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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
Delaware 1-5885 13-2625764
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
60 Wall Street, New York, NY 10260-0060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 483-2323
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Number of shares outstanding of each of the registrant's classes of common stock
at April 30, 1999:
Common Stock, $2.50 Par Value 177,366,844 Shares
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PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following financial statement information as of and for the three months
ended March 31, 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
Consolidated balance sheet
J.P. Morgan & Co. Incorporated .................................... 4
Consolidated statement of changes in stockholders' equity
J.P. Morgan & Co. Incorporated .................................... 5
Consolidated statement of cash flows
J.P. Morgan & Co. Incorporated .................................... 6
Consolidated statement of condition
Morgan Guaranty Trust Company of New York ......................... 7
Notes to Consolidated financial statements
J.P. Morgan & Co. Incorporated .................................... 8-24
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial highlights .............................................. 25
Segment analysis .................................................. 26-27
Financial review .................................................. 28-34
Risk management ................................................... 35-39
Consolidated average balances and net interest earnings ........... 40-41
Cross-border and local outstandings under the regulatory basis .... 42
PART II -- OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 43
Item 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 44
SIGNATURES ............................................................. 45
</TABLE>
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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
--------------------------------------------------------------------------------------
March 31 March 31 Increase/ December 31 Increase/
1999 1998 (Decrease) 1998 (Decrease)
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<S> <C> <C> <C> <C> <C>
Net interest revenue
Interest revenue $2,757 $3,262 ($505) $3,024 ($267)
Interest expense 2,368 2,926 (558) 2,701 (333)
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Net interest revenue 389 336 53 323 66
Provision for loan losses -- -- -- 85 (85)
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Net interest revenue after provision
for loan losses 389 336 53 238 151
Noninterest revenues
Trading revenue 1,134 896 238 520 614
Investment banking revenue 390 346 44 381 9
Investment management revenue 246 211 35 220 26
Fees and commissions 214 190 24 179 35
Investment securities (loss)/revenue (41) 43 (84) (42) 1
Other revenue/(loss) 159 (25) 184 8 151
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Total noninterest revenues 2,102 1,661 441 1,266 836
Total revenues, net of interest expense
and provision for credit losses 2,491 1,997 494 1,504 987
Operating expenses
Employee compensation and benefits 1,096 1,003 93 801 295
Net occupancy 82 151 (69) 124 (42)
Technology and communications 247 301 (54) 305 (58)
Other expenses 142 177 (35) 161 (19)
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Total operating expenses 1,567 1,632 (65) 1,391 176
Income before income taxes 924 365 559 113 811
Income taxes 324 128 196 24 300
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Net income 600 237 363 89 511
Per common share
Net income
Basic $3.24 $1.26 $1.98 $0.44 $2.80
Diluted 3.01 1.15 1.86 0.42 2.59
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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<TABLE>
<CAPTION>
Consolidated balance sheet
J.P. Morgan & Co. Incorporated
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March 31 December 31
In millions, except share data 1999 1998
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<S> <C> <C>
Assets
Cash and due from banks $ 1,450 $ 1,203
Interest-earning deposits with banks 2,188 2,371
Debt investment securities available-for-sale carried at fair value 32,106 36,232
Equity investment securities 1,096 1,169
Trading account assets 119,853 113,896
Securities purchased under agreements to resell ($27,700 at March 1999
and $31,056 at December 1998) and federal funds sold 29,430 31,731
Securities borrowed 39,248 30,790
Loans, net of allowance for loan losses of $447 at March 1999 and $470 at December 1998 25,785 25,025
Accrued interest and accounts receivable 6,220 7,689
Premises and equipment, net of accumulated depreciation of $1,360 at March 1999 and
$1,350 at December 1998 1,903 1,881
Other assets 9,791 9,080
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Total assets 269,070 261,067
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Liabilities
Noninterest-bearing deposits:
In offices in the U.S. 841 1,242
In offices outside the U.S. 557 563
Interest-bearing deposits:
In offices in the U.S. 7,027 7,724
In offices outside the U.S. 48,379 45,499
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Total deposits 56,804 55,028
Trading account liabilities 76,527 70,643
Securities sold under agreements to repurchase ($61,736 at March 1999 and $62,784
at December 1998) and federal funds purchased 61,910 63,368
Commercial paper 9,533 6,637
Other liabilities for borrowed money 12,413 12,515
Accounts payable and accrued expenses 7,711 9,859
Long-term debt not qualifying as risk-based capital 22,916 23,037
Other liabilities, including allowance for credit losses of $125 3,074 2,999
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250,888 244,086
Liabilities qualifying as risk-based capital:
Long-term debt 5,402 4,570
Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 1,150
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Total liabilities 257,440 249,806
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 March 1999 and 200,873,067 at December 1998) 502 502
Capital surplus 1,249 1,252
Common stock issuable under stock award plans 1,439 1,460
Retained earnings 10,022 9,614
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 10 147
Foreign currency translation, net of taxes (47) (46)
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13,869 13,623
Less: treasury stock (24,237,929 shares at March 1999 and 25,866,786 shares
at December 1998) at cost 2,239 2,362
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Total stockholders' equity 11,630 11,261
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Total liabilities and stockholders' equity 269,070 261,067
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</TABLE>
See notes to consolidated financial statements.
4
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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: Three months ended March 31 Equity Income Equity Income
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<S> <C> <C> <C> <C>
Preferred stock
Adjustable-rate cumulative preferred stock balance, January 1 and
March 31 $ 244 $ 244
Variable cumulative preferred stock balance, January 1 and March 31 250 250
Fixed cumulative preferred stock, January 1 and March 31 200 200
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Total preferred stock, March 31 694 694
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Common stock
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Balance, January 1 and March 31 502 502
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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 (3) (9)
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Balance, March 31 1,249 1,351
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Common stock issuable under stock award plans
Balance, January 1 1,460 1,185
Deferred stock awards, net (21) 56
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Balance, March 31 1,439 1,241
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Retained earnings
Balance, January 1 9,614 9,398
Net income 600 $ 600 237 $ 237
Dividends declared on preferred stock (9) (9)
Dividends declared on common stock (175) (169)
Dividend equivalents on common stock issuable (8) (10)
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Balance, March 31 10,022 9,447
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Accumulated other comprehensive income
Net unrealized gains on investment securities:
Balance, net of taxes, January 1 147 432
-------- --------
Net unrealized holding (losses)/gains arising during the period,
before taxes (($149) in 1999 and $10 in 1998, net of taxes) (247) 33
Reclassification adjustment for net (losses)/gains included in net income,
before taxes (($15) in 1999 and $13 in 1998, net of taxes) 26 (35)
-------- --------
Change in net unrealized gains on investment securities, before taxes (221) (2)
Income tax benefit/(expense) 84 3
-------- --------
Change in net unrealized gains on investment securities, net of taxes (137) (137) 1 1
Balance, net of taxes, March 31 10 433
-------- --------
Foreign currency translation:
Balance, net of taxes, January 1 (46) (22)
-------- --------
Translation adjustment arising during the period, before taxes - (11)
Income tax benefit (1) 4
-------- --------
Translation adjustment arising during the period, net of taxes (1) (1) (7) (7)
-------- --------
Balance, net of taxes, March 31 (47) (29)
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Total accumulated other comprehensive income,
net of taxes, March 31 (37) 404
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Less: Treasury stock
Balance, January 1 2,362 2,145
Purchases 109 135
Shares issued/distributed, primarily related to various employee benefit plans (232) (238)
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Balance, March 31 2,239 2,042
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Total stockholders' equity 11,630 11,597
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Total comprehensive income 462 231
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</TABLE>
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
Consolidated statement of cash flows
J.P. Morgan & Co. Incorporated
- ---------------------------------------------------------------------------------------------------------------------------
In millions Three months ended
- ---------------------------------------------------------------------------------------------------------------------------
March 31 March 31
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 600 $ 237
Adjustments to reconcile to cash provided by (used in) operating activities:
Noncash items: depreciation, amortization, deferred income taxes, stock award
plans, and write-downs on investment securities 452 150
Net (increase) decrease in assets:
Trading account assets (6,045) (11,536)
Securities purchased under agreements to resell 3,340 7,805
Securities borrowed (8,458) 1,591
Loans held for sale 1,090 (57)
Accrued interest and accounts receivable 1,464 (1,611)
Net increase/(decrease) in liabilities:
Trading account liabilities 5,817 504
Securities sold under agreements to repurchase (1,063) 9,392
Accounts payable and accrued expenses (2,041) (2,022)
Other changes in operating assets and liabilities, net (1,191) (1,241)
Net investment securities losses/(gains) included in cash flows from investing activities 18 (47)
- ---------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by operating activities (6,017) 3,165
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Net decrease in interest-earning deposits with banks 181 626
Debt investment securities:
Proceeds from sales 13,202 3,273
Proceeds from maturities, calls, and mandatory redemptions 2,762 1,761
Purchases (12,175) (7,879)
Net (increase) in federal funds sold (1,055) --
Net decrease (increase) in loans (1,879) (2,163)
Payments for premises and equipment (97) (63)
Investment in American Century Companies, Inc. -- (965)
Other changes, net 204 (976)
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Cash provided by (used in) investing activities 1,143 (6,386)
- ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) in noninterest-bearing deposits (408) (201)
Net increase in interest-bearing deposits 2,131 1,694
Net (decrease) in federal funds purchased (410) (1,457)
Net increase in commercial paper 2,896 2,299
Other liabilities for borrowed money proceeds 2,377 4,859
Other liabilities for borrowed money payments (3,910) (5,963)
Long-term debt proceeds 3,119 4,520
Long-term debt payments (2,194) (2,271)
Capital stock issued or distributed 44 166
Capital stock purchased (109) (135)
Dividends paid (182) (177)
Other changes, net 1,782 (759)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 5,136 2,575
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks (15) 1
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and due from banks 247 (645)
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 March 31, 1999 and 1998 1,450 1,113
- ---------------------------------------------------------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 2,348 $ 3,212
Income taxes 190 173
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</TABLE>
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
Consolidated statement of condition
Morgan Guaranty Trust Company of New York
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March 31 December 31
In millions, except share data 1999 1998
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<S> <C> <C>
Assets
Cash and due from banks $ 1,415 $ 1,147
Interest-earning deposits with banks 2,170 2,372
Debt investment securities available-for-sale carried at fair value 6,581 3,634
Trading account assets 93,719 90,770
Securities purchased under agreements to resell and federal funds sold 30,392 33,316
Securities borrowed 8,187 8,193
Loans, net of allowance for loan losses of $446 at March 1999 and $470 at December 1998 25,646 24,876
Accrued interest and accounts receivable 5,170 3,898
Premises and equipment, net of accumulated depreciation of $1,164 at March 1999 and
$1,160 at December 1998 1,725 1,703
Other assets 8,791 5,337
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Total assets 183,796 175,246
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Liabilities
Noninterest-bearing deposits:
In offices in the U.S. 866 1,232
In offices outside the U.S. 559 572
Interest-bearing deposits:
In offices in the U.S. 7,051 7,749
In offices outside the U.S. 50,126 46,668
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Total deposits 58,602 56,221
Trading account liabilities 67,693 64,776
Securities sold under agreements to repurchase and federal funds purchased 19,200 14,916
Other liabilities for borrowed money 7,588 8,646
Accounts payable and accrued expenses 5,483 6,123
Long-term debt not qualifying as risk-based capital (includes $482 at March 1999 and
$736 at December 1998 of notes payable to J.P. Morgan) 10,301 10,358
Other liabilities, including allowance for credit losses of $125 1,040 542
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169,907 161,582
Long-term debt qualifying as risk-based capital (includes $3,053 at March 1999 and
$3,053 at December 1998 of notes payable to J.P. Morgan) 3,146 3,186
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Total liabilities 173,053 164,768
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 7,120 6,836
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 99 118
Foreign currency translation, net of taxes (46) (46)
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Total stockholder's equity 10,743 10,478
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Total liabilities and stockholder's equity 183,796 175,246
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</TABLE>
Member of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
See notes to consolidated financial statements.
7
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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:
o advisory
o underwriting
o financing
o market making
o asset management
o 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 March 31, 1999 and 1998 and for the three months ended March
31, 1999, March 31, 1998, and December 31, 1998 are 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 supplemented 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:
o A default has occurred or is expected to occur,
o The payment of principal and/or interest or other cash flows is greater
than 90 days past due and collateral, if any, is insufficient to cover
principal and interest, or
o 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, observable
market value, or the fair value of the collateral. If the determined SFAS No.
114 value is less than the recorded investment in the impaired loan, an
allowance is established or appropriated for the amount deemed uncollectible; if
the impairment is deemed permanent or highly certain, the exposure is charged
off against the allowance.
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. Interest received on impaired loans is
applied in the following order:
o against the recorded impaired loan until paid in full
o as a recovery up to any amounts charged off related to the impaired loan
o as revenue
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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 loans and an
allowance for off-balance-sheet credit financial instruments such as
commitments, 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
component; a statistical model estimate for expected losses on our remaining
performing portfolio; and a general component for probable losses that is
necessary to reflect the imprecise, subjective, and judgmental elements in
evaluating and modeling credit risk. In previous quarters, management utilized a
coverage ratio approach to determine the appropriate level of the general
component so that the combination of the expected loss and general components
would be at least 150% of the expected loss component. During the first quarter
of 1999, management refined its method and separately estimated the impact of
identified model limitations.
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 have begun an initiative to
review 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
Disclosures about segments of an enterprise and related information
Effective with the filing of our 1998 Annual report on Form 10-K for the year
ended December 31, 1998, we adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This standard establishes the criteria
for determining an operating segment and the required financial information to
be disclosed. SFAS No. 131 also establishes standards for disclosing related
information regarding products and services, geographic areas, and major
customers. This standard supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise. This standard is limited to issues of
reporting and presentation and does not address recognition or measurement. Its
adoption, therefore, did not affect our earnings, liquidity, or capital
resources. All periods presented have been restated to conform to the new
requirements. Refer to note 22, "Segments."
Accounting for derivative instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted starting
with our financial statements for the quarter ended March 31, 2000. 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.
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 January 1,
2000 positions in accordance with the standard.
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 $29 million
was capitalized in the first quarter. Previously, these costs would have been
expensed as incurred. Once the
9
<PAGE> 10
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 March 31, 1999, approximately $62 million of the fourth-quarter charge was
accrued in Other liabilities of which $40 million related to severance and the
remainder related to real estate. We expect to use the majority of this
remaining reserve by the end of 1999, excluding certain long-term commitments.
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 22, "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, in May 1999, a hub and spoke 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 may change
and, in that event, the contribution of this segment would be impacted over
time.
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.
10
<PAGE> 11
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.
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>
First quarter
-----------------------------
In millions 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Interest revenue
Deposits with banks $ 81 $ 70
Debt investment securities (a) 459 378
Trading account assets 861 1,184
Securities purchased under agreements
to resell and federal funds sold 426 505
Securities borrowed 448 496
Loans 430 546
Other sources 52 83
- -------------------------------------------------------------------------------------
Total interest revenue 2,757 3,262
- -------------------------------------------------------------------------------------
Interest expense
Deposits 616 790
Trading account liabilities 274 455
Securities sold under agreements to
repurchase and federal funds purchased 743 932
Other borrowed money 355 395
Long-term debt 380 354
- -------------------------------------------------------------------------------------
Total interest expense 2,368 2,926
- -------------------------------------------------------------------------------------
Net interest revenue 389 336
- -------------------------------------------------------------------------------------
</TABLE>
(a) Interest revenue from debt investment securities included taxable revenue of
$429 million and revenue exempt from U.S. income taxes of $30 million for the
three months ended March 31, 1999. Interest revenue from debt investment
securities included taxable revenue of $356 million and revenue exempt from U.S.
income taxes of $22 million for the three months March 31, 1998.
Net interest revenue associated with derivatives used for purposes
other-than-trading was approximately $26 million for the three months ended
March 31, 1999, compared with approximately $32 million for the three months
ended March 31, 1998. At March 31, 1999, approximately $209 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 March 31,
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 March 31, 1999 of $209 million, are
expected to amortize into Net interest revenue as follows: $36 million -
remainder of 1999; $48 million in 2000; $48 million in 2001; $46 million in
2002; $28 million in 2003; ($1) million in 2004; and approximately $4 million
thereafter.
11
<PAGE> 12
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 months ended March 31, 1999 and 1998. Prior
period amounts have been restated to reflect the product groupings as described
below.
<TABLE>
<CAPTION>
First quarter
--------------------
In millions 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Fixed income $ 561 $ 724
Equities 160 97
Foreign exchange 413 75
- --------------------------------------------------------------------------------
Total trading revenue 1,134 896
- --------------------------------------------------------------------------------
Trading-related net interest revenue 215 109
- --------------------------------------------------------------------------------
Combined total 1,349 1,005
- --------------------------------------------------------------------------------
</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 March 31, 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: March 31, 1999 Cost gains losses value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 4,064 $ 98 $ -- $ 4,162
U.S. government agency, principally mortgage-backed 25,450 48 255 25,243
U.S. state and political subdivision 1,506 131 6 1,631
U.S. corporate and bank debt 119 1 4 116
Foreign government (a) 406 -- 7 399
Foreign corporate and bank debt 470 5 37 438
Other 117 -- -- 117
- --------------------------------------------------------------------------------------------------------------------
Total debt investment securities 32,132 283 309 32,106
- --------------------------------------------------------------------------------------------------------------------
</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 gains/(losses) during
the three months ended March 31, 1999 and 1998. These amounts are recorded in
Investment securities revenue.
<TABLE>
<CAPTION>
First quarter
-------------------
In millions 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Gross realized gains from sales of securities $ 34 $ 47
Gross realized losses from sales of securities (60) (32)
- -----------------------------------------------------------------------------------
Net debt investment securities (losses)/gains (26) 15
- -----------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
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 March 31, 1999 are shown
in the following table.
<TABLE>
<CAPTION>
In millions: March 31, 1999
- -------------------------------------------------------------------------------------------------------
<S> <C>
Cost $ 450
- -------------------------------------------------------------------------------------------------------
Gross unrealized gains 129
Gross unrealized losses (90)
- -------------------------------------------------------------------------------------------------------
Net unrealized gains(a) 39
- -------------------------------------------------------------------------------------------------------
Fair and carrying value 489
- -------------------------------------------------------------------------------------------------------
</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: March 31, 1999
- -------------------------------------------------------------------------------------------------------
<S> <C>
Carrying value $ 607
Net unrealized gains on nonmarketable securities(a) 105
- -------------------------------------------------------------------------------------------------------
Fair value 712
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) Primarily relates to investments in the telecommunications, media, and
transportation 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 months ended March 31,
1999 and 1998. These amounts are recorded in Investment securities revenue.
<TABLE>
<CAPTION>
First quarter
----------------------
In millions 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross realized gains from marketable available-for-sale securities $ -- $ 25
Gross realized gains from nonmarketable and other equity securities 8 7
Write-downs for other-than-temporary impairments in value (38) (14)
- -------------------------------------------------------------------------------------------------------
Net equity investment securities realized (losses)/gains (30) 18
- -------------------------------------------------------------------------------------------------------
</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 March 31, 1999 and 1998 goodwill totaled $751 million and
$785 million, respectively. Amortization of goodwill was approximately $8
million for the three months ended March 31, 1999 and 1998, respectively. Our
share of equity income or loss in American Century and the amortization of
goodwill related to this investment is recorded in Other revenue.
13
<PAGE> 14
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 March 31, 1999. It also includes the average balance for the
three months ended March 31, 1999.
<TABLE>
<CAPTION>
Carrying Average
value balance
------------------------ -----------------------
March 31 First quarter
In millions: 1999 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Trading account assets
U.S. Treasury $ 9 509 $ 11 038
U.S. government agency 12 328 11 455
Foreign government 20 396 20 418
Corporate debt and equity 18 962 20 034
Other securities 7 114 5 770
Interest rate and currency swaps 20 255 16 689
Credit derivatives 2 478 2 714
Foreign exchange contracts 3 043 3 962
Interest rate futures and forwards 55 90
Commodity and equity contracts 3 618 3 012
Purchased option contracts 22 095 18 123
- ----------------------------------------------------------------------------------------------------
Total trading account assets 119 853 113 305
- ----------------------------------------------------------------------------------------------------
Trading account liabilities
U.S. Treasury 5 108 6 588
Foreign government 13 669 11 211
Corporate debt and equity 11 239 8 344
Other securities 3 260 3 356
Interest rate and currency swaps 16 834 16 763
Credit derivatives 1 856 1 536
Foreign exchange contracts 2 755 5 137
Interest rate futures and forwards 977 1 247
Commodity and equity contracts 2 626 2 578
Written option contracts 18 203 16 483
- ----------------------------------------------------------------------------------------------------
Total trading account liabilities 76 527 73 243
- ----------------------------------------------------------------------------------------------------
</TABLE>
Included in trading account assets are gross derivative receivables of $534
million at March 31, 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 $30.9 billion were netted
against amounts payable for securities purchased of $30.2 billion. This produced
a net trade date receivable of $0.7 billion, recorded in accrued interest and
accounts receivable, at March 31, 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:
o interest rate and currency swap contracts
o credit derivatives
o interest rate futures, forward rate agreements, and interest rate option
contracts
o foreign exchange spot, forward, futures, and option contracts
o equity swap, futures and option contracts
o commodity swap, forward and option contracts
14
<PAGE> 15
In our investing activities we use derivative instruments including:
o interest rate and currency swap contracts
o credit derivatives
o foreign exchange forward contracts
o interest rate futures and debt securities forward contracts
o 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 default of one or more referenced credits. The
protection buyer pays a periodic fee in return for a contingent payment by the
protection seller in case of default. The contingent payment is typically the
loss incurred by the creditor of the reference credit in the event of default -
that is, the difference between the notional and the recovery amount.
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.
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 $94.5 billion of master netting agreements in
effect at March 31, 1999.
15
<PAGE> 16
<TABLE>
<CAPTION>
In billions: March 31, 1999 Notional amounts Credit exposure
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate and currency swaps
Trading $3,575.1
Other-than-trading(a)(b) 68.5
- ------------------------------------------------------------------------------------------------------------------------
Total interest rate and currency swaps 3,643.6 $20.2
- ---------------------------------------------------------------------------------------------------------------------
Credit derivatives
Trading 87.8
Other-than-trading (a) 21.7
- ---------------------------------------------------------------------------------------------------------------------
Total credit derivatives 109.5 2.5
- ---------------------------------------------------------------------------------------------------------------------
Foreign exchange spot, forward, and futures contracts
Trading 498.7
Other-than-trading(a)(b) 20.4
- ---------------------------------------------------------------------------------------------------------------------
Total foreign exchange spot, forward, and futures contracts 519.1 3.0
- ---------------------------------------------------------------------------------------------------------------------
Interest rate futures, forward rate agreements, and debt securities forwards
Trading 1,239.0
Other-than-trading 14.1
- ---------------------------------------------------------------------------------------------------------------------
Total interest rate futures, forward rate agreements,
and debt securities forwards 1,253.1 --
- ---------------------------------------------------------------------------------------------------------------------
Commodity and equity swaps, forward, and futures contracts, all trading 74.0 3.6
- ---------------------------------------------------------------------------------------------------------------------
Purchased options(c)
Trading 1,339.3
Other-than-trading(a) 8.0
- ---------------------------------------------------------------------------------------------------------------------
Total purchased options 1,347.3 22.1
- ---------------------------------------------------------------------------------------------------------------------
Written options, all trading(d) 1,539.3
- ---------------------------------------------------------------------------------------------------------------------
Total on-balance-sheet credit exposure 51.4
- ---------------------------------------------------------------------------------------------------------------------
</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 $26.2 billion at March 31, 1999, and were primarily
denominated in the following currencies: Euro $7.2 billion, Canadian dollar $2.2
billion, Swiss franc $1.9 billion, Danish krone $1.4 billion, Japanese yen $1.3
billion and British pound $1.3 billion.
(c) At March 31, 1999, purchased options used for trading purposes included
$1,013.2 billion of interest rate options, $209.5 billion of foreign exchange
options, and $116.6 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 $233.6 billion and those negotiated
over-the-counter amounted to $1,113.7 billion at March 31, 1999.
(d) At March 31, 1999, written options included $1,216.2 billion of interest
rate options, $209.0 billion of foreign exchange options, and $114.1 billion of
commodity and equity options. Written option contracts executed on an exchange
amounted to $325.2 billion and those negotiated over-the-counter amounted to
$1,214.1 billion at March 31, 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 March 31, 1999. Gross unrealized gains and gross
unrealized losses associated with open derivative contracts at March 31, 1999,
are as follows:
<TABLE>
<CAPTION>
Gross Gross Net
unrealized unrealized unrealized
In millions: March 31, 1999 gains (losses) gains (losses)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt $ 250 $ (35) $ 215
Debt investment securities 46 (37) 9
Deposits 289 (5) 284
Other financial instruments 102 (100) 2
- ---------------------------------------------------------------------------------------------------------
Total 687 (177) 510
- ---------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
11. Loans
Included in Loans are loans held for sale of approximately $1.7 billion and $2.8
billion as of March 31, 1999 and December 31, 1998, respectively. 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. The decrease from
December 31, 1998 is primarily the result of the securitization of approximately
$1.7 billion of loans, partially offset by purchases of new loans during the
quarter.
12. Other credit-related products
Credit-related financial instruments include commitments to extend credit,
standby letters of credit and 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 credit-related
financial instruments at March 31, 1999.
<TABLE>
<CAPTION>
In billions: March 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
Commitments to extend credit $86.2
Standby letters of credit and guarantees 12.8
Securities lending indemnifications (a) 7.6
- -------------------------------------------------------------------------------
</TABLE>
(a) At March 31, 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 $40 million for
each of the three months ended March 31, 1999 and 1998. 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 $15 million and
$9 million for the three months ended March 31, 1999 and 1998, respectively.
13. Impaired loans
Total impaired loans, organized by the location of the counterparty - net of
charge-offs - at March 31, 1999 and 1998 are presented in the following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In millions: March 31 1999 1998(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
Counterparties in the U.S.
Commercial and industrial $ 28 $ 12
Other, primarily other financial institutions 54 15
- --------------------------------------------------------------------------------
82 27
- --------------------------------------------------------------------------------
Counterparties outside the U.S.
Commercial and industrial 6 40
Banks -- 2
Other 13 13
- --------------------------------------------------------------------------------
19 55
- --------------------------------------------------------------------------------
Total impaired loans 101 82
- --------------------------------------------------------------------------------
Allowance for impaired loans 12 31
- --------------------------------------------------------------------------------
</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 $75
million and $10 million as of March 31, 1999 and 1998, respectively.
17
<PAGE> 18
The following table presents an analysis of the changes in impaired loans.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
First First
quarter quarter
In millions 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans, January 1 $ 122 $ 113
- -----------------------------------------------------------------------------------------------
Additions to impaired loans 13 65
Less:
Repayments of principal, net of
additional advances (1) (1)
Impaired loans returning to
accrual status (2) (39)
Charge-offs:
Commercial and industrial (3) (23)
Banks -- (29)
Other, primarily other financial institutions (25) (1)
Interest and other credits (3) (3)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Impaired loans, March 31 101 82
- -----------------------------------------------------------------------------------------------
</TABLE>
For the three months ended March 31, 1999 and 1998, the average recorded
investments in impaired loans was $115 million and $108 million, respectively.
An analysis of the effect of impaired loans - net of charge-offs - on interest
revenue for the three months ended March 31, 1999 and 1998 is presented in the
following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
First First
quarter quarter
In millions 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Interest revenue that would have been recorded if accruing $ 2 $2
Net interest revenue recorded related to the current period -- 4
- -----------------------------------------------------------------------------------------
Negative/(positive) impact of impaired loans on interest
revenue 2 (2)
- -----------------------------------------------------------------------------------------
</TABLE>
14. Allowances for credit losses
The following table summarizes the activity of the allowance for loan losses.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
First quarter First quarter
In millions 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance, January 1 $ 470 $ 546
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Reclassifications in the U.S. -- 6
Reclassifications outside the U.S. -- (56)
- -------------------------------------------------------------------------------------------------
(a)(50)
- -------------------------------------------------------------------------------------------------
Recoveries:
Counterparties in the U.S. 1 4
Counterparties outside the U.S. 4 5
- -------------------------------------------------------------------------------------------------
5 9
- -------------------------------------------------------------------------------------------------
Charge-offs:
Counterparties in the U.S., primarily other financial
institutions (28) (2)
Counterparties outside the U.S.:
Commercial and industrial -- (21)
Banks -- (29)
Other -- (1)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net charge-offs (23) (44)
- -------------------------------------------------------------------------------------------------
Ending balance, March 31 447 452
- -------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
(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 off-balance-sheet credit instruments such as
commitments, 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 quarter 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
March 31.
<TABLE>
<CAPTION>
In millions: March 31 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Specific counterparty components in the U.S. $ 7 $ 24
Specific counterparty components outside the U.S. 5 19
- -----------------------------------------------------------------------------
Total specific counterparty 12 43
- -----------------------------------------------------------------------------
Specific country 49 116
Expected loss 208 175
General 178 118
- -----------------------------------------------------------------------------
Total 447 452
- -----------------------------------------------------------------------------
</TABLE>
The allowance for credit losses on off-balance-sheet credit instruments at
January 1, 1999 and March 31, 1999 was $125 million. At January 1, 1998 and
March 31, 1998, this allowance was $185 million. The following table displays
our allowance for credit losses on off-balance-sheet credit instruments by
component as of March 31.
<TABLE>
<CAPTION>
In millions: March 31 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Specific counterparty components in the U.S. $ 2 $ --
Specific counterparty components outside the U.S. 3 2
- -------------------------------------------------------------------------------------
Total specific counterparty 5 2
- -------------------------------------------------------------------------------------
Specific country 3 23
Expected loss 63 71
General 54 89
- -------------------------------------------------------------------------------------
Total 125 185
- -------------------------------------------------------------------------------------
</TABLE>
15. Investment banking revenue
<TABLE>
<CAPTION>
First quarter
--------------------
In millions 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Advisory and syndication fees $ 221 $ 191
Underwriting revenue 169 155
- -----------------------------------------------------------------------------------
Total 390 346
- -----------------------------------------------------------------------------------
</TABLE>
16. Other revenue and other expenses
Other revenue
In the 1999 first quarter, Other revenue of $159 million includes $93 million of
gains on hedges of the firm's anticipated foreign currency revenues and expenses
and $40 million from equity earnings in affiliates (excluding American Century),
the majority of which relates to our Proprietary Investing and Trading segment.
The impact of our investment in American Century, including related
amortization, was not significant and is included in the Asset Management and
Servicing sector.
Other expenses
The following table presents the major components of Other expenses.
<TABLE>
<CAPTION>
First quarter
-------------------
In millions 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Professional services $ 28 $ 28
Marketing and business development 37 46
Other 77 103
- ----------------------------------------------------------------------------
Total other expenses 142 177
- ----------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
17. Income taxes
The effective tax rate for the three months ended March 31, 1999 and 1998 was
35%. The income tax benefit related to net realized gains and write-downs for
other-than-temporary impairments in value on debt and equity investment
securities, excluding securities in SBICs, was approximately $22 million for the
three months ended March 31, 1999, compared to an income tax expense of $12
million for the three months ended March 31, 1998. The applicable tax rate used
to compute the income tax benefit/expense related to net gains on debt and
equity investment securities was approximately 39% and 37% for the three months
ended March 31, 1999 and 1998, 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
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 March 31, 1999.
Capital ratios and amounts
The following table indicates the risk-based capital and leverage ratios and
amounts as of March 31, 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 $11,712 8.2%
Morgan Guaranty 10,609 8.5
- ------------------------------------------------------------------------------
Total risk-based capital(a)
J.P. Morgan $17,526 12.3%
Morgan Guaranty 14,299 11.5
- ------------------------------------------------------------------------------
Leverage
J.P. Morgan 4.4%
Morgan Guaranty 5.8
- ------------------------------------------------------------------------------
</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 $11.5 billion and $10.0 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 March 31, 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 March 31, 1999, that would change J.P. Morgan's and Morgan Guaranty's well
capitalized status.
20
<PAGE> 21
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 March 31, 1999 were $143.1 billion,
compared with $140.2 billion at December 31, 1998.
19. 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 months ended March 31,
1999 and 1998 is presented in the following table.
<TABLE>
<CAPTION>
First Quarter
---------------------------------
Dollars in millions, except share data 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 600 $ 237
Preferred stock dividends and other (9) (9)
- --------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings
per share - income available to
Common stockholders $ 591 $ 228
- --------------------------------------------------------------------------------------------
Denominator for basic earnings per share -
weighted-average shares 182,740,896 181,795,950
Effect of dilutive securities:
Options (a) 4,663,826(b) 6,687,569
Other stock awards (c) 8,978,013 9,634,103
4.75% convertible debentures -- 71,836
- --------------------------------------------------------------------------------------------
13,641,839 16,393,508
- --------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
weighted-average number of common
shares and dilutive potential common
shares 196,382,735 198,189,458
- --------------------------------------------------------------------------------------------
Basic earnings per share $ 3.24 $ 1.26
Diluted earnings per share 3.01 1.15
- --------------------------------------------------------------------------------------------
</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) Options to purchase 5,003,500 and 100,000 shares of our common stock at
$130.94 and $128.21, respectively, per share were outstanding at March 31, 1999,
but were not included in the computation of diluted EPS for the three months
ended March 31, 1999. The inclusion of such options using the treasury stock
method would have an antidilutive effect on the diluted EPS calculation because
the options' exercise price was greater than the average market price of our
common shares for the three months ended March 31, 1999. These options expire on
July 15, 2008 and January 19, 2009, respectively.
(c) Weighted-average incremental shares for other stock awards include
restricted stock and stock bonus awards. The related tax benefits are also
considered.
20. Commitments and contingent liabilities
Excluding mortgaged properties, assets on the consolidated balance sheet of
approximately $95.9 billion at March 31, 1999, were pledged as collateral for
borrowings, to qualify for fiduciary powers, to secure public monies as required
by law, and for other purposes.
21. 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 March 31, 1999, the SFAS No. 107 aggregate net fair
value for all financial instruments approximated the associated net carrying
values on our "Consolidated balance sheet".
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. The use of other valuation techniques may produce results that are
different from those obtained under current fair value methodologies. For
example, using the cost of credit derivatives to hedge loan exposures as a
method to
21
<PAGE> 22
estimate the fair value of loans, rather than discounting loans using current
market rates, would result in fair values that are substantially lower.
22. 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, and is managed by
individuals who report directly to the Chairman and Chief Executive Officer.
J.P. Morgan's segments or activities are: Investment Banking, Equities, Interest
Rate Markets/Foreign Exchange, 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 first quarter of 1999, the following segment reporting changes were
made to reflect the way we currently manage the firm:
1. The Interest Rate Markets and Foreign Exchange segments reported
separately in the 1998 Annual report have been combined into one Interest
Rate Markets/Foreign Exchange segment.
2. Dealer and market making activities in the currencies and local-currency
denominated government securities of emerging countries in Eastern Europe
and Asia, as well as related derivatives, are now reflected in Interest
Rate Markets/Foreign Exchange. These activities were previously included
in Credit Markets.
3. Activities related to our proprietary emerging markets portfolio, which
were previously separately managed and included in the Proprietary
Investing and Trading segment, were dissolved.
4. The method of applying overhead to segment results changed to better
reflect management's estimate of overhead usage by each segment. Overhead
represents costs associated with various support functions that exist for
the benefit of the firm as a whole.
With the exception of item 3, prior period amounts have been restated to
incorporate these changes.
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. As
discussed above, 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
managing the firm's credit risk and the tax-equivalent adjustment.
The following table presents segment pretax income for the three months ended
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Asset
Rate Manage- Proprietary Propriet-
Markets/ ment Equity Investing ary
Investment Foreign Credit Credit Global and Invest- and Invest- Corporate Consolid-
In millions Banking Equities Exchange Markets Portfolio Finance Servicing ments Trading ments Items(f) ated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 1999 (a) (b) (c) (c)(d)(e)
Total revenues $258 $288 $662 $696 $128 $2,032 $371 $(22) $119 $97 $(9) $2,491
Total expenses 210 230 359 259 45 1,103 280 14 33 47 137 1,567
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax income 48 58 303 437 83 929 91 (36) 86 50 (146) 924
- -----------------------------------------------------------------------------------------------------------------------------------
First Quarter 1998 (a) (b) (c) (c)(d)(e)
Total revenues 251 135 613 364 92 1,455 362 26 264 290 (110) 1,997
Total expenses 185 191 352 256 29 1,013 296 9 40 49 274 1,632
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax income 66 (56) 261 108 63 442 66 17 224 241 (384) 365
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Revenues related to the structuring of tax-advantaged loans and structured
credit products for Credit Portfolio were $18 million in the first quarter
of 1999 and $8 million in the first quarter of 1998. These amounts are
eliminated in consolidation.
22
<PAGE> 23
(b) The net impact to Credit Portfolio for managing the firm's credit risk,
including estimated potential losses on its own positions, was ($19)
million in the first quarter of 1999 and ($15) million in the first
quarter of 1998. The adjustment to gross-up Credit Portfolio's revenue to
a taxable basis was $7 million in the first quarter of 1998. These amounts
are eliminated in consolidation.
(c) Includes results from certain investments accounted for under the equity
method of accounting. See note 16, "Other revenue and other expenses" for
additional information.
(d) The adjustment to gross-up Proprietary Investing and Trading's tax exempt
revenues to a taxable basis was $38 million in the first quarter of 1999
and $23 million in the first quarter of 1998. These amounts are eliminated
in consolidation.
(e) Total return revenues, which combine reported revenues and the change in
net unrealized appreciation, were $83 million in the first quarter of 1999
and $209 million in the first quarter of 1998.
(f) We classify the revenues and expenses of Corporate Items into three broad
categories:
o Recurring items not allocated to the segments - including recurring
corporate items, such as provisions for credit losses, 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 $41 million in the first quarter of
1999 and ($114) million in the first quarter of 1998.
o 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 ($6)
million in the first quarter of 1999 and ($2) million in the first
quarter of 1998. Nonrecurring expenses in the first quarter of 1998
include a charge of $215 million in connection with restructuring
initiatives.
o 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 ($44) million in the
first quarter of 1999 and $6 million in the first quarter of 1998.
The following table presents segment pretax income for each of the four quarters
of 1998, and the full years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Asset Propriet-
Rate Manage- ary Propriet-
Markets/ ment Equity Investing ary
Investment Foreign Credit Credit Global and Invest- and Invest- Corporate Consolid-
In millions Banking Equities Exchange Markets Portfolio Finance Servicing ments Trading ments Items ated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 1998
Total revenues $251 $135 $613 $364 $92 $1,455 $362 $26 $264 $290 $(110) $1,997
Total expenses 185 191 352 256 29 1,013 296 9 40 49 274 1,632
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 66 (56) 261 108 63 442 66 17 224 241 (384) 365
- ------------------------------------------------------------------------------------------------------------------------------------
Second Quarter 1998
Total revenues 247 244 622 238 136 1,487 393 102 103 205 68 2,153
Total expenses 175 225 339 204 38 981 311 15 39 54 70 1,416
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 72 19 283 34 98 506 82 87 64 151 (2) 737
- ------------------------------------------------------------------------------------------------------------------------------------
Third Quarter 1998
Total revenues 238 141 348 (140) 97 684 383 160 147 307 (73) 1,301
Total expenses 166 162 280 77 42 727 293 15 35 50 29 1,099
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 72 (21) 68 (217) 55 (43) 90 145 112 257 (102) 202
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth Quarter 1998
Total revenues 265 180 472 130 25 1,072 353 47 192 239 (160) 1,504
Total expenses 184 199 312 193 36 924 285 10 42 52 130 1,391
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 81 (19) 160 (63) (11) 148 68 37 150 187 (290) 113
- ------------------------------------------------------------------------------------------------------------------------------------
Full Year 1998 (a)
Total revenues 1,001 700 2,055 592 350 4,698 1,491 335 706 1,041 (275) 6,955
Total expenses 710 777 1,283 730 145 3,645 1,185 49 156 205 503 5,538
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 291 (77) 772 (138) 205 1,053 306 286 550 836 (778) 1,417
- ------------------------------------------------------------------------------------------------------------------------------------
Full Year 1997 (a)
Total revenues 768 465 1,752 841 447 4,273 1,384 399 895 1,294 269 7,220
Total expenses 686 692 1,259 735 123 3,495 1,130 47 154 201 240 5,066
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 82 (227) 493 106 324 778 254 352 741 1,093 29 2,154
- ------------------------------------------------------------------------------------------------------------------------------------
Full Year 1996 (a)
Total revenues 614 419 1,495 1,012 536 4,076 1,187 270 934 1,204 388 6,855
Total expenses 604 513 1,134 638 80 2,969 905 38 137 175 474 4,523
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 10 (94) 361 374 456 1,107 282 232 797 1,029 (86) 2,332
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Refer to note 29, "Segments," of the 1998 Annual report for supplemental
segment disclosures. Consistent with first quarter 1999 segment reporting
restatements, amounts related to the Interest Rate Markets and Foreign Exchange
segments should be combined.
23
<PAGE> 24
The following table presents segment assets at period end, as well as average
period assets, for each of the years ended December 31, 1998 and 1997, and the
quarter ended March 31, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Asset
Rate Manage- Propriet- Propriet-
Markets/ ment ary- ary
Assets, in Foreign Credit Credit Global and Equity Investing Invest- Corporate
billions Equities Exchange Markets Portfolio Finance Servicing Investments and Trading ments Items Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999
At March 31 $38 $119 $27 $16 $200 $13 $1 $48 $49 $7 $269
Average 34 122 29 17 202 13 1 49 50 5 270
1998
At December 31 28 123 22 17 190 8 1 57 58 5 261
Average 31 137 31 21 220 10 1 51 52 1 283
1997
At December 31 27 116 30 21 194 9 1 46 47 12 262
Average 26 119 28 22 195 11 1 44 45 2 253
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23. 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:
o 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.
o 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.
o Revenues from proprietary investing and trading activities are based on
the location of the risk taker.
o Expenses are allocated based on the estimated cost associated with
servicing the regions' client base.
o 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 months ended March 31, 1999 and 1998 are distributed
among domestic and international operations, as presented in the following
table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Income
Pretax tax Net
Total Total income/ expense/ income/
In millions revenues(a) expenses (loss) (benefit) (loss)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First quarter 1999
Europe(b) $ 770 $ 459 $311 $124 $187
Asia Pacific 135 138 (3) (1) (2)
Latin America(c) 496 59 437 175 262
- --------------------------------------------------------------------------------------------------------
Total international operations 1,401 656 745 298 447
Domestic operations(d) 1,090 911 179 26 153
- --------------------------------------------------------------------------------------------------------
Total 2,491 1,567 924 324 600
- --------------------------------------------------------------------------------------------------------
First quarter 1998
Europe(b) 647 567(e) 80 32 48
Asia Pacific 189 164(e) 25 10 15
Latin America(c) 201 75 126 50 76
- --------------------------------------------------------------------------------------------------------
Total international operations 1,037 806 231 92 139
Domestic operations(d) 960 826(e) 134 36 98
- --------------------------------------------------------------------------------------------------------
Total 1,997 1,632 365 128 237
- --------------------------------------------------------------------------------------------------------
</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) 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.
24
<PAGE> 25
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial highlights
J.P. Morgan reported first quarter net income of $600 million, or $3.01 per
share. This is an increase of 64% over first quarter 1998 operating income of
$366 million, or $1.80 per share. The 1998 result excludes a charge related to
restructuring of business activities. Return on equity in the first quarter was
22%, compared with 13% a year ago.
Other highlights for the first quarter:
o Total revenues were up 25% from a year ago.
o Global Finance revenues rose 40%, reflecting strong client activity and
gains from managing our market and credit risk exposures.
o Asset Management and Servicing revenues included a 13% increase in
investment management fees; assets under management rose 11% to $320
billion.
o Proprietary Investments revenues of $97 million reflect lower results from
proprietary investing and trading activities and from our equity
investment portfolio.
o Excluding bonus accruals, core operating expenses were down $100 million
and are on track toward our expense reduction target for the year. Total
expenses rose 11%.
First quarter results at a glance
<TABLE>
<CAPTION>
First quarter Fourth quarter
-------------------------------------------------------------------------------------------------------------------
In millions of dollars, except per share data 1999 1998 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $2,491 $1,997 $1,504
Operating expenses (1,567) (1,632)(a) (1,391)(a)
Income taxes (324) (128) (24)
-------------------------------------------------------------------------------------------------------------------
Net income 600 237 89
Net income per share $3.01 $1.15 $0.42
Dividends declared per share $0.99 $0.95 $0.99
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes charges of $215 million and $143 million related to
restructuring of business activities and other cost reductions in the
first and fourth quarters of 1998, respectively.
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, in May 1999, a hub and spoke 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 may change
and, in that event, 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.
25
<PAGE> 26
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 more
than 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 from the presentation appearing in our 1998 Annual report -
refer to note 22, "Segments," for more details. Presented below are the summary
results for each sector for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Asset
Rate Manage- Proprietary Prop-
Markets/ ment Equity Investing rietary Corpo-
Investment Foreign Credit Credit Global and Invest- and Invest- rate Consol-
Banking Equities Exchange Markets Portfolio Finance Servicing ments Trading ments Item idated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 1999
Total revenues $258 $288 $662 $696 $128 $2,032 $371 $(22) $119 $97 $(9) $2,491
Total expenses 210 230 359 259 45 1,103 280 14 33 47 137 1,567
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 48 58 303 437 83 929 91 (36) 86 50 (146) 924
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter 1998
Total revenues 251 135 613 364 92 1,455 362 26 264 290 (110) 1,997
Total expenses 185 191 352 256 29 1,013 296 9 40 49 274 1,632
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 66 (56) 261 108 63 442 66 17 224 241 (384) 365
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter 1999 vs. First Quarter 1998
Total revenues 7 153 49 332 36 577 9 (48) (145) (193) 101 494
Total expenses 25 39 7 3 16 90 (16) 5 (7) (2) (137) (65)
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income (18) 114 42 329 20 487 25 (53) (138) (191) 238 559
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sector results
Revenues were $2.491 billion in the first quarter of 1999, up 25% from a year
ago. Client-focused revenues, which are reported in the Global Finance and Asset
Management and Servicing sectors, totaled $2.403 billion in the first quarter of
1999, up 32% from $1.817 billion a year ago. Revenues from Proprietary
Investments were $97 million versus $290 million in first quarter 1998.
Global Finance revenues increased 40% to $2.032 billion in the first quarter of
1999 across regions and activities, reflecting the benefits of our diversified
global franchise and an improvement in the market environment since the end of
1998.
o Investment Banking revenues were $258 million, up slightly from the 1998
first quarter. Continued strong growth in advisory revenues offset a
decline in origination revenues from risk management products. J.P. Morgan
was ranked sixth by Securities Data Co. in completed mergers and
acquisitions worldwide, with a market share of 15.8%, and first in
completed cross-border activity.
o Equities revenues of $288 million more than doubled from a year ago,
driven by higher equity derivatives and underwriting revenues, and strong
worldwide equity trading volumes. Our secondary market share continued to
increase in the United States, Europe, and Latin America. We were ranked
sixth by Securities Data Co. in U.S. lead equity underwriting with a
market share of 5.7%.
o Interest Rate Markets/Foreign Exchange revenues rose 8% to $662 million.
Strong performance in securities and derivatives activities in Interest
Rate Markets reflected favorable positioning and continued strength of
client demand and more than offset the decline in Foreign Exchange-related
revenues. Overall, results were well diversified.
o Credit Markets revenues were $696 million, up 91%. Revenues across
activities rebounded from the fourth quarter because of narrowing credit
spreads and recovering client demand. The increase over the year-ago
quarter was primarily driven by strong results in Latin America, including
gains on positions in Brazil taken in association with hedging our
economic exposures.
26
<PAGE> 27
o Credit Portfolio revenues increased 39% to $128 million. This primarily
reflects lower costs related to the implementation of our credit strategy.
Continued progress on this strategy resulted in the reduction of the
economic capital employed in this business by 33% since December 31, 1997.
Global Finance expenses increased 9% as higher bonus accruals across all
segments, reflecting strong results, more than offset lower pre-bonus operating
expenses as we continue to progress on our productivity initiatives.
Asset Management and Servicing revenues were up 2% to $371 million, driven by a
13% increase in investment management fees. Assets under management rose 11% to
$320 billion at March 31, 1999, from a year ago. Expenses were down 5% to $280
million.
Proprietary Investments revenues were $97 million, 67% lower than first quarter
1998.
o Proprietary Investing and Trading revenues were $119 million, down 55%.
Total return - reported revenues and the change in net unrealized
appreciation - was $83 million compared with $209 million in first quarter
1998. Lower results from Asian and U.S. markets were partially offset by
strong results in European interest rate markets.
o Equity Investments recorded a loss of $22 million, primarily reflecting
write-downs of Brazilian investments. Revenues were $26 million in the
first quarter of 1998 when we posted net gains of $20 million.
Corporate Items had negative revenues of $9 million, compared with negative
revenues of $110 million in last year's first quarter. Hedges of anticipated
foreign currency revenues and expenses had a gain of approximately $75 million,
compared with a loss of approximately $30 million in the 1998 first quarter.
Corporate Items expenses were $137 million in the quarter, down from $274
million a year ago. The decrease relates primarily to the 1998 first quarter
charge of $215 million taken in connection with restructuring activities.
27
<PAGE> 28
Financial review
Revenues
Revenues were $2.491 billion in the first quarter of 1999, compared with $1.997
billion in the year ago quarter.
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, increased 16% to $389
million from the first quarter of 1998. This increase resulted from higher net
interest revenue from our market-making activities in interest rate and credit
markets, offset by lower net interest revenues from our proprietary investing
positions.
Total trading revenue was $1.134 billion in the first quarter of 1999, an
increase of 27% from $896 million in the first quarter of 1998. The increase was
driven by the market making activities in our Global Finance sector, primarily
reflecting strong results in our credit-related activities, particularly in
Latin America, which included gains on positions in Brazil taken in association
with hedging our economic exposures. Also contributing to the increase were
strong results in equity derivatives. These gains were partially offset by lower
trading revenues in Proprietary Investments, reflecting lower results in Asian
and U.S. markets, which were partly offset by strong results in European
interest rate markets.
Investment banking revenue grew 13% to $390 million in the first quarter of 1999
from $346 million in the first quarter of 1998. Debt and equity underwriting
revenue grew 9% to $169 million on strong equity underwriting. J.P. Morgan was
ranked sixth by Securities Data Co. in U.S. lead equity underwriting with a
market share of 5.7% in the 1999 first quarter. Advisory and syndication fees
rose 16% to $221 million on strong advisory fees. J.P. Morgan was ranked sixth
by Securities Data Co. in completed mergers and acquisitions worldwide, with a
market share of 15.8%, and first in completed cross-border activity.
Investment management revenue increased 17% to $246 million in the 1999 first
quarter from a year ago. Assets under management were $320 billion at March 31,
1999, compared with $288 billion a year ago, reflecting net new business and
market appreciation.
Fees and commissions were $214 million, up 13% from $190 million in the year-ago
quarter. The increase primarily reflects higher equities brokerage commissions
related to higher volumes on U.S., European, and Latin American exchanges.
Investment securities revenue was negative (loss) $41 million in the first
quarter of 1999. The loss reflects write-downs of $38 million primarily on
Brazilian equity investments, and net losses of $26 million on the sale of debt
investment securities. These losses were partially offset by gains on positions
associated with our equity investments portfolio, including securities in Small
Business Investment Companies, of $10 million in the current quarter. The
current quarter results compares with investment securities revenue of $43
million in the first quarter of 1998. Net gains from equity securities were $20
million and net realized gains from debt investment securities were $15 million
in the year ago quarter.
Other revenue was $159 million in the first quarter of 1999, compared with a
loss of $25 million a year earlier. For the first quarter of 1999, other revenue
includes $93 million of gains on hedges of anticipated foreign currency revenues
and $40 million from equity earnings in affiliates (excluding American Century).
The impact of our investment in American Century, including goodwill
amortization, was not significant.
Operating expenses
Operating expenses were $1.567 billion, compared with $1.632 billion in the
first quarter of last year. The 1998 first quarter included a charge of $215
million in connection with restructuring initiatives. Excluding this charge,
expenses rose 11 % as higher bonus accruals reflecting our strong results more
than offset lower pre-bonus operating expenses. Before bonus accruals, operating
expenses were down $100 million. We are on track to achieve our previously
stated $400 million pre-bonus expense reduction target for 1999. The firm's
efficiency ratio was 63%, compared with 71% in the first quarter of last year
excluding the charge.
Costs associated with the preparation for the Year 2000 and European Economic
and Monetary Union were $25 million, down from $55 million. Software costs of
$29 million were capitalized rather than expensed because of a change in
accounting rules, and are not included in 1999 expenses or our expense reduction
target.
28
<PAGE> 29
At March 31, 1999, staff totaled 15,100 employees, compared with 15,674 at
December 31, 1998, and 16,534 employees at March 31, 1998.
Income-tax expense in the first quarter totaled $324 million, based on an
effective tax rate of 35%, compared with $128 million in the year-earlier
quarter. The increase in expense reflects higher pretax income.
Assets
Total assets were $269 billion at March 31, 1999, compared with $261 billion at
December 31, 1998.
Asset Quality
Impaired loans
<TABLE>
<CAPTION>
==========================================================================================================
March 31, December 31, March 31,
In millions: 1999 1998 (a) 1998 (a)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial and industrial $ 34 $ 25 $ 52
Banks - - 2
Other, primarily other financial institutions 67 97 28
- ----------------------------------------------------------------------------------------------------------
Total impaired loans 101 122 82
==========================================================================================================
</TABLE>
(a) Certain reclassifications were made to conform with the categorization used
in Bank regulatory filings.
Impaired loans were $101 million at March 31, 1999 versus $122 million at
December 31, 1998. The increase in impaired commercial and industrial loans was
primarily due to newly classified impaired loans in the U.S. healthcare and
manufacturing industries. The decrease in "Other" primarily relates to one U.S.
counterparty, which was partially charged-off 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 loans and an
allowance for off-balance-sheet credit instruments such as commitments, 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.
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 have begun an initiative to
review 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.
29
<PAGE> 30
The following table summarizes the activity of our allowances for credit losses
for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Allowance for Allowance for off-balance-sheet
loan losses credit instruments
- -------------------------------------------------------------------------------------------------------------------------
First quarter First quarter First quarter First quarter
In millions 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance, January 1 $470 $546 $ 125 $185
- -------------------------------------------------------------------------------------------------------------------------
Reclassifications in the U.S. (a) - (50) - -
- -------------------------------------------------------------------------------------------------------------------------
Recoveries: 5 9 - -
Charge-offs:
Commercial and industrial (3) (23) - -
Banks - (29) - -
Other, primarily financial institutions (25) (1) - -
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs (23) (44) - -
- -------------------------------------------------------------------------------------------------------------------------
Ending balance, March 31 447 452 125 185
- -------------------------------------------------------------------------------------------------------------------------
</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 off-balance-sheet credit instruments such as
commitments, 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."
The following table displays our allowances for credit losses by component at
March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for Allowance for off-balance-sheet
loan losses credit instruments
- ---------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31, December 31,
In millions: 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total specific counterparty $ 12 $ 34 $ 5 $ 3
Specific country 49 93 3 30
Expected loss 208 228 63 66
General 178 115 54 26
- ---------------------------------------------------------------------------------------------------------------------------
Total 447 470 125 125
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
March 31, 1999 versus December 31, 1998
The allowance for loan losses decreased to $447 million at March 31, 1999 from
$470 million at December 31, 1998. The decrease reflects charge-offs of $28
million, primarily related to one U.S. counterparty, partially offset by
recoveries across various industries. The allowance for credit losses for
off-balance-sheet credit instruments was $125 million at March 31, 1999 and
December 31, 1998.
The specific counterparty component of the allowance for loan losses, which
represents the SFAS No. 114 impairment reserve, decreased $22 million to $12
million at March 31, 1999, primarily due to the removal of an allocation
relating to one U.S. counterparty that was partially charged-off in the quarter.
This charge-off was also primarily the cause for the decline in the level of
impaired loans at March 31, 1999. The specific counterparty component of the
allowance for off-balance-sheet credit instruments was $5 million at March 31,
1999, compared with $3 million at December 31, 1998.
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.
sovereigns versus corporates and cross-border versus local). To determine these
estimates, management utilized historical loss experience as well as secondary
market data, where applicable. The specific country component of the allowance
for loan losses decreased to $49 million at March 31, 1999 from $93 million at
year-end. The decrease primarily related to the removal of specific country
allocations on South Korea, Thailand, and Malaysia, reflecting management's
assessment of improving conditions. Exposures to these countries are now
included in the expected loss component at March 31, 1999. Countries included in
the specific country component of the allowance for loan losses at March 31,
1999 were Brazil and Indonesia.
30
<PAGE> 31
These countries, which are both subject to International Monetary Support
programs, continue to present higher than normal credit concerns reflecting
uncertainty around economic reforms. The specific country allocation of the
allowance for off-balance-sheet credit instruments decreased to $3 million at
March 31, 1999 from $30 million at year-end, reflecting the maturity of certain
Brazilian cross-border funding commitments.
The expected loss component of the allowance for loan losses decreased to $208
million from $228 million at December 31, 1998. The decrease reflected lower
loss estimates due to reduced credit risk exposure as well as improved credit
quality related to exposures in Latin America, excluding Brazil, which is
covered by the specific country component. Our expected loss component for Latin
American credits utilizes bond spreads in the region as a more dynamic indicator
of credit quality, versus published credit ratings, which often lag the rapid
change of events that is characteristic of emerging markets. These decreases
were partially offset by the inclusion of exposures for South Korea, Thailand,
and Malaysia, which were previously included in the specific country component.
The expected loss component of the allowance for off-balance-sheet credit
instruments decreased $3 million to $63 million at March 31, 1999, also
reflecting improvements in the credit quality of Latin American credits,
partially offset by the inclusion of exposures for South Korea, Thailand, and
Malaysia.
The general component of the allowance for loan losses was $178 million at
March 31, 1999, compared with $115 million at December 31, 1998. The general
component of the allowance for off-balance-sheet credit instruments was $54
million at March 31, 1999, compared with $26 million at December 31, 1998.
These general components reflect management's assessment of amounts needed to
cover risks not adequately addressed by other components of the allowances
because of the imprecise, subjective, and judgmental elements in evaluating and
modeling credit risk. In previous quarters, management utilized a coverage
ratio approach to determine the appropriate level of the general components. In
determining the appropriate level of the general component of each of the
allowances as of March 31, 1999, management refined its approach and separately
estimated the impact of identified model limitations. In particular, our
expected loss component, with the exception of Latin American credits which
were previously adjusted as discussed above, utilizes default and recovery
statistics in its model that are based on U.S. corporate experience. These
statistics do not match the risks associated with our emerging market
exposures, and accordingly, the general component in each of our allowances is
needed to compensate for this limitation in the expected loss component. To
estimate probable losses related to this limitation, loss estimates in our
remaining emerging market exposures were adjusted to reflect the credit pricing
inherent in bond spreads in emerging markets, as well as regional estimates of
recovery. In addition, the general components are needed to adjust the results
produced by our expected loss model to reflect facility draw-down percentages
upon default that were more reflective of historical and industry experience.
As noted previously, we continue to refine our model for determining the
appropriate level of our allowances.
31
<PAGE> 32
Exposures to emerging countries
The following tables present exposures to certain emerging markets based upon
management's view of total exposure as of March 31, 1999. See page 42 for
cross-border and local outstandings under the regulatory basis.
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.
By type of financial instrument
<TABLE>
<CAPTION>
====================================================================================================================================
Credit Total
In billions Deriva- Other out- deriva- Commit- Cross- Local Total
March 31, 1999 Loans tives Standings tives ments Border exposure exposure
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
China $ - $ 0.1 $ - $ - $ - $ 0.1 $ - $ 0.1
Hong Kong 0.6 0.1 0.3 (0.2) 0.1 0.9 0.4 1.3
Indonesia 0.1 - - - 0.1 0.2 - 0.2
Malaysia - - 0.1 (0.1) - - - -
Philippines - 0.1 0.1 - - 0.2 - 0.2
Singapore - 0.1 0.2 (0.2) - 0.1 0.1 0.2
South Korea 0.5 1.3 0.4 (0.5) - 1.7 - 1.7
Taiwan - - - - 0.1 0.1 - 0.1
Thailand - 0.1 0.1 - - 0.2 - 0.2
Other 0.1 - - (0.1) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Asia, excluding Japan(a) 1.3 1.8 1.2 (1.1) 0.3 3.5 0.5 4.0
- ------------------------------------------------------------------------------------------------------------------------------------
Argentina 0.1 0.3 0.6 (0.3) - 0.7 0.5 1.2
Brazil 0.4 - 0.3 (0.3) - 0.4 1.4 1.8
Chile 0.4 - 0.1 - - 0.5 - 0.5
Colombia 0.2 - 0.3 - - 0.5 - 0.5
Mexico 0.6 0.3 0.5 (0.5) - 0.9 0.7 1.6
Other 0.5 0.1 0.2 (0.1) 0.1 0.8 - 0.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total Latin America, excluding the Caribbean 2.2 0.7 2.0 (1.2) 0.1 3.8 2.6 6.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
By type of counterparty
<TABLE>
<CAPTION>
=======================================================================================
In billions Govern-
March 31, 1999 Banks ments Other Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
China $ - $ - $ 0.1 $0.1
Hong Kong 0.1 0.3 0.9 1.3
Indonesia - 0.1 0.1 0.2
Malaysia - - - -
Philippines - - 0.2 0.2
Singapore 0.1 - 0.1 0.2
South Korea 0.9 0.5 0.3 1.7
Taiwan 0.1 - - 0.1
Thailand 0.2 - - 0.2
Other - - - -
- ---------------------------------------------------------------------------------------
Total Asia, excluding Japan(a) 1.4 0.9 1.7 4.0
- ---------------------------------------------------------------------------------------
Argentina - 0.6 0.6 1.2
Brazil 0.2 0.6 1.0 1.8
Chile - - 0.5 0.5
Colombia - 0.1 0.4 0.5
Mexico 0.1 0.2 1.3 1.6
Other 0.2 0.1 0.5 0.8
- ---------------------------------------------------------------------------------------
Total Latin America, excluding the Caribbean 0.5 1.6 4.3 6.4
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Total exposures to Japan, based upon management's view, were $6.6 billion at
March 31, 1999.
Total exposures to South Africa, based upon management's view, were $1.0 billion
at March 31, 1999.
32
<PAGE> 33
Capital
Stockholders' equity
Total stockholders' equity was $11.63 billion at March 31, 1999. Stockholders'
equity included approximately $10 million of net unrealized appreciation on debt
investment securities and marketable equity investment securities, net the
related deferred tax liability of $3 million. This compares with $147 million of
net unrealized appreciation at December 31, 1998, net of the related tax
liability of $87 million. The net unrealized appreciation of $10 million at
March 31, 1999 consists of net unrealized depreciation on debt investment
securities of $26 million and net unrealized appreciation on marketable equity
investment securities of $39 million. This compares with net unrealized
appreciation on both debt and marketable equity investment securities of $125
million and $109 million, respectively, at December 31, 1998. 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 that more than offset the positive impact of narrowing
mortgage-backed securities spreads. Included in the table below are selected
ratios based upon stockholders' equity.
<TABLE>
<CAPTION>
March 31 December 31 March 31
Dollars in billions, except share data 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total stockholders' equity $11.6 $11.3 $11.6
Annualized rate of return on average common stockholders' equity (a)(b) 22.3% 3.1% 8.6%
As percent of period-end total assets:
Common equity 4.1% 4.0% 4.0%
Total equity 4.3% 4.3% 4.3%
Book value per common share (c) $56.66 $55.01 $56.55
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the annualized rate of return on average common stockholders'
equity for the three months ended March 31, 1999, December 31, 1998, and March
31, 1998. Excluding the impact of SFAS No. 115, the annualized rate of return on
average common stockholders' equity would have been 22.5%, 3.1%, and 8.9% for
the three months ended March 31, 1999, December 31, 1998, and March 31, 1998,
respectively.
(b) Excluding the 1998 first quarter after tax charge of $129 million ($215
million before tax) related to the restructuring of business activities, the
annualized rate of return on average common stockholders' equity was 13.4%
(including the impact of SFAS No. 115) and 14.0% (excluding the impact of SFAS
No. 115) for the three months ended March 31, 1998.
(c) Excluding the impact of SFAS No. 115, the book value per common share would
have been $56.56, $54.24, and $54.30 at March 31, 1999, December 31, 1998, and
March 31, 1998, respectively.
During the first quarter, the firm purchased approximately $110 million of its
common stock, or 900,000 shares in total. These purchases were part of the
Board of Directors' 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 March 31, 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 March 31, 1999.
At March 31, 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 8.2% and 12.3%, respectively; 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 March 31, 1999 were $143.1
billion, compared with $140.2 billion at December 31, 1998.
33
<PAGE> 34
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:
o economic and market conditions (including the liquidity of secondary
markets)
o volatility of market prices, rates, and indices
o timing and volume of market activity
o availability of capital
o inflation
o political events (including legislative, regulatory, and other
developments)
o competitive forces (including the ability to attract and retain highly
skilled individuals)
o the ability to develop and support technology and information systems
o investor sentiment.
As a result of these variables, revenues and net income in any particular period
may:
o not be indicative of full-year results
o vary from year to year
o 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.
34
<PAGE> 35
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
people 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:
o Market risk: the possibility of loss due to changes in market prices and
rates, the correlations among them, and their levels of volatility
o 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.
o Liquidity risk: the risk of being unable to fund our portfolio of assets
at reasonable rates and to appropriate maturities
o 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 profiles
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.
The DEaR measure does not reflect the impact of credit considerations in
determining the fair value of our derivatives trading portfolio.
The following presents the market risk profiles for the firm. 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 market risk profile
During the first quarter, market conditions stabilized from the fourth quarter's
extreme conditions, which were characterized by sharp increases in volatilities,
illiquidity, and breakdowns in historical correlations. DEaR in our trading
activities was $34 million at March 31, 1999, versus $35 million at year-end
1998; the first quarter reflected higher levels of trading positions offset by
lower volatilities. The DEaR for our investment portfolio, which consists
largely of U.S. government agency securities, was $24 million as of March 31,
1999, versus $72 million at December 31, 1998. The decline reflects lower
volatility versus the previous quarter, as well as a reduction in the size and
underlying interest rate risk in the portfolio. Aggregate DEaR which represents
trading and investing activities combined, was $42 million at March 31, 1999
versus $83 million at December 31, 1998.
35
<PAGE> 36
Twelve-month market risk profile
DEaR for trading activities
Average DEaR for trading activities was $38 million and ranged from $29 million
to $55 million for the twelve months ended March 31, 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 March 31, 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 extreme market conditions experienced in the
latter half of 1998 as discussed earlier.
Our primary market risk exposures in our trading activities:
The twelve month average and period-end DEaR for March 31, 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
------------------------------- -----------------------------------
March 31 December 31
1999 1998 March 31 December 31
In millions Average Average 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk $30 $30 $32 $31
Foreign exchange rate risk 17 18 12 11
Equity price risk 12 12 9 12
Commodity price risk 3 3 2 3
Diversification effects (24) (25) (21) (22)
- ----------------------------------------------------------------------------------------------------------------------
Total 38 38 34 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 March 31, 1999 was $38 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.
36
<PAGE> 37
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 March 31, 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 averaged $60 million for the twelve months ended March 31, 1999
and ranged from $33 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:
o 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.
o 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.
o Renovation/replacement: We set about to identify "replace vs. renovate"
opportunities, renovate applications and products, and document code and
system changes. Status: 98% complete for critical applications.
o Testing: We established a consistent testing methodology, conducted unit
and system tests, and received certification sign-off from senior business
managers. Status: 94% complete for critical applications.
o Implementation: This final phase entails implementing critical updated
applications and products and conducting final compliance certification.
Status: 90% complete for critical applications.
The awareness and inventory/assessment phases were completed in 1997. The
renovation/replacement and testing phases were substantially completed by
December 31, 1998; 98% of internal high critical applications achieved
certification, based on the firm's certification process, which meets Federal
Financial Institutions Examination Council (FFIEC) guidelines for year 2000
compliance. In the implementation phase, approximately 90% of critical,
certified
37
<PAGE> 38
applications have been implemented globally. The remaining high critical
applications are scheduled to be tested and substantially implemented by June
30, 1999. Among building systems, over 90% of firm-owned and rented premises
have been validated while 72% have been implemented. 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, and (iii)
point to point testing with major financial clearing entities. The main risk to
completing the remaining technology schedule is the performance of
vendor-supplied software and service providers.
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 or overall trends in results of
operations. There can be no assurance, however, that the failure to ensure year
2000 capability by a third party would not have a material adverse effect on the
firm. 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. Future 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 turned toward the 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:
o 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;
o Deploy mitigation strategies prior to the millennium event in order to
reduce the probability of business disruption at the millennium change -
Status: ongoing;
o Develop business recovery plans for high likelihood and impact risk areas
in the event of post-millennium failure - Status: due June;
o 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,
final documentation due June;
o 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 will be developed to manage both internal
and external failures that may take place over and after the millennium
changeover, including February 29, 2000.
Costs to prepare the firm for year 2000 are estimated at $300 million, including
$242 million incurred through March 1999 ($225 million through December 31,
1998; $17 million in three months ended March 31, 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.
38
<PAGE> 39
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 34 for more information on forward-looking
statements.
39
<PAGE> 40
Consolidated average balances and net interest earnings
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Three months ended
On a taxable-equivalent basis --------------------------------------------------------------------------
March 31, 1999 March 31, 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. $ 2,937 $ 81 11.18% $ 2,045 $ 64 12.69%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 619 13 8.52 809 15 7.52
U.S. state and political subdivision 1,653 47 11.53 1,214 35 11.69
Other 29,056 387 5.40 19,683 297 6.12
Debt investment securities in offices
outside the U.S. (a) 2,504 31 5.02 2,394 43 7.28
Trading account assets:
In offices in the U.S. 29,704 393 5.37 30,458 517 6.88
In offices outside the U.S. 28,649 469 6.64 38,508 668 7.04
Securities purchased under agreements to resell:
In offices in the U.S. 22,016 265 4.88 16,819 210 5.06
In offices outside the U.S. 13,240 161 4.93 23,181 295 5.16
Securities borrowed,
mainly in offices in the U.S. 36,948 448 4.92 40,204 496 5.00
Loans:
In offices in the U.S. 5,766 104 7.31 6,518 118 7.34
In offices outside the U.S. 21,747 327 6.10 26,022 430 6.70
Other interest-earning assets (b):
In offices in the U.S. 1,430 20 * 1,038 34 *
In offices outside the U.S. 974 32 * 886 55 *
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 197,243 2,778 5.71 209,779 3,277 6.34
Cash and due from banks 2,156 1,172
Other noninterest-earning assets 70,764 68,706
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 270,163 279,657
- ------------------------------------------------------------------------------------------------------------------------------------
</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 March 31, 1999 and 1998.
(a) For the three months ended March 31, 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
40
<PAGE> 41
Consolidated average balances and net interest earnings
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Three months ended
On a taxable-equivalent basis --------------------------------------------------------------------------
March 31, 1999 March 31, 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. $ 9,018 $ 110 4.95% $ 10,346 $ 140 5.49%
In offices outside the U.S. 47,617 506 4.31 51,243 650 5.14
Trading account liabilities:
In offices in the U.S. 6,650 113 6.89 10,791 229 8.61
In offices outside the U.S. 12,840 161 5.09 14,783 226 6.20
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 61,171 743 4.93 67,432 932 5.61
Commercial paper, mainly in offices
in the U.S. 9,661 121 5.08 8,924 124 5.64
Other interest-bearing liabilities:
In offices in the U.S. 10,917 185 6.87 16,398 219 5.42
In offices outside the U.S. 3,994 49 4.98 2,370 52 8.90
Long-term debt,
mainly in offices in the U.S. 28,548 380 5.40 23,580 354 6.09
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 190,416 2,368 5.04 205,867 2,926 5.76
Noninterest-bearing deposits:
In offices in the U.S. 882 996
In offices outside the U.S. 812 869
Other noninterest-bearing
liabilities 66,603 60,435
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 258,713 268,167
Stockholders' equity 11,450 11,490
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 270,163 279,657
Net yield on interest-earning assets 0.84 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest earnings 410 351
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 42
Cross-border and local outstandings under the regulatory basis
For financial reporting purposes only, the following table presents our
cross-border and local outstandings under the regulatory basis established by
the Federal Financial Institutions Examination Council (FFIEC). Bank regulatory
rules differ from management's view in the treatment of credit derivatives,
trading account short positions, and the use of fair value versus cost of
investment securities. In addition, management does not net local funding or
liabilities against any local exposures as allowed by the FFIEC. Refer to page
32 for more information on exposures based on the management view.
In accordance with the regulatory rules, cross-border outstandings include,
regardless of currency:
o all claims of our U.S. offices against foreign residents
o 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 March 31, 1999.
<TABLE>
<CAPTION>
Total out-
standings
Net local Total % of and
In millions Govern- out- out- Total Commit- commit-
March 31, 1999 Banks ments Other(a) standings standings assets ments ments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Germany $12 091 $2 702 $1 440 19 $16 252 6.04% $1 136 $17 388
Japan(b) 846 10 743 1 699 2 287 15 575 5.79% 1 175 16 750
United Kingdom 6 208 58 6 223 - 12 489 4.64% 1 089 13 578
Italy 2 487 7 517 492 118 10 614 3.94% 23 10 637
France 5 124 1 850 2 498 - 9 472 3.52% 1 446 10 918
Netherlands 5 843 741 1 170 - 7 754 2.88% 332 8 086
Belgium 1 865 971 1 501 - 4 337 1.61% 7 427 11 764
Spain 1 586 982 1 143 221 3 932 1.46% 456 4 388
Cayman Islands 142 - 3 680 - 3 822 1.42% 400 4 222
Switzerland 1 350 406 1 525 - 3 281 1.22% 861 4 142
Canada 1 369 926 625 190 3 110 1.16% 1 592 4 702
Mexico 57 1 058 1 163 195 2 473 0.92% 26 2 499
South Korea(b) 944 651 740 51 2 386 0.89% 73 2 459
Luxembourg 467 25 1 711 - 2 203 0.82% 243 2 446
Argentina(b) 55 1 002 541 486 2 084 0.77% - 2 084
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes nonbank financial institutions and commercial and industrial
entities.
(b) See page 32 for exposures to these countries under the management view.
42
<PAGE> 43
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SUMMARY OF J.P. MORGAN'S ANNUAL MEETING
The 1999 annual meeting of stockholders of J.P. Morgan & Co. Incorporated was
held on Wednesday, April 14, 1999 at the company's 60 Wall Street headquarters;
82.92% of the 177,204,028 shares of common stock outstanding and eligible to be
voted was represented either in person or by proxy, constituting a quorum.
Douglas A. Warner III, Chairman of the Board, presided.
The stockholders took the following actions:
1. Elected all 17 nominees to one-year terms as members of the Board of
Directors. The directors are:
<TABLE>
<CAPTION>
Percent
of
Percent of Shares shares
Director Shares in favor shares voting Withheld voting
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas A. Warner III * 145,291,590 98.88% 1,649,701 1.12%
Paul A. Allaire 145,386,321 98.94% 1,554,970 1.06%
Riley P. Bechtel 145,414,888 98.96% 1,526,403 1.04%
Lawrence A. Bossidy 145,388,028 98.94% 1,553,263 1.06%
Martin Feldstein 145,478,821 99.01% 1,462,470 0.99%
Ellen V. Futter 145,402,309 98.95% 1,538,982 1.05%
Hanna H. Gray 145,374,418 98.93% 1,566,873 1.07%
Walter A. Gubert ** 145,356,587 98.92% 1,584,704 1.08%
James R. Houghton 145,473,369 99.00% 1,467,922 1.00%
James L. Ketelsen 145,316,209 98.89% 1,625,082 1.11%
John A. Krol 145,500,127 99.02% 1,441,164 0.98%
Roberto G. Mendoza ** 145,326,784 98.90% 1,614,507 1.10%
Michael E. Patterson ** 145,370,172 98.93% 1,571,119 1.07%
Lee R. Raymond 145,426,101 98.97% 1,515,190 1.03%
Richard D. Simmons 145,352,006 98.92% 1,589,285 1.08%
Kurt F. Viermetz 145,227,829 98.83% 1,713,462 1.17%
Douglas C. Yearley 145,358,497 98.92% 1,582,794 1.08%
</TABLE>
* Chairman of the Board
** Vice Chairman of the Board
2. Approved the appointment of PricewaterhouseCoopers LLP as independent
accountants to perform auditing functions during 1999. There were 146,303,949
shares in favor, or 99.57% of shares voting; 197,514 shares against, or 0.13% of
shares voting; 439,828 shares abstained; and no shares reflecting broker
nonvotes.
3. Defeated the stockholder proposal relating to prior government service. There
were 114,899,164 shares against, or 94.94% of shares voting; 2,790,888 shares
for, or 2.31% of shares voting; 3,332,770 shares abstained; and 25,918,469
shares reflecting broker nonvotes.
4. Defeated the stockholder proposal relating to cumulative voting. There were
87,899,042 shares against, or 72.63% of shares voting; 31,352,315 shares for, or
25.91% of shares voting; 1,768,514 shares abstained; and 25,921,420 shares
reflecting broker nonvotes.
5. Defeated the stockholder proposal relating to efficient use of capital and
financial stabilization. There were 110,680,289 shares against, or 91.46% of
shares voting; 4,214,173 shares for, or 3.48% of shares voting; 6,121,210 shares
abstained; and 25,925,619 shares reflecting broker nonvotes.
43
<PAGE> 44
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
12. Statement re computation of ratios (incorporated by reference
to exhibit 12 to J.P. Morgan's report on Form 8-K, dated April
14, 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 March 31, 1999:
January 19, 1999 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing
its earnings for the three and twelve-month periods ended
December 31, 1998.
Disclosed the statement of consolidated average balances and net
interest earnings for the three and twelve month periods ended
December 31, 1998.
44
<PAGE> 45
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J.P. MORGAN & CO. INCORPORATED
---------------------------------------
(Registrant)
/s/ DAVID H. SIDWELL
---------------------------------------
NAME: DAVID H. SIDWELL
TITLE: MANAGING DIRECTOR AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
DATE: May 17, 1999
45
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the current
report on Form 10-Q for the three months ended March 31, 1999 and is qualified
in its entirety by reference to such financial statements and disclosures.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,450
<INT-BEARING-DEPOSITS> 2,188
<FED-FUNDS-SOLD> 29,430<F1>
<TRADING-ASSETS> 119,853
<INVESTMENTS-HELD-FOR-SALE> 32,595
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 26,232
<ALLOWANCE> 447
<TOTAL-ASSETS> 269,070
<DEPOSITS> 56,804
<SHORT-TERM> 83,856<F2>
<LIABILITIES-OTHER> 88,462<F3>
<LONG-TERM> 28,318
0
694
<COMMON> 502
<OTHER-SE> 10,434
<TOTAL-LIABILITIES-AND-EQUITY> 269,070
<INTEREST-LOAN> 430
<INTEREST-INVEST> 459
<INTEREST-OTHER> 1,868
<INTEREST-TOTAL> 2,757
<INTEREST-DEPOSIT> 616
<INTEREST-EXPENSE> 2,368
<INTEREST-INCOME-NET> 389
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (41)<F4>
<EXPENSE-OTHER> 1,567<F5>
<INCOME-PRETAX> 924
<INCOME-PRE-EXTRAORDINARY> 924
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 600
<EPS-PRIMARY> 3.24<F6>
<EPS-DILUTED> 3.01<F6>
<YIELD-ACTUAL> 0.84
<LOANS-NON> 101
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 595<F7>
<CHARGE-OFFS> 28<F7>
<RECOVERIES> 5<F7>
<ALLOWANCE-CLOSE> 572<F7>
<ALLOWANCE-DOMESTIC> 9<F7>
<ALLOWANCE-FOREIGN> 8<F7>
<ALLOWANCE-UNALLOCATED> 555<F7>
<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 gains and losses on debt and equity investment securities,
other-than-temporary impairments or write-downs in value, and related dividend
income.
<F5>Includes employee compensation and benefits, net occupancy, technology and
communications, and other expenses.
<F6>Primary EPS represents basic EPS under Statement of Financial accounting
standards No. 128, Earnings per Share.
<F7>Amounts relate to the firm's allowance for loan losses and allowance for
credit losses on off-balance-sheet credit instruments such as commitments,
standby letter of credit, and guarantees. The unallocated allowance includes
the specific country, the expected loss, and the general 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>
