Asian loan portfolio. Net charge-offs in the foreign
commercial and industrial loan portfolio for the first quarter of 2001 increased
to $22 million, from $18 million in the same period last year.
FINANCIAL INSTITUTIONS: Loans to financial institutions decreased $6.0 billion
during 2001, when compared with year-end, primarily in the domestic portion of
the portfolio. Nonperforming financial institution loans increased from $42
million to $281 million, primarily due to one borrower in the domestic
portfolio.
-33-
34
Part I
Item 2 (continued)
DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
For a discussion of the derivative and foreign exchange contracts utilized by
JPMorgan Chase in connection with its trading and Assets/Liabilities ("A/L")
activities, see Note 3 of this Form 10-Q, and page 50 and Notes 1 and 25 of
JPMorgan Chase's 2000 Annual Report. The following table provides the remaining
maturities of derivative and foreign exchange contracts outstanding at March 31,
2001 and December 31, 2000.
AT MARCH 31, 2001 At December 31, 2000
--------------------------------------------------- ---------------------------------------------------
INTEREST FOREIGN EQUITY, Interest Foreign Equity,
RATE EXCHANGE COMMODITY AND Rate Exchange Commodity and
CONTRACTS CONTRACTS OTHER CONTRACTS TOTAL Contracts Contracts Other Contracts Total
--------- --------- --------------- ----- --------- --------- --------------- -----
Less Than 1 Year 12% 87% 39% 26% 12% 89% 40% 28%
1 to 5 Years 44 11 58 40 45 9 57 41
Over 5 Years 44 2 3 34 43 2 3 31
--- --- --- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
COUNTRY EXPOSURE
The following table presents JPMorgan Chase's exposure to selected countries.
Cross-border disclosure is based on an adjusted regulatory view (FFIEC 009) of
country exposure (see footnote (a) below). For a further discussion of the
Firm's country exposure, see page 51 of the 2000 Annual Report.
SELECTED COUNTRY EXPOSURE
AT MARCH 31, 2001 At Dec 31, 2000
--------------------------------------------------------------------- ---------------
GROSS LESS TOTAL Total
LENDING- TRADING- LOCAL LOCAL CROSS-BORDER Cross-Border
(in billions) RELATED RELATED COUNTRY FUNDING EXPOSURE Exposure
(b) (c) ASSETS (d) (a) (a)
-------- -------- ------- --------- ------------ ---------------
Emerging Market Countries
Mexico $ 1.2 $ 2.0 $ 1.0 $ (0.8) $ 3.4 $ 3.1
======== ======= ======= ======== ======= =======
Brazil $ 0.6 $ 1.0 $ 2.4 $ (1.5) $ 2.5 $ 2.6
======== ======= ======= ======== ======= =======
Argentina $ 1.1 $ 1.2 $ 0.4 $ (0.3) $ 2.4 $ 2.2
======== ======= ======= ======== ======= =======
South Africa $ 0.3 $ 1.1 $ 0.4 $ (0.3) $ 1.5 $ 1.2
======== ======= ======= ======== ======= =======
Indonesia $ 0.8 $ 0.1 $ -- $ -- $ 0.9 $ 0.9
======== ======= ======== ======== ======= =======
Turkey $ 0.2 $ 0.2 $ 0.1 $ -- $ 0.5 $ 0.9
======== ======= ======= ======== ======= =======
Russia $ 0.1 $ 0.1 $ -- $ -- $ 0.2 $ 0.2
======== ======= ======== ======== ======= =======
Other Selected Countries
Japan $ 2.5 $ 4.5 $ 5.2 $ (4.0) $ 8.2 $ 15.3
======== ======= ======= ======== ======= =======
(a) Under the adjusted regulatory view of country exposure, resale
agreements are reported by the country of the counterparty of the
transactions (rather than the country of the issuer of the underlying
security); short security positions can be used to offset long
positions in a country; and credit derivatives are treated as trading
positions and used to reduce or increase exposure within a country.
(b) Lending-related includes loans and accrued interest receivable,
interest-bearing deposits with banks, acceptances, other monetary
assets, issued letters of credit, resale agreements and undrawn
commitments to extend credit (all adjusted for the impact of credit
derivatives).
(c) Trading-related includes cross-border trading debt and equity
instruments adjusted for the impact of credit derivatives and the
mark-to-market exposure of derivative and foreign exchange contracts.
The amounts associated with derivative and foreign exchange contracts
are presented after taking into account the impact of legally
enforceable master netting agreements.
(d) Local assets funded cross border are considered cross-border exposure.
Cross-border exposure to Argentina on an adjusted regulatory view, increased
from $2.2 billion at December 31, 2000 to $2.4 billion at March 31, 2001.
However, the internal management view of cross-border exposure to Argentina was
$1.5 billion at March 31, 2001, up from $1.1 billion at December 31, 2000.
-34-
35
Part I
Item 2 (continued)
CONSUMER PORTFOLIO
PAST DUE 90 DAYS & OVER
CREDIT-RELATED ASSETS NONPERFORMING ASSETS AND ACCRUING
--------------------------- ------------------------ -----------------------
(in millions) MARCH 31, Dec 31, MARCH 31, Dec 31, MARCH 31, Dec 31,
CONSUMER LOANS: 2001 2000 2001 2000 2001 2000
------------ ----------- --------- ------- ---------- --------
1-4 Family Residential Mortgages $ 54,143 $ 50,302 $ 254 $ 269 $ 3 $ 2
Credit Card - Reported 19,835 18,495 24 26 352 327
Credit Card Securitizations (a) 16,625 17,871 -- -- 374 387
------------ ----------- --------- ------- --------- -------
Credit Card - Managed 36,460 36,366 24 26 726 714
Auto Financings 21,457 19,802 84 76 1 1
Other Consumer (b) (d) 8,136 7,991 15 13 69 71
------------ ----------- --------- ------- --------- -------
TOTAL CONSUMER LOANS $ 120,196 $ 114,461 $ 377 $ 384 $ 799 $ 788
============ =========== ========= ======= ========= =======
NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (c)
-------------------- ---------------------------------------
(in millions, except ratios) FIRST QUARTER FIRST QUARTER
-------------------- ---------------------------------------
CONSUMER LOANS: 2001 2000 2001 2000
-------- ------- ----- -----
1-4 Family Residential Mortgages $ 10 $ 9 0.08% 0.08%
Credit Card - Reported 218 188 4.44 5.26
Credit Card Securitizations (a) 241 254 5.77 5.57
-------- -------
Credit Card - Managed 459 442 5.05 5.44
Auto Financings 29 21 0.56 0.45
Other Consumer (b) (d) 42 52 1.91 2.20
-------- -------
TOTAL CONSUMER LOANS $ 540 $ 524 1.83% 1.98%
======== =======
(a) Represents the portion of JPMorgan Chase's credit card receivables that
have been securitized.
(b) Consists of installment loans (direct and indirect types of consumer
finance), student loans and unsecured lines of credit.
(c) Annualized.
(d) Includes foreign consumer.
JPMorgan Chase's consumer portfolio is primarily domestic and is geographically
well-diversified. JPMorgan Chase's managed consumer portfolio totaled $120.2
billion at March 31, 2001, an increase of $5.7 billion since year-end. Consumer
net charge-offs, on a managed basis, were $540 million and $524 million for the
first quarter of 2001 and 2000, respectively. The increase is primarily due to
an increase in credit card net charge-offs.
RESIDENTIAL MORTGAGE LOANS: Residential mortgage loans were $54.1 billion at
March 31, 2001, a $3.8 billion increase from year-end, while the level of
nonperforming residential mortgage loans decreased 6%. The net charge-off rate
of 0.08% for the first quarter of 2001 was unchanged from first quarter 2000,
reflecting the continued stable credit quality of this portfolio.
CREDIT CARD LOANS: JPMorgan Chase analyzes its credit card portfolio on a
"managed basis," which includes credit card receivables on the balance sheet as
well as credit card receivables that have been securitized. These amounts
include domestic and international consumer and commercial credit card activity
(for reporting purposes, commercial credit cards are reported within the
commercial loan category).
Managed credit card receivables of $36.5 billion for the first quarter of 2001
remained flat when compared with year-end 2000 but increased 13% from last
year's first quarter. During the 2001 first quarter, net charge-offs as a
percentage of average credit card receivables decreased to 5.05%, compared with
5.44% in the prior-year period. Loans over 90 days past due increased to 1.99%
of the portfolio at March 31, 2001, compared with 1.96% at December 31, 2000.
Management anticipates that the managed credit card net charge-off ratio for the
full-year 2001 will be comparable to full-year 2000 although the amount of total
charge-offs are expected to increase for 2001.
AUTO FINANCINGS: Auto financings outstanding increased 8% at March 31, 2001,
when compared with year-end 2000. Although increased from the prior year, the
charge-off rate of 0.56% for the 2001 first quarter continues to be indicative
of this portfolio's selective approach to asset origination. Total originations
were $4.3 billion for the three months of 2001, compared with $2.6 billion for
the same 2000 period.
-35-
36
Part I
Item 2 (continued)
OTHER CONSUMER LOANS: The level of other consumer loans of $8.1 billion at March
31, 2001 remained comparable with year-end levels. The net charge-off rates
related to this portfolio were down in the first quarter when compared with
the first quarter of 2000.
ALLOWANCE FOR CREDIT LOSSES
Loans: JPMorgan Chase's allowance for loan losses is intended to cover probable
credit losses as of March 31, 2001, for which either the asset is not
specifically identified or the size of the loss has not been fully determined.
Within the allowance, there are both specific and expected loss components and a
residual component. For a further discussion of the specific loss, expected loss
and residual components of the allowance for loan losses, see page 53 of
JPMorgan Chase's 2000 Annual Report.
March 31, 2001 versus March 31, 2000: The provision for loan losses increased
$105 million or 31% when compared to the first quarter of 2000.
Foreign commercial net loan charge-offs remained relatively stable during the
first three months of 2001, when compared to the prior-year quarter, and foreign
commercial nonperforming loans decreased $365 million from March 31, 2000.
However, domestic commercial net loan charge-offs and nonperforming loans
increased $84 million and $720 million, respectively, during the same periods.
ALLOWANCE COMPONENTS
(in millions) AT MARCH 31, 2001 At March 31, 2000
----------------- -----------------
Specific Loss $ 713 $ 516
Expected Loss:
Consumer 1,560 1,493
Commercial 876 988
----------- ---------
Total Expected Loss 2,436 2,481
----------- ---------
Residual Component 523 750
----------- ---------
Total $ 3,672 $ 3,747
=========== =========
Lending-Related Commitments: JPMorgan Chase also has an allowance for its
lending-related commitments, using a methodology similar to that for the loan
portfolio. This allowance, which is reported in Other Liabilities, was $283
million at March 31, 2001 and $296 million at March 31, 2000.
-36-
37
Part I
Item 2 (continued)
MARKET RISK MANAGEMENT
AGGREGATE VAR EXPOSURE
Value-at-risk ("VAR") is a measure of the dollar amount of potential loss from
adverse market moves in an everyday market environment. VAR calculations are
performed for all material trading and investment portfolios and for market
risk-related A/L activities. Due to the complexity of the modeling and
procedural differences at the heritage firms, combined VAR is not available for
periods prior to the merger date. In addition, due to significant differences in
the definition of market risk-related revenues used in preparation of histograms
at Chase and J.P. Morgan, it is not feasible to include a histogram for
fiscal-year 2000.
Although no single risk statistic can reflect all aspects of market risk, the
tables that follow provide a meaningful overview of the market risk exposure of
JPMorgan Chase.
The following table represents JPMorgan Chase's average and period-end VARs for
its trading portfolios and its A/L activities.
AGGREGATE PORTFOLIO
THREE MONTHS ENDED MARCH 31, 2001
-------------------------------------------------
AVERAGE MINIMUM MAXIMUM AT MARCH 31, 2001
(in millions) VAR VAR VAR
- ----------------------------------------------------------------------------------------------------------------------------
Trading Portfolio $ 58.2 $ 48.9 $ 70.6 $ 62.7
Investment Portfolio and
A/L Activities (a) 101.5 79.8 120.2 120.2
Less: Portfolio Diversification (35.9) NM NM (55.9)
----------- ---------- --------- -----------
Total VAR $ 123.8 $ 99.4 $ 151.4 $ 127.0
=========== ========= ========= ===========
(a) Substantially all of the risk is interest rate related.
NM - Because the minimum and maximum may occur on different days for
different risk components, it is not meaningful to compute a portfolio
diversification effect. In addition, JPMorgan Chase's average and
period-end VARs are less than the sum of the VARs of its market risk
components due to risk offsets resulting from portfolio
diversification.
MARKET RISK-RELATED ACTIVITIES
Value-at-Risk: JPMorgan Chase is exposed to interest rate, foreign exchange,
equity and commodity market risks in its trading portfolio. The table below
reflects VAR data for the trading portfolio by risk category. See Aggregate VAR
Exposure section above for average and period-end VARs for the total trading
portfolio.
MARKED-TO-MARKET TRADING PORTFOLIO (a)
THREE MONTHS ENDED MARCH 31, 2001
-------------------------------------------------
AVERAGE MINIMUM MAXIMUM AT MARCH 31, 2001
(in millions) VAR VAR VAR
- ----------------------------------------------------------------------------------------------------------------------------
Interest Rate $ 35.1 $ 23.5 $ 51.6 $ 37.0
Foreign Exchange 6.0 3.7 10.3 5.6
Equities 22.4 14.2 29.1 27.2
Commodities 4.0 2.5 5.7 3.8
Hedge Fund Investments 3.3 2.6 4.2 2.6
Less: Portfolio Diversification (12.6) NM NM (13.5)
----------- --------- --------- -----------
Total Trading VAR $ 58.2 $ 48.9 $ 70.6 $ 62.7
=========== ========= ========= ===========
(a) While integrated VAR computations are available for the aggregate
portfolio, integrated VAR by risk category has not yet been
implemented. Accordingly, this table has been prepared using certain
estimates and assumptions. The risk category VAR was computed based on
the methodologies used by the heritage firms, assuming no correlation
between the heritage firms' exposures. Actual risk category VAR may
differ from these estimates.
NM - Because the minimum and maximum may occur on different days for
different risk components, it is not meaningful to compute a portfolio
diversification effect. In addition, JPMorgan Chase's average and
period-end VARs are less than the sum of the VARs of its market risk
components due to risk offsets resulting from portfolio
diversification.
-37-
38
Part I
Item 2 (continued)
HISTOGRAM:
The following histogram illustrates JPMorgan Chase's daily market risk-related
revenue, which is defined as the daily change in value of the mark-to-market
trading portfolios plus any trading-related net interest income, brokerage
commissions, underwriting fees or other revenue. In first quarter 2001, JPMorgan
Chase posted positive daily market risk-related revenue for 60 out of 62 days,
with 46 days exceeding positive $25 million. Losses were sustained on only two
of the 62 days represented in the histogram. JPMorgan Chase incurred no daily
trading losses in excess of $15 million in the first quarter of 2001.
[See Appendix 1 - Narrative Description of Graphic Image Material]
Stress Testing: Whereas VAR captures exposure to unlikely events in normal
markets, stress testing discloses market risk under plausible events in abnormal
markets.
The following table represents the potential stress test loss (pre-tax) in
JPMorgan Chase's trading portfolio predicted by JPMorgan Chase's stress test
scenarios.
LARGEST MONTHLY STRESS TEST LOSS - PRE-TAX
THREE MONTHS ENDED MARCH 31, 2001
--------------------------------------------------
(in millions) AVERAGE MINIMUM MAXIMUM AT MARCH 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------
Stress Test Loss - Pre-Tax $ (340) $ (214) $ (447) $ (214)
-38-
39
Part I
Item 2 (continued)
INVESTMENT PORTFOLIO AND ASSET/LIABILITY ACTIVITIES
JPMorgan Chase is also exposed to market risk in its investment portfolio and
A/L activities. Market risk measurements for JPMorgan Chase's investment
portfolio and A/L activities do not take into account all factors that have an
effect on these activities, such as changes in credit quality.
Value-at-Risk: See the VAR Aggregate Exposure section on page 37 for JPMorgan
Chase's average and period-end VARs for its investment portfolio and market
risk-related A/L activities.
Stress Testing:
Economic value stress testing measures the potential change in the market value
of JPMorgan Chase's investment portfolio and A/L activities. As of March 31,
2001, the potential impact of the economic value stress test scenario on the
value of JPMorgan Chase's investment portfolio and A/L activities would have
been equivalent to less than 1% of JPMorgan Chase's market capitalization.
The NII stress test measures the potential change in JPMorgan Chase's interest
earnings over a one-year time horizon. At March 31, 2001, JPMorgan Chase's
largest potential NII stress test loss was estimated to be approximately 8.1% of
projected net income for the full year 2001.
Nonstatistical Risk Measures: Exposure to interest rate risk is assessed using a
Basis Point Value ("BPV") method. BPV measures the change in market value of
JPMorgan Chase's investment portfolio and A/L activities to a one basis point
increase in interest rates (directional risk) or one basis point widening of
interest rate spreads (basis risk). The table that follows shows that JPMorgan
Chase had a directional BPV of $(8.6) million (pre-tax) at March 31, 2001. This
indicates that the market value of JPMorgan Chase's A/L positions would have
declined by approximately $8.6 million for every one basis point increase in
interest rates along the interest rate yield curve. The table also shows that
the economic value of JPMorgan Chase's investment portfolio and A/L activities
would have declined by $(18.4) million (pre-tax) for every one basis point
widening of interest rate spreads (basis risk).
MARKET RISK-RELATED A/L ACTIVITIES
THREE MONTHS ENDED MARCH 31, 2001
----------------------------------------------------
(in millions) AVERAGE MINIMUM MAXIMUM AT MARCH 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------
DIRECTIONAL RISK $ (7.3) $ (6.0) $ (8.6) $ (8.6)
BASIS RISK (16.4) (14.5) (18.4) (18.4)
-39-
40
Part I
Item 2 (continued)
CAPITAL MANAGEMENT
The following discussion of JPMorgan Chase's capital management focuses
primarily on the developments since December 31, 2000 and should be read in
conjunction with pages 44-45 and Note 23 of JPMorgan Chase's 2000 Annual Report.
CAPITAL
JPMorgan Chase's capital levels at March 31, 2001 continued to improve with
ratios well in excess of regulatory guidelines. At March 31, 2001, the Tier 1
and Total Capital ratios were 8.7% and 12.3%, respectively, and the Tier 1
leverage ratio was 5.4%.
The following table shows JPMorgan Chase's capital generation and use during the
periods indicated.
FIRST QUARTER
-------------------------
(in billions) 2001 2000
-------- ---------
SOURCES OF FREE CASH FLOW
Cash Operating Earnings Less Dividends $ 0.9 $ 1.5
Plus: Preferred Stock and Equivalents/Special Items 0.2 --
Less: Capital for Internal Asset Growth (0.5) (0.6)
------- --------
Total Sources of Free Cash Flow $ 0.6 $ 0.9
======= ========
USES OF FREE CASH FLOW
Increases (Decreases) in Capital Ratios $ 1.2 $ (0.1)
Acquisitions 0.1 --
Repurchases Net of Stock Issuances (0.7) 1.0
------- --------
Total Uses of Free Cash Flow $ 0.6 $ 0.9
======= ========
In the first quarter of 2001, JPMorgan Chase raised the quarterly cash dividend
on its common stock to $0.34 per share from $0.32 per share.
At March 31, 2001, the total capitalization of JPMorgan Chase (the sum of Tier 1
and Tier 2 Capital) was $55.4 billion, an increase of $2.0 billion from December
31, 2000. This increase reflects retained earnings (net income less common and
preferred dividends) generated during the period, treasury stock reissuances of
$554 million and the issuance of $500 million in trust preferred capital
securities, partially offset by the redemption of preferred stock and capital
needed for internal asset growth.
LIQUIDITY RISK MANAGEMENT
The following discussion of JPMorgan Chase's liquidity risk management focuses
primarily on the developments since December 31, 2000 and should be read in
conjunction with page 59 of JPMorgan Chase's 2000 Annual Report.
LIQUIDITY
During the first three months of 2001, JPMorgan Chase issued approximately $4.5
billion of long-term debt and $500 million of trust preferred capital
securities. During the same period, $5 billion of long-term debt matured or was
redeemed.
-40-
41
Part I
Item 2 (continued)
OPERATIONAL RISK MANAGEMENT
For a discussion of JPMorgan Chase's operational risk management, refer to page
58 of JPMorgan Chase's 2000 Annual Report.
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 1 through 6 of JPMorgan Chase's 2000 Form 10-K.
DIVIDENDS
JPMorgan Chase's bank subsidiaries, without the approval of their relevant
banking regulators, could pay dividends to their respective bank holding
companies in amounts up to the limitations imposed upon such banks by regulatory
restrictions. These dividend limitations, in the aggregate, totaled
approximately $3.8 billion at March 31, 2001.
OTHER EVENTS
On February 21, 2001, J.P. Morgan Chase & Co. acquired Colson Services Corp.
("Colson"), a privately held record keeper and loan servicer. The Colson
business will be managed as part of Institutional Trust Services within Treasury
& Securities Services and will enhance the Firm's position as a leading provider
of outsourcing support to government agencies.
On February 28, 2001, Chase Manhattan Mortgage Corporation, an indirect
subsidiary of J.P. Morgan Chase & Co., completed the acquisition of the mortgage
business of Advanta Corp. The acquisition included Advanta's origination
capability, loan servicing and subservicing portfolio, and related
securitization residual interests.
ACCOUNTING DEVELOPMENTS
ADOPTION OF SFAS 140
The Firm adopted the transfer provisions of SFAS 140 on April 1, 2001. Adoption
will not have a significant impact on the Firm's financial statements.
LEGAL ISOLATION
In April 2001, the FASB announced its intention to issue a Technical Bulletin
that would delay the effective date of SFAS 140 for certain provisions that
impact entities subject to possible receivership by the FDIC. For those
entities, it is expected that the Technical Bulletin will delay the isolation
standards of SFAS 140 until transfers occurring after December 31, 2001. Until
the Technical Bulletin is issued, the FASB has concluded it is appropriate for
entities to continue to apply the previous isolation standard of SFAS 125. The
Firm is currently reviewing its transactions to determine what modifications
will be required to conform with SFAS 140.
-41-
42
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
FIRST QUARTER
---------------------------- Over/(Under)
REPORTED BASIS 2001 2000 1Qtr2000
----------- --------- ------------
Revenue $ 8,253 $ 8,769 (6)%
Noninterest Expense (excluding Merger
and Restructuring Costs) 5,598 5,353 5
Merger and Restructuring Costs 328 -- NM
Provision for Loan Losses 447 342 31
Net Income (a) $ 1,199 $ 1,988 (40)%
Net Income per Share:
- --------------------
Basic (a) $ 0.60 $ 1.06 (43)%
Diluted (a) 0.58 1.01 (43)
Cash Dividends Declared 0.34 0.32 6
Share Price at Period End 44.90 58.13 (23)
Book Value at Period End 21.17 18.49 14
Common Shares Outstanding:
- -------------------------
Average Common Shares:
Basic 1,966.6 1,853.0 6 %
Diluted 2,032.2 1,945.1 4
Common Shares at Period End 1,984.2 1,837.5 8
Performance Ratios:
- ------------------
Return on Average Total Assets (b) 0.67% 1.23% (56) bp
Return on Average Common Equity (b) 11.6 23.8 (1,220)
Capital Ratios:
- --------------
Tier 1 Capital Ratio 8.7% 8.5% 20 bp
Total Capital Ratio 12.3 12.2 10
Tier 1 Leverage 5.4 5.8 (40)
- -------------------------------------------------------------------------------------------------------------
EXCLUDING JPMORGAN PARTNERS (f)
----------------------------------------------------------
OPERATING BASIS (c)
Revenue $ 8,437 $ 8,422 --
Noninterest Expense 5,496 5,228 5%
Credit Costs 688 596 15
Earnings 1,463 1,681 (13)
Diluted Earnings per Share 0.71 0.85 (16)
Return on Average Common Equity (b) 17.0% 25.8% (880) bp
Overhead Ratio (d) 65 62 300
CASH OPERATING BASIS:
Cash Earnings $ 1,635 $ 1,772 (8)%
Cash Diluted Earnings per Share 0.80 0.90 (11)
Shareholder Value Added (e) 645 1,031 (37)
Cash Return on Average Common Equity (b) 19.0% 27.2% (820) bp
Cash Overhead Ratio (d) 63 61 200
INCLUDING JPMORGAN PARTNERS (f)
----------------------------------------------------------
OPERATING BASIS (c)
Revenue $ 8,494 $ 9,023 (6)%
Noninterest Expense 5,598 5,353 5
Credit Costs 688 596 15
Earnings 1,436 1,988 (28)
Diluted Earnings per Share 0.70 1.01 (31)
Return on Average Common Equity (b) 13.9% 23.8% (990) bp
Overhead Ratio (d) 66 59 700
CASH OPERATING BASIS:
Cash Earnings $ 1,613 $ 2,081 (22)%
Cash Diluted Earnings per Share 0.78 1.06 (26)
Shareholder Value Added (e) 370 1,067 (65)
Cash Return on Average Common Equity (b) 15.6% 24.9% (930) bp
Cash Overhead Ratio (d) 64 58 600
(a) Reported basis for the first quarter of 2001 includes the cumulative
effect of a transition adjustment of $(25) million, net of taxes,
related to the adoption of SFAS 133, relating to the accounting for
derivative instruments and hedging activities. The impact on each of
basic and diluted earnings per share was $(0.01).
(b) Based on annualized amounts.
(c) Operating basis excludes the impact of credit card securitizations,
merger and restructuring costs and special items. See page 26 for a
reconciliation of results on a reported and operating basis.
-42-
43
Part I
Item 2 (continued)
(d) The overhead ratio is noninterest expense as a percentage of the total
of net interest income and noninterest revenue (excluding merger and
restructuring costs and special items). The cash overhead ratio also
excludes the impact of amortization of goodwill and certain other
intangibles.
(e) SVA represents operating earnings excluding the amortization of
goodwill and certain other intangibles, minus preferred dividends and
an explicit charge for capital. An integrated cost of capital was
implemented during the first quarter of 2001. A 12% cost of capital has
been used for all businesses except JPMP, which has a 15% cost of
capital. Prior periods have been restated to conform with current
methodologies.
(f) JPMP is JPMorgan Chase's private equity business. See pages 21 through
22 for its line of business results.
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
-43-
44
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS, EXCEPT RATES)
FIRST QUARTER 2001 First Quarter 2000
------------------------------------------- -------------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
------------ -------- ------------ ------------ -------- ------------
ASSETS
Deposits with Banks $ 7,517 $ 139 7.51% $ 10,196 $ 212 8.35%
Federal Funds Sold and
Securities Purchased under
Resale Agreements 82,836 1,196 5.86 75,220 1,090 5.83
Securities and Trading Assets 200,872 2,901 5.86 (a) 164,128 2,692 6.60 (a)
Securities Borrowed 37,261 493 5.37 35,999 528 5.90
Loans 219,133 4,469 8.27 203,693 3,942 7.79
----------- ------- ----------- --------
Total Interest-Earning Assets 547,619 9,198 6.81 489,236 8,464 6.96
Allowance for Loan Losses (3,699) (3,699)
Cash and Due from Banks 21,380 16,086
Trading Assets - Derivative Receivables 76,238 75,490
Other Assets 89,420 74,483
----------- -----------
Total Assets $ 730,958 $ 651,596
=========== ===========
LIABILITIES
Interest Bearing Deposits $ 216,749 2,636 4.93% $ 216,462 2,507 4.66%
Federal Funds Purchased and
Securities Sold under
Repurchase Agreements 152,675 2,136 5.67 119,224 1,566 5.28
Commercial Paper 17,963 265 5.98 18,630 272 5.86
Other Borrowings (b) 70,606 981 5.64 52,118 946 7.30
Long-Term Debt 47,445 744 6.36 45,084 735 6.56
----------- ------- ----------- --------
Total Interest-Bearing Liabilities 505,438 6,762 5.43 451,518 6,026 5.37
----------- ------- ----------- --------
Noninterest-Bearing Deposits 55,213 52,338
Trading Liabilities - Derivative Payables 74,742 68,532
Other Liabilities 52,263 43,887
----------- -----------
Total Liabilities 687,656 616,275
----------- -----------
PREFERRED STOCK OF SUBSIDIARY 550 550
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,487 1,622
Common Stockholders' Equity 41,265 33,149
----------- -----------
Total Stockholders' Equity 42,752 34,771
----------- -----------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 730,958 $ 651,596
=========== ===========
INTEREST RATE SPREAD 1.38% 1.59%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 2,436 1.80% $ 2,438 2.00%
======= ==== ======== ====
(a) For the three months ended March 31, 2001 and March 31, 2000, the
annualized rate for available-for-sale securities based on historical
cost was 5.95% and 6.09%, respectively, and the annualized rate for
available-for-sale securities based on fair value was 5.95% and 6.47%,
respectively.
(b) Includes securities sold but not yet purchased and structured notes and
trust preferred notes.
-44-
45
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
QUARTERLY CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
2001 2000
-------- --------------------------------------------------
FIRST Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
REVENUE
Investment Banking Fees $ 941 $ 1,051 $ 1,013 $ 1,107 $ 1,191
Trading Revenue 2,001 1,142 1,455 1,730 1,971
Fees and Commissions 2,065 2,387 2,427 2,218 2,197
Private Equity - Realized Gains 412 373 656 630 392
Private Equity - Unrealized Gains (Losses) (285) (471) (676) (171) 282
Securities Gains (Losses) 455 118 90 24 (3)
Other Revenue 246 1,482 415 67 325
------- ------- ------- ------- -------
TOTAL NONINTEREST REVENUE 5,835 6,082 5,380 5,605 6,355
------- ------- ------- ------- -------
Interest Income 9,180 9,922 9,423 8,858 8,440
Interest Expense 6,762 7,461 7,080 6,564 6,026
------- ------- ------- ------- -------
NET INTEREST INCOME 2,418 2,461 2,343 2,294 2,414
------- ------- ------- ------- -------
REVENUE BEFORE PROVISION FOR LOAN LOSSES 8,253 8,543 7,723 7,899 8,769
Provision for Loan Losses 447 409 298 328 342
------- ------- ------- ------- -------
TOTAL NET REVENUE 7,806 8,134 7,425 7,571 8,427
------- ------- ------- ------- -------
EXPENSE
Compensation Expense 3,357 3,310 3,135 2,963 3,340
Occupancy Expense 348 351 338 297 308
Technology and Communications 654 668 632 574 580
Merger and Restructuring Costs 328 1,302 79 50 --
Amortization of Intangibles 177 186 157 92 93
Other Expense 1,062 1,227 1,011 1,099 1,032
------- ------- ------- ------- -------
TOTAL NONINTEREST EXPENSE 5,926 7,044 5,352 5,075 5,353
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE AND
EFFECT OF ACCOUNTING CHANGE 1,880 1,090 2,073 2,496 3,074
Income Tax Expense 656 382 675 863 1,086
------- ------- ------- ------- -------
INCOME BEFORE EFFECT OF $ 1,224 $ 708 $ 1,398 $ 1,633 $ 1,988
ACCOUNTING CHANGE
Net Effect of Change in Accounting Principle (25) -- -- -- --
------- ------- ------- ------- -------
NET INCOME $ 1,199 $ 708 $ 1,398 $ 1,633 $ 1,988
======= ======= ======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 1,178 $ 687 $ 1,374 $ 1,607 $ 1,963
======= ======= ======= ======= =======
NET INCOME PER SHARE (a)
Basic $ 0.60 $ 0.36 $ 0.73 $ 0.87 $ 1.06
======= ======= ======= ======= =======
Diluted $ 0.58 $ 0.34 $ 0.69 $ 0.83 $ 1.01
======= ======= ======= ======= =======
(a) Basic and diluted earnings per share have been reduced by $(0.01) in
the first quarter of 2001 due to the impact of the adoption of SFAS 133
relating to the accounting for derivative instruments and hedging
activities.
-45-
46
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
QUARTERLY CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
2001 2000 2000 2000 2000
--------- --------- --------- --------- ---------
ASSETS
Cash and Due from Banks $ 22,371 $ 23,972 $ 20,284 $ 20,859 $ 18,159
Deposits with Banks 7,979 8,333 8,669 8,768 8,190
Federal Funds Sold and Securities Purchased
under Resale Agreements 71,147 69,474 69,413 69,421 70,048
Securities Borrowed 37,264 32,371 36,424 34,681 35,027
Trading Assets: Debt and Equity Instruments 138,270 139,249 140,992 115,730 124,225
Derivative Receivables 78,907 76,373 67,028 68,728 78,258
Securities 69,731 73,695 71,282 71,050 72,075
Loans (Net of Allowance for Loan Losses) 213,116 212,385 214,496 203,611 198,870
Goodwill and Other Intangibles 15,351 15,833 15,678 10,012 9,858
Private Equity Investments 10,877 11,428 11,502 12,102 11,742
Accrued Interest and Accounts Receivable 15,352 20,618 15,491 18,122 18,681
Premises and Equipment 7,085 7,087 6,863 6,584 6,460
Other Assets 26,174 24,530 29,375 22,700 24,453
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 713,624 $ 715,348 $ 707,497 $ 662,368 $ 676,046
========= ========= ========= ========= =========
LIABILITIES
Deposits:
Noninterest-Bearing $ 59,686 $ 62,713 $ 54,903 $ 57,904 $ 55,554
Interest-Bearing 212,886 216,652 214,882 213,012 203,441
--------- --------- --------- --------- ---------
Total Deposits 272,572 279,365 269,785 270,916 258,995
Federal Funds Purchased and Securities Sold
under Repurchase Agreements 145,703 131,738 145,210 125,237 139,520
Commercial Paper 16,281 24,851 19,462 13,354 15,031
Other Borrowed Funds 28,716 19,840 20,065 15,124 16,271
Trading Liabilities: Debt and Equity Instruments 52,501 52,157 58,972 52,506 54,633
Derivative Payables 73,312 76,517 65,253 65,531 72,117
Accounts Payable, Accrued Expenses and Other
Liabilities, Including the Allowance for Credit Losses 33,575 40,754 37,225 34,298 33,820
Long-Term Debt 42,609 43,299 45,634 44,528 45,825
Guaranteed Preferred Beneficial Interests in the Firm's
Junior Subordinated Deferrable Interest Debentures 4,439 3,939 3,939 3,689 3,688
--------- --------- --------- --------- ---------
TOTAL LIABILITIES 669,708 672,460 665,545 625,183 639,900
--------- --------- --------- --------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 550 550 550 550
STOCKHOLDERS' EQUITY
Preferred Stock 1,362 1,520 1,522 1,522 1,622
Common Stock 1,984 1,940 2,066 2,066 1,625
Capital Surplus 11,663 11,598 12,427 12,205 12,280
Retained Earnings 28,592 28,096 31,678 30,887 29,848
Accumulated Other Comprehensive Income (Loss) (214) (241) (995) (1,281) (1,266)
Treasury Stock, at Cost (21) (575) (5,296) (8,764) (8,513)
--------- --------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 43,366 42,338 41,402 36,635 35,596
--------- --------- --------- --------- ---------
TOTAL LIABILITIES, PREFERRED STOCK OF
SUBSIDIARY AND STOCKHOLDERS' EQUITY $ 713,624 $ 715,348 $ 707,497 $ 662,368 $ 676,046
========= ========= ========= ========= =========
-46-
47
Part I
Item 2 (continued)
- --------------------------------------------------------------------------------
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
The page numbers included after each definition represent the pages in this Form
10-Q where the term primarily is used.
Basis Point Value ("BPV"): This measurement quantifies the change in the market
value of JPMorgan Chase's assets and liabilities (that are not part of its
trading activities) that would result from a one basis point change in interest
rates. (Page 39)
Cash Operating Earnings: Operating earnings excluding the impact of the
amortization of certain other intangibles. (Pages 14-15, 18-21, 23-25, 40 and
42)
Cash Overhead Ratio: Noninterest expense, excluding amortization of certain
other intangibles, as a percentage of the total of net interest income and
noninterest revenue (excluding merger and restructuring costs and special
items). (Pages 18, 30, 42 and 43)
Chase USA: Chase Manhattan Bank USA, National Association. (Page 12)
FASB: Financial Accounting Standards Board. (Page 41)
Managed Credit Card Receivables or Managed Basis: JPMorgan Chase uses this
terminology to refer to its credit card receivables on the balance sheet plus
credit card receivables that have been securitized. (Pages 14, 18, 32 and 35)
Merger: The term refers to the December 31, 2000 merger of The Chase Manhattan
Corporation and J.P. Morgan & Co. Incorporated. (Pages 7-8, 15-17, 26, 30-31,
37, 42 and 43)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Pages 30 and 44)
Operating Basis or Operating Earnings: Reported results excluding the impact of
credit card securitizations, merger and restructuring costs and special items.
(Pages 14-21, 23-31, 40, 42 and 43)
Overhead Ratio: Noninterest expense as a percentage of the total of net interest
income and noninterest revenue (excluding merger and restructuring costs and
special items). (Pages 30, 42 and 43)
SFAS: Statement of Financial Accounting Standards.
SFAS 107: "Disclosures about Fair Value of Financial Instruments." (Page 13)
SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities."
(Page 7)
SFAS 125: "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." (Page 41)
SFAS 133: "Accounting for Derivative Instruments and Hedging Activities." (Pages
3, 7, 10-12, 14, 16, 42, 45 and 52)
SFAS 140: "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125."
(Pages 9, 10 and 41)
Shareholder Value Added ("SVA"): Represents operating earnings excluding the
amortization of goodwill and certain other intangibles (i.e., cash operating
earnings) minus preferred dividends and an explicit charge for capital. (Pages
14, 18, 42 and 43)
Special Items: The 2001 first quarter included $328 million (pre-tax) in merger
and restructuring expenses and the cumulative effect of a transition adjustment
of $(25) million (after-tax) related to the adoption of SFAS 133. There were no
special items in the first quarter of 2000. (Pages 14-16, 26, 30, 40, 42 and 43)
Stress Testing: Discloses market risk under plausible events in abnormal
markets. (Pages 38 and 39)
Value-at-Risk ("VAR"): A measure of the dollar amount of potential loss from
adverse market moves in an everyday market environment. (Pages 37, 38 and 39)
-47-
48
Item 3 Quantitative and Qualitative Disclosures About Market Risk
For a discussion of the quantitative and qualitative
disclosures about market risk, see the market risk management
section of the MD&A on pages 37-39 of this Form 10-Q.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
In June 1999, Sumitomo Corporation filed a lawsuit against The
Chase Manhattan Bank in the United States District Court for
the Southern District of New York. The complaint alleges that
during the period from 1994 to 1996, the Bank assisted a
Sumitomo employee in making copper trades by funding
unauthorized loans to the Sumitomo employee. The complaint
alleges that the Bank knew the employee did not have authority
to enter into the transactions on behalf of Sumitomo. The
complaint asserts claims under the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and New York common law and
alleges damages of $532 million (subject to trebling under
RICO), plus punitive damages.
In August 1999, Sumitomo Corporation filed a separate action
against J.P. Morgan & Co., Morgan Guaranty Trust Company of
New York and a former Morgan employee (collectively "Morgan")
in the United States District Court for the Southern District
of New York. The complaint in this action contains
allegations, similar to the allegations in the complaint filed
by Sumitomo against Chase, that during the period from 1993 to
1996, Morgan assisted a Sumitomo employee in making copper
trades by funding unauthorized loans to the Sumitomo employee.
The complaint alleges that Morgan knew the employee did not
have authority to enter into the transactions on behalf of
Sumitomo. The complaint asserts claims under RICO and New York
common law and alleges damages of $735 million (subject to
trebling under RICO), plus punitive damages. The separate
actions against Chase and Morgan have been consolidated for
discovery purposes.
Chase Securities Inc. ("CSI") has been named as a defendant or
third-party defendant in 13 actions that were filed in either
the United States District Court for the Northern District of
Oklahoma or in Oklahoma state court beginning in October 1999
arising out of the failure of Commercial Financial Services,
Inc. ("CFS"). Plaintiffs in these actions are institutional
investors who purchased over $1.6 billion in original face
amount of asset-backed securities issued by CFS. The
securities were backed by delinquent credit card receivables.
In addition to CSI, the defendants in various of the actions
are the founders and key executives of CFS, as well as its
auditors, its outside counsel and the rating agencies that
rated the securities. CSI is alleged to have been the
investment banker to CFS and to have acted as an initial
purchaser and as placement agent in connection with the
issuance of certain of the securities. Plaintiffs allege that
defendants either knew or were reckless in not knowing that
the securities were sold to plaintiffs on the basis of
misleading misrepresentations and omissions of material facts.
The complaints against CSI assert claims under the Securities
Exchange Act of 1934, the Oklahoma Securities Act, and under
common law theories of fraud and negligent misrepresentation.
In the actions against CSI, damages in the amount of
approximately $1.2 billion allegedly suffered as a result of
defendants' misrepresentations and omissions, plus punitive
damages, are being claimed.
The Securities and Exchange Commission ("SEC") investigated
the question of whether, in connection with the bond paying
agency function within JPMorgan Chase's Institutional Trust
Services group, there had been violations of its transfer
agency recordkeeping or reporting regulations and whether
JPMorgan Chase's disclosure regarding these issues had been
adequate and timely. The conditions giving rise to the alleged
violations have since been addressed, and JPMorgan Chase has
made an offer of settlement to the SEC, which is under
consideration.
-48-
49
PART II - OTHER INFORMATION (CONTINUED)
Item 1 Legal Proceedings (continued)
In addition to the matters described above, JPMorgan Chase and
its subsidiaries have been named from time to time as
defendants in various legal actions and proceedings arising in
connection with their respective businesses and have been
involved from time to time in investigations and proceedings
by governmental agencies. In view of the inherent difficulty
of predicting the outcome of such matters, JPMorgan Chase
cannot state what the eventual outcome of pending matters will
be. JPMorgan Chase is contesting the allegations made in each
pending matter and believes, based on current knowledge and
after consultation with counsel, that the outcome of such
matters will not have a material adverse effect on the
consolidated financial condition of JPMorgan Chase but may be
material to JPMorgan Chase's operating results for any
particular period, depending on the level of JPMorgan Chase's
income for such period.
Item 2 Sales of Unregistered Common Stock
During the first quarter of 2001, shares of common stock of
J.P. Morgan Chase were issued in transactions exempt from
registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof. Shares of common stock were issued to
retired directors who had deferred receipt of such common
stock pursuant to the Deferred Compensation Plan for
Non-Employee Directors as follows: January 2, 2001 - 31,365
shares and January 5, 2001 - 1,848 shares. Shares of common
stock were issued to retired employees who had deferred
receipt of such common shares pursuant to the Corporate
Performance Incentive Plan as follows: January 31, 2001 -
19,764 shares; February 16, 2001 - 436 shares; February 21,
2001 - 552 shares; and February 22, 2001 - 171 shares.
Item 6 Exhibits and Reports on Form 8-K (A) Exhibits:
11 - Computation of Earnings per Common Share
12(a) - Computation of Ratio of Earnings to Fixed Charges
12(b) - Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements
(B) Reports on Form 8-K:
JPMorgan Chase filed 2 reports on Form 8-K during the quarter
ended March 31, 2001, as follows:
Form 8-K dated January 17, 2001: JPMorgan Chase announced the
fourth quarter and full-year 2000 results.
Form 8-K dated January 31, 2001: JPMorgan Chase announced the
business outlook summary of the investor presentation of
January 17, 2001.
-49-
50
SIGNATURE
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 CHASE & CO.
------------------------------
(Registrant)
Date May 15, 2001 By /s/ Joseph L. Sclafani
------------ --------------------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-50-
51
APPENDIX 1
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations.
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------- ---- -----------
1 38 Bar Graph entitled "Daily Market Risk-Related Revenue for the First Quarter 2001" presenting
the following information:
Millions of Dollars 0><10 10><20 20><30 30><40 40><50 50><60 60><70
------------------- ----- ------ ------ ------ ------ ------ ------
Number of trading
days revenue was
within the above
prescribed positive
range 4 6 7 8 7 10 3
70><80 80><90 90><100 100><110 110><120 Over 120
------ ------ ------- -------- -------- --------
6 2 2 2 1 2
Millions of Dollars 0><(10) Over (10)
------ ---------
Number of trading
days revenue was
within the above
prescribed negative
range 1 1
Average Daily Revenue was $48.2 million
52
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
- ---------- -------- ---------------------
11 Computation of Earnings 52
per Common Share
12(a) Computation of Ratio of 53
Earnings to Fixed Charges
12(b) Computation of Ratio of 54
Earnings to Fixed Charges
and Preferred Stock Dividend
Requirements
-51-