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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
J.P. MORGAN & CO. INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 1-5885 13-2625764
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
60 Wall Street, New York, NY 10260-0060
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (212) 483-2323
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes..X.. No.....
Number of shares outstanding of each of the registrant's classes of common stock
at July 31, 1999:
Common Stock, $2.50 Par Value 175,557,180 Shares
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1
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PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following financial statement information as of and for the three and six
months ended June 30, 1999, is set forth within this document on the pages
indicated:
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Three month Consolidated statement of income
J.P. Morgan & Co. Incorporated . . . . . . . . . . . . . . . . 3
Six month Consolidated statement of income
J.P. Morgan & Co. Incorporated . . . . . . . . . . . . . . . . 4
Consolidated balance sheet
J.P. Morgan & Co. Incorporated . . . . . . . . . . . . . . 5
Consolidated statement of changes in stockholders' equity
J.P. Morgan & Co. Incorporated . . . . . . . . . . . . . . 6
Consolidated statement of cash flows
J.P. Morgan & Co. Incorporated . . . . . . . . . . . . . . . 7
Consolidated statement of condition
Morgan Guaranty Trust Company of New York . . . . . . . . . . . 8
Notes to Consolidated financial statements
J.P. Morgan & Co. Incorporated . . . . . . . . . . . . . . . 9-26
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial highlights . . . . . . . . . . . . . . . . . . 27
Segment analysis . . . . . . . . . . . . . . . . . . . 28-29
Financial review. . . . . . . . . . . . . . . . . . . . 30-36
Risk management. . . . . . . . . . . . . . . . . . . . 37-41
Consolidated average balances and net interest earnings . . . . . . . 42-45
Cross-border and local outstandings under the regulatory basis . . . . 46
PART II -- OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . 47
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . 48
</TABLE>
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
In millions, except share data
<TABLE>
<CAPTION>
Three months ended
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June 30 June 30 Increase/ March 31 Increase/
1999 1998 (Decrease) 1999 (Decrease)
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<S> <C> <C> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $2,713 $3,106 ($393) $2,757 ($44)
Interest expense 2,288 2,816 (528) 2,368 (80)
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Net interest revenue 425 290 135 389 36
Reversal of provision for loan losses (105) -- (105) -- (105)
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Net interest revenue after reversal of
provision for loan losses 530 290 240 389 141
NONINTEREST REVENUES
Trading revenue 803 877 (74) 1,134 (331)
Investment banking revenue 457 362 95 390 67
Investment management revenue 260 226 34 246 14
Fees and commissions 191 197 (6) 214 (23)
Investment securities (loss)/revenue (29) 68 (97) (41) 12
Other (loss)/revenue, including a $35 million
provision for credit losses (June 30, 1999) (21) 133 (154) 159 (180)
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Total noninterest revenues 1,661 1,863 (202) 2,102 (441)
Total revenues, net of interest expense
and net reversal of provision for credit losses 2,191 2,153 38 2,491 (300)
OPERATING EXPENSES
Employee compensation and benefits 970 862 108 1,096 (126)
Net occupancy 80 78 2 82 (2)
Technology and communications 231 293 (62) 247 (16)
Other expenses 136 183 (47) 142 (6)
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Total operating expenses 1,417 1,416 1 1,567 (150)
Income before income taxes 774 737 37 924 (150)
Income taxes 270 256 14 324 (54)
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Net income 504 481 23 600 (96)
PER COMMON SHARE
Net income
Basic $2.71 $2.57 $0.14 $3.24 ($0.53)
Diluted 2.52 2.36 0.16 3.01 (0.49)
Dividends declared 0.99 0.95 0.04 0.99 --
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</TABLE>
See notes to consolidated financial statements.
3
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CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
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In millions, except share data Six months ended
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June 30 June 30 Increase/
1999 1998 (Decrease)
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<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $5,470 $6,368 ($898)
Interest expense 4,656 5,742 (1,086)
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Net interest revenue 814 626 188
Reversal of provision for loan losses (105) -- (105)
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Net interest revenue after reversal of
provision for loan losses 919 626 293
NONINTEREST REVENUES
Trading revenue 1,937 1,773 164
Investment banking revenue 847 708 139
Investment management revenue 506 437 69
Fees and commissions 405 387 18
Investment securities (loss)/revenue (70) 111 (181)
Other revenue, including a $35 million
provision for credit losses in 1999 138 108 30
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Total noninterest revenues 3,763 3,524 239
Total revenues, net of interest expense
and net reversal of provision for
credit losses 4,682 4,150 532
OPERATING EXPENSES
Employee compensation and benefits 2,066 1,865 201
Net occupancy 162 229 (67)
Technology and communications 478 594 (116)
Other expenses 278 360 (82)
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Total operating expenses 2,984 3,048 (64)
Income before income taxes 1,698 1,102 596
Income taxes 594 384 210
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Net income 1,104 718 386
PER COMMON SHARE
Net income
Basic $5.94 $3.82 $2.12
Diluted 5.53 3.51 2.02
Dividends declared 1.98 1.90 0.08
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</TABLE>
See notes to consolidated financial statements.
4
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CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
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June 30 December 31
In millions, except share data 1999 1998
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<S> <C> <C>
ASSETS
Cash and due from banks $ 2,094 $ 1,203
Interest-earning deposits with banks 2,058 2,371
Debt investment securities available-for-sale carried at fair value 26,702 36,232
Equity investment securities 1,264 1,169
Trading account assets (including derivative receivables of $40,391 at June 1999 and
$48,124 at December 1998) 114,465 113,896
Securities purchased under agreements to resell ($32,739 at June 1999
and $31,056 at December 1998) and federal funds sold 33,531 31,731
Securities borrowed 39,977 30,790
Loans, net of allowance for loan losses of $335 at June 1999 and $470 at December 1998 28,753 25,025
Accrued interest and accounts receivable 6,084 7,689
Premises and equipment, net of accumulated depreciation of $1,322 at June 1999 and
$1,350 at December 1998 1,893 1,881
Other assets 12,573 9,080
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Total assets 269,394 261,067
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LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 1,222 1,242
In offices outside the U.S. 778 563
Interest-bearing deposits:
In offices in the U.S. 6,627 7,724
In offices outside the U.S. 46,708 45,499
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Total deposits 55,335 55,028
Trading account liabilities (including derivative payables of $37,329 at June 1999 and 70,129 70,643
$44,683 at December 1998)
Securities sold under agreements to repurchase ($63,460 at June 1999 and $62,784
at December 1998) and federal funds purchased 64,554 63,368
Commercial paper 13,114 6,637
Other liabilities for borrowed money 10,974 12,515
Accounts payable and accrued expenses 10,089 9,859
Long-term debt not qualifying as risk-based capital 22,722 23,037
Other liabilities, including allowance for credit losses of $160 at June 1999 and
$125 at December 1998 4,116 2,999
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251,033 244,086
Liabilities qualifying as risk-based capital:
Long-term debt 5,408 4,570
Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 1,150
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Total liabilities 257,591 249,806
STOCKHOLDERS' EQUITY
Preferred stock (authorized shares: 10,000,000)
Adjustable rate cumulative preferred stock, $100 par value (issued and outstanding: 2,444,300) 244 244
Variable cumulative preferred stock, $1,000 par value (issued and outstanding: 250,000) 250 250
Fixed cumulative preferred stock, $500 par value (issued and outstanding: 400,000) 200 200
Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,934,737
at June 1999 and 200,873,067 at December 1998) 502 502
Capital surplus 1,245 1,252
Common stock issuable under stock award plans 1,540 1,460
Retained earnings 10,334 9,614
Accumulated other comprehensive income:
Net unrealized (losses)/gains on investment securities, net of taxes (52) 147
Foreign currency translation, net of taxes (46) (46)
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14,217 13,623
Less: treasury stock (24,985,131 shares at June 1999 and 25,866,786 shares
at December 1998) at cost 2,414 2,362
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Total stockholders' equity 11,803 11,261
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Total liabilities and stockholders' equity 269,394 261,067
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</TABLE>
See notes to consolidated financial statements.
5
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
1999 1998
----------------------------- ---------------------------
Compre- Compre-
Stockholders' hensive Stockholders' hensive
In millions: Six months ended June 30 Equity Income Equity Income
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<S> <C> <C> <C> <C>
PREFERRED STOCK
Adjustable-rate cumulative preferred stock balance, January 1
and June 30 $ 244 $ 244
Variable cumulative preferred stock balance, January 1 and
June 30 250 250
Fixed cumulative preferred stock, January 1 and June 30 200 200
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Total preferred stock, June 30 694 694
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COMMON STOCK
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Balance, January 1 and June 30 502 502
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CAPITAL SURPLUS
Balance, January 1 1,252 1,360
Shares issued or distributed under dividend reinvestment plan,
various employee benefit plans, and conversion of debentures
and income tax benefits associated with stock options (7) (54)
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Balance, June 30 1,245 1,306
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COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 1,460 1,185
Deferred stock awards, net 80 157
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Balance, June 30 1,540 1,342
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RETAINED EARNINGS
Balance, January 1 9,614 9,398
Net income 1,104 $1,104 718 $718
Dividends declared on preferred stock (18) (18)
Dividends declared on common stock (349) (337)
Dividend equivalents on common stock issuable (17) (18)
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Balance, June 30 10,334 9,743
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized (losses)/gains on investment securities:
Balance, net of taxes, January 1 147 432
-------- -------
Net unrealized holding (losses)/gains arising during the period,
before taxes (($239) in 1999 and $14 in 1998, net of taxes) (402) 19
Reclassification adjustment for net losses/(gains) included in
net income, before taxes (($40) in 1999 and $64 in 1998,
net of taxes) 67 (100)
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Change in net unrealized (losses)/gains on investment securities, (335) (81)
before taxes
Income tax benefit 136 25
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Change in net unrealized (losses)/gains on investment securities, net (199) (199) (56) (56)
of taxes
Balance, net of taxes, June 30 (52) 376
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Foreign currency translation:
Balance, net of taxes, January 1 (46) (22)
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Translation adjustment arising during the period, before taxes (7) (34)
Income tax benefit 7 12
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Translation adjustment arising during the period, net of taxes - - (22) (22)
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Balance, net of taxes, June 30 (46) (44)
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Total accumulated other comprehensive income,
net of taxes, June 30 (98) 332
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LESS: TREASURY STOCK
Balance, January 1 2,362 2,145
Purchases 447 446
Shares issued/distributed, primarily related to various employee
benefit plans (395) (388)
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Balance, June 30 2,414 2,203
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TOTAL STOCKHOLDERS' EQUITY 11,803 11,716
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TOTAL COMPREHENSIVE INCOME 905 640
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</TABLE>
See notes to consolidated financial statements.
6
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CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
J.P. Morgan & Co. Incorporated
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In millions Six months ended
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June 30 June 30
1999 1998
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<S> <C> <C>
NET INCOME $ 1,104 $ 718
Adjustments to reconcile to cash (used in) provided by operating activities:
Noncash items: net negative provision for credit losses, depreciation,
amortization, deferred income taxes, stock award plans, and 842 473
write-downs on investment securities
Gain on sale of global trust and agency services business -- (79)
Net (increase)/decrease in assets:
Trading account assets (709) (11,567)
Securities purchased under agreements to resell (1,710) 2,493
Securities borrowed (9,187) (1,840)
Loans held for sale 1,357 (189)
Accrued interest and accounts receivable 1,601 (2,568)
Net increase/(decrease) in liabilities:
Trading account liabilities (621) 3,932
Securities sold under agreements to repurchase 650 14,141
Accounts payable and accrued expenses 157 (2,514)
Other changes in operating assets and liabilities, net (2,449) (2,417)
Net investment securities losses/(gains) included in cash flows from
investing activities 58 (127)
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CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (8,907) 456
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Net decrease/(increase) in interest-earning deposits with banks 309 (669)
Debt investment securities:
Proceeds from sales 19,602 7,077
Proceeds from maturities, calls, and mandatory redemptions 4,846 4,197
Purchases (15,511) (12,513)
Net (increase) in federal funds sold (117) --
Net (increase) decrease in loans (5,047) 258
Payments for premises and equipment (159) (113)
Investment in American Century Companies, Inc. -- (965)
Other changes, net (1,342) (2,159)
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CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,581 (4,887)
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Net increase in noninterest-bearing deposits 193 11
Net increase (decrease) in interest-bearing deposits 17 (1,805)
Net increase (decrease) in federal funds purchased 510 (2,030)
Net increase in commercial paper 6,476 6,117
Other liabilities for borrowed money proceeds 6,582 6,912
Other liabilities for borrowed money payments (8,873) (6,748)
Long-term debt proceeds 4,898 7,289
Long-term debt payments (3,970) (4,199)
Capital stock issued or distributed 154 219
Capital stock purchased (447) (446)
Dividends paid (363) (355)
Other changes, net 2,051 (759)
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CASH PROVIDED BY FINANCING ACTIVITIES 7,228 4,206
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Effect of exchange rate changes on cash and due from banks (11) (11)
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INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 891 (236)
Cash and due from banks at December 31, 1998 and 1997 1,203 1,758
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Cash and due from banks at June 30, 1999 and 1998 2,094 1,522
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Cash disbursements made for:
Interest $ 4,728 $ 5,658
Income taxes 310 370
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</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York
<TABLE>
<CAPTION>
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June 30 December 31
In millions, except share data 1999 1998
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<S> <C> <C>
ASSETS
Cash and due from banks $ 2,033 $ 1,147
Interest-earning deposits with banks 2,055 2,372
Debt investment securities available-for-sale carried at fair value 2,989 3,634
Trading account assets 80,496 90,770
Securities purchased under agreements to resell and federal funds sold 30,158 33,316
Securities borrowed 11,739 8,193
Loans, net of allowance for loan losses of $334 at June 1999 and $470 at December 1998 28,272 24,876
Accrued interest and accounts receivable 4,722 3,898
Premises and equipment, net of accumulated depreciation of $1,121 at June 1999 and
$1,160 at December 1998 1,712 1,703
Other assets 12,335 5,337
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Total assets 176,511 175,246
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LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 1,279 1,232
In offices outside the U.S. 782 572
Interest-bearing deposits:
In offices in the U.S. 6,656 7,749
In offices outside the U.S. 50,388 46,668
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Total deposits 59,105 56,221
Trading account liabilities 60,956 64,776
Securities sold under agreements to repurchase and federal funds purchased 16,145 14,916
Other liabilities for borrowed money 6,886 8,646
Accounts payable and accrued expenses 7,921 6,123
Long-term debt not qualifying as risk-based capital (includes $482 at June 1999 and
$736 at December 1998 of notes payable to J.P. Morgan) 9,600 10,358
Other liabilities, including allowance for credit losses of $160 at June 1999 and $125
at December 1998 1,875 542
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162,488 161,582
Long-term debt qualifying as risk-based capital (includes $3,053 at June 1999
and December 1998 of notes payable to J.P. Morgan) 3,145 3,186
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Total liabilities 165,633 164,768
STOCKHOLDER'S EQUITY
Preferred stock, $100 par value (authorized shares: 2,500,000) - -
Common stock, $25 par value (authorized shares: 11,000,000; issued and outstanding 10,599,027) 265 265
Surplus 3,305 3,305
Undivided profits 7,269 6,836
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 85 118
Foreign currency translation, net of taxes (46) (46)
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Total stockholder's equity 10,878 10,478
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Total liabilities and stockholder's equity 176,511 175,246
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</TABLE>
Member of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
See notes to consolidated financial statements.
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan & Co. Incorporated (J.P. Morgan), a global financial services firm,
is the holding company for a group of subsidiaries that provide a range of
financial services, including: advisory, underwriting, financing, market making,
asset management, and brokerage.
We serve a broad client base that includes corporations, governments,
institutions, and individuals. We also use our expertise and resources to enter
into proprietary transactions for our own account.
J.P. Morgan and our subsidiaries, including Morgan Guaranty Trust Company of New
York (Morgan Guaranty), use accounting and reporting policies and practices that
conform with U.S. generally accepted accounting principles.
Basis of presentation
Financial information included in the accounts of J.P. Morgan, and the
subsidiaries for which our ownership is more than 50% of the company, is
contained in the consolidated financial statements. All material intercompany
accounts and transactions have been eliminated in consolidation. The financial
information as of and for the periods ended June 30, 1999, June 30, 1998, and
March 31, 1999 is unaudited. All adjustments which, in the opinion of
management, are necessary for a fair presentation have been made and were of a
normal, recurring nature. These unaudited financial statements should be read in
conjunction with the audited financial statements included in J.P. Morgan's
Annual report on Form 10-K for the year ended December 31, 1998. The nature of
J.P. Morgan's business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain prior year amounts
have been reclassified to conform with the current presentation.
The following provides certain supplemental information regarding our accounting
policies.
Impaired loans
A loan is impaired when, based on current information and events, it is probable
that we will be unable to collect all amounts due, including principal and
interest, according to the contractual terms of the agreement. We consider the
following in identifying impaired loans:
- - A default has occurred or is expected to occur,
- - The payment of principal and/or interest or other cash flows is greater
than 90 days past due, or
- - Management has serious doubts as to the collectibility of future cash
flows, even if the loan is currently performing.
Once a loan is identified as impaired, management regularly measures impairment
in accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures (collectively with SFAS 114, SFAS No. 114). We measure impairment of
a loan based on the present value of expected future cash flows, an observable
market value, or the fair value of the collateral. If the determined SFAS No.
114 value is less than the recorded investment (book value) in the impaired
loan, an allowance is established or appropriated for the amount deemed
uncollectible; if the impairment is deemed highly certain, the exposure is
charged off against the allowance.
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Generally, when a loan is recognized as impaired, the accrual of interest is
discontinued and any previously accrued but unpaid interest on the loan is
reversed against the current period's interest revenue. When doubt exists as to
the collectibility of the remaining recorded investment, any interest received
on impaired loans is applied in the following order:
- - against the recorded impaired loan until paid in full
- - as a recovery up to any amounts charged off related to the impaired
loan
- - as revenue
If it is deemed highly certain we will collect the remaining recorded investment
of the impaired loan, interest income is recorded on a cash basis as payments
are received.
Allowances for credit losses
We maintain allowances for credit losses to absorb losses inherent in our
traditional extensions of credit that we believe are probable and that can be
reasonably estimated. These allowances include an allowance for loan losses and
an allowance for credit losses on lending commitments which include, commitments
to extend credit, standby letters of credit, and guarantees.
The firm's Asset Quality Review process determines the appropriate allowances
based on an estimate of probable losses by counterparty, industry, or country;
and a statistical model estimate for expected losses on our remaining performing
portfolio, which includes the general component. The general component of our
allowances for credit losses is used to estimate the impact of separately
identified limitations in our expected loss model. Since all factors used to
derive the general component relate to the expected loss component, the general
component, starting June 30, 1999, is included as part of the expected loss
component for disclosure purposes. Prior period amounts have been reclassified.
In March 1999, a Joint Working Group, comprised of banking and securities
regulators, was formed to provide clarification to the banking industry
regarding the appropriate accounting, disclosure, and documentation requirements
for allowances for credit losses. We are in the process of reviewing our model
for estimating credit losses and determining the appropriate level of our
allowances, with the goal of refining it based on our review, which will
incorporate any guidance issued by the Joint Working Group.
2. ACCOUNTING CHANGES AND DEVELOPMENTS
Accounting for derivative instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The standard will require us to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through earnings. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings or be recognized in other
comprehensive income until the hedged item is recognized in earnings. If the
change in fair value of a derivative designated as a hedge is not effectively
offset, as defined, by the change in value of the item it is hedging, this
difference will be immediately recognized in earnings. While we have not
determined the specific impact of SFAS No. 133 on our earnings and financial
position, we have identified, based on current hedging strategies, our
activities that would be most affected by the new standard. Specifically, the
Proprietary Investing and Trading segment uses derivatives to hedge its
investment portfolio, deposits, and issuance of debt - primarily hedges of
interest rate risk. Our credit activities use credit derivatives to hedge credit
risk, and to a lesser extent, use other derivatives to hedge interest rate risk.
Pursuant to SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, we are
required to adopt the standard effective January 1, 2001. Management is
currently evaluating the impact of SFAS No. 133 on our hedging strategies. The
actual assessment of the impact on the firm's earnings and financial position of
adopting SFAS No. 133 will be made based on our positions at the date of
adoption.
Accounting for the costs of computer software developed or obtained for
internal use
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This statement
requires that we capitalize certain costs associated with the acquisition or
development of internal use software. Effective January 1, 1999, we adopted SOP
98-1; restatement of financial statements of previous years is not allowed. As a
result of this adoption we expect to capitalize approximately $130 million in
software costs during 1999, net of expected amortization, of which
10
<PAGE> 11
$66 million were capitalized in the first half of the year. Previously, these
costs would have been expensed as incurred. Once the software is ready for its
intended use, we will begin amortizing capitalized costs on a straight-line
basis over its expected useful life. This period will generally not exceed three
years.
3. RESTRUCTURING OF BUSINESS ACTIVITIES
During the first quarter 1998, the firm announced a plan to restructure certain
sales and trading functions in Europe, refocus our investment banking and
equities businesses in Asia, and rationalize resources throughout the firm. As a
result of this decision, the 1998 first quarter reflected a pretax charge of
$215 million ($129 million after tax) which consisted of the following:
severance-related costs of $140 million recorded in Employee compensation and
benefits associated with staff reductions of approximately 900; $70 million in
Net occupancy, primarily related to lease termination fees, estimated losses on
sublease agreements, and the write-off of various leasehold improvements and
equipment, primarily in Europe; and $5 million in Technology and communications,
related to equipment write-offs. During the fourth quarter 1998, we revised our
estimates of remaining costs under the plan and reduced the liability by $7
million; this adjustment was recorded in Net occupancy. Excluding certain
long-term commitments, the reserve related to this charge was substantially
utilized as of December 31, 1998.
During the fourth quarter 1998, the firm incurred an additional pretax charge of
$143 million ($86 million after tax) related to cost reduction programs that are
part of its productivity initiatives. The charge reflected severance-related
costs of $101 million recorded in Employee compensation and benefits associated
with staff reductions of approximately 800. It also reflected $42 million (net
of the $7 million adjustment discussed above) in Net occupancy primarily related
to estimated losses on sublease agreements and the write-off of various
leasehold improvements and furniture and fixtures in several European locations.
As of June 30, 1999, approximately $48 million of the fourth-quarter charge was
accrued in Other liabilities, of which $28 million related to severance and the
remainder related to real estate. Excluding certain long-term commitments, the
remainder of this reserve will be substantially utilized by December 31, 1999.
While predominantly impacting the European and North American regions, the
special charges primarily affected all client-focused activities as defined by
our reported segments in note 23, "Segments."
Additional costs associated with these initiatives did not meet the requirement
for inclusion in the first- or fourth-quarter charge. These items will be
expensed as incurred but are not expected to have a material impact on the firm.
The remaining reserve relates to future cash outflows associated with severance
payments, lease termination benefits, and other exit costs. We do not anticipate
that the payment of these items will have a material impact on the financial
position or liquidity of the firm.
4. BUSINESS CHANGES AND DEVELOPMENTS
Euroclear
We operate, under contract, the Euroclear system - the world's largest
clearance and settlement system for internationally traded securities. In
connection with our role as operator of Euroclear, we provide credit and deposit
services to Euroclear participants. The results related to Euroclear are
included in the Asset Management and Servicing segment and represent a
significant component of the segment's pretax income. In response to the
introduction of the euro and other developments in global markets, Euroclear and
Morgan have proposed a clearance and settlement consolidation model to capture
synergies across markets with the goal of developing for clients a more
efficient international clearing system. As a result of this and other
initiatives in Europe, our role as operator of the Euroclear system is likely to
change, in which case the contribution of this segment would be impacted over
time.
11
<PAGE> 12
Occupancy
On December 23, 1998, the City and State of New York and the New York Stock
Exchange announced an agreement to build a new Exchange on land currently
occupied by J.P. Morgan facilities at 15 Broad Street, 23 Wall Street, and 37
Wall Street in New York City. We do not anticipate any disruption to our
operations, or any material impact to the firm's financial statements, as a
result of this transaction.
Securities portfolio accounting services
On April 22, 1999, J.P. Morgan announced that The Bank of New York has been
appointed to provide securities portfolio accounting and related operational
services for J.P. Morgan's asset management business. We do not anticipate any
disruption to our operations, or any material impact to the firm's financial
statements, as a result of this transaction.
Sale of global trust and agency services business
In June 1998, we completed the sale of our global trust and agency services
business to Citibank, resulting in a net gain of $131 million ($79 million after
tax) recorded in Other revenue. The sale will not have a material effect on our
ongoing earnings.
5. INTEREST REVENUE AND EXPENSE
The table below presents an analysis of interest revenue and expense obtained
from on- and off-balance-sheet financial instruments. Interest revenue and
expense associated with derivative financial instruments are included with
related balance sheet instruments. These derivative financial instruments are
used as hedges or to modify the interest rate characteristics of assets and
liabilities and include swaps, forwards, futures, options, and debt securities
forwards.
<TABLE>
<CAPTION>
Second quarter Six months
----------------------------------------------------------
In millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE
Deposits with banks $ 79 $ 65 $ 160 $ 129
Debt investment securities (a) 405 328 864 706
Trading account assets 932 1,126 1,793 2,310
Securities purchased under agreements to
resell and federal funds sold 355 455 781 960
Securities borrowed 470 514 918 1,010
Loans 404 544 834 1,090
Other sources 68 74 120 163
- --------------------------------------------------------------------------------------------------------------------
Total interest revenue 2,713 3,106 5,470 6,368
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 559 703 1,175 1,493
Trading account liabilities 294 377 568 832
Securities sold under agreements to
repurchase and federal funds purchased 725 937 1,468 1,869
Other borrowed money 339 408 694 803
Long-term debt 371 391 751 745
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 2,288 2,816 4,656 5,742
- --------------------------------------------------------------------------------------------------------------------
Net interest revenue 425 290 814 626
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Interest revenue from debt investment securities included taxable revenue of
$380 million and $809 million and revenue exempt from U.S. income taxes of $25
million and $55 million for the three months and six months ended June 30, 1999,
respectively. Interest revenue from debt investment securities included taxable
revenue of $298 million and $654 million and revenue exempt from U.S. income
taxes of $30 million and $52 million for the three and six months ended June 30,
1998, respectively.
Net interest revenue associated with derivatives used for purposes
other-than-trading was approximately $1 million and $27 million for the three
and six months ended June 30, 1999, respectively, compared with approximately
$39 million and $71 million for the three and six months ended June 30, 1998,
respectively. At June 30, 1999, approximately $78 million of net deferred
losses on closed derivative contracts used for purposes other-than-trading were
recorded on the "Consolidated balance sheet." These amounts are primarily net
deferred losses on closed hedge contracts, which are included in the amortized
cost of the debt investment portfolio as of June 30, 1999. The amount of net
deferred gains or losses on closed derivative contracts changes from period to
period, primarily due to the amortization of such amounts to Net interest
revenue. These changes are also influenced by the execution of our investing
strategies, which may result in the sale of the underlying hedged instruments
and/or termination of hedge contracts. Net deferred losses (gains) on closed
derivative contracts as of June 30, 1999 of $78 million, are expected to
amortize into Net interest revenue as follows: $15 million - remainder of 1999;
$22 million in 2000; $24 million in 2001; $23 million in 2002; $21 million in
2003; $10 million in 2004; and approximately ($37) million thereafter.
12
<PAGE> 13
6. TRADING REVENUE
Trading revenue is predominantly generated by our market making activities
included in our Global Finance sector as well as activities in our Proprietary
Investments sector. The following table presents trading revenue by principal
product grouping for the three and six months ended June 30, 1999 and 1998.
Prior period amounts have been restated to reflect the product groupings as
described below.
<TABLE>
<CAPTION>
Second quarter Six months
------------------ ----------------------
In millions 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income $469 $519 $1,030 $1,243
Equities 324 112 484 209
Foreign exchange 10 246 423 321
- --------------------------------------------------------------------------------------------------------------------
Total trading revenue 803 877 1,937 1,773
Trading-related net interest revenue 263 74 478 183
- --------------------------------------------------------------------------------------------------------------------
Combined total 1,066 951 2,415 1,956
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed income trading revenue includes the results of making markets in both
developed and emerging countries in government securities, U.S. government
agency securities, corporate debt securities, money market instruments, interest
rate and currency swaps, and options and other derivatives. Equities trading
revenue includes the results of making markets in global equity securities,
equity derivatives such as swaps, options, futures, and forward contracts, and
convertible debt securities. Foreign exchange trading revenue includes the
results of making markets in spot, options, and short-term interest rate
products in order to help clients manage their foreign currency exposure.
Foreign exchange also includes the results from commodity transactions in spot,
forwards, options, and swaps.
7. INVESTMENT SECURITIES
DEBT INVESTMENT SECURITIES
Our debt investment securities portfolio is classified as available-for-sale.
Available-for-sale securities are measured at fair value and unrealized gains or
losses are reported as a net amount within the stockholders' equity account, Net
unrealized gains on investment securities, net of taxes.
The following table presents the gross unrealized gains and losses and a
comparison of the cost, along with the fair and carrying value of our
available-for-sale debt investment securities at June 30, 1999. The gross
unrealized gains or losses on each debt investment security include the effects
of any related hedge. See note 10, "Derivatives," for additional detail of gross
unrealized gains and losses associated with open derivative contracts used to
hedge debt investment securities.
<TABLE>
<CAPTION>
Gross Gross Fair and
unrealized unrealized carrying
In millions: June 30, 1999 Cost gains losses value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 572 $ 76 $ 1 $ 647
U.S. government agency, principally mortgage-backed 23,668 34 337 23,365
U.S. state and political subdivision 1,539 137 47 1,629
U.S. corporate and bank debt 192 1 - 193
Foreign government(a) 338 - 10 328
Foreign corporate and bank debt 455 2 25 432
Other 107 1 - 108
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt investment securities 26,871 251 420 26,702
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Primarily includes debt of countries that are members of the Organization
for Economic Cooperation and Development.
The table below presents net debt investment securities losses during the three
and six months ended June 30, 1999 and 1998. These amounts are recorded in
Investment securities revenue.
<TABLE>
<CAPTION>
Second quarter Six months
-------------------------- -------------------------
In millions 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross realized gains from sales of securities $ 73 $ 11 $ 107 $ 58
Gross realized losses from sales of securities (115) (52) (175) (84)
Write-downs for other-than-temporary impairments in value - (2) - (2)
Net gains on maturities, calls, and mandatory redemptions 1 - 1 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net debt investment securities losses (41) (43) (67) (28)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
EQUITY INVESTMENT SECURITIES
Equity investment securities include both marketable and nonmarketable
securities.
Marketable available-for-sale equity investment securities
Marketable equity investment securities, which are classified as
available-for-sale, are recorded at fair value. Unrealized gains and losses
are reported as a net amount within the stockholders' equity account, Net
unrealized gains on investment securities, net of taxes. Gross unrealized
gains and losses, as well as a comparison of the cost, and fair and carrying
value of marketable available-for-sale equity investment securities as of
June 30, 1999 are shown in the following table.
<TABLE>
<CAPTION>
In millions: June 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Cost $498
- ------------------------------------------------------------------------------------------------------------------------------------
Gross unrealized gains 144
Gross unrealized losses (76)
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains(a) 68
- ------------------------------------------------------------------------------------------------------------------------------------
Fair and carrying value 566
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Primarily relates to investments in the telecommunications and financial
services industries.
Nonmarketable and other equity securities
Nonmarketable equity investment securities are carried at cost on the balance
sheet. Securities held in subsidiaries registered as Small Business Investment
Companies (SBICs) are carried at fair value on the balance sheet, with
changes in fair value recorded currently in Investment securities revenue.
The following table presents the carrying and fair value, as well as the
net unrealized gains, on nonmarketable and other equity securities.
<TABLE>
<CAPTION>
In millions: June 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Carrying value $698
Net unrealized gains on nonmarketable securities(a) 123
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value 821
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Primarily relates to investments in the telecommunications and financial
services industries.
Realized gains and write-downs
The following table presents gross realized gains and write-downs for
other-than-temporary impairments in value related to our equity investments
portfolio, excluding securities in SBICs, for the three and six months ended
June 30, 1999 and 1998. These amounts are recorded in Investment securities
revenue.
<TABLE>
<CAPTION>
Second quarter Six months
----------------------- -------------------------
In millions 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross realized gains from marketable available-for-sale securities $- $117 $- $142
Gross realized gains from nonmarketable and other equity securities 1 4 9 11
Write-downs for other-than-temporary impairments in value - (20) (38) (34)
- ------------------------------------------------------------------------------------------------------------------------------------
Net equity investment securities realized gains/(losses) 1 101 (29) 119
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8. INVESTMENT IN AMERICAN CENTURY COMPANIES, INC.
In January 1998, we completed the purchase of a 45% economic interest in
American Century Companies, Inc. (American Century) for $965 million. American
Century is a no-load U.S. mutual fund company selling directly to individuals.
The investment is accounted for under the equity method of accounting and
recorded in Other assets. The excess of our investment over our share of equity
(i.e., goodwill) in American Century was approximately $795 million at the time
of purchase. This amount is being amortized on a straight-line basis over a
period of 25 years. At June 30, 1999 and 1998, goodwill totaled $743 million and
$777 million, respectively. Amortization of goodwill was approximately $8
million for the three months ended June 30, 1999 and 1998, respectively. For the
six months ended June 30, 1999 and 1998, amortization of goodwill was
approximately $16 million in each period. Our share of equity income in American
Century and the amortization of goodwill related to this investment is recorded
in Other revenue. The results of this investment are included in the Asset
Management and Servicing segment.
14
<PAGE> 15
9. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and liabilities, including derivative instruments used
for trading purposes, are carried at fair value. The following table presents
the fair and carrying value of trading account assets and trading account
liabilities at June 30, 1999. It also includes the average balances for the
three and six months ended June 30, 1999.
<TABLE>
<CAPTION>
Carrying Average
value balance
------------------------ -----------------------------------------------
June 30, Second quarter Six months
In millions: 1999 1999 1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRADING ACCOUNT ASSETS
U.S. Treasury $ 13,138 $ 9,381 $ 10,205
U.S. government agency 16,581 14,003 12,736
Foreign government 19,318 20,054 20,235
Corporate debt and equity 18,489 18,600 19,313
Other securities 6,548 7,754 6,428
Interest rate and currency swaps 15,190 16,437 16,555
Credit derivatives 842 2,052 2,381
Foreign exchange contracts 2,254 2,852 3,397
Interest rate futures and forwards 109 34 62
Commodity and equity contracts 4,702 3,997 3,510
Purchased option contracts 17,294 22,265 20,203
- -------------------------------------------------------------------------------------------------------------------------------
Total trading account assets 114,465 117,429 115,025
- -------------------------------------------------------------------------------------------------------------------------------
TRADING ACCOUNT LIABILITIES
U.S. Treasury 7,064 6,098 6,342
Foreign government 13,488 12,716 11,967
Corporate debt and equity 9,950 10,487 9,421
Other securities 2,298 3,214 3,284
Interest rate and currency swaps 10,998 12,274 14,499
Credit derivatives 759 1,405 1,470
Foreign exchange contracts 2,242 3,256 4,185
Interest rate futures and forwards 890 827 1,036
Commodity and equity contracts 3,990 2,872 2,729
Written option contracts 18,450 21,560 19,033
- -------------------------------------------------------------------------------------------------------------------------------
Total trading account liabilities 70,129 74,709 73,966
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in trading account assets are gross derivative receivables of $534
million at June 30, 1999 that relate to disputed swap contracts with South
Korean counterparties. An adjustment has been made by management to record these
receivables at their estimated fair value.
Trade date receivables/payables
Amounts receivable and payable for securities that have not reached their
contractual settlement dates are recorded net in the "Consolidated balance
sheet." Amounts receivable for securities sold of $33.4 billion were netted
against amounts payable for securities purchased of $33.0 billion. This produced
a net trade date receivable of $0.4 billion, recorded in Accrued interest and
accounts receivable, at June 30, 1999.
10. DERIVATIVES
In general, derivatives are contracts or agreements whose values are derived
from changes in interest rates, foreign exchange rates, prices of securities, or
financial or commodity indices. The timing of cash receipts and payments for
derivatives is generally determined by contractual agreement. Derivatives are
either standardized contracts executed on an exchange or negotiated
over-the-counter contracts. Futures and options contracts are examples of
standard exchange-traded derivatives. Forwards, swaps, and option contracts are
examples of over-the-counter derivatives. Over-the-counter derivatives are
generally not traded like securities. In the normal course of business, however,
they may be terminated or assigned to another counterparty if the original
holder agrees.
Derivatives may be used for trading or other-than-trading purposes.
Other-than-trading purposes are primarily related to our investing activities.
Derivatives used for trading purposes include:
- - interest rate and currency swap contracts
- - credit derivatives
- - interest rate futures, forward rate agreements, and interest rate option
contracts
- - foreign exchange spot, forward, futures, and option contracts
- - equity swap, futures and option contracts
- - commodity swap, forward and option contracts
15
<PAGE> 16
In our investing activities we use derivative instruments including:
- - interest rate and currency swap contracts
- - credit derivatives
- - foreign exchange forward contracts
- - interest rate futures and debt securities forward contracts
- - interest rate and equity option contracts
Interest rate swaps are contractual agreements to exchange periodic interest
payments at specified intervals. The notional amounts of interest rate swaps are
not exchanged; they are used solely to calculate the periodic interest payments.
Currency swaps generally involve exchanging principal (the notional amount) and
periodic interest payments in one currency for principal and periodic interest
payments in another currency.
Credit derivatives include credit default swaps and related swap and option
contracts. Credit default swaps are contractual agreements that provide
insurance against a credit event of one or more referenced credits. The nature
of the credit event is established by the protection buyer and seller at the
inception of the transaction, and includes events such as bankruptcy,
insolvency and failure to meet payment obligations when due. The protection
buyer pays a periodic fee in return for a contingent payment by the protection
seller following a credit event. The contingent payment is typically the loss
- - the difference between the notional and the recovery amount - incurred by
the creditor of the reference credit as a result of the event.
Foreign exchange contracts involve an agreement to exchange one country's
currency for another at an agreed upon price and settlement date. The contracts
reported in the following table primarily include forward contracts.
Interest rate futures are standardized exchange-traded agreements to receive or
deliver a specific financial instrument at a specific future date and price.
Forward rate agreements provide for the payment or receipt of the difference
between a specified interest rate and a reference rate at a future settlement
date. Debt security forwards include to-be-announced and when-issued securities
contracts.
Commodity and equity contracts include swaps and futures in the commodity and
equity markets and commodity forward agreements. Equity swaps are contractual
agreements to receive the appreciation or depreciation in value based on a
specific strike price on an equity instrument in return for paying another rate,
which is usually based on equity index movements or interest rates. Commodity
swaps are contractual commitments to exchange the fixed price of a commodity for
a floating price. Equity and commodity futures are exchange-traded agreements to
receive or deliver a financial instrument or commodity at a specific future date
and price. Equity and commodity forwards are over-the-counter agreements to
purchase or sell a specific amount of a financial instrument or commodity at an
agreed-upon price and settlement date.
An option provides the option purchaser, for a fee, the right - but not the
obligation - to buy or sell a security at a fixed price on or before a specified
date. The option writer is obligated to buy or sell the security if the
purchaser chooses to exercise the option. These options include contracts in the
interest rate, foreign exchange, equity, and commodity markets.
Interest rate options include caps and floors.
16
<PAGE> 17
The following table presents notional amounts for trading and other-than-trading
derivatives, based on management's intent and ongoing usage. A summary of the
on-balance-sheet credit exposure, which is represented by the net positive fair
value associated with trading derivatives and recorded in Trading account
assets, is also included in the following table. Our on-balance-sheet credit
exposure takes into consideration $88.8 billion of master netting agreements in
effect at June 30, 1999.
<TABLE>
<CAPTION>
On-balance-sheet
In billions: June 30, 1999 Notional amounts credit exposure
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate and currency swaps
Trading $ 3,653.9
Other-than-trading(a)(b) 72.2
- -------------------------------------------------------------------------------------------------------
Total interest rate and currency swaps 3,726.1 $ 15.2
- -------------------------------------------------------------------------------------------------------
Credit derivatives
Trading 104.6
Other-than-trading (a) 18.4
- -------------------------------------------------------------------------------------------------------
Total credit derivatives 123.0 0.8
- -------------------------------------------------------------------------------------------------------
Foreign exchange spot, forward, and futures contracts
Trading 462.1
Other-than-trading(a)(b) 20.6
- --------------------------------------------------------------------------------------------------------
Total foreign exchange spot, forward, and futures contracts 482.7 2.3
- --------------------------------------------------------------------------------------------------------
Interest rate futures, forward rate agreements, and debt
securities forwards
Trading 1,207.6
Other-than-trading 41.9
- --------------------------------------------------------------------------------------------------------
Total interest rate futures, forward rate agreements,
and debt securities forwards 1,249.5 0.1
- --------------------------------------------------------------------------------------------------------
Commodity and equity swaps, forward, and futures contracts, 74.7 4.7
all trading
- --------------------------------------------------------------------------------------------------------
Purchased options(c)
Trading 1,293.1
Other-than-trading(a) 8.1
- --------------------------------------------------------------------------------------------------------
Total purchased options 1,301.2 17.3
- --------------------------------------------------------------------------------------------------------
Written options, all trading(d) 1,607.5
- --------------------------------------------------------------------------------------------------------
Total on-balance-sheet credit exposure 40.4
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Derivatives used as hedges of other-than-trading positions may be transacted
with third parties through independently managed J.P. Morgan derivative dealers
that function as intermediaries for credit and administrative purposes. In such
cases, the terms of the third-party transaction - notional, duration, currency,
etc. - are matched with the terms of the internal trade to ensure the hedged
risk has been offset with a third party. If such terms are not matched or a
third-party trade is not transacted, the intercompany trade is eliminated in
consolidation.
(b) The notional amounts of derivative contracts used for purposes
other-than-trading, conducted in the foreign exchange markets, primarily forward
contracts, amounted to $26.3 billion at June 30, 1999, and were primarily
denominated in the following currencies: Japanese yen $4.5 billion, Canadian
dollar $2.7 billion, Euro $2.6 billion, Swiss franc $2.6 billion, Australian
dollar $1.1 billion, and British pound $1.1 billion.
(c) At June 30, 1999, purchased options used for trading purposes included
$964.4 billion of interest rate options, $196.0 billion of foreign exchange
options, and $132.7 billion of commodity and equity options. Options used for
purposes other-than-trading are primarily interest rate options. Purchased
options executed on an exchange amounted to $235.7 billion and those negotiated
over-the-counter amounted to $1,065.5 billion at June 30,1999.
(d) At June 30, 1999, written options included $1,262.0 billion of interest rate
options, $212.6 billion of foreign exchange options, and $132.9 billion of
commodity and equity options. Written option contracts executed on an exchange
amounted to $303.6 billion and those negotiated over-the-counter amounted to
$1,303.9 billion at June 30, 1999.
As part of our other-than-trading activities, we use derivatives to hedge our
exposure to interest rate and currency fluctuations, primarily on or related to
debt investment securities. We also use them to modify the characteristics of
interest rate-related balance sheet instruments such as loans, short-term
borrowings, and long-term debt.
Net unrealized gains associated with open derivative contracts used to hedge or
modify the interest rate characteristics of related balance sheet instruments
amounted to $0.5 billion at June 30, 1999. Gross unrealized gains and gross
unrealized losses associated with open derivative contracts at June 30, 1999,
are as follows:
<TABLE>
<CAPTION>
Gross Gross Net
unrealized unrealized unrealized
In millions: June 30, 1999 gains (losses) Gains (losses)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt $ 655 ($ 426) $ 229
Debt investment securities 141 (8) 133
Deposits 155 (16) 139
Other financial instruments 152 (116) 36
- ------------------------------------------------------------------------------------------------------
Total 1,103 (566) 537
- ------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
11. LOANS
Included in Loans are loans held for sale of approximately $1.4 billion at June
30, 1999. These loans are recorded on the balance sheet at lower of cost or fair
value and are primarily to borrowers in the U.S. in various industries.
12. OTHER CREDIT-RELATED PRODUCTS
Lending commitments include commitments to extend credit, standby letters of
credit, guarantees, and indemnifications related to securities lending
activities. The contractual amounts of these instruments represent the amount at
risk should the contract be fully drawn upon, the client default, and the value
of the collateral become worthless.
The following table summarizes the contractual amount of lending commitments.
<TABLE>
<CAPTION>
June March December September June March December
In billions 1999 1999 1998 1998 1998 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commitments to extend credit(a) $66.3 $71.4 $73.0 $75.3 $74.4 $80.5 $76.4
Standby letters of credit and guarantees 10.7 12.8 15.9 16.5 16.1 15.6 15.8
Securities lending indemnifications(b) 8.6 7.6 4.1 8.9 9.2 7.5 5.3
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Previously included in this disclosure were commitments to enter into
future resale agreements. These commitments are currently disclosed in note 21,
"Commitments and contingent liabilities."
(b) At June 30, 1999, J.P. Morgan held cash and other collateral in full
support of securities lending indemnifications.
Included in Fees and Commissions are credit-related fees of $38 million and $47
million for the three months ended June 30, 1999 and 1998, respectively.
Credit-related fees were $78 million and $87 million for the six months ended
June 30, 1999 and 1998, respectively. They are primarily earned from commitments
to extend credit, standby letters of credit and guarantees, and securities
lending indemnifications. Also included in Fees and Commissions are amounts paid
to credit derivative providers of $8 million and $6 million for the three months
ended June 30, 1999 and 1998, respectively. Amounts paid to credit derivative
providers were $23 million and $15 million for the six months ended June 30,
1999 and 1998, respectively.
13. IMPAIRED LOANS
Total impaired loans, organized by the location of the counterparty - net of
charge-offs - at June 30, 1999 and 1998 are presented in the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
In millions: June 30 1999 1998(a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
COUNTERPARTIES IN THE U.S.
Commercial and industrial $22 $ 8
Other 17 18
- ------------------------------------------------------------------------------------------------------
39 26
- ------------------------------------------------------------------------------------------------------
COUNTERPARTIES OUTSIDE THE U.S.
Commercial and industrial 16 16
Banks - -
Other 12 13
- ------------------------------------------------------------------------------------------------------
28 29
- ------------------------------------------------------------------------------------------------------
TOTAL IMPAIRED LOANS 67 55
- ------------------------------------------------------------------------------------------------------
Allowance for impaired loans 14 19
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Certain reclassifications were made to conform with the categorization used
in Bank regulatory filings.
Impaired loans for which no SFAS No. 114 reserve was deemed necessary were $37
million and $25 million as of June 30, 1999 and 1998, respectively.
18
<PAGE> 19
The following table presents an analysis of the changes in impaired loans.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Second Second Six Six
quarter quarter months months
In millions 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IMPAIRED LOANS, BEGINNING PERIOD $101 $82 $122 $113
- ------------------------------------------------------------------------------------------------------------------------------
Additions to impaired loans 17 61 30 126
Less:
Repayments of principal, net of
additional advances (41) (24) (42) (25)
Impaired loans returning to
accrual status - - (2) (39)
Charge-offs(a):
Commercial and industrial (7) (11) (10) (34)
Banks (1) (32) (1) (61)
Other, primarily other financial institutions - (17) (25) (18)
Interest and other credits (2) (4) (5) (7)
- ------------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS, JUNE 30 67 55 67 55
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Charge-offs include losses on loan sales of $5 million and $52 million for
the three months ended June 30, 1999 and 1998, respectively. Charge-offs include
losses on loan sales, primarily banks and other financial institutions of $30
million and $78 million for the six months ended June 30, 1999 and 1998,
respectively.
For the three months ended June 30, 1999 and 1998, the average recorded
investments in impaired loans was $73 million and $69 million, respectively. For
the six months ended June 30, 1999 and 1998, the average recorded investments in
impaired loans was $93 million and $89 million, respectively.
An analysis of the effect of impaired loans - net of charge-offs - on interest
revenue for the three and six months ended June 30, 1999 and 1998 is presented
in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Second Second Six Six
quarter quarter months months
In millions 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest revenue that would have been recorded if accruing $2 $2 $4 $4
Net interest revenue recorded related to the current period - - - 4
- ---------------------------------------------------------------------------------------------------------------
Negative impact of impaired loans on interest revenue 2 2 4 -
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
14. ALLOWANCES FOR CREDIT LOSSES
The following table summarizes the activity of our allowance for loan losses.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Second Second Six Six
quarter quarter months months
In millions 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEGINNING BALANCE $ 447 $452 $470 $546
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Reversal of provision for loan losses in the U.S. (65) - (65) -
Reversal of provision for loan losses outside the U.S. (40) - (40) -
- ---------------------------------------------------------------------------------------------------------------------------------
(105) - (105) -
- ---------------------------------------------------------------------------------------------------------------------------------
Reclassifications in the U.S. - - - 6
Reclassifications outside the U.S. - - - (56)
- ---------------------------------------------------------------------------------------------------------------------------------
- - -
(50)(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Counterparties in the U.S. - - 1 4
Counterparties outside the U.S. 1 - 5 5
- ---------------------------------------------------------------------------------------------------------------------------------
1 - 6 9
- ---------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Counterparties in the U.S., primarily other financial institutions (7) - (35) (2)
Counterparties outside the U.S.:
Commercial and industrial - (11) - (32)
Banks (1) (32) (1) (61)
Other - (17) - (18)
- ---------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (7) (60) (30) (104)
- ---------------------------------------------------------------------------------------------------------------------------------
ENDING BALANCE, JUNE 30 335 392 335 392
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to July 1, 1998, changes, excluding charge-offs and recoveries, across
balance sheet reserve or allowance captions-which included an adjustment for
trading derivatives needed to determine fair value, an allowance for loan
losses, and an allowance for credit losses on lending commitments which include
commitments to extend credit, standby letters of credit, and guarantees - were
shown as reclassifications. Reclassifications had no impact on net income and,
accordingly, were not shown on the income statement. Subsequent to July 1, 1998,
reclassifications across balance sheet captions for allowances are reflected as
provisions and reversals of provisions in the "Consolidated statement of
income." If reclassifications prior to July 1, 1998 were included in the
"Consolidated statement of income," the captions on the income statement for the
first six months of 1998 would change with no impact on net income as follows:
Provision for loan losses would be a negative (income) $50 million and Trading
revenue would decrease by $50 million.
The following table displays our allowance for loan losses by component as of
June 30.
<TABLE>
<CAPTION>
In millions: June 30 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Specific counterparty components in the U.S. $ 6 $ 25
Specific counterparty components outside the U.S. 8 12
- ------------------------------------------------------------------------------------------------------------------------------------
Total specific counterparty 14 37
- ------------------------------------------------------------------------------------------------------------------------------------
Specific country 32 83
Expected loss(b) 289 272
- ------------------------------------------------------------------------------------------------------------------------------------
Total 335 392
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the activity of our allowance for credit losses
on lending commitments.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Second Second Six Six
quarter quarter months months
In millions 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEGINNING BALANCE $125 $185 $125 $185
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses in the U.S. 51 - 51 -
Reversal of provision for credit losses outside the U.S. (16) - (16) -
- -----------------------------------------------------------------------------------------------------------------------------------
35 - 35 -
- -----------------------------------------------------------------------------------------------------------------------------------
ENDING BALANCE, JUNE 30 160 185 160 185
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
The following table displays our allowance for credit losses on lending
commitments by component as of June 30.
<TABLE>
<CAPTION>
In millions: June 30 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Specific counterparty components in the U.S. $ 17 $ -
Specific counterparty components outside the U.S. 3 2
- ------------------------------------------------------------------------------------------------------
Total specific counterparty 20 2
- ------------------------------------------------------------------------------------------------------
Specific country 3 13
Expected loss(b) 137 170
- ------------------------------------------------------------------------------------------------------
Total 160 185
- ------------------------------------------------------------------------------------------------------
</TABLE>
(b) The general component of our allowances for credit losses is used to
estimate the impact of separately identified limitations in our expected loss
model. Since all factors used to derive the general component relates to the
expected loss component, the general component, starting June 30, 1999, is
included as part of the expected loss component for disclosure purposes. Prior
period amounts have been reclassified.
15. INVESTMENT BANKING REVENUE
<TABLE>
<CAPTION>
Second quarter Six months
----------------------------------------------
In millions 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisory and syndication fees $258 $198 $479 $389
Underwriting revenue 199 164 368 319
- ----------------------------------------------------------------------------------------------------
Total 457 362 847 708
- ----------------------------------------------------------------------------------------------------
</TABLE>
16. OTHER REVENUE AND OTHER EXPENSES
Other revenue
In the 1999 second quarter, Other revenue of negative (loss) $21 million
includes $37 million of gains on hedges of the firm's anticipated foreign
currency revenues and expenses and a $35 million provision for credit losses
related to the allowance for credit losses on lending commitments.
For the six months ended June 30, 1999, Other revenue of $138 million includes
$130 million of gains on hedges of the firm's anticipated foreign currency
revenues and expenses and a second quarter $35 million provision for credit
losses as discussed above.
For the three and six months ended June 30, 1998, Other revenue of $133 million
and $108 million, respectively, includes a $131 million net gain on the sale of
the firm's global trust and agency services business. See note 4, "Business
changes and developments."
Other expenses
The following table presents the major components of Other expenses.
<TABLE>
<CAPTION>
Second quarter Six months
---------------------------------------------------
In millions 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Professional services $ 23 $ 31 $ 51 $ 59
Marketing and business development 48 43 85 89
Other 65 109 142 212
-----------------------------------------------------------------------------------------------------------------------------------
Total other expenses 136 183 278 360
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17. INCOME TAXES
The effective tax rate for the three and six months ended June 30, 1999 and 1998
was 35%. The income tax benefit related to net realized losses and write-downs
for other-than-temporary impairments in value on debt and equity investment
securities, excluding securities in SBICs, was approximately $17 million and $39
million for the three and six months ended June 30, 1999, compared to an income
tax expense of $19 million and $31 million for the three and six months ended
June 30, 1998. The applicable tax rate used to compute the income tax benefit
related to net losses on debt and equity investment securities was approximately
40% for the three and six months ended June 30, 1999. For the three and six
months ended June 30, 1998, the applicable tax rate used to compute the income
tax expense related to net gains on debt and equity investment securities was
approximately 33% and 34%, respectively.
18. CAPITAL REQUIREMENTS
J.P. Morgan, our subsidiaries, and certain foreign branches of our bank
subsidiary, Morgan Guaranty Trust Company of New York (Morgan Guaranty), are
subject to regulatory capital requirements of U.S. and foreign regulators. Our
primary federal banking regulator, the Board of Governors of the Federal Reserve
System (Federal Reserve Board), establishes minimum capital requirements for
J.P. Morgan, the consolidated bank holding company, and some of our
subsidiaries, including Morgan Guaranty. These requirements ensure that banks
and bank holding companies meet specific guidelines that involve quantitative
21
<PAGE> 22
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting principles. Failure to meet these
requirements can result in actions by regulators that could have a direct
material impact on our financial statements. The capital of J.P. Morgan and our
principal subsidiaries, Morgan Guaranty and J.P. Morgan Securities Inc. (JPMSI),
exceeded the minimum requirements set by each regulator at June 30, 1999.
Capital ratios and amounts
The following table indicates the risk-based capital and leverage ratios and
amounts as of June 30, 1999 for J.P. Morgan and Morgan Guaranty under the
Federal Reserve Board's market risk capital guidelines. These guidelines
incorporate a measure of market risk for trading positions. Under the market
risk capital guidelines, the published capital ratios of J.P. Morgan are
calculated including the equity, assets, and off-balance-sheet exposures of
JPMSI. In accordance with Federal Reserve Board guidelines, the risk-based
capital and leverage amounts and ratios exclude the effect of SFAS No. 115.
<TABLE>
<CAPTION>
Dollars in millions Amounts Ratios(b)
- -------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital(a)
J.P. Morgan $11,972 8.4%
Morgan Guaranty 10,772 8.7
- -------------------------------------------------------------------------------
Total risk-based capital(a)
J.P. Morgan $17,786 12.5%
Morgan Guaranty 14,439 11.6
- -------------------------------------------------------------------------------
Leverage
J.P. Morgan 4.5%
Morgan Guaranty 6.2
- -------------------------------------------------------------------------------
</TABLE>
(a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required
minimum tier 1 capital of $5.7 billion and $5.0 billion, respectively. For
capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum
total risk-based capital of $11.4 billion and $9.9 billion, respectively.
(b) Pursuant to Federal Reserve Board guidelines, the minimum tier 1 capital,
total risk-based capital, and leverage ratios are 4%, 8%, and 3%, respectively,
for bank holding companies and banks.
Capital categories
Bank regulators use five capital category definitions for regulatory supervision
purposes. The categories range from well capitalized to critically
undercapitalized. A bank is considered well capitalized if it has minimum tier 1
capital, total capital, and leverage ratios of 6%, 10%, and 5%, respectively,
under standards provided by the regulatory framework for prompt corrective
action and the Federal Reserve Board.
Bank holding companies also have guidelines which determine the capital levels
at which they shall be considered well capitalized. Pursuant to these
guidelines, the Federal Reserve Board considers a bank holding company to be
well capitalized if it has minimum tier 1 capital, total capital, and leverage
ratios of 6%, 10%, and 3%, respectively.
At June 30, 1999, the ratios of J.P. Morgan and Morgan Guaranty exceeded the
minimum standards required for a well capitalized bank holding company and bank,
respectively. Management is aware of no conditions or events that have occurred
since June 30, 1999, that would change J.P. Morgan's and Morgan Guaranty's well
capitalized status.
Risk-adjusted assets
Risk-adjusted assets represent the total of all on- and off-balance-sheet
exposures for risk-based factors as prescribed by the Federal Reserve Board.
J.P. Morgan's risk-adjusted assets as of June 30, 1999 were $142.5 billion,
compared with $143.1 billion at March 31, 1999. At December 31, 1998, risk
adjusted assets were $140.2 billion.
19. STOCK OPTIONS AND OTHER AWARD PLANS
J.P. Morgan's stock option and stock award plans provide for the grant of
stock-related awards to key employees.
To satisfy awards granted under stock option and stock award plans, we may make
common stock available from authorized but unissued shares. We also may purchase
shares in the open market at various times during the year. Shares available for
future grants under stock incentive plans totaled 9,493,000 as of July 31, 1999.
A portion of these shares may be made available from treasury shares. Shares
authorized for future grants under the Stock Bonus Plan are 6.5% of outstanding
shares. All shares authorized under the Stock Bonus Plan are required to be
settled in treasury shares.
In July 1999 we granted stock option awards totaling 6,088,000 with an average
exercise price of $135.72.
22
<PAGE> 23
20. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding,
which includes contingently issuable shares where all necessary conditions for
issuance have been satisfied. Diluted EPS includes the determinants of basic EPS
and, in addition, gives effect to dilutive potential common shares that were
outstanding during the period.
The computation of basic and diluted EPS for the three and six months ended June
30, 1999 and 1998 is presented in the following table.
<TABLE>
<CAPTION>
Second quarter Six months
--------------------------------------- -----------------------------------
Dollars in millions, except share data 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $504 $481 $1,104 $718
Preferred stock dividends and other (9) (9) (18) (18)
- -------------------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings
per share - income available to
Common stockholders $495 $472 $1,086 $700
- -------------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings per share -
weighted-average shares 182,962,751 183,469,787 182,851,824 183,138,853
Effect of dilutive securities:
Options(a) 5,766,219 7,260,936 5,215,023 6,974,253
Other stock awards(b) 7,810,372 9,264,175 8,394,193 9,449,139
4.75% convertible debentures - 69,309 - 70,565
- -------------------------------------------------------------------------------------------------------------------------------
13,576,591 16,594,420 13,609,216 16,493,957
- -------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
weighted-average number of common
shares and dilutive potential common shares 196,539,342 200,064,207 196,461,040 199,632,810
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $2.71 $2.57 $5.94 $3.82
Diluted earnings per share 2.52 2.36 5.53 3.51
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Earnings per share amounts are based on actual numbers before rounding.
(a) The dilutive effect of stock options was computed using the treasury stock
method. This method computes the number of incremental shares by assuming the
issuance of outstanding stock options, reduced by the number of shares assumed
to be repurchased from the issuance proceeds, using the average market price of
our common stock for the period. The related tax benefits are also considered.
(b) Weighted-average incremental shares for other stock awards include
restricted stock and stock bonus awards. The related tax benefits are also
considered.
21. COMMITMENTS AND CONTINGENT LIABILITIES
Excluding mortgaged properties, assets on our "Consolidated balance sheet" of
approximately $102.5 billion at June 30, 1999, were pledged as collateral for
borrowings, to qualify for fiduciary powers, to secure public monies as required
by law, and for other purposes.
At June 30, 1999 we had commitments to enter into future resale and repurchase
agreements totaling $7.9 billion and $6.0 billion, respectively.
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, we estimate the fair value of all on- and off-balance-sheet
financial instruments. At June 30, 1999, the SFAS No. 107 aggregate net fair
value for all financial instruments exceeded associated net carrying values on
our "Consolidated balance sheet" by $0.5 billion. At December 31, 1998, the
aggregate net fair value for all financial instruments approximated the
associated net carrying values on our "Consolidated balance sheet". The increase
from December 31, 1998 primarily related to long-term debt.
The SFAS No. 107 fair value of a financial instrument is the current amount that
would be exchanged between willing parties (other than in a forced sale or
liquidation), and is best evidenced by a quoted market price, if one exists.
Where quoted market prices are not available for financial instruments, fair
values are estimated using internal valuation techniques including pricing
models and discounted cash flows that may not be indicative of net realizable
value. Beginning June 30, 1999, we refined the valuation technique used to
estimate the fair value of our traditional credit products, which includes
loans, commitments to extend credit, standby letters of credit, and guarantees,
to better reflect how we currently manage these exposures. The revised technique
utilizes a discounted cash flows approach which uses rates based on credit
spreads in various markets including credit derivatives, asset swaps and bonds.
Previously, we estimated the fair value of these products based on secondary
loan spreads. The impact of this change in estimate at June 30, 1999 was a
reduction in the excess of the aggregate net fair value over the carrying value
on our "Consolidated balance sheet" by approximately $0.2 billion.
23
<PAGE> 24
23. SEGMENTS
We present our results based on the segments or activities as reviewed
separately by the chief operating decision maker, our Chairman and Chief
Executive Officer, as well as other members of senior management. Each segment
is organized based on similar products and services we provide globally to our
clients or activities we undertake solely for our own account.
J.P. Morgan's segments or activities are: Investment Banking, Equities, Interest
Rate and Foreign Exchange Markets, Credit Markets, Credit Portfolio, Asset
Management and Servicing (See note 4, "Business changes and developments"),
Equity Investments, and Proprietary Investing and Trading. In addition to the
activities of our proprietary positioning group, the Proprietary Investing and
Trading segment is comprised of a separately managed credit investment
securities portfolio and our investment in Long-Term Capital Management, L.P.
For purposes of presentation, we have grouped these segments into the sectors
Global Finance, Asset Management and Servicing, and Proprietary Investments.
During the second quarter of 1999, Credit Portfolio's results have been restated
to reflect the segment's responsibility for managing the firm's allowance for
credit losses as follows: provisions for credit losses, previously included in
Corporate Items, are included in the segment, and the intercompany credit loss
charge previously paid to Corporate Items in lieu of recording provisions, has
been eliminated. Prior period amounts have been restated.
The assessment of segment performance by senior management includes a review of
pretax income for each of the segments. Our management reporting system and
policies were used to determine revenues and expenses attributable to each
segment. Earnings on stockholders' equity were allocated based on management's
estimate of the economic capital of each segment; economic capital levels are
derived principally from an estimate of risk inherent in each segment. Overhead
was applied based on management's estimate of overhead usage by each segment.
Transactions between segments are recorded within segment results as if
conducted with a third party and eliminated in consolidation. The accounting
policies of our segments are, in all material respects, consistent with those
described in note 1, "Summary of Significant Accounting Policies," of our 1998
Annual report except for management reporting policies related to the
tax-equivalent adjustment.
The following table presents segment pretax income for the three and six months
ended June 30, 1999 and 1998.
SUMMARY OF SECTOR RESULTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Interest Rate
Investment and Credit Credit GLOBAL
In millions Banking Equities FX Markets Markets Portfolio FINANCE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER 1999
Total Revenues $320 $427 $555 $361(a) $152 $1,815
Total Expenses 228 236 321 210 41 1,036
- --------------------------------------------------------------------------------------------------------------------------
Pretax Income 92 191 234 151 111 779
- --------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1998
Total Revenues 247 244 622 238 167(b) 1,518
Total Expenses 175 225 339 204 38 981
- --------------------------------------------------------------------------------------------------------------------------
Pretax Income 72 19 283 34 129 537
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1999
Total Revenues 578 715 1,217 1,057(a) 306 3,873
Total Expenses 438 466 680 469 86 2,139
- --------------------------------------------------------------------------------------------------------------------------
Pretax Income 140 249 537 588 220 1,734
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1998
Total Revenues 498 379 1,235 602(a) 289(b) 3,003
Total Expenses 360 416 691 460 67 1,994
- --------------------------------------------------------------------------------------------------------------------------
Pretax Income 138 (37) 544 142 222 1,009
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ASSET
MANAGE- Proprietary
MENT AND Equity Investing PROPRIETARY Corporate CONSOL-
In millions SERVICING Investments and Trading INVESTMENTS Items(e) IDATED
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER 1999
Total Revenues $410 $13 $44(c)(d) $57 ($91) $2,191
Total Expenses 279 13 42 55 47 1,417
- ------------------------------------------------------------------------------------------------------------------------
Pretax Income 131 -- 2 2 (138) 774
- ------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1998
Total Revenues 393 102 103(c)(d) 205 37 2,153
Total Expenses 311 15 39 54 70 1,416
- ------------------------------------------------------------------------------------------------------------------------
Pretax Income 82 87 64 151 (33) 737
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1999
Total Revenues 781 (9) 163(c)(d) 154 (126) 4,682
Total Expenses 559 27 75 102 184 2,984
- ------------------------------------------------------------------------------------------------------------------------
Pretax Income 222 (36) 88 52 (310) 1,698
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1998
Total Revenues 755 128 367(c)(d) 495 (103) 4,150
Total Expenses 607 24 79 103 344 3,048
- ------------------------------------------------------------------------------------------------------------------------
Pretax Income 148 104 288 392 (447) 1,102
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Revenues related to the structuring of tax-advantaged loans and structured
credit products for Credit Portfolio were $22 million for the three months
ended June 30, 1999. For the six months ended June 30, 1999 and 1998 these
revenues were $40 million and $8 million, respectively. These amounts are
eliminated in consolidation.
(b) The adjustment to gross-up Credit Portfolio's revenue to a taxable basis
was $7 million and $14 million for the three and six months ended June 30,
1998, respectively. These amounts are eliminated in consolidation.
(c) The adjustment to gross up the Proprietary Investing and Trading segment
tax-exempt revenues to a taxable basis was $30 million and $29 million for
the three months ended June 30, 1999 and 1998, respectively. For the six
months ended June 30, 1999 and 1998 the adjustment was $68 million and $52
million, respectively. These amounts are eliminated in consolidation.
(d) Total return revenues, which combine reported revenues and the change in
net unrealized appreciation, were $26 million and $79 million for the three
months ended June 30, 1999 and 1998, respectively. Total return for the six
months ended June 30, 1999 and 1998 was $109 million and $288 million,
respectively.
24
<PAGE> 25
(e) We classify the revenues and expenses of Corporate Items into three broad
categories:
- Recurring items not allocated to the segments - including recurring
corporate items, unallocated net interest revenue, results of
hedging anticipated net foreign currency revenues and expenses across
all segments, corporate-owned life insurance, and equity earnings of
certain affiliates. Recurring items included in revenues were ($30)
million and ($58) million for the three months ended June 30, 1999 and
1998, respectively, and $11 million and ($172) million for the six
months ended June 30, 1999 and 1998, respectively.
- Nonrecurring items not allocated to the segments - includes gains on
sales of businesses, revenues and expenses associated with businesses
that have been sold or discontinued, special charges, and other
one-time corporate items. Nonrecurring revenues were $12 million and
$161 million for the three months ended June 30, 1999 and 1998,
respectively. Nonrecurring revenues were $6 million and $159 million
for the six months ended June 30, 1999 and 1998, respectively, and
included a second quarter pretax gain of $131 million related to the
sale of the firm's global trust and agency services business.
Nonrecurring expenses in the first quarter of 1998 include a charge of
$215 million in connection with restructuring initiatives.
- Consolidation and management reporting offsets - comprises offsets to
certain amounts recorded in the segments, including the allocation of
earnings on equity out of corporate items and into the segments,
adjustments to bring segments to a tax-equivalent basis, and other
management accounting adjustments. Consolidation and management
reporting offset revenues were ($73) million and ($66) million for the
three months ended June 30, 1999 and 1998, respectively, and ($143)
million and ($90) million for the six months ended June 30, 1999 and
1998, respectively.
The following table presents segment assets at period end, as well as average
period assets, for the six months ended June 30, 1999, for the three months
ended March 31, 1999, and for the year ended December 31, 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
ASSET
Interest MANAGE-
Rate MENT
and Credit Credit GLOBAL AND Equity
Assets(a), in billions Equities FX Markets Markets Portfolio FINANCE SERVICING Investments
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
At June 30 $34 $126 $26 $16 $202 $17 $1
Average 35 123 28 17 203 13 1
1999
At March 31 38 119 27 16 200 13 1
Average 34 122 29 17 202 13 1
1998
At December 31 28 123 22 17 190 8 1
Average 31 137 31 21 220 10 1
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
PROPRIET-
Proprietary ARY
Assets(a), Investing INVEST- CORPORATE
Assets(a), in billions and Trading MENTS ITEMS TOTAL
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
At June 30 $47 $48 $2 $269
Average 47 48 4 268
1999
At March 31 48 49 7 269
Average 49 50 5 270
1998
At December 31 57 58 5 261
Average 51 52 1 283
- ---------------------------------------------------------------------
</TABLE>
(a) The unrealized gains and losses related to derivatives contracts are
reflected in the total assets of each respective business; however, the
credit risks related to these exposures are managed centrally by Credit
Portfolio.
25
<PAGE> 26
24. International operations
For financial reporting purposes, our operations are divided into domestic and
international components. We believe that the method we have chosen to allocate
our results among domestic and international sources, while inexact, is
appropriate.
Because our operations are highly integrated, we need to make estimates and
assumptions to identify revenues and expenses by geographic region. The
following is a summary of these assumptions:
- - Client-focused revenues are assigned to the region managing the client
relationship for a particular product. For investment banking
activities, this is the client's head office; for most other products,
it is the location where the activity is transacted.
- - Market making revenues that cannot be specifically attributed to
individual clients (for example, gains or losses from positions taken
to facilitate client transactions) are generally allocated based on the
proportion of regional revenues.
- - Revenues from proprietary investing and trading activities are based on
the location of the risk taker.
- - Expenses are allocated based on the estimated cost associated with
servicing the regions' client base.
- - Earnings on stockholders' equity are mainly allocated based on each
region's proportion of regional revenue, and adjustments are made for
differences between domestic and international tax rates.
The results for the three and six months ended June 30, 1999 and 1998 were
distributed among domestic and international operations, as presented in the
following table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Income
Total Total Pretax tax Net
In millions revenues(a,g) expenses income expense income
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SECOND QUARTER 1999
Europe(b) $ 745 $ 421 $ 324 $ 131 $ 193
Asia Pacific 188 144 44 18 26
Latin America(c) 153 58 95 37 58
- ---------------------------------------------------------------------------------------------------------------
Total international operations 1,086 623 463 186 277
Domestic operations(d) 1,105 794 311 84 227
- ---------------------------------------------------------------------------------------------------------------
Total 2,191 1,417 774 270 504
- ---------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1998
Europe(b) 744(e) 476 268 107 161
Asia Pacific 180 128 52 21 31
Latin America(c) 98 48 50 20 30
- ---------------------------------------------------------------------------------------------------------------
Total international operations 1,022 652 370 148 222
Domestic operations(d) 1,131 764 367 108 259
- ---------------------------------------------------------------------------------------------------------------
Total 2,153 1,416 737 256 481
===============================================================================================================
Income
Total Total Pretax tax Net
In millions revenues(a,g) expenses income expenses income
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS 1999
Europe(b) $1,515 $ 880 $ 635 $ 255 $ 380
Asia Pacific 323 282 41 17 24
Latin America(c) 649 117 532 212 320
- ---------------------------------------------------------------------------------------------------------------
Total international operations 2,487 1,279 1,208 484 724
Domestic operations(d) 2,195 1,705 490 110 380
- ---------------------------------------------------------------------------------------------------------------
Total 4,682 2,984 1,698 594 1,104
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS 1998
Europe(b) 1,391(e) 1,043(f) 348 139 209
Asia Pacific 369 292(f) 77 31 46
Latin America(c) 299 123 176 70 106
- ---------------------------------------------------------------------------------------------------------------
Total international operations 2,059 1,458 601 240 361
Domestic operations(d) 2,091 1,590(f) 501 144 357
- ---------------------------------------------------------------------------------------------------------------
Total 4,150 3,048 1,102 384 718
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes net interest revenue and noninterest revenues.
(b) Includes the Middle East and Africa.
(c) Includes Mexico, Central America, and South America.
(d) Includes the United States, Canada, and the Caribbean. Results relate
substantially to United States operations for both years.
(e) Includes 1998 second quarter net gain of $131 million related to the sale of
our global trust and agency services business.
(f) Total expenses include a 1998 first quarter $215 million pretax charge
related to the restructuring of business activities which was recorded as
follows: $116 million in Europe, $15 million in Asia Pacific, and $84
million in Domestic operations
(g) For the three and six months ended June 30, 1999, revenues include a net $70
million negative provision for credit losses, which was recorded as follows:
($11) million in Europe, $38 million in Asia Pacific, $29 million in Latin
America, and $14 million in Domestic operations.
26
<PAGE> 27
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
J.P. Morgan reported second quarter 1999 net income of $504 million, or $2.52
per share, compared with $481 million, or $2.36 per share, in the second quarter
of 1998. Net income rose 25%, excluding last year's $79 million gain on the sale
of our global trust and agency services business. Return on equity was 18% in
the quarter.
Net income for the first half of 1999 was $1.104 billion compared with $718
million in the first six months of 1998. Earnings per share for the 1999
year-to-date were $5.53 versus $3.51 in the same period a year ago.
OTHER HIGHLIGHTS FOR THE SECOND QUARTER:
- - Revenues excluding last year's gain rose 8% and included a 16% rise from
client-focused activities
- - Combined Investment Banking and Equities revenues grew 52% from the
year-ago quarter
- - Asset management and private client revenues rose by 11% versus last year
- - Core expenses before bonuses for the first half of the year were down by
more than $200 million
- - Economic capital required for our credit portfolio was down 44% from
December 31, 1997, well ahead of schedule to achieve the 50% reduction
targeted for the end of 2000
SECOND QUARTER RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Second quarter First quarter
---------------------------------------------------------------------------------------------
In millions of dollars, except per share data 1999 1998 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $2,191 $ 2,153(a) $2,491
Operating expenses (1,417) (1,416) (1,567)
Income taxes (270) (256) (324)
---------------------------------------------------------------------------------------------
Net income 504 481 600
Net income per share $2.52 $2.36 $3.01
Dividends declared per share $0.99 $0.95 $0.99
---------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a gain of $131 million related to the sale of the firm's
global trust and agency services business.
OTHER DEVELOPMENTS
Euroclear
We operate, under contract, the Euroclear system - the world's largest
clearance and settlement system for internationally traded securities. In
connection with our role as operator of Euroclear, we provide credit and deposit
services to Euroclear participants. The results related to Euroclear are
included in the Asset Management and Servicing segment and represent a
significant component of the segment's pretax income. In response to the
introduction of the euro and other developments in global markets, Euroclear and
Morgan have proposed a clearance and settlement consolidation model to capture
synergies across markets with the goal of developing for clients a more
efficient international clearing system. As a result of this and other
initiatives in Europe, our role as operator of the Euroclear system is likely to
change, in which case the contribution of this segment would be impacted over
time.
Securities portfolio accounting services
On April 22, 1999, J.P. Morgan announced that The Bank of New York has been
appointed to provide securities portfolio accounting and related operational
services for J.P. Morgan's asset management business. We do not anticipate any
disruption to our operations, or any material impact to the firm's financial
statements, as a result of this transaction.
27
<PAGE> 28
SEGMENT ANALYSIS
For the purposes of reporting our results, we divide our business segments or
activities into three sectors: Global Finance, Asset Management and Servicing,
and Proprietary Investments. Reporting by sector helps simplify the presentation
of complex, interrelated activities conducted in over thirty countries by
approximately 15,000 people.
The first two sectors - Global Finance and Asset Management and Servicing -
comprise the services we provide to clients. Proprietary Investments represent
the activities we undertake exclusively for our own account. For a description
of our business sectors and activities within each sector, refer to the J.P.
Morgan & Co. Incorporated 1998 Annual report. Certain information and amounts
have been restated to reflect management's current reporting structure - refer
to note 23, "Segments," for more details. Presented below are the summary
results for each sector for the three and six months ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
SUMMARY OF SECTOR RESULTS
- -------------------------------------------------------------------------------------------------------------------------------
Interest Rate
Investment and Credit
In millions Banking Equities FX Markets Markets
- -------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1999
<S> <C> <C> <C> <C>
Total Revenues $320 $427 $555 $361
Total Expenses 228 236 321 210
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax Income 92 191 234 151
- ---------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1998
Total Revenues 247 244 622 238
Total Expenses 175 225 339 204
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax Income 72 19 283 34
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE), SECOND QUARTER 1999 VS SECOND QUARTER 1998
Total Revenues 73 183 (67) 123
Total Expenses 53 11 (18) 6
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax Income 20 172 (49) 117
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1999
Total Revenues 578 715 1,217 1,057
Total Expenses 438 466 680 469
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax Income 140 249 537 588
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1998
Total Revenues 498 379 1,235 602
Total Expenses 360 416 691 460
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax Income 138 (37) 544 142
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE), SIX MONTHS 1999 VS. SIX MONTHS 1998
Total Revenues 80 336 (18) 455
Total Expenses 78 50 (11) 9
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax Income 2 286 (7) 446
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ASSET
MANAGE-
Credit GLOBAL MENT AND Equity
In millions Portfolio FINANCE SERVICING Investments
- -----------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1999
<S> <C> <C> <C> <C>
Total Revenues $152(a) $1,815 $410 $ 13
Total Expenses 41 1,036 279 13
- ----------------------------------------------------------------------------------------------------------------------------
Pretax Income 111 779 131 --
- ----------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1998
Total Revenues 167 1,518 393 102
Total Expenses 38 981 311 15
- ----------------------------------------------------------------------------------------------------------------------------
Pretax Income 129 537 82 87
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE), SECOND QUARTER 1999 VS SECOND QUARTER 1998
Total Revenues (15) 297 17 (89)
Total Expenses 3 55 (32) (2)
- ----------------------------------------------------------------------------------------------------------------------------
Pretax Income (18) 242 49 (87)
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1999
Total Revenues 306(a) 3,873 781 (9)
Total Expenses 86 2,139 559 27
- ----------------------------------------------------------------------------------------------------------------------------
Pretax Income 220 1,734 222 (36)
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1998
Total Revenues 289 3,003 755 128
Total Expenses 67 1,994 607 24
- ----------------------------------------------------------------------------------------------------------------------------
Pretax Income 222 1,009 148 104
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE), SIX MONTHS 1999 VS. SIX MONTHS 1998
Total Revenues 17 870 26 (137)
Total Expenses 19 145 (48) 3
- ----------------------------------------------------------------------------------------------------------------------------
Pretax Income (2) 725 74 (140)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Proprietary
Investing PROPRIETARY Corporate CONSOL-
In millions and Trading INVESTMENTS Items IDATED
- ------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1999
<S> <C> <C> <C> <C>
Total Revenues $44 $57 ($91) $2,191
Total Expenses 42 55 47 1,417
- ---------------------------------------------------------------------------------------------------------------------------
Pretax Income 2 2 (138) 774
- ---------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1998
Total Revenues 103 205 37 (b) 2,153
Total Expenses 39 54 70 1,416
- ---------------------------------------------------------------------------------------------------------------------------
Pretax Income 64 151 (33) 737
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE), SECOND QUARTER 1999 VS SECOND QUARTER 1998
Total Revenues (59) (148) (128) 38
Total Expenses 3 1 (23) 1
- ---------------------------------------------------------------------------------------------------------------------------
Pretax Income (62) (149) (105) 37
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1999
Total Revenues 163 154 (126) 4,682
Total Expenses 75 102 184 2,984
- ---------------------------------------------------------------------------------------------------------------------------
Pretax Income 88 52 (310) 1,698
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1998
Total Revenues 367 495 (103)(b) 4,150
Total Expenses 79 103 344 (c) 3,048
- ---------------------------------------------------------------------------------------------------------------------------
Pretax Income 288 392 (447) 1,102
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE), SIX MONTHS 1999 VS. SIX MONTHS 1998
Total Revenues (204) (341) (23) 532
Total Expenses (4) (1) (160) (64)
- ---------------------------------------------------------------------------------------------------------------------------
Pretax Income (200) (340) 137 596
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a second quarter 1999 net reversal of provision for credit losses
($70) million.
(b) Includes a second quarter 1998 pretax gain of $131 million related to the
sale of the firm's global trust and agency services business.
(c) Includes a first quarter 1998 pretax charge of $215 million related to
restructuring of business activities.
28
<PAGE> 29
SECTOR RESULTS
Revenues were $2.191 billion in the second quarter of 1999, up 8% from the same
1998 period excluding last year's gain. Revenues from client-focused activities,
reported in the Global Finance and Asset Management and Servicing sectors,
totaled $2.225 billion in the second quarter of 1999, up 16% from $1.911 billion
a year ago. Revenues from Proprietary Investments were $57 million versus $205
million a year ago.
GLOBAL FINANCE revenues of $1.815 billion in the quarter increased 20% over last
year.
- - Investment Banking revenues were $320 million, up 30%, reflecting strong
demand for advisory and capital markets services. Growth was broad-based,
driven by strength in advisory services and origination revenues from
acquisition financing, high yield origination, and risk management
products. For the first half of 1999, Thomson Financial Securities Data
Company Inc. ranked J.P. Morgan sixth in completed merger and acquisitions
worldwide, with a market share of 15.2%.
- - Equities revenues of $427 million rose 75% from a year ago, led by very
strong equity derivatives results and complemented by increases in
underwriting and secondary trading revenues. Morgan ranked eighth in U.S.
equity lead underwriting for the first half of 1999; market share was 4.4%.
Equity commission revenues increased more than 15% in both the United
States and Europe, as we continued to gain market share in both regions.
- - Interest Rate and Foreign Exchange Markets had revenues of $555 million
versus $622 million a year ago. Interest rate markets revenues were higher,
reflecting strength across all regions. These increases were offset by a
decline in foreign exchange revenues, resulting from lower volatility in
both G-7 and emerging markets currencies.
- - Credit Markets revenues increased 52% to $361 million, as all Credit
Markets activities experienced growth. Origination revenues were strong on
increased volumes in both investment grade and high yield markets as well
as in structured finance transactions. Stronger emerging markets revenues
drove increased securities trading results over last year's quarter.
- - Credit Portfolio revenues of $152 million declined 9%. This partially
reflects lower net interest earnings and lower fees as we reduced the
segment's loan exposures and commitments to lend. It also reflects slightly
higher hedging costs and losses on loan sales associated with reducing
exposures. The reduction in revenues was partly offset by a $70 million net
reversal of the provisions for credit losses. The negative provision was
taken in light of better credit market conditions, especially in emerging
markets, and reduced credit risk exposures. We are ahead of schedule to
meet our December 2000 target of a 50% capital reduction in Credit
Portfolio; at June 30, 1999, economic capital in the segment was down 44%
from December 31, 1997, driven by reduced exposures and, to a lesser
extent, improved market spreads.
ASSET MANAGEMENT AND SERVICING revenues increased 4% to $410 million. Asset
management and private client revenues were up 11%, driven by higher investment
management fees. Euroclear revenues were lower. Assets under management rose 8%
from a year ago to $326 billion.
PROPRIETARY INVESTMENTS revenues were $57 million, compared with $205 million a
year ago.
- - Proprietary Investing and Trading revenues were $44 million, down from $103
million. Total return - reported revenues and the change in net unrealized
appreciation - was $26 million compared with $79 million. Lower results in
Asia and the United States were partially offset by strong results in the
European markets.
- - Equity Investments revenues were $13 million versus $102 million a year
ago, when we recognized net gains of $101 million related primarily to the
sale of an investment in the insurance industry.
CORPORATE ITEMS had negative revenues of $91 million. This compares with
revenues of $37 million last year, when we recognized the $131 million gain on
the sale of the firm's global trust and agency services business.
29
<PAGE> 30
FINANCIAL REVIEW
REVENUES
Revenues were $2.191 billion in the second quarter of 1999, compared with $2.153
billion in the year ago quarter. For the six months ended June 30, 1999,
revenues were $4.682 billion versus $4.150 billion in the same period a year
ago.
Net interest revenue, the aggregate of interest revenue and expense generated
from the firm's client-focused and proprietary activities using a variety of
asset, liability, and off-balance-sheet instruments, was $530 million in
the second quarter of 1999 including a $105 million negative provision to
reduce the allowance for loan losses. The negative provision was taken in
light of better credit market conditions, especially in emerging markets, and
reduced credit risk exposures. Excluding the negative provision, net interest
revenue increased 47% to $425 million from the second quarter of 1998. This
increase resulted primarily from higher net interest revenue from our
market-making activities in interest rate and credit markets. Excluding the
negative provision, net interest revenue for the first six months of 1999
increased 30% to $814 million, from the corresponding 1998 period.
Total trading revenue was $803 million in the second quarter of 1999, a decrease
of 8% from $877 million. The decrease was driven by lower trading revenues in
our Proprietary Investments segment, primarily reflecting lower results in Asia;
these results were partially offset by higher revenue from activities in our
Global Finance segment. Our Global Finance segment reflected strong results in
equity derivatives and in our credit-related activities, particularly local
market activities in Latin America. These results were partially offset by lower
revenues in the interest rate and foreign exchange markets. Year-to-date trading
revenues increased to $1.937 billion from $1.773 billion for the first six
months of 1999.
Investment banking revenue grew 26% to $457 million in the second quarter of
1999 from $362 million in the second quarter of 1998 driven by continued demand
for advisory and capital markets services. Underwriting revenue grew 21% to $199
million, and advisory and syndication fees rose 30% to $258 million. For the
first half of 1999, Thomson Financial Securities Data Company Inc. ranked J.P.
Morgan sixth in completed merger acquisitions worldwide, with a market share of
15.2%. Investment banking revenue for the first half of 1999 increased 20% to
$847 million, over the same 1998 period.
Investment management revenue increased 15% to $260 million in the 1999 second
quarter from a year ago. Assets under management were $326 billion at June 30,
1999, compared with $302 billion a year ago; the increase reflected net new
business and market appreciation. For the first six months of 1999, investment
management revenue was $506 million, an increase of 16% over the prior year
period.
Fees and commissions were $191 million, down 3% from $197 million in the
year-ago quarter. Higher equity brokerage and futures and options commissions
were more than offset by lower fees from traditional credit products and
increased costs to manage the firm's credit risk. For the year to date, fees and
commissions were $405 million compared to $387 million in the same 1998 period.
Investment securities revenue was negative (loss) $29 million in the second
quarter of 1999, primarily reflecting net losses of $46 million on the sale of
debt investment securities. The 1998 second quarter investment securities
revenue was $68 million and included net gains from positions associated with
our equity investments portfolio of $101 million, which primarily related to the
sale of an investment in the insurance industry. These gains were offset by net
realized losses of $43 million on sales of debt investment securities. For the
current six month period, investment securities revenue was negative (loss) $70
million versus revenue of $111 million for the first six months of 1998.
Other revenue was negative (loss) $21 million in the second quarter of 1999,
compared with revenue of $133 million a year earlier. For the second quarter of
1999, other revenue includes $37 million of gains on hedges of anticipated
foreign currency revenues and a $35 million provision related to the allowance
for credit losses on lending commitments. For the three months ended June 30,
1998, other revenue of $133 million includes a $131 million net gain on the sale
of the firm's global trust and agency services business. Other revenue for the
first half of 1999 was $138 million, compared with $108 million for the first
six months of 1998.
OPERATING EXPENSES
Operating expenses were $1.417 billion, level with the second quarter last year.
Non-compensation operating expenses were 19% lower this quarter as we continued
our focus on productivity. Compensation expenses rose as a result of
30
<PAGE> 31
increased bonus accruals. The firm's efficiency ratio was 65% in the second
quarter, compared with 70% a year ago excluding the one-time gain.
Costs associated with preparation for the Year 2000 were $13 million for the
second quarter, down from $55 million last year, which also included preparation
for European Economic and Monetary Union. For the first half of 1999, costs of
preparation for the Year 2000 and European Economic and Monetary Union were $38
million, down $72 million from last year. Second quarter 1999 software costs of
$37 million were capitalized rather than recorded as expenses because of a
change in accounting rules and are not included in the 1999 expenses. For the
six months ended June 30, 1999, $66 million of software costs were capitalized.
Operating expenses for the first half of 1999 were $2.984 billion. Before bonus
accruals and excluding the effect of software capitalization, this represents a
reduction of more than $200 million compared with the first half of last year.
At June 30, 1999, staff totaled 14,902 employees, compared with 15,100 at March
31, 1999, 15,674 at December 31, 1998 and 16,045 employees at June 30, 1998.
Income-tax expense in the second quarter totaled $270 million, based on an
effective tax rate of 35%, compared with $256 million in the year-earlier
quarter. The increase in expense reflects higher pretax income.
ASSETS
Total assets were $269 billion at June 30, 1999, compared with $261 billion at
December 31, 1998.
ASSET QUALITY
<TABLE>
<CAPTION>
IMPAIRED LOANS
- ------------------------------------------------------------------------------------------------------------
June 30, March 31, December 31,
In millions: 1999 1999 1998(a)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial and industrial $38 $ 34 $ 25
Banks - - -
Other, primarily other financial institutions at
March 31, 1999 29 67 97
- ------------------------------------------------------------------------------------------------------------
Total impaired loans 67 101 122
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Certain reclassifications were made to conform with the categorization used
in Bank regulatory filings.
Impaired loans were $67 million at June 30, 1999 versus $101 million at March
31, 1999. Newly classified "Commercial and industrial" impaired loans were
partially offset by charge-offs of $8 million during the second quarter of 1999.
The decrease in "Other" primarily relates to an exposure to one U.S.
counterparty, which was sold during the quarter.
ALLOWANCES FOR CREDIT LOSSES
We maintain allowances for credit losses to absorb losses inherent in our
traditional extensions of credit that we believe are probable and that can be
reasonably estimated. These allowances include an allowance for loan losses and
an allowance for credit losses on lending commitments, which include commitments
to extend credit, standby letters of credit, and guarantees.
In determining the appropriate size of our allowances, we make use of our
historical experience over the course of past credit cycles. We believe our use
of past credit cycle experience is appropriate because our current portfolio is
similar to that of the past: institutionally based, with significant emerging
market exposures. Our experience has shown that credit losses, when they occur,
are significant and highly correlated, particularly across emerging markets. The
actual amount of credit losses realized may vary from estimated losses at each
period end, due to improved economic conditions or successful management of our
credit exposures, resulting in lower net charge-offs than expected. Our process
includes procedures to limit differences between estimated and actual credit
losses, which include detailed quarterly assessments by senior management and
model adjustments to reflect current market indicators of credit quality.
31
<PAGE> 32
In March 1999, a Joint Working Group, comprised of banking and securities
regulators, was formed to provide clarification to the banking industry
regarding the appropriate accounting, disclosure, and documentation requirements
for allowances for credit losses. We are in the process of reviewing our model
for estimating credit losses and determining the appropriate level of our
allowances, with the goal of refining it based on our review, which will
incorporate any guidance issued by the Joint Working Group.
The following table summarizes the activity of our allowances for credit losses
for the three and six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR ALLOWANCE FOR CREDIT LOSSES ON
LOAN LOSSES LENDING COMMITMENTS
- -----------------------------------------------------------------------------------------------------------------------
Second Second Second Second
quarter quarter quarter quarter
In millions 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEGINNING BALANCE, APRIL 1 $447 $452 $125 $185
- -----------------------------------------------------------------------------------------------------------------------
(Reversal of provision)/provision for credit
losses (105) - 35 -
- -----------------------------------------------------------------------------------------------------------------------
Recoveries: 1 - - -
Charge-offs:
Commercial and industrial (7) (11) - -
Banks (1) (32) - -
Other, primarily financial institutions - (17) - -
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Net charge-offs (7) (60) - -
- -----------------------------------------------------------------------------------------------------------------------
ENDING BALANCE, JUNE 30 335 392 160 185
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR ALLOWANCE FOR CREDIT LOSSES ON
LOAN LOSSES LENDING COMMITMENTS
- -----------------------------------------------------------------------------------------------------------------------
Six months Six months Six months Six months
In millions 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEGINNING BALANCE, JANUARY 1 $470 $546 $ 125 $185
- -----------------------------------------------------------------------------------------------------------------------
Reclassifications in the U.S.(a) (105) (50) 35 -
- -----------------------------------------------------------------------------------------------------------------------
Recoveries: 6 9 - -
Charge-offs:
Commercial and industrial (10) (34) - -
Banks (1) (61) - -
Other, primarily financial institutions (25) (18) - -
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs (30) (104) - -
- ----------------------------------------------------------------------------------------------------------------------
ENDING BALANCE, JUNE 30 335 392 160 185
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to July 1, 1998, changes, excluding charge-offs and recoveries, across
balance sheet reserve or allowance captions - which included an adjustment for
trading derivatives needed to determine fair value, an allowance for loan
losses, and an allowance for credit losses which include commitments to extend
credit, standby letters of credit, and guarantees - were shown as
reclassifications. Reclassifications had no impact on net income and,
accordingly, were not shown on the income statement. Subsequent to July 1, 1998,
reclassifications across balance sheet captions for allowances are reflected as
provisions and reversals of provisions in the "Consolidated statement of
income." If reclassifications prior to July 1, 1998 were included in the
"Consolidated statement of income", the captions on the income statement for the
six months ended June 30, 1998 would change with no impact on net income as
follows: Provision for loan losses would be a negative (revenue) $50 million and
Trading revenue would decrease by $50 million.
The following table displays our allowances for credit losses by component at
June 30, 1999, March 31, 1999, and December 31, 1998.
32
<PAGE> 33
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR ALLOWANCE FOR CREDIT LOSSES ON
LOAN LOSSES LENDING COMMITMENTS
- -------------------------------------------------------------------------------------------------------------------------------
June 30, March 31, December 31, June 30, March 31, December 31,
In millions: 1999 1999 1998 1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Specific counterparty $ 14 $ 12 $ 34 $ 20 $ 5 $ 3
Specific country 32 49 93 3 3 30
Expected loss(b) 289 386 343 137 117 92
- -------------------------------------------------------------------------------------------------------------------------------
Total 335 447 470 160 125 125
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) The general component of our allowances for credit losses is used to
estimate the impact of separately identified limitations in our expected loss
model. Since all factors used to derive the general component relates to the
expected loss component, the general component is now included as part of the
expected loss component for disclosure purposes. Prior period amounts have been
reclassified.
During the second quarter, the firm recorded a net $70 million reversal of the
allowances for credit losses. Overall, the net negative provision was taken in
light of better credit market conditions, especially in emerging markets, and
reduced credit risk exposures. The net provision included a negative provision
(revenue) for loan losses of $105 million and a provision for credit losses on
lending commitments of $35 million. The allowance for loan losses was $335
million at June 30, 1999, compared with $447 million at March 31, 1999. The
allowance for credit losses on lending commitments was $160 million at June 30,
1999, compared to $125 million at March 31, 1999, respectively.
The specific counterparty component of the allowance for loan losses, which
represents the SFAS No. 114 impairment reserve, was $14 million and $12 million
at June 30, 1999 and March 31, 1999, respectively. The increase in the specific
counterparty component from the prior quarter primarily reflects the addition of
two counterparty allocations, partially offset by charge-offs of $8 million
during the quarter. The specific counterparty component of the allowance for
credit losses on lending commitments was $20 million at June 30, 1999, compared
with $5 million at March 31, 1999. The increase reflects the addition of one
North American counterparty.
The specific country component focuses on countries experiencing financial
stress. The loss estimates for each country were determined by management by
applying a percentage loss estimate on a "tiering of risk basis" (e.g. different
loss estimates based on whether exposures are sovereigns versus corporates or
cross-border versus local). To determine these estimates, management utilized
historical loss experience and secondary market data, where applicable. The
specific country component of the allowance for loan losses decreased to $32
million at June 30, 1999 from $49 million at March 31, 1999. Countries included
in the specific country component of the allowance for loan losses at June 30,
1999 were Brazil and Indonesia- consistent with March 31, 1999. The decrease in
the specific country component of the allowance for loan losses reflects
improvement in Brazil's credit market conditions. The specific country
allocation of the allowance for credit losses on lending commitments remained
unchanged at $3 million as of June 30, 1999 and reflects an allocation for
Indonesia.
The expected loss component, which includes the general component, is an
estimate, based on statistical modeling, of the probable loss inherent in our
existing performing portfolio of traditional credit products, net of recoveries.
The general component of our allowances for credit losses is used to estimate
the impact of separately identified limitations in our expected loss model.
Since all factors used to derive the general component relate to the expected
loss component, the general component is now included as part of the expected
loss component for disclosure purposes. Prior period amounts have been
reclassified to conform with this presentation. In determining the appropriate
level of the general component, loss estimates related to our emerging market
exposures, excluding Brazil and Indonesia which are covered by the specific
country component, were adjusted to reflect the credit pricing inherent in bond
spreads in emerging markets, as well as regional estimates of recovery. This
adjustment was made to compensate for the fact that our expected loss model
utilizes default and recovery statistics that are based on U.S. corporate
experience, which do not match the risks associated with exposures in emerging
markets. In addition, the general component is needed to adjust the results
produced by our expected loss model to reflect facility draw-down percentages
upon default that we believe are more reflective of historical and industry
experience. The expected loss component of the allowance for loan losses
decreased to $289 million at June 30, 1999 from $386 million at March 31, 1999.
The decrease reflects improved credit market conditions, especially in emerging
markets, and reduced credit risk exposures. It also includes an adjustment to
our methodology which assigns more of the loss estimates associated with client
facilities to the allowance for credit losses on lending commitments. The
expected loss component of the allowance for credit losses on lending
commitments was $137 million at June 30, 1999, compared with $117 million at
March 31, 1999. The increase reflects the same dynamics as the allowance for
loan losses,
33
<PAGE> 34
however, these dynamics were more than offset by the previously discussed
adjustment to our methodology. As noted previously, we continue to refine our
model for determining the appropriate level of our allowances.
EXPOSURES TO EMERGING COUNTRIES
The following tables present exposures to certain emerging markets based on
management's view of total exposure as of June 30, 1999.
The management view takes into account the following cross-border and local
exposures: the notional or contract value of loans, commitments to extend
credit, securities purchased under agreements to resell, interest-earning
deposits with banks; the fair values of trading account assets (cash securities
and derivatives, excluding any collateral we hold to offset these exposures) and
investment securities; and other monetary assets. It also considers the impact
of credit derivatives, at their notional or contract value, where we have bought
or sold credit protection outside of the respective country. Trading assets
reflect the net of long and short positions of the same issuer. Management's
view differs from bank regulatory rules, which are established by the Federal
Financial Institutions Examination Council (FFIEC), because of its treatment of
credit derivatives, trading account short positions, and the use of fair values
versus cost of investment securities. In addition, management does not net local
funding or liabilities against local exposures as allowed by the FFIEC.
<TABLE>
<CAPTION>
By type of financial instrument
- ------------------------------------------------------------------------------------------------------------------------------------
Credit Total
In billions Deriva- Other out- deriva- Commit- cross- Local Total
June 30, 1999 Loans tives standings tives ments Border exposure exposure
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
China $ - $0.1 $ - ($0.1) $ - $ - $ - $ -
Hong Kong 0.5 0.1 0.2 (0.1) 0.1 0.8 0.3 1.1
Indonesia 0.1 - - - 0.1 0.2 - 0.2
Malaysia - - 0.1 - - 0.1 - 0.1
Philippines - - 0.1 - - 0.1 - 0.1
Singapore - 0.1 0.2 (0.2) - 0.1 0.1 0.2
South Korea 0.5 1.2 0.5 (0.5) - 1.7 0.5 2.2
Taiwan - - - - 0.1 0.1 - 0.1
Thailand - 0.1 0.1 - - 0.2 - 0.2
Other - - 0.1 - - 0.1 0.1 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Asia, excluding Japan(a) 1.1 1.6 1.3 (0.9) 0.3 3.4 1.0 4.4
- ------------------------------------------------------------------------------------------------------------------------------------
Argentina 0.1 0.3 0.6 (0.5) - 0.5 0.4 0.9
Brazil 0.3 - 0.3 (0.3) - 0.3 1.5 1.8
Chile 0.5 - - (0.1) - 0.4 - 0.4
Colombia 0.2 - 0.3 - - 0.5 - 0.5
Mexico 0.4 0.3 0.4 (0.4) - 0.7 0.7 1.4
Other 0.4 0.1 0.2 (0.1) 0.1 0.7 - 0.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total Latin America, excluding the 1.9 0.7 1.8 (1.4) 0.1 3.1 2.6 5.7
Caribbean
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
By type of counterparty
- ---------------------------------------------------------------------------------------
In billions Govern-
June 30, 1999 Banks ments Other Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
China $ - $ - $ - $ -
Hong Kong 0.1 0.2 0.8 1.1
Indonesia - - 0.2 0.2
Malaysia 0.1 - - 0.1
Philippines 0.1 - - 0.1
Singapore 0.1 - 0.1 0.2
South Korea 0.8 1.1 0.3 2.2
Taiwan 0.1 - - 0.1
Thailand 0.2 - - 0.2
Other - 0.2 - 0.2
- ---------------------------------------------------------------------------------------
Total Asia, excluding Japan(a) 1.5 1.5 1.4 4.4
- ---------------------------------------------------------------------------------------
Argentina - 0.4 0.5 0.9
Brazil 0.6 0.7 0.5 1.8
Chile - - 0.4 0.4
Colombia - 0.1 0.4 0.5
Mexico 0.1 0.4 0.9 1.4
Other 0.1 0.1 0.5 0.7
- ---------------------------------------------------------------------------------------
Total Latin America, excluding the 0.8 1.7 3.2 5.7
Caribbean
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Total exposures to Japan, based upon management's view, were $4.5 billion
and $4.4 billion at June 30, 1999 and March 31, 1999, respectively.
Total exposures to South Africa, based upon management's view, were $1.9 billion
and $1.8 billion at June 30,1999 and March 31, 1999, respectively.
34
<PAGE> 35
CAPITAL
STOCKHOLDERS' EQUITY
Total stockholders' equity was $11.8 billion at June 30, 1999. Stockholders'
equity included approximately $52 million of net unrealized depreciation on debt
investment securities and marketable equity investment securities, net the
related deferred tax benefit of $49 million. This compares with $10 million of
net unrealized appreciation at March 31, 1999, net of the related tax liability
of $3 million. The net unrealized depreciation on debt investment securities was
$169 million at June 30, 1999, compared with a net unrealized depreciation of
$26 million at March 31, 1999. The decline in debt investment securities
primarily related to decreases in the value of U.S. government and agency
securities reflecting the negative effect of a rise in Treasury yields. The net
unrealized appreciation on marketable equity investment securities was $68
million at June 30, 1999, and $39 million at March 31, 1999. Included in the
table below are selected ratios based upon stockholders' equity.
<TABLE>
<CAPTION>
June 30, March 31, December 31, June 30,
Dollars in billions, except share data 1999 1999 1998 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total stockholders' equity $ 11.8 $ 11.6 $ 11.3 $ 11.7
Annualized rate of return on average common
stockholders'equity (a)(b) 18.0% 22.3% 3.1% 17.3%
As percent of period-end total assets:
Common equity 4.1% 4.1% 4.0% 3.9%
Total equity 4.4% 4.3% 4.3% 4.2%
Book value per common share (c) $ 57.60 $ 56.66 $ 55.01 $ 57.26
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the annualized rate of return on average common stockholders'
equity for the three months ended June 30, 1999, March 31, 1999, December 31,
1998, and June 30, 1998. Excluding the impact of SFAS No. 115, the annualized
rate of return on average common stockholders' equity would have been 18.1%,
22.5%, 3.1%, and 18.0% for the three months ended June 30, 1999, March 31,
1999, December 31, 1998, and June 30, 1998, respectively.
(b) Excluding the 1998 second quarter after tax gain of $79 million ($131
million before tax) related to the sale of the firm's global trust and agency
services business, the annualized rate of return on average common stockholders'
equity was 14.4% (including the impact of SFAS No. 115) and 15.0 % (excluding
the impact of SFAS No. 115) for the three months ended June 30, 1998.
(c) Excluding the impact of SFAS No. 115, the book value per common share would
have been $57.87, $56.56, $54.24, and $55.31 at June 30, 1999, March 31, 1999,
December 31, 1998, and June 30, 1998, respectively.
The firm purchased approximately $337 million of its common stock or 2.5 million
shares in the second quarter, for a total of $447 million or 3.4 million shares
in the year to date. These purchases were part of the December 1998
authorization to repurchase $750 million of common stock subject to market
conditions and other factors. These purchases may be made periodically in 1999
or beyond in the open market or through privately negotiated transactions.
REGULATORY CAPITAL REQUIREMENTS
At June 30, 1999, the capital of J.P. Morgan and Morgan Guaranty Trust Company
of New York (Morgan Guaranty) remained well above the minimum standards set by
regulators. Further, the capital ratios of J.P. Morgan and Morgan Guaranty
exceeded the minimum standards for a well capitalized bank holding company and
bank, respectively, at June 30, 1999.
At June 30, 1999, under the Federal Reserve Board market risk capital guidelines
for calculation of risk-based capital ratios, J.P. Morgan's tier 1 and total
risk-based capital ratios were 8.4% and 12.5%, respectively; the leverage ratio
was 4.5%. At March 31, 1999, J.P. Morgan's tier 1 and total risk-based capital
ratios were 8.2% and 12.3%, respectively, and the leverage ratio was 4.4%. At
December 31, 1998, J.P. Morgan's tier 1 and total risk-based capital ratios were
8.0% and 11.7%, respectively, and the leverage ratio was 3.9%. Refer to note 18,
"Capital Requirements," for further information.
Risk-adjusted assets represent the total of all on- and off-balance-sheet
exposures adjusted for risk-based factors as prescribed by the Federal Reserve
Board. J.P. Morgan's risk-adjusted assets as of June 30, 1999 were $142.5
billion, compared with $143.1 billion at March 31, 1999. At December 31, 1998,
risk adjusted assets were $140.2 billion.
35
<PAGE> 36
FORWARD-LOOKING STATEMENTS
Certain sections of our Form 10-Q contain forward-looking statements. We use
words such as "expects," "believe," "anticipate," and "estimate" to identify
these statements. In particular, disclosures made in Financial Highlights,
Financial Review and The year 2000 initiative contain forward-looking
statements. Such statements are based on our current expectations and are
subject to various risks and uncertainties as discussed in the Business
environment and other information and Risk management sections of our 1998
Annual report. Actual results could differ materially from those currently
anticipated due to a number of variables in addition to those discussed
elsewhere in this document and in the firm's other public filings, press
releases and discussions with management, including:
- - economic and market conditions (including the liquidity of secondary
markets)
- - volatility of market prices, rates, and indices
- - timing and volume of market activity
- - availability of capital
- - inflation
- - political events (including legislative, regulatory, and other
developments)
- - competitive forces (including the ability to attract and retain highly
skilled individuals)
- - the ability to develop and support technology and information systems
- - investor sentiment.
As a result of these variables, revenues and net income in any particular period
may:
- - not be indicative of full-year results
- - vary from year to year
- - impact the firm's ability to achieve its strategic objectives
J.P. Morgan claims the protection afforded by the safe harbor for forward-
looking statements contained in the Private Securities Litigation Reform
Act of 1995.
36
<PAGE> 37
RISK MANAGEMENT
Risk is inherent in our business, and sound risk management is key to our
success. We have developed and implemented comprehensive policies and procedures
to identify, mitigate, and monitor risk across the firm. These practices rely on
constant communication, judgment, and knowledge of products and markets by the
professionals closest to them, combined with regular oversight by a central risk
management group and senior management.
The major types of risk to which we are exposed are:
- - Market risk: the possibility of loss due to changes in market prices and
rates, the correlations among them, and their levels of volatility
- - Credit risk: the possibility of loss due to changes in the quality of
counterparties, the correlations among them, and the market prices for
credit risk assets. We are subject to credit risk in our lending
activities, sales and trading activities, and derivative activities and
when we act as an intermediary on behalf of clients and other third
parties.
- - Liquidity risk: the risk of being unable to fund our portfolio of assets at
reasonable rates and to appropriate maturities
- - Operating risk: the potential for loss arising from breakdowns in policies
and controls for ensuring the proper functioning of people, contracts,
systems, and facilities
Our risk management processes are built on a foundation of early identification
and measurement. They are regularly reviewed and modified as our business
changes in response to market, credit, product, and other developments. We
constantly seek to strengthen our risk management process. Further, we mitigate
our exposure to losses from unexpected events by diversifying our activities
across instruments, markets, clients and geographic regions. Please refer to our
1998 Annual report for a detailed discussion of how we manage risk.
MARKET RISK
Market risk arises from trading and investing in both our client-focused and
proprietary activities. Our ability to estimate potential losses that could
arise from adverse changes in market conditions is a key element of managing
market risk. While quantitative measures are integral to our process, judgment
and experience are crucial in assessing whether our level of market risk is
acceptable. In particular when markets experience extreme conditions, we
continue to use our tools to quantify our risks but rely on management's
judgment to interpret and gauge the impact that extreme changes in volatility
and market correlations can have on positions that, in normal markets, are
estimated to be low-risk.
Our primary tool for the systematic measuring and monitoring of market risk is
the Daily Earnings at Risk (DEaR) calculation. DEaR is an estimate, at a 95%
confidence level, of the worst expected loss in the value of our portfolios over
a one-day time horizon. The DEaR measure makes assumptions about market behavior
and takes into account numerous variables that may cause a change in the value
of our portfolios, including interest rates, foreign exchange rates, equity and
commodity prices and their volatilities, and correlations among these variables.
Effective June 30, 1999, we enhanced our measurement of DEaR to incorporate
credit risk related to counterparty exposure in our trading derivatives
portfolio. We began to measure the credit risk embedded in derivative trading
exposures based on market prices for credit risk. Previously, these exposures
were measured using a combination of historical default experience derived from
public credit ratings and other fair value adjustments. We continue to refine
our risk measurement and reporting methodology. Prior period amounts have not
been restated due to data limitations. As a result, DEaR for the twelve months
ended June 30, 1999 has been presented in accordance with our previous risk
measurement methodology. The level of market risk, which is measured on a
diversified basis, will vary with market factors, the level of client
activity, and price and market movements.
Quarterly trading and proprietary investing DEaR
Firm-wide market and credit risk DEaR for our trading activities approximated
$45 million at June 30, 1999. This reflects, before diversification benefits,
market risk DEaR of $27 million at June 30, 1999 ($34 million at March 31, 1999)
as well as derivative credit risk DEaR of approximately $35 million at June 30,
1999.
DEaR for our proprietary investing activities, which consists largely of U.S.
government agency securities, was $30 million at June 30, 1999, versus $24
million at March 31, 1999.
37
<PAGE> 38
Twelve-month market risk profile
DEaR for trading activities
Average DEaR for our trading activities, excluding credit risk related to
derivative counterparty exposure as previously discussed, was $36 million and
ranged from $19 million to $55 million for the twelve months ended June 30,
1999. For the twelve months ended December 31, 1998, average DEaR for trading
activities was $38 million and ranged from $27 million to $55 million. We
evaluate the reasonableness of DEaR for our trading activities by comparing
actual daily revenue to estimates predicted by our models. During the twelve
months ended June 30, 1999, daily revenue fell short of the downside DEaR band
(average daily revenue less the DEaR estimate) by more than the expected
frequency or greater than 5% of the time. This primarily resulted from a
combination of extreme market conditions experienced in the latter half of 1998
and higher average trading revenue in 1999.
Our primary market risk exposures in our trading activities:
The twelve month average and period-end DEaR for June 30, 1999 and December 31,
1998, segregated by type of market risk exposure associated with our trading
activities, is presented in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Twelve months ended Period-end
(Average)
--------------------------------------- ------------------------------------
June 30, December 31, June 30, December 31,
In millions 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk $29 $30 $24 $31
Foreign exchange rate risk 14 18 6 11
Equity price risk 10 12 2 12
Commodity price risk 3 3 1 3
Diversification effects (20) (25) (6) (22)
- ----------------------------------------------------------------------------------------------------------------------
Total 36 38 27 35
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest rate risk
Interest rate risk is the possibility that changes in interest rates will affect
the value of financial instruments. Our primary risk exposures to interest rates
from trading activities are in sovereign and corporate bond markets across North
America, Europe, Asia and Latin America; mortgage-backed security markets in the
U.S.; and interest rate derivatives. They also include spread, volatility, and
basis risk. We use instruments such as interest rate swaps, options, U.S.
government securities, and futures and forward contracts to manage our exposure
to interest rate risk.
Foreign exchange rate risk
Foreign exchange rate risk represents the possibility that fluctuations in
foreign exchange rates will impact the value of our financial instruments. Our
primary risk exposures to foreign exchange rates arise from transactions in all
major countries and most minor countries throughout Europe, Latin America, and
Asia. We manage the risk arising from foreign currency transactions primarily
through currency swaps; options; and spot, futures and forward contracts.
Equity price risk
Equity price risk is the possibility that equity security prices will fluctuate,
affecting the value of equity securities and other instruments that derive their
value from a particular stock, a defined basket of stocks, or a stock index. Our
primary risk exposure to equity price risk arises from our activities in our
equity derivatives portfolio. We manage the risk of loss through the use of
equity cash, future, swap, and option instruments.
Given the nature of our business, we expect frequent changes to our primary risk
exposures over the course of a year. Our integrated approach to managing market
risk considers this expectation and facilitates a dynamic and proactive
adjustment of the risk profile across all our trading activities as needed.
DEaR for proprietary investing activities
Average DEaR for our proprietary investing activities for the twelve months
ended June 30, 1999 was $40 million, and ranged from $8 million to $109 million.
This compares with average DEaR of $33 million and a range from $8 million to
$109 million for the twelve months ended December 31, 1998.
38
<PAGE> 39
The primary sources of market risk associated with our proprietary investing
activities are spread risk in our mortgage-backed securities portfolio and
interest rate risk associated with fixed income securities. Spread risk is the
possibility that changes in credit spreads will affect the value of our
financial instruments.
In estimating risk for our investing activities, we have measured the risk in
this portfolio using the same one-day horizon and 95% confidence interval used
for trading, in order to facilitate aggregation with our trading risk
activities. This approach to risk estimation does not, however, fit well with
the longer horizon or with other risk features of these nontrading activities.
For this reason, we also track risk in our investing portfolio using a one-week
value-at-risk measure to evaluate our risk estimates relative to total return.
For the twelve months ended June 30, 1999, weekly total return fell short of
expected weekly results by amounts greater than related weekly risk estimates on
more times than the expected frequency. This resulted primarily from the extreme
market conditions experienced in the latter half of 1998.
Aggregate DEaR
Aggregate DEaR, excluding derivative credit risk DEaR, averaged $59 million for
the twelve months ended June 30, 1999 and ranged from $26 million to $120
million. For the twelve months ended December 31, 1998, average aggregate DEaR
was $55 million and ranged from $33 million to $120 million.
Operating Risk
The year 2000 initiative
With the new millennium approaching, organizations are examining their computer
systems to ensure that they are year 2000 compliant. The issue, in simple terms,
is that many existing computer systems fail to properly identify dates after
December 31, 1999. Systems that calculate, compare, or sort using the incorrect
date will cause erroneous results, ranging from system malfunctions to incorrect
or incomplete transaction processing. If systems are not updated, potential
risks include business interruption or shutdown, financial loss, reputation
loss, regulatory actions, and/or legal liability. J.P. Morgan uses computers in
all aspects of its business including processing of transactions from inception
through to settlement.
We have undertaken a firmwide initiative to address the year 2000 issue and
developed a comprehensive plan to mitigate the internal and external risks. The
internal components of the initiative address software applications, technology
products and facilities; the external components address credit and operating
risk and fiduciary responsibilities. Each business line is responsible for
remediating within its operating area, addressing all interdependencies within
the firm, and identifying and managing risk posed by external entities,
including clients, counterparties, vendors, exchanges, depositories, utilities,
suppliers, agents, and regulatory agencies. A multidisciplinary team of internal
and external experts supports the business teams by providing direction and
firmwide coordination.
We divided our remediation plan into five phases:
- - Awareness: To begin, we launched a firmwide awareness campaign, developed
and implemented an organizational model, set up a management oversight
committee, and established a risk model. Status: complete.
- - Inventory/assessment: We conducted a firmwide inventory of information
technology (IT) and non-IT (e.g., telecommunications, power, facilities
applications, and products), documented business processes, and identified
external interfaces and dependencies. In this phase we assessed the
potential impact on these inventories, prioritized renovation activities,
developed renovation plans, and determined the compliance status of
third-party products and services. Status: complete.
- - Renovation/replacement: We set about to identify "replace vs. renovate"
opportunities, renovate applications and products, and document code and
system changes. Status: complete.
- - Testing: We established a consistent testing methodology, conducted unit and
system tests, and received certification sign-off from senior business
managers. Status: 99.9% complete (100% complete for high and medium
criticality applications). A small fraction of our non-critical landlord
owned facilities remain untested. We expect to complete testing during the
third quarter.
- - Implementation: This final phase entails implementing critical updated
applications and products and conducting final compliance certification.
Status: 99.7% complete (100% complete for high and medium criticality
applications). A small percentage of network devices have not been
implemented due to an external vendor dependency. We expect implementation
to be completed during the third quarter.
39
<PAGE> 40
The awareness and inventory/assessment phases were completed in 1997. The
renovation/replacement and testing phases were substantially completed by
December 31, 1998 and are now fully complete; 100% of internal high and medium
criticality applications achieved certification, based on the firm's
certification process. Among building systems, 99.9% of firm-owned and rented
premises have been validated while 99.7% have been implemented. In addition,
approximately 95% of our low criticality applications, which by definition are
not crucial to our business processes, have also been completed. The remaining
low criticality items are scheduled for implementation by September 30, 1999. As
of June 30th, the technology portion of the program met with the Federal
Financial Institutions Examination Council (FFIEC) mandate. We have also
successfully participated in several industry tests including (i) the Securities
Industry Association-sponsored Equities Beta Test (July 1998), Market Data Beta
Test (February 1999) and Industry-wide Street Test (March-April 1999), (ii) the
Futures Industry Association-sponsored Futures and Options Beta Test (September
1998), (iii) the New York Clearing House's Global Payments Systems Test (June
1999), (iv) various non-US industry tests in such countries as the United
Kingdom, Germany, Japan, Singapore, Argentina, and (v) point to point testing
with major financial clearing entities.
Based on currently available information, management does not believe that the
year 2000 issue as it relates to our internal systems will have a material
adverse impact on the firm's financial condition. However, the failure of
external parties to resolve their own year 2000 issues could expose J.P. Morgan
to potential losses, impairment of business processes and activities, and
financial markets disruption. We are working with key external parties to stem
the potential risks the year 2000 problem poses to us and the global financial
community. On-going industry-wide street testing, which has been scheduled in
different countries, is an important component of this work.
As such, the focus of the program has further increased toward assessment and
mitigation of external risks. The overall goal of our Risk Mitigation Delivery
Model is to identify year 2000 risks and institute plans to mitigate these
risks. The following steps have been, or are being, taken:
- - Identify and address the year 2000 program risks which would prevent the
completion of work to achieve year 2000 compliance for all high
critical/high risk functions - Status: complete;
- - Deploy mitigation strategies prior to the millennium event in order to
reduce the probability of business disruption at the millennium change -
Status: ongoing;
- - Develop business recovery plans for high likelihood and impact risk areas
in the event of post-millennium failure - Status: complete;
- - Develop an overall command center (crisis management) framework for
successfully responding to potential business disruptions as they occur,
caused either by internal or external failures - Status: framework agreed,
initial documentation completed, detailed documentation (contact lists,
staffing schedules, transition weekend head count, etc.) is currently under
development with finalization expected during the third quarter of 1999;
- - Establish risk committees within each line of business to monitor risk
sources and oversee the implementation of the above mitigation - Status:
complete.
To date, we have completed an initial assessment of readiness of the key clients
who, in aggregate, represent the majority of our credit exposure. A process is
in place to monitor readiness on an ongoing basis and take credit action where
appropriate. We have also assessed the readiness of important non-client
counterparties and individual countries, in the latter case in conjunction with
the Global 2000 Coordinating Group, an industry group formed to facilitate the
readiness of the global financial community for the year 2000 date change. These
assessments are updated on an ongoing basis, in particular with respect to
counterparties and countries who fall into the "high risk, high impact"
category. We have developed scenario and contingency plans that identify and
track the impact and likelihood of key events that could impact our ability to
conduct business as usual. These plans identify trigger points to actions that
will mitigate risk on a timely basis, prior to the millennium. During the first
half of 1999, business recovery plans were developed to manage both internal and
external failures that may take place over and after the millennium changeover,
including February 29, 2000. Validation and "dress rehearsals" of the business
recovery plans will continue throughout the year.
Additionally, general uncertainty about the outcome of the millennium change may
cause market participants to temporarily reduce the level of their market
activities. Consequently, there may be a downturn in client and general market
activity for a period of time before and after January 1, 2000. If this occurs,
our net revenues may be adversely affected depending on the length of the
reduction in activity and how broadly it affects the markets.
40
<PAGE> 41
Costs to prepare the firm for year 2000 are estimated at $300 million, including
$256 million incurred through June 1999 ($225 million through December 31, 1998;
$31 million in the six months ended June 30, 1999). Costs incurred relating to
this project are funded through operating cash flow and expensed during the
period in which they are incurred. The firm's expectations about future costs
associated with the year 2000 are subject to uncertainties that could cause
actual spending to differ materially from that anticipated.
The above section on the year 2000 initiative contains forward-looking
statements including, without limitation, statements relating to the firm's
plans, expectations, intentions, and adequate resources, that are made pursuant
to the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Estimates are based on assumptions of future events, including the
availability of resources, third-party renovation plans and other factors. There
can be no guarantee, however, that our estimates will be achieved, or that there
will not be a delay in achieving our plans. Specific factors that could cause
actual results to differ materially from our estimates include, but are not
limited to, the availability and cost of resources, the ability to locate and
correct all relevant noncompliant systems, and timely responses to and
renovations by third-parties, and similar uncertainties. Refer to page 36 for
more information on forward-looking statements.
41
<PAGE> 42
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, Three months ended
Interest and average rates -----------------------------------------------------------------------------
on a taxable-equivalent basis June 30, 1999 June 30, 1998
--------------------------------------- -----------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 2,269 $ 79 13.97% $ 2,218 $ 65 11.75%
Debt investment securities in
offices in the U.S.(a):
U.S. Treasury 594 12 8.10 748 15 8.04
U.S. state and political subdivision 1,478 43 11.67 1,305 39 11.99
Other 24,394 334 5.49 19,661 259 5.28
Debt investment securities in offices
outside the U.S.(a) 3,046 35 4.61 1,471 30 8.18
Trading account assets:
In offices in the U.S. 31,760 502 6.34 28,834 428 5.95
In offices outside the U.S. 28,610 430 6.03 41,332 698 6.77
Securities purchased under agreements to resell:
In offices in the U.S. 18,177 214 4.72 13,051 181 5.56
In offices outside the U.S. 13,993 141 4.04 22,961 274 4.79
Securities borrowed,
mainly in offices in the U.S. 39,680 470 4.75 40,916 514 5.04
Loans:
In offices in the U.S. 6,633 110 6.65 6,869 115 6.72
In offices outside the U.S. 18,919 295 6.25 25,687 430 6.71
Other interest-earning assets(b):
In offices in the U.S. 1,785 23 * 2,425 41 *
In offices outside the U.S. 968 45 * 981 33 *
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 192,306 2,733 5.70 208,459 3,122 6.01
Cash and due from banks 947 1,402
Other noninterest-earning assets 72,892 72,003
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 266,145 281,864
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the three months ended June 1999 and 1998.
(a) For the three months ended June 30, 1999 and 1998, average debt investment
securities are computed based on historical amortized cost, excluding the
effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance sheet
transactions.
* Not meaningful
42
<PAGE> 43
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, Three months ended
Interest and average rates ----------------------------------------------------------------------------
on a taxable-equivalent basis June 30, 1999 June 30, 1998
-------------------------------------- -----------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. $ 7,654 $ 91 4.77% $ 7,251 $ 99 5.48%
In offices outside the U.S. 45,806 468 4.10 50,753 604 4.77
Trading account liabilities:
In offices in the U.S. 6,632 115 6.96 9,939 165 6.66
In offices outside the U.S. 14,588 179 4.92 15,804 212 5.38
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 63,196 725 4.60 70,305 937 5.35
Commercial paper, mainly in offices
in the U.S. 10,759 133 4.96 8,930 126 5.66
Other interest-bearing liabilities:
In offices in the U.S. 8,221 160 7.81 11,529 202 7.03
In offices outside the U.S. 4,079 46 4.52 4,869 80 6.59
Long-term debt,
mainly in offices in the U.S. 28,136 371 5.29 26,488 391 5.92
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 189,071 2,288 4.85 205,868 2,816 5.49
Noninterest-bearing deposits:
In offices in the U.S. 907 931
In offices outside the U.S. 426 915
Other noninterest-bearing
liabilities 64,042 62,504
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 254,446 270,218
Stockholders' equity 11,699 11,646
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 266,145 281,864
Net yield on interest-earning assets 0.93 0.59
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest earnings 445 306
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 44
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, Six months ended
Interest and average rates ---------------------------------------------------------------------------
On a taxable-equivalent basis June 30, 1999 June 30, 1998
---------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 2,601 $ 160 12.40% $ 2,131 $ 129 12.21%
Debt investment securities in
offices in the U.S.(a):
U.S. Treasury 606 25 8.32 778 30 7.78
U.S. state and political subdivision 1,565 90 11.60 1,260 74 11.84
Other 26,712 721 5.44 19,643 556 5.71
Debt investment securities in offices
outside the U.S.(a) 2,777 66 4.79 1,930 73 7.63
Trading account assets:
In offices in the U.S. 30,738 895 5.87 29,641 945 6.43
In offices outside the U.S. 28,630 899 6.33 39,928 1,366 6.90
Securities purchased under agreements
to resell and federal funds sold,
In offices in the U.S. 20,086 479 4.81 14,924 391 5.28
In offices outside the U.S. 13,619 302 4.47 23,071 569 4.97
Securities borrowed,
mainly in offices in the U.S. 38,321 918 4.83 40,562 1,010 5.02
Loans:
In offices in the U.S. 6,202 214 6.96 6,695 233 7.02
In offices outside the U.S. 20,325 622 6.17 25,853 860 6.71
Other interest-earning assets(b):
In offices in the U.S. 1,608 43 * 1,736 75 *
In offices outside the U.S. 971 77 * 935 88 *
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 194,761 5,511 5.71 209,087 6,399 6.17
Cash and due from banks 1,548 1,288
Other noninterest-earning assets 71,833 70,392
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 268,142 280,767
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the six months ended June 1999 and 1998.
(a) For the six months ended June 30, 1999 and 1998, average debt investment
securities are computed based on historical amortized cost, excluding the
effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance sheet
transactions.
* Not meaningful
44
<PAGE> 45
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Six months ended
on a taxable-equivalent basis ----------------------------------------------------------------------------
June 30, 1999 June 30, 1998
----------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
-------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. $ 8,332 $ 201 4.86% $ 8,790 $ 239 5.48%
In offices outside the U.S. 46,706 974 4.21 50,997 1,254 4.96
Trading account liabilities:
In offices in the U.S. 6,641 228 6.92 10,363 394 7.67
In offices outside the U.S. 13,719 340 5.00 15,296 438 5.77
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 62,189 1,468 4.76 68,877 1,869 5.47
Commercial paper, mainly in offices
in the U.S. 10,213 254 5.02 8,927 250 5.65
Other interest-bearing liabilities:
In offices in the U.S. 9,562 345 7.28 13,950 421 6.09
In offices outside the U.S. 4,037 95 4.75 3,625 132 7.34
Long-term debt,
mainly in offices in the U.S. 28,341 751 5.34 25,042 745 6.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 189,740 4,656 4.95 205,867 5,742 5.62
Noninterest-bearing deposits:
In offices in the U.S. 894 963
In offices outside the U.S. 617 892
Other noninterest-bearing
liabilities 65,316 61,477
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 256,567 269,199
Stockholders' equity 11,575 11,568
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 268,142 280,767
Net yield on interest-earning assets 0.89 0.63
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest earnings 855 657
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 46
CROSS-BORDER AND LOCAL OUTSTANDINGS UNDER THE REGULATORY BASIS
For financial reporting purposes only, the following table presents our
cross-border and local outstandings under the regulatory basis established by
the Federal Financial Institutions Examination Council (FFIEC). Bank regulatory
rules differ from management's view in the treatment of credit derivatives,
trading account short positions, and the use of fair value versus cost of
investment securities. In addition, management does not net local funding or
liabilities against any local exposures as allowed by the FFIEC. Refer to page
34 for more information on exposures based on the management view.
In accordance with the regulatory rules, cross-border outstandings include,
regardless of currency:
- - all claims of our U.S. offices against foreign residents
- - all claims of our foreign offices against residents of other foreign
countries
Local outstandings include all claims of our foreign offices with residents of
the same foreign country, net of local funding.
All outstandings are based on the location of the ultimate counterparty; that
is, if collateral or a formal guarantee exists, the country presented is
determined by the location where the collateral is held and realizable, or the
location of the guarantor. Cross-border and local outstandings include the
following: interest-earning deposits with banks; investment securities; trading
account assets including derivatives; securities purchased under agreements to
resell; loans; accrued interest; investments in affiliates; and other monetary
assets. Commitments include all cross-border commitments to extend credit,
standby letters of credit, and guarantees, and securities lending
indemnifications.
The following table shows each country where cross-border and local outstandings
exceed 0.75% of total assets, as of June 30, 1999.
<TABLE>
<CAPTION>
Total out-
standings
Net local Total % of and
In millions Govern- out- out- Total Commit- commit-
June 30, 1999 Banks ments Other(a) standings standings assets ments ments
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Germany $13,960 $2,998 $1,539 $- $18,497 6.87% $991 $19,488
United Kingdom 7,473 45 3,385 - 10,903 4.05 1,511 12,414
Netherlands 5,956 1,099 2,793 - 9,848 3.66 316 10,164
Italy 3,783 4,330 907 - 9,020 3.35 56 9,076
France 4,160 1,852 2,449 - 8,461 3.14 804 9,265
Spain 3,317 1,614 1,686 153 6,770 2.51 629 7,399
Switzerland 2,341 441 762 - 3,544 1.32 572 4,116
Luxembourg 271 29 3,162 - 3,462 1.29 63 3,525
Cayman Islands 10 - 3,155 - 3,165 1.17 320 3,485
Japan (b) 1,182 278 1,629 - 3,089 1.15 1,215 4,304
Brazil (b) 183 969 405 630 2,187 0.81 20 2,207
Canada 771 707 629 - 2,107 0.78 1,633 3,740
Belgium 622 1,064 376 - 2,062 0.77 7,156 9,218
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes nonbank financial institutions and commercial and industrial
entities.
(b) See page 34 for exposures to these countries under the management view.
46
<PAGE> 47
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. Statement re computation of ratios (incorporated by reference
to exhibit 12 to J.P. Morgan's report on Form 8-K, dated July
19, 1999)
27. Financial data schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended June 30, 1999:
April 14, 1999 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing
its earnings for the three-month period ended March 31, 1999.
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J.P. MORGAN & CO. INCORPORATED
------------------------------
(Registrant)
/s/ DAVID H. SIDWELL
-------------------------------
NAME: DAVID H. SIDWELL
TITLE: MANAGING DIRECTOR AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
DATE: August 16, 1999
48
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CURRENT REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
DISCLOSURE.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,094
<INT-BEARING-DEPOSITS> 2,058
<FED-FUNDS-SOLD> 33,531<F1>
<TRADING-ASSETS> 114,465
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 29,088
<ALLOWANCE> 335
<TOTAL-ASSETS> 269,394
<DEPOSITS> 55,335
<SHORT-TERM> 88,642<F2>
<LIABILITIES-OTHER> 85,484<F3>
<LONG-TERM> 28,130
0
694
<COMMON> 502
<OTHER-SE> 10,607
<TOTAL-LIABILITIES-AND-EQUITY> 269,394
<INTEREST-LOAN> 834
<INTEREST-INVEST> 864
<INTEREST-OTHER> 3,772
<INTEREST-TOTAL> 5,470
<INTEREST-DEPOSIT> 1,175
<INTEREST-EXPENSE> 4,656
<INTEREST-INCOME-NET> 814
<LOAN-LOSSES> (70)<F4>
<SECURITIES-GAINS> (70)<F5>
<EXPENSE-OTHER> 2,984<F6>
<INCOME-PRETAX> 1,698
<INCOME-PRE-EXTRAORDINARY> 1,698
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,104
<EPS-BASIC> 5.94<F7>
<EPS-DILUTED> 5.53<F7>
<YIELD-ACTUAL> 0.89
<LOANS-NON> 67
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 595<F8>
<CHARGE-OFFS> (36)<F8>
<RECOVERIES> 6<F8>
<ALLOWANCE-CLOSE> 495<F8>
<ALLOWANCE-DOMESTIC> 23<F8>
<ALLOWANCE-FOREIGN> 11<F8>
<ALLOWANCE-UNALLOCATED> 461<F8>
<FN>
<F1>Includes securities purchased under agreements to resell and/or federal funds
sold.
<F2>Includes securities sold under agreements to repurchase and federal funds
purchased, commercial paper, and other liabilities for borrowed money.
<F3>Includes trading account liabilities, accounts payable and accrued expenses,
other liabilities, and company-obligated mandatorily redeemable preferred
securities of subsidiaries.
<F4>Includes a reversal of provision for loan losses of ($105) million, and a
provision for credit losses on lending commitments of $35 million, recorded in
Other revenue.
<F5>Includes gains and losses on debt and equity investment securities,
other-than-temporary impairments or write-downs in value and related dividend
income.
<F6>Includes employee compensation and benefits, net occupancy, technology and
communications, and other expenses.
<F7>Primary EPS represents basic EPS under Statement of Financial Accounting
Standards No. 128, Earnings per Share.
<F8>Amounts relate to the firm's allowance for loan losses and allowance for credit
losses on lending commitments, such as commitments, standby letters of credit,
and guarantees. The unallocated allowance includes the specific country and
expected loss components of our allowances for credit losses. The allocated
amounts represent our allowances to specific counterparties determined in
accordance with SFAS No. 114 and SFAS No. 5, for loans and off-balance-sheet
credit instruments, respectively.
</FN>
</TABLE>
