<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-5885
J.P. MORGAN & CO. INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 13-2625764
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 Wall Street, New York, NY 10260-0060
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 483-2323
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
------------------- ------------------------
<S> <C>
Common Stock, $2.50 Par Value New York Stock Exchange
Adjustable Rate Cumulative Preferred Stock, New York Stock Exchange
Series A, No Par Value, Stated Value $100
Depositary shares representing a one- New York Stock Exchange
tenth interest in 6 5/8% Cumulative
Preferred Stock, Series H, No Par
Value, Stated Value $500
2.5% Commodity-Indexed Preferred American Stock Exchange
Securities (ComPS(SM)), Series A issued
by J.P. Morgan Index Funding Company I
and guaranteed by J.P. Morgan & Co.
Incorporated
Commodity-Indexed Preferred Securities American Stock Exchange
(ComPS(SM)), Series B issued by J.P.Morgan
Index Funding Company I and guaranteed by
J.P. Morgan & Co. Incorporated, Initial
Face Amount $13
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
<PAGE> 2
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.....
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
J.P. Morgan totaled $17,589,370,207 at February 25, 2000.
The number of shares outstanding of J.P. Morgan's Common Stock, $2.50 Par
Value, at February 25, 2000, 163,053,258 totaled shares.
DOCUMENTS INCORPORATED BY REFERENCE
J.P. Morgan's Annual Report to Stockholders for the year ended December 31,
1999, is incorporated by reference in response to Part I, Items 1, 2, 3, and 4;
Part II, Items 5, 6, 7, 7a, 8, and 9; and Part IV, Item 14 of Form 10-K.
J.P. Morgan's definitive Proxy Statement dated March 8, 2000, is
incorporated by reference in response to Part III, Items 10, 11, 12, and 13 of
Form 10-K.
<PAGE> 3
------------------------------
PART I
All references to pages appearing in the J.P. Morgan & Co. Incorporated (J.P.
Morgan) Annual Report to Stockholders for the year ended December 31, 1999,
attached hereto as Exhibit 13, are incorporated herein by reference in
accordance with General Instruction G to Form 10-K. This document shall be
deemed to have been "filed" only to the extent of the material incorporated
herein by reference.
ITEM 1.
Description of business:
Refer to pages 22, 27-36, and 53 of J.P. Morgan's 1999 Annual Report to
Stockholders incorporated herein by reference.(See Exhibit 13 to this Form 10-K)
Number of employees:
Refer to page 114 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference. (See Exhibit 13 to this Form 10-K)
Financial information about foreign and domestic operations:
Refer to pages 50 and 108-109 of J.P. Morgan's 1999 Annual Report to
Stockholders incorporated herein by reference. (See Exhibit 13 to this Form
10-K). Also refer to the subsequent section titled Cross-border and local
outstandings under the regulatory basis.
Distribution of assets, liabilities, and stockholders' equity; interest rates
and interest differential:
Refer to pages 116-118 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference. (See Exhibit 13 to this Form 10-K)
Investment portfolio:
Refer to pages 80-82 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference. (See Exhibit 13 to this Form 10-K.)
<PAGE> 4
Loan portfolio:
For significant accounting policies and details regarding our loan portfolio and
impaired loans as of December 31, 1999 and 1998, refer to pages 67-69 and pages
87-90 of J.P. Morgan's 1999 Annual Report to Stockholders incorporated herein by
reference. (See Exhibit 13 to this Form 10-K).
In addition, the table below provides period-end information prior to December
31, 1998 related to our loan portfolio. The information is presented by industry
of borrower and location of booking office as of December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
In millions: December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans in offices in the U.S.
Commercial and industrial $ 1 326 $ 1 878 $ 1 990
Financial institution:
Banks 232 641 729
Other financial institutions 939 902 527
Collateralized by real estate 1 330 324 365
Other, primarily individuals and including
U.S. state and political subdivisions 1 509 1 488 1 666
- --------------------------------------------------------------------------------------------------------------
5 336 5 233 5 277
- --------------------------------------------------------------------------------------------------------------
Loans in offices outside the U.S.
Commercial and industrial 12 576 12 026 10 045
Financial institution:
Banks 3 419 2 853 1 447
Other financial institutions 4 805 4 522 3 013
Collateralized by real estate 1 153 364 281
Foreign governments and official
institutions 693 811 1 042
Other, primarily individuals and including
U.S. state and political subdivisions 3 596 2 311 2 348
- --------------------------------------------------------------------------------------------------------------
26 242 22 887 18 176
- --------------------------------------------------------------------------------------------------------------
Total loans 31 578 28 120 23 453
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Impaired Loans
In addition, the following table presents impaired loans - net of charge-offs -
organized by the location of the counterparty as of December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
In millions: December 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Counterparties in the U.S.
Commercial and industrial $ 12 $ 83 $ 59
Other 16 17 31
- ---------------------------------------------------------------------------------------------------------
28 100 90
- ---------------------------------------------------------------------------------------------------------
Counterparties outside the U.S.
Commercial and industrial 44 6 8
Banks 28 1 1
Other 13 13 18
- ---------------------------------------------------------------------------------------------------------
85 20 27
- ---------------------------------------------------------------------------------------------------------
Total impaired loans 113 120 117
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Certain reclassifications were made to the above table to conform with the
categorization used in Bank regulatory filings. The above amounts are
categorized on the same basis as the impaired loans disclosure in J.P. Morgan's
1999 Annual Report to Stockholders incorporated herein by reference. (See
Exhibit 13 to this Form 10-K.)
<PAGE> 5
The following table presents an analysis of the changes in impaired loans for
the periods ended prior to December 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
In millions 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans, January 1 $120 $117 $219
- ------------------------------------------------------------------------------------------------------
Additions to impaired loans 123 123 124
Less:
Repayments of principal, net of additional advances (21) (57) (113)
Impaired loans returning to accrual status (48) - -
Charge-offs:(a)
Commercial and industrial (21) (30) (39)
Banks and other financial institutions (17) - -
Other (2) (9) (16)
Interest and other credits (7) (11) (12)
Sales and swaps of loans (14) (13) (46)
- ------------------------------------------------------------------------------------------------------
Impaired loans, December 31 113 120 117
- ------------------------------------------------------------------------------------------------------
</TABLE>
Summary of loan loss experience:
For significant accounting policies and details regarding our loan loss
experience for the years ended December 31, 1999, 1998 and 1997, refer to pages
67-69 and pages 91-92 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference. (See Exhibit 13 to this Form 10-K). In
addition, the tables below provide a summary of credit loss experience for the
years ended December 31, 1996 and 1995.
Allowances for credit losses
Prior to December 31, 1996, our reserves and allowances for credit losses were
displayed in the aggregate as a reduction of loans in our Consolidated balance
sheet. Beginning December 31, 1996, in accordance with the American Institute
of Certified Public Accountants (AICPA) Banks and Savings Institutions Audit
Guide, the aggregate allowance was apportioned and displayed as a reduction to
loans, as a reduction of trading assets related to determining the fair value of
our derivatives portfolio, and as other liabilities related to off-balance-sheet
lending commitments. Amounts were allocated based on assigning specific
counterparty, industry, and country allocations based on product or balance
sheet caption of the underlying counterparty exposure; amounts related to the
general component were proportionally allocated to balance sheet captions based
on an assessment of the level of risk of the underlying exposures.
<PAGE> 6
The following table summarizes the activity of the allowance for loan losses for
the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
In millions 1996 1995 (d)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance, January 1 $ 1 130 (c) $ 1 131
- ------------------------------------------------------------------------------------------------------
Reclassifications in the U.S. (198) -
Reclassifications outside the U.S. (352) -
- ------------------------------------------------------------------------------------------------------
(550) (c) -
- ------------------------------------------------------------------------------------------------------
Recoveries:
Counterparties in the U.S. 20 37
Counterparties outside the U.S. 5 17
- ------------------------------------------------------------------------------------------------------
25 54
- ------------------------------------------------------------------------------------------------------
Charge-offs:
Counterparties in the U.S. (36) (45)
Counterparties outside the U.S.
Commercial and industrial (1) (6)
Banks and other financial institutions - -
Other (2) (4)
- ------------------------------------------------------------------------------------------------------
(39) (55)
- ------------------------------------------------------------------------------------------------------
Net charge-offs(a) (14) (1)
- ------------------------------------------------------------------------------------------------------
Ending balance, December 31 566 1,130
- ------------------------------------------------------------------------------------------------------
International portion of the allowance, December 31 389 (b) 716
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net charge-offs as a percentage of average loans were 0.05%, and 0.01%
for 1996 and 1995, respectively.
(b) Not reflected in the above table are transfers to the international
portion of the allowance from the domestic portion of $23 million in
1996.
(c) Balance at January 1, 1996 represents the aggregate allowance.
Reclassifications represent the estimated apportionment of the aggregate
allowance at December 31, 1995 as well as changes across balance sheet
captions for allowances during 1996. Reclassifications had no impact on
net income and, accordingly, were not shown on the Consolidated
statement of income. Subsequent to July 1, 1998, reclassifications
across balance sheet captions for allowances are reflected as provisions
or reversals of provisions in the Consolidated statement of income. If
reclassifications prior to July 1, 1998 were included in the
Consolidated statement of income, these captions would change as
follows, with no impact on net income: in 1996, Provision for loan
losses would decrease by $307 million, Trading revenue would decrease by
$196 million, and Other revenue would decrease by $111 million.
(d) 1995 summarizes the activity of the aggregate allowance for credit
losses that was shown as a reduction of loans in 1995.
The following table summarizes the activity of the allowance for credit losses
on lending commitments for the year ended December 31, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
In millions 1996
- -------------------------------------------------------------------------
<S> <C>
Beginning balance, January 1 $ -
- -------------------------------------------------------------------------
Reclassifications in the U.S. 111
Reclassifications outside the U.S. 89
- -------------------------------------------------------------------------
200 (b)
- -------------------------------------------------------------------------
Ending balance, December 31 200
- -------------------------------------------------------------------------
International portion of the allowance, December 31(a) 89
- -------------------------------------------------------------------------
</TABLE>
(a) Not reflected in the above table are transfers to the international portion
of the allowance from the domestic portion of $89 million in 1996.
(b) Refer to note (c) to the table above.
<PAGE> 7
The following table displays our allowances for loan losses and credit losses on
lending commitments by component as of December 31, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Lending
In millions: Loans commitments
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Specific counterparty components in the U.S. $86 $31
Specific counterparty components outside the U.S. 28 31
- --------------------------------------------------------------------------------------------------------------
Total specific counterparty 114 62
- --------------------------------------------------------------------------------------------------------------
Expected loss (a) 452 138
- --------------------------------------------------------------------------------------------------------------
Total 566 200
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a)During 1999, we revised our model for calculating expected credit losses to
incorporate factors for estimating loss previously included in our country,
industry, expected loss, and general components of our allowances. For
disclosure purposes, the country, industry, expected loss, and general
components of prior periods have been aggregated and included in the expected
loss caption in the above table.
The following table displays our aggregate allowance for credit losses by
component as of December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
In millions: 1995
<S> <C>
Specific counterparty components in the U.S. $142
Specific counterparty components outside the U.S. 59
- ---------------------------------------------------------------------------------------
Total specific counterparty 201
- ---------------------------------------------------------------------------------------
Expected loss (a) 929
- ---------------------------------------------------------------------------------------
Total 1 130
- ---------------------------------------------------------------------------------------
</TABLE>
(a)During 1999, we revised our model for calculating expected credit losses to
incorporate factors for estimating loss previously included in our country,
industry, expected loss, and general components of our allowances. For
disclosure purposes, the country, industry, expected loss, and general
components of prior periods have been aggregated and included in the expected
loss caption in the above table.
Deposits:
Refer to page 93 and pages 116-118 of J.P. Morgan's 1999 Annual Report to
Stockholders incorporated herein by reference. (See Exhibit 13 to this Form
10-K)
Return on equity and assets:
Refer to pages 114 and 115 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference. (See Exhibit 13 to this Form 10-K)
Short-term borrowings:
Refer to page 94 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference. (See Exhibit 13 to this Form 10-K)
Cross-border and local outstandings under the regulatory basis:
The following 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 50 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference as Exhibit 13 to this Form 10-K for more
information on exposures based on the management view.
<PAGE> 8
In accordance with the regulatory rules, cross-border outstandings include,
regardless of currency:
- - all claims of our U.S. offices against foreign residents
- - all claims of our foreign offices against residents of other foreign countries
Local outstandings include all claims of our foreign offices with residents of
the same foreign country, net of local funding.
All outstandings are primarily based on the location of the ultimate
counterparty; that is, if collateral or a formal guarantee exists, the country
presented is determined by the location where the collateral is held and
realizable, or the location of the guarantor. In 1998 and 1997, securities
purchased under agreements to resell are included based upon domicile of
counterparty and are not risk shifted to the country of collateral. 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 tables show each country where cross-border and local outstandings
exceed 0.75% of total assets, as of December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Total out-
Net local Total % of standings
In millions Govern- out- out- total Commit- and
December 31, 1999 Banks ments Other(a) standings standings assets ments commitments
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Germany $7,988 $3,849 $2,100 $- $13,937 5.34 % $984 $14,921
The Netherlands 5,442 2,081 5,755 - 13,278 5.09 944 14,222
Italy 2,066 7,265 1,253 12 10,596 4.06 36 10,632
France 2,164 2,219 3,185 - 7,568 2.90 909 8,477
Japan 3,137 918 2,744 - 6,799 2.61 2 6,801
United Kingdom 1,775 416 3,276 - 5,467 2.10 1,375 6,842
Switzerland 1,541 439 1,977 525 4,482 1.72 890 5,372
Canada 859 793 1,447 - 3,099 1.19 1,186 4,285
Spain 572 1,077 1,154 91 2,894 1.11 315 3,209
South Africa 947 1,253 483 80 2,763 1.06 43 2,806
Mexico 42 1,185 988 - 2,215 0.85 25 2,240
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes nonbank financial institutions and commercial and industrial
entities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Total out-
Net local Total % of standings
In millions Govern- out- out- total Commit- and
December 31, 1998 Banks ments Other(a) standings standings assets ments commitments
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Japan $ 1 064 $11 189 $ 2 327 $ 5 049 $ 19 629 7.52 % $ 1 204 $ 20 833
Germany 11 983 1 533 1 578 169 15 263 5.85 1 415 16 678
Italy 2 921 9 597 562 73 13 153 5.04 76 13 229
France 5 604 994 2 282 - 8 880 3.40 2 318 11 198
The Netherlands 6 101 878 906 - 7 885 3.02 367 8 252
United Kingdom 3 362 104 4 293 - 7 759 2.97 1 306 9 065
Cayman Islands 151 - 4 630 - 4 781 1.83 300 5 081
Spain 1 854 1 216 1 376 189 4 635 1.78 512 5 147
Switzerland 2 249 615 1 357 - 4 221 1.62 802 5 023
Belgium 1 429 1 135 1 088 - 3 652 1.40 4 469 8 121
Canada 1 776 957 758 - 3 491 1.34 1 601 5 092
South Korea 891 656 736 - 2 283 0.87 54 2 337
Hong Kong 251 16 803 1 082 2 152 0.82 188 2 340
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes nonbank financial institutions and commercial and industrial
entities.
<PAGE> 9
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Total out-
Net standings
In millions local Total % of and
December 31, 1997 Govern- out- out- total Commit- commit-
Banks ments Other(a) standings standings assets ments ments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
United Kingdom $ 6 314 $ 643 $ 6 181 $ - $ 13 138 5.01 % $ 1 185 $ 14 323
Japan 2 748 5 410 2 876 - 11 034 4.21 1 866 12 900
France 5 614 1 025 2 072 744 9 455 3.61 1 889 11 344
Germany 4 904 2 855 1 014 24 8 797 3.36 1 230 10 027
Cayman Islands 6 473 6 368 - 6 847 2.61 160 7 007
The Netherlands 2 751 999 2 082 - 5 832 2.22 704 6 536
Italy 1 644 3 238 623 - 5 505 2.10 4 5 509
Belgium 2 104 1 938 1 199 - 5 241 2.00 4 191 9 432
Switzerland 2 742 556 1 028 477 4 803 1.83 1 319 6 122
Canada 1 490 1 840 791 - 4 121 1.57 1 716 5 837
Spain 1 362 1 783 545 - 3 690 1.41 170 3 860
Brazil 310 1 061 826 1393 3 590 1.37 24 3 614
South Korea 1 901 190 1 089 - 3 180 1.21 282 3 462
Hong Kong 620 58 1 769 - 2 447 0.93 412 2 859
Argentina 129 1 241 903 69 2 342 0.89 5 2 347
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes nonbank financial institutions and commercial and industrial
entities.
<PAGE> 10
ITEM 2. PROPERTIES
J.P. Morgan owns and occupies buildings in locations around the world, which
include: New York (60 Wall Street headquarters, 23 Wall Street, 15 Broad Street
and 522 Fifth Avenue), Delaware, London, and Paris. We also lease office space
in locations around the world including New York, Delaware, Brussels, Paris, and
London.
J.P. Morgan's financing arrangement for an office building complex in London
involved the sale to the lender of a 52.5% interest in the building complex.
This arrangement excluded the interior office finishing, furniture, and
technology. The building at 60 Wall Street is subject to a $404 million
mortgage as of December 31, 1999. These transactions are described in note 24,
Long-term debt, to the consolidated financial statements included in J.P.
Morgan's 1999 Annual Report to Stockholders filed as Exhibit 13 to this Form
10-K.
On December 23, 1998, the City and State of New York and the New York Stock
Exchange announced their intention 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 on our financial statements, as a result of
this transaction.
ITEM 3. LEGAL PROCEEDINGS
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
PART II
All references to pages appearing in the J.P. Morgan & Co. Incorporated Annual
Report to Stockholders for the year ended December 31, 1999, attached hereto as
Exhibit 13, are incorporated herein by reference in accordance with General
Instructions G to Form 10-K. This document shall be deemed to have been "filed"
only to the extent of the material incorporated herein by reference.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
Refer to page 110 and pages 113-115 of J.P. Morgan's 1999 Annual Report
to Stockholders incorporated herein by reference. (See Exhibit 13 to this Form
10-K)
ITEM 6. SELECTED FINANCIAL DATA:
Refer to pages 114-115 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference. (See Exhibit 13 to this Form 10-K)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Refer to pages 2-6 and pages 22-56 of J.P. Morgan's 1999 Annual Report
to stockholders incorporated herein by reference. (See Exhibit 13 to this Form
10-K)
<PAGE> 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Refer to pages 39-43 and page 46 of J.P. Morgan's 1999 Annual Report to
Stockholders incorporated herein by reference. (See Exhibit 13 to this Form
10-K)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Report of independent accountants - Refer to page 57 of J.P. Morgan's 1999
Annual Report to Stockholders incorporated herein by reference. (See Exhibit
13 to this Form 10-K)
Consolidated financial statements including the consolidated statement of
income, balance sheet, statement of changes in stockholders' equity and
statement of cash flows - Refer to pages 58-62 of J.P. Morgan's 1999 Annual
Report to Stockholders incorporated herein by reference. (See Exhibit 13 to
this Form 10-K)
Consolidated statement of condition of Morgan Guaranty Trust Company of New York
- - Refer to page 63 of J.P. Morgan's 1999 Annual Report to Stockholders
incorporated herein by reference. (See Exhibit 13 to this Form 10-K)
Notes to consolidated financial statements - Refer to pages 64-113 of J.P.
Morgan's 1999 Annual Report to Stockholders incorporated herein by reference.
(See Exhibit 13 to this Form 10-K)
Selected consolidated quarterly financial data - Refer to page 113 of J.P.
Morgan's 1999 Annual Report to Stockholders incorporated herein by reference.
(See Exhibit 13 to this Form 10-K) Fourth quarter 1999 results are
incorporated herein by reference to the report on Form 8-K dated January 18,
2000, filed with the Securities and Exchange Commission.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Nothing to report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
Incorporated by reference to the definitive Proxy Statement dated March 8, 2000.
ITEM 11. EXECUTIVE COMPENSATION:
Incorporated by reference to the definitive Proxy Statement dated March 8, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Incorporated by reference to the definitive Proxy Statement dated March 8, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Incorporated by reference to the definitive Proxy Statement dated March 8, 2000.
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
1. Financial statements have been included in Item 8.
2. Financial statement schedules: Schedule III - Condensed financial
information of J.P. Morgan & Co. Incorporated (parent)
Refer to pages 110-112 of J.P. Morgan's 1999 Annual Report to
Stockholders incorporated herein by reference. (See Exhibit 13 to
this Form 10-K)
Exhibits
3a. Restated certificate of incorporation, as amended (incorporated by
reference to Exhibit 3a to J.P. Morgan's post-effective amendment
No. 1 to Form S-3, Registration No. 33-55851)
3b. By-laws of J.P. Morgan as amended through April 10, 1996
(incorporated by reference to Exhibit 3b to J.P. Morgan's report on
Form 8-K, dated April 11, 1996)
4. Instruments defining the rights of security holders, including
indentures. J.P. Morgan hereby agrees to furnish to the Commission,
upon request, a copy of any unfiled agreements defining the rights
of holders of long-term debt of J.P. Morgan and of all subsidiaries
of J.P. Morgan for which consolidated or unconsolidated financial
statements are required to be filed.
10a. 1992 stock incentive plan, as amended (incorporated by reference to
Exhibit 10a to J.P. Morgan's annual report on Form 10-K for the year
ended December 31, 1994, File No. 1-5885)
10b. Director stock plan, as amended (incorporated by reference to
Exhibit 10b to J.P. Morgan's annual report on Form 10-K for the year
ended December 31, 1994, File No. 1-5885)
10c. Deferred compensation plan for directors' fees, as amended
(incorporated by reference to Exhibit 10c to J.P. Morgan's annual
report on Form 10-K for the year ended December 31, 1992, File No.
1-5885)
10d. 1989 stock incentive plan, as amended (incorporated by reference to
Exhibit 10d to J.P. Morgan's annual report on Form 10-K for the year
ended December 31, 1994, File No. 1-5885)
10e. 1987 stock incentive plan, as amended (incorporated by reference to
Exhibit 10e to J.P. Morgan's annual report on Form 10-K for the year
ended December 31, 1994, File No. 1-5885)
10f. Incentive compensation plan, as amended (incorporated by reference
to Exhibit 10f to J.P. Morgan's annual report on Form 10-K for the
year ended December 31, 1997, File No. 1-5885)
10g. Stock option award (incorporated by reference to Exhibit 10h to J.P.
Morgan's quarterly report on Form 10-Q for the quarter ended March
31, 1995, File No. 1-5885)
<PAGE> 13
10h. 1995 stock incentive plan, as amended (incorporated by reference to
Exhibit 10i to J.P. Morgan's annual report on Form 10-K for the year
ended December 31, 1996, File No. 1-5885)
10i. 1995 executive officer performance plan (incorporated by reference
to Exhibit 10j to J.P. Morgan's annual report on Form 10-K for the
year ended December 31, 1995, File No. 1-5885)
10j. 1998 performance plan (incorporated by reference to Exhibit 10 to
J.P. Morgan's quarterly report on Form 10-Q for the quarter ended
September 30, 1998, File No. 1-5885)
12. Statements re computation of ratios
13. Annual Report to Stockholders. Only those sections of the Annual
Report to Stockholders referenced in Parts I, II and IV above
are incorporated in this report on Form 10-K.
21. Subsidiaries of J.P. Morgan
23. Consent of independent accountants
24. Powers of attorney
27. Financial data schedule
Other schedules and exhibits are omitted because the required information either
is not applicable or is shown in the consolidated financial statements or the
notes thereto.
Reports on Form 8-K:
Report on Form 8-K dated October 18, 1999, was filed with the Securities and
Exchange Commission during the quarter ended December 31, 1999, which reported
the issuance by J.P. Morgan of a press release reporting its earnings for the
three- and nine-month periods ended September 30, 1999.
<PAGE> 14
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on March 8,
2000, on its behalf by the undersigned, thereunto duly authorized.
(Registrant) J.P. MORGAN & CO. INCORPORATED
By (SIGNATURE) /s/RACHEL F. ROBBINS
-----------------------------
(Name and Title) Rachel F. Robbins
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 8, 2000, by the following persons on behalf of
the registrant in the capacities indicated.
By (SIGNATURE) /s/PETER D. HANCOCK
-----------------------------
(Name and Title) Peter D. Hancock
Chief Financial Officer
(Principal financial officer)
By (SIGNATURE) /s/DAVID H. SIDWELL
-----------------------------
(Name and Title) David H. Sidwell
Managing Director and Controller
(Principal accounting officer)
By (SIGNATURE) /s/DOUGLAS A. WARNER III *
-----------------------------
(Name and Title) Douglas A. Warner III
Chairman of the Board and Director
(Principal executive officer)
By (SIGNATURE) /s/PAUL A. ALLAIRE*
-----------------------------
(Name and Title) Paul A. Allaire, Director
By (SIGNATURE) /s/RILEY P. BECHTEL *
-----------------------------
(Name and Title) Riley P. Bechtel, Director
By (SIGNATURE) /s/LAWRENCE A. BOSSIDY *
-----------------------------
(Name and Title) Lawrence A. Bossidy, Director
By (SIGNATURE) /s/MARTIN FELDSTEIN *
-----------------------------
(Name and Title) Martin Feldstein, Director
By (SIGNATURE) /s/ELLEN V. FUTTER *
-----------------------------
(Name and Title) Ellen V. Futter, Director
<PAGE> 15
By (SIGNATURE) /s/HANNA H. GRAY *
-----------------------------
(Name and Title) Hanna H. Gray, Director
By (SIGNATURE) /s/WALTER A. GUBERT *
-----------------------------
(Name and Title) Walter A. Gubert
Vice Chairman of the Board and Director
By (SIGNATURE) /s/JAMES R. HOUGHTON *
-----------------------------
(Name and Title) James R. Houghton, Director
By (SIGNATURE) /s/JAMES L. KETELSEN *
-----------------------------
(Name and Title) James L. Ketelsen, Director
By (SIGNATURE) /s/JOHN A. KROL *
-----------------------------
(Name and Title) John A. Krol, Director
By (SIGNATURE) /s/ROBERTO G. MENDOZA *
-----------------------------
(Name and Title) Roberto G. Mendoza
Vice Chairman of the Board and Director
By (SIGNATURE) /s/MICHAEL E. PATTERSON *
-----------------------------
(Name and Title) Michael E. Patterson
Vice Chairman of the Board and Director
By (SIGNATURE) /s/LEE R. RAYMOND *
-----------------------------
(Name and Title) Lee R. Raymond, Director
By (SIGNATURE) /s/RICHARD D. SIMMONS *
-----------------------------
(Name and Title) Richard D. Simmons, Director
By (SIGNATURE) /s/KURT F. VIERMETZ *
-----------------------------
(Name and Title) Kurt F. Viermetz, Director
By (SIGNATURE) /s/LLOYD D. WARD *
-----------------------------
(Name and Title) Lloyd D. Ward, Director
By (SIGNATURE) /s/DOUGLAS C. YEARLEY *
-----------------------------
(Name and Title) Douglas C. Yearley, Director
* By /s/JAMES C.P. BERRY
--------------------------
James C.P. Berry
(Attorney-in-fact)
<PAGE> 16
LIST OF EXHIBITS
3a. Restated certificate of incorporation, as amended
(incorporated by reference to Exhibit 3a to J.P.
Morgan's post-effective amendment No. 1 to Form S-3,
Registration No. 33-55851)
3b. By-laws of J.P. Morgan as amended through April 10, 1996
(incorporated by reference to Exhibit 3b to J.P.
Morgan's report on Form 8-K, dated April 11, 1996)
4. Instruments defining the rights of security holders,
including indentures. J.P. Morgan hereby agrees to
furnish to the Commission, upon request, a copy of any
unfiled agreements defining the rights of holders of
long-term debt of J.P. Morgan and of all subsidiaries of
J.P. Morgan for which consolidated or unconsolidated
financial statements are required to be filed.
10a. 1992 stock incentive plan, as amended (incorporated by
reference to Exhibit 10a to J.P. Morgan's annual report
on Form 10-K for the year ended December 31, 1994, File
No. 1-5885)
10b. Director stock plan, as amended (incorporated by
reference to Exhibit 10b to J.P. Morgan's annual report
on Form 10-K for the year ended December 31, 1994, File
No. 1-5885)
10c. Deferred compensation plan for directors' fees, as
amended (incorporated by reference to Exhibit 10c to
J.P. Morgan's annual report on Form 10-K for the year
ended December 31, 1992, File No. 1-5885)
10d. 1989 stock incentive plan, as amended (incorporated by
reference to Exhibit 10d to J.P. Morgan's annual report
on Form 10-K for the year ended December 31, 1994, File
No. 1-5885)
10e. 1987 stock incentive plan, as amended (incorporated by
reference to Exhibit 10e to J.P. Morgan's annual report
on Form 10-K for the year ended December 31, 1994, File
No. 1-5885)
10f. Incentive compensation plan, as amended (incorporated by
reference to Exhibit 10f to J.P. Morgan annual report on
Form 10-K for the year ended December 31, 1997, File No.
1-5885)
10g. Stock option award (incorporated by reference to Exhibit
10h to J.P. Morgan's quarterly report on Form 10-Q for
the quarter ended March 31, 1995, File No. 1-5885)
10h. 1995 stock incentive plan, as amended (incorporated by
reference to Exhibit 10i to J.P. Morgan's annual report
on Form 10-K for the year ended December 31, 1996, File
No. 1-5885)
<PAGE> 17
10i. 1995 executive officer performance plan (incorporated by
reference to Exhibit 10j to J.P. Morgan's annual report
on Form 10-K for the year ended December 31, 1995, File
No. 1-5885)
10j. 1998 performance plan (incorporated by reference to
Exhibit 10 to J.P. Morgan's quarterly report on Form
10-Q for the quarter ended September 30, 1998, File No.
1-5885)
12. Statements re computation of ratios
13. Annual Report to Stockholders. Only those sections of
the Annual Report to Stockholders referenced in Parts
I, II and IV above are incorporated in this report on
Form 10-K.
21. Subsidiaries of J.P. Morgan
23. Consent of independent accountants
24. Powers of attorney
27. Financial data schedule
<PAGE> 1
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
J.P. Morgan & Co. Incorporated
Consolidated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
Twelve months ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income $2 055 $963 $1 465 $1 574 $1 296
Add: income taxes 1 059 454 689 758 610
Less: equity in undistributed income
of all affiliates accounted for by
the equity method 71 79 40 25 16
Add: fixed charges, excluding interest
on deposits 7 207 8 584 7 756 6 502 5 452
-----------------------------------------------------------------------------------------------------------------------------------
Earnings available for fixed charges,
excluding interest on deposits 10 250 9 922 9 870 8 809 7 342
Add: interest on deposits 2 253 2 823 2 753 2 541 2 520
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings available for fixed charges,
including interest on deposits 12 503 12 745 12 623 11 350 9 862
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense, excluding interest on
deposits 7 176 8 537 7 728 6 470 5 414
Interest factor in net rental expense 31 47 28 32 38
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed charges, excluding interest on
deposits 7 207 8 584 7 756 6 502 5 452
Add: interest on deposits 2 253 2 823 2 753 2 541 2 520
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed charges, including interest
on deposits 9 460 11 407 10 509 9 043 7 972
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges:
Excluding interest on deposits 1.42 1.16 1.27 1.35 1.35
Including interest on deposits 1.32 1.12 1.20 1.26 1.24
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
EXHIBIT 12
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
J.P. Morgan & Co. Incorporated
Consolidated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions
Twelve months ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income $2 055 $963 $1 465 $1 574 $1 296
Add: income taxes 1 059 454 689 758 610
Less: equity in undistributed income
of all affiliates accounted for by
the equity method 71 79 40 25 16
Add: fixed charges, excluding interest
on deposits 7 260 8 637 7 756 6 502 5 452
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings available for fixed charges,
excluding interest on deposits 10 303 9 975 9 870 8 809 7 342
Add: interest on deposits 2 253 2 823 2 753 2 541 2 520
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings available for fixed charges,
including interest on deposits 12 556 12 798 12 623 11 350 9 862
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense, excluding interest on
deposits 7 176 8 537 7 728 6 470 5 414
Interest factor in net rental expense 31 47 28 32 38
Preferred stock dividends 53 53 51 49 35
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed charges, excluding interest
on deposits 7 260 8 637 7 807 6 551 5 487
Add: interest on deposits 2 253 2 823 2 753 2 541 2 520
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed charges, including interest
on deposits 9 513 11 460 10 560 9 092 8 007
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and
preferred stock dividends:
Excluding interest on deposits 1.42 1.15 1.26 1.34 1.34
Including interest on deposits 1.32 1.11 1.20 1.25 1.23
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
[Front Cover]
J.P. Morgan & Co. Incorporated
99 Annual Report
<PAGE> 2
[Inside Front Cover]
For an interactive version of
this annual report, visit www.jpmorgan.com/annual.
TABLE OF CONTENTS
2 Letter to shareholders
7 Voices and views
23 Review and outlook
27 Business segment results
37 Productivity and quality
38 Capital and risk management
55 Consolidated revenue and expense analysis
58 Consolidated financial statements
64 Notes to consolidated financial statements
114 Five-year financial summary
119 Management, Board of Directors, advisory councils
123 J.P. Morgan directory
<PAGE> 3
FINANCIAL HIGHLIGHTS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
Dollars in millions, except per share data 1999 1998 1997
<S> <C> <C> <C>
Total revenues $8 856 $6 955 $7 220
Pretax income 3 114 1 417 2 154
Net income 2 055 963 1 465
Economic value added* 863 (272) 7
Earnings per share - diluted $10.39 $4.71 $7.17
Dividends declared per share $3.97 $3.84 $3.59
Return on average common equity 18.4% 8.6% 13.4%
AT YEAR-END
Total assets $260 898 $261 067 $262 159
Total stockholders' equity 11 439 11 261 11 404
Book value per share $57.83 $55.01 $55.99
</TABLE>
*Excludes special items
1
<PAGE> 4
[Photo of Douglas A. Warner III, Chairman and chief executive officer]
[SIDEBAR - OUR BUSINESS WITH CLIENTS - THROUGH MANY MORE AND FAR DEEPER
RELATIONSHIPS WITH INSTITUTIONS AND INDIVIDUALS - WILL BE THE MAJOR SOURCE OF
EARNINGS GROWTH FOR THE FIRM.]
Dear fellow shareholders:
Nineteen ninety-nine was a strong year for J.P. Morgan. We made good progress on
our strategic agenda by focusing on growth in our client activities, risk
reduction, and productivity. Net income rose to $2.055 billion, or $10.39 per
share, a significant rebound from 1998. Return on common equity was 18.4
percent, well above our cost of equity capital. And our efficiency ratio -
expenses divided by revenues - improved to 65 percent, our target for the year.
We also report to you here for the first time an important measure of the firm's
risk-adjusted profitability: economic value added, or EVA. We generated EVA of
$863 million after tax in 1999, compared with negative EVA in 1998 and breakeven
in 1997. The change in EVA is particularly important because it reflects two
major drivers of shareholder value: earnings growth and risk reduction.
Our focus now is on the future. In every facet of our business we are
confronting the profound economic transformation being worked by technology.
This change is as dramatic as any we have faced in our history. My overwhelming
sense is that it presents an enormous growth opportunity for J.P. Morgan.
If there is a watchword for capturing this opportunity, it is accelerate. We are
moving aggressively to build on our achievements in 1999, focusing on three key
initiatives:
- - combining integrated advice and content with technology to reach more
clients with more relevant services than ever before
- - driving capital markets innovation with a reduced risk profile
- - leading the industry in the adoption of best practices in productivity
and quality
2
<PAGE> 5
[Photos - Walter A. Gubert, vice chairman; Michael E. Patterson, vice chairman]
EXPANDING CLIENT REACH
Two years ago in this space, I said that J.P. Morgan, having built a global
investment bank through a multiyear investment program, was poised to generate
significant returns. We started to realize this performance potential in 1998,
despite the effect of market turmoil on our overall results. Our momentum
continued in 1999 with all our client activities making meaningful contributions
to the bottom line. This is a milestone because our client activities - through
many more and deeper relationships with institutional and individual clients -
will be the major source of earnings growth for the firm.
The primary achievement of 1999 was a decisive move to profitability by our
investment banking and equities business: pretax income of three quarters of a
billion dollars last year was three and a half times greater than in 1998.
Operating leverage from our maturing equities franchise accounted for the jump,
with equity derivatives a particularly outstanding performer. In an intensely
competitive market for investment banking services, we continued to increase
market share in mergers and acquisitions as well as in equity underwriting.
Market activity was skewed to the telecommunications, media, and technology
industries - vital sectors in which we are still gaining share and aggressively
adding resources.
This performance was complemented by fixed income activities, broadly defined,
which staged a strong turnaround in earnings and a significant reduction in
risk. Pretax income was almost $1.5 billion, more than double that of 1998. In
an improved market environment we benefited from strong client demand and
dominance in some of the fastest growing market segments such as derivatives and
emerging markets. At the same time, pretax margins in our asset management and
private banking business more than tripled as a result of productivity savings
and solid revenue growth.
These achievements provide us with a platform from which to pursue our greatest
growth opportunity: an increase in the number of clients we serve and a deeper
relationship with each of them. Critical technologies have matured to the point
where it is possible to provide sophisticated services to more individuals and
institutions than ever before - and to do so cost-effectively.
3
<PAGE> 6
[SIDEBAR - A WORLD WHERE TECHNOLOGY IS FUNDAMENTALLY CHANGING HOW ISSUERS AND
INVESTORS ACCESS THE CAPITAL MARKETS PLAYS TO THIS FIRM'S STRENGTHS.]
If we could have imagined a world in which the value of our brand would rise,
this is it. Our role as trusted partner to our clients, providing unbiased
advice with a global perspective and solving the most complex problems by
integrating knowledge and service of the highest quality, is more relevant than
ever. Now, technology enables us to take elements of this approach on line,
allowing us to aggregate sophisticated information and provide integrated
services through customized, single points of access.
We have launched a major effort to extend the reach of our private bank to a
much broader group of affluent individuals in the United States. This market has
doubled in the last five years and now exceeds seven million households.
Research shows that while many financial firms have targeted the affluent
market, none provides what clients seek most: a trusted advisor who integrates a
full range of investment, tax-planning, brokerage, banking, and generational
planning services. We aim to penetrate this market rapidly by providing clients
with a choice of channels for accessing our unique offering, including the
Internet and telephone contact as well as face-to-face interaction with private
bankers.
Extension of our institutional client relationships is equally important. To
that end, we have undertaken a number of initiatives to accelerate client
acquisition across the firm. We aim to double the rate of growth among our most
important institutional clients - those who generate annual revenues of $1
million or more - from its current rate of 4 percent.
We have a strong resume from which to expand our base of corporate and issuer
clients, including leading positions in industry segments ranging from
healthcare to the consumer/retail, financial institution, energy, and industrial
sectors. We rank among the top five merger and acquisition advisors to these
industries globally. In equities, we are among the three most active U.S. lead
underwriters for the largest transactions - those greater than $500 million. And
we are a top-tier investment bank in the fast-growing European market as well as
in Latin America and Japan. These are powerful leadership positions from which
to grow.
LEADING CAPITAL MARKET INNOVATION
In the course of the past two years we have dramatically reduced the amount of
both credit and market risk to which we are exposed. While this reduction has
come at a cost, it has positioned us to advantage in a world where technology is
fundamentally changing how issuers and investors access the capital markets.
4
<PAGE> 7
First, our achievements: Risk in our credit portfolio is down by 50 percent from
year-end 1997, a year earlier than planned. We also significantly scaled back
market risk, most notably in our Proprietary Investing and Trading segment,
where we realized significant losses in the process. One measure of risk we use
is daily earnings at risk or DEaR. The firm's aggregate DEaR at the end of 1999
was more than 70 percent lower than at the end of 1998 - an unusually volatile
and risky time in the markets - and well below its year-end 1997 level.
The reduction in risk does not mean retrenchment from the markets. On the
contrary, the importance of capital markets globally continues to increase, and
providing clients access to them continues to be one of our critical missions.
But how issuers and investors access the markets, and the role of financial
intermediaries, is changing rapidly and inexorably. Value will accrue to firms
that provide investors with returns through insight, analytical tools, and a
broad range of execution capabilities, while enabling issuers to tap the most
efficient sources of capital. The new environment will require fast
decision-making, active risk management, and rapid but shorter-term capital
commitment, not the assumption of large, static risk positions. This is our
model for the future.
Technology will play a crucial role. It will let us accelerate and broaden our
delivery of distinctive products and services. For example, MorganMarkets, our
research web site, already contains a wide range of analysis and tools.
Knowledge management technology will let us capture vastly more information and
tailor it intelligently and efficiently to each client.
Technology also promotes efficiency and transparency in the markets by
facilitating electronic platforms. We will co-invest in promising systems, as we
did with the Archipelago and Tradepoint electronic communication networks
(ECNs). And we will lead such new initiatives as Market Axess, a multidealer
electronic platform for fixed income instruments, and Cygnifi, a derivatives
services company - both announced in January 2000.
Finally, we have many opportunities to commercialize our own leading-edge
technologies. We did this with our derivatives expertise in the case of Cygnifi.
We also launched Horizon, a web-based software tool for operational risk
management, last October. Many other technologies with the potential for
adaptation to a broader market exist throughout the firm.
[SIDEBAR - AFTER A DISTINGUISHED 32-YEAR CAREER WITH THE FIRM, ROBERTO G.
MENDOZA WILL RETIRE AS VICE CHAIRMAN OF THE BOARD IN APRIL AND WILL NOT STAND
FOR REELECTION AS A DIRECTOR. A FORMIDABLE FINANCIER AND STRATEGIST, ROBERTO HAS
PLAYED A KEY ROLE IN J.P. MORGAN'S TRANSFORMATION INTO A GLOBAL INVESTMENT BANK.
IN THE EARLY 1980S HE LED OUR INTERNATIONAL FINANCIAL MANAGEMENT GROUP, WHICH
BECAME A SEEDBED OF CAPITAL MARKETS AND INVESTMENT BANKING EXPERTISE. LATER, AS
HEAD OF OUR FLEDGLING MERGERS AND ACQUISITIONS PRACTICE, HE BUILT IT INTO A
MAJOR BUSINESS FOR THE FIRM. ROBERTO HAS CREATED TREMENDOUS VALUE FOR BOTH OUR
CLIENTS AND OUR SHAREHOLDERS, AND PROFOUNDLY SHAPED THIS FIRM'S IDENTITY. WE ALL
THANK HIM DEEPLY FOR HIS COUNTLESS CONTRIBUTIONS AND WISH HIM THE VERY BEST FOR
THE FUTURE.]
5
<PAGE> 8
EFFICIENCY AND QUALITY MINDSET TAKING HOLD
Productivity and quality are becoming a mindset at J.P. Morgan. Our goal is to
make that mindset indelible. Discipline in productivity and quality of service
are essential to client acquisition and retention, to risk management, and to
profitable growth at a time when demands for investment in people and technology
are high.
We want to lead the industry with best practices on this front. What began in
1998 as a drive to cut costs became a firmwide focus last year on margin
improvement and quality. We achieved our target of reducing expenses before
incentive compensation by $400 million in 1999. During the year we introduced
across the firm the Six Sigma business improvement methodology, training 1,600
individuals in its fundamentals and applying it to a number of business
processes. Broad application of Six Sigma will allow us to realize margin
benefits through greater efficiency and through increases in revenues. Its
application to our business will be a major pillar of our strategy going
forward.
The sum of our accomplishments allowed the Board of Directors to authorize, in
October, a $3 billion share buyback and a modest increase in the common stock
dividend to $1.00 per share. Taken together, these actions reflect both the
significant capital freed up through risk reduction and our excellent prospects
for future earnings growth. They should be viewed as interlocking elements of a
more dynamic capital strategy that returns excess capital to shareholders but is
flexible about the timing and amount of share repurchases and dividend
increases.
In the final analysis the quality, commitment, and passion of our people will
determine J.P. Morgan's fortunes. On the following pages, we bring you some of
those people. Their perspective on the markets, their optimistic embrace of
change and sense of urgency, viewed against this firm's enduring legacy of
client focus, innovation, and thought leadership, underscore the magnitude of
the opportunity before us.
/s/ Douglas A. Warner III
Douglas A. Warner III
Chairman of the Board
and Chief Executive Officer
6
<PAGE> 9
[SIDEBAR - A SERIES OF CONVERSATIONS WITH J.P. MORGAN PROFESSIONALS
IDEAS
SOLUTIONS
ACCESS]
<PAGE> 10
[PHOTOS - SUSAN WALKER WHITE, EQUITY RESEARCH; MICHAEL CAMPBELL, J.P.
MORGAN CAPITAL CORPORATION]
[SIDEBAR - "HAVING MORE INFORMATION MEANS YOU ACTUALLY HAVE EVEN GREATER NEED
FOR GOOD ADVICE - FOR A PATHFINDER THROUGH THE JUNGLE OF INFORMATION."]
8
<PAGE> 11
[SIDEBAR - VOICES AND VIEWS: NOTES FROM CONVERSATIONS
SOLUTIONS
THE CHOICE IS SIMPLE: INVENT AND REINVENT YOURSELF OR BECOME EXTINCT.]
[PHOTO - PATRICK MOSES, INTERNAL CONSULTING SERVICES]
"Information is a democratizing force, but it creates anxiety and urgent demands
for perspective and judgment. Faced with thickets of news and data, what
clients seek above all is guidance, not just more content . . ."
"No matter their size or stage of development, clients are seeking sponsorship,
advice, and commitment of capital for transformational initiatives.
Established enterprises seek to stay relevant as they penetrate new businesses
or expand their market share against nimble competitors. Emerging corporate
and private clients need advice and tools to help them grow. Technology is
leveling playing fields, but it also lets us reach many more clients for the
first time . . ."
"Serving clients means forming a true partnership - aligning our interests so
that their success and our success are one and the same. And we can't confine
ourselves to our own backyard. Providing end-to-end solutions may mean
combining our products and know-how with services in other parts of the
market. Whether we find solutions by manufacturing them ourselves or just
assembling them here, the goal is to be absolutely centered on clients' needs
. . ."
[SIDEBAR - LEFT TO RIGHT: SUSAN WALKER WHITE, EQUITY RESEARCH; MICHAEL CAMPBELL,
J.P. MORGAN CAPITAL CORPORATION; PATRICK MOSES, INTERNAL CONSULTING SERVICES]
9
<PAGE> 12
[SIDEBAR - The knowledge of many serving the needs of one]
[PHOTO - MIYOUNG LEE, PRIVATE EQUITY]
We partner with clients, both institutional and individual, as they position
themselves in the new economy. Taking the long view and putting together
integrated solutions - ideas and expertise from within the firm, from the
client, and from other parts of the market helps us accelerate and sustain their
success.
HELPING ENTERPRISES STAY RELEVANT
As industries rationalize and established companies seek scale and relevance,
they demand an integrated approach from their advisors. This was true in the
$42.7 billion merger of Germany's VIAG AG and VEBA AG, which created Europe's
largest investor-owned energy utility. Because of the complex conglomerate
structure of both companies, our advisory work for VIAG required a wide range of
expertise - in the energy, chemical, industrial, real estate, and
telecommunications industries as well as in German and European regulatory
issues.
Likewise, our versatility came to the fore after we advised LYONDELL CHEMICAL
CO. on its successful 1998 acquisition of ARCO Chemical. The company sought a
creative restructuring of its balance sheet. In response, last May we priced a
$2.4 billion high-yield bond offering, the fourth-largest ever completed;
arranged a $1 billion leveraged loan; and executed a $765 million secondary
equity offering.
We demonstrated our strength in serving clients' most complex cross-border needs
in the three-way, $1.9 billion strategic partnership of AT&T CORP., British
Telecom, and Japan Telecom announced last April. By advising AT&T on backing
Japan Telecom's bid to enhance its competitiveness in a rapidly consolidating
market, we helped bolster our client's presence in that market and completed the
largest foreign investment ever made in Japanese telecommunications.
Elsewhere in Asia, we advised on the two most significant bank consolidations:
in Malaysia, the combination that created BUMIPUTRA-COMMERCE BANK BHD.; and in
the Philippines, BANK OF THE PHILIPPINE ISLANDS' acquisition of Far East Bank.
Both mergers were the largest in their respective markets and accelerated
banking consolidation across the region.
10
<PAGE> 13
[SIDEBAR - SOLUTIONS]
[SIDEBAR - "If we can help our clients define their places in their competitive
landscapes, we stay relevant by helping them stay relevant." - Miyoung Lee,
Private Equity]
SPONSORING EMERGING COMPANIES
The booming digital economy is creating the industry leaders of the future. One
company at the heart of this trend is NETWORK SOLUTIONS, INC., the five-year-old
web domain-name registrar that transformed itself from Internet pioneer to
nimble commercial enterprise - helped by a $780 million secondary offering we
led for them last February. We have also led IPOs for clients producing some of
the web's cutting-edge technologies, including INTERACTIVE PICTURES CORP.
(IPIX), the Internet photography company.
Through our subsidiary J.P. MORGAN CAPITAL CORPORATION, we have long put our own
capital to work to support developing companies. Complementing this effort is
our Internet incubator, which supports new enterprises not only financially but
conceptually - indeed, at birth. Drawing on our global network, the incubator
combines our experience and capabilities to identify, create, and nurture
Internet financial services businesses worldwide. In January it launched its
first venture, MARKET AXESS (see page 19).
INTEGRATING ADVICE FOR INDIVIDUALS
The demand for comprehensive advice is as great among individuals as it is among
our institutional clients. In one instance, we helped a European private client
complete a leveraged buyout of his company. We also helped management attract
external institutional investors, and we participated in the deal through an
equity investment.
Under way at the end of the year was an intensive development effort to bring
our unique brand of integrated advice to a larger number of affluent households
by providing clients with a choice of accessing Morgan's expertise through
traditional channels, over the phone, or on the Internet.
11
<PAGE> 14
[SIDEBAR - VOICES AND VIEWS: NOTES FROM CONVERSATIONS
IDEAS
VALUE COMES FROM INNOVATION, AND THE BAR FOR INNOVATION RISES CONSTANTLY.]
[PHOTO - KELLY CESARE, EQUITY DERIVATIVES]
"Innovation is imperative. Clients aren't waiting anymore for a push to bring
about change - they insist on being change agents. Whether it's a nascent
Internet business launching an idea, a venerable corporation ripping up old
models, or an individual putting newfound wealth to work, everyone is jostling
for position in the new economy. The firms that serve them have an equally
tough challenge: coming up with products and services to remain relevant, to
stay ahead of the trend . . ."
"Listening to clients and providing what they need is essential; anticipating
what will make them more efficient, better positioned, and more valuable -
that's the hallmark of leaders. It's not enough to react to client demand or
to execute the typical solution, especially when the clients are changing and
the old solutions don't fit anymore . . ."
"To be an innovator means inventing, synthesizing, rethinking. It may mean
looking across different asset classes to create new trade ideas. Or combining
content and analysis to create distinctive research. It can mean adapting
advice to fluid markets, global restructuring, and heightened competitive
pressures. Or creating new tools and interfaces to capture opportunities from
accelerated and integrated markets . . ."
"Technology has increased the speed at which Morgan innovates, but it hasn't
changed our fundamental value proposition: integrity, quality, and client
focus. A new product or clever structure is nothing more than that if it exists
for its own sake. We have to be obsessed not just with the new thing but with
the best thing - the idea that becomes somebody's solution . . ."
[SIDEBAR - LEFT TO RIGHT: KELLY CESARE, EQUITY DERIVATIVES; MICHELE FIGUEIREDO,
PRIVATE BANKING; ERIK OKEN, INVESTMENT BANKING]
12
<PAGE> 15
[PHOTOS - MICHELE FIGUEIREDO, PRIVATE BANKING; ERIK OKEN, INVESTMENT BANKING]
[SIDEBAR - "THE KEY IS TO DRIVE CHANGES IN THE MARKETPLACE, TO BE IN FRONT OF
THE NEXT THING - WITHOUT CHANGING THE WAY WE DO BUSINESS."]
13
<PAGE> 16
[SIDEBAR - INNOVATING PRODUCTS AND MARKETS
"ADVICE IS NOT JUST ABOUT INFORMATION; IT'S NOT JUST ABOUT THE NUMBERS. IT'S
ABOUT INSIGHT, IDEAS, CONNECTIONS, INTRODUCTIONS. IT'S ABOUT PROVIDING A
HOLISTIC VIEW." - RAJ RATHI, INVESTMENT BANKING]
Innovation is an essential part of J.P. Morgan's heritage. We have facilitated
the growth of new industries beginning with the railroads, fostered the
development of new markets such as derivatives, and invented standard-setting
products such as ADRs, Brady bonds, and RiskMetrics(TM). Today we're advancing
industry realignment, fueling the growth of new markets, and developing
leading-edge research and risk management tools.
Advancing industry realignment
Some of the most innovative deals in 1999 helped clients transform their
industries or uncovered new ways to value companies. Through a unique
partnership structure, we helped Dutch company Royal KPN N.V. and its partner
BellSouth Corporation win the acquisition of the number three German cellular
operator E-Plus Mobilfunk GmbH against much larger competitors.
In real estate the year's standout deal was not a merger but a demerger, that of
Rodamco N.V. As sole advisor on this complex [currency symbol for Euro]6 billion
deal - the largest European public real estate transaction to date - we helped
create four leading, regionally focused real estate companies and a top global
real estate investment management company.
Our work for Genentech, Inc., a public company that was taken private by Roche
Holding AG, then relaunched in a $2.2 billion initial public offering just weeks
later, won broad market acclaim. The "re-IPO" proved so successful that just
three months later we priced another $2.9 billion of Genentech equity for Roche,
the largest U.S. secondary offering in history.
14
<PAGE> 17
[SIDEBAR - IDEAS]
[PHOTOS - RAJ RATHI, INVESTMENT BANKING]
Fueling market growth in complex derivatives
In credit derivatives we continue to be a leader in the business of tailoring
risks to investors' needs. In 1999 we introduced the MINCS/SEQUILS structure, an
advanced collateralized loan obligation that solves a complex problem: how to
achieve an investment-grade rating while securitizing sub-investment-grade
loans. In our initial use of the structure, we distributed the risk of $1.5
billion of leveraged loans to the capital markets.
Similarly, in equity derivatives we are developing innovative strategies to help
corporate clients unlock value from their equity positions. These structures let
them hedge large positions while addressing multiple concerns: financing cost,
rating-agency treatment, taxes, and accounting. Clients in the fast-growing
media and telecom sectors account for a large portion of these transactions,
some of which exceed $1 billion.
Developing leading-edge tools
We believe that what works for us can and should be shared with the markets, and
the Internet has accelerated the process. Launched in the summer of 1999,
MorganMarkets provides Morgan's first-rate research - reports, data, analytics,
and indices - alongside tools that can't be found elsewhere. It includes more
than a dozen interactive advanced research applications, such as Fixed Income
Marketplace, an electronic inventory and pricing service, and Sage, an emerging
markets analytics system. The latest addition to MorganMarkets, Volatility
Center, contains market information and risk-measurement tools for the foreign
exchange and precious metals options markets. Volatility Center is the first
site to offer comprehensive information about a broad array of currencies,
including emerging markets currencies. And it lays the groundwork for electronic
execution of options trades.
Last year we married risk management and technology to create Horizon, a
web-based software tool. Developed by J.P. Morgan and released last fall to the
broader markets in partnership with Ernst & Young, Horizon gives companies a
clearer picture of the unique systemic risks they face in a world of
technology-driven commerce and significantly streamlines manual risk assessment
processes.
15
<PAGE> 18
[PHOTOS - JOE DELGADO, J.P. MORGAN CAPITAL CORPORATION; LESLEY EYDENBERG,
CAPITAL MARKETS]
[SIDEBAR - "WE ARE IN A WORLD OF NO SECOND TRIES."]
16
<PAGE> 19
[SIDEBAR - VOICES AND VIEWS: NOTES FROM CONVERSATIONS
ACCESS
AS TECHNOLOGY INVADES MARKETS, INTERMEDIARIES NEED TO DO MORE OR GET OUT OF THE
WAY.]
[PHOTO - BRIAN CONROY, LISTED STOCK TRADING]
"Accelerating markets and relentless competition are changing the definition of
value - as the role of the straight intermediary becomes commoditized, market
makers have to think creatively to maintain leadership. Market participants
are getting smarter as a wave of information and technologies brings them
closer to the action and supplies them with a wealth of choices . . ."
"It's understood - expected - that financial firms can execute transactions,
even the most complex ones. Inevitably, then, the dialogue with clients is
changing: moving away from the question 'Can my deal be done?' and toward 'How
can it be done better, cheaper, faster?' The challenge is to build the
infrastructure so that the process, whether it's executed by us or by the
client, is both seamless and first-rate . . ."
"On the other hand, in the most commoditized markets, the way to win is, in a
way, to do less: guide clients through the transaction process, use technology
to give them the best tools to do it themselves, then monitor their progress
and add value by offering advice, ideas, and service . . ."
"The most successful financial firms partner with the widest possible array of
clients, opening the 'black box' and adding transparency to the markets. It's
another kind of partnership at which we excel . . ."
[SIDEBAR - LEFT TO RIGHT: JOE DELGADO, J.P. MORGAN CAPITAL CORPORATION; LESLEY
EYDENBERG, CAPITAL MARKETS; BRIAN CONROY, LISTED STOCK TRADING]
17
<PAGE> 20
[SIDEBAR - BUILDING THE INFRASTRUCTURE FOR BEST EXECUTION]
[PHOTO - BRYAN WEADOCK, FIXED INCOME]
The rules in the market have changed: Investors want financial intermediaries to
hand them the keys so they can drive the execution process themselves. This is
something we welcome and encourage, so we're sharing existing tools and creating
others to increase access, transparency, and efficiency. Whether launching
platforms that allow issuers and investors to converse directly, proposing
e-commerce protocols to the broader markets, or partnering with electronic
exchanges, we're committed to giving clients the best execution wherever it's
offered and reinforcing our legacy as a setter of standards.
Electrifying markets
The buzz in 1999 was about ECNs (electronic communication networks) - new
trading platforms that have begun to reshape the way liquidity moves through
equity markets. We've invested in the ones we feel feature the smartest design
and, strategically, offer our clients the best execution: Archipelago in the
United States and Tradepoint Financial Networks in Europe.
But this is only the beginning of the e-markets story. In November we announced
J.P. Morgan eXpress, a new online electronic system for real-time trading of
European government bonds. The system, driven by our pricing and analytical
tools, offers liquidity to institutional investors on securities representing
over [Euro currency symbol]1 trillion of outstanding debt. We also became a key
backer and the lead equity investor in creditex, a new online trading and
information platform for credit derivatives. Through our investment and product
support, we aim to significantly improve market liquidity and pricing
transparency.
Finally, we're capitalizing on opportunities provided by technology to reach
investors beyond our traditional client base. In Japan we took an equity stake
in Monex Inc., an Internet-based securities and advisory service provider to
Japanese retail clients. This is another way for us to participate in, and
profit from, the rapid transformation of markets.
18
<PAGE> 21
[SIDEBAR "VALUE COMES FROM IDEAS - AND FROM MAKING MARKETS MORE TRANSPARENT." -
BRYAN WEADOCK, FIXED INCOME]
As we move into the new year, we continue to champion the migration of the more
fragmented fixed income and derivatives markets to the Internet, beginning with
the debuts of Market Axess, a multidealer fixed income platform, and Cygnifi, an
online derivatives services company.
Connecting systems and participants
To make the most of these new systems, however, participants must speak the same
language. To that end, we're helping create the protocols that make
interdependent electronic infrastructures possible. Last summer we brought
together the key global derivatives players behind FpML (Financial Products
Markup Language), a protocol for derivatives e-commerce that we offered free to
the financial markets. FpML has already been embraced as an e-commerce standard
for interest rate and foreign exchange derivatives; our competitors and leading
technology companies are helping us build the protocol and the products that
will use it.
In the futures and options markets, we've built a network that increases
transparency and efficiency for clearing clients. First announced in 1998 and
enhanced in 1999, MORCOM ExTra is available to futures and options market makers
both as a freestanding application that allows clients to retrieve data and
reconcile their own accounts more efficiently and on the web, which offers the
bonus of two-way communication with our client service representatives. Like all
the tools we develop, MORCOM gives market participants access, choice,
flexibility, and speed - all essential in the increasingly open markets of the
new economy.
19
<PAGE> 22
[SIDEBAR - "SPEED IS ESSENTIAL - GETTING IT RIGHT IS WHAT SETS APART THE
LEADERS."]
[PHOTOS - CARTY CHOCK, E-COMMERCE; ANJLI BHANDARI, LEADERSHIP AND ORGANIZATIONAL
DEVELOPMENT, RICHARD KAYE, CORPORATE COMMUNCIATION]
[SIDEBAR - FROM LEFT TO RIGHT:
CARTY CHOCK, E-COMMERCE; ANJLI BHANDARI, LEADERSHIP
AND ORGANIZATIONAL DEVELOPMENT, RICHARD KAYE, CORPORATE COMMUNCIATION]
20
<PAGE> 23
[SIDEBAR -
RESULTS
RESULTS BY BUSINESS
CAPITAL AND RISK MANAGEMENT
CONSOLIDATED FINANCIAL STATEMENTS]
<PAGE> 24
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
23 Review and outlook
27 Business segment results
37 Productivity and quality
38 Capital and risk management
55 Consolidated revenue and
expense analysis
57 Reports of management and
independent accountants
58 Consolidated financial statements
64 Notes to consolidated financial statements
114 Five-year financial summary
116 Consolidated average balances and taxable-equivalent
net interest earnings
119 Management
120 Board of Directors
121 International Council
122 Directors Advisory Council
123 J.P. Morgan directory
125 Corporate information
J.P. Morgan is a leading global financial services firm that meets critical
financial needs for business enterprises, governments, and individuals
worldwide. We advise on corporate strategy and structure; raise capital;
develop, structure, and make markets in financial instruments; and manage
investment assets. We also commit our own capital to promising enterprises
and invest and trade to capture market opportunities for our own account.
J.P. Morgan and its subsidiaries operate in an intensely competitive
industry. We compete globally with investment banks, commercial banks, and a
wide range of nonbank financial institutions. Our non-U.S. competitors may
have advantages in their home markets. We have also seen new competitors such
as insurance companies and Internet companies compete with us for clients,
market share, and people. We anticipate further competitive pressures from
industry consolidation, which we expect to accelerate in the wake of the
November 1999 passage of the Gramm-Leach-Bliley Act.
In addition to a competitive marketplace, we also operate in an unpredictable
global market environment. Our results are directly affected by factors
outside our control, including general economic and market conditions;
volatility of market prices, rates, and indices; and legislative and
regulatory developments. They are also dependent on our ability to attract
and retain skilled individuals and our ability to develop and support
technology and information systems that are critical to our operations.
Consequently, our results may vary significantly from period to period, and
we may not be able to achieve our strategic objectives.
Certain sections of our annual report contain forward-looking statements.
We use words such as expect, believe, anticipate, and estimate to identify
these statements. In particular, disclosures made in the sections "Letter to
shareholders," "Review and outlook," and "Business segment results" related
to performance targets and the outlook for 2000 contain forward-looking
statements. Such statements are based on our current expectations and are
subject to the risks and uncertainties discussed above, which could cause
actual results to differ materially from those currently anticipated. J.P.
Morgan claims the protection afforded by the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
22
<PAGE> 25
REVIEW AND OUTLOOK
- -------------------------------------------------------------------------------
WE MADE SUBSTANTIAL PROGRESS ON OUR STRATEGIC INITIATIVES IN 1999 AS WE FOCUSED
ON GROWTH IN CLIENT-GENERATED REVENUES, RISK REDUCTION, AND PRODUCTIVITY.
RESULTS FOR THE YEAR WERE STRONG AND WE ACHIEVED OUR PRINCIPAL FINANCIAL GOALS.
HIGHLIGHTS INCLUDED:
- NET INCOME OF $2.055 BILLION, A RECORD
- FIRMWIDE AFTER-TAX ECONOMIC VALUE ADDED OF $863 MILLION, UP $1.1 BILLION
BEFORE SPECIAL ITEMS
- RETURN ON AVERAGE COMMON EQUITY OF 18.4%
- RISK IN OUR CREDIT PORTFOLIO DOWN BY 50% FROM 1997
- REVENUE GROWTH OF 31%
- OPERATING EXPENSES BEFORE PERFORMANCE-DRIVEN COMPENSATION DOWN
APPROXIMATELY $400 MILLION
- AN EFFICIENCY RATIO OF 65%
MARKET ENVIRONMENT IN 1999
The market environment remained unsettled and highly competitive, but
significantly improved from the second half of 1998.
The U.S. economy continued to expand, supported by and in turn fueling a
strong stock market, and economic activity began to pick up in Japan and
Europe as the year progressed. Recovery also took hold in many of the major
emerging economies of Asia and Latin America, particularly after the
devaluation of Brazil's currency in January passed without systemic
aftershocks.
Securities issuance was strong through most of the year. Equity issuance was
dominated by technology and media companies, while debt issuance was driven
by pent-up demand after 1998's crisis and by anticipation of rising interest
rates and the transition to the year 2000. Global mergers and acquisitions
activity was also high, particularly related to industrial restructuring in
Europe and the boom in the technology, media, and telecommunications sectors.
A benign credit environment and improved liquidity drove a general decline in
spreads from 1998. However, there were periods of illiquidity and widening
spreads for certain instruments, notably government agency securities, driven
by the need to rebalance investor portfolios, the decreasing supply of
government debt, and concerns over the year 2000 transition.
The transition to 2000 occurred without significant business disruptions. The
equity markets did not experience major outflows, and most companies
successfully prefunded their anticipated cash needs.
[BAR GRAPHS]
On page 23 of the annual report there is a bar chart depicting the firm's
diluted earnings per share, for 1995 to 1999.
DILUTED EARNINGS PER SHARE
- -------------------------------------
<TABLE>
<S> <C>
1995 $ 6.42
1996 $ 7.63
1997 $ 7.17
1998 $ 4.71
1999 $10.39
</TABLE>
- -------------------------------------
On page 23 of the annual report there is a bar chart depicting the firm's
return on average common equity, for 1995 to 1999.
RETURN ON AVERAGE COMMON EQUITY
- -------------------------------------
<TABLE>
<S> <C>
1995 13.6%
1996 14.9%
1997 13.4%
1998 8.6%
1999 18.4%
</TABLE>
- -------------------------------------------------
On page 23 of the annual report there is a bar chart depicting the firm's
efficiency ratio, for 1995 to 1999.
EFFICIENCY RATIO
EXPENSES/REVENUES (EXCLUDING NON-RECURRING ITEMS)
- -------------------------------------------------
<TABLE>
<S> <C>
1995 68%
1996 66%
1997 70%
1998 77%
1999 65%
</TABLE>
Review and outlook 23
<PAGE> 26
On page 24 of the annual report there is a horizontal bar chart depicting the
firm's segment results in terms of pretax EVA, pretax income and revenues,
for 1999.
1999 SEGMENT RESULTS
<TABLE>
<CAPTION>
IN MILLIONS PRETAX EVA PRETAX INCOME REVENUES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Credit Markets $452 $676 $1 526
Interest Rate and Foreign Exchange Markets $345 $777 $2 009
Equities $312 $473 $1 417
Equity Investments $296 $501 $ 646
Investment Banking $212 $275 $1 196
Credit Portfolio $183 $629 $ 783
Asset Management Services $161 $234 $1 355
Proprietary Investing and Trading ($443) ($123) $ 29
- -----------------------------------------------------------------------------------------------------------
</TABLE>
1999 PERFORMANCE
In 1999 we adopted an economic value added* methodology to measure
performance and track progress on our growth, risk management, and
productivity initiatives. With the exception of our Proprietary Investing and
Trading activities, all our businesses earned positive EVA. Firmwide
after-tax EVA increased by $1.1 billion to $863 million. Our Proprietary
Investing and Trading segment had a challenging year, with significant total
return losses in two portfolios. The risk positions in these portfolios have
been substantially reduced.
CLIENT-DRIVEN REVENUE GROWTH
Total revenues in 1999 increased 31%, before nonrecurring gains in 1998, led
by a strong recovery in credit markets and market share gains in a vibrant
equity market environment. Strong equity markets also led to substantial
equity investment gains. We realized revenue benefits from risk reduction
efforts in our credit portfolio, and Investment Banking and Asset Management
Services both saw double-digit growth.
Momentum with clients in the improved market environment contributed to
revenue growth in 1999. Client revenues - which exclude gains or losses on
positions and inventories we hold in our market areas, our credit portfolio,
and results from trading or investing for our own account - have grown at a
compound annual rate of more than 10% over the last three years, with growth
coming from new client acquisition as well as from higher average earnings
per client.
Institutions - corporations, governments, financial services companies -
account for the majority of the firm's client revenues. Revenues from
corporate clients were particularly strong in 1999, rising by 30%. We saw
increases in a number of sectors, notably the technology, media, and
telecommunications industries, the pharmaceuticals industry, and the chemical
sector.
Our private bank provides approximately 13,000 individual clients with an
integrated offering of wealth advisory services. Overall, revenues from
private clients, recorded across all segments, were $669 million, level with
1998. Growth in revenues from private clients softened in the first half of
1999, primarily owing to the departure of several client sales teams. We
regained momentum in the second half of the year: Revenues from private
clients rose by 8% compared with the first half.
RISK REDUCTION AND CAPITAL ACTIONS
While we continue to pursue growth in client revenues, we significantly
reduced the risk in our credit and market activities in 1999. The declines
reflected the stabilization of markets and aggressive reduction of positions.
In line with our stated target, risk in our credit portfolio was down by 50%
from the end of 1997. We also reduced market risk levels, as measured by
daily earnings at risk (DEaR), from $83 million to $22 million. Lower credit
and market risk reduced the capital requirement of our business. Overall,
average capital required by all our market and credit activities declined
nearly 30% to $8.6 billion.
Strong earnings and reduced risk allowed the firm to repurchase a total of
$2.1 billion of its common stock, or 16.3 million shares, in 1999, partially
offset by 6 million shares issued to employees under our compensation plans.
Shares worth $1.4 billion were repurchased under the October 1999
authorization to repurchase up to $3 billion of common stock.
* Economic value added (EVA) is defined as operating income, adjusted to reflect
certain segments on a total return basis, less preferred stock dividends and
a charge for the cost of equity capital.
24 Review and outlook
<PAGE> 27
PRODUCTIVITY GAINS
Operating expenses for 1999 reflect meaningful gains in productivity. Higher
incentive compensation accruals resulted in expense growth of 11% before
1998's special charges. Before performance-driven compensation core operating
expenses were down approximately $400 million. The efficiency ratio
(operating expenses divided by revenues) was 65%, within our
mid-sixty-percent target range.
OUTLOOK FOR 2000
Our primary objectives for 2000 are consistent with the achievements of 1999:
to generate growth in client revenues by providing more clients with more
services while maintaining a reduced risk profile and leveraging technology
and innovation to advance our market leadership.
GROWTH OF INSTITUTIONAL CLIENTS
For institutional clients, the technology revolution and the reshaping of
industry have accelerated the need for integrated advice and services. Among
our corporate and other issuer clients several trends support this increased
demand:
- the need for significant strategic repositioning in every sector of the
economy, which will require technology-focused advice and execution
capabilities
- the rapid growth of business-to-business e-commerce, which will require
financing and financial advisory services
- the escalation of industry consolidation in Europe
- the likely resurgence of mergers and acquisitions and related financings
among companies in emerging markets, as these economies rebound
- the repeal of Glass-Steagall legislation in the United States
We believe that telecommunications, media, and technology companies will
continue to account for a large proportion of total investment banking
activity and are committing significant resources to these sectors. This will
include focusing private equity financing on providing growth capital to the
telecommunications and Internet sectors.
Technology is also redefining how we deliver services to institutional
investors and market participants by providing us an opportunity to reach
more clients more efficiently. Many of our electronic business initiatives
target this client base (see "E-business initiatives" below, for further
discussion.)
A high proportion of institutional client revenues comes from clients who
generate in excess of $1 million annually for J.P. Morgan. We expect to
accelerate growth in both the number of these significant clients from a
historical rate of 4% annually - and in the average revenue each generates.
EXPANSION OF THE PRIVATE BANK
Our private bank is a major growth opportunity for J.P. Morgan. We already
have a leadership position among high net worth individuals and families
based on our integration of liquidity management, investment management,
brokerage, trust and estate planning, combined with our capabilities as a
premier investment bank. We currently deliver this offering in a very
personalized, "high-touch" way.
The opportunity is in extending this offering to affluent households. In the
United States, for example, the number of households with net worth of $1
million or more has doubled in the last five years and now exceeds 7 million.
Our long experience in advising individuals on optimizing their after-tax
wealth places us in an ideal position to meet the needs of this growing
affluent population. Recognizing that we must provide choices and
flexibility, we are building service options that meet the needs of the
market and use, in particular, the power of the Internet and phone-based
delivery channels to deliver service to investors when and as they choose.
In 1999, we spent $71 million on developing these distribution capabilities.
Review and outlook 25
<PAGE> 28
REDUCED RISK PROFILE
Risk remains inherent in our business, and after the significant actions
taken in 1998 and 1999 we are not looking for further dramatic risk
reductions in our credit portfolio. Rather, as origination volumes rise we
expect to boost the turnover, and thus the returns, on the capital we commit
to credit. With regard to market risk, we intend to further decrease the
proportion of positioning risk to client revenues.
E-BUSINESS INITIATIVES
In early 2000 we launched an initiative to coordinate the acceleration and
integration of the firm's e-business activities. This focused, firmwide
effort will speed decision making, accelerate development of electronic
platforms and products, and advance our strategy in the new economy. We will
use technology to seize the initiative in pursuing our strategic priorities:
to reach more clients with more relevant solutions; to develop innovative
products, ideas, and practices; and to give clients more efficient access to
the capital markets.
We have three interrelated areas of focus in e-business: First, we will
embrace electronic media to improve service and reach greater numbers of
clients. To advance our client strategy and raise market share we will be
developing portals aimed at markets that have not traditionally been part of
Morgan's client base. The expansion of our private bank to reach affluent
households by leveraging Internet and phone-based service channels is a major
initiative in this regard. We will also develop market-specific e-commerce
sites, such as the European government-bond hub J.P. Morgan eXpress, and
invest in platforms that appear best positioned for success, as we did with
equity trading systems Archipelago and Tradepoint.
Promoting transparency in the markets also supports our client strategy by
fueling growth and liquidity in the markets. Hence, our introduction of
Financial Products Markup Language (FpML), a standardized derivative protocol
that will result in more streamlined and accurate communication among market
participants. And in credit derivatives, we are a key backer of creditex, an
on-line credit derivative exchange aimed at spurring the growth of this
fast-evolving market.
The second major focus is on mining J.P. Morgan's own infrastructure for
technology, systems, and processes that can be commercialized and shared with
clients and markets. Cygnifi, an Internet-based independent derivatives
services company, and Horizon, a web-based risk management software tool we
developed, are good examples. Others are in the pipeline.
Finally, drawing on the J.P. Morgan network and the broad range of skills
that reside within the firm, we will identify, invest in, form partnerships
with, and even originate companies that let us take advantage of the
explosion in e-commerce. To this end, our Internet incubator was launched in
1999 and in January 2000 announced its first project: Market Axess, the
Internet's largest fixed income platform for connecting institutional
investors and securities dealers.
The preceding information under "Outlook for 2000" constitutes forward
looking information. Our ability to achieve these strategic and financial
objectives may be adversely affected by the risk factors discussed on page
22.
26 Review and outlook
<PAGE> 29
BUSINESS SEGMENT RESULTS
- -------------------------------------------------------------------------------
INVESTMENT BANKING
------------------------------------------------------------
INVESTMENT BANKING RESULTS IN 1999 - MARKET SHARE GAINS, RECORD REVENUES,
MORE CLIENTS, AND SIGNIFICANT CONTRIBUTION TO THE FIRM'S EVA - REFLECT THE
BREADTH AND STRENGTH OF OUR FRANCHISE.
<TABLE>
<CAPTION>
SUMMARY OF RESULTS
------------------------------------------------------------
In millions 1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
Total revenues ................. $1 196 $1 001 $774
Total expenses ................. 921 710 686
------------------------------------------------------------
Pretax income 275 291 88
------------------------------------------------------------
Pretax EVA 212 233 26
------------------------------------------------------------
Average economic capital 405 349 351
------------------------------------------------------------
</TABLE>
BUSINESS DESCRIPTION
Investment Banking includes corporate and institutional client relationship
management, conducted by our global network of client bankers. Bankers
coordinate marketing and origination activities for our full range of
products. The segment's revenues include those from advisory services: In
partnership with clients, advisory professionals analyze and implement
strategic alternatives including mergers, acquisitions, privatizations, and
changes in clients' capital structure. Segment results also include a portion
of revenues from debt and equity underwriting and from the origination of
client derivative transactions.
------------------------------------------------------------
Our progress reflects two factors. First, market trends - accelerated
economic restructuring in Europe and Asia, increased global capital flows,
and the technology revolution's impact on corporate strategy - play to our
strengths. Second, we deliver superior performance to our clients - through
seamless integration of services, global expertise, market knowledge and,
above all, trusted relationships.
EXPANDED CLIENT FRANCHISE
We are becoming a leading investment bank to many more clients and serving
our existing clients with a broader range of services. For the third year
running, new clients accounted for more than 11% of investment banking client
revenue, and clients providing revenue of more than $5 million increased by
35%.
We manage our client activities across multiple industry and geographic
boundaries. A particular area of focus has been to expand our client base
among technology, media, and telecommunications companies (TMT) and among
high-growth companies with complex needs. In 1999 new TMT clients accounted
for 43% of our revenues in those sectors, much of it in strategic capital
raising activities.
In 1999 our revenue mix also became more diversified by region. Growth in the
European market led to significant revenue gains as a result of our strong
position in the region. Total revenues from European clients accounted for
44% of total revenues in 1999, up from 33% in 1998.
We focus on providing corporate clients with integrated services across the
full range of J.P. Morgan's capabilities. In 1999 advisory assignments on
cross-border acquisitions for such companies as TRW Inc. and Stagecoach
Holdings PLC provided us with significant capital raising opportunities.
Sell-side advisory and equity underwriting mandates led to substantial
business opportunities in equity derivatives, private banking, and asset
management.
INCREASED MARKET SHARE
During 1999 our market position increased in mergers and acquisitions,
equities, and high-yield debt issuance. In mergers and acquisitions, we were
ranked among the top five advisors in both announced and completed
transactions and ranked fourth in cross-border transactions. For completed
deals, our worldwide market share rose to 15.6% from 12.7% in 1998. We were
also among the top five global advisors in the industrial, consumer and
retail, financial institution, energy, and healthcare industries.
As a defensive advisor in hostile transactions, we ranked second globally and
first in Europe, where hostile transactions became a major force in
redefining the competitive landscape.
In Asia, J.P. Morgan ranked first for completed transactions involving
Japanese targets.
[BAR GRAPH]
On page 27 of the annual report there is a stacked bar chart depicting the
total annual value of the mergers and acquisitions transactions on which the
firm served as advisor, for 1995 to 1999. The bars show a breakdown of
cross-border volume and total volume.
J.P. MORGAN MERGER AND ACQUISITION VOLUME (COMPLETED)
IN BILLIONS
- -----------------------------------------------------
<TABLE>
<S> <C>
1995 $ 59.7
1996 $123.2
1997 $136.1
1998 $264.5
1999 $362.0
</TABLE>
Source: Thomson Financial Securities Data
Business segment results 27
<PAGE> 30
In underwriting we also recorded market share gains. In equities we were one
of the few lead managers to increase market share in the United States in
1999. Our market share in high-yield financing also advanced over the
previous year; in investment grade financings, we continue to command leading
positions in our target areas: maturities over 18 months, yankee issuance,
and industrial bond offerings.
STRONG REVENUE GROWTH, SIGNIFICANT EVA CONTRIBUTION
Serving more clients with more services resulted in record revenues. Revenues
rose 19% to $1,196 million, up from $1,001 million in 1998, driven by higher
merger and acquisition and underwriting fees. Revenues increased in each of
our industry sectors, led by a 70% increase in technology, media, and
telecommunications. Pretax EVA was $212 million, as compared with $233
million in 1998; revenue gains were outpaced by higher incentive compensation
levels, reflecting competitive market conditions.
The strong performance in 1999 follows a record year for Investment Banking
in 1998. Pretax EVA in 1998 rose by $207 million, reflecting a 29% rise in
revenues as we increased market share in mergers and acquisitions and in
equities. Expenses were $710 million in 1998, up only 3% from the previous
year.
EQUITY INVESTMENTS
------------------------------------------------------------
EQUITY INVESTMENTS HAD A VERY HEALTHY 1999 AS WE
BENEFITED FROM THE GROWTH OF OUR PORTFOLIO COMPANIES,
WHICH ARE BROADLY DIVERSIFIED ACROSS INDUSTRIES AND REGIONS WORLDWIDE.
<TABLE>
<CAPTION>
SUMMARY OF RESULTS
------------------------------------------------------------
In millions 1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
Total revenues ................ $ 646 $ 346 $ 413
Total expenses ................ 145 49 48
------------------------------------------------------------
Pretax income 501 297 365
------------------------------------------------------------
Pretax EVA 296 143 194
------------------------------------------------------------
Average economic capital 1 479 1 201 1 353
------------------------------------------------------------
</TABLE>
BUSINESS DESCRIPTION
Equity Investments invests the firm's, employees', and third-party capital in
private equity investments worldwide, seeking significant capital
appreciation. We leverage J.P. Morgan's global network and client
relationships to generate investment opportunities. We provide growth capital
for new and existing companies, making investments that allow companies to
expand operations, access new business opportunities, or transform capital
structures. On average, we hold investments for three to five years and
typically exit through a public offering of securities or a sale of the
company.
------------------------------------------------------------
During 1999, we increased the pace of our investment activities by 20%,
directly committing over $550 million to 53 companies. The strong deal flow
was sourced primarily through the J.P. Morgan network and focused on
telecommunications and e-commerce investments. Our portfolio at year-end
reflected investments of $1.3 billion at cost.
POWERFUL DIFFERENTIATING FACTORS
J.P. Morgan Capital Corporation (JPMCC) is an experienced global private
equity investor with a current portfolio of more than 120 companies in 23
countries. Our strategy is to create a portfolio that is diversified both
globally and by industry, while favoring those regions and sectors that we
believe will provide the greatest risk-adjusted returns. We make the majority
of our investments in private companies. JPMCC also serves as general partner
to $2.5 billion in private equity funds focused on the real estate and
financial services industries. $1.8 billion of these funds were raised in
1999.
28 Business segment results
<PAGE> 31
We come to the business with a number of competitive advantages that
differentiate us in a bustling private equity marketplace. First is J.P.
Morgan's broad network for deal sourcing. Our investment banking, equity
research, private banking, and corporate technology teams provide us with
ideas and opportunities, particularly in rapidly expanding industries such as
telecommunications and e-commerce. The potential of this network is enormous.
Working from this strong base for generating ideas, we field an experienced,
independent investment team. Our industry and regional specialists can
evaluate proposals swiftly and provide ongoing support to portfolio
companies. In addition, the firm's product and service resources enable these
companies to grow faster. We can advise on acquisitions and joint ventures,
tap into growth capital through the debt and equity markets, and introduce
promising start-ups to potential partners and clients.
[PIE CHARTS]
On page 29 of the annual report there is a pie chart depicting the carrying
value of the firm's equity investments as of December 31, 1999 by region on a
percentage basis.
CARRYING VALUE BY REGION
- ------------------------
<TABLE>
<S> <C>
North America 69%
Latin America 16
Europe 8
Asia 7
</TABLE>
- ------------------------
On page 29 of the annual report there is a pie chart depicting the carrying
value of the firm's equity investments as of December 31, 1999 by industry
sector on a percentage basis.
CARRYING VALUE BY SECTOR
- ------------------------
<TABLE>
<S> <C>
Technology, media,
telecommunications 45%
Financial 20
Consumer/retail 12
Industrial 7
Real estate 5
Healthcare 5
Energy 1
Other 5
</TABLE>
- ------------------------
EMERGING INDUSTRIES FUELED 1999 PERFORMANCE
These distinctive strengths help explain our performance in 1999. Revenues of
$646 million reflect major investment gains in the telecommunications sector:
four investments - FrontierVision Partners, Nortel Inversora, Triton PCS, and
Triton Cellular - generated gains of more than $100 million each. These
revenues were partially offset by write-downs of approximately $200 million,
primarily in insurance investments.
Principally as a result of these gains, 1999 produced strong pretax EVA
results of $296 million. Our EVA methodology compares investment returns with
an external benchmark historical return for private equity funds over an
extended period of time. A positive EVA result means that our performance has
exceeded that benchmark.
Following the private equity industry, we also measure our performance using
a pretax "cash on cash" internal rate of return. JPMCC's return over the last
18 years is 30%; its return over the past five years is 33%.
In 1998, Equity Investments earned revenues of $346 million, down from $413
million in 1997. Investment gains were $315 million net of write-downs of $89
million that related mostly to emerging markets investments. Pretax EVA in
1998 was $143 million, down from $194 million, reflecting primarily the
decline in pretax income.
SIGNIFICANT VALUE POTENTIAL
Based on estimates of fair value, the value of our current portfolio is
approximately $566 million greater than the amount we invested (cost). To
date, $341 million of this potential gain has been reflected as income in our
financial statements pursuant to accounting rules for SBIC investments. See
note 1 for more information.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Unrealized
In millions: December 31, 1999 Cost Fair value(a) gain
--------------------------------------------------------------------------
<S> <C> <C> <C>
SBIC equity investments ........... $ 253 $ 594 $341(b)
Marketable equity securities ...... 277 430 153(c)
Nonmarketable equity securities ... 490 555 65
Other assets(d) ................... 262 269 7
--------------------------------------------------------------------------
Total 1 282 1 848 566
--------------------------------------------------------------------------
</TABLE>
(a) Based on estimates of fair value; includes valuation adjustments for
liquidity concerns and contractual restrictions.
(b) Recognized through earnings.
(c) Recognized in stockholders' equity.
(d) Includes debt investment securities and investments in limited
partnerships under the equity method of accounting.
Business segment results 29
<PAGE> 32
EQUITIES
------------------------------------------------------------
LEADERSHIP ACROSS OUR GLOBAL PRODUCT CAPABILITIES
PRODUCED OUTSTANDING RESULTS - NEW HIGHS IN MARKET SHARE,
A DOUBLING OF REVENUES, AND AN INCREASE IN EVA OF MORE
THAN $500 MILLION.
<TABLE>
<CAPTION>
SUMMARY OF RESULTS
------------------------------------------------------------
In millions 1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
Total revenues ................ $1 417 $699 $459
Total expenses ................ 944 776 692
------------------------------------------------------------
Pretax income 473 (77) (233)
------------------------------------------------------------
Pretax EVA 312 (231) (373)
------------------------------------------------------------
Average economic capital 716 658 562
------------------------------------------------------------
</TABLE>
BUSINESS DESCRIPTION
Our Equities activities comprise underwriting, market making, research,
equity derivatives, and American depository receipt (ADR) services. We help
clients execute their strategies by raising equity capital in the public and
private markets and structure derivative transactions to provide hedges or
enhanced returns. As a market maker, we act as both principal and agent to
facilitate clients' transactions in exchange-listed and over-the-counter
securities. Equity research supports both underwriting and market making.
------------------------------------------------------------
We achieved 1999's strong results by leveraging the capabilities we have
built over the past decade and by focusing on "best execution" for our
clients in every aspect of our business.
DERIVATIVES LEADERSHIP, UNDERWRITING MOMENTUM
We hold a global leadership position in equity derivatives, helping clients
with their most significant and complex hedging and asset-monetization
challenges. In volatile and increasingly complex stock markets, derivatives
represent one of our largest revenue sources. In 1999 we saw strong demand
from both corporate and private banking clients.
In our cash activities (underwriting and trading) we saw continued growth in
underwriting. We expanded market share to 5.6% in U.S. lead underwritings,
which included transactions for Network Solutions Inc., High Speed Access
Corp., Interactive Pictures Corp., Engelhard Corp., RoweCom, Inc., and
Sharper Image Corp.
Another sign of leadership is our consistent top-three ranking in equity
offerings over $500 million: the largest and most complex deals. Two major
transactions we led for Genentech Inc., representing $5.1 billion of equity
raised within four months, exemplify this strength. Last summer, we helped
Roche Holdings exercise its option to reacquire publicly traded Genentech
shares. We then led a $2.2 billion initial public offering of the company -
the largest U.S. healthcare offering at the time. This was followed by a $2.9
billion secondary offering, the largest ever in the United States.
Our distinctive brand of research is a key component of our activities.
Recognition in the marketplace was reflected in strong standings in most
major research polls, including those conducted by Institutional Investor,
Reuters, and the Wall Street Journal.
During 1999, our trading capabilities were rounded out by the addition of
basket trading. We enhanced our electronic trading capabilities, embracing
change in order to lower costs and improve execution for clients. In
particular, strategic investments in the electronic communications networks
Archipelago and Tradepoint gave us new avenues for execution. We remain among
the most active market makers, evidenced by our status as the number one
trader of some of the largest and most liquid stocks in the market: General
Motors Corporation, AES Corporation, ebookers.com PLC, Mediaone Group Inc.,
Interactive Pictures Corp., Genentech, Inc., The Hertz Corporation, Swisscom,
and Telefonica de Argentina S.A., to name a few.
GROWTH IN PROFITABILITY
Pretax EVA for 1999 increased by $543 million to $312 million. Revenues
doubled, while operating expenses before incentive compensation were down,
surpassing our own internal goal to keep these costs flat. Increased
productivity was key to this success, particularly in our use of technology.
Revenue growth was driven by equity derivatives, which saw higher client
revenues and significant gains in portfolio management. Equity underwriting
revenues and brokerage commissions also increased, as we gained market share.
Incentive compensation increased as a result of these revenue gains, causing
total expenses to rise by 22%.
Revenues in 1998 rose 52% thanks to market share gains in our cash activities
and on strong client demand and favorable positioning in derivatives.
Expenses increased only 12% in 1998.
30 Business segment results
<PAGE> 33
INTEREST RATE AND FOREIGN EXCHANGE MARKETS
----------------------------------------------------------------
SUBSTANTIAL PROFITABILITY CONTINUES TO BE THE MAIN THEME IN INTEREST RATE AND
FOREIGN EXCHANGE MARKETS. DESPITE A YEAR CHARACTERIZED BY BEARISH BOND
MARKETS AND LACKLUSTER FOREIGN EXCHANGE MARKETS, OUR CLIENT FRANCHISE
CONTINUES TO FLOURISH AND WE HAVE PRODUCED CONSISTENT PORTFOLIO GAINS.
<TABLE>
<CAPTION>
SUMMARY OF RESULTS
----------------------------------------------------------------
In millions 1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Total revenues .................... $2 009 $2 064 $1 770
Total expenses .................... 1 232 1 283 1 277
----------------------------------------------------------------
Pretax income 777 781 493
----------------------------------------------------------------
Pretax EVA 345 330 138
----------------------------------------------------------------
Average economic capital 2 027 2 138 1 484
----------------------------------------------------------------
</TABLE>
BUSINESS DESCRIPTION
Interest Rate and Foreign Exchange activities comprise market making, risk
management, sales, and research across developed countries globally, as well
as in Eastern Europe, Africa, and emerging Asia. We act as a dealer and
market maker in G-10 and emerging market government bonds and underwrite and
make markets in municipal bonds. We provide swap and other interest rate
derivative products and futures and options brokerage services to assist our
clients in managing their exposures to interest rates and currencies. Foreign
exchange activities include spot contracts, short-term interest rate
instruments, currency derivatives, and precious metals.
----------------------------------------------------------------
Interest Rate and Foreign Exchange Markets is a large and growing global
client activity based on leadership positions, an integrated product
offering, and differentiated service.
STRONG PROFITABILITY
Pretax EVA increased to $345 million over the previous year, as a result of
lower expenses and capital charges. Total revenues were flat with 1998,
reflecting two opposite trends. Our government bond, swap and derivative, and
futures and options activities all benefited from steady increases in client
activity. Our client base has become increasingly diversified by all
measures: industry, region, and product. We have seen a fundamental shift in
the mix of our product portfolio, with greater balance between more liquid,
standardized products and structured transactions. In 1999 we were once again
named Derivative House of the Year by International Financing Review, and our
repeated success with clients is testimony to our capabilities. In futures
and options brokerage, we continue to hold dominant market share positions on
the world's major exchanges. As a result, we saw a record year in interest
rate market activities.
However, the year brought a decline in foreign-exchange-related revenues
because markets were much less volatile than in 1998. Investor clients
shifted from foreign exchange products into fixed income and equities, and
the impact of the European monetary union reduced overall market activity. In
addition, currency markets in Eastern Europe, Africa, and Emerging Asia were
less volatile, resulting in lower client activity.
Expenses for Interest Rate and Foreign Exchange Markets, before incentive
compensation, were down nearly 20% from 1998. The decline is attributable to
a successful productivity and quality program which included the completion
of a state-of-the-art, integrated, and completely scaleable derivatives
infrastructure.
The year's solid performance follows a 1998 increase in pretax EVA of nearly
$200 million, driven by a 17% increase in revenue. Strong client activity in
structured derivatives, government bonds, and futures and options, along with
portfolio management gains, fueled top-line growth.
INNOVATION, CAPITAL COMMITMENT, AND SCALE
We manage our business and set priorities according to three main themes:
innovation, capital commitment, and scale. Success in all three allowed us to
deliver another strong year of EVA.
We maintained our dominance in derivatives in an increasingly competitive
landscape in 1999, continuing to combine our sophisticated structuring and
risk management skills and superior technology to solve clients' problems. We
focus on continuous product innovation and expansion into new delivery
channels, positioning the firm for further earnings growth. In 1999 we
generated nearly $1 billion in interest rate derivative client
revenues, demonstrating this competitive advantage.
Complementing our client activity we have generated consistent portfolio
management gains over the past several years. We scale DEaR - our primary
measure of risk - to the expected level of client revenue. In 1999 we again
capitalized on market opportunities while keeping our portfolio risk
positions proportional to the level of client activity.
We also made great strides in increasing share across products and markets,
while significantly driving down the overall cost of our operation. The
transformation of our futures and options business is the clearest example
of this achievement: In a market experiencing significant margin compression,
we used e-commerce to redefine our business model and, in the process,
captured additional market share while significantly reducing unit costs.
Business segment results 31
<PAGE> 34
CREDIT MARKETS AND CREDIT PORTFOLIO
----------------------------------------------------------------
OUR FOCUS IN CREDIT MARKETS AND CREDIT PORTFOLIO IS ON INNOVATION AND
LEADERSHIP. IN 1999 WE SCORED WELL ON BOTH FRONTS. THE RESULT: A REVENUE
INCREASE OF MORE THAN 100% IN 1999 AND AN EXCEPTIONAL EVA CONTRIBUTION FROM
BOTH SEGMENTS.
SUMMARY OF CREDIT MARKETS RESULTS
<TABLE>
<CAPTION>
----------------------------------------------------------------
In millions 1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Total revenues .................... $1 526 $ 628 $ 842
Total expenses .................... 850 729 719
----------------------------------------------------------------
Pretax income 676 (101) 123
----------------------------------------------------------------
Pretax EVA 452 (492) (226)
----------------------------------------------------------------
Average economic capital 1 053 2 096 1 754
----------------------------------------------------------------
</TABLE>
SUMMARY OF CREDIT PORTFOLIO RESULTS
<TABLE>
<CAPTION>
----------------------------------------------------------------
In millions 1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Total revenues ..................... $ 783 $ 390 $ 700
Total expenses ..................... 154 145 122
----------------------------------------------------------------
Pretax income 629 245 578
----------------------------------------------------------------
Pretax EVA 183 (449) 17
----------------------------------------------------------------
Average economic capital 3 020 4 611 5 302
----------------------------------------------------------------
</TABLE>
BUSINESS DESCRIPTION
Credit Markets activities include underwriting, market making, and research
related to investment-grade, high-yield, and emerging market debt securities.
They also include our role as a dealer and market maker in the government
securities, currencies, and derivatives of emerging countries in Latin
America. This segment also includes global loan syndications, structured
finance, and credit derivatives activities.
Within Credit Portfolio we manage substantially all of the firm's credit
risk associated with 1) traditional credit products and 2) derivative
counterparties. Traditional credit products, which include loans and lending
commitments are recorded on an accrual basis with interest and
credit-related fees recorded as earned. The segment's revenues include,
through provisions for credit losses, the estimated losses on these products
as calculated when we determine the appropriate allowances for credit
losses. For derivatives, this segment captures the pricing adjustment
related to credit risk needed to record the firm's derivatives trading
portfolio at fair value. Accordingly, revenues include fluctuations in the
value of positions related to changes in the credit quality of derivative
counterparties and other market factors affecting the amount of credit
exposure. This segment's revenues also include the costs of hedging credit
risk.
--------------------------------------------------------------
By actively managing our credit risk and reducing the capital required by our
credit portfolio we are establishing ourselves as an innovator in credit risk
management. We also continue to advance our leadership in high growth capital
market segments that require strong credit and superior market skills:
emerging markets, credit derivatives, and structured finance.
CREDIT PORTFOLIO CAPITAL REDUCED AHEAD OF SCHEDULE
One of five major strategic initiatives we set for the firm at the end of
1997 was to transform our credit business to an underwriting and distribution
model. A prime goal of the initiative was to significantly reduce risk and
bring down the economic capital in our credit portfolio by 50%. We have
achieved this goal a year ahead of schedule, by three principal means:
- reducing credit exposures, particularly to the most risky market segments,
such as emerging markets
- hedging exposures through credit derivatives and securitizations
- exercising greater selectivity in advancing credit in nonstrategic
situations
We achieved our strategy with the support of our clients, regulators, and the
major credit rating agencies. Our success has sparked substantial interest
from other market participants and we believe our approach to active credit
risk management is increasingly becoming a model for other industry
participants. By making our processes and tools for managing credit more
broadly available we are increasing transparency and making credit markets
more efficient for clients.
LEADERSHIP AND INNOVATION IN CREDIT MARKETS
In 1999 we maintained or built on selected leadership positions in credit
markets. Once again, J.P. Morgan was the number one trader of emerging market
debt in 1999, with a market share of 24%, we were also named the number one
debt originator in Latin America and emerging Asia. Notable emerging market
transactions included the $3.9 billion debt exchange for the Republic of
Argentina and the $2.0 billion Brady bond exchange for the Republic of
Brazil. We also led the first straight corporate bond issuance in Latin
America since the 1998 crisis, for Embotelladora Arica S.A.
32 Business segment results
<PAGE> 35
In structured finance and credit derivatives we had a record year as a result
of improved credit markets, increased usage of securitization markets by
issuers as a means of funding, greater investor appetite for structured
transactions, and new product innovation. We were named Best Overall Credit
Derivatives House by Institutional Investor and other leading publications.
Among the most innovative transactions of the year was a $345 million
collateralized debt obligation of other collateralized debt obligations for
Zais Investment Grade Ltd., which was selected as derivatives deal of the
year by Institutional Investor.
Our debt underwriting activities had a good year as we expanded into more
profitable, higher-growth areas. An increase in lead manager roles and
acquisition financings drove strong results in high-grade origination. We
ranked fifth among U.S. lead managers of issues with maturities longer than
18 months. In the high-yield market we maintained our share and improved our
ranking in North America despite much lower market volumes than in 1998. We
lead-managed major transactions for Packaging Corp. of America and Lyondell
Petrochemical Co. We continue to focus on expanding in this profitable
segment of the market.
EXCEPTIONAL PERFORMANCE IN 1999
1999 was an exceptional year for Credit Portfolio and Credit Markets.
Combined pretax EVA for the two segments increased by $1.6 billion.
Pretax EVA for Credit Markets increased by over $900 million to $452 million
as a result of a significant jump in pretax income and lower capital charges.
Revenues more than doubled to $1.5 billion, from $0.6 billion in 1998, in an
environment much improved from a year ago, particularly in the first half of
the year, following the severe dislocations in 1998. Tighter spreads and
improved market liquidity resulted in higher trading revenues across all
asset classes; origination revenues also rose, particularly for structured
and high-grade securities. Results for 1999 also include gains related to
hedging our economic exposures in Brazil.
In Credit Portfolio pretax EVA of $183 million also represents a dramatic
increase from a weak 1998 as revenues doubled and the charge for capital
declined by more than 35%. Our EVA methodology compares Credit Portfolio's
economic return with market-derived benchmark credit spreads, hence positive
EVA indicates outperformance of the expected market return. The increase
reflects unusually strong revenues resulting from the overall improvement in
the global credit environment, reduced risk in our credit exposures, and
refinement of our credit risk management. Changes in the valuation of our
derivatives credit risk increased revenues by approximately $250 million,
primarily reflecting spread tightening and improvements in collateral
management. Better market conditions also allowed us to reduce our allowance,
after charge-offs and recoveries, by $175 million in 1999, compared with a
provision for credit losses of $50 million a year earlier. Partially
offsetting these gains were lower net interest earnings resulting from
reduced exposures.
Combined pretax EVA for Credit Markets and Credit Portfolio declined by over
$700 million in 1998, compared with 1997, reflecting the volatile and
illiquid market environment that followed Russia's default in August 1998.
Credit markets revenues declined 25% as credit spreads widened and investors
withdrew from both emerging and developed markets in the second half of 1998.
As a result of the crisis, we suffered $130 million of losses on Russian
positions, lower results in emerging market external debt trading, and
significant declines in the value of our corporate debt positions in the U.S.
and Europe. Offsetting these negative trends were positive loan syndication
results, increases in corporate debt underwriting, and higher earnings from
local currency securities trading. Credit Portfolio's revenues declined by
over 40% in 1998 to $390 million. The decline resulted from revenue
reductions associated with transforming our credit business and reducing our
emerging market exposures. Widening of credit spreads in the second half of
the year exacerbated the decline by reducing the fair value of the firm's
derivatives portfolio.
Business segment results 33
<PAGE> 36
PROPRIETARY INVESTING AND TRADING
------------------------------------------------------------
1999 WAS A CHALLENGING YEAR FOR PROPRIETARY INVESTING AND TRADING - A PERIOD
OF STRATEGIC CHANGE IN WHICH WE SIGNIFICANTLY SHIFTED OUR FOCUS. RESULTS
ACROSS OUR PORTFOLIOS WERE MIXED - SIGNIFICANT LOSSES IN OUR U.S. INVESTMENT
PORTFOLIO AND ASIAN TRADING PORTFOLIO, BUT STRONG RETURNS FROM NEWER, MORE
DIVERSIFIED GLOBAL TRADING ACTIVITIES.
SUMMARY OF RESULTS
<TABLE>
<CAPTION>
------------------------------------------------------------
In millions 1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
Total revenues .............. $ 29 $ 663 $894
Total expenses .............. 152 157 154
------------------------------------------------------------
Pretax income (123) 506 740
------------------------------------------------------------
Total return revenues(a) 31 424 657
------------------------------------------------------------
Pretax EVA (443) (186) 308
------------------------------------------------------------
Average economic capital 1 821 2 527 876
------------------------------------------------------------
</TABLE>
(a) Total revenues and the change in net unrealized value.
BUSINESS DESCRIPTION
In Proprietary Investing and Trading we actively manage market risk positions
for J.P. Morgan's own account across a broad range of markets and products.
We also manage the firm's capital and liquidity profiles, ensuring that we
have access to funding under all market conditions to support the firm's
business activities. The results in this segment also include two portfolios
- a credit investment securities portfolio and a proprietary emerging markets
portfolio - which have been discontinued, and our investment in Long-Term
Capital Management, L.P.
------------------------------------------------------------
1999: A SHIFT IN FOCUS
Over the past year we have shifted our focus from relatively static holdings
with longer-term investment horizons, concentrated in certain key products,
to more diversified strategies that are dynamically traded across many
products and markets. The majority of risk is now concentrated in these newer
strategies, which include a broad range of fixed income and equity
securities, foreign exchange, and related derivatives.
FINANCIAL PERFORMANCE
In 1999 the substantial decline in reported revenues and in total return
revenues - the most meaningful measure for these activities - was related to
two factors: a decrease in the value of longer-term mortgage-backed
securities positions in our U.S. investment securities portfolio, and losses
in Asia following an extremely strong 1998. These risk positions, which were
part of our historical, longer-term strategies, have been substantially
reduced.
Partly offsetting these losses was strong performance in the trading
portfolios we have been developing. Positions in these businesses
significantly outperformed key alternative investment benchmarks.
In 1998 the decline in reported revenues and total return revenues resulted
from decreases in the value of our U.S. investment securities portfolio, as
well as reported losses of $209 million in two subsequently discontinued
portfolios as we reduced exposures to emerging markets.
REDUCTION OF RISK AND CAPITAL BENEFITS EVA
As our business has evolved and our strategies have become more diversified,
we have reduced the risk of our portfolios. DEaR for this segment has
declined from a high of $87 million early in 1999 to $13 million at year-end.
As a direct result, we have also seen a dramatic decrease in the amount of
capital required to support our business, which has favorably affected EVA.
Average capital for the segment declined from $2.5 billion to $1.8 billion in
1999; capital at year-end 1999 was reduced to approximately $500 million. In
addition, we constantly evaluate positions to ensure that they are
appropriately uncorrelated to other positions in our portfolio, as well as to
other activities across the firm.
34 Business segment results
<PAGE> 37
ASSET MANAGEMENT SERVICES
----------------------------------------------------------------
In 1999 Asset Management Services made significant progress toward its
strategic and operating goals: growth in assets under management from
expanded product capabilities and distribution channels and further
improvement in pretax margins. We also took important steps to extend the
reach of our private bank into the affluent investor market.
<TABLE>
<CAPTION>
SUMMARY OF RESULTS
----------------------------------------------------------------
In millions 1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Total revenues ...................... $1 355 $1 164 $1 107
Total expenses ...................... 1 121 1 100 1 043
----------------------------------------------------------------
Pretax income 234 64 64
----------------------------------------------------------------
Pretax EVA 161 3 (7)
----------------------------------------------------------------
Average economic capital 561 559 549
----------------------------------------------------------------
</TABLE>
BUSINESS DESCRIPTION
Asset Management Services delivers investment management expertise and advice
across all asset classes and global markets to private and public sector
institutional investors. High net worth individuals receive advice integrated
across the full array of wealth management services.
----------------------------------------------------------------
GROWTH IN ASSETS UNDER MANAGEMENT
Assets under management increased 15% to $349 billion as of December 31,
1999.
On page 35 of the annual report there is a stacked bar chart depicting the
total value of assets under management by the firm's Asset Management Services
sector, for 1995 to 1999. The chart shows a breakdown by institutional and
private assets under management.
ASSETS UNDER MANAGEMENT
In billions: December 31
- ------------------------------------
<TABLE>
<CAPTION>
Private Institutional Total
<S> <C> <C> <C>
1995 $41 $138 $179
1996 49 159 208
1997 61 180 241
1998 78 233 303
1999 79 270 349
</TABLE>
We have built a broad array of asset class capabilities and distribution
channels. We are committed to superior client service and focus relentlessly
on investment performance. In 1999 asset growth was broadly diversified
across distribution channels, and, for the first time in our history, assets
from sources other than defined benefit plans grew at a faster rate than
those from defined benefit plans. This is a critical milestone given our
significant and long-established position in the defined benefit market.
On page 35 of the annual report there is a stacked bar chart depicting global
portfolio allocation by asset class for the funds under management by the
firm's Asset Management Services sector, as of December 31, 1999. The bars show
a breakdown by U.S. and non-U.S. assets.
GLOBAL PORTFOLIO ALLOCATION BY ASSET CLASS
In billions: December 31, 1999
- ------------------------------------------
<TABLE>
<CAPTION>
U.S. Non-U.S.
Assets Assets Total
<S> <C> <C> <C>
Total $249 $100 $349
Money Market 41 9 50
Fixed Income 76 32 108
Equity 116 58 174
Other 16 1 17
</TABLE>
Investors have been increasing their allocations to alternative asset
classes, such as private equity and real estate. We are one of the leading
managers in this market and believe we can continue to grow by capturing a
greater share of existing clients' assets. In 1999 we raised almost $3
billion in two private equity funds. We were also awarded our single largest
mandate ever when the Teamsters' Central States Southeast and Southwest Areas
Pension Funds appointed us named fiduciary, overseeing more than $10 billion
in assets.
Our business partnership with American Century has achieved its primary
objective: Our Retirement Plan Services joint venture has become a leading
provider of defined contribution services, with assets under management
increasing by 39% to $31 billion. Our strategy has been to leverage our
long-standing defined benefit corporate relationships: we have won business
from Champion International Corporation, Navistar International Corporation,
and others. As of December 31, 1999, we were managing 248 bundled service
plans with more than 350,000 participants.
Our international partnerships are expanding our distribution capabilities
and global presence. Ventures with DGZ-DekaBank (Germany), Banques Populaires
(France), and Dai-ichi Kangyo Bank (Japan) have raised almost $5 billion in
additional assets while helping our partners successfully compete in their
markets.
FINANCIAL PERFORMANCE
Our operating plan resulted in significant margin improvement in 1999. The
strong increase in pretax EVA was driven almost entirely by increased pretax
income. Revenue growth far outpaced growth in expenses, resulting in pretax
margins of 17% compared with 5% for 1998.
Business segment results 35
<PAGE> 38
Revenues increased by 16% primarily due to an increase in investment
management fees of $132 million. This increase in fees reflected growth in
assets under management, including a favorable shift towards higher-fee asset
classes such as private equity, real estate, and structured equity, where we
have benefited from superior investment performance.
Earnings on our 45% equity investment in American Century also contributed to
the increase in revenues. Our investment turned accretive in 1999 - one year
ahead of original forecasts.
Expenses increased 2%, or $21 million, to $1,121 million, primarily as a
result of higher compensation. Offsetting these increases were tangible gains
in productivity. Our emphasis on process improvement, targeted growth, and
better allocation of resources generated $72 million of expense reduction. As
part of this focus, we announced in 1999 an agreement to outsource our U.S.
fund accounting services to Bank of New York.
<TABLE>
<CAPTION>
CORPORATE
---------------------------------------------------------------------------
SUMMARY OF RESULTS
---------------------------------------------------------------------------
In millions 1999 1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues ......................... ($ 105) $ - $ 261
Total expenses ......................... 223 589 325
---------------------------------------------------------------------------
Pretax Income (328) (589) (64)
---------------------------------------------------------------------------
Pretax EVA* (211) 242 (67)
---------------------------------------------------------------------------
Corporate average economic capital
Diversification ..................... (2 739) (3 266) (3 134)
Other ............................... 1 487 1 463 288
Firm excess available capital........... 2 622 (14) 3 218
---------------------------------------------------------------------------
</TABLE>
*Excludes special items in 1998 totaling ($171 million).
Corporate includes three principal categories: 1) Corporate research and
development initiatives that involve strategic investments in new client
segments or services, but are managed separately from existing business
lines; 2) other corporate items that are recurring but unallocated to the
business segments, including but not limited to: the capital cost related to
a) the surplus or shortfall of available capital over economic capital
requirements, b) the diversification benefit included in the firm's
consolidated economic capital requirement, and c) Corporate assets and
investments not allocated to business segments; revenue items such as the
results of hedging anticipated net foreign currency revenues and expenses
across all business segments; corporate-owned life insurance; certain equity
earnings in affiliates; and consolidation and management reporting offsets to
certain revenues and expenses recorded in the business segments; and 3)
Nonrecurring items, which include gains on sales of businesses, revenues and
expenses associated with businesses that have been sold or are in the process
of being discontinued, and other one-time items.
---------------------------------------------------------------------------
Pretax EVA was ($211 million) in 1999 compared with $242 million in 1998,
excluding special items related to business sales and restructuring charges
in 1998. The decline primarily reflected an increase in the charge for equity
capital. Lower risk levels and capital utilization by the business segments
in 1999 resulted in increased surplus capital and a lower diversification
benefit, both of which lead to a higher charge for Corporate equity capital.
This compares with 1998, when market conditions were difficult and business
capital requirements were higher, resulting in no surplus capital and a
larger diversification benefit.
BUSINESS DEVELOPMENT INITIATIVES
In 1999 we began an accelerated development effort to expand the reach of our
private bank into the affluent household market segment in the United States.
Total expenses for this initiative were $71 million in 1999, primarily for
personnel, marketing, and technology. No revenues were generated during the
year. For additional information, see "Expansion of the private bank" on page
25.
RECURRING ITEMS NOT ALLOCATED TO SEGMENTS
Recurring Corporate revenues increased $157 million in 1999, due in part to
improved hedging results. Consolidation and management reporting revenue
offsets decreased $53 million from 1998, primarily because of lower
taxable-equivalent adjustments.
EUROCLEAR AND NONRECURRING ITEMS
Revenues related to Euroclear were $251 million in 1999, down $61 million
from 1998; pretax income declined to $216 million from $261 million.
Nonrecurring Corporate revenues including Euroclear decreased $209 million
due in part to gains of $187 million related to the sales of our global trust
and agency services and our Australian institutional asset management
businesses in 1998. The decline in Corporate expenses reflected the 1998
special charges taken in the first and fourth quarters in connection with
expense reduction initiatives, which totaled $358 million across all
segments.
Revenues in Corporate decreased $261 million in 1998 from 1997, reflecting
lower hedging results offset by gains related to the previously mentioned
business sales. Expenses increased $264 million in 1998 over 1997. Expenses
grew in 1998 primarily due to the previously mentioned special charges.
Pretax EVA was $242 million in 1998 before special items, versus ($67
million) in 1997.
36 Business segment results
<PAGE> 39
PRODUCTIVITY AND QUALITY
In 1999, J.P. Morgan made significant progress in its productivity and
quality initiative. We exceeded our targeted productivity savings by $30
million, increased margins, and identified future revenue sources.
We did so by intensifying the initiative across the firm, completing more
than 300 projects in all business groups and regions, beginning to train
employees in the Six Sigma discipline, systematically using clients'
feedback, and broadening the use of metrics.
EXCEEDED SAVINGS TARGET
Coming into 1999, our goals were simple but challenging: decrease costs,
expand margins and increase revenues through a dedicated emphasis on
productivity and quality. The results: We surpassed our targeted productivity
savings of $400 million by $30 million. We also increased revenues by $80
million as a result of projects that improved our service delivery to
clients.
Our productivity savings were the result of the following efforts to simplify
our operations:
- Creating economies of scale through "hub and spoke" organizations and
regional shared service centers in Asia, Europe, and North America
- Reengineering core processes and consolidating our technology
- Outsourcing non-core tasks and instituting more effective vendor
management
- Better managing demand for internal and external services
- Exiting certain discrete areas of business.
The productivity savings achieved through these steps contributed to a
decline in operating expenses before incentive compensation of approximately
$400 million, in line with our target.
Progress on productivity did not come at the expense of strategic investment.
Across the firm, we invested approximately $630 million in resources and new
projects, funded by productivity savings and capacity created through the
completion of projects.
<TABLE>
<CAPTION>
1999 PRODUCTIVITY AND EXPENSE REDUCTION
------------------------------------------------------------
In millions, before incentive compensation
------------------------------------------------------------
<S> <C>
Productivity savings .............................. - $430
Completed projects ................................ - 600
New investments ................................... + 630
------------------------------------------------------------
Net expense reduction - $400
------------------------------------------------------------
</TABLE>
SIX SIGMA: IMPROVING QUALITY THROUGH CLIENT FEEDBACK A critical cornerstone
to our efforts in 1999 was the adoption of the Six Sigma business improvement
discipline. The key steps for applying this discipline to our business are
eliminating errors and defects by breaking work processes into individual
steps, analyzing root causes of current performance, making appropriate
changes to processes, and measuring progress against goals.
Systematic use of client feedback was an important element in this process.
We solicited clients' input for a number of projects. Their responses gave us
a clearer understanding of which services they viewed as critical and how to
distinguish ourselves from the competition. Using the Six Sigma discipline,
we then redesigned the core processes behind these activities to increase
consistency of service delivery and margins.
In an effort to instill this common approach to all areas of the firm, we
trained 1,600 people around the globe in how to apply elements of Six Sigma
to productivity and quality projects. To ensure that our improvements are
sustained, we improved our client and process metrics, which we use to
measure our performance against client needs, process standards, and
financial goals.
Going forward, we no longer expect margin benefits from our productivity and
quality program to come predominantly from expense savings. Projects that
analyze business processes end to end can result in a variety of revenue
enhancements. Examples include:
- Higher sales through better-designed product offerings
- Improved time to market for new product offerings
- Enhanced mechanisms for cross-selling
- Redesigned internal processes and staffing mix on assignments to increase
client satisfaction
- Improved assessment of where value is created, resulting in pricing which
is closely aligned with client priorities
In 2000, we expect that revenue increases from the productivity and quality
program will contribute a significantly larger share to margin enhancement.
The preceding information under "Productivity and quality" contains forward
looking information. Refer to page 22 for more information.
Productivity and quality 37
<PAGE> 40
CAPITAL AND RISK MANAGEMENT
We seek to increase shareholder value through a firmwide discipline that
links capital allocation, risk management, performance measurement,
investment decisions, and incentive compensation into one integrated
framework. This framework buttresses our day-to-day operations at all levels
of the firm and employs consistent economic value added (EVA) and
capital allocation methodologies. EVA integrates traditional operating
earnings with capital and risk management by subtracting from income a
charge for the equity used in support of our business.
These efforts have shown results in the past year. We have substantially
reduced the risk in our credit and market activities. The following chart
depicts the reduction in market risk achieved over the past year, as measured
by Daily Earnings at Risk (DEaR), a concept later described in detail, and a
reduction in credit risk, as measured by required capital in the Credit
Portfolio segment.
[GRAPH]
On page 38 of the annual report there is a line graph depicting risk and
capital trends over an eight quarter period from first quarter 1998 through
fourth quarter 1999, the reduction in market risk achieved over the past year,
as measured by Daily Earnings at Risk (DEaR) and a reduction in credit risk, as
measured by required capital in the Credit Portfolio segment.
CAPITAL MANAGEMENT FRAMEWORK
J.P. Morgan's capital management framework optimizes the use of our capital
by determining:
- the optimal amount of total capital commensurate with our overall risk
profile in order to:
- support business strategies
- meet targeted credit ratings and regulatory ratios
- protect against losses and maintain liquidity
- capital allocation to activities with the most favorable returns
- the most efficient composition of our capital base
The Capital Committee manages the firm's overall capital structure and is
chaired by the chief financial officer.
Our economic capital allocation model estimates the amount of equity required
by each business activity and the firm as a whole. Business economic capital
is estimated as if each activity were conducted as a standalone entity. This
estimate is based, to the extent possible, on observations of the capital
structures and risk profiles of public companies or benchmarks. In
particular, for our markets and asset management activities, required
economic capital is based on the revenue volatility and fixed expenses of
public U.S. investment banks and asset management companies, respectively;
for Credit Portfolio, capital is based on a simulation of unexpected credit
losses; and for Equity Investments, capital is equal to the carrying value of
the portfolio. Diversification of Morgan's portfolio of businesses lowers the
consolidated level of required equity and is a factor in assessing the
appropriate level of capitalization of the firm. The benefit of
diversification is not allocated to the businesses.
The related cost of equity for each business activity is based on observable
market returns of publicly held investments, with the exception of our Credit
Portfolio segment, whose cost of equity is based on market pricing for credit
risk. To arrive at the charge for equity capital for each segment, we
multiply its allocated required economic capital by its market-based cost of
equity (or hurdle rate). To arrive at the consolidated charge for equity
capital for J.P. Morgan, we multiply the firm's common equity by its
market-based cost of equity, which currently is estimated at 10.5%.
REQUIRED VERSUS AVAILABLE CAPITAL
J.P. Morgan's total required economic capital is compared with available
capital to evaluate overall capital utilization. It is our policy to maintain
an appropriate excess of capital to provide for growth and as additional
protection against losses. The following table compares average required
versus available capital for the last two years.
38 Capital and risk management
<PAGE> 41
<TABLE>
<CAPTION>
REQUIRED VERSUS AVAILABLE CAPITAL
--------------------------------------------------------------
Average (billions) 1999 1998
--------------------------------------------------------------
<S> <C> <C>
Common stockholders' equity ................. $11.0 $10.8
Preferred stock, excluding variable ......... .4 .4
Trust preferred securities .................. 1.2 1.2
Other adjustments ........................... (.1) (.1)
--------------------------------------------------------------
Total available capital 12.5 12.3
--------------------------------------------------------------
Required economic capital:
Credit Portfolio ......................... 3.0 4.6
Interest Rate Markets and FX ............. 2.0 2.1
Proprietary Investing and Trading ........ 1.8 2.5
Equity Investments ....................... 1.5 1.2
Credit Markets ........................... 1.1 2.1
Equities ................................. 0.7 0.7
Asset Management Services ................ 0.6 0.6
Investment Banking ....................... 0.4 0.3
--------------------------------------------------------------
Total business segments .................. 11.1 14.1
Corporate ................................ 1.5 1.5
Diversification .......................... (2.7) (3.3)
--------------------------------------------------------------
Total required economic capital 9.9 12.3
--------------------------------------------------------------
Excess available capital 2.6 -
--------------------------------------------------------------
</TABLE>
In 1999 required capital was down 20% on average and substantially more at
year-end; excess available capital during 1999 approximated $2.6 billion on
average, compared with no excess in 1998. The decline in required capital
reflects decisive actions to reduce positions and risk in our Credit
Portfolio, Credit Markets, and Proprietary Investing and Trading segments, as
well as improved market conditions.
Based in part on the reduction in required capital and our capital strategy,
we announced, in October 1999, our intention to repurchase up to $3 billion
of common stock over the following 12 to 18 months. (See Liquidity risk and
capital resources on page 51 for more information.)
RISK MANAGEMENT FRAMEWORK
Risk is inherent in our business, and sound risk management is key to our
success. The major types of risks to which we are exposed are market, credit,
liquidity, and operating risk. We have developed and implemented
comprehensive policies and procedures to identify, mitigate, and monitor risk
across the firm.
We have established control mechanisms at various levels within the firm to
ensure high standards of risk management. Business managers have the primary
responsibility for managing risk. Located in markets around the world, they
have firsthand knowledge of market, industry, credit, economic, and political
conditions in their host countries. They are therefore best equipped to use
their experience and insight, along with risk management tools, to adjust
their risk strategies in a timely manner. They continually review new
activities and material changes to our existing activities to ensure that
significant risks are identified and that appropriate control procedures are
in place.
The primary oversight unit is the Corporate Risk Management group (CRMG). The
CRMG focuses on creating incentives for appropriate risk-versus-return
behavior at the business level and on helping identify and implement ways to
optimize EVA and the allocation of the firm's resources. The CRMG is
independent of the business groups and is managed by the chief financial
officer. To accomplish its objectives, this group:
- sets risk management policies and provides risk management training
- establishes and controls market and credit risk limits by business,
product, country, industry, and geographic region
- performs independent reviews of significant risk concentrations and has
the authority to challenge any risk position
- oversees allocation of balance sheet capacity and adherence to capital
targets
In addition to the CRMG oversight responsibilities, the Risk Management
Committee oversees management of all market- and credit-related risks. It
comprises the firm's most senior professionals and is chaired by the chief
financial officer. The committee adds to the transparency of principal risks
through regular attendance by senior business managers to discuss, among
other matters, significant market and credit exposures, concentrations of
positions, risk strategies, financial strength, asset quality, significant
position and risk limit changes, effectiveness of risk estimation, and
special agenda items such as potential new products. Various other senior
management committees that provide forums for oversight of our risk profile,
including the Capital Committee, the Operating Risk Committee, and the
Liquidity Risk Committee, are discussed throughout the Capital and Risk
Management section.
Capital and risk management 39
<PAGE> 42
Several groups that are independent of the business units - Audit, Legal, and
Financial - track risk from a variety of perspectives and make sure that the
businesses operate within established corporate policies and limits. In
addition, the Committee on Risk Policies of the Board of Directors is
responsible for overseeing policies relating to credit and market risk,
including the nature and levels of such risks.
Our processes are built on a foundation of early identification and
measurement. We use quantitative tools, including daily earnings at risk
measures, stress testing, vulnerability identification procedures, and other
measures, to regularly gauge our exposures. Although quantitative measures of
risk are integral to our process, our framework recognizes the limitations of
models and integrates their use, as tools, with our management experience and
judgment, market leadership, and strong emphasis on risk transparency and
discipline reviews. For example, when markets experience extreme conditions,
as they did in the latter part of 1998, 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. We
continuously review and modify our processes as our business changes in
response to market, credit, product, and other developments.
DAILY EARNINGS AT RISK
Our primary tool for the systematic measuring and monitoring of market and
credit risk is the daily earnings at risk (DEaR) calculation. DEaR for each
business is a key input to our EVA calculation and capital allocation. DEaR
is a statistical measure used to estimate the firm's exposure in normal
markets to market risk and, starting in 1999, credit risk in our trading
derivatives portfolio. It is calculated for almost all financial instruments.
We do not calculate DEaR for investments held in our Equity Investments
segment. (These investments are monitored by the firm's Investment Committee,
which is responsible for overseeing proprietary equity investment activities,
advising on portfolio strategy, approving all investments made over defined
limits, and monitoring portfolio risk.) We also do not measure the credit
risk of traditional credit products (loans and commitments to lend) by DEaR;
this credit risk is managed in the Credit Portfolio segment and is discussed
subsequently.
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, under normal market
conditions. For example, aggregate market risk DEaR was $22 million on
December 31, 1999. This implies that 95% of the time, a loss of no more than
$22 million would be expected over the course of one day as a result of our
market risk positions. DEaR allows for a consistent and uniform measure of
risk across all applicable products and activities. We regularly compare DEaR
estimates with daily trading results to determine the accuracy of these
estimates.
The firm's DEaR measure is based on a model that uses historical simulations.
It makes assumptions about market behavior and takes into account numerous
variables that may cause a change in the value of our portfolios, including
interest rates, foreign exchange rates, equity and commodity prices and their
volatilities, and correlations among these variables. The model weights
recent patterns of market volatility and correlations more heavily, given its
primary use as a measure of the expected volatility of short-term trading
positions. Our Financial group regularly calculates, reviews, and updates the
empirical market information that serves as the basis for the DEaR
calculation.
We use DEaR limits to define the maximum DEaR a given portfolio should have
at any one point in time. Limits are important to ensure adequate discussion
of changes in risk appetite. The CRMG sets DEaR limits at the business and
firmwide level. Within these overall limits, business managers set regional,
local, product, and trader limits or guidelines as deemed appropriate. The
level of risk to be assumed is based on our overall objectives, business
manager experience, client and regulatory requirements, market liquidity, and
volatility.
We estimate DEaR each day for each global trading activity, as well as at the
firmwide trading and aggregate level. As previously noted, in 1999 we began
to use DEaR to measure the credit risk embedded in our trading derivatives
exposures and are incorporating this measure into our daily process.
Management reviews daily reports of profit and loss, aggregate positions, and
the firm's risk profile. These reports compare DEaR by individual activity
and risk type with relevant DEaR limits and include a description of
significant positions and a discussion of market conditions. Risk managers
meet daily to discuss the firm's global risk profile and trading and
investing strategies.
40 Capital and risk management
<PAGE> 43
STRESS TESTING
We regularly supplement our DEaR calculations with stress testing at both the
firmwide and business-specific levels. Stress testing measures the impact of
abnormal movements on the firm's portfolios. Some of the stress test
assumptions are very specific to businesses' specialized risks, while others
are conducted in conformity with firmwide stress scenarios that are
distributed by the CRMG. This provides senior management with an analysis of
the potential impact on the firm's revenue. In select cases, we supplement
DEaR limits with stress-test-based limits - limits for the risk of loss
beyond the expected confidence level - for those portfolios that are
particularly susceptible to extreme market-related valuation losses.
VULNERABILITY IDENTIFICATION
In 1999 we introduced vulnerability identification (VID) as a discipline to
highlight material risks which may or may not be captured by measures such as
DEaR. The discipline systematically captures potential "worst-case" losses
identified by traders and other risk takers. Once identified, these losses -
or VIDs - may be quantified through specific stress tests and assist senior
management in focusing on significant risks. The discipline also reinforces a
"no-surprises" culture among the risk takers across the firm. Cross-firm
analysis is done on VIDs to see which scenarios are diversified away and
which may be exacerbated because several risk-taking units are exposed to
them.
BUSINESS RISK REVIEWS
The CRMG periodically performs special reviews of our risk-taking activities.
These reviews include, but are not limited to, detailed analyses of
selected portfolios, including the liquidity and turnover of trading asset
inventories, reviews of new products, and reviews of the models and controls
used to calculate and monitor market and credit risk.
MARKET RISK MANAGEMENT
Market risk is the risk of loss in our trading and investing activities
arising from changes in interest and foreign exchange rates, credit spreads,
equity and commodity prices, and the correlations among them and their levels
of volatility. The portfolio effect of holding diverse instruments across a
variety of business activities and geographic areas helps reduce the
potential impact on earnings from market risk.
MARKET RISK PROFILES
Overall, the markets returned to historically more normal levels of
volatility in 1999, compared with the extreme conditions experienced in 1998.
The latter half of 1998 was characterized by sharp increases in volatilities,
illiquidity, and breakdowns in historical correlations, all resulting from
market dislocations triggered by events in emerging markets.
Following are our market risk profiles for 1999 and 1998. The level of market
risk, which includes the effect of diversification, varies with market
factors, the level of client activity, and market movements.
<TABLE>
<CAPTION>
DEaR
------------------------------------------------------------------------------------------------------------------------------
Trading Investing Aggregate
------------------ ----------------- -----------------
In millions 1999 1998 1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High ........................................ $48 $55 $75 $109 $92 $120
Low ......................................... 18 27 8 8 20 33
------------------------------------------------------------------------------------------------------------------------------
December 31 26 35 9 72 22 83
------------------------------------------------------------------------------------------------------------------------------
Average 29 38 26 33 42 55
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEaR FOR TRADING ACTIVITIES
Average market risk DEaR for our trading activities declined 24% to $29
million in 1999, primarily reflecting lower exposures and levels of
volatility compared with 1998. During 1999, our DEaR estimates were
consistent with statistical expectations. In 1999 our daily revenue fell
short of the downside DEaR band (average daily revenue less the DEaR
estimate) on nine days, or less than 5% of the time. This compares with 20
days in 1998 (greater than 5%) when sharp increases in the actual volatility
of our daily revenue significantly exceeded that implied by our DEaR
estimates of risk. Nine of the 20 occurrences in 1998 fell within the
August-to-October period of market turmoil. Approximately half of the 20
occurrences exceeded our estimates by only a small margin.
Capital and risk management 41
<PAGE> 44
PRIMARY RISK EXPOSURES IN OUR TRADING ACTIVITIES
The average and period-end DEaR for 1999 and 1998, segregated by type of primary
market risk exposure associated with our trading activities, is presented in the
table below.
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 allows for a dynamic and proactive
adjustment of the risk profile across all our trading activities as needed.
DEaR FOR TRADING ACTIVITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 December December
In millions average average 31, 1999 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk(a) .............. $ 23 $ 30 $ 22 $ 31
Foreign exchange rate risk(b) ...... 7 18 4 11
Equity price risk(c) ............... 5 12 4 12
Commodity price risk ............. 2 3 1 3
Diversification effects ............ (8) (25) (5) (22)
- --------------------------------------------------------------------------------
Total 29 38 26 35
- --------------------------------------------------------------------------------
</TABLE>
(a) 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
securities markets in the U.S.; and interest rate derivatives. They also include
spread, volatility, and basis risk. We use such instruments as interest rate
swaps, options, U.S. government securities, and futures and forward contracts to
manage our exposure to interest rate risk.
(b) Foreign exchange rate risk represents the possibility that changes in
foreign exchange rates will affect 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 foreign exchange risk primarily through currency swaps; options;
and spot, futures, and forward contracts.
(c) Equity price risk is the possibility that equity security prices will
fluctuate, affecting their own value and that of other instruments which 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 this risk primarily through
equity cash, future, swap, and option instruments.
HISTOGRAM OF DAILY 1999 REVENUES
The histogram below shows the distribution of 1999 daily revenue from our
trading activities, which includes trading revenue, trading-related net interest
revenue, commissions, and other sources of revenue. It is used to compare the
reasonableness of our DEaR prediction to actual results.
DAILY MARKET RISK RELATED REVENUE
Depicted on page 42 of the annual report is a histogram showing the frequency
distribution of 1999 daily revenue from our trading activities, which includes
trading revenue, trading-related net interest revenue, commissions, and other
sources of revenue in millions of dollars. It also shows the upside and
downside confidence bands around which our daily revenue was distributed.
As shown in the histogram, the volatility of our trading revenue was in line
with expectations according to our DEaR estimates. At a 95% confidence
interval, the actual distribution of 1999 revenues would imply an average DEaR
of $32 million. This compares with our actual average 1999 DEaR estimate of $29
million.
Number of days per daily revenue band, dollars in millions
[BAR CHART]
42 Capital and risk management
<PAGE> 45
As shown in the histogram, the volatility of our trading revenue was in line
with expectations according to our DEaR estimates. At a 95% confidence interval,
the actual distribution of 1999 revenues would imply an average DEaR of $32
million. This compares with our actual average 1999 DEaR estimate of $29
million.
DEaR FOR PROPRIETARY INVESTING ACTIVITIES
Average DEaR for our proprietary investing activities was $26 million in 1999,
compared with $33 million in 1998. The decline primarily reflects reduced
exposures in our investment portfolio.
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.
In 1999 the results of our DEaR estimates were reasonable and consistent with
statistical expectations using the same one-day horizon and 95% confidence
interval used for trading. In 1998 the results were not consistent with
statistical expectations, reflecting increased volatility associated with the
August-to-October crisis period, coupled with increased holdings of U.S.
government agency securities.
CREDIT RISK MANAGEMENT
Credit risk represents 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.
Credit risk also arises from issuers of government and corporate bonds and
selected equity securities that we use in our market making and proprietary
investing activities. This form of credit risk is measured and managed as part
of our market risk management process.
We continuously manage the credit risk of individual transactions,
counterparties, countries, and other portfolio levels through (1) the request
and approval process, (2) ongoing credit monitoring, including regular risk
reviews and monthly business risk reviews, (3) proactive exposure management,
and (4) our asset quality review (AQR) process.
REQUEST AND APPROVAL
We make our initial decisions about extending credit on a name-by-name basis.
Credit approvals are made by experienced credit officers, based on an evaluation
of the counterparty's creditworthiness and the type of credit arrangement,
either for a given transaction or in total for that counterparty. The officers
consider the counterparty's current and projected financial condition as well as
the covenants, collateral, and protection available in the event of credit
quality deterioration. Credit officers are granted authority to extend credit at
different levels; the largest or riskiest credit extension decisions require the
approval of senior credit managers. In addition, the CRMG sets concentration
limits for various industries, countries, geographic regions, and products.
ONGOING CREDIT MONITORING
After credit has been extended, credit officers and industry analysts, in
collaboration with business managers, continue to monitor the counterparty's
credit quality. Senior credit officers regularly review current and potential
exposure and adherence to limits on both individual counterparties and
portfolios. Credit risk is also monitored by the senior members of the Risk
Management Committee and senior credit officers, who review each counterparty to
whom we have significant exposure. The Risk Management Committee regularly
reviews our overall credit risk profile in light of current market conditions.
PROACTIVE EXPOSURE MANAGEMENT
Proactive portfolio management involves making credit decisions and changing
risk concentrations in response to market events or changes in the firm's credit
strategy. Collateral management is an important element in this process. On a
regular basis, we estimate DEaR associated with the credit risk in our
derivatives trading portfolio, calculate economic capital at risk, and perform
stress tests. In addition, we actively manage our exposures via the sale of
loans and investment securities; the unwinding of derivative contracts; credit
derivative transactions and other hedges; and such capital market transactions
as securitizations.
Capital and risk management 43
<PAGE> 46
We use collateral as a means of mitigating credit exposure from privately
negotiated derivative contracts. Credit officers are also involved in the
decision to collateralize and in the ongoing monitoring of collateralized
exposures. The firm currently has more than 1,200 collateralized relationships
with all types of counterparties - including hedge funds, banks and
broker-dealers, and corporate clients - across the credit rating spectrum.
Collateral generally consists of highly-rated liquid securities and cash. At
least once each day, we compute the value of our credit exposure and the value
of collateral currently held against it for all counterparties with which we
have a collateral agreement. Each day, or as often as we consider necessary, we
call for additional collateral from our counterparties.
ASSET QUALITY REVIEW
Our credit review procedures are designed to promote early identification of
counterparty, country, industry, and product exposures that require special
monitoring. These procedures are based on our asset quality review process, a
systematic bottom-up review of exposures that management uses to estimate
probable credit losses and determine the appropriateness of our related
allowances. This process is dynamic and ongoing throughout the year, with major
reviews at the end of every quarter. Key participants include senior members of
the Risk Management Committee, the senior credit officer, the controller, and
representatives of our auditors and legal counsel.
Every quarter credit officers identify risks for review by the senior management
team. The starting point is the Special Review List, a list of counterparties
that require special periodic review until the senior credit officer determines
that they no longer do. The items reviewed represent the credit concerns of our
credit officers worldwide on specific counterparties, industries, and countries
that merit analysis and discussion.
The appropiate credit risk officer analyzes and prepares a write-up on the risk,
which includes the history of our relationship with the counterparty, our
current exposure and any cause for concern with that exposure, business
financials, market performance, an impairment analysis, and management's
business and financial strategy. The write-up concludes with a recommendation to
the AQR Committee. Such a recommendation could be placement on impaired status,
specific allocation, charge-off, or continued review.
Each credit risk issue is presented to the AQR Committee by the assigned credit
risk officer at the committee's quarterly meetings. Based on this discussion,
the committee, using its judgment and experience, determines the appropriate
actions (placement on impaired status, specific allocation, or charge-off) that
should be taken.
Members of the committee then consider appropriate actions to be taken in
addition to the specific risk decisions reached at the meeting. This typically
includes a review of expected loss calculations for the existing performing
portfolio. Their review considers the following: business and economic
conditions; regulatory requirements; our historical experience; concentrations
of risk by country, industry, product, and client; the relative size of many of
our credit exposures, given our wholesale orientation; the level and history of
impaired assets and charge-offs; and the estimated sale prices of certain
exposures.
The review results in a quarterly determination of the appropriateness of our
allowances for credit losses and whether provisions or reversals of provisions
are needed. This review is performed separately for each allowance
classification - loans and lending commitments - and component by component
within each allowance. The actual amount of credit losses or charge-offs, when
they occur, may vary from estimated losses at each period end, due to changing
economic conditions or exposure management decisions. Our process includes
procedures to limit differences between estimated and actual credit losses,
which include detailed quarterly assessments by senior management and model
inputs that reflect current market indicators of credit quality. The results of
the AQR process are documented and reviewed by the chief financial officer and
the chairman. The Board of Directors is updated each quarter on credit events
affecting the firm and on our assessment of the appropriateness of our
allowances.
The AQR Committee also reviews any other significant exposures with credit
concerns to determine appropriate actions. This includes a review of derivative
receivables with credit risk issues to determine the appropriate credit
adjustment needed to determine the fair value of the portfolio.
The following sections provide detailed information regarding the firm's
significant credit exposures.
44 Capital and risk management
<PAGE> 47
CREDIT EXPOSURES
CREDIT EXPOSURE AND RELATED ECONOMIC CAPITAL
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 Economic Economic
------------------------------- ----------------------------- capital capital
In billions: December 31 Carrying value Fair value Carrying value Fair value 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Derivatives ...................... $43.7(a) $43.7 $48.1(a) $48.1 $0.9 $1.9
Loans and lending commitments .... 26.4(b) 26.5 24.9(b) 24.7 1.8 2.4
- ------------------------------------------------------------------------------------------------------------------------------
Total credit exposures(c) 70.1 70.2 73.0 72.8 2.7 4.3
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Carried at fair value on the balance sheet with changes in fair value
recorded in the income statement. Includes credit valuation adjustment at
December 31, 1999 and 1998, of $670 million and $881 million, respectively.
(b) Amount net of allowances for credit losses of $406 million as of December
31, 1999 and $595 million as of December 31, 1998. Carrying value excludes the
notional value of lending commitments, which are off-balance-sheet instruments,
described in the following table.
(c) Substantially all credit risk related to derivatives, loans, and lending
commitment exposures are managed by the Credit Portfolio segment. Economic
capital includes the impact of purchased credit protection and other credit risk
hedges.
CREDIT EXPOSURE BEFORE AND AFTER COLLATERAL
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Maturing
---------------------------------- After collateral(b)
After one ----------------------
Within but within After 1999 Gross 1999 Net 1998 Net
In billions: December 31 one year five years five years exposure exposure exposure
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Derivatives ............................... $18.7 $16.8 $8.2 $43.7(a) $37.7(a) $39.1(a)
Loans(c) .................................. 11.9 10.7 4.2 26.8 18.9 19.1
Lending commitments(c) .................... 36.6 41.4 5.1 83.1 82.3 87.9
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the benefit of master netting agreements of $94.0 billion and
$107.6 billion at December 31, 1999 and 1998, respectively.
(b) Collateral held consisting of highly rated liquid securities (U.S.
government securities) and cash was as follows: derivatives - $6 billion (1999)
and $9 billion (1998); loans - $7.9 billion (1999) and $6.4 billion (1998); and
lending commitments - $0.8 billion (1999) and $1.0 billion (1998).
(c) Before allowance for credit losses.
COUNTERPARTY CREDIT QUALITY
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Loans and lending
Derivatives commitments
------------------ -----------------
December 31 1999 1998 1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA, AA ....................... 52% 52% 43% 32%
A ............................. 31 30 29 35
BBB ........................... 12 12 18 16
BB or below ................... 5 6 10 17
- ---------------------------------------------------------------------------
100 100 100 100
- ---------------------------------------------------------------------------
</TABLE>
Estimated percentages of credit exposures by counterparty credit rating based on
internal credit ratings. Ratings of AAA, AA, A, and BBB represent
investment-grade ratings and are analogous to those of public rating agencies in
the United States. Credit exposures utilized are after the benefit of master
netting agreements, collateral, and purchased credit protection (i.e., credit
derivatives).
Capital and risk management 45
<PAGE> 48
DERIVATIVES
Derivatives, in general, are contracts or agreements whose values are derived
from changes in interest rates, foreign exchange rates, credit spreads, prices
of securities, or financial or commodity indices. Derivatives are either
exchange-traded or privately negotiated (often referred to as over-the-counter
(OTC)). We are a global leader in structuring and trading a broad range of
derivatives transactions for our clients as part of their risk management,
capital raising, and investment activities. In our trading activities, we enter
into derivative transactions to help clients manage a broad range of risk
exposures. We also assume trading positions based on our market expectations and
to benefit from price differentials between instruments and markets. In
addition, we use derivatives to manage risks associated with our credit,
investing, and funding strategies. Refer to note 17 for more information on our
use of derivatives.
We carry derivatives used in our trading activities at fair value and record the
unrealized gain or loss (the positive or negative fair value) in trading account
assets or liabilities on the balance sheet, respectively; any changes in the
value of our trading derivatives are recorded in Trading revenue. The value of
derivatives will fluctuate with market movements and changes in counterparty
credit quality, sometimes significantly, depending on the nature of the
exposure. Derivatives are often referred to as off-balance-sheet financial
transactions because the notional amounts of their contracts are not recorded on
the balance sheet; however, the unrealized gains or losses on trading
derivatives, which generally represent a fraction of the notional amount, are
recorded on the balance sheet.
The fair value of derivatives is substantially derived from liquid market prices
as evidenced by exchange traded prices or broker-dealer quotations. Some
derivatives require valuation adjustments based on defined methodologies applied
consistently over time to ensure that positions are carried at the best estimate
of fair value. The largest valuation adjustment relates to credit risk
associated with privately negotiated derivatives (the "credit valuation
adjustment") in our derivatives trading portfolio. Credit risk associated with
exchange-traded contracts is small to nonexistent since our counterparty
exposure is to an exchanged-linked clearinghouse whose exposures are secured by
margin or collateral.
The credit valuation adjustment is managed centrally by our Credit Portfolio
segment and is calculated as follows. We measure the counterparty exposure
arising from privately negotiated derivative transactions with a market
simulation model that estimates forward probability distributions of credit
exposure. Based on the exposure profile of our derivatives portfolio, we
estimate credit loss using market prices for credit risk derived from spreads in
credit derivatives, asset swaps, and bonds. This credit loss estimate is the
credit valuation adjustment.
The credit valuation adjustment is dynamically recalculated on a daily basis,
taking into account positions after master netting agreements, collateral,
updated market parameters, credit rating changes, and new derivative activity.
This adjustment for credit risk also includes additional amounts for name
specific credit risk not reflected in credit spreads as determined by our asset
quality review process. We actively manage the market and credit risk volatility
of the credit valuation adjustment with credit, interest rate, foreign exchange,
and commodity derivatives. Changes in the credit valuation adjustment, including
related hedges, due to changes in credit and market risk factors, are reflected
in trading revenue as they occur. As of December 31, 1999 and 1998, the credit
valuation adjustment for our derivatives portfolio approximated $670 million and
$881 million, respectively. In risk equivalent terms, the credit exposure in our
derivatives trading portfolio at year-end 1999 was similar to a $40 billion
portfolio of bonds to A rated counterparties with a five-year maturity.
We evaluate derivative credit risk in much the same way we evaluate risks
associated with cash (debt and equity) instruments. In the second quarter of
1999, we began to measure the counterparty credit risk embedded in our trading
derivatives using DEaR. The main factors affecting this measure are spread
volatility and the risk of counterparty downgrades and defaults. Derivatives
credit risk DEaR as of December 31, 1999 approximated $12 million. This compares
with derivatives credit risk DEaR of $35 million as of June 30, 1999. The
decline is attributable to reduced exposures, reflecting maturities or
roll-offs, the increased use of credit derivatives to lower overall portfolio
risk levels, improved market conditions which resulted in lower levels of
volatility, and methodology enhancements.
46 Capital and risk management
<PAGE> 49
TRADITIONAL CREDIT PRODUCTS
The majority of credit risk from traditional credit products relates to
exposures managed by our Credit Portfolio segment. Exposures not managed by this
segment, primarily associated with our private banking activities, are largely
secured. The maximum credit risk for our traditional credit products is measured
by their contractual amounts, net of collateral. For example, the risk of a loan
is the amount of money lent to the client. For lending commitments, the risk is
the amount that would be owed should the contract be drawn upon, the client
default, and the collateral becomes worthless. A significant number of our
commitments expire, however, without being drawn upon. Moreover, commitments
usually include financial covenants and/or material adverse change clauses that,
if triggered, enable us to withdraw from the obligation to lend.
Credit Portfolio is moving toward managing the risks in its traditional lending
products in a manner similar to exposures in our market-making activities - that
is, we evaluate and make decisions based on a fair value model. This method
differs from the accrual basis of accounting described in note 1 because changes
in the fair value of loans and lending commitments are not reflected on the
balance sheet or in earnings. We use fair value because it depicts the market's
current assessment of the value and risk associated with an instrument or a
portfolio. It thus provides meaningful and current decision-making information,
ultimately leading to better diversification of risk, since the effects of
varying market conditions and events are more readily evident. Recent
developments in the credit markets, including the growth in credit derivatives
and the development of sophisticated credit portfolio models, continue to
improve the availability and reliability of market prices for credit risk. With
such progress, we have been able to make our credit activities more dynamic and
less capital-intensive while continuing to meet the needs of our clients.
In 1999 we began to compute on a regular basis the fair value of traditional
credit products in our Credit Portfolio segment. Amounts are based on market
prices for credit risk (credit spreads) in various markets, including credit
derivatives, asset swaps, and bonds. During 1999, the difference between the
carrying value on the balance sheet and the fair value of our credit portfolio
improved by approximately $300 million, reflecting an improved global credit
environment over 1998 as indicated by a tightening of credit spreads, as well as
reduced exposures through asset sales, roll-offs, and increased hedging.
We use credit derivatives to manage credit risk. The use of credit derivatives
for our own account is an important part of our credit transformation strategy,
as it allows us to reduce the risk and capital employed by credit activities.
Since December 1997 we significantly reduced credit risk on approximately $25
billion of traditional credit product exposures through the use of
securitizations and name-specific credit default swaps.
IMPAIRED LOANS
The following table presents impaired loans, net of charge-offs, as of December
31, for the past three years. Refer to note 1 for a description of how we
identify impaired loans.
IMPAIRED LOANS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
In millions: December 31 1999 1998(a) 1997(a)
- ---------------------------------------------------------------
<S> <C> <C> <C>
Commercial and industrial ........... $ 54 $ 25 $ 56
Banks ............................... - - 28
Other ............................... 23 97 29
- ---------------------------------------------------------------
Total impaired loans 77 122 113
- ---------------------------------------------------------------
</TABLE>
(a) Certain reclassifications were made to conform with the categorization used
in bank regulatory filings.
Impaired loans were $77 million as of December 31, 1999, compared with $122
million as of December 31, 1998. The increase in impaired commercial and
industrial loans was primarily due to the addition of one counterparty in the
Latin American steel industry. The decrease in Other primarily relates to an
exposure to one U.S. counterparty in the financial services industry, which was
sold during the year.
Impaired loans were $122 million as of December 31, 1998, compared with $113
million as of December 31, 1997. The decrease in impaired commercial and
industrial loans was primarily due to foreign-counterparty-related charge-offs
and repayments during the year. The decrease in banks relates to certain
counterparties that returned to performing status, as well as charge-offs during
the year. Offsetting these decreases was an increase in Other, related primarily
to one counterparty referred to in the previous paragraph.
Capital and risk management 47
<PAGE> 50
ALLOWANCES FOR CREDIT LOSSES
The following table summarizes the activity and year-end information of our
allowances for credit losses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Allowance for credit losses
Allowance for loan losses on lending commitments
--------------------------- ---------------------------
In millions 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1 .................... $ 470 $ 546 $ 566 $ 125 $ 185 $ 200
- --------------------------------------------------------------------------------------------------------
Provision for credit losses ........... - 110 - - - -
Reversal of provision for credit losses (175) - - - (60) -
- --------------------------------------------------------------------------------------------------------
Recoveries ............................ 33 19 40 - - -
Charge-offs:
Commercial and industrial ............ (16) (46) (21) - - -
Banks ................................ (1) (83) (17) - - -
Other ................................ (30) (26) (2) - - -
- --------------------------------------------------------------------------------------------------------
Net charge-offs(a) (14) (136) - - - -
- --------------------------------------------------------------------------------------------------------
Reclassifications(b) - (50) (20) - - (15)
- --------------------------------------------------------------------------------------------------------
Balance, December 31 281 470 546 125 125 185
========================================================================================================
Components:
- --------------------------------------------------------------------------------------------------------
Specific counterparty $ 24 $ 34 $ 106 $ 22 $ 3 $ 2
Expected loss(c) 257 436 440 103 122 183
- --------------------------------------------------------------------------------------------------------
Total allowance, December 31 281 470 546 125 125 185
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes losses on loan sales, primarily banks and other financial
institutions, of $33 million in 1999 and $105 million in 1998.
(b) Prior to July 1, 1998, changes, excluding charge-offs and recoveries, across
balance sheet reserve or allowance captions - which included an adjustment for
trading derivatives needed to determine fair value, an allowance for loan
losses, and an allowance for credit losses on lending commitments - were shown
as reclassifications. Reclassifications had no impact on net income and,
accordingly, were not shown on the "Consolidated statement of income."
Subsequent to July 1, 1998, reclassifications across balance sheet captions for
allowances are reflected as provisions or reversals of provisions in the
relevant components of the "Consolidated statement of income."
(c) For disclosure purposes, the country, expected loss, and general components
of previous years have been aggregated and included in the expected loss caption
in the above table, to conform with current year presentation.
DECEMBER 31, 1999 VERSUS DECEMBER 31, 1998
The allowance for loan losses decreased to $281 million at year-end 1999 from
$470 million at the previous year-end. Overall improvement in the global credit
environment and reduced risk in our credit exposures led to the reduction in the
allowance for loan losses. As a result, we recorded a negative provision for
loan losses of $175 million in the year. The allowance for credit losses on
lending commitments was $125 million as of December 31, 1999 and 1998.
The specific counterparty component of the allowance for loan losses, calculated
in accordance with SFAS No. 114, decreased to $24 million as of December 31,
1999. Charge-offs were partially offset by new allocations to a Latin American
steel counterparty and to a U.S. financial institution. The specific
counterparty component of the allowances for credit losses on lending
commitments was $22 million at year-end 1999, compared with $3 million the
previous year. The increase primarily reflects the addition of one U.S.
counterparty in the healthcare industry.
The expected loss component of our allowances is an estimate, based on
statistical modeling, of the probable loss inherent in our existing performing
portfolio of traditional credit products. In 1999 we revised our model to
incorporate all factors used in determining expected credit loss. Previously,
our allowance model included separate components or estimates of loss based on
country, industry, performing portfolio and imprecision (i.e., general). The
revised model combines all components into one loss estimate. The impact of this
change was not significant.
48 Capital and risk management
<PAGE> 51
In simple terms, expected losses can be estimated by predicting default
probabilities and the amount of loss given default. The revised expected loss
model uses a combination of historical data and current market spreads to
estimate default probabilities. The combination of these two sources of credit
information is appropriate because each one on its own has limitations:
Historical experience is often a lagging indicator of loss, and market spreads
may overestimate loss in volatile times. Historical default data is based on
long-term averages ranging from 15 to 20 years. As a result, current changes in
credit conditions often do not significantly affect historical default grids in
a timely manner because the impact of recent events is lessened when combined
with data over a long period. To compensate, we use the credit pricing inherent
in market spreads in our model. Taken together, historical default data and
market spreads provide a more balanced estimate of expected loss.
The expected loss component of the allowance for loan losses was $257 million as
of December 31, 1999, compared with $436 million at the end of 1998. Loss
estimates to emerging countries declined more than 50% to $70 million from a
year-ago; developed countries loss estimates declined 30% to $187 million.
Throughout 1999 improvements in market spreads, which are used as a current
indicator of credit quality, coupled with a reduction of our credit exposures,
particularly in emerging markets, resulted in the decrease.
The expected loss component of the allowance for credit losses on lending
commitments was $103 million at the end of 1999, compared with $122 million at
the previous year-end. This decrease primarily relates to a reduction of
exposures in Brazil. The 1998 figure included a $25 million allowance for
certain Brazilian cross-border funding commitments, which matured in the first
quarter of 1999.
DECEMBER 31, 1998, VERSUS DECEMBER 31, 1997
The allowance for loan losses decreased to $470 million as of December 31, 1998,
from $546 million at the end of 1997. The decrease was due primarily to net
charge-offs of $136 million in 1998 and a reclassification to our trading
portfolio in the first quarter related to impaired derivative receivables, which
was partially offset by a provision for loan losses of $110 million. Most
charge-offs resulted from losses on loan sales to counterparties in emerging
Asia, which were incurred as part of the firm's exposure reduction initiatives.
The allowance for credit losses on lending commitments decreased to $125 million
as of December 31, 1998, resulting in a negative provision of $60 million,
recorded in Other revenue, which was needed to reflect the allowance at an
appropriate level.
The specific counterparty component of the allowance for loan losses decreased
to $34 million, reflecting declines in counterparty allocations across regions,
primarily because of the return of certain counterparties to performing status
during the year and lower loss estimates related to emerging Asian
counterparties. Although specific counterparty allocations declined, the level
of impaired loans did not change significantly, primarily reflecting the
addition of one counterparty in 1998 that more than offset loans returning to
performing status. The specific counterparty component of the allowance for
credit losses on lending commitments was $3 million as of December 31, 1998,
compared with $2 million the previous year.
The expected loss component of the allowance for loan losses (which includes
amounts previously included in the country, expected loss, and general
components as discussed earlier) was $436 million as of December 31, 1998,
compared with $440 million as of December 31, 1997. Excluding loss estimates
related to countries experiencing financial stress, the expected loss component
was $343 million at December 31, 1998, versus $242 million in the previous year.
The increase reflected our assessment that estimated probable losses for Latin
American credits - excluding Brazil, which is discussed below - were higher than
at the end of 1997 due to events in the second half of 1998. We believed that
the increase was appropriate to reflect our loss experience during 1998 in
emerging markets, including the fact that there is a high correlation among
emerging markets when losses occur. To determine the loss estimates, we used
bond spreads in the region as an indicator of credit quality, since the
situation was judged too volatile for us to rely on published credit ratings.
Loss estimates related to countries experiencing financial stress (formerly our
specific country component) were $93 million as of December 31, 1998, compared
with $198 million at the previous year-end. The decrease reflects lower
exposures to countries in emerging Asia. Total exposure to emerging Asia was
down more than 50% in 1998. This decrease was partially offset by the addition
of a specific country loss estimate for Brazilian credit exposures, reflecting
volatile economic conditions stemming from uncertainties about fiscal reforms.
Countries included in this loss estimate at year-end 1998 were South Korea,
Indonesia, Malaysia, Thailand, and Brazil. These countries were all subject to
International Monetary Fund (IMF) support programs.
Capital and risk management 49
<PAGE> 52
The loss estimates for each country were determined by management by applying a
"tiering of risk" basis (e.g., sovereigns have a lower percentage of coverage
than corporates). Management used historical loss experience and judgment,
considering secondary market data where applicable to determine these estimates.
During the course of 1998 we incurred losses, primarily through loan sales, to
counterparties in emerging Asia. We believe that while financial conditions in
the region improved during the year, losses in our remaining emerging Asian
exposures were probable and that, in light of recent experience, our loss
estimates were reasonable. With regard to Brazil, there was a significant
deterioration in the credit situation, demonstrated by the need for an IMF
program in the fourth quarter of 1998. As a result, we determined that it was
necessary to have a specific country allocation for Brazil.
The expected loss component for the allowances for credit losses on lending
commitments was $122 million as of December 31, 1998, compared to $183 million
as of December 31, 1997. The decrease reflects lower exposures to countries in
emerging Asia and management's decision to reduce loss estimates based on their
judgment and experience with lending commitments. This decrease was partially
offset by higher estimated losses for Latin American credits, including Brazil,
as previously discussed.
INTERNATIONAL ALLOWANCES FOR CREDIT LOSSES
The international portion of our allowances for credit losses was $180 million,
$341 million, and $486 million as of December 31, 1999, 1998, and 1997,
respectively. It represented approximately 44%, 57%, and 66% of our total
credit-related product allowances in each of the respective years. The decrease
reflects lower exposures to emerging markets and improved credit conditions
globally. Refer to note 21 for more information.
EXPOSURES TO EMERGING COUNTRIES
Over the past two years, we have proactively decreased our exposures to certain
emerging markets to reflect the increased risk associated with these assets as
well as our longer-term credit transformation strategy. As a result, emerging
market exposures in Asia (excluding Japan) and Latin America combined were
reduced by 17% and 50%, respectively, in 1999 and 1998. Consistent with our
credit strategy and market opportunities, we will continue to actively manage
exposures as appropriate.
EXPOSURES TO EMERGING COUNTRIES
EMERGING ASIA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1999 1998
Govern- Total Total
In billions: December 31 Banks ments Other exposure exposure
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
China .............................. - $ - $ - $ - $ 0.1
Hong Kong .......................... - 0.2 0.5 0.7 1.6
Indonesia .......................... - - 0.2 0.2 0.2
Malaysia ........................... 0.1 0.1 - 0.2 -
Philippines ........................ - 0.1 0.1 0.2 0.2
Singapore .......................... 0.3 0.1 0.2 0.6 0.2
South Korea ........................ 0.4 0.4 0.7 1.5 1.7
Taiwan ............................. - - - - 0.1
Thailand ........................... 0.2 - - 0.2 0.2
Other .............................. - 0.2 - 0.2 0.3
- -----------------------------------------------------------------------------------
Total Asia, excluding Japan(a) 1.0 1.1 1.7 3.8 4.6
- -----------------------------------------------------------------------------------
</TABLE>
(a) Total exposures to Japan, based upon management's view, were $4.6 billion at
December 31, 1999.
LATIN AMERICA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1999 1998
Govern- Total Total
In billions: December 31 Banks ments Other exposure exposure
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Argentina ...................................... $ - $ 0.7 $ 0.6 $ 1.3 $ 1.3
Brazil ......................................... 0.5 0.5 0.5 1.5 1.9
Chile .......................................... - - 0.3 0.3 0.4
Colombia ....................................... - 0.1 0.2 0.3 0.6
Mexico ......................................... - 0.6 0.9 1.5 1.2
Other .......................................... - 0.1 0.4 0.5 1.1
- ---------------------------------------------------------------------------------------------
Total Latin America, excluding the Caribbean 0.5 2.0 2.9 5.4 6.5
- ---------------------------------------------------------------------------------------------
</TABLE>
The above tables present exposures to certain emerging markets based on
management's view of total exposure. 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, and interest-earning deposits with banks; the fair values of trading
account assets (cash securities and derivatives, excluding any collateral we may
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, when we have bought or sold credit protection outside the
respective country. Trading assets reflect the net of long and short positions
of the same issuer.
EXPOSURES TO FINANCIAL SERVICES INSTITUTIONS
Credit exposures to counterparties in the financial services industry, including
banks, broker-dealers, insurance companies, and other financial institutions
follow.
50 Capital and risk management
<PAGE> 53
EXPOSURES BY PRODUCT AND TYPE OF COUNTERPARTY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
In billions: December 31, 1999 Credit exposure by product(a)(b)
---------------------------------------------------------------
Lending Economic
Counterparty Derivatives Loans commitments Total(a) capital
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Banks ........................... $14.6 $0.2 $ 3.9 $18.7 $0.4
Broker-dealers .................. 1.7 - 0.1 1.8 0.1
Insurance companies ............. 0.7 - 1.8 2.5 -
Other financial institutions .... 3.6 2.1 8.9 14.6 0.2
- ---------------------------------------------------------------------------------------------------
Total 20.6 2.3 14.7 37.6 0.7
- ---------------------------------------------------------------------------------------------------
</TABLE>
(a) Credit exposures are after the benefit of master netting agreements,
collateral, and purchased credit protection.
(b) In addition, other exposures, substantially consisting of cash securities in
our trading account, was as follows: $7.9 billion to banks, $1.4 billion to
broker-dealer, $1.4 billion to insurance companies and $3.3 billion to other
financial institutions.
CREDIT RATINGS BY TYPE OF COUNTERPARTY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1999 Percentage of credit exposure by counterparty credit rating(a)
--------------------------------------------------------------
BB and
Counterparty AAA, AA A BBB below Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Banks ......................... 53% 32% 9% 6% 100%
Broker-dealers ................ 34 31 34 1 100
Insurance companies ........... 15 50 31 4 100
Other financial institutions .. 34 40 13 13 100
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on exposures related to derivatives, loans and lending commitments.
LIQUIDITY RISK AND CAPITAL RESOURCES
Liquidity risk arises in the general funding of the firm's activities and in the
management of positions. It includes both the risk of being unable to fund our
portfolio of assets at appropriate maturities and rates and the risk of being
unable to liquidate a position in a timely manner at a reasonable price.
The Liquidity Risk Committee is responsible for identifying, measuring, and
monitoring our liquidity risks. This group comprises senior business, financial,
and corporate risk management officers, who meet monthly to review trends in the
firm's overall liquidity risk profile. Any significant changes are communicated
to senior management and the Risk Management Committee. In addition, the
Liquidity Risk Committee oversees a cross-business task force that meets
regularly, or on an immediate basis if necessary, to discuss liquidity crisis
planning. The task force brings together representatives from every business
group of the bank. This group worked extensively and successfully in preparation
for the year 2000, since they were responsible for monitoring and assessing the
funding needs of our activities over the year-end.
It is our liquidity policy to maintain sufficient capital, long-term debt, and
capital securities to ensure the capacity to fund the firm on a fully
collateralized basis. This strategy ensures that even under adverse conditions
we have access to funds necessary to cover client needs, maturing liabilities,
and the capital requirements of our subsidiaries.
Our liquidity measurement and reporting procedures are designed to ensure an
adequate liquidity surplus. We use cash capital reporting to monitor our ability
to fund the firm on a fully collateralized basis, in the event that we become
unable to replace our short-term unsecured debt. The cash capital calculation
compares the value of assets as reported on the balance sheet at a point in time
with the expected collateral value that would be assigned to these assets
assuming they were pledged to secure short-term borrowing. The difference
between the actual and liquidity value of assets is then compared with total
long-term funding sources (stockholders' equity, preferred securities, long-term
debt, and term deposits) to determine the cash capital surplus or shortfall. It
is our policy to maintain a positive cash capital position.
In addition to monitoring cash capital, the Liquidity Risk Committee regularly
reviews liquidity stress test results. Stress tests monitor future funding
requirements under various market conditions that might adversely affect our
ability to liquidate investment and trading positions and our ability to access
unsecured funding sources. Stress tests are conducted under firm-specific and
market-wide scenarios. Basic surplus is an example of a firm-specific stress
analysis. It measures whether or not our current asset holdings are sufficiently
liquid to sustain a J.P. Morgan specific liquidity crisis. Basic surplus is
calculated across various maturity buckets, from overnight to 90 days, to ensure
that assets and liabilities are matched in such a way as to maintain sufficient
liquidity during a 90 day period, in the event that we cannot access the money
or capital markets for funding.
Capital and risk management 51
<PAGE> 54
SOURCES OF FUNDS
We have access to a diverse funding base around the world. We raise funds
globally using a broad range of instruments including deposits, certificates of
deposits, commercial paper, bank notes, repurchase agreements, federal funds
purchased, long-term debt, capital securities, and stockholders' equity. This
enhances funding flexibility, limits dependence on any one source of funds, and
generally lowers the cost of funds. In making funding decisions, management
considers market conditions, prevailing interest rates, liquidity needs, and the
desired maturity profile. We also use derivatives to modify the characteristics
of interest-rate-related instruments such as short-term borrowings and long-term
debt. Refer to note 17.
We regularly review our mix of funding and investor concentrations to ensure
that our sources are well diversified. We maintain geographic diversification,
utilizing a broad range of debt instruments that vary by both maturity and
currency. In addition, we review exposure by creditor to ensure that we do not
have concentrated risk to any single investor.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
In billions: Average balances 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing deposits ............................................................. $50.5 $56.7 $55.9
Non-interest-bearing deposits ......................................................... 1.5 1.7 1.5
Commercial paper ...................................................................... 11.0 9.7 4.9
Other liabilities for borrowed money .................................................. 10.5 14.3 18.2
Securities sold under agreements to repurchase and federal funds purchased 61.8 70.5 67.1
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The above table presents the average balances of our short-term borrowings.
Interest-bearing deposits include time deposits and certificates of deposit and
generally have maturities of less than one year. Non-interest-bearing deposits
include items in the process of collection and compensating balances from
clients. Other liabilities for borrowed money include bank notes with an
original maturity of less than one year, term federal funds purchased,
securities lent, and other short-term borrowings. Repurchase agreements
represent secured sources of funding, using our inventory of government and
agency, money market, and corporate securities as collateral. Maturities range
from overnight to one year, with close to 80% maturing in less than three
months.
LONG-TERM DEBT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
In billions: December 31 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt qualifying as
risk-based capital ............... $ 5.2 $ 4.6 $ 4.7
Long-term debt not qualifying as
risk-based capital ............... 19.0 23.0 18.2
- -----------------------------------------------------------------
Total long-term debt 24.2 27.6 22.9
- -----------------------------------------------------------------
</TABLE>
Over the past two years we have taken advantage of market opportunities to
extend the maturity of our liabilities and pursue non-U.S.-dollar funding
opportunities in Europe and Japan. During 1999 we issued $5.7 billion in
long-term debt (debt with an original maturity greater than one year), of which
approximately $1.0 billion qualifies as risk-based capital. Approximately $8.6
billion of maturities and $38 million of early redemptions offset the additions
to long-term debt.
In 1998 we issued $12.4 billion in long-term debt, of which approximately $0.1
billion qualifies as risk-based capital. Approximately $7.7 billion of
maturities and $580 million of early redemptions offset the additions to
long-term debt.
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
In millions: December 31 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Common stockholders' equity ........ $10 745 $10 567 $10 710
- -------------------------------------------------------------------
Total stockholders' equity ......... 11 439 11 261 11 404
- -------------------------------------------------------------------
Total stockholders' equity to
year-end assets 4.4% 4.3% 4.4%
- -------------------------------------------------------------------
</TABLE>
Common and total stockholders' equity as of December 31, 1999 increased from the
previous year due to earnings in excess of common and preferred dividends and
shares issued under employee benefit plans. These increases more than offset
stock repurchases and a decrease in unrealized appreciation on debt and
marketable equity securities. Common and total stockholders' equity in 1998
declined from the previous year. This was due to stock repurchases and a
decrease in unrealized appreciation on debt and marketable equity securities.
These decreases more than offset earnings in excess of common and preferred
dividends and increases related to shares under employee benefit plans.
52 Capital and risk management
<PAGE> 55
In October 1999, the Board of Directors approved the purchase of up to $3
billion of J.P. Morgan common stock. Approximately $1 billion purchased in the
fourth quarter of 1999 reflected excess capital generated from our capital
management actions as previously discussed. The remaining $2 billion we
anticipate will be equally used to lessen the dilutive impact on earnings per
share of the firm's employee benefit plans and to return excess capital
generated from future operations.
In 1999 we repurchased approximately 16.3 million common shares worth $2.1
billion. These purchases were covered under the October 1999 and December 1998
authorizations to repurchase up to $3 billion and $750 million of common stock,
respectively. They were partially offset by the issuance of six million shares
to employees under the firm's compensation plans. We intend to repurchase the
remaining shares of the October 1999 authorization over the next 12 to 15
months, subject to market conditions, business considerations, and other
factors. During 1998 we purchased approximately 6.6 million common shares worth
$755 million.
In December 1999 our Board of Directors increased the regular quarterly dividend
on the company's common stock to $1.00 per share from $0.99 per share.
REGULATORY REQUIREMENTS
J.P. Morgan is subject to regulation under state and federal law, including the
Bank Holding Company Act of 1956 (the Act). The Act prohibits us from engaging
in activities not closely related to banking and limits the amount of securities
we may acquire of a company engaging in non-banking activities. The Act was
amended by the Gramm-Leach-Bliley Act, and beginning on March 11, 2000, will
allow financial holding companies (a defined term) to engage in activities that
are "financial in nature", and to own, to a greater extent than now permitted,
securities of companies engaged in non-banking activities. J.P. Morgan has filed
an election with the Board to become a financial holding company. The
Gramm-Leach-Bliley Act also repeals prohibitions which restricted gross revenues
from bank ineligible underwriting and dealing activities of J.P. Morgan
Securities Inc. to a maximum of 25% of total gross revenues.
J.P. Morgan, our subsidiaries, and certain foreign branches of our bank
subsidiary, Morgan Guaranty Trust Company of New York (Morgan Guaranty), are
required to meet the capital adequacy rules of several U.S. and non-U.S.
regulators.
Our primary federal banking regulator, the Federal Reserve Board, establishes
minimum capital requirements and leverage ratios for J.P. Morgan, the
consolidated bank holding company, and for some of our subsidiaries, including
Morgan Guaranty. J.P. Morgan and its principal subsidiaries exceeded the minimum
standards set by each regulator as of December 31, 1999. J.P. Morgan and Morgan
Guaranty also exceeded the minimum standards for a well capitalized bank holding
company and bank, respectively, as of December 31, 1999, and we are aware of no
conditions or events since year-end that would change our well capitalized
status.
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
J.P. Morgan Well
-------------- Required capitalized
December 31 1999 1998 minimum minimum
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital ............. 8.8% 8.0% 4.0% 6.0%
Total risk-based capital ... 12.9 11.7 8.0 10.0
Leverage ................... 4.7 3.9 3.0 3.0
- ----------------------------------------------------------------------
Morgan Guaranty Well
--------------- Required capitalized
December 31 1999 1998 minimum minimum
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital ............ 9.2% 8.7% 4.0% 6.0%
Total risk-based capital .. 12.1 12.0 8.0 10.0
Leverage .................. 6.7 5.3 3.0 5.0
- -----------------------------------------------------------------------
</TABLE>
Risk-adjusted assets represent the total of all on- and off-balance-sheet assets
adjusted for risk-based factors as prescribed by the Federal Reserve Board. J.P.
Morgan's risk-adjusted assets as of December 31, 1999, 1998 and 1997, were
$131.4 billion, $140.2 billion, and $148.5 billion, respectively. Refer to note
28 for more information.
OPERATING RISK MANAGEMENT
Operating risk includes:
- - Execution risk: the risk that the execution of a transaction will be
inconsistent with management's intentions and expectations. Key aspects of
execution risk include failure to detect and manage unauthorized
transactions, improper capture, and faulty processing and recording of
transaction details, as well as inadequate safeguarding of assets.
- - Information risk: the risk that information created, received, processed,
stored, or transmitted within or outside the firm will be unavailable, of
poor quality, improperly utilized, or inappropriately accessed. Information
risk includes the risks arising from the processes and technology used to
manage information.
Capital and risk management 53
<PAGE> 56
- - Relationship/reputational risk: the risk to the firm of damaging client
relationships as a result of inappropriate or unsatisfactory delivery of
products or services. It also includes the risk of entering into
relationships with clients and counterparties whose character or business
practices do not meet our standards.
- - Legal/regulatory risk: the risk of changes to, or noncompliance with,
federal, state, or local laws and regulations or lack of conformity with
relevant standards (e.g., accounting standards). It also includes the risk
that a transaction is not legally enforceable or will become unenforceable
over its life or that contractual obligations will not be fulfilled.
- - People risk: the potential for a lack of appropriate skills and resources
and related supervision to meet business requirements, for the misuse of
these resources, and for inappropriate judgment or improper behavior of
staff.
Primary responsibility for managing operating risk rests with business managers.
These individuals, with the support of their staff, are responsible for
establishing and maintaining internal control procedures that are appropriate
for their operating environments. To this end, the objectives of each business
activity are identified and the risks associated with those objectives assessed.
The business managers institute a series of policies, standards, and procedures
to manage these risks, considering their nature and magnitude. Periodic
self-assessment and monitoring mechanisms help ensure that established internal
controls are effective and operate in accordance with established standards.
The Operating Risk Committee sets the firm's overall strategic operating risk
agenda and monitors its progress. The committee meets regularly to discuss the
most significant operating risks facing the firm, to monitor the health of the
control environment, and to initiate any actions necessary to offset those
risks.
Our Internal Audit department objectively reviews our business activities to
assess the quality of the control environment and recommend actions to address
any issues. It supports the Audit and Examining Committee, a key independent
oversight body composed of members of the Board of Directors who are independent
of management. This committee is kept abreast of the overall and business level
control environment, as well as the status of important control initiatives.
Our control environment is built on the integrity, competence, and supervision
of our professionals, as well as management's control philosophy and operating
style. This comprehensive system of internal controls is designed to ensure
compliance with the policies and procedures of the firm and the appropriate
management of operating risks, all of which support the firm's objectives.
An important goal in the coming year is to develop comprehensive, quantitative
measures of operating risk on a firm-wide basis. Such measures can also be
linked to the firm's capital allocation framework and EVA analysis. This
integrated approach to operating risk will capitalize further on the broad range
of business-specific control and productivity initiatives already underway.
Further, this will foster an environment of continuous self-improvement and
provide the tools for active capital management around the firm's operating
risk.
YEAR 2000 INITIATIVE UPDATE
One unique example of potential operating risk was preparation for the year
2000. Year 2000 has been one of the largest initiatives undertaken by J.P.
Morgan. The program spanned a five-year period and involved more than 2,000
people. During the course of the program, we successfully renovated more than
3,000 applications and more than 2,000 technology products. We dedicated a
significant amount of time to updating our contingency plans to mitigate year
2000 risk. We also performed extensive scenario planning exercises and conducted
several firmwide year 2000 tests. J.P. Morgan was well prepared to deal with
both internal and external year 2000 issues. We established a firmwide
communications center to obtain information from internal and external sources
and then quickly disseminate status reports to senior decision-makers,
regulators, shareholders, clients, and employees. Our extensive efforts resulted
in the firm's successful transition into the new millennium and contributed to a
successful transition for the industry.
Based on our experiences with year 2000 and the European monetary union (EMU),
the firm has demonstrated its ability to manage large scale, global,
cross-business projects. We have developed a library of best practices that can
be applied to new initiatives including e-commerce and continuing productivity
improvements. As a result of this work, we now have a much simplified and
improved technology base, as we have been able to implement current levels of
technology releases across the board as well as strengthen our vendor contacts
and relationships. We have better positioned ourselves for such major industry
initiatives as decimalization and extended exchange trading hours. Preparation
for the year 2000 has set a precedent for cooperation across the financial
industry in discussing issues, sharing information, and communicating with
regulators.
54 Capital and risk management
<PAGE> 57
CONSOLIDATED REVENUE AND EXPENSE ANALYSIS
- --------------------------------------------------------------------------------
REVENUES
Revenues increased 31% in 1999 to $8,856 million, excluding nonrecurring gains
in 1998 of $187 million related to business sales. For 1998, revenues were
$6,768 million, down 6% from $7,220 million in 1997.
Net interest revenue rose 20% in 1999, excluding the impact of credit loss
provisions, primarily reflecting increases in our interest rate market
activities. Net interest revenue in 1999 also included the benefit of a negative
provision for loan losses of $175 million, as improvements in the global credit
environment and reduced exposures allowed us to reduce our allowance level. This
compares with a loss provision of $110 million in 1998 related to emerging
markets. Net interest revenue decreased 32% in 1998 to $1,281 million, excluding
the provision for loan losses. The decline primarily reflected lower net
interest revenue from our interest rate markets and proprietary investing
activities, partially offset by increases related to equities securities
borrowing, local market positions in Eastern Europe, and higher
Euroclear-related deposits.
Noninterest revenues were $7,140 million versus $5,784 million in 1998.
Excluding gains related to business sales in 1998, noninterest revenues
increased 28%. Trading revenue increased 32% to $3,115 million, reflecting
strong results in our equities and credit activities, partially offset by lower
revenues in the interest rate and foreign exchange markets and trading for our
own account. Advisory and underwriting fees grew 16% to $1,630 million
reflecting growth in both advisory and equity underwriting. Investment
management fees increased 17% to $1,035 million, fueled by asset growth, a shift
in asset mix toward higher-fee alternative investment disciplines, and increased
performance fees. Fees and commissions rose 13% to $846 million on higher equity
brokerage commissions and futures and options brokerage results. Investment
securities revenues were $332 million in 1999, compared with $205 million in
1998, reflecting higher equity investment gains partially offset by losses on
sales of debt investment securities as we repositioned our portfolio.
Noninterest revenues rose 5% in 1998, excluding nonrecurring gains of $187
million on business sales recorded in Other revenue. Trading revenue was $2,362
million in 1998, an 11% increase from $2,137 million in 1997. Sharp increases in
trading revenue from swaps and government and agency securities drove the rise.
Partially offsetting the increases were losses in emerging markets, largely
related to Russian trading account positions, losses in corporate debt
securities, and lower results in precious metals. Advisory and underwriting fees
grew 25% in 1998 to $1,401 million as we increased market share globally in
mergers and acquisitions, and from increased client demand. Investment
management fees rose 11% to $881 million, driven by a 26% increase in assets
under management. Fees and commissions increased 16% in 1998, primarily owing to
higher equities brokerage commissions and strong futures and options brokerage
results. Investment securities revenue was $205 million in 1998, reflecting net
equity gains of $315 million, primarily in the insurance industry, and net
realized losses of $140 million on debt investment securities, mostly related to
emerging Asia.
OPERATING EXPENSES
Total operating expenses for 1999 were $5,742 million, an increase of 11% over
1998, excluding special charges of $358 million related to cost reduction
initiatives. The rise was entirely attributable to higher incentive compensation
and closely linked to growth in revenues. Excluding performance-driven
compensation and excluding the effect of software capitalization, core operating
expenses were down approximately $400 million, as we achieved our expense target
for the year. Operating expenses in 1998 increased only 2% from 1997: while
incentive compensation was lower, expenses to prepare for the year 2000 and EMU,
along with investment in key business initiatives, offset the decline.
Employee compensation and benefits in 1999 totaled $3,892 million. The 30% rise
was due to increases in incentive compensation. In 1998 Employee compensation
and benefits - before severance costs of $241 million - decreased by 1% from
1997 as lower incentive compensation was partially offset by higher salary
expense.
Noncompensation expenses of $1,850 million in 1999 were 15% lower than in 1998
before special items, reflecting the progress on our productivity initiatives,
lower expenditures on year 2000 and EMU initiatives, and the capitalization of
some software development costs. Noncompensation expenses increased 7% in 1998.
Consolidated revenue and expense analysis 55
<PAGE> 58
Net occupancy expenses of $299 million were 8% below 1998 before special items
of $112 million, primarily due to a reserve reversal of $25 million related to
revised real estate cost estimates, partially offset by certain asset
write-offs. This follows a 7% increase in 1998 that reflects higher rents and
depreciation charges, but excludes a $28 million charge incurred in 1997 in
connection with the renovation of New York office space.
Technology and communications expenses decreased 20% in 1999, to $947 million.
The decline reflects lower consulting costs related to software capitalization
and lower resource costs charged by the Pinnacle Alliance, a consortium of firms
contracted to manage parts of our global technology infrastructure. It follows a
16% increase in 1998, when expenses rose to meet the technology demands for year
2000 compliance and EMU, to enhance our risk management capabilities, and as
part of several multi-year system upgrades. In 1999 software costs of $138
million were capitalized rather than recorded as expenses because of a required
change in accounting rules (see note 1.)
Other expenses (travel, professional fees, outside services, certain brokerage
fees, taxes other than income taxes, and training fees) of $604 million declined
by 11% in 1999 after remaining substantially unchanged the year before. The
decline reflects the broad implementation of our productivity initiatives and
heightened expense discipline.
1998 BUSINESS RESTRUCTURING
In 1998, we implemented cost reductions programs to generate annualized savings
of $410 million by restructuring a number of activities and other productivity
initiatives. About $235 million and $175 million of these savings were realized
in 1999 and 1998, respectively. In connection with these restructurings, we
incurred special charges in the first and fourth quarters of 1998 totaling $358
million, comprised of $241 million in severance costs associated with staff
reductions of approximately 1,700, $112 million in real estate write-downs, and
$5 million in equipment writedowns. Refer to note 4 for more information.
PREPARATION FOR THE YEAR 2000 AND EMU
J.P. Morgan experienced a smooth transition into the year 2000. For 1999 costs
of preparation for the transition, combined with costs of preparing for EMU,
were $56 million, down from $205 million in 1998 and $96 million in 1997.
Preparations for EMU were substantially completed in 1998. The total cost of
year 2000 preparation was $280 million, including $10 million estimated for
2000.
INCOME TAXES
Income tax expenses were $1,059 million in 1999, compared with $454 million in
1998. The increase was due to higher pretax income and an increase in the
effective tax rate from 32% to 34%. Income taxes in 1997 were $689 million,
reflecting higher pretax income than in 1998 and an effective tax rate of 32%.
ACCOUNTING DEVELOPMENTS
See note 1 to the consolidated financial statements.
56 Consolidated revenue and expense analysis
<PAGE> 59
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The consolidated financial statements in this Annual report were prepared by the
management of J.P. Morgan. In doing so, management applied generally accepted
accounting principles and also exercised its judgment and made estimates
wherever they were deemed appropriate. Other financial information that is
included in this Annual report is consistent with that of the consolidated
financial statements.
In discharging its responsibility for both the integrity and fairness of these
statements and information, and for the examination of the accounting systems
from which they are derived, management maintains a system of internal control
designed to provide reasonable assurance, weighing the costs with the benefits
sought, that transactions are executed in accordance with its authorization and
in compliance with laws and regulations, assets are safeguarded, and proper
records are maintained. An important element in management's effort to establish
a reliable control environment is the careful selection, training, and
development of professional personnel. Management believes that the system of
internal control, which is subject to close scrutiny by management itself and by
internal auditors and is revised as considered necessary, supports the integrity
and reliability of the consolidated financial statements.
Further, independent accountants perform a study and evaluation of the system of
internal accounting control for the purpose of expressing an opinion on the
consolidated financial statements of J.P. Morgan.
The Board of Directors of J.P. Morgan appoints an Audit and Examining Committee
responsible for monitoring the accounting practices and internal controls of the
firm. The committee, whose membership consists of directors who are not officers
or employees of J.P. Morgan, meets periodically with members of the internal
auditing staff to discuss the nature and scope of their work and to review such
reports and other matters as the committee deems necessary. The committee also
recommends to the Board of Directors the engagement of an independent accounting
firm and meets with representatives of that firm to discuss the examination of
the consolidated financial statements as well as other auditing and financial
reporting matters. Both the internal auditors and the independent accountants
are given access to the Audit and Examining Committee at any time to discuss
privately matters they believe may be of significance.
In addition, J.P. Morgan is examined periodically by examiners from the Federal
Reserve System, the State of New York Banking Department, the New York Stock
Exchange, and other regulatory agencies. The Board of Directors and management
consider reports that arise from such examinations.
Douglas A. Warner III
Chairman of the Board
Peter D. Hancock
Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
of J.P. Morgan & Co. Incorporated
We have audited the accompanying consolidated balance sheet of J.P. Morgan & Co.
Incorporated ("J.P. Morgan") and its subsidiaries as of December 31, 1999 and
1998, the related consolidated statements of income, of changes in stockholders'
equity, and of cash flows for each of the three years in the period ended
December 31, 1999, and the consolidated statement of condition of Morgan
Guaranty Trust Company of New York and its subsidiaries as of December 31, 1999
and 1998. These financial statements are the responsibility of J.P. Morgan's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J.P. Morgan and its
subsidiaries as of December 31, 1999 and 1998, the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, and the financial position of Morgan Guaranty Trust Company of New
York and its subsidiaries as of December 31, 1999 and 1998, in conformity with
accounting principles generally accepted in the United States.
PricewaterhouseCoopers LLP
New York, New York
January 12, 2000
Reports of management and independent accountants 57
<PAGE> 60
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------------
J.P. Morgan & Co. Incorporated
========================================================================================================================
In millions, except share data 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue ................................................ $10 970 $12 641 $12 353
Interest expense ................................................ 9 429 11 360 10 481
- ------------------------------------------------------------------------------------------------------------------------
Net interest revenue ............................................ 1 541 1 281 1 872
Provision for loan losses ....................................... - 110 -
Reversal of provision for loan losses ........................... (175) - -
- ------------------------------------------------------------------------------------------------------------------------
Net interest revenue after loan loss provisions ................. 1 716 1 171 1 872
NONINTEREST REVENUES
Trading revenue ................................................. 3 115 2 362 2 137
Advisory and underwriting fees .................................. 1 630 1 401 1 123
Investment management fees ...................................... 1 035 881 792
Fees and commissions ............................................ 846 748 647
Investment securities revenue ................................... 332 205 409
Other revenue (note 12) ......................................... 182 187 240
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues ...................................... 7 140 5 784 5 348
TOTAL REVENUES, NET ............................................. 8 856 6 955 7 220
OPERATING EXPENSES (note 4)
Employee compensation and benefits .............................. 3 892 3 233 3 027
Net occupancy ................................................... 299 437 333
Technology and communications ................................... 947 1 192 1 025
Other expenses .................................................. 604 676 681
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses ........................................ 5 742 5 538 5 066
Income before income taxes ...................................... 3 114 1 417 2 154
Income taxes .................................................... 1 059 454 689
- ------------------------------------------------------------------------------------------------------------------------
Net income ...................................................... 2 055 963 1 465
PER COMMON SHARE
Net income:
Basic ........................................................ $11.16 $5.08 $7.71
Diluted ...................................................... 10.39 4.71 7.17
Dividends declared .............................................. 3.97 3.84 3.59
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
58 Consolidated statement of income
<PAGE> 61
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
===================================================================================================================================
December 31
In millions, except share data 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks .......................................................................................... $2 463 $1 203
Interest-earning deposits with banks ............................................................................. 2 345 2 371
Debt investment securities available-for-sale .................................................................... 14 286 36 232
Equity investment securities ..................................................................................... 1 734 1 169
Trading account assets:
U.S. and foreign governments .................................................................................. 42 663 44 465
Corporate debt and equity and other securities ................................................................ 31 271 21 307
Derivatives receivables ....................................................................................... 43 658 48 124
- ------------------------------------------------------------------------------------------------------------------------------------
Total trading account assets ..................................................................................... 117 592 113 896
Securities purchased under agreements to resell ($34 470 at 1999 and $31 056 at 1998) and federal funds sold ..... 35 970 31 731
Securities borrowed .............................................................................................. 34 716 30 790
Loans, net of allowance for loan losses of $281 at 1999 and $470 at 1998 ......................................... 26 568 25 025
Accrued interest and accounts receivable ......................................................................... 10 119 7 689
Premises and equipment, net ...................................................................................... 1 997 1 881
Other assets ..................................................................................................... 13 108 9 080
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 260 898 261 067
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits ......................................................................................................... 45 319 55 028
Trading account liabilities:
U.S. and foreign governments .................................................................................. 19 378 15 999
Corporate debt and equity and other securities ................................................................ 16 063 9 961
Derivatives payables .......................................................................................... 44 976 44 683
- ------------------------------------------------------------------------------------------------------------------------------------
Total trading account liabilities ................................................................................ 80 417 70 643
Securities sold under agreements to repurchase ($58 950 at 1999 and $62 784 at 1998) and federal funds purchased . 59 693 63 368
Commercial paper ................................................................................................. 11 854 6 637
Other liabilities for borrowed money ............................................................................. 10 258 12 515
Accounts payable and accrued expenses ............................................................................ 10 621 9 859
Long-term debt not qualifying as risk-based capital .............................................................. 19 048 23 037
Other liabilities, including allowance for credit losses of $125 at 1999 and 1998 ................................ 5 897 2 999
- ------------------------------------------------------------------------------------------------------------------------------------
243 107 244 086
Liabilities qualifying as risk-based capital:
Long-term debt ................................................................................................... 5 202 4 570
Company-obligated mandatorily redeemable preferred securities of subsidiaries .................................... 1 150 1 150
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................................................................ 249 459 249 806
Commitments and contingencies (notes 19, 29, 30, and 32)
STOCKHOLDERS' EQUITY
Preferred stock
Adjustable-rate cumulative preferred stock, $100 par value (issued and outstanding: 2 444 300) ................ 244 244
Variable cumulative preferred stock, $1 000 par value (issued and outstanding: 250 000) ....................... 250 250
Fixed cumulative preferred stock, $500 par value (issued and outstanding: 400 000) ............................ 200 200
Common stock, $2.50 par value (authorized shares: 500 000 000; issued: 200 998 455 at 1999 and 200 873 067 at 1998) 502 502
Capital surplus .................................................................................................. 1 249 1 252
Common stock issuable under stock award plans .................................................................... 2 002 1 460
Retained earnings ................................................................................................ 10 908 9 614
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes ................................................... 44 147
Foreign currency translation, net of taxes .................................................................... (18) (46)
- ------------------------------------------------------------------------------------------------------------------------------------
15 381 13 623
Less: treasury stock (36 200 897 shares at 1999 and 25 866 786 shares at 1998) at cost ........................... 3 942 2 362
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11 439 11 261
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 260 898 261 067
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated balance sheet 59
<PAGE> 62
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
===================================================================================================================================
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Stockholders' Comprehensive Stockholders' Comprehensive Stockholders' Comprehensive
In millions equity income equity income equity income
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Adjustable-rate cumulative preferred stock,
Balance, January 1 and December 31 .............. $244 $244 $244
Variable cumulative preferred stock, Balance,
January 1 and December 31 ....................... 250 250 250
Fixed cumulative preferred stock, Balance,
January 1 and December 31 ....................... 200 200 200
- -----------------------------------------------------------------------------------------------------------------------------------
Total preferred stock, December 31 694 694 694
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, January 1 and December 31 502 502 502
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance, January 1 ............................... 1 252 1 360 1 446
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) (108) (86)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 1 249 1 252 1 360
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 1 460 1 185 838
Deferred stock awards, net 542 275 347
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 2 002 1 460 1 185
- -----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, January 1 ............................... 9 614 9 398 8 635
Net income ....................................... 2 055 $2 055 963 $963 1 465 $1 465
Dividends declared on preferred stock ............ (35) (37) (35)
Dividends declared on common stock ............... (689) (677) (642)
Dividend equivalents on common stock issuable..... (37) (33) (25)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 10 908 9 614 9 398
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income, subtotal 2 055 963 1 465
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
60 Consolidated statement of changes in stockholders' equity
<PAGE> 63
<TABLE>
<CAPTION>
====================================================================================================================================
1999 1998 1997
----------------------------- -------------------------- ---------------------------
Stockholders' Comprehensive Stockholders' Comprehensive Stockholders' Comprehensive
In millions equity income equity income equity income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive income, subtotal from previous
page 2 055 963 1 465
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized gains on investment securities:
Balance, net of taxes, January 1 147 432 464
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized holding gains/(losses) arising
during the period, before taxes (($354) in
1999, ($169) in 1998, and $137 in 1997, net
of taxes) ................................... (597) (285) 217
Reclassification adjustment for net gains
included in net income, before taxes (($242)
in 1999, $112 in 1998, and $164 in 1997, net
of taxes) ................................... 403 (169) (261)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net unrealized gains on investment
securities, before taxes .................... (194) (454) (44)
Income tax benefit ........................... 91 169 12
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net unrealized gains on investment
securities, net of taxes .................... (103) (103) (285) (285) (32) (32)
Balance, net of taxes, December 31 ........... 44 147 432
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation:
Balance, net of taxes, January 1 (46) (22) (12)
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustment arising during the
period, before taxes ........................ 36 (38) (14)
Income tax benefit/(expense) ................. (8) 14 4
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustment arising during the
period, net of taxes 28 28 (24) (24) (10) (10)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, net of taxes, December 31 (18) (46) (22)
- ------------------------------------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive
income, net of taxes, December 31 26 101 410
- ------------------------------------------------------------------------------------------------------------------------------------
LESS: TREASURY STOCK
Balance, January 1 ........................... 2 362 2145 1 135
Purchases (16 349 shares in 1999,
6 628 shares in 1998, and 14 030 shares
in 1997) .................................... 2 144 755 1 500
Shares issued/distributed, primarily related
to various employee benefit plans
(6 014 shares in 1999, 5 166 shares in 1998,
and 5 421 shares in 1997) ................... (564) (538) (490)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 3 942 2 362 2 145
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11 439 11 261 11 404
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1 980 654 1 423
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated statement of changes in stockholders' equity 61
<PAGE> 64
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
===========================================================================================================================
In millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME ........................................................................... $ 2 055 $ 963 $ 1 465
Adjustments to reconcile to cash (used in) provided by operating activities:
Net provision for credit losses .................................................... (175) 50 --
Gain on sale of businesses ......................................................... -- (113) --
Noncash items: depreciation, amortization, deferred income taxes,
stock award plans, and write-downs on investment securities ...................... 1 508 864 544
Net (increase) decrease in assets:
Trading account assets ........................................................... (3 856) (1 868) (20 993)
Securities purchased under agreements to resell .................................. (3 439) 7 981 (6 564)
Securities borrowed .............................................................. (3 926) 7 585 (10 444)
Loans held for sale .............................................................. (430) (2 645) 144
Accrued interest and accounts receivable ......................................... (2 438) (2 724) 1 804
Net increase (decrease) in liabilities:
Trading account liabilities ...................................................... 9 651 (318) 20 149
Securities sold under agreements to repurchase ................................... (3 860) 9 608 (2 929)
Accounts payable and accrued expenses ............................................ 841 (489) 5 205
Other changes in operating assets and liabilities, net ............................. (637) (2 035) 1 202
Net investment securities gains included in cash flows from investing activities ... (30) (290) (437)
- ---------------------------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (4 736) 16 569 (10 854)
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease (increase) in interest-earning deposits with banks ...................... 21 (234) (225)
Debt investment securities:
Proceeds from sales ................................................................ 33 059 13 874 22 655
Proceeds from maturities, calls, and mandatory redemptions ......................... 7 987 9 247 4 093
Purchases .......................................................................... (19 991) (37 341) (25 007)
Net (increase) decrease in federal funds sold ........................................ (825) (675) 50
Net (increase) decrease in loans ..................................................... (1 032) 8 563 (3 670)
Investment in American Century Companies, Inc. ....................................... -- (965) --
Return of capital/(investment) in Long-Term Capital Management, L.P. ................. 300 (300) --
Payments for premises and equipment .................................................. (314) (247) (138)
Other changes, net ................................................................... (4 205) (741) (627)
- ---------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15 000 (8 819) (2 869)
- ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in non-interest-bearing deposits ............................. (410) (419) 16
Net (decrease) increase in interest-bearing deposits ................................. (9 381) (3 295) 6 106
Net increase (decrease) in federal funds purchased ................................... 159 (4 018) (710)
Net increase in commercial paper ..................................................... 5 216 16 2 490
Other liabilities for borrowed money proceeds ........................................ 5 823 21 977 22 773
Other liabilities for borrowed money payments ........................................ (8 979) (24 394) (25 797)
Long-term debt proceeds .............................................................. 5 676 12 906 12 315
Long-term debt payments .............................................................. (8 600) (8 594) (2 075)
Proceeds from issuance of company-obligated mandatorily redeemable
preferred securities of subsidiaries .............................................. -- -- 400
Capital stock issued or distributed .................................................. 255 179 245
Capital stock purchased .............................................................. (2 144) (755) (1 500)
Dividends paid ....................................................................... (731) (707) (673)
Other changes, net ................................................................... 4 069 (1 258) 1 036
- ---------------------------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9 047) (8 362) 14 626
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks ........................... 43 57 (51)
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS ....................................... 1 260 (555) 852
Cash and due from banks, beginning of year ........................................... 1 203 1 758 906
- ---------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year 2 463 1 203 1 758
- ---------------------------------------------------------------------------------------------------------------------------
Cash disbursements made for:
Interest ........................................................................... $ 9 119 $ 11 455 $ 10 030
Income taxes ....................................................................... 1 106 800 1 254
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
62 Consolidated statement of cash flows
<PAGE> 65
CONSOLIDATED STATEMENT OF CONDITION
- --------------------------------------------------------------------------------
Morgan Guaranty Trust Company of New York
<TABLE>
<CAPTION>
============================================================================================================================
December 31
In millions, except share data 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................................ $ 2 382 $ 1 147
Interest-earning deposits with banks ........................................................... 2 266 2 372
Debt investment securities available-for-sale .................................................. 4 992 3 634
Trading account assets ......................................................................... 84 786 90 770
Securities purchased under agreements to resell and federal funds sold ......................... 19 094 33 316
Securities borrowed ............................................................................ 9 700 8 193
Loans, net of allowance for loan losses of $280 at 1999 and $470 at 1998 ....................... 26 072 24 876
Accrued interest and accounts receivable ....................................................... 4 426 3 898
Premises and equipment, net of accumulated depreciation of $1 113 at 1999 and $1 160 at 1998 ... 1 810 1 703
Other assets ................................................................................... 12 138 5 337
- ----------------------------------------------------------------------------------------------------------------------------
Total assets 167 666 175 246
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. ....................................................................... 907 1 232
In offices outside the U.S. .................................................................. 501 572
Interest-bearing deposits:
In offices in the U.S. ....................................................................... 4 256 7 749
In offices outside the U.S. .................................................................. 42 052 46 668
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits ................................................................................. 47 716 56 221
Trading account liabilities .................................................................... 72 066 64 776
Securities sold under agreements to repurchase and federal funds purchased ..................... 13 610 14 916
Other liabilities for borrowed money ........................................................... 5 482 8 646
Accounts payable and accrued expenses .......................................................... 6 310 6 123
Long-term debt not qualifying as risk-based capital (including $727 at 1999 and
$736 at 1998 of notes payable to J.P. Morgan) .................................................. 6 224 10 358
Other liabilities, including allowance for credit losses of $125 at 1999 and 1998 .............. 2 719 542
- ----------------------------------------------------------------------------------------------------------------------------
154 127 161 582
Long-term debt qualifying as risk-based capital (including $2 853 at 1999 and
$3 053 at 1998 of notes payable to J.P. Morgan) .............................................. 2 944 3 186
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities .............................................................................. 157 071 164 768
Commitments and contingencies
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 .............................................................................. 6 975 6 836
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes .................................. 67 118
Foreign currency translation, net of taxes ................................................... (17) (46)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity ..................................................................... 10 595 10 478
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity 167 666 175 246
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
Member of the Federal Reserve System and Federal Deposit Insurance Corporation.
Consolidated statement of condition-Morgan Guaranty Trust Company of New York 63
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
=============================================================================
J.P. Morgan & Co. Incorporated (J.P. Morgan) is the holding company for a
group of subsidiaries that provide a wide range of financial services.
We serve a broad client base that includes corporations, governments,
institutions, and individuals. We also enter into transactions for our own
account.
J.P. Morgan and its subsidiaries use accounting and reporting policies and
practices that conform with U.S. generally accepted accounting principles.
BASIS OF PRESENTATION
CONSOLIDATION
Our consolidated financial statements include the accounts of J.P. Morgan and
of subsidiaries in which we have more than 50% ownership. All material
intercompany accounts and transactions are eliminated during consolidation.
For companies in which we have significant influence over operating and
financing decisions (generally defined as owning a voting or economic
interest of 20% to 50%), we use the equity method of accounting. These
investments are included in Other assets, and our share of income or loss is
included in Other revenue, with the exception of such investments held in our
Equity Investments segment, where our share of income or loss is recorded in
Investment securities revenue.
Assets that we hold in an agency or fiduciary capacity are not assets of J.P.
Morgan. They are therefore not included in our "Consolidated balance sheet."
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
Preparing our consolidated financial statements requires us to make estimates
and assumptions that affect our reported assets and liabilities as well as
the disclosure of contingent assets and liabilities. Our revenues and
expenses are also affected. Actual results could be different from these
estimates.
FAIR VALUE
We define fair value as the value at which positions could be closed out or
sold in a transaction with a willing and knowledgeable counterparty over a
period of time consistent with our trading or investment strategy.
The accounting for an asset or liability may differ based on the type of
instrument and/or its use in a trading or investing strategy. Generally, the
measurement framework recorded in financial statements is one of the
following:
- Recorded at fair value on the balance sheet with changes in fair value
recorded each period in the "Consolidated statement of income;"
- Recorded at fair value on the balance sheet with changes in fair value
recorded each period in a separate component of stockholders' equity and
as part of comprehensive income; or
- Recorded at cost (less other-than-temporary impairments) with changes in
fair value not recorded in the financial statements but disclosed in the
notes thereto.
Fair value is based on quoted market prices, where available. If listed
prices or quotes are not available, fair value is based on internally
developed models that primarily use market-based or independent information
as inputs. Valuation adjustments are made, at times, based on defined
methodologies that are applied consistently over time to ensure that
positions are carried at the best estimate of fair value. Valuation
adjustments include amounts to reflect counterparty credit quality, liquidity
and concentration concerns, and ongoing servicing costs. Our valuation
process is continually subject to a rigorous review which includes valuation
model reviews and price testing to independent sources.
The following sections describe the methods used, by financial instrument, to
determine fair value.
MARKETABLE SECURITIES
Fair value is based on listed market prices or broker or dealer price
quotations. In limited circumstances, we adjust the quoted market price for
concentration factors and contractual restrictions.
64 Notes to consolidated financial statements
<PAGE> 67
NONMARKETABLE SECURITIES
Fair value is based on valuation models and other financial information as
determined by management. Information used to derive fair value includes
prices of similar instruments and third-party indicators of fair value, which
include recent financing transactions and prospective purchase offers.
Valuation adjustments are made for liquidity concerns and other contractual
restrictions.
DERIVATIVES
Fair value for derivatives is determined based on the following:
- position valuation substantially based on liquid market pricing as
evidenced by exchange traded prices, broker-dealer quotations or related
input factors which assume all counterparties have the same credit rating
- an adjustment of the resulting portfolio value to reflect the credit
quality of individual counterparties that is substantially based on market
prices for credit risk
- other pricing adjustments, including liquidity, ongoing servicing costs,
and transaction hedging costs.
LOANS AND LENDING COMMITMENTS
Fair value for loans that are actively traded is based on market quotes and
prices of similar instruments. Valuation adjustments may be made for
liquidity and concentration concerns. Fair value for non-traded loans and
lending commitments is based on a discounted cash flows approach which uses
rates based on credit spreads in various markets including credit
derivatives, asset swaps, and bonds. Valuations are also adjusted to reflect
collateral and third party guarantees.
LONG-TERM DEBT AND COMMERCIAL PAPER
Fair value for long-term debt and commercial paper issued is based on current
LIBOR rates and does not consider changes in our own credit quality.
DEPOSITS AND OTHER INTEREST EARNING-ASSETS
Fair value for deposits and other interest-earning assets is based on
prevailing market yield curves that closely reflect our interest-earning
deposit and borrowing rates.
SHORT-TERM FINANCIAL INSTRUMENTS
Fair value for short-term financial instruments approximates their carrying
value. These financial instruments include cash and due from banks, certain
securities purchased under agreements to resell and federal funds sold,
securities borrowed, accrued interest and accounts receivable, certain
securities sold under agreements to repurchase and federal funds purchased,
accounts payable, and accrued expenses. Instruments are generally classified
as short-term if they have a maturity or repricing profile of 90 days or
less.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars with period-end exchange rates. We translate revenues and
expenses using exchange rates at the transaction date.
Gains and losses from translating the financial statements of a foreign
operation where the functional currency is not the U.S. dollar are included
in Accumulated other comprehensive income.
For foreign operations where the functional currency is the U.S. dollar,
which include operations in highly inflationary environments, translation
adjustments are reported in Other revenue.
PREMIUMS AND DISCOUNTS
We generally recognize amortization of premiums and accretion of discounts as
Interest expense or Interest revenue over the life of the instrument.
Notes to consolidated financial statements 65
<PAGE> 68
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of an entity
excluding such transactions with stockholders as the issuance of common or
preferred stock, payment of dividends, and purchase of treasury shares.
Comprehensive income has two major components: net income, as reported in the
"Consolidated statement of income," and other comprehensive income as
reported in the "Consolidated statement of changes in stockholders' equity."
Other comprehensive income includes such items as unrealized gains and losses
on available-for-sale securities and foreign currency translation.
Comprehensive income does not include changes in the fair value of
nonmarketable securities, traditional credit products, and other assets
generally carried at cost.
RECLASSIFICATIONS
We have reclassified certain amounts from previous years to conform with our
1999 presentation.
DEBT INVESTMENT SECURITIES
Debt investment securities are carried at fair value and classified as
"available-for-sale." This means they may be sold in response to or in
anticipation of changes in interest rates and prepayment risk, liquidity
considerations, and other factors. Any unrealized gains and losses, including
the effect of any related hedges, are reported net as increases or decreases
to accumulated other comprehensive income.
Realized gains and losses are included in Investment securities revenue. We
generally use the specific identification method to determine our gain or
loss when a security is sold. Also included in Investment securities revenue
are write-downs due to impairments in value that are other-than-temporary.
EQUITY INVESTMENT SECURITIES
Marketable equity investment securities are classified as
"available-for-sale" and are recorded at fair value on the "Consolidated
balance sheet." Unrealized gains and losses, including the effect of any
related hedges, are reported net as increases or decreases to accumulated
other comprehensive income. Nonmarketable equity investment securities are
carried at cost on the "Consolidated balance sheet." Carrying values are
reduced for other-than-temporary impairments in value. In accordance with
specialized industry accounting principles, securities held in subsidiaries
registered as small business investment companies (SBICs) are carried at fair
value.
Investment securities revenue includes realized gains and losses on equity
investment securities, generally computed by the average cost method, changes
in the fair value of securities held in SBICs, other-than-temporary
impairments in value, and related dividend income.
TRADING ACCOUNT ASSETS AND LIABILITIES, INCLUDING DERIVATIVES
Trading account assets include securities purchased that we own ("long"
positions). Trading account liabilities include securities that we have sold
to other parties but do not own ourselves. These securities are "short"
positions, and we are obligated to purchase them at a future date. Trading
positions are carried at fair value on the "Consolidated balance sheet" and
recorded on a trade date basis. We recognize changes in the fair value of
trading positions as they occur in Trading revenue. Trading account assets
and liabilities include derivatives used for trading purposes, which we carry
at fair value on the "Consolidated balance sheet." We recognize changes in
the fair value of trading derivatives as they occur in Trading revenue. In
certain businesses, brokerage and exchange expenses are included in Trading
revenue. Reported unrealized gains and losses include the effect of master
netting agreements as permitted under Financial Accounting Standards Board
(FASB) Interpretation No. 39.
DERIVATIVES USED FOR NONTRADING PURPOSES
We use derivatives as an end-user to hedge exposures, modify the interest
rate characteristics of related balance sheet instruments, or meet
longer-term investment objectives. These derivatives are not included in
trading account assets and liabilities.
Derivatives used as hedges must be effective at reducing the risk associated
with the exposure being hedged. Each derivative must be designated as a hedge
at the beginning of the contract and must be highly correlated with the
underlying hedged item for the life of the contract.
66 Notes to consolidated financial statements
<PAGE> 69
Swaps used to modify the interest rate characteristics of non-trading-related
balance sheet instruments must be linked to the related asset or liability,
with the terms of the swap generally equal to those of the related asset or
liability, at the beginning and throughout the life of the contract. We
generally defer unrealized gains and losses on all these derivative
contracts.
Derivatives used to hedge or modify the interest rate characteristics of debt
investment securities are carried at fair value; unrealized gains and losses
on these derivatives are recorded in Accumulated other comprehensive income.
The interest component associated with derivatives used as hedges or to
modify the interest rate characteristics of assets and liabilities is
recognized over the contract's life in Net interest revenue.
Cash margin requirements associated with futures contracts and option
premiums for contracts used as hedges are recorded in Other assets or Other
liabilities.
When a contract is settled or terminated, the cumulative change in the fair
value is recorded as an adjustment to the carrying value of the underlying
asset or liability and recognized in Net interest revenue over the asset's or
liability's expected remaining life. If the underlying instrument is sold, we
immediately recognize the cumulative change in the derivative's value in the
component of earnings relating to the underlying instrument.
Prior to January 1, 1998, we used risk-adjusting swaps - interest rate swaps
that replicated the cash flows of nonamortizing cash instruments - in a
manner similar to debt investment securities, to achieve a desired overall
interest rate profile. They did not contain leveraged or imbedded option
features. Interest revenue and expense from these swaps were accrued over the
life of the agreement and included in Net interest revenue. We carried
risk-adjusting swaps at whichever amount was lower: the aggregate cost or
fair value. Aggregate unrealized net valuation adjustments, if any, were
recorded in Other revenue.
SECURITIES FINANCING TRANSACTIONS
Securities purchased under agreement to resell (resale agreements) and
Securities sold under agreements to repurchase (repurchase agreements) are
generally treated as collateralized financing transactions and are carried at
the amounts the securities will be subsequently sold or repurchased, plus
accrued interest. Where appropriate, resale and repurchase agreements with
the same counterparty are reported on a net basis. We take possession of
securities purchased under resale agreements. On a daily basis, we monitor
the market value of the underlying collateral, which consists primarily of
U.S. government and agency securities, and request additional collateral from
our counterparties when necessary.
Securities borrowed and securities lent (recorded in Other liabilities for
borrowed money) are recorded at the amount of cash collateral advanced or
received. Securities borrowed consist primarily of government and equity
securities. We monitor the market value of the securities borrowed and lent
on a daily basis and call for additional collateral when appropriate. Fees
received or paid are recorded in Interest revenue or Interest expense.
LOANS
Loans are generally reported at the principal amount outstanding. Purchased
loans are reported at the remaining unpaid principal net of any unamortized
discount or premium. Loan origination fees are deferred and recognized as an
adjustment to yield over the life of the loan. We report loans held-for-sale
at either cost or fair value, whichever is lower. Loans held for trading
purposes are included in trading account assets and are carried at fair value
with gains and losses included in Trading revenue. Interest revenue is
accrued on the unpaid principal balance and is included in Interest revenue.
IMPAIRED LOANS
A loan is impaired when, after we have considered current information and
events, it is probable that we will be unable to collect all amounts,
including principal and interest, according to the contractual terms of the
agreement. We consider the following in identifying impaired loans:
- A default has occurred or is expected to occur,
- The payment of principal and/or interest or other cash flows is greater
than 90 days past due, or
- Management has serious doubts about the collectibility of future cash
flows, even if the loan is currently performing.
Notes to consolidated financial statements 67
<PAGE> 70
Once we identify a loan as impaired, management regularly measures impairment
in accordance with Statement of Financial Accounting Standards (SFAS) No.
114, as amended by SFAS No. 118. We measure impairment of a loan based on the
present value of expected future cash flows, on an observable market value,
or on the fair value of any collateral. If the resulting value is less than
the recorded investment (book value) in the impaired loan, an allowance is
established for the amount deemed uncollectible; if the impairment is
considered highly certain, the exposure is charged off against the allowance.
Generally, when a loan becomes impaired, interest stops accruing and any
previously accrued but unpaid interest on the loan is reversed against the
current period's interest revenue. When we doubt that we can collect the
remaining recorded investment, any interest received is applied first against
the recorded investment until paid in full, second as a recovery to the
allowance up to any previously charged off amounts on the impaired loan, and
third as interest revenue. When we deem it highly certain that we will
collect the remaining recorded investment, interest revenue is recorded on a
cash basis as payments are received.
An impaired loan is restored to performing status when principal and interest
are deemed to be fully collectible in accordance with the contractual terms
of the loan agreement. Once an impaired loan is returned to performing
status, any previous allowance allocated is removed, interest accrues
according to the original terms of the contract, and principal payments are
applied first to the loan balance until paid in full, then as recoveries of
charge-offs, and finally as revenue.
ALLOWANCES FOR CREDIT LOSSES
We maintain allowances to absorb credit losses inherent in our traditional
extensions of credit that are probable and can be reasonably estimated. They
include an allowance for loan losses and an allowance for credit losses on
lending commitments that include commitments to extend credit, standby
letters of credit, and guarantees.
Our credit review procedures are designed to identify as early as possible
counterparty, country, industry, and product exposures that require special
monitoring. These procedures make up our asset quality review (AQR) process -
a systematic, bottom-up review of exposures that management uses to estimate
probable credit losses and determine the appropriateness of our related
allowances.
The AQR process determines the appropriate allowances based on an estimate of
probable losses for specific counterparties and a statistical model estimate
of expected losses on our remaining performing portfolio. Accordingly, in
determining the appropriate level of our allowances, we focus on the
following components at each reporting period, if applicable, for each
allowance:
- Specific counterparty: an estimate of probable losses related to specific
counterparties experiencing particular credit issues determined in
accordance with SFAS No. 114 for loans and SFAS No. 5 for lending
commitments.
- Expected loss: a statistical estimate of the probable loss inherent in our
performing portfolio of traditional credit products, net of recoveries,
determined in accordance with SFAS No.5. The estimate takes into account
the amount and duration of exposures, counterparty ratings, historical
default information, current market trends, and recovery rates. The
expected loss component excludes exposures covered by the specific
counterparty component discussed above and is intended to recognize
probable losses on a portfolio basis that have not yet been specifically
identified.
In 1999 we revised our expected credit loss model for calculating expected
credit losses to incorporate factors for estimating loss previously
included in our specific country, industry, expected loss, and general
components of our allowances. The revised model uses a combination of
historical data and current market spreads in deriving the default
probabilities used to determine the expected loss. The combination of
these two sources of credit information is appropriate because each one on
its own has its limitations: Historical experience is often a lagging
indicator of loss and market spreads may overestimate loss in volatile
times. Historical default data uses a long time series - 15 to 20 years.
As a result, current changes in credit conditions often do not
significantly affect historical default grids in a timely manner, because
the impact of recent events is lessened when combined with data over a
long time series. To compensate for this, we use the credit pricing
inherent in current market spreads in our model. Taken together,
historical default data and market spreads provide a more balanced
estimate of expected loss. The model initially determines the amount of
expected loss inherent in our portfolio. Management then applies its
judgment as to the appropriateness of the final allowance level by
reviewing other information at the allowance measurement date. This review
is based on a structured process that documents the precise environmental
factors used (e.g., industry, geographical, economic, and political) to
make the appropriate decision.
68 Notes to consolidated financial statements
<PAGE> 71
The AQR Committee regularly reviews specific counterparties and determines
any credit actions (placement on impaired status, specific allocation, or
charge-off) that should be taken. The senior members of the AQR Committee
also review the expected loss calculations of the existing performing
portfolio and other risk factors. The committee's review results in a
quarterly determination of our allowances for credit losses and of whether or
not provisions or reversals of provisions are necessary. This review is
performed separately for each allowance classification - loans and lending
commitments - and on a component-by-component basis within each allowance.
Provisions or reversals of provisions related to loans and lending
commitments are reflected in Net interest revenue and Other revenue,
respectively.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. We generally compute
depreciation using the straight-line method over the estimated useful life of
an asset. For leasehold improvements, we use the straight-line method over
the lesser of the lease term or the estimated economic useful life of the
improvement.
Effective January 1, 1999, in compliance with Statement of Position 98-1, we
capitalize certain costs associated with the acquisition or development of
internal-use software. Previously, these costs would have been expensed as
incurred. Once the software is ready for its intended use, we begin to
amortize capitalized costs on a straight-line basis over its expected useful
life. This period generally does not exceed three years. The restatement of
previous years' financial statements was not allowed.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
Company-obligated mandatorily redeemable preferred securities of subsidiaries
(trust preferred securities) are accounted for as a liability on our
"Consolidated balance sheet." Dividends (or distributions) on trust preferred
securities are treated as interest and expensed on an accrual basis. Interest
related to the trust preferred securities is included in Interest expense.
FEE REVENUE
Advisory and underwriting fees include securities underwriting revenues as
well as merger and acquisition, private placement, advisory, and loan
syndication fees. Underwriting revenues are represented net of syndicate
expenses and are recorded on a trade date basis. All other fees are
recognized as revenue when the related services are performed. In addition,
we recognize credit arrangement and syndication fees as revenue after
satisfying certain retention, timing, and yield criteria.
Investment management fees and revenue from Fees and commissions are
recognized when the related service is performed. We recognize commitment
fees as revenue in the period in which the unused commitment is available.
STOCK OPTIONS AND STOCK AWARDS
We have elected to account for our stock-based compensation plans in
accordance with Accounting Principles Board (APB) No. 25 as permitted by SFAS
No. 123. Stock-based compensation plans include stock options, restricted
stock awards, stock bonus awards, stock unit awards, and deferred stock
payable in stock.
We account for stock option awards in accordance with the
intrinsic-value-based method of APB No. 25, rather than the fair-value-based
method of SFAS No. 123. In accordance with APB No. 25, we do not record
compensation expense for stock options that are granted without any intrinsic
value. For disclosure purposes, we include in the "Notes to consolidated
financial statements" the pro forma effects on net income and earnings per
share, as if we had recorded the compensation cost related to stock options
using the fair-value-based method. Refer to note 30 for further information.
For other stock-based compensation awards, compensation expense is recorded
over the period in which employees perform services to which the award
relates.
Notes to consolidated financial statements 69
<PAGE> 72
INCOME TAXES
J.P. Morgan and its eligible subsidiaries file a consolidated U.S. federal
income tax return. We use the asset and liability method required by SFAS No.
109 to provide income taxes on all transactions recorded in the consolidated
financial statements. This requires that income taxes reflect the expected
future tax consequences of temporary differences between the carrying amounts
of assets or liabilities for book purposes and for tax purposes. Accordingly,
we determine a deferred tax liability or asset for each temporary difference
based on the tax rates that we expect to be in effect when the underlying
items of income and expense are to be realized. Our expense for income taxes
includes the current and deferred portions of that expense. We establish a
valuation allowance to reduce deferred tax assets to the amount we expect to
be realized.
STATEMENT OF CASH FLOWS
For J.P. Morgan's "Consolidated statement of cash flows," we define our cash
and cash equivalents as those amounts included in Cash and due from banks. We
classify cash flows from investment securities, including securities
available-for-sale, as investing activities. Cash flows from sales of
investment securities with remaining lives of more than one year when
purchased and less than 90 days when sold, mandatory redemptions, and calls
are classified as proceeds from maturities. We classify cash flows from
derivative transactions used as hedges in the same manner as the items being
hedged.
ACCOUNTING DEVELOPMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998 the FASB issued SFAS No. 133, which will require us to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through earnings. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative will either be offset against the change in fair value of the
hedged asset, liability, or firm commitment through earnings or be recognized
in Other comprehensive income until the hedged item affects earnings. If the
change in fair value or cash flows of a derivative designated as a hedge is
not effectively offset, as defined, by the change in value or cash flows of
the item it is hedging, this difference will be immediately recognized in
earnings.
Due to the significant uncertainties surrounding the FASB's evolving
interpretation of SFAS No. 133 implementation issues, we have not been able
to determine the specific impact of SFAS No. 133 on our earnings and
financial position. Based on our current hedging strategies, the activities
that would be most affected by the new standard would be those of our
Proprietary Investing and Trading segment, which uses derivatives to hedge
its investment portfolio, deposits, and issuance of debt, as well as those in
our Credit Portfolio segment, which uses credit derivatives to hedge credit
risk, and to a lesser extent, other derivatives to hedge interest rate risk.
Pursuant to SFAS No. 137, we are required to adopt SFAS No. 133 effective
January 1, 2001. At the time these financial statements were issued, the FASB
was preparing to issue an amendment to SFAS No. 133. A final amendment is not
expected to be issued until May 2000. As such, we cannot estimate the impact
of SFAS No. 133 on our earnings and financial position until the final rules
are available.
2. ESTIMATING THE FAIR VALUE OF FINANCIAL INSTRUMENTS
=============================================================================
The following table presents the carrying value and fair value of J.P.
Morgan's financial instruments as of December 31, 1999 and 1998 in accordance
with SFAS No. 107. Accordingly, certain amounts which are not considered
financial instruments, including premises and equipment as well as
investments under the equity method of accounting, are excluded from the
table. Refer to note 1 for detailed information on how we estimate the fair
value of financial instruments.
70 Notes to consolidated financial statements
<PAGE> 73
<TABLE>
<CAPTION>
========================================================================================================================
1999 1998
------------------------------- ------------------------------
Appre- Appre-
ciation/ ciation/
Carrying Fair (depre- Carrying Fair (depre-
In billions: December 31 value value ciation) value value ciation)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FAIR VALUE THROUGH EARNINGS
Financial assets:
Trading account assets:(a)
Cash securities ............................... $ 73.9 $ 73.9 $ -- $ 65.8 $ 65.8 $ --
Derivative receivables ........................ 43.7 43.7 -- 48.1 48.1 --
Equity investments - SBICs ...................... 0.6 0.6 -- 0.2 0.2 --
Financial liabilities:
Trading account liabilities:(a)
Cash securities ............................... 35.4 35.4 -- 26.0 26.0 --
Derivative payables ........................... 45.0 45.0 -- 44.7 44.7 --
FAIR VALUE THROUGH EQUITY
Financial assets:
Debt investment securities ...................... 14.3 14.3 -- 36.2 36.2 --
Equity investments - marketable securities ...... 0.6 0.6 -- 0.6 0.6 --
CARRIED AT COST (APPROXIMATES FAIR VALUE)
Financial assets:
Securities purchased under agreements to
resell and federal funds sold ................. 36.0 36.0 -- 31.7 31.7 --
Securities borrowed ............................. 34.7 34.7 -- 30.8 30.8 --
Loans, net(b) ................................... 8.2 8.2 -- 7.2 7.2 --
Other financial assets, including cash and due
from banks, accrued interest and accounts
receivable, and other assets .................. 17.8 17.8 -- 14.1 14.1 --
Financial liabilities:
Noninterest-bearing deposits .................... 1.4 1.4 -- 1.8 1.8 --
Securities sold under agreements to
repurchase and federal funds purchased ........ 59.7 59.7 -- 63.4 63.4 --
Other financial liabilities, including securities
lent, accounts payable and other liabilities .. 18.7 18.7 -- 15.2 15.2 --
CARRIED AT COST
Financial assets:
Interest-earning deposits with banks ............ 2.3 2.3 -- 2.4 2.4 --
Loans, net(c) ................................... 18.3 18.4 0.1 17.8 17.4 (0.4)
Related derivatives ........................... -- 0.1 0.1 -- 0.3 0.3
Equity investments - nonmarketable securities ... 0.5 0.6 0.1 0.4 0.5 0.1
Other financial assets .......................... 6.4 6.4 -- 2.1 2.1 --
Financial liabilities:
Interest-bearing deposits ....................... 43.9 44.2 (0.3) 53.2 53.2 --
Related derivatives ........................... -- (0.1) 0.1 -- (0.3) 0.3
Commercial paper ................................ 11.9 11.9 -- 6.6 6.6 --
Other liabilities for borrowed money ............ 7.2 7.2 -- 7.5 7.5 --
Long-term debt .................................. 24.3 24.1 0.2 27.6 28.5 (0.9)
Related derivatives ........................... -- 0.3 (0.3) -- (0.4) 0.4
Other financial liabilities ..................... 0.7 0.7 -- 2.8 2.9 (0.1)
Allowance - lending commitments ................. 0.1 -- 0.1 0.1 -- 0.1
Company-obligated mandatorily redeemable
preferred securities of subsidiaries .......... 1.2 1.1 0.1 1.2 1.3 (0.1)
Related derivatives ........................... -- 0.1 (0.1) -- (0.1) 0.1
Lending commitments(c) .......................... -- (0.2) (0.2) -- (0.2) (0.2)
- ------------------------------------------------------------------------------------------------------------------------
Net depreciation before considering income taxes (0.1) (0.4)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Refer to note 16 for detailed information on financial instruments,
including derivatives, used for trading purposes.
(b) Includes loans from Euroclear-related and Private banking activities.
(c) In 1999 we refined the valuation technique used to estimate the fair value
of our traditional credit products, which include loans, commitments to extend
credit, standby letters of credit, and guarantees, to better reflect how we
currently manage these exposures. The revised technique utilizes a discounted
cash flows approach which uses rates based on credit spreads in various markets
including credit derivatives, asset swaps, and bonds. Previously, we estimated
the fair value of these products based on secondary loan spreads. Prior-period
amounts have been restated.
Notes to consolidated financial statements 71
<PAGE> 74
3. BUSINESS SEGMENTS
=============================================================================
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in assessing
performance. In accordance with SFAS No. 131, we have presented results based
on the segments as reviewed separately by the chief operating decision maker,
our chairman and chief executive officer, as well as other members of senior
management. Each segment is defined by the products and services it provides
globally to our clients or the activities it undertakes solely for our own
account.
J.P. Morgan's segments, or activities, are Investment Banking, Equity
Investments, Equities, Interest Rate and Foreign Exchange Markets, Credit
Markets, Credit Portfolio, Proprietary Investing and Trading, and Asset
Management Services. In addition to the activities of our proprietary
positioning group, the Proprietary Investing and Trading segment comprises
the following separately managed investments: a proprietary emerging markets
portfolio, a credit investment securities portfolio, and our investment in
Long-Term Capital Management, L.P. - the first two of these have been
discontinued and our remaining investment in Long-Term Capital Management,
L.P. is expected to be repaid in the first quarter of 2000.
The assessment of segment performance by senior management includes a review
for each segment of pretax economic value added, pretax income, revenues, and
expenses, as well as related trends among these items. We define economic
value added (EVA) as operating income, adjusted to reflect certain segments
on a total return basis, less preferred stock dividends and a charge for the
cost of equity capital. At the business level, EVA is currently evaluated on
a pretax basis, while at the firm level EVA is assessed after the impact of
taxes. To arrive at the charge for equity capital for each segment, we
multiply its allocated required economic capital by its market-based cost of
equity (or hurdle rate), with the exception of our Credit Portfolio segment
whose cost of equity is based on market pricing for credit risk. The cost of
equity for each business activity is separately determined from observable
market returns of publicly held investments. To arrive at the charge for
equity capital for J.P. Morgan consolidated, we multiply the firm's equity by
its market-based cost of equity, which is currently estimated at 10.5%.
Our management reporting system and policies were used to determine income
(revenues minus expenses) attributable to each segment. Earnings on
stockholders' equity were allocated based on management's estimate of the
economic capital of each segment. Overhead, which represents costs associated
with various support functions that exist for the benefit of the firm as a
whole, is allocated to each segment based on that segment's expenses.
Transactions between segments are recorded within segment results as if
conducted with a third party and are eliminated in consolidation.
The accounting policies of our segments are, in all material respects,
consistent with those described in note 1, except for management reporting
policies related to the tax-equivalent adjustment. For purposes of
comparability, segment results include an adjustment to gross-up tax-exempt
revenue to a taxable basis; this adjustment is eliminated in consolidation.
In addition, in arriving at pretax EVA an adjustment is made to record
certain segments on a total return basis; the Proprietary Investing and
Trading segment is the only segment significantly affected by this adjustment
(see footnote 6 to the segment results table below.)
Our economic capital allocation model estimates the amount of equity required
by each business activity and the firm as a whole. Business economic capital
is estimated as if each activity were conducted as a stand-alone operating
entity. This estimate is based, to the extent possible, on observations of
the capital structures and risk profiles of public companies or benchmarks.
In particular, for our markets and asset management activities, required
economic capital is based on the revenue volatility and fixed expenses of
public U.S. investment banks and asset management companies, respectively;
for Credit Portfolio, capital is based on a simulation of unexpected credit
losses; and, for Equity Investments, capital is equal to the carrying value
of the portfolio. Diversification of Morgan's portfolio of businesses is
reflected as a reduction to the consolidated level of required equity and is
a factor in assessing the appropriate level of capitalization of the firm.
The benefit of diversification is not allocated to the segments.
The following table presents segment results for the years ended December 31,
1999, 1998, and 1997.
72 Notes to consolidated financial statements
<PAGE> 75
<TABLE>
<CAPTION>
==============================================================================================================
Interest Rate
Invest- Equity and Foreign
ment Invest- Exchange Credit
In millions Banking ments Equities Markets Markets
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Net interest revenues ................. $ 6 $( 11) $ 118 $ 428 $ 287
- --------------------------------------------------------------------------------------------------------------
Trading revenue ....................... 232 -- 615 1 246 785
Advisory and underwriting fees ........ 971 6 173 61 387
Investment management fees ............ -- 15 -- -- --
Fees and commissions .................. (19) -- 431 163 26
Investment securities revenue ......... (1) 634(12) (5) (9) 1
Other revenue ......................... 7 2 85 120 40
- --------------------------------------------------------------------------------------------------------------
Total noninterest revenues ............ 1 190 657 1 299 1 581 1 239
- --------------------------------------------------------------------------------------------------------------
Total revenues ........................ 1 196 646 1 417 2 009 1 526(1)
- --------------------------------------------------------------------------------------------------------------
Total operating expenses .............. 921 145 944 1 232 850
- --------------------------------------------------------------------------------------------------------------
Total pretax income(8) ................ 275 501 473 777 676
- --------------------------------------------------------------------------------------------------------------
Pretax EVA ............................ 212 296 312 345 452
- --------------------------------------------------------------------------------------------------------------
Total assets at year-end (in billions) -- 2 27 93 22
- --------------------------------------------------------------------------------------------------------------
Average required economic capital ..... 405 1 479 716 2 027 1 053
- --------------------------------------------------------------------------------------------------------------
1998
Net interest revenues ................. $ -- $( 7) $ 107 $ 58 $ 198
- --------------------------------------------------------------------------------------------------------------
Trading revenue ....................... 187 1 108 1 729 45
Advisory and underwriting fees ........ 811 7 138 50 368
Investment management fees ............ -- -- -- -- --
Fees and commissions .................. -- -- 331 111 4
Investment securities revenue ......... -- 345 -- -- --
Other revenue ......................... 3 -- 15 116 13
- --------------------------------------------------------------------------------------------------------------
Total noninterest revenues ............ 1 001 353 592 2 006 430
- --------------------------------------------------------------------------------------------------------------
Total revenues ........................ 1 001 346 699 2 064 628(1)
- --------------------------------------------------------------------------------------------------------------
Total operating expenses .............. 710 49 776 1 283 729
- --------------------------------------------------------------------------------------------------------------
Total pretax income(8) ................ 291 297 (77) 781 (101)
- --------------------------------------------------------------------------------------------------------------
Pretax EVA ............................ 233 143 (231) 330 (492)
- --------------------------------------------------------------------------------------------------------------
Total assets at year-end (in billions) -- 1 19 86 20
- --------------------------------------------------------------------------------------------------------------
Average required economic capital ..... 349 1 201 658 2 138 2 096
- --------------------------------------------------------------------------------------------------------------
1997
Net interest revenues ................. $ 5 $( 8) $ 15 $ 309 $ 207
- --------------------------------------------------------------------------------------------------------------
Trading revenue ....................... 133 -- 92 1 259 325
Advisory and underwriting fees ........ 633 10 142 41 295
Investment management fees ............ -- -- -- -- --
Fees and commissions .................. -- -- 202 68 (4)
Investment securities revenue ......... -- 407 -- -- --
Other revenue ......................... 3 4 8 93 19
- --------------------------------------------------------------------------------------------------------------
Total noninterest revenues ............ 769 421 444 1 461 635
- --------------------------------------------------------------------------------------------------------------
Total revenues ........................ 774 413 459 1 770 842
- --------------------------------------------------------------------------------------------------------------
Total operating expenses .............. 686 48 692 1 277 719
- --------------------------------------------------------------------------------------------------------------
Total pretax income(8) ................ 88 365 (233) 493 123
- --------------------------------------------------------------------------------------------------------------
Pretax EVA ............................ 26 194 (373) 138 (226)
- --------------------------------------------------------------------------------------------------------------
Total assets at year-end (in billions) -- 1 21 84 26
- --------------------------------------------------------------------------------------------------------------
Average required economic capital ..... 351 1 353 562 1 484 1 754
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================================================
Proprietary Asset
Investing Manage-
Credit and ment Consol-
In millions Portfolio Trading Services Corporate idated
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Net interest revenues ................. $ 562(2) $ 205(5) $ 105 $ 16 $ 1 716
- -------------------------------------------------------------------------------------------------------------------------
Trading revenue ....................... 188 (41) 42 48 3 115
Advisory and underwriting fees ........ 2 -- 35 (5) 1 630
Investment management fees ............ -- -- 1 026 (6) 1 035
Fees and commissions .................. 98 2 97 48 846
Investment securities revenue ......... -- (300) (1) 13 332
Other revenue ......................... (67) 163(12) 51(12) (219) 182
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues ............ 221 (176) 1 250 (121) 7 140
- -------------------------------------------------------------------------------------------------------------------------
Total revenues ........................ 783 29(3)(6) 1 355 (105) 8 856
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses .............. 154 152 1 121 223 5 742
- -------------------------------------------------------------------------------------------------------------------------
Total pretax income(8) ................ 629 (123) 234 (328)(7) 3 114
- -------------------------------------------------------------------------------------------------------------------------
Pretax EVA ............................ 183 (443) 161 (211)(9) 1 307(11)
- -------------------------------------------------------------------------------------------------------------------------
Total assets at year-end (in billions) 59 37 10 11 261
- -------------------------------------------------------------------------------------------------------------------------
Average required economic capital ..... 3 020 1 821 561 (1 252)(10) 9 830
- -------------------------------------------------------------------------------------------------------------------------
1998
Net interest revenues ................. $ 346(2) $ 314(5) $ 99 $ 56 $ 1 171
- -------------------------------------------------------------------------------------------------------------------------
Trading revenue ....................... (75) 318 42 7 2 362
Advisory and underwriting fees ........ 6 -- 25 (4) 1 401
Investment management fees ............ -- -- 894 (13) 881
Fees and commissions .................. 109 (1) 97 97 748
Investment securities revenue ......... -- (109) -- (31) 205
Other revenue ......................... 4 141(12) 7(12) (112) 187
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues ............ 44 349 1 065 (56) 5 784
- -------------------------------------------------------------------------------------------------------------------------
Total revenues ........................ 390 663(3)(4)(6) 1 164 -- 6 955
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses .............. 145 157 1 100 589 5 538
- -------------------------------------------------------------------------------------------------------------------------
Total pretax income(8) ................ 245 506 64 (589)(7) 1 417
- -------------------------------------------------------------------------------------------------------------------------
Pretax EVA ............................ (449) (186) 3 242(9) (407)(11)
- -------------------------------------------------------------------------------------------------------------------------
Total assets at year-end (in billions) 65 56 7 7 261
- -------------------------------------------------------------------------------------------------------------------------
Average required economic capital ..... 4 611 2 527 559 (1 803)(10) 12 336
- -------------------------------------------------------------------------------------------------------------------------
1997
Net interest revenues ................. $ 546(2) $517(5) $ 124 $ 157 $ 1 872
- -------------------------------------------------------------------------------------------------------------------------
Trading revenue ....................... (28) 265 41 50 2 137
Advisory and underwriting fees ........ -- -- 25 (23) 1 123
Investment management fees ............ -- -- 808 (16) 792
Fees and commissions .................. 178 2 87 114 647
Investment securities revenue ......... -- 32 -- (30) 409
Other revenue ......................... 4 78 22 9 240
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues ............ 154 377 983 104 5 348
- -------------------------------------------------------------------------------------------------------------------------
Total revenues ........................ 700 894(3)(6) 1 107 261 7 220
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses .............. 122 154 1 043 325 5 066
- -------------------------------------------------------------------------------------------------------------------------
Total pretax income(8) ................ 578 740 64 (64)(7) 2 154
- -------------------------------------------------------------------------------------------------------------------------
Pretax EVA ............................ 17 308 (7) (67)(9) 10(11)
- -------------------------------------------------------------------------------------------------------------------------
Total assets at year-end (in billions) 62 46 7 15 262
- -------------------------------------------------------------------------------------------------------------------------
Average required economic capital ..... 5 302 876 549 (2 846)(10) 9 385
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to consolidated financial statements 73
<PAGE> 76
(1) Revenues related to the structuring of tax-advantaged loans and structured
credit products for Credit Portfolio were $48 million in 1999 and 1998. These
amounts are eliminated in consolidation.
(2) The adjustment to gross up Credit Portfolio's revenue to a taxable basis was
$27 in million 1999, $26 million in 1998 and $24 million in 1997. These amounts
are eliminated in consolidation.
(3) Revenues from our credit investment securities portfolio were ($14 million)
in 1999, ($129 million) in 1998, and $45 million in 1997. Revenues from our
proprietary emerging markets portfolio were ($80 million) in 1998 and $22
million in 1997. Expenses for these portfolios were not significant.
(4) Includes $35 million of gains related to the sale of investment securities
to Interest Rate Markets. This amount is eliminated in consolidation.
(5) The adjustment to gross up Proprietary Investing and Trading's tax-exempt
revenues to a taxable basis was $142 million in 1999, $119 million in 1998, and
$84 million in 1997. These amounts are eliminated in consolidation.
(6) Total return revenues, which combine reported revenues and the change in net
unrealized appreciation/depreciation, were $31 million in 1999, $424 million in
1998, and $657 million in 1997.
(7) We classify the revenues and expenses of Corporate into three broad
categories:
- - Corporate research and development initiatives that involve strategic
investments in new client segments or services, but are managed separately
from existing business lines. Expenses related to this area totaled $71
million in 1999.
- - Other corporate revenues and expenses that are recurring but unallocated to
the business segments, including but not limited to: the results of hedging
anticipated net foreign currency revenues and expenses across all business
segments; corporate-owned life insurance; certain equity earnings in
affiliates; and consolidation and management reporting offsets to certain
revenues and expenses recorded in the business segments. Excluding
consolidation and management reporting offsets, recurring revenues were
($173 million) in 1999, ($330 million) in 1998 and $18 million in 1997.
Consolidation and management reporting offsets - which comprises offsets to
certain amounts recorded in the segments, including the allocation of
earnings on equity out of Corporate into the segments, adjustments to bring
segments to a tax-equivalent basis, and other management accounting
adjustments - were ($223 million) in 1999, ($171 million) in 1998 and ($110
million) in 1997.
- - Nonrecurring items not allocated to the segments - including gains on the
sale of businesses, revenues and expenses associated with businesses that
have been sold or are in the process of being discontinued, including
revenues and expenses related to Euroclear activities, special charges, and
other one-time corporate items. Nonrecurring revenues were $41 million in
1999, $189 million in 1998 and $65 million in 1997. Significant
nonrecurring revenue items include the following: third quarter of 1998
pretax gain of $56 million related to the sale of the firm's investment
management business in Australia; second quarter of 1998 pretax gain of
$131 million related to the sale of the firm's global trust and agency
services business. Nonrecurring expenses in 1998 include $358 million in
special charges taken in connection with the restructuring of business
activities and other productivity initiatives. Corporate includes revenues,
expenses and pretax income related to Euroclear activities in 1999, 1998,
and 1997, respectively, as follows: revenues - $251 million, $312 million,
and $288 million; expenses - $35 million, $51 million, and $56 million; and
pretax income - $216 million, $261 million, and $232 million.
(8) The table below provides an estimate of the total noncash amounts (net
provision for credit losses, depreciation, amortization, stock award plans, and
write-downs on investment securities) included in the pretax income of each
segment for the years ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
==================================================================================
In millions 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Banking .......................... $ 202 $ 121 $ 112
Equity Investments .......................... 232 95 44
Equities .................................... 133 76 71
Interest Rate and Foreign Exchange Markets... 170 104 119
Credit Markets .............................. 117 74 94
Credit Portfolio ............................ (164) 59 13
Proprietary Investing and Trading ........... 352 554 225
Asset Management Services ................... 167 142 111
Corporate ................................... 141 25 23
- ----------------------------------------------------------------------------------
Total 1 350 1 250 812
- ----------------------------------------------------------------------------------
</TABLE>
(9) Corporate pretax EVA in 1998 excludes $171 million of special items
included in pretax income related to the sale of businesses and
restructuring charges (note 7). Pretax EVA for Corporate includes the cost
of equity adjustment related to the following items, among others: assets
and investments not allocated to the segments (note 10a), the
diversification effect, and excess/shortfall capital.
(10) The following table provides a reconciliation of average common equity to
required capital for the last three years.
<TABLE>
<CAPTION>
=================================================================================================
In millions 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average common equity ................................. $10 953 $10 816 $10 659
Trust preferred securities ............................ 1150 1150 1150
Fixed and adjustable preferred stock .................. 444 444 444
Other adjustments ..................................... (95) (88) 350
- -------------------------------------------------------------------------------------------------
Total available capital ............................... 12 452 12 322 12 603
- -------------------------------------------------------------------------------------------------
Total required economic capital of business segments... 11 082 14 139 12 231
Corporate(a) .......................................... 1 487 1 463 288
Diversification ....................................... (2 739) (3 266) (3 134)
- -------------------------------------------------------------------------------------------------
Total required capital ................................ 9 830 12 336 9 385
- -------------------------------------------------------------------------------------------------
Excess available capital .............................. 2 622 (14) 3 218
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes capital related to goodwill, Euroclear, retirement plans and other
corporate assets.
(11) Consolidated after tax EVA (pretax EVA x (1-effective tax rate)) was $863
million in 1999, ($272 million) in 1998, and $7 million in 1997.
(12) Includes share of income/loss on investments carried under the equity
method of accounting and related goodwill amortization as follows: Equity
Investments - $50 million (1999) and $ 4 million (1997); Proprietary
Investing and Trading - ($6 million) (1999) and $26 million (1998); and
Asset Management Services - $39 million (1999) and ($4 million) (1998).
74 Notes to consolidated financial statements
<PAGE> 77
4. RESTRUCTURING OF BUSINESS ACTIVITIES
=============================================================================
Results for 1998 include pretax charges totaling $358 million ($215 million
after tax); this reflects a first-quarter pretax charge of $215 million ($129
million after tax) and a fourth-quarter pretax charge of $143 million ($86
million after tax).
During the first quarter of 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. The related charge reflected severance-related costs of $140 million
recorded in Employee compensation and benefits associated with the reduction
of our staff by approximately 900 positions; $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 of
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 of $32 million associated with
severance and real estate, the reserve related to this charge was
substantially utilized as of December 31, 1998.
During the fourth quarter of 1998, the firm incurred an additional charge
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 reducing staff
by approximately 800 positions. 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. During the fourth quarter of 1999, we revised our estimates of
real estate costs and reduced the liability by $25 million; this adjustment
was recorded in Net occupancy. Excluding certain long-term commitments of $9
million associated with severance and real estate, the reserve related to
this charge was substantially utilized as of December 31, 1999.
The special charges primarily affected all client-focused activities,
predominantly in Europe and North America, as defined by our reported
segments in note 3.
Additional costs associated with these initiatives did not meet the
requirement for inclusion in the first- or fourth-quarter charge and were
expensed as incurred.
5. BUSINESS CHANGES AND DEVELOPMENTS
=============================================================================
EUROCLEAR
On September 1, 1999, J.P. Morgan and the Boards of Euroclear Clearance
System PLC and Euroclear Clearance System Societe Cooperative announced that
they had signed a letter of intent to create a new, market-owned European
bank to operate all aspects of the Euroclear System. This agreement-in-
principle anticipates the formation of a European bank in Brussels to succeed
J.P. Morgan as operator and banker for the Euroclear System, facilitating
Euroclear's strategy to maintain its leadership and capitalize on partnership
opportunities as market forces reshape the settlement infrastructure in
Europe. J.P. Morgan will remain as operator and banker of Euroclear until the
successor bank is established, a process that is expected to take up to 18
months from January 1, 2000. The management and staff of Euroclear,
comprising approximately 1,200 J.P. Morgan employees, will transfer to the
new entity.
Under the existing Operating Agreement, income from clearance and settlement
operations is earned by Euroclear Clearance System Societe Cooperative, while
J.P. Morgan retains earnings from providing banking services to the System's
participants. Under the agreement-in-principle, J.P. Morgan will continue to
receive pretax banking income for three years from January 1, 2000, with a
minimum of $195 million and maximum of $295 million per year, whether the
income is earned by J.P. Morgan prior to the changeover to the new bank or
afterward by the new bank. After the new bank becomes operational, it will
also pay J.P. Morgan for certain transition costs and for any assets and
know-how that are transferred to it.
Until the new bank becomes operational, J.P. Morgan will continue to record
pretax banking income over the period during which it is earned. Upon the
changeover to the new bank, J.P. Morgan will recognize as income, on that
date, all expected amounts due over the remaining contract period, plus any
gain on assets transferred to the new bank. This amount will be subsequently
adjusted based on the determination of the final pretax banking income of
Euroclear as specified in the definitive agreement.
Notes to consolidated financial statements 75
<PAGE> 78
Prior to the changeover to the successor bank, all funds due J.P. Morgan
under the agreement-in-principle will be received as earned. Following the
changeover, 50% of all funds due to J.P. Morgan will be paid as earned. The
remaining 50% will be paid in monthly installments over the period ending six
years after the signing of the definitive agreement. The successor bank will
have the option of prepaying its obligation for the remaining period at the
higher of $245 million per year or the average of the actual annual income
(subject to the floor and cap noted above), for the portion of the three-year
period preceding the prepayment.
Pretax income from Euroclear-related activities reported by J.P. Morgan was
$216 million for 1999, $261 million for 1998, and $232 million for 1997.
OCCUPANCY
On December 23, 1998, the City and State of New York and the New York Stock
Exchange announced their intention 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.
SALE OF INVESTMENT MANAGEMENT BUSINESS IN AUSTRALIA
In July 1998 we completed the sale of our investment management business in
Australia to Salomon Smith Barney Asset Management (a subsidiary of
Citigroup), resulting in a net gain of $56 million ($34 million after tax)
recorded in Other revenue. The sale will not have a material effect on our
ongoing earnings.
SALE OF GLOBAL TRUST AND AGENCY BUSINESS
In June 1998 we completed the sale of our global trust and agency services
business to Citibank (a wholly owned subsidiary of Citigroup), resulting in a
net gain of $131 million ($79 million after tax) which is recorded in Other
revenue. The sale will not have a material effect on our ongoing earnings.
6. 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>
==========================================================================================================================
In millions 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST REVENUE
Deposits with banks ..................................................................... $ 254 $ 294 $ 199
Debt investment securities(a) ........................................................... 1 588 1 456 1 557
Trading account assets .................................................................. 3 727 4 344 4 275
Securities purchased under agreements to resell and federal funds sold .................. 1 609 2 031 2 059
Securities borrowed ..................................................................... 1 833 2 088 1 784
Loans ................................................................................... 1 670 2 109 2 029
Other sources(b) ........................................................................ 289 319 450
--------------------------------------------------------------------------------------------------------------------------
Total interest revenue 10 970 12 641 12 353
--------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits ................................................................................. 2 253 2 823 2 753
Trading account liabilities .............................................................. 1 174 1 541 1 652
Securities sold under agreements to repurchase and federal funds purchased ............... 3 030 3 846 3 532
Other borrowed money ..................................................................... 1 466 1 613 1 447
Long-term debt ........................................................................... 1 506 1 537 1 097
--------------------------------------------------------------------------------------------------------------------------
Total interest expense 9 429 11 360 10 481
--------------------------------------------------------------------------------------------------------------------------
Net interest revenue 1 541 1 281 1 872
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Interest revenue from debt investment securities included taxable revenue
of $1,485 million, $1,335 million, and $1,462 million and revenue exempt from
U.S. income taxes of $103 million, $121 million, and $95 million in 1999,
1998, and 1997, respectively.
(b) Primarily risk-adjusting swaps for the year ended December 31, 1997.
Refer to note 1.
76 Notes to consolidated financial statements
<PAGE> 79
Net interest revenue associated with derivatives used for purposes
other-than-trading was approximately $1 million in 1999, $159 million in
1998, and $177 million in 1997. As of December 31, 1999 and 1998,
approximately $34 million of net deferred gains and $249 million of net
deferred losses, respectively, on closed derivative contracts used for
purposes other-than-trading were recorded on the "Consolidated balance
sheet." These amounts primarily relate to closed hedge contracts included in
the amortized cost of the debt investment portfolio as of December 31, 1999
and 1998. 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 December 31,
1999, are expected to amortize into Net interest revenue as follows: ($3
million) in 2001; $0.2 million in 2002; $0.2 million in 2003; $0.6 million in
2004; and approximately $36 million thereafter.
7. TRADING REVENUE
=============================================================================
The following table presents trading revenue by principal product grouping
for 1999, 1998, and 1997.
<TABLE>
<CAPTION>
=================================================================================
In millions 1999 1998 1997
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income .................................. $1 594 $1 330 $1 578
Equities ...................................... 971 367 226
Foreign exchange .............................. 550 665 333
---------------------------------------------------------------------------------
Total trading revenue 3 115 2 362 2 137
---------------------------------------------------------------------------------
Trading-related net interest revenue 699 309 529
---------------------------------------------------------------------------------
Combined total 3 814 2 671 2 666
---------------------------------------------------------------------------------
</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 and option contracts, and in
short-term interest rate products in order to help clients manage their
foreign currency exposure. Foreign exchange also includes the results from
commodity transactions in spot, forward, and option contracts, and in swaps.
8. ADVISORY AND UNDERWRITING FEES
<TABLE>
<CAPTION>
=================================================================================================
In millions 1999 1998 1997
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------
Advisory fees ................................................ $ 778 $ 643 $ 476
Underwriting revenue and syndication fees .................... 852 758 647
-------------------------------------------------------------------------------------------------
Total 1 630 1 401 1 123
-------------------------------------------------------------------------------------------------
</TABLE>
Advisory fees include revenues earned from advising clients on such corporate
strategies as mergers and acquisitions, privatizations, and changes in
capital structures. Underwriting revenue includes fees from both debt and
equity underwriting. Syndication fees include revenue earned from the
arrangement and syndication of credit facilities.
9. INVESTMENT MANAGEMENT FEES
<TABLE>
<CAPTION>
===================================================================================
In millions 1999 1998 1997
<S> <C> <C> <C>
-----------------------------------------------------------------------------------
Investment advisory fees ....................... $ 737 $499 $423
Trust fees ..................................... 298 382 369
-----------------------------------------------------------------------------------
Total 1 035 881 792
-----------------------------------------------------------------------------------
</TABLE>
Investment advisory fees include revenues earned from commissions charged for
investment advice given to individuals, institutions, pension funds, and
sovereign governments. Trust fees include revenues earned from commissions
charged for the administration of pension and personal trusts, and estates.
Notes to consolidated financial statements 77
<PAGE> 80
10. FEES AND COMMISSIONS
<TABLE>
<CAPTION>
==========================================================================================
In millions 1999 1998 1997
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
Operational services fees:
Commissions ........................................... $615 $519 $351
Custody and securities handling ....................... 32 49 65
Other fees ............................................ 67 65 66
Credit related fees:
Loan commitments ...................................... 91 88 82
Letters of credit and guarantees ...................... 48 53 58
Securities lending and indemnifications ............... 30 34 29
Other fees ............................................ (37) (60) (4)
------------------------------------------------------------------------------------------
Total 846 748 647
------------------------------------------------------------------------------------------
</TABLE>
Commissions include fees earned on brokerage services for futures, options,
and equity securities, securities clearing services, and fees earned on
international depository receipts. Custody and securities handling revenues
primarily include fees from safekeeping transactions and brokerage execution
fees. Other fees include revenues earned from cash management services,
account service fees, and other operational service fees.
Loan commitment fees include revenues from lending commitments. We also earn
fees by providing standby letters of credit and guarantees. Securities
lending and indemnification revenues include fees earned in connection with
securities borrowing and lending transactions where the borrower provides no
cash collateral. Other fees primarily include amounts paid to purchase credit
protection on loans and lending commitments.
11. INVESTMENT SECURITIES REVENUE
<TABLE>
<CAPTION>
============================================================================================================
In millions 1999 1998 1997
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
DEBT INVESTMENT SECURITIES
Gross realized gains from sales of securities ............................. $173 $105 $128
Gross realized losses from sales of securities ............................ (467) (225) (102)
Net gains on maturities, calls, and mandatory redemptions ................. 1 8 5
Write-downs for other-than-temporary impairments in value ................. - (28) (29)
------------------------------------------------------------------------------------------------------------
Net debt investment securities (loss) revenue (293) (140) 2
------------------------------------------------------------------------------------------------------------
EQUITY INVESTMENT SECURITIES
Gross realized gains from marketable available-for-sale securities ........ 13 334 262
Gross realized gains from nonmarketable securities ........................ 310 68 144
Net appreciation in SBIC securities ....................................... 433 2 4
Write-downs for other-than-temporary impairments in value ................. (207) (89) (37)
Dividend and other income ................................................. 76 30 34
------------------------------------------------------------------------------------------------------------
Net equity investment securities revenue 625 345 407
------------------------------------------------------------------------------------------------------------
Total investment securities revenue 332 205 409
------------------------------------------------------------------------------------------------------------
</TABLE>
78 Notes to consolidated financial statements
<PAGE> 81
12. OTHER REVENUE AND OTHER EXPENSES
=============================================================================
OTHER REVENUE
<TABLE>
<CAPTION>
==================================================================================================================
In millions 1999 1998 1997
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
Foreign currency hedging gains/loss(a) .......................................... $105 ($ 57) $135
Equity earnings in certain affiliates, including related goodwill amortization... 39 47 40
Reversal of provisions for credit losses ........................................ - 60 -
Gain on sale of businesses (see note 5) ......................................... - 187 -
Other(b) ........................................................................ 38 (50) 65
------------------------------------------------------------------------------------------------------------------
Total other revenue 182 187 240
------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes gains and losses on hedges of anticipated foreign currency
revenues and expenses. These gains and losses are partially offset by the
impact of exchange rate movements on reported revenues and expenses over the
year.
(b) Includes losses on loan sales of approximately $30 million in 1999 and
$45 million in 1998.
OTHER EXPENSES
<TABLE>
<CAPTION>
========================================================================================
In millions 1999 1998 1997
<S> <C> <C> <C>
----------------------------------------------------------------------------------------
Professional services .................................. $127 $123 $135
Marketing and business development ..................... 184 169 200
Other outside services ................................. 187 187 180
Other .................................................. 106 197 166
----------------------------------------------------------------------------------------
Total other expenses 604 676 681
----------------------------------------------------------------------------------------
</TABLE>
13. INVESTMENT IN AMERICAN CENTURY
=============================================================================
In January 1998, we completed the purchase of a 45% economic interest in
American Century Companies, Inc. (American Century) for $965 million.
American Century is a no-load U.S. mutual fund company selling directly to
individuals. The investment is accounted for under the equity method of
accounting and recorded in Other assets. The excess of our investment over
our share of equity (i.e., goodwill) in American Century was approximately
$795 million at the time of purchase. This amount is being amortized on a
straight-line basis over a period of 25 years resulting in annual
amortization expense of approximately $32 million. As of December 31, 1999
and 1998, goodwill totaled $731 million and $763 million, respectively. Our
share of equity income in American Century and the amortization of goodwill
related to this investment is recorded in Other revenue. The results of this
investment are included in the Asset Management Services segment.
14. CASH AND DUE FROM BANKS
=============================================================================
J.P. Morgan is required to maintain non-interest-earning reserve balances
with U.S. Federal Reserve banks and various foreign central banks. Such
balances, which are based principally on deposits outstanding, are included
in Cash and due from banks. As of December 31, 1999 and 1998, required
reserves were $566 million and $260 million, respectively. Average required
reserves were $387 million in 1999 and $293 million in 1998.
Notes to consolidated financial statements 79
<PAGE> 82
15. INVESTMENT SECURITIES
=============================================================================
DEBT INVESTMENT SECURITIES
The following table presents the gross unrealized gains and losses and a
comparison of the cost, along with the fair and carrying value of our
available-for-sale debt investment securities as of December 31, 1999, 1998,
and 1997. The gross unrealized gains or losses on each debt investment
security include the effects of any related hedge. See note 17 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: December 31 Cost gains losses value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
U.S. Treasury ............................................. $ 2 303 $ 31 $ 3 $ 2 331
U.S. government agency, principally mortgage-backed ....... 9 090 44 241 8 893
U.S. state and political subdivision ...................... 2 093 205 166 2 132
U.S. corporate and bank debt .............................. 76 - - 76
Foreign government(a) ..................................... 740 - - 740
Foreign corporate and bank debt ........................... 5 1 - 6
Other ..................................................... 108 - - 108
--------------------------------------------------------------------------------------------------------------
Total debt investment securities 14 415 281 410 14 286
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
==============================================================================================================
Gross Gross Fair and
unrealized unrealized carrying
In millions: December 31 Cost gains losses value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
U.S. Treasury ............................................. $ 620 $130 $ 1 $ 749
U.S. government agency, principally mortgage-backed ....... 32 458 34 117 32 375
U.S. state and political subdivision ...................... 1 800 174 31 1 943
U.S. corporate and bank debt .............................. 200 2 5 197
Foreign government(a) ..................................... 376 - 9 367
Foreign corporate and bank debt ........................... 536 2 55 483
Other ..................................................... 117 1 - 118
--------------------------------------------------------------------------------------------------------------
Total debt investment securities 36 107 343 218 36 232
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
==============================================================================================================
Gross Gross Fair and
unrealized unrealized carrying
In millions: December 31 Cost gains losses value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
U.S. Treasury ............................................. $ 1 035 $142 $ 1 $ 1 176
U.S. government agency, principally mortgage-backed ....... 16 779 126 75 16 830
U.S. state and political subdivision ...................... 1 440 184 10 1 614
U.S. corporate and bank debt .............................. 428 1 2 427
Foreign government(a) ..................................... 784 5 14 775
Foreign corporate and bank debt ........................... 1 929 2 99 1 832
Other ..................................................... 112 2 - 114
--------------------------------------------------------------------------------------------------------------
Total debt investment securities 22 507 462 201 22 768
--------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Primarily includes debt of countries that are members of the Organization
for Economic Cooperation and Development.
As of December 31, 1999, there were no securities of a single issuer,
excluding the U.S. Treasury and U.S. government agencies, whose fair value
exceeded 10% of stockholders' equity.
80 Notes to consolidated financial statements
<PAGE> 83
The following table displays the maturities and related weighted-average rates
of available-for-sale debt investment securities as of December 31, 1999.
<TABLE>
<CAPTION>
===============================================================================================================================
After one year After five years
Within but within but within After 10
In millions: December 31 one year five years 10 years years Total
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury .......................................... $2 003 $ 64 $ 157 $ 79 $ 2 303
U.S. government agency, principally mortgage-backed(a).. 60 252 7 502 1 276 9 090
U.S. state and political subdivision ................... 236 272 169 1 416 2 093
U.S. corporate and bank debt ........................... 7 - 59 10 76
Foreign government ..................................... 732 8 - - 740
Foreign corporate and bank debt ........................ - - 5 - 5
Other .................................................. - - - 108 108
-------------------------------------------------------------------------------------------------------------------------------
Total debt investment securities, at cost .............. 3 038 596 7 892 2 889 14 415
Fair value ............................................. 3 040 610 7 764 2 872 14 286
-------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains/(losses) 2 14 (128) (17) (129)
-------------------------------------------------------------------------------------------------------------------------------
Average rate on debt investment securities, at cost(b) 4.57% 6.74% 6.73% 7.46% 6.42%
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Mortgage-backed securities are included based on their weighted-average
lives, which reflect anticipated future prepayments based on a consensus of
dealers in the market.
(b) Average rates represent the weighted average as of December 31, 1999, and
include the effects of various hedging transactions. Average rates do not
give effect to unrealized gains and losses that are reflected as a component
of stockholders' equity. U.S. state and political subdivision securities have
been adjusted to a taxable-equivalent basis.
Notes to consolidated financial statements 81
<PAGE> 84
EQUITY INVESTMENT SECURITIES
Equity investment securities are generally owned by J.P. Morgan Capital
Corporation, a wholly owned nonbank subsidiary of J.P. Morgan. Many of these
equity investment securities are subject to legal, regulatory, and contractual
restrictions that limit our ability to dispose of them freely.
The following table shows gross unrealized gains and losses, a comparison of the
cost, fair value and carrying value of marketable, nonmarketable, and SBIC
securities portfolios of J.P. Morgan consolidated. A substantial portion of
these are included in our Equity Investments segment.
<TABLE>
<CAPTION>
====================================================================================================================
In millions: December 31 Marketable Nonmarketable SBIC securities
- --------------------------------------------------------------------------------------------------------------------
Accounting (see note 1) Fair value through equity Cost Fair value through earnings
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Cost $390 $547 $287
- --------------------------------------------------------------------------------------------------------------------
Gross unrealized gains ......... 170 70 342
Gross unrealized losses ........ (1) (5) (1)
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gains 169(a) 65(b) 341(c)
- --------------------------------------------------------------------------------------------------------------------
Fair value 559 612 628
- --------------------------------------------------------------------------------------------------------------------
Carrying value on balance sheet 559 547 628
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================
In millions: December 31 Marketable Nonmarketable SBIC securities
- --------------------------------------------------------------------------------------------------------------------
Accounting (see note 1) Fair value through equity Cost Fair value through earnings
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Cost $446 $439 $172
- --------------------------------------------------------------------------------------------------------------------
Gross unrealized gains ......... 143 124 6
Gross unrealized losses ........ (34) (20) (3)
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gains 109(a) 104(a) 3
- --------------------------------------------------------------------------------------------------------------------
Fair value 555 543 175
- --------------------------------------------------------------------------------------------------------------------
Carrying value on balance sheet 555 439 175
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================
In millions: December 31 Marketable Nonmarketable SBIC securities
- --------------------------------------------------------------------------------------------------------------------
Accounting (see note 1) Fair value through equity Cost Fair value through earnings
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Cost $207 $338 $108
- --------------------------------------------------------------------------------------------------------------------
Gross unrealized gains ......... 436 158 7
Gross unrealized losses ........ (9) (22) (2)
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gains 427(d) 136(a) 5
- --------------------------------------------------------------------------------------------------------------------
Fair value 634 474 113
- --------------------------------------------------------------------------------------------------------------------
Carrying value on balance sheet 634 338 113
====================================================================================================================
</TABLE>
(a) Primarily relates to investments in the telecommunications and financial
services industries.
(b) Primarily relates to investments in the financial services and media
industries.
(c) Primarily relates to investments in the telecommunications industries.
(d) Primarily relates to investments in the insurance industry.
82 Notes to consolidated financial statements
<PAGE> 85
16. TRADING ACCOUNT ASSETS AND LIABILITIES
================================================================================
The following table presents the fair and carrying value of trading account
assets and trading account liabilities as of December 31, 1999 and 1998. It also
includes the average balances for the years then ended.
<TABLE>
<CAPTION>
=============================================================================================
1999 1998
- ---------------------------------------------------------------------------------------------
Carrying Average Carrying Average
In millions: December 31 value balance value balance
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRADING ACCOUNT ASSETS
U.S. Treasury ............................ $ 9 369 $ 9 072 $ 18 262 $ 11 758
U.S. government agency ................... 14 142 13 847 6 040 10 194
Foreign government ....................... 19 152 18 670 20 163 28 858
Corporate debt and equity ................ 24 494 19 638 16 862 20 908
Other securities ......................... 6 777 7 494 4 445 8 771
Interest rate and currency swaps ......... 15 073 16 717 18 129 21 846
Credit derivatives ....................... 290 753 1 401 1 167
Foreign exchange contracts ............... 2 168 2 857 4 132 4 849
Interest rate futures and forwards ....... 280 49 259 202
Equity and commodity contracts ........... 6 185 4 825 3 310 2 911
Purchased option contracts ............... 19 662 19 015 20 893 13 668
- ---------------------------------------------------------------------------------------------
117 592 112 937 113 896 125 132
- ---------------------------------------------------------------------------------------------
TRADING ACCOUNT LIABILITIES
U.S. Treasury ............................ 8 484 5 768 5 786 8 934
Foreign government ....................... 10 894 12 415 10 213 14 291
Corporate debt and equity ................ 10 901 8 942 7 752 9 365
Other securities ......................... 5 162 3 120 2 209 2 546
Interest rate and currency swaps ......... 14 871 13 968 16 375 18 424
Credit derivatives ....................... 1 035 879 1 228 1 467
Foreign exchange contracts ............... 2 038 3 178 4 396 4 870
Interest rate futures and forwards ....... 226 700 1 323 979
Equity and commodity contracts ........... 4 760 3 554 2 951 2 681
Written option contracts ................. 22 046 19 498 18 410 13 889
- ---------------------------------------------------------------------------------------------
80 417 72 022 70 643 77 446
- ---------------------------------------------------------------------------------------------
</TABLE>
TRADE DATE RECEIVABLES/PAYABLES
Amounts receivable and payable for securities that have not reached their
contractual settlement dates in our trading and investing activities are
recorded net in the "Consolidated balance sheet." Amounts receivable for
securities sold of $14.0 billion were netted against amounts payable for
securities purchased of $8.0 billion. This produced a net trade date receivable
of $6.0 billion, recorded in Accrued interest and accounts receivable as of
December 31, 1999. In 1998 amounts receivable for securities sold of $9.8
billion were netted against amounts payable for securities purchased of $9.0
billion. This produced a net trade date receivable of $0.8 billion.
Notes to consolidated financial statements 83
<PAGE> 86
17. DERIVATIVES
=============================================================================
In general, derivatives are contracts or agreements whose values are derived
from changes in interest rates, foreign exchange rates, credit spreads, prices
of securities, or financial or commodity indices. The timing of cash receipts
and payments for derivatives is generally determined by contractual agreement.
Derivatives are either standardized contracts executed on an exchange or
privately negotiated contracts. Futures and option contracts are examples of
standard exchange-traded derivatives. Forward, swap, and option contracts are
examples of privately negotiated derivatives. Privately negotiated derivatives
are generally not traded like securities. In the normal course of business,
however, they may be terminated or assigned to another counterparty if the
original holder agrees. We use derivatives for trading or other-than-trading
purposes. Other-than-trading purposes are primarily related to our investing
activities.
Interest rate swaps are contractual agreements to exchange periodic interest
payments at specified intervals. The notional amounts of interest rate swaps are
not exchanged; they are used solely to calculate the periodic interest payments.
Currency swaps generally involve exchanging principal (the notional amount) and
periodic interest payments in one currency for principal and periodic interest
payments in another currency.
Credit derivatives include credit default swaps and related swap and option
contracts. Credit default swaps are contractual agreements that provide
insurance against a credit event of one or more referenced credits. The nature
of the credit event is established by the protection buyer and seller at the
inception of the transaction. Events include bankruptcy, insolvency, and failure
to meet payment obligations when due. The protection buyer pays a periodic fee
in return for a contingent payment by the protection seller following a credit
event. The contingent payment is typically the loss - the difference between the
notional and the recovery amount incurred by the creditor of the reference
credit as a result of the event.
Foreign exchange contracts involve an agreement to exchange one country's
currency for another at an agreed-upon price and settlement date. Most of the
contracts reported in the following table are forward contracts.
Interest rate futures are standardized exchange-traded agreements to receive or
deliver a specific financial instrument at a specific future date and price.
Forward rate agreements provide for the payment or receipt of the difference
between a specified interest rate and a reference rate at a future settlement
date. Debt security forwards include to-be-announced and when-issued securities
contracts.
Equity and commodity contracts include swaps and futures in the equity and
commodity markets and commodity forward agreements. Equity swaps are contractual
agreements to receive the appreciation or depreciation in value based on a
specific strike price on an equity instrument in return for paying another rate,
which is usually based on equity index movements or interest rates. Commodity
swaps are contractual commitments to exchange the fixed price of a commodity for
a floating price. Equity and commodity futures are exchange-traded agreements to
receive or deliver a financial instrument or commodity at a specific future date
and price. Equity and commodity forwards are privately negotiated agreements to
purchase or sell a specific amount of a financial instrument or commodity at an
agreed-upon price and settlement date.
An option provides the option purchaser, for a fee, the right - but not the
obligation - to buy or sell a security at a fixed price on or before a specified
date. The option writer is obligated to buy or sell the security if the
purchaser chooses to exercise the option. These options include contracts in the
interest rate, foreign exchange, equity, and commodity markets. Interest rate
options include caps and floors.
84 Notes to consolidated financial statements
<PAGE> 87
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 $94.0 billion and $107.6 billion of master
netting agreements in effect as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
===========================================================================================================
On-balance-sheet
Notional amounts credit exposure
------------------------------------------------
In billions: December 31 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps:
Trading ............................................ $4 338.2 $3 736.7
Other-than-trading(a)(b) ........................... 63.6 65.4
- -----------------------------------------------------------------------------------------------------------
Total interest rate and currency swaps 4 401.8 3 802.1 $15.0 $18.1
- -----------------------------------------------------------------------------------------------------------
Credit derivatives:
Trading ............................................ 155.6 59.5
Other-than-trading(a) .............................. 16.8 4.1
- -----------------------------------------------------------------------------------------------------------
Total credit derivatives ........................... 172.4 63.6 0.3 1.4
- -----------------------------------------------------------------------------------------------------------
Foreign exchange spot, forward, and futures contracts:
Trading ............................................ 426.6 565.4
Other-than-trading(a) .............................. 18.8 37.6
- -----------------------------------------------------------------------------------------------------------
Total foreign exchange spot, forward, and futures
contracts 445.4 603.0 2.2 4.1
- -----------------------------------------------------------------------------------------------------------
Interest rate futures, forward rate agreements, and debt
securities forwards:
Trading ............................................ 924.7 1 458.3
Other-than-trading ................................. 36.7 8.7
- -----------------------------------------------------------------------------------------------------------
Total interest rate futures, forward rate
agreements, and debt securities forwards 961.4 1 467.0 0.3 0.3
- -----------------------------------------------------------------------------------------------------------
Equity and commodity swaps, forward
and futures contracts, all trading ................... 94.5 86.0 6.2 3.3
- -----------------------------------------------------------------------------------------------------------
Purchased options:(c)
Trading ............................................ 1 275.3 1 291.5
Other-than-trading(a) .............................. 10.3 0.5
- -----------------------------------------------------------------------------------------------------------
Total purchased options 1 285.6 1 292.0 19.7 20.9
- -----------------------------------------------------------------------------------------------------------
Written options, all trading(d) 1 515.2 1 544.0 - -
- -----------------------------------------------------------------------------------------------------------
Total on-balance-sheet credit exposure 43.7 48.1
- -----------------------------------------------------------------------------------------------------------
</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 that 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) As of December 31, 1999 and 1998, the notional amounts of derivative
contracts used for purposes other-than-trading conducted in the foreign
exchange markets, primarily forward contracts, amounted to $24.6 billion and
$42.7 billion, respectively. As of December 31, 1999, these contracts were
primarily denominated in the following currencies: Euro $7.7 billion,
Japanese yen $5.6 billion, Swiss franc $3.0 billion, British pound $2.5
billion, and Canadian dollar $1.4 billion. As of December 31, 1998, these
contracts were primarily denominated in the following currencies: German
deutsche mark $5.6 billion, French franc $5.4 billion, Japanese yen $4.6
billion, British pound $3.6 billion, Euro $3.2 billion, Swiss franc $3.1
billion, and Italian lira $2.7 billion.
(c) As of December 31, 1999 and 1998, purchased options used for trading
purposes included $950.8 billion and $987.1 billion, respectively, of
interest rate options; $161.9 billion and $200.9 billion, respectively, of
foreign exchange options; and $162.6 billion and $103.5 billion,
respectively, of commodity and equity options. Only interest rate options
are used for purposes other-than-trading. Purchased options executed on an
exchange amounted to $204.1 billion and $269.5 billion, privately negotiated
contracts amounted to $1,081.5 billion and $1,022.5 billion as of December
31, 1999 and 1998, respectively.
(d) As of December 31, 1999 and 1998, written options included $1,167.5 billion
and $1,239.4 billion, respectively, of interest rate options; $186.8 billion
and $196.7 billion, respectively, of foreign exchange options; and $160.9
billion and $107.9 billion, respectively, of commodity and equity options.
Written options executed on an exchange amounted to $200.7 billion and
$395.9 billion, and privately negotiated contracts amounted to $1,314.5
billion and $1,148.1 billion as of December 31, 1999 and 1998, respectively.
Notes to consolidated financial statements 85
<PAGE> 88
Derivatives are used to hedge or modify the interest rate characteristics of
debt investment securities, loans, deposits, other liabilities for borrowed
money, long-term debt, and other financial assets and liabilities. Net
unrealized gains and losses associated with such derivatives contracts amounted
to ($1 million) and $785 million as of December 31, 1999 and 1998, respectively.
Gross unrealized gains and gross unrealized losses associated with open
derivatives contracts used for these purposes as of December 31, 1999 and 1998,
are presented in the following table. Such amounts primarily relate to interest
rate and currency swaps used to hedge or modify the interest rate
characteristics of long-term debt; debt investment securities, principally
mortgage-backed securities; deposits; and other financial instruments.
<TABLE>
<CAPTION>
=============================================================================
Gross Gross Net
unrealized unrealized unrealized
In millions: December 31 gains losses gains/(losses)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Long-term debt ..................... $ 294 $551 ($257)
Debt investment securities ......... 192 39 153
Deposits ........................... 181 49 132
Other financial instruments ........ 153 182 (29)
- -----------------------------------------------------------------------------
Total 820 821 (1)
- -----------------------------------------------------------------------------
1998
Long-term debt ..................... $ 554 $133 $421
Debt investment securities ......... 13 25 (12)
Deposits ........................... 343 16 327
Other financial instruments ........ 242 193 49
- -----------------------------------------------------------------------------
Total 1 152 367 785
- -----------------------------------------------------------------------------
</TABLE>
The following table presents notional and on-balance-sheet credit exposure by
maturity.
NOTIONAL AMOUNT (TRADING AND OTHER-THAN-TRADING)
=============================================================================
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
After one year
Within but within After five
In billions: December 31 one year five years years Total 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps ......................... $1 179.1 $1 877.6 $1 345.1 $4 401.8
Credit derivatives ....................................... 19.2 142.9 10.3 172.4
Foreign exchange spot, forward, and futures contracts .... 429.3 15.6 0.5 445.4
Interest rate futures, forward rate agreements, and debt
securities forwards .................................... 800.2 160.9 0.3 961.4
Equity and commodity swaps, forward and futures contracts. 81.4 11.5 1.6 94.5
Purchased option contracts ............................... 458.8 611.9 214.9 1 285.6
Written option contracts ................................. 458.3 787.9 269.0 1 515.2
- -------------------------------------------------------------------------------------------------------------
</TABLE>
ON-BALANCE-SHEET CREDIT EXPOSURE (TRADING)
=============================================================================
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
After one year
Within but within After five
In billions: December 31 one year five years years Total 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps ........................... $4.0 $6.4 $4.6 $15.0
Credit derivatives ......................................... 0.1 0.1 0.1 0.3
Foreign exchange spot, forward, and futures contracts ...... 2.1 0.1 - 2.2
Interest rate futures, forward rate agreements, and debt
securities forwards ...................................... 0.2 0.1 - 0.3
Equity and commodity swaps, forward and futures contracts .. 5.3 0.8 0.1 6.2
Purchased option contracts ................................. 7.0 9.3 3.4 19.7
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
86 Notes to consolidated financial statements
<PAGE> 89
After considering the effect of collateral and purchased credit protection, as
of December 31, 1999 no individual industry exceeded 10% of total
on-balance-sheet derivative credit exposure, with the exception of banks (39%).
In addition, no individual country exceeded 10% of total on-balance-sheet
derivative credit exposure, with the exception of the United States (35%). On a
regional basis, exposures were 35% to North America, 53% to Europe, 10% to Asia
Pacific, and 2% to Latin America.
18. LOANS
========================================================================
INDUSTRY OR TYPE OF BORROWER
The table below provides loan detail by industry and location of the borrower
or, in the case of guaranteed loans, the industry and location of the guarantor.
The table does not consider collateral or purchased credit protection.
<TABLE>
<CAPTION>
=========================================================================
In millions: December 31 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
DOMESTIC
Commercial and industrial ...................... $ 8 459 $ 5 755
Financial institution:
Banks ........................................ 234 934
Other financial institutions ................. 2 097 2 183
Real estate .................................... 2 731 1 787
Other, primarily individuals and including
U.S. state and political subdivisions ........ 1 881 3 776
- -------------------------------------------------------------------------
15 402 14 435
- -------------------------------------------------------------------------
FOREIGN
Commercial and industrial ...................... 8 252 5 834
Financial institution:
Banks ........................................ 1 664 2 507
Other financial institutions ................. 453 846
Real estate .................................... 169 418
Governments and official institutions .......... 396 917
Other, primarily individuals ................... 513 538
- -------------------------------------------------------------------------
11 447 11 060
- -------------------------------------------------------------------------
Total loans 26 849 25 495
- -------------------------------------------------------------------------
</TABLE>
MATURITY PROFILE OF LOAN PORTFOLIO
The following table shows our loan portfolio by maturity and industry of
borrower as of December 31, 1999.
<TABLE>
<CAPTION>
=================================================================================================
Maturing
- -------------------------------------------------------------------------------------------------
After one
Within year but After five
In millions: December 31 one year within five years Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial ...................... $ 7 186 $ 7 854 $1 671 $16 711
Financial institution:
Banks ........................................ 1 708 171 19 1 898
Other financial institutions ................. 918 663 969 2 550
Real estate .................................... 319 1 189 1 392 2 900
Foreign governments and official institutions .. 103 182 111 396
Other, primarily individuals and including
U.S. state and political subdivisions ........ 1 675 599 120 2 394
- -------------------------------------------------------------------------------------------------
Total loans 11 909 10 658 4 282 26 849
- -------------------------------------------------------------------------------------------------
</TABLE>
Notes to consolidated financial statements 87
<PAGE> 90
INTEREST RATE STRUCTURE OF LOAN PORTFOLIO
The table below shows our loan portfolio based on interest rate structure as of
December 31, 1999.
<TABLE>
<CAPTION>
==============================================================================================
Maturing
----------------------------------------------------
After one
Within year but After five
In millions: December 31 one year within five years Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans at fixed rates of interest ........ $ 2 263 $ 853 $1 584 $ 4 700
Loans at floating rates of interest ..... 9 646 9 805 2 698 22 149
- ----------------------------------------------------------------------------------------------
Total loans 11 909 10 658 4 282 26 849
- ----------------------------------------------------------------------------------------------
</TABLE>
LOAN CONCENTRATIONS
As of December 31, 1999 no individual industry exceeded 10% of total loans,
after considering the effect of cash and marketable securities collateral and
purchased credit protection, with the exception of real estate (17%) and other
financial institutions (11%). In addition, as of December 31, 1999 no individual
country exceeded 10% of total loans, with the exception of the United States
(54%) and the United Kingdom (11%). On a regional basis, exposures were 54% to
North America, 32% to Europe, 8% to Latin America and 6% to Asia Pacific.
LOANS HELD FOR SALE
Included in Loans are loans held for sale of approximately $3.2 billion as of
December 31, 1999, compared with $2.8 billion as of December 31, 1998. These
loans are recorded on the balance sheet at the lower of cost or fair value and
are primarily to borrowers in the U.S. in various industries.
19. OTHER CREDIT-RELATED PRODUCTS
============================================================================
Lending commitments include commitments to extend credit, standby letters of
credit and guarantees. The contractual amounts of these instruments represent
the amount at risk should the contract be fully drawn upon, the client default,
and the value of the collateral become worthless.
The total contractual amount of credit-related financial instruments does not
represent the future liquidity requirements, since we expect a significant
amount of commitments to expire or mature without being drawn. The credit risk
associated with these instruments varies according to each client's
creditworthiness and the value of any collateral held. Commitments to extend
credit generally require clients to meet certain credit-related terms and
conditions before drawdown. Market risk for commitments to extend credit,
standby letters of credit, and guarantees, while not significant, may arise as
availability of and access to credit markets change.
The following table summarizes the contractual amount of credit-related
instruments as of December 31.
<TABLE>
<CAPTION>
======================================================================
In billions: December 31 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit .................. $69.3 $73.0
Standby letters of credit and guarantees ...... 13.8 15.9
- ----------------------------------------------------------------------
Total lending commitments 83.1 88.9
- ----------------------------------------------------------------------
</TABLE>
We also have securities lending indemnifications associated with our
Euroclear-related activities of $5.6 billion and $4.1 billion as of December 31,
1999 and 1998, respectively. As of December 31, 1999 and 1998, J.P. Morgan held
cash and other collateral in full support of these securities lending
indemnifications.
88 Notes to consolidated financial statements
<PAGE> 91
After considering the effect of collateral and purchased credit protection, as
of December 31, 1999 no individual industry exceeded 10% of total lending
commitments, with the exception of other financial institutions (11%). In
addition, no individual country exceeded 10% of total lending commitments, with
the exception of the United States (86%). On a regional basis, exposures were
86% to North America, 13% to Europe, and 1% to Asia Pacific.
PURCHASE OF CREDIT PROTECTION
Since December 1997, we have entered into three Synthetic Collateralized Loan
Obligations that has allowed us to reduce the credit risk on a portfolio of
counterparties totaling approximately $20 billion in notional amount. This was
accomplished using credit default swaps, whereby the credit risk is transferred
into the capital markets via a special purpose entity, without us having to sell
the assets or change their composition. The structures provide protection at the
counterparty level, that is, protection is provided on all exposures to a
referenced counterparty versus on a specific loan, commitment or derivative
transaction to that counterparty. We have retained the first risk of loss equity
tranche in these transactions totaling $224 million. As a result of these
structures, we were able to reduce economic capital by approximately $406
million as of December 31, 1999. These structures have also allowed us to reduce
our risk-adjusted assets by approximately $4.8 billion as of December 31, 1999,
thereby increasing our Tier I and Total risk-based capital ratios by 31 basis
points (0.31%) and 45 basis points (0.45 %), respectively. In particular, these
transactions have allowed us to convert the credit risk associated with $20
billion of diversified exposure on our balance sheet - as described in the
following table - from various lower credit ratings to that we believe is
equivalent to a AAA+ counterparty.
<TABLE>
<CAPTION>
===============================================
Counterparty rating Notional exposure
- -----------------------------------------------
<S> <C>
AAA ....................... $ 1 058
AA ........................ 3 869
A ......................... 8 432
BBB ....................... 5 282
BB ........................ 1 020
B ......................... 271
CCC and below ............. 342
- -----------------------------------------------
Total 20 274
- -----------------------------------------------
</TABLE>
The notional exposures in the above table are diversified by counterparty in the
following industries: banks - $2,731 million; nonbank financial institutions -
$2,930 million; governments - $855 million; commercial and industrial - $5,222
million; cyclical $4,609 million; and non-cyclical - $3,927 million.
In addition to the above transactions, during 1999 the firm executed a
collateralized loan obligation transaction, whereby we participated out to third
parties approximately $2.3 billion of traditional credit product exposure. This
transaction resulted in a decrease of $60 million in economic capital. In 1999,
the firm also entered into single name credit default swaps to hedge some of the
credit exposure arising from our traditional lending and the derivatives
activities. As of December 31, 1999, the total outstanding notional amount of
single name credit default swaps where the firm had bought protection was
approximately $15 billion.
20. IMPAIRED LOANS
==============================================================================
The following table shows impaired loans - net of charge-offs - as of December
31.
<TABLE>
<CAPTION>
======================================================================
In millions: December 31 1999(a) 1998(a)(b) 1997(a)(b)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Commercial and industrial ...... $54 $ 25 $ 56
Banks .......................... - - 28
Other .......................... 23 97 29
- ----------------------------------------------------------------------
Total impaired loans 77 122 113
- ----------------------------------------------------------------------
Allowance for impaired loans 24 34 50
- ----------------------------------------------------------------------
</TABLE>
(a) Impaired loans for which no SFAS No. 114 reserve was deemed necessary were
$22 million, $15 million, and $9 million as of December 31, 1999, 1998, and
1997, respectively. As of December 31, 1999, approximately 40% of impaired
loans were measured for impairment using observable market prices, 40% using
the fair value of collateral, and the remainder using the present value of
future cash flows.
(b) Certain reclassifications were made to conform with the categorization used
in Bank regulatory filings.
Notes to consolidated financial statements 89
<PAGE> 92
An analysis of the effect of impaired loans - net of charge-offs - on interest
revenue for 1999, 1998, and 1997 is presented in the following table.
<TABLE>
<CAPTION>
===============================================================================================
In millions 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest revenue that would have been recorded if accruing .... $ 10 $6 $ 9
Net interest revenue recorded:
Related to the current period ............................... - 5 3
Related to prior periods .................................... - - 2
- -----------------------------------------------------------------------------------------------
(Negative) impact of impaired loans on interest revenue (10) (1) (4)
- -----------------------------------------------------------------------------------------------
</TABLE>
Interest that would have been recorded if accruing represents $5 million, $3
million, and $4 million from borrowers in the U.S., and $5 million, $3 million,
and $5 million from borrowers outside the U.S. in 1999, 1998, and 1997,
respectively. Interest revenue recorded represents $3 million and $6 million
from borrowers in the U.S., and $2 million and ($1 million) from borrowers
outside the U.S. in 1998 and 1997, respectively.
As of December 31, 1999 and 1998, loans of $29 million and $38 million,
respectively, were over 90 days past due (principal or interest) and still
accruing interest, but not considered impaired.
For 1999, 1998, and 1997, the average recorded investments in impaired loans
amounted to $110 million, $78 million, and $99 million, respectively.
The following table presents impaired loans - net of charge-offs - organized by
the location of the counterparty.
<TABLE>
<CAPTION>
========================================================================
In millions: December 31 1999 1998(a) 1997(a)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
COUNTERPARTIES IN THE U.S.:
Commercial and industrial .......... $18 $ 16 $ 12
Other .............................. 13 83 16
- ------------------------------------------------------------------------
31 99 28
- ------------------------------------------------------------------------
COUNTERPARTIES OUTSIDE THE U.S.:
Commercial and industrial .......... 36 9 44
Banks .............................. - - 28
Other .............................. 10 14 13
- ------------------------------------------------------------------------
46 23 85
- ------------------------------------------------------------------------
Total impaired loans 77 122 113
- ------------------------------------------------------------------------
</TABLE>
(a) Certain reclassifications were made to conform with the categorization used
in Bank regulatory filings.
The following table presents an analysis of the changes in impaired loans.
<TABLE>
<CAPTION>
========================================================================================
In millions 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
IMPAIRED LOANS, JANUARY 1 $122 $113 $120
- ----------------------------------------------------------------------------------------
Additions to impaired loans .......................... 141 252 123
Less:
Repayments of principal, net of additional advances. (45) (40) (21)
Impaired loans returning to accrual status ......... (86) (39) (48)
Charge-offs:(a)
Commercial and industrial ................... (16) (46) (21)
Banks and other financial institutions ...... (1) (83) (17)
Other ....................................... (30) (26) (2)
Interest and other credits ......................... (8) (9) (7)
Sales and swaps of loans ........................... - - (14)
- ----------------------------------------------------------------------------------------
IMPAIRED LOANS, DECEMBER 31 77 122 113
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Charge-offs include losses on loan sales of $105 million for 1998 with a
carrying value of $1.1 billion. The carrying value of loans sold is not
included in the above table.
Lending commitments to counterparties considered impaired totaled $65 million
and $18 million at December 31, 1999 and 1998, respectively.
90 Notes to consolidated financial statements
<PAGE> 93
21. ALLOWANCES FOR CREDIT LOSSES
============================================================================
Our allowances for credit losses include an allowance for loan losses and an
allowance for credit losses on lending commitments.
The following table summarizes the activity of the allowance for loan losses
during the last three years.
<TABLE>
<CAPTION>
=============================================================================================================
In millions 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BEGINNING BALANCE, JANUARY 1 .......................................... $ 470 $ 546 $566
- -------------------------------------------------------------------------------------------------------------
(Reversal of provision)/provision for loan losses in the U.S. ......... (14) 60 -
(Reversal of provision)/provision for loan losses outside the U.S. .... (161) 50 -
- -------------------------------------------------------------------------------------------------------------
(175) 110 -
- -------------------------------------------------------------------------------------------------------------
Reclassifications in the U.S. ......................................... - 6 5
Reclassifications outside the U.S. .................................... - (56) (25)
- -------------------------------------------------------------------------------------------------------------
- (50)(a) (20)(a)
- -------------------------------------------------------------------------------------------------------------
Recoveries:
Counterparties in the U.S. ............................................ 4 13 20
Counterparties outside the U.S. ....................................... 29 6 20
- -------------------------------------------------------------------------------------------------------------
33 19 40
- -------------------------------------------------------------------------------------------------------------
Charge-offs:(b)
Counterparties in the U.S. .......................................... (38) (5) (3)
Counterparties outside the U.S.:
Commercial and industrial .................................... (3) (44) (20)
Banks and other financial institutions ....................... (1) (83) (17)
Other ........................................................ (5) (23) -
- -------------------------------------------------------------------------------------------------------------
(47) (155) (40)
- -------------------------------------------------------------------------------------------------------------
Net charge-offs(c) (14) (136) -
- -------------------------------------------------------------------------------------------------------------
ENDING BALANCE, DECEMBER 31 281 470 546
- -------------------------------------------------------------------------------------------------------------
International portion of the allowance, December 31(d) 134 272 379
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to July 1, 1998, changes, excluding charge-offs and recoveries, across
balance sheet reserve or allowance captions - which included an adjustment
for trading derivatives needed to determine fair value, an allowance for
loan losses, and an allowance for credit losses on lending commitments -
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," these
captions would change as follows, with no impact on net income: In 1998,
Provision for loan losses and Trading revenue would both decrease by $50
million; in 1997, Provision for loan losses would decrease by $20 million,
Trading revenue would decrease by $35 million, and Other revenue would
increase by $15 million.
(b) Charge-offs include losses on loan sales, primarily banks and other
financial institutions, of $33 million and $105 million during 1999 and
1998, respectively.
(c) Net charge-offs as a percentage of average loans were 0.05% and 0.44% for
1999 and 1998, respectively.
(d) Not reflected in the above table are transfers to the international portion
of the allowance from the domestic portion of $3 million, $43 million, and
$32 million in 1999, 1998, and 1997, respectively.
The following table displays our allowance for loan losses by component as of
December 31.
<TABLE>
<CAPTION>
=======================================================================================
In millions: December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Specific counterparty components in the U.S. ........ $ 11 $ 29 $ 55
Specific counterparty components outside the U.S. ... 13 5 51
- ---------------------------------------------------------------------------------------
Total specific counterparty 24 34 106
- ---------------------------------------------------------------------------------------
Expected loss(a) .................................... 257 436 440
- ---------------------------------------------------------------------------------------
Total 281 470 546
- ---------------------------------------------------------------------------------------
</TABLE>
(a) During 1999, we revised our model for calculating expected credit losses to
incorporate factors for estimating loss previously included in our country,
expected loss, and general components of our allowances. For disclosure
purposes, the country, expected loss, and general components of prior
periods have been aggregated and included in the expected loss caption in
the above table.
Notes to consolidated financial statements 91
<PAGE> 94
The following table summarizes the activity of the allowance for credit losses
on lending commitments during the last three years.
<TABLE>
<CAPTION>
===========================================================================================================
In millions 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BEGINNING BALANCE, JANUARY 1 $125 $185 $200
- -----------------------------------------------------------------------------------------------------------
Provision/(reversal of provision) for credit losses in the U.S. ........ 18 (60) -
Reversal of provision for credit losses outside the U.S. ............... (18) - -
- -----------------------------------------------------------------------------------------------------------
- (60) -
- -----------------------------------------------------------------------------------------------------------
Reclassifications in the U.S. .......................................... - - -
Reclassifications outside the U.S. ..................................... - - (15)
- -----------------------------------------------------------------------------------------------------------
- - (15)
- -----------------------------------------------------------------------------------------------------------
ENDING BALANCE, DECEMBER 31 125 125 185
- -----------------------------------------------------------------------------------------------------------
International portion of the allowance, December 31(a) 46 69 107
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Not reflected in the above table are transfers (from)/to the international
portion of the allowance to the domestic portion of ($5 million), ($27
million), and $33 million in 1999, 1998, and 1997, respectively.
The following table displays our allowance for credit losses on lending
commitments by component as of December 31.
<TABLE>
<CAPTION>
=====================================================================================
In millions: December 31 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Specific counterparty components in the U.S. ...... $ 19 $ 1 $ -
Specific counterparty components outside the U.S. . 3 2 2
- -------------------------------------------------------------------------------------
Total specific counterparty ....................... 22 3 2
- -------------------------------------------------------------------------------------
Expected loss(b) 103 122 183
- -------------------------------------------------------------------------------------
Total 125 125 185
- -------------------------------------------------------------------------------------
</TABLE>
(b) During 1999, we revised our model for calculating expected credit losses to
incorporate factors for estimating loss previously included in our country,
expected loss, and general components of our allowances. For disclosure
purposes, the country, expected loss, and general components of prior
periods have been aggregated and included in the expected loss caption in
the above table.
22. PREMISES AND EQUIPMENT
================================================================================
This table presents components of premises and equipment as of December 31.
<TABLE>
<CAPTION>
===================================================================================
In millions: December 31 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Land ...................................................... $ 118 $ 112
Buildings ................................................. 1 134 1 130
Equipment and furniture ................................... 1 096 1 064
Capitalized software costs ................................ 143 -
Leasehold improvements .................................... 327 420
Property under financing obligation: land and building .... 474 488
Construction-in-progress .................................. 24 17
- -----------------------------------------------------------------------------------
3 316 3 231
Less: accumulated depreciation/amortization ............... 1 319 1 350
- -----------------------------------------------------------------------------------
1 997 1 881
- -----------------------------------------------------------------------------------
</TABLE>
Beginning in 1999 we capitalized $143 million of software costs in accordance
with SOP 98-1 (see note 1). Amortization related to these costs were $5 million.
Depreciation expense totaled $189 million in 1999, $208 million in 1998, and
$185 million in 1997. No interest was capitalized in connection with various
construction projects in 1999 or 1998. Refer to note 5.
92 Notes to consolidated financial statements
<PAGE> 95
23. DEPOSITS AND OTHER BORROWINGS
=============================================================================
DEPOSITS
The table below presents deposits in offices in the U.S. and outside the U.S.
<TABLE>
<CAPTION>
==============================================================
In millions: December 31 1999 1998
- --------------------------------------------------------------
<S> <C> <C>
NON-INTEREST-BEARING DEPOSITS:
In offices in the U.S. .............. $ 898 $ 1 242
In offices outside the U.S. ......... 498 563
- --------------------------------------------------------------
1 396 1 805
- --------------------------------------------------------------
INTEREST-BEARING DEPOSITS:
In offices in the U.S. .............. 4 209 7 724
In offices outside the U.S. ......... 39 714 45 499
- --------------------------------------------------------------
43 923 53 223
- --------------------------------------------------------------
Total deposits 45 319 55 028
- --------------------------------------------------------------
</TABLE>
Except for time deposits in 1997, no average balance in offices in the U.S. for
any individual deposit category exceeded 10% of the average total deposits in
1999, 1998, or 1997. In 1997 the average balance for time deposits in offices in
the U.S. was $7,350 million, and the average rate paid was 5.75%.
Average deposits in offices outside the U.S. are presented in the following
table.
<TABLE>
<CAPTION>
===================================================================================================================
1999 1998 1997
Average Average Average Average Average Average
In millions balance rate paid balance rate paid balance rate paid
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-BEARING DEPOSITS
From banks in foreign countries .............. $13 545 3.81% $13 908 4.86% $14 777 4.55%
From foreign governments and official
institutions ................................ 8 813 4.70 12 787 5.04 13 656 5.15
Other time ................................... 19 061 4.61 19 992 4.96 15 461 5.02
On demand .................................... 2 581 4.14 2 357 4.74 2 360 2.69
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits in
offices outside the U.S. 44 000 4.35 49 044 4.95 46 254 4.79
- -------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING DEPOSITS
From banks in foreign countries .............. 105 222 121
From foreign governments and official
institutions ................................ 2 - 2
Other demand ................................. 445 562 329
- -------------------------------------------------------------------------------------------------------------------
Total non-interest-bearing deposits in
offices outside the U.S. 552 784 452
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Foreign-country-related deposits in offices in the U.S. totaled approximately
$0.3 billion as of December 31, 1999; $0.8 billion as of December 31, 1998; and
$0.6 billion as of December 31, 1997.
This table presents a profile of the maturities of time certificates of deposit
and other time deposits in denominations of $100,000 or more as of December 31,
1999.
<TABLE>
<CAPTION>
====================================================================================================
After six
Within After three months but After
three months but within one
In millions: December 31, 1999 months within six one year year Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OFFICES IN THE U.S.
Time certificates of deposit ......... $ 1 824 $ 222 $200 $ 1 $ 2 247
Other time deposits .................. 39 - - 462 501
- ----------------------------------------------------------------------------------------------------
1 863 222 200 463 2 748
- ----------------------------------------------------------------------------------------------------
OFFICES OUTSIDE THE U.S.
Time certificates of deposit ......... 4 557 678 99 252 5 586
Other time deposits .................. 19 101 970 559 1 752 22 382
- ----------------------------------------------------------------------------------------------------
23 658 1 648 658 2 004 27 968
- ----------------------------------------------------------------------------------------------------
</TABLE>
Notes to consolidated financial statements 93
<PAGE> 96
<TABLE>
<CAPTION>
PURCHASED FUNDS AND OTHER BORROWINGS
Purchased funds and other borrowings are detailed in the following table.
==========================================================================================
In millions 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Balance at year-end .............................. $58 950 $62 784 $53 202
Average balance .................................. 60 928 68 534 63 163
Maximum month-end balance ........................ 69 315 82 740 73 447
Average interest rate:
During year .................................... 4.89% 5.45% 5.24%
At year-end .................................... 4.37 4.76 5.99
- ------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED (DAY-TO-DAY)
Balance at year-end .............................. $ 743 $ 584 $4 602
Average balance .................................. 911 2 003 3 958
Maximum month-end balance ........................ 2 785 7 770 6 186
Average interest rate:
During year .................................... 5.55% 5.63% 5.56%
At year-end .................................... 4.56 5.24 6.43
- ------------------------------------------------------------------------------------------
COMMERCIAL PAPER
Balance at year-end .............................. $11 854 $ 6 637 $6 622
Average balance .................................. 11 047 9 682 4 858
Maximum month-end balance ........................ 14 774 12 738 6 622
Average interest rate:
During year .................................... 5.26% 5.57% 5.39%
At year-end .................................... 5.59 5.19 5.78
- ------------------------------------------------------------------------------------------
OTHER LIABILITIES FOR BORROWED MONEY
Federal funds purchased (term):
Balance at year-end ............................ $590 $ 460 $1 465
Average balance ................................ 347 689 435
Maximum month-end balance ...................... 915 1 495 1 465
Average interest rate:
During year .................................. 5.16% 5.66% 5.71%
At year-end .................................. 6.00 5.29 5.79
Other:
Balance at year-end ............................ $ 9 668 $12 055 $15 711
Average balance ................................ 10 141 13 620 17 813
Maximum month-end balance ...................... 13 559 16 407 20 107
Average interest rate:
During year .................................. 7.63% 6.90% 6.02%
At year-end .................................. 7.67 6.39 4.78
- ------------------------------------------------------------------------------------------
</TABLE>
We computed average interest rates during each year by dividing total interest
expense by the average amount borrowed. Average interest rates at year-end are
average rates for a single day and, as such, may reflect one-day market
distortions that are not indicative of generally prevailing rates. Original
maturities of securities sold under agreements to repurchase are usually not
more than six months. Original maturities of commercial paper are generally not
more than nine months. Other liabilities for borrowed money tend to have
original maturities of one year or less.
94 Notes to consolidated financial statements
<PAGE> 97
24. LONG-TERM DEBT
================================================================================
The net proceeds from the issuance of J.P. Morgan's long-term debt may be used
for general corporate purposes. This includes investing in equity and debt
securities and advancing funds to our subsidiaries. We have the option to redeem
certain debt, before it matures, at specified prices.
LONG-TERM DEBT QUALIFYING AS RISK-BASED CAPITAL
Long-term debt that qualifies as risk-based capital generally must be unsecured
and subordinated with an original weighted-average maturity of at least five
years. Subordinated debt would be junior in right of payment to all other
indebtedness in the event of our liquidation. The following table presents
long-term debt that qualifies as risk-based capital. It represents all our
subordinated issues as of December 31.
<TABLE>
<CAPTION>
============================================================================================================
Total debt
J.P. Morgan (parent) Morgan Guaranty outstanding
-------------------- ---------------- --------------
Fixed Floating Fixed Floating
In millions rate rate rate rate 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONTRACTUAL MATURITY DATE
2000 ....................................... $ - $200 $ - $ - $ 200 $ 200
2002 ....................................... 200 446 211 - 857 859
2003 ....................................... 218 - - - 218 228
2004 ....................................... 671 - - - 671 662
2005 - 2009 ................................ 2 535 294 - - 2 829 1 833
Thereafter ................................. 1 101(a) 255 - - 1 356 1 332
- ------------------------------------------------------------------------------------------------------------
6 131 5 114
Less: amortization for risk-based capital
purposes(b) .............................. (929) (544)
- ------------------------------------------------------------------------------------------------------------
Total long-term debt qualifying as risk-based
capital 5 202 4 570
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts include $323 million of outstanding zero-coupon notes as of December
31, 1999. The principal amount of these notes is $2,396 million, of which
$10 million matures in 2017, $2,250 million matures in 2027, $100 million
matures in 2028, and $36 million matures in 2038. The weighted-average yield
to maturity on the notes, which do not bear interest, is 5.21%. The carrying
value increases as the discount on the notes is accreted to interest
expense.
(b) The balance of debt qualifying as risk-based capital is reduced 20% per year
during each of the last five years prior to maturity.
LONG-TERM DEBT NOT QUALIFYING AS RISK-BASED CAPITAL
The following table presents long-term debt that does not qualify as risk-based
capital. Most of the debt in this table is senior debt as of December 31. Senior
debt has a higher claim on our assets than junior or subordinated debt.
<TABLE>
<CAPTION>
=============================================================================================================
Total debt
J.P. Morgan (parent) Morgan Guaranty outstanding
-------------------- ---------------- --------------
Fixed Floating Fixed Floating
In millions rate rate rate rate 1999 1998
- -------------------------------------------------------------------------------------------------------------
CONTRACTUAL MATURITY DATE
<S> <C> <C> <C> <C> <C> <C>
1999 ....................................... $ - $ - $ - $ - $ - $10 314
2000 ....................................... 1 745(a) 4 283 642 535 7 205 4 848(a)
2001 ....................................... 814 1 158 947 531 3 450 2 600
2002 ....................................... - 754(d) 500 - 1 254 591
2003 ....................................... 351 168 323 - 842 902
2004 ....................................... 357 1 151 310 102 1 920 381
2005 - 2009 ................................ 969(b) 430 - 689 2 088 1 536(b)
Thereafter ................................. 404(c) 158 264(e) 227 1 053 1 048(c)(f)
British pound financing obligation(g) ...... 307 273
- -------------------------------------------------------------------------------------------------------------
18 119 22 493
Add: amortization for risk-based capital
purposes(h) .............................. 929 544
- -------------------------------------------------------------------------------------------------------------
Total long-term debt not qualifying as
risk-based capital 19 048 23 037
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to consolidated financial statements 95
<PAGE> 98
(a) Amounts include 2.5% cumulative Series A Commodity-Indexed Preferred
Securities (ComPS) with a face value of $50 million; a carrying value of
$40.2 million and $50 million as of December 31, 1999 and 1998,
respectively; and a maturity date, which may change as defined, of October
16, 2000. J.P. Morgan Index Funding Company I (JPMIFC),a wholly owned
subsidiary of J.P. Morgan, is the issuer of the ComPS. The ComPS redemption
price is indexed to the JPMCI Crude Oil Total Return Index and may be more
or less than the face amount of the ComPS. The proceeds of the sale of ComPS
and JPMIFC's common stock were used by JPMIFC to purchase $50 million, 2.5%
Series A Intercompany Notes (Intercompany Notes) of Morgan Guaranty. The
Intercompany Notes are the sole assets of JPMIFC and have the same terms as
the ComPS. The obligations of J.P. Morgan under agreements with JPMIFC, as
defined, constitute a full and unconditional guarantee, on a subordinated
basis, of payments due on the ComPS.
(b) Includes notes maturing in 2008 - 2009 for which the interest rates were
reset during 1998 for the following 10-year term based on the interest rate
for 10-year U.S. Treasury securities at that time. The carrying amount of
these notes was $425 million as of December 31, 1999 and 1998.
(c) Amounts include a convertible mortgage loan with a carrying value of $404
million and $405 million as of December 31, 1999 and 1998, respectively. The
interest rate on the loan increases 0.5% every four years from 7%, as set in
1988, to 9% in 2004. After 2008, the rate will be fixed based on the
interest rate for 10-year U.S. Treasury securities at that time. Beginning
in 2008 the loan may be converted, at the option of the lender, into a 49%
interest in the J.P. Morgan building at 60 Wall Street. If the loan is
converted, J.P. Morgan will have the option to lease the property for seven
10-year terms. J.P. Morgan has the right to prepay the debt if the lender
does not exercise the conversion option. The loan is collateralized by the
60 Wall Street building owned by Morgan Guaranty.
(d) Amounts include Series B Commodity-Indexed Preferred Securities (ComPS) with
a face value of $70.2 million; a carrying value of $70.2 million at December
31, 1999; and a maturity date, which may change as defined, of March 4,
2002. J.P. Morgan Index Funding Company I (JPMIFC), a wholly owned
subsidiary of J.P. Morgan, is the issuer of the ComPS. The proceeds of the
sale of ComPS and JPMIFC's common stock were used by JPMIFC to purchase
$70.2 million, Series B Intercompany Notes (Intercompany Notes) of Morgan
Guaranty. The Intercompany Notes including those in note (a) above are the
sole assets of JPMIFC and have the same terms as the ComPS. The obligations
of J.P. Morgan under agreements with JPMIFC, as defined, constitute a full
and unconditional guarantee, on a subordinated basis, of payments due on the
CompPS.
(e) Amounts represent $264 million of outstanding zero-coupon notes as of
December 31, 1999. The principal amount of these notes is $2,951 million.
The weighted-average yield to maturity on the notes, which do not bear
interest, is 16.51%. The carrying value increases as the discount on the
notes is accreted to interest expense.
(f) Amounts represent $306 million of outstanding zero-coupon notes as of
December 31, 1998. The principal amount of these notes is $3,221 million.
The weighted-average yield to maturity on the notes, which do not bear
interest, is 14.56%. The carrying value increases as the discount on the
notes is accreted to interest expense.
(g) Represents the sale of a 52.5% interest in J.P. Morgan's office building
complex in London. The transaction is treated as a financing obligation,
which is being partly amortized over a 25-year period, corresponding with
J.P. Morgan's initial lease term for the entire complex. A residual
liability is maintained and is treated as a 25 year participating mortgage
in accordance with the provisions of SOP 97-1. J.P. Morgan has renewal
options to lease this space for an additional 50 years. The lease contains
escalation clauses under which rental payments will be redetermined every
five years, beginning after year 15. Interest on the financing obligation is
imputed annually at an effective rate that varies depending on then-current
rental rates in the London real estate market. The table below presents the
aggregate amounts of minimum cash payments (at the December 31, 1999,
exchange rate) to be applied to the financing obligation for each of the
five years subsequent to December 31, 1999, and thereafter.
<TABLE>
<CAPTION>
==========================================================
In millions
- ----------------------------------------------------------
<S> <C>
2000 .......................................... $25
2001 .......................................... 26
2002 .......................................... 27
2003 .......................................... 27
2004 .......................................... 27
Thereafter .................................... 411
- ----------------------------------------------------------
Total cash payments ........................... 543
Less: interest ................................ (236)
- ----------------------------------------------------------
Balance outstanding at December 31, 1999 307
- ----------------------------------------------------------
</TABLE>
(h) The balance of debt qualifying as risk-based capital is reduced 20% per year
during each of the last five years prior to maturity.
The long-term debt tables above include non-U.S.-dollar-denominated debt
totaling $6,459 million and $4,943 million as of December 31, 1999 and 1998,
respectively. Of this amount, $3,871 million and $4,189 million were fixed-rate
instruments, while $2,588 million and $754 million were floating-rate
instruments, as of December 31, 1999 and 1998, respectively.
Also included in these long-term debt tables are notes issued under J.P.
Morgan's domestic and euro-medium term notes programs totaling $9,713 million
and $9,884 million as of December 31, 1999 and 1998, respectively. Based solely
on contractual terms, the weighted-average interest rate of these issues was
6.27% and 5.42% as of December 31, 1999 and 1998, respectively. Maturities of
these issues as of December 31, 1999, range from 2000 to 2038.
96 Notes to consolidated financial statements
<PAGE> 99
The ranges of interest rates associated with long-term debt as of December 31
are summarized in the following table for 1999 and 1998. They are based on the
yield to maturity for zero-coupon notes and contractual terms for all other
issues.
<TABLE>
<CAPTION>
================================================================================
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. dollar fixed-rate issues .............. 2.50 - 10.00% 2.50 - 10.00%
U.S. dollar floating-rate issues(a) ........ 1.00 - 8.50 4.97 - 8.00
Non-U.S. dollar fixed-rate issues .......... 1.00 - 22.00 2.00 - 22.00
Non-U.S. dollar floating-rate issues(a) .... 1.15 - 9.13 1.00 - 9.84
- --------------------------------------------------------------------------------
</TABLE>
(a) Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
The weighted-average interest rate for total long-term debt was 7.81% and 6.50%
as of December 31, 1999 and 1998, respectively. In order to modify exposure to
interest rate and currency exchange rate movements, J.P. Morgan utilizes
derivative instruments, primarily interest rate and currency swaps, in
conjunction with some of its debt issues. The effect of these instruments used
to modify this is included in the calculation of interest expense on the
associated debt. The weighted-average interest rate for total long-term debt,
including the effects of the related derivative instruments, was 6.20% and 5.51%
as of December 31, 1999 and 1998, respectively.
25. INCOME TAXES
============================================================================
The following table presents the current and deferred portions of income tax
expense included in the "Consolidated statement of income."
============================================================================
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- --------------------------- ---------------------------
In millions Current Deferred Total Current Deferred Total Current Deferred Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME TAX EXPENSE (BENEFIT)
U.S. ....................... $ 392 ($ 16) $ 376 $ 20 ($366) ($346) $221 ($151) $ 70
Foreign .................... 641 (24) 617 794 (53) 741 539 7 546
State and local ............ 43 23 66 66 (7) 59 106 (33) 73
- -----------------------------------------------------------------------------------------------------------------------
1 076 (17) 1 059 880 (426) 454 866 (177) 689
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The income tax (benefit)/expense 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 ($77 million) in 1999, $60
million in 1998, and $137 million in 1997.
The table below presents the components of deferred tax assets and liabilities
as of December 31 for 1999, 1998, and 1997.
<TABLE>
<CAPTION>
===========================================================================================================
In millions: December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Compensation and benefits ............................................. $1 376 $1 173 $ 971
Foreign tax credit carry forward
($130 expiring in 2003; $155 expiring in 2004) ........................ 285 200 -
Allowances for credit losses and other valuation adjustments .......... 156 363 430
Write-down of equity investment securities ............................ 125 31 22
Foreign operations .................................................... 52 105 62
Other ................................................................. 340 279 244
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets before valuation allowance .................. 2 334 2 151 1 729
Less: valuation allowance(a) .......................................... 120 120 120
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets 2 214 2 031 1 609
- -----------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Gains on debt and equity investment securities ........................ 405 434 521
Unremitted earnings ................................................... 150 104 91
Lease financing transactions .......................................... 120 130 144
Other ................................................................. 174 129 165
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 849 797 921
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) The valuation allowance is primarily related to the ability to recognize
tax benefits associated with foreign operations.
Notes to consolidated financial statements 97
<PAGE> 100
J.P. Morgan recorded an income tax liability of $12 million, $87 million, and
$256 million as of December 31, 1999, 1998, and 1997, respectively, related to
the net unrealized gains on investment securities classified as
available-for-sale.
The following table displays a reconciliation of the difference between the
expected U.S. statutory income tax rate and J.P. Morgan's effective income tax
rate.
<TABLE>
<CAPTION>
============================================================================================
Percentage of pretax income 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory tax rate .................................. 35.0% 35.0% 35.0%
Increase (decrease) due to:
State and local taxes, net of U.S. income tax effects .. 1.4 2.7 2.2
Tax-exempt income ...................................... (3.3) (7.7) (4.9)
Other .................................................. 0.9 2.0 (0.3)
- --------------------------------------------------------------------------------------------
Effective tax rate 34.0 32.0 32.0
- --------------------------------------------------------------------------------------------
</TABLE>
26. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES
================================================================================
In November 1996 JPM Capital Trust I (Trust I) issued $750 million of cumulative
capital securities (trust preferred securities) with a fixed rate of 7.54%. In
January 1997 JPM Capital Trust II (Trust II) issued $400 million of trust
preferred securities with a fixed rate of 7.95%. Trust I and Trust II are wholly
owned subsidiaries of J.P. Morgan.
The trust preferred securities:
- - have a stated value and liquidation preference of $1,000 per share
- - have no voting rights
- - qualify as tier 1 capital under current Federal Reserve guidelines
Trust I used the proceeds from the sale of its 7.54% trust preferred securities
and the sale of its common stock to J.P. Morgan to purchase $773.2 million of
7.54% junior subordinated debentures (intercompany debentures) of J.P. Morgan.
Trust II used the proceeds from the sale of its 7.95% trust preferred securities
and the sale of its common stock to J.P. Morgan to purchase $412.4 million of
intercompany debentures of J.P. Morgan. The intercompany debentures are
unsecured and rank subordinate and junior in right of payment to all other debt,
liabilities, and obligations of J.P. Morgan. Therefore, their claim on J.P.
Morgan's assets comes after all of J.P. Morgan's other obligations are
fulfilled. The intercompany debentures represent the sole assets of Trust I and
Trust II.
Interest on each of the trust preferred securities is cumulative, payable
semiannually, and fully and unconditionally guaranteed by J.P. Morgan - but only
if, and to the extent that, the semiannual interest payments are made on the
intercompany debentures by J.P. Morgan. The obligations of J.P. Morgan under the
trust agreements, as defined, constitute a full and unconditional guarantee by
J.P. Morgan of the trusts' obligations under the trust preferred securities
issued.
The $773.2 million 7.54% intercompany debentures mature on January 15, 2027.
Upon approval from the Federal Reserve, J.P. Morgan has the right to redeem the
7.54% intercompany debentures, starting on January 15, 2007. They can be
redeemed at 103.77% of the stated liquidation preference amount on or after
January 15, 2007, with this price declining 0.377% per year until January 15,
2017. After January 15, 2017, the price will equal 100% of the stated
liquidation preference amount.
The $412.4 million 7.95% intercompany debentures mature on February 1, 2027.
Upon approval from the Federal Reserve, J.P. Morgan has the right to redeem the
7.95% intercompany debentures, starting on February 1, 2007. They can be
redeemed at 103.975% of the stated liquidation preference amount on or after
February 1, 2007, with this price declining 0.398% per year until February 1,
2017. After February 1, 2017, the price will equal 100% of the stated
liquidation preference amount.
Proceeds from any redemption or maturity of the intercompany debentures held by
Trust I or Trust II would cause a mandatory redemption of the respective trust
preferred securities of Trust I or Trust II,having an aggregate liquidation
amount equal to the principal amount of respective intercompany debentures
redeemed.
98 Notes to consolidated financial statements
<PAGE> 101
In accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 53, J.P. Morgan is not required to disclose separate financial statements
for Trusts I and II because they are wholly owned, have no independent
operations, and are issuing securities that contain a full and unconditional
guarantee of their parent, J.P. Morgan.
The proceeds from the issuance of the 7.54% trust preferred securities were used
in 1997 to purchase $750 million of J.P. Morgan common stock in the open market
or through privately negotiated transactions. This action was approved by the
Board of Directors in December 1996.
27. PREFERRED STOCK
===============================================================================
Authorized shares of preferred stock totaled 10,000,000 as of December 31, 1999
and 1998. With the exception of fixed cumulative preferred stock, Series H
shares, J.P. Morgan may redeem the outstanding preferred stock, in whole or in
part, at its option, for the stated value plus accrued and unpaid dividends. The
Series H shares may not be redeemed before March 31, 2006. All preferred stock
has a dividend preference over other stock in the paying of dividends, holds a
preference in the liquidation of assets, and is generally nonvoting. This table
presents preferred stock outstanding as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
====================================================================================================================================
Authorized, issued, and
outstanding shares Dividend rate(a)
------------------------ ----------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable rate cumulative preferred stock, Series A
(stated value: $100 per share) ................................................. 2 444 300 2 444 300 5.00% 5.00%
Variable cumulative preferred stock, Series B, C, D, E, and F (50 000
shares each series; stated value: $1 000 per share) ............................ 250 000 250 000 4.35-5.40 4.23-4.38
Fixed cumulative preferred stock, Series H (stated value:
$500 per share) ................................................................ 400 000 400 000 6.63 6.63
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Series A: The quarterly dividend rate is determined by a formula based on
the interest rates of certain actively traded U.S. Treasury obligations. In no
event will the quarterly rate be less than 5.00% or greater than 11.50% per
annum. The Series A preferred stock qualifies as tier I capital.
Series B, C, D, E, and F: Dividend rates for each series are determined
periodically by either auction or remarketing. The dividend rates may not exceed
certain maximums that are 110% to 200% of various market interest rates,
depending on the prevailing credit rating of the instrument at the dividend
determination dates and the duration of the then-current dividend periods. The
dividend periods may vary from one day to 30 years, depending on the dividend
determination method used. During 1999 and 1998 J.P. Morgan reset the dividend
rates approximately every 49 days. The dividend rates stated above represent the
range of those in effect at year-end. These series of preferred stock qualify as
tier II capital.
Series H: The quarterly dividend rate is paid at the fixed rate of 6.625% per
annum. The Series H preferred stock qualifies as tier I capital.
28. CAPITAL REQUIREMENTS
===============================================================================
J.P. Morgan, its subsidiaries, and certain foreign branches of its bank
subsidiary Morgan Guaranty Trust Company of New York are subject to regulatory
capital requirements of U.S. and foreign regulators. Our primary federal banking
regulator, the Board of Governors of the Federal Reserve System (Federal Reserve
Board), establishes minimum capital requirements for J.P. Morgan, the
consolidated bank holding company, and some of our subsidiaries, including
Morgan Guaranty. These requirements ensure that banks and bank holding companies
meet specific guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under generally
accepted accounting principles. Failure to meet these requirements can result in
actions by regulators that could have a direct material impact on our financial
statements. The capital of J.P. Morgan and our principal subsidiaries, Morgan
Guaranty and J.P. Morgan Securities Inc. (JPMSI), exceeded the minimum
requirements set by each regulator as of December 31, 1999.
J.P. Morgan's risk-based capital ratios are calculated in accordance with the
Federal Reserve Board's market risk capital guidelines. These guidelines require
our risk-based capital ratios to take into account general market risk and
specific issuer risk of our debt and equity trading portfolios, as well as
general market risk associated with all trading and nontrading foreign exchange
and commodity positions. The guidelines, however, continue to exclude the effect
of SFAS No. 115. The calculation of risk-based capital ratios for J.P. Morgan,
the bank holding company, includes the capital and assets of JPMSI, our section
20 subsidiary.
Notes to consolidated financial statements 99
<PAGE> 102
CAPITAL RATIOS AND AMOUNTS
The following tables show the risk-based capital and leverage ratios and amounts
for J.P. Morgan and Morgan Guaranty as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
===============================================================================================
1999 1998
------------------------ ------------------------
Dollars in millions: December 31 Amounts(a) Ratios(b) Amounts(c) Ratios(b)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier I capital
J.P. Morgan .................... $11 525 8.8% $11 213 8.0%
Morgan Guaranty ................ 10 508 9.2 10 337 8.7
- -----------------------------------------------------------------------------------------------
Total risk-based capital
J.P. Morgan .................... 16 935 12.9 16 454 11.7
Morgan Guaranty ................ 13 863 12.1 14 251 12.0
- -----------------------------------------------------------------------------------------------
Leverage
J.P. Morgan .................... 4.7 3.9
Morgan Guaranty ................ 6.7 5.3
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required
minimum tier I capital of $5.3 billion and $4.6 billion, respectively, as of
December 31, 1999. The required minimum total risk-based capital for J.P.
Morgan and Morgan Guaranty was $10.5 billion and $9.1 billion, respectively,
as of December 31, 1999.
(b) Pursuant to Federal Reserve Board guidelines, the minimum tier I capital,
total risk-based capital, and leverage ratios are 4%, 8%, and 3%,
respectively, for bank holding companies and banks.
(c) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required
minimum tier I capital of $5.6 billion and $4.8 billion, respectively, as of
December 31, 1998. The required minimum total risk-based capital for J.P.
Morgan and Morgan Guaranty was $11.2 billion and $9.5 billion, respectively,
as of December 31, 1998.
J.P. MORGAN RISK-BASED CAPITAL
The following table shows the components of J.P. Morgan's risk-based capital as
of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
===============================================================================================================
December 31(a)
---------------------
In millions 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stockholders' equity ........................................................... $10 703 $10 422
Adjustable and fixed-rate cumulative preferred stock .................................. 444 444
Company-obligated mandatorily redeemable preferred securities of subsidiaries ......... 1 150 1 150
Less: investments in certain subsidiaries and goodwill(b) ............................. 772 803
- ---------------------------------------------------------------------------------------------------------------
TIER I CAPITAL ........................................................................ 11 525 11 213
- ---------------------------------------------------------------------------------------------------------------
Variable cumulative preferred stock ................................................... 248 248
Long-term debt qualifying as risk-based capital ....................................... 5 202 4 570
Qualifying allowances for credit losses and other valuation adjustments ............... 432 906
Less: investments in certain subsidiaries(b) .......................................... 472 483
- ---------------------------------------------------------------------------------------------------------------
TIER II CAPITAL ....................................................................... 5 410 5 241
- ---------------------------------------------------------------------------------------------------------------
TOTAL RISK-BASED CAPITAL .............................................................. 16 935 16 454
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Certain amounts are adjusted to reflect regulatory rules.
(b) Certain portions of our investments in certain subsidiaries are deducted
from both tier I and tier II capital.
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
I capital, total capital, and leverage ratios of 6%, 10%, and 5%, respectively,
under standards provided by the regulatory framework for prompt corrective
action and the Federal Reserve Board.
Bank holding companies also have guidelines that determine the capital levels at
which they shall be considered well capitalized. According to these guidelines,
a bank holding company is considered well capitalized if it has minimum tier I
capital, total capital, and leverage ratios of 6%, 10%, and 3%, respectively.
As of December 31, 1999 and 1998, 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 December 31, 1999, which would change J.P. Morgan's and
Morgan Guaranty's well capitalized status.
100 Notes to consolidated financial statements
<PAGE> 103
RISK-ADJUSTED ASSETS
The following table sets forth the consolidated risk-adjusted assets of J.P.
Morgan.
<TABLE>
<CAPTION>
===========================================================================================================================
1999 1998
---------------------- --------------------
Risk- Risk-
Balance adjusted Balance adjusted
In billions: December 31 sheet balance sheet balance
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks and interest-earning deposits with banks ....... $ 4.8 $ 1.6 $ 3.6 $ 0.9
Debt investment securities ............................................. 14.3 1.9 36.2 3.0
Equity investment securities ........................................... 1.7 1.3 1.2 1.1
Trading account assets(a) .............................................. 117.6 48.8 113.9 61.1
Resale agreements and federal funds sold ............................... 36.0 5.9 31.7 5.2
Securities borrowed .................................................... 34.7 14.5 30.8 12.7
Loans, net ............................................................. 26.6 23.3 25.0 19.3
Premises and equipment, net ............................................ 2.0 2.0 1.9 1.9
Accrued interest and accounts receivable and other assets .............. 23.2 10.8 16.8 11.9
Lending commitments .................................................... 19.8 21.7
Securities lending indemnifications and other credit commitments ....... 1.5 1.4
- ---------------------------------------------------------------------------------------------------------------------------
Total 260.9 131.4 261.1 140.2
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Also includes amount of risk adjusted assets related to credit risk
associated with nontrading derivatives, which is not significant.
NET CAPITAL REQUIREMENT OF JPMSI
J.P. Morgan Securities Inc. (JPMSI) is subject to the Securities and Exchange
Commission (SEC) Uniform Net Capital Rule, which requires it to maintain a
minimum net capital. JPMSI has elected to compute its net capital requirement in
accordance with the Alternative Method under SEC Rule 15c3-1(a)(ii), which
requires a broker or dealer to maintain at all times net capital, as defined, at
the greater of $1 million or 2% of aggregate debit items arising from customer
transactions.
As of December 31, 1999 and 1998, JPMSI had net capital, as defined under such
rules, of $1,117 million and $1,023 million, respectively, compared with net
capital requirements of $127 million and $76 million, respectively. As a result,
JPMSI had excess net capital of $990 million and $947 million as of December 31,
1999 and 1998, respectively.
29. EMPLOYEE BENEFITS
===============================================================================
DEFINED BENEFIT PLANS
We have noncontributory defined benefit pension plans covering most of our
regular employees. In addition, certain U.S. employees hired before February 1,
1989, may be eligible for postretirement health care and life insurance when
they retire, though we have no contractual obligation to provide this coverage.
Our cost to provide postretirement benefits to non-U.S. employees has not been
material.
Pension plan assets are managed by trustees and are invested primarily in
fixed-income securities, listed stocks, and commingled pension trust funds.
Other postretirement benefit obligations are funded with corporate-owned life
insurance (COLI) purchased on the lives of eligible employees and retirees.
Assets of the COLI policy are held in a separate account with the insurance
company. The insurance company invests the cash value of the policy in equities,
bonds, and other debt securities. While we own the COLI policy, the COLI
proceeds (death benefits, withdrawals, and other distributions) may be used only
to reimburse J.P. Morgan for its net postretirement claim payments and related
administrative expenses.
Assets of our funded pension plans exceeded their accumulated benefit
obligations as of September 30, 1999 and 1998 (the dates of the actuarial
valuations). Accumulated benefit obligations for unfunded pension plans were $59
million as of September 30, 1999, and $66 million as of September 30, 1998. The
benefit obligations projected for these unfunded pension plans were $62 million
and $70 million as of September 30, 1999 and 1998, respectively.
Notes to consolidated financial statements 101
<PAGE> 104
The following tables present information related to our benefit plans, including
amounts recorded on the "Consolidated balance sheet" and the components of net
periodic benefit cost. Settlement gains resulted mainly from the conversion of
several pension plans from defined benefit to defined contribution. Curtailment
gains reflect reduced liabilities due to employee terminations.
<TABLE>
<CAPTION>
==========================================================================================================
Pension benefits Other postretirement benefits
----------------- -----------------------------
In millions 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RECONCILIATION OF BENEFIT OBLIGATION
Benefit obligation, beginning of year ........ $1 468 $1 345 $ 218 $ 210
Service cost ................................. 52 63 4 5
Interest cost ................................ 91 94 14 15
Participant contributions .................... 1 -- -- --
Benefits paid ................................ (113) (67) (9) (10)
Actuarial (gains)/losses ..................... (125) 84 (25) 15
Plan amendments .............................. -- 10 (5) (12)
Settlements .................................. -- (53) -- --
Curtailments ................................. (5) (17) (2) (5)
Effect of foreign exchange rates ............. (5) 9 -- --
- -----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1 364 1 468 195 218
- -----------------------------------------------------------------------------------------------------------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets, beginning of year . 1 645 1 555 222 168
Actual return on plan assets ................. 239 78 43 18
Employer contributions ....................... 19 84 81 40
Participant contributions .................... 1 -- -- --
Benefits paid ................................ (110) (64) -- --
Plan expense ................................. (2) -- -- --
COLI proceeds ................................ -- -- (13) (4)
Settlements .................................. -- (16) -- --
Effect of foreign exchange rates ............. (8) 8 -- --
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1 784 1 645 333 222
- -----------------------------------------------------------------------------------------------------------
FUNDED STATUS
Funded status as of September 30 ............. 419 177 137 4
Unrecognized net actuarial (gains) ........... (312) (84) (124) (85)
Unrecognized prior service cost .............. 30 34 (13) (12)
Unrecognized net asset at transition ......... (6) (14) -- --
Fourth-quarter expense ....................... (1) (6) -- --
Fourth-quarter contributions ................. 7 6 (3) 79
Fourth-quarter net benefit claims ............ -- -- 2 2
- -----------------------------------------------------------------------------------------------------------
Net amount recognized 137 113 (1) (12)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The following table provides the amounts recognized in the "Consolidated balance
sheet" as of December 31 of both years.
<TABLE>
<CAPTION>
======================================================================================================================
Other
postretirement
Pension benefits benefits
---------------- -----------------
In millions 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid benefit cost recorded in Other assets ................................. $ 230 $ 213 $ 16 $ --
Accrued benefit liability recorded in Accounts payable and accrued expenses ... (93) (100) (17) (12)
- ----------------------------------------------------------------------------------------------------------------------
Net amount recognized 137 113 (1) (12)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
102 Notes to consolidated financial statements
<PAGE> 105
The following table provides the components of net periodic benefit cost for the
plans reflected in Employee compensation and benefits in the "Consolidated
statement of income" for fiscal years 1999, 1998, and 1997.
<TABLE>
<CAPTION>
=========================================================================================================================
Other
postretirement
Pension benefits benefits
------------------------- ----------------------------
In millions 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost .................................................. $ 52 $ 62 $ 56 $ 4 $ 5 $ 4
Interest cost ................................................. 91 94 90 14 15 15
Expected return on plan assets................................. (130) (119) (112) (24) (15) (11)
Amortization of:
Net transition assets ....................................... (8) (7) (7) -- -- --
Prior service cost .......................................... 3 2 2 (4) -- --
Net actuarial gains ......................................... (1) (2) (2) (4) (5) (4)
- --------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost ..................................... 7 30 27 (14) -- 4
Curtailment gains ............................................. (5) (11) -- (2) (5) --
Settlement gains .............................................. -- (14) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost after curtailments and settlements 2 5 27 (16) (5) 4
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the assumptions used in the measurement of the firm's
benefit obligation.
<TABLE>
<CAPTION>
=======================================================================================================================
Other
postretirement
Pension benefits benefits
------------------------ --------------------------
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30
Discount rate ............................... 7.0% 6.3% 7.0% 7.5% 6.5% 7.3%
Expected return on plan assets............... 8.7 8.7 8.7 9.0 9.0 9.0
Rate of compensation increase................ 3.6 3.6 4.7 3.6 3.8 4.8
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 10.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2000. The rate was assumed to
decrease gradually each year to a rate of 5.5% in 2010 and to remain at that
level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
================================================================================
In millions 1% increase 1% decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on annual expense .................... $ 2 $ (1)
Effect on benefit obligations ............... 15 (12)
- --------------------------------------------------------------------------------
</TABLE>
DEFINED CONTRIBUTION PLANS
J.P. Morgan maintains several defined contribution pension plans. The most
significant is the Deferred Profit Sharing/401(k) Plan, covering substantially
all U.S. employees. We contribute to this plan based on our financial
performance, and participants may make pretax contributions to tax-deferred
investment portfolios. Non-U.S. defined contribution plans are administered in
accordance with local laws. Total expense, which represents J.P. Morgan's
contribution for these plans, was $53 million for 1999, $28 million for 1998,
and $27 million for 1997.
Notes to consolidated financial statements 103
<PAGE> 106
30. STOCK OPTIONS AND STOCK AWARDS
================================================================================
J.P. Morgan's stock option and stock award plans provide for the grant of
stock-related awards to key employees, including stock options, restricted stock
awards, stock bonus awards, stock unit awards, and deferred stock payable in
stock.
To satisfy awards granted under stock option and stock award plans, we may make
common stock available from authorized but unissued shares. We may also purchase
shares in the open market at various times during the year. Shares available for
future grants under the Stock Incentive Plans totaled 9,110,950 as of December
31, 1999. A portion of these shares may be made available from treasury shares.
Shares authorized for future grants under the Stock Bonus Plan represent 6.5% of
outstanding shares. All shares authorized under the Stock Bonus Plan must be
settled in treasury shares. Compensation cost recognized for our stock award
plans in the "Consolidated statement of income" for 1999, 1998, and 1997 was
$659 million, $327 million, and $381 million, respectively.
If we had determined compensation cost for our stock-based compensation plans
based on fair value at the award grant dates consistent with the method of SFAS
No. 123, the net income and earnings per share for 1999, 1998 and 1997 would
approximate the pro forma amounts in the following table.
<TABLE>
<CAPTION>
===========================================================================================================
<S> <C> <C> <C>
In millions, except share data 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Net income(a) As reported ......................... $2 055 $963 $1 465
Pro forma ........................... 1 962 913 1 418
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share As reported ......................... $11.16 $5.08 $7.71
Pro forma ........................... 10.65 4.81 7.46
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share As reported ......................... $10.39 $4.71 $7.17
Pro forma ........................... 9.91 4.45 6.94
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) For pro forma purposes, the fair value of stock option awards is amortized
over the relative vesting periods; the fair value of other stock awards is
generally expensed entirely in the year of performance to which it relates. As
of December 31, 1999, 1998, and 1997, the unamortized expense, net of taxes, of
nonvested options for pro forma purposes was $145 million, $96 million, and $62
million, respectively.
STOCK OPTIONS
Stock options under the Stock Incentive and Stock Bonus Plans are issued to
employees at exercise prices not less than the market value of the stock on the
grant date. In accordance with APB Opinion No. 25 and related Interpretations,
no compensation cost has been recognized for fixed stock option plans. Stock
options are generally exercisable one to five years following the date of grant
and have a life of 10 years from the date of grant. Options generally vest
ratably over the vesting period, which approximates 3 years on average.
J.P. Morgan uses a modified Black-Scholes option-pricing model to estimate the
fair value of each option grant. We use this method because employee stock
options are much different from traded options and because changes in subjective
assumptions can materially affect the fair value estimate. The modified
Black-Scholes model takes into account the estimated lives of the options and an
expected dividend yield based on historical dividend rate increases.
The following weighted-average assumptions were used as inputs to the modified
Black-Scholes model for grants in 1999, 1998, and 1997, respectively:
- - dividend-yield of 2.94%, 2.93%, and 3.26%
- - five year monthly historical volatility of 26.1%, 19.3%, and 16.7%
- - risk-free interest rate of 5.71%, 5.57%, and 6.35%
- - expected life of seven years
104 Notes to consolidated financial statements
<PAGE> 107
A summary of our stock option activity and related information follows.
<TABLE>
<CAPTION>
==================================================================================================================================
1999 1998 1997
----------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ....... 26 733 243 $ 86.75 25 078 738 $ 74.02 25 072 115 $ 64.45
Granted ................................ 6 338 697 135.25 5 307 392 129.98 4 687 145 107.80
Exercised .............................. (4 161 894) 64.15 (3 283 539) 58.38 (4 554 749) 55.88
Forfeited .............................. (586 038) 117.93 (366 455) 96.59 (125 773) 80.41
Expired ................................ -- -- (2 893) 31.31 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at year-end ................ 28 324 008 100.28 26 733 243 86.75 25 078 738 74.02
- ----------------------------------------------------------------------------------------------------------------------------------
Exercisable at year-end ................ 15 208 644 79.37 15 210 649 68.11 15 669 676 61.87
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options
granted during the year 37.70 29.23 22.60
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1999.
<TABLE>
<CAPTION>
==================================================================================================================================
Options outstanding Options exercisable
--------------------------------------------------- ---------------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life (years) price exercisable price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$31-$61 ...................... 4 650 243 3.86 $ 58.31 4 646 078 $ 58.31
$65-$85 ...................... 7 864 306 4.66 74.20 6 664 306 72.25
$100-$136 .................... 15 809 459 8.61 125.60 3 898 260 116.65
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options are generally granted in the middle of the year.
RESTRICTED STOCK AWARDS
Under the Stock Incentive and Stock Bonus Plans, we provide restricted stock
awards in the form of share credits. Each share credit is equivalent to one
share of J.P. Morgan common stock. Restricted stock awards generally become
fully vested on the fifth anniversary of the award date.
The participant may receive the award payment as soon as the award has become
vested, but it may be deferred pursuant to the participant's election or as
specified by the committee of the Board of Directors that administers the
plans, in each case subject to the discretion of such committee.
As of December 31, 1999, total share credits granted were 3,597,066,
representing previously granted restricted stock awards; as of December 31,
1998 and 1997, this amount was 3,584,551 share credits and 3,585,911 share
credits, respectively. These share credits include credits attributable to
dividend equivalents. For the 1999 award year, 609,813 share credits were
granted at the weighted-average fair value of $121.59 per share. For the 1998
and 1997 award years, 222,693 and 422,594 share credits were granted at the
weighted-average fair value of $107.00 and $102.67 per share, respectively.
STOCK BONUS AWARDS
Under the Stock Incentive and Stock Bonus Plans, we provide stock bonus
awards that are substantially similar to restricted stock awards, except that
stock bonus awards granted since 1997 generally become fully vested on the
second anniversary of the award date and are subject to an additional
three-year holding period. (Stock bonus awards made before 1997 generally
become fully vested on the third anniversary of the award date.) The
participant may receive the award payment as soon as the award has become
vested and the holding period, if applicable, has been satisfied, but it may
be deferred pursuant to the participant's election or as specified by the
committee of the Board of Directors administering the plans, in each case
subject to the discretion of such committee.
105 Notes to consolidated financial statements
<PAGE> 108
As of December 31, 1999, 1998, and 1997, share credits representing previously
granted stock bonus awards totaled 9,984,230, 8,348,763, and 5,890,648,
respectively. These share credits include credits attributable to dividend
equivalents. For the 1999 award year, 4,852,015 share credits were granted at
the weighted-average fair value of $122.90 per share. For the 1998 and 1997
award years, 2,484,849 and 3,079,353 share credits were granted at the
weighted-average fair values of $107.29 and $101.47 per share, respectively.
STOCK UNIT AWARDS
Under the Stock Bonus Plan, we provide stock unit awards that are similar to
restricted stock and stock bonus awards. However, the value of a stock unit
award, not including the value of dividend equivalents accrued on the award,
will never exceed (though it may be less than) the dollar value of the original
award. Stock unit awards granted since 1997 generally become fully vested on the
second anniversary of the award date and are subject to an additional three-year
holding period. Stock unit awards granted before 1997 generally become fully
vested on the third anniversary of the award date. The participant may receive
the award payment as soon as the award has become vested and the holding period,
if applicable, has been satisfied.
As of December 31, 1999, 1998, and 1997, share credits representing previously
granted stock units totaled 384,645, 421,991, and 324,382, respectively. These
share credits include credits attributable to dividend equivalents. For the 1999
award year, 118,800 share credits were granted at the weighted-average fair
value of $123.28 per share. For the 1998 and 1997 award years, 75,741 and
172,459 share credits were granted at the weighted-average fair value of $106.84
and $101.47 per share, respectively.
DEFERRED STOCK PAYABLE IN STOCK
J.P. Morgan's Incentive Compensation Plans allow eligible employees to defer all
or a portion of their current annual incentive compensation into several types
of accounts - including a J.P. Morgan common stock account. Deferral amounts are
not subject to forfeiture. The amounts that employees defer into the J.P. Morgan
common stock account are converted into share credits. They earn dividend
equivalents during the deferral period. Commencing in the year following
retirement or termination of employment, a participant's balance in the J.P.
Morgan common stock account is distributed in the form of J.P. Morgan common
stock.
As of December 31, 1999 and 1998, share credits payable in stock - including
share credits attributable to dividend equivalents - totaled 2,397,620 and
2,426,232 credits, respectively. For the 1999 award year, 117,946 share credits
were granted at the weighted-average fair value of $126.63 per share. For the
1998 and 1997 award years, 56,646 and 259,690 share credits were granted at the
weighted-average fair value of $105.06 and $112.85 per share, respectively.
Except for options, stock awards are generally granted in January following the
award year. In January 2000 5,146,223 share credits representing stock awards
other than options were granted.
PERFORMANCE PLAN
In July 1998 the firm adopted the 1998 Performance Plan of J.P. Morgan & Co.
Incorporated and Affiliated Companies ("Performance Plan"). Awards granted under
the Performance Plan will be earned based on the achievement of firmwide
performance goals (including significantly improved risk-adjusted returns,
earnings growth, and expense management) during the 1998 - 2000 performance
period. Unless determined otherwise, the awards, if any, will be paid in cash in
January 2001.
106 Notes to consolidated financial statements
<PAGE> 109
]31. EARNINGS PER SHARE
================================================================================
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding, which includes
contingently issuable shares for which all necessary conditions for issuance
have been satisfied. Diluted EPS includes the determinants of basic EPS and, in
addition, takes into account dilutive potential common shares that were
outstanding during the period.
The following table presents the computation of basic and diluted EPS for the
years ended December 31.
<TABLE>
<CAPTION>
=======================================================================================================================
Dollars in millions, except share data .............................. 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income .......................................................... $2 055 $963 $1 465
Preferred stock dividends and other ................................. (35) (35) (36)
- -----------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share - income
available to common stockholders ................................... 2 020 928 1 429
- -----------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings per share - weighted-average shares .. 180 967 767 182 437 574 185 241 295
Effect of dilutive securities:
Options(a) ........................................................ 5 065 978(b) 5 789 576(c) 6 893 623
Other stock awards(d) ............................................. 8 373 051 8 914 892 7 109 024
Other(e) .......................................................... 16 000 59 016 74 373
- -----------------------------------------------------------------------------------------------------------------------
13 455 029 14 763 484 14 077 020
- -----------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - weighted-average
number of common shares and dilutive potential common shares ....... 194 422 796 197 201 058 199 318 315
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share ............................................ $11.16 $5.08 $7.71
Diluted earnings per share .......................................... 10.39 4.71 7.17
- -----------------------------------------------------------------------------------------------------------------------
</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 6,055,500 shares of our common stock at $135.72 per
share were outstanding as of December 31, 1999, but were not included in the
computation of diluted EPS. The inclusion of such options using the treasury
stock method would have an antidilutive effect on the diluted EPS calculation
because the options' exercise price was greater than the average market price of
our common shares for 1999. These options expire on July 15, 2009.
(c) Options to purchase 5,110,500 shares of our common stock at $130.94 per
share were outstanding as of December 31, 1998, but were not included in the
computation of diluted EPS. The inclusion of such options using the treasury
stock method would have an antidilutive effect on the diluted EPS calculation
because the options' exercise price was greater than the average market price of
our common shares for 1998. These options expire on July 15, 2008.
(d) Weighted-average incremental shares for other stock awards include
restricted stock and stock bonus awards. The related tax benefits are also
considered. See note 30 for further information.
(e) Includes the dilutive effect of the 4.75% convertible debentures for 1998
and 1997, which matured at the end of 1998. 1999 includes the dilutive effect of
transactions related to the purchase of treasury shares.
32. COMMITMENTS AND CONTINGENT LIABILITIES
================================================================================
PLEDGED ASSETS
Excluding mortgaged properties, assets on the "Consolidated balance sheet" of
approximately $102.5 billion as of December 31, 1999, and approximately $93.1
billion as of December 31, 1998, were pledged as collateral for borrowings, to
qualify for fiduciary powers, to secure public monies as required by law, and
for other purposes.
RESALE AND REPURCHASE AGREEMENTS
As of December 31, 1999 and 1998, we had commitments to enter into future resale
agreements of $4.3 billion and $5.4 billion, respectively; and commitments to
enter into future repurchase agreements of $1.2 billion and $6.3 billion,
respectively.
Notes to consolidated financial statements 107
<PAGE> 110
SEGREGATED ASSETS
In compliance with rules and regulations established by domestic and foreign
regulators, cash of $1,656 million and $1,068 million and securities with a
market value of $3,031 million and $3,207 million were segregated in special
bank accounts for the benefit of securities and futures brokerage customers as
of December 31, 1999 and 1998, respectively.
RENTAL EXPENSE AND COMMITMENTS
Operating expenses include net rentals of $87 million in 1999, $143 million in
1998, and $83 million in 1997.
As of December 31, 1999, our minimum rental commitments for noncancelable leases
of premises and equipment are $1,043 million in aggregate. Certain leases
contain renewal options and escalation clauses. For each of the five years after
December 31, 1999, our minimum rental commitments for noncancelable leases of
premises and equipment are:
- - $111 million in 2000
- - $94 million in 2001
- - $82 million in 2002
- - $76 million in 2003
- - $70 million in 2004
SUBSIDIARY AND AFFILIATE OBLIGATIONS
In the ordinary course of business, J.P. Morgan guarantees the performance of
certain obligations of certain subsidiaries and affiliates. We do not expect
that these agreements will have a material effect on the results of our
operations.
LEGAL ACTION
Various legal actions and proceedings are pending against or involve J.P. Morgan
and our subsidiaries. After reviewing with counsel all actions and proceedings
pending against or involving us, management considers that the outcome of such
matters will not have a material adverse effect on J.P. Morgan's financial
condition.
33. INTERNATIONAL OPERATIONS
================================================================================
For financial reporting purposes, we divide our operations into domestic and
international components. As these operations are highly integrated, estimates
and subjective assumptions have been made to apportion revenue and expense
between domestic and international components. In 1999, we changed our estimates
and assumptions to be consistent with the allocations used for our business
segments as reported in Note 3. Prior period amounts have been restated to
reflect this allocation methodology.
ASSETS
In general, we distribute assets on the basis of counterparty location, with the
exception of premises and equipment, which is allocated to the region in which
the asset is recorded.
REVENUES AND EXPENSES
- - Client-focused revenues are allocated between the regions responsible for
managing the client relationship and the regions responsible for product
execution and risk management
- - Revenues from proprietary investing and trading activities and equity
investments are allocated based on the location of the risk taker
- - Expenses are allocated based on the estimated cost associated with
servicing each region's client base. Corporate revenues and expenses are
allocated primarily to the region in which they are recorded. Certain
centrally managed expenses are allocated based on the underlying activity.
108 Notes to consolidated financial statements
<PAGE> 111
Assets as of December 31 and results for the years ended December 31, 1999,
1998, and 1997 were distributed among domestic and international operations as
presented in the following table.
<TABLE>
<CAPTION>
=============================================================================================================================
Total Total Total Pretax Income tax Net
In millions assets revenues(a) expenses income expense income
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Europe(b) ........................... $ 91 404 $3 166 $1 806 $1 360 $ 544 $ 816
Asia-Pacific ........................ 16 444 675 533 142 57 85
Latin America(c) .................... 9 874 793 263 530 212 318
- ----------------------------------------------------------------------------------------------------------------------------
Total international operations ...... 117 722 4 634 2 602 2 032 813 1 219
Domestic operations(d) .............. 143 176 4 222 3 140 1 082 246 836
- ----------------------------------------------------------------------------------------------------------------------------
Total 260 898 8 856 5 742 3 114 1 059 2 055
- ----------------------------------------------------------------------------------------------------------------------------
1998
Europe(b) ........................... $ 86 144 $2 376(e) $1 979(g) $ 397 $ 159 $ 238
Asia-Pacific ........................ 15 215 866(f) 548(g) 318 127 191
Latin America(c) .................... 11 556 268 232(g) 36 14 22
- ----------------------------------------------------------------------------------------------------------------------------
Total international operations ...... 112 915 3 510 2 759 751 300 451
Domestic operations(d) .............. 148 152 3 445 2 779(g) 666 154 512
- ----------------------------------------------------------------------------------------------------------------------------
Total 261 067 6 955 5 538 1 417 454 963
- ----------------------------------------------------------------------------------------------------------------------------
1997
Europe(b) ........................... $ 88 018 $2 476 $1 713 $ 763 $ 305 $ 458
Asia-Pacific ........................ 22 791 936 507 429 171 258
Latin America(c) .................... 12 885 390 234 156 63 93
- ----------------------------------------------------------------------------------------------------------------------------
Total international operations ...... 123 694 3 802 2 454 1 348 539 809
Domestic operations(d) .............. 138 465 3 418 2 612 806 150 656
- ----------------------------------------------------------------------------------------------------------------------------
Total 262 159 7 220 5 066 2 154 689 1 465
- ----------------------------------------------------------------------------------------------------------------------------
</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. Total assets, revenue
and expenses relate substantially to United States operations for all years.
(e) Includes 1998 second-quarter net pretax gain of $131 million related to the
sale of our global trust and agency services business. Refer to note 5.
(f) Includes 1998 third-quarter net pretax gain of $56 million related to the
sale of our investment management business in Australia. Refer to note 5.
(g) Total expenses include 1998 special charges of $358 million, which was
recorded as follows: $183 million in Europe, $22 million in Asia-Pacific,
$3 million in Latin America, and $150 million in domestic operations. Refer
to note 4.
The table below presents the composition of international assets as of December
31.
<TABLE>
<CAPTION>
===============================================================================================
In millions: December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning deposits with banks:
At overseas branches or subsidiaries of U.S. banks .. $ 613 $ 241 $ 23
Other ............................................... 1 710 1 455 1 832
Loans, net ............................................ 11 313 12 723 17 797
Investment securities ................................. 1 451 642 2 580
Trading account assets ................................ 69 902 74 609 73 328
Other assets .......................................... 32 733 23 245 28 134
- -----------------------------------------------------------------------------------------------
Total international assets 117 722 112 915 123 694
- -----------------------------------------------------------------------------------------------
</TABLE>
Notes to consolidated financial statements 109
<PAGE> 112
34. CERTAIN RESTRICTIONS: SUBSIDIARIES
================================================================================
Under the Federal Reserve Act and New York State law, certain legal restrictions
limit the amount of dividends that Morgan Guaranty - a state member bank - can
declare. The most restrictive test requires approval of the Federal Reserve
Board if Morgan Guaranty's declared dividends exceed the net profits for the
current year combined with the preceding two years' net profits. The calculation
of the amount available for payment of dividends is based on net profits reduced
by the amount of dividends declared. As of December 31, 1999, the cumulative
retained net profits for the years 1999 and 1998 available for distribution as
dividends in 2000 without approval of the Federal Reserve Board were
approximately $48 million, excluding the net income earned in 2000.
The Federal Reserve Board may prohibit the payment of dividends if it determines
that circumstances relating to the financial condition of a bank are such that
the payment of dividends would be an unsafe and unsound practice.
U.S. federal law also places restrictions on certain types of transactions
engaged in by insured banks and their subsidiaries with certain affiliates,
including, in the case of Morgan Guaranty, J.P. Morgan and its non-banking
subsidiaries. "Covered transactions" are limited to 20% of capital and surplus,
as defined, and covered transactions with any one such affiliate are limited to
10% of capital and surplus. These transactions include loans and extensions of
credit to such an affiliate; purchases of assets from such an affiliate; and any
guarantees, acceptances, and letters of credit issued on behalf of such an
affiliate. Such loans, extensions of credit, guarantees, acceptances, and
letters of credit must be collateralized. In addition, a wide variety of
transactions engaged in by insured banks and their subsidiaries with such
affiliates must be made on terms and under circumstances that are at least as
favorable to the bank or subsidiary concerned as those prevailing at the time
for comparable transactions with nonaffiliated companies.
Certain other subsidiaries are subject to various restrictions, mainly
regulatory requirements, that may limit cash dividends and advances to J.P.
Morgan and that establish minimum capital requirements.
35. CONDENSED FINANCIAL STATEMENTS OF J.P. MORGAN (PARENT)
================================================================================
Presented below are the condensed statements of income, balance sheet, and cash
flows for J.P. Morgan & Co. Incorporated, the parent company.
J.P. MORGAN (PARENT) STATEMENT OF INCOME
================================================================================
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
In millions 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Equity in undistributed earnings of subsidiaries ................................. $ 402 $ 212 $ 855
Dividends from subsidiaries:
Bank .......................................................................... 1 449 472 404
Other ......................................................................... 177 264 201
- ----------------------------------------------------------------------------------------------------------------
Total equity in earnings of subsidiaries ......................................... 2 028 948 1 460
Interest from subsidiaries ....................................................... 1 422 1 298 739
Other interest revenue ........................................................... 40 38 53
Advisory and underwriting fees - allocations from subsidiaries ................... 178 141 125
Service fees from subsidiaries ................................................... 338 250 248
Investment securities revenue .................................................... 135 46 --
Other revenue .................................................................... 7 7 3
- ----------------------------------------------------------------------------------------------------------------
Total revenues 4 148 2 728 2 628
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
Interest (includes $93 in 1999, $94 in 1998, and $101 in 1997 to subsidiaries) ... 1 693 1 525 891
Employee compensation and benefits ............................................... 375 248 245
Other expenses ................................................................... 119 139 129
- ----------------------------------------------------------------------------------------------------------------
Total expenses 2 187 1 912 1 265
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes ....................................................... 1 961 816 1 363
Income tax benefit ............................................................... (94) (147) (102)
- ----------------------------------------------------------------------------------------------------------------
Net income 2 055 963 1 465
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
110 Notes to consolidated financial statements
<PAGE> 113
J.P. MORGAN (PARENT) BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
December 31
In millions 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Interest-earning deposits with subsidiary bank .................................................. $ 1 548 $ 591
Debt investment securities available-for-sale carried at fair value ............................. 1 296 993
Equity investment securities .................................................................... -- 10
Investments in subsidiaries:
Bank .......................................................................................... 10 595 10 478
U.S. broker-dealer ............................................................................ 1 011 746
Other nonbank ................................................................................. 1 043 1 065
Advances to subsidiaries:
Bank .......................................................................................... 3 761 3 728
U.S. broker-dealer(a) ......................................................................... 2 797 6 690
Other nonbanks, primarily securities-related(b) ............................................... 18 989 9 565
Accrued interest and accounts receivable, primarily from subsidiary bank ........................ 340 362
Other assets (includes $3 332 in 1999 and $2 990 in 1998 related to corporate-owned life insurance
contracts; $1 206 in 1999 and $1 095 in 1998 related to deferred tax assets) ................... 5 595 4 636
- -------------------------------------------------------------------------------------------------------------------------------
Total assets 46 975 38 864
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase .................................................. 121 --
Commercial paper ................................................................................ 11 485 6 127
Other liabilities for borrowed money ............................................................ 964 148
Accounts payable and accrued expenses ........................................................... 2 099 1 829
Long-term debt not qualifying as risk-based capital ............................................. 13 440 13 365
Other liabilities 1 130 511
- -------------------------------------------------------------------------------------------------------------------------------
29 239 21 980
Long-term debt qualifying as risk-based capital ................................................. 5 111 4 437
Intercompany debentures(c) ...................................................................... 1 186 1 186
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 35 536 27 603
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11 439 11 261
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 46 975 38 864
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) As of December 31, 1999 and 1998, $1.7 billion and $5.7 billion,
respectively, of these advances was collateralized by marketable securities,
primarily U.S. government and agency securities.
(b) As of December 31, 1999 and 1998, $18.4 billion and $7.6 billion,
respectively, of marketable equity and government agency securities were
available as collateral for these advances.
(c) Consists solely of junior subordinated debentures issued to JPM Capital
Trust I and Trust II. Refer to note 26.
Notes to consolidated financial statements 111
<PAGE> 114
J.P. MORGAN (PARENT) STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME .................................................................................... $ 2 055 $ 963 $ 1 465
Adjustments to reconcile to cash provided by operating activities:
Equity in undistributed (earnings) of subsidiaries .......................................... (402) (212) (855)
Net (decrease) due to changes in other balance sheet amounts ................................ (44) (93) (54)
Net investment securities (gains) included in cash flows from investing activities .......... (136) (46) --
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 1 473 612 556
- ------------------------------------------------------------------------------------------------------------------------------------
Net (increase) in interest-earning deposits with subsidiary bank .............................. (957) (152) (237)
Debt investment securities:
Proceeds from sales and maturities .......................................................... 1 421 2 330 1 394
Purchases ................................................................................... (1 489) (2 373) (1 161)
Net (increase) in advances to subsidiaries .................................................... (5 522) (5 605) (3 461)
Capital from (to) subsidiaries ................................................................ 2 (252) (26)
Net payments for insurance contracts .......................................................... (231) (703) (453)
Other changes, net ............................................................................ (154) (33) (41)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (6 930) (6 788) (3 985)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in securities sold under agreements to repurchase ..................... 121 (351) (154)
Net increase in commercial paper .............................................................. 5 357 19 2 660
Net increase (decrease) in other liabilities for borrowed money ............................... 827 (390) 515
Long-term debt:
Proceeds .................................................................................... 3 780 9 655 3 302
Payments .................................................................................... (2 666) (1 848) (1 754)
Intercompany debentures:
Proceeds .................................................................................... -- -- 413
Capital stock issued or distributed ........................................................... 276 179 245
Capital stock purchased ....................................................................... (2 144) (755) (1 500)
Dividends paid ................................................................................ (731) (707) (673)
Cash receipts from subsidiaries for common stock issuable ..................................... 637 338 370
Other changes, net ............................................................................ -- 36 5
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 5 457 6 176 3 429
- ------------------------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND DUE FROM BANKS -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash disbursements for interest and taxes 1 856 1 267 827
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
112 Notes to consolidated financial statements
<PAGE> 115
36. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
===============================================================================
J.P. Morgan & Co. Incorporated
===============================================================================
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
In millions, except share data 1999 1998
-------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
- ----------------------------------------------------------------------------------------------------------------------------------
Interest revenue ....................... $2 717 $2 783 $2 713 $2 757 $3 024 $3 249 $3 106 $3 262
Interest expense ....................... 2 379 2 394 2 288 2 368 2 701 2 917 2 816 2 926
Provision for loan losses .............. -- -- -- -- 85 25 -- --
Reversal of provision for loan losses .. (25) (45) (105) -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest revenue after loan
loss provisions ...................... 363 434 530 389 238 307 290 336
Total noninterest revenues ............. 1 826 1 551 1 661 2 102 1 266 994(a) 1 863(a) 1 661
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue, net ..................... 2 189 1 985 2 191 2 491 1 504 1 301 2 153 1 997
Total operating expenses ............... 1 417 1 341 1 417 1 567 1 391(b) 1 099 1 416 1 632(b)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes ............. 772 644 774 924 113 202 737 365
Income taxes ........................... 263 202 270 324 24 46 256 128
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME ............................. 509 442 504 600 89 156 481 237
- ----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income:
Basic ................................ $ 2.83 $ 2.39 $ 2.71 $ 3.24 $ 0.44 $ 0.81 $ 2.57 $ 1.26
Diluted .............................. 2.63 2.22 2.52 3.01 0.42 0.75 2.36 1.15
Dividends declared ..................... 1.00 0.99 0.99 0.99 0.99 0.95 0.95 0.95
- ----------------------------------------------------------------------------------------------------------------------------------
Price range per common share on
the composite tape:
High ................................. $ 142 $ 146 $146-3/4 $126-7/16 $115-7/8 $133-9/16 $148-11/16 $138-13/16
Low .................................. 106-1/2 112-13/16 123-15/16 99-1/4 74-1/2 84-5/8 116-15/16 98-13/16
- ----------------------------------------------------------------------------------------------------------------------------------
Closing price per common share
at quarter-end ....................... 126-5/8 115-1/2 140-1/2 123-3/8 105-1/16 84-5/8 117-1/16 134-5/16
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The principal market on which the company's common stock is traded is the New
York Stock Exchange.
(a) Refer to note 5.
(b) Refer to note 4.
The 1999 fourth-quarter results are discussed in J.P. Morgan's earnings release
dated January 18, 2000, which has been filed with the Securities and Exchange
Commission on Form 8-K.
Notes to consolidated financial statements 113
<PAGE> 116
FIVE-YEAR FINANCIAL SUMMARY
- --------------------------------------------------------------------------------
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
==================================================================================================================================
Dollars in millions, except per share amounts 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Total interest revenue .................................... $10 970 $12 641 $12 353 $10 713 $ 9 937
Total noninterest revenue ................................. 7 140 5 784 5 348 5 153 3 901
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue ............................................. 18 110 18 425 17 701 15 866 13 838
Interest expense .......................................... 9 429 11 360 10 481 9 011 7 934
Provision for loan losses ................................. -- 110 -- -- --
Reversal of provision for loan losses ..................... (175) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue, net ........................................ 8 856 6 955 7 220 6 855 5 904
Total operating expenses .................................. 5 742 5 538(d) 5 066 4 523 3 998
- ----------------------------------------------------------------------------------------------------------------------------------
Net income ................................................ 2 055 963 1 465 1 574 1 296
At year-end:
Total assets ............................................ 260 898 261 067 262 159 222 026 184 879
Long-term debt and other capital securities(a) .......... 25 400 28 757 24 139 13 853 9 327
Stockholders' equity .................................... 11 439 11 261 11 404 11 432 10 451
Common stockholders' equity ............................. 10 745 10 567 10 710 10 738 9 957
Tier 1 risk-based capital ............................... 11 525 11 213 11 854 (b) (b)
Total risk-based capital ................................ 16 935 16 454 17 680 (b) (b)
Per common share:
Net income:
Basic(c) .............................................. $ 11.16 $ 5.08 $ 7.71 $ 8.11 $ 6.70
Diluted(c) ............................................ 10.39 4.71 7.17 7.63 6.42
Book value .............................................. 57.83 55.01 55.99 54.43 50.71
Dividends declared ...................................... 3.97 3.84 3.59 3.31 3.06
EARNINGS RATIOS
Net income as % of:
Average total assets .................................... 0.79% 0.34% 0.58% 0.73% 0.73%
Average common stockholders' equity ..................... 18.4 8.6 13.4 14.9 13.6
Average stockholders' equity ............................ 17.6 8.4 12.9 14.3 13.2
DIVIDEND PAYOUT RATIO
Dividends declared per common share as % of diluted
net income per common share............................ 38.2% 81.5% 50.1% 43.4% 47.7%
CAPITAL RATIOS
Average stockholders' equity as % of average total assets.. 4.5% 4.1% 4.5% 5.1% 5.5%
Common stockholders' equity as % of:
Average total assets .................................... 4.1 3.7 4.2 5.0 5.6
Total year-end assets ................................... 4.1 4.0 4.1 4.8 5.4
Total stockholders' equity as % of:
Average total assets .................................... 4.4 4.0 4.5 5.3 5.9
Total year-end assets ................................... 4.4 4.3 4.4 5.2 5.7
Tier I risk-based capital ratio ........................... 8.8 8.0 8.0 (b) (b)
Total risk-based capital ratio ............................ 12.9 11.7 11.9 (b) (b)
Leverage ratio ............................................ 4.7 3.9 4.4 (b) (b)
OTHER SELECTED DATA
Registered holders of record of common stock at year-end... 26 395 27 992 29 186 29 607 29 391
Common shares outstanding at year-end (in thousands) ...... 164 798 175 006 176 318 184 923 187 116
Employees at year-end:
In the U.S. ............................................. 8 159 8 402 8 994 8 579 8 855
Outside the U.S. ........................................ 7 353 7 272 7 949 6 948 6 758
- ----------------------------------------------------------------------------------------------------------------------------------
Total employees 15 512 15 674 16 943 15 527 15 613
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
114 Five-year financial summary
<PAGE> 117
(a) Includes $5,202 million, $4,570 million, $4,743 million, $3,692 million, and
$3,590 million of long-term debt qualifying as risk-based capital at year end
1999, 1998, 1997, 1996, and 1995, respectively, and company-obligated
mandatorily redeemable preferred securities of subsidiaries of $1,150 million at
year end 1999, 1998 and 1997, and $750 million at year end 1996, qualifying as
risk-based capital.
(b) Amounts and ratios after 1996 reflect the adoption of the Federal Reserve
Board's market risk capital guidelines for calculation of risk-based capital
ratios. These guidelines require us to incorporate a measure of market risk for
trading positions. In addition, the capital and assets of the Section 20
subsidiary, J.P. Morgan Securities Inc., are no longer excluded from the
calculations. The 1996 and 1995 amounts and ratios included in the following
table have not been restated and accordingly exclude the equity, assets, and
off-balance-sheet exposures of J.P. Morgan Securities Inc. See Note 28.
<TABLE>
<CAPTION>
===================================================================
Dollars in millions 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Tier I risk-based capital ......... $10 873 $ 9 033
Total risk-based capital .......... 15 145 13 398
Tier I risk-based capital ratio ... 8.8% 8.8%
Total risk-based capital ratio .... 12.2 13.0
Leverage ratio .................... 5.9 6.1
- -------------------------------------------------------------------
</TABLE>
(c) Effective December 31, 1997, we adopted the provisions of SFAS No. 128,
Earnings per Share. SFAS No. 128 supercedes APB No. 15 and related
interpretations and replaces the computations of primary and fully diluted
earnings per share (EPS) with basic and diluted EPS, respectively. Prior-period
amounts have been restated. See Note 31.
(d) 1998 includes charges in the first and fourth quarters totaling $358 million
($215 million after tax) related to the restructuring of business activities and
other cost reduction programs. The charges were recorded as follows: $241
million in Employee compensation and benefits, related to severance; $112
million in Net occupancy, related to real estate write-offs; and $5 million in
Technology and communications, related to equipment write-offs. See Note 4.
Five-year financial summary 115
<PAGE> 118
CONSOLIDATED AVERAGE BALANCES AND TAXABLE-EQUIVALENT NET INTEREST EARNINGS
- --------------------------------------------------------------------------------
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
====================================================================================================================
Dollars in millions 1999
--------------------------------- --------------------------
Interest and average rates on Average Average Average
a taxable-equivalent basis balance Interest rate balance Interest
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. .... $ 2 494 $ 254 10.18% $ 2 079 $ 294
Debt investment securities in offices
in the U.S.:(a)
U.S. Treasury ........................ 504 43 8.53 723 61
U.S. state and political subdivision 1 430 167 11.68 1 535 168
Other ................................ 23 454 1 315 5.61 21 128 1 185
Debt investment securities in offices
outside the U.S.(a) ................... 2 807 134 4.77 1 519 109
Trading account assets:
In offices in the U.S. ............... 32 362 2 037 6.29 30 394 1 837
In offices outside the U.S. .......... 26 552 1 690 6.36 36 227 2 509
Securities purchased under agreements
to resell and federal funds sold:
In offices in the U.S. ............... 21 066 1 077 5.11 17 372 939
In offices outside the U.S. .......... 12 991 532 4.10 21 478 1 092
Securities borrowed, mainly in offices
in the U.S. .......................... 37 000 1 833 4.95 40 680 2 088
Loans:
In offices in the U.S. ............... 8 122 567 6.98 6 452 464
In offices outside the U.S. .......... 18 020 1 106 6.14 24 491 1 650
Other interest-earning assets:(b)
In offices in the U.S. ............... 2 317 133 * 2 112 122
In offices outside the U.S. .......... 919 157 * 944 199
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets .......... 190 038 11 045 5.81 207 134 12 717
Cash and due from banks ................ 1 294 1 429
Other noninterest-earning assets ....... 68 545 74 621
- --------------------------------------------------------------------------------------------------------------------
Total assets 259 877 283 184
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Dollars in millions 1998 1997
-------- ---------------------------------
Interest and average rates on Average Average Average
a taxable-equivalent basis rate balance Interest rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. .... 14.14% $ 2 035 $ 199 9.78%
Debt investment securities in offices
in the U.S.:(a)
U.S. Treasury ........................ 8.44 1 296 95 7.33
U.S. state and political subdivision . 10.94 1 264 148 11.71
Other ................................ 5.61 17 260 1 095 6.34
Debt investment securities in offices
outside the U.S.(a) ................... 7.18 3 733 273 7.31
Trading account assets:
In offices in the U.S. ............... 6.04 25 245 1 587 6.29
In offices outside the U.S. .......... 6.93 39 367 2 693 6.84
Securities purchased under agreements
to resell and federal funds sold:
In offices in the U.S. ............... 5.41 15 660 895 5.72
In offices outside the U.S. .......... 5.08 24 785 1 164 4.70
Securities borrowed, mainly in offices
in the U.S. ........................... 5.13 36 287 1 784 4.92
Loans:
In offices in the U.S. ............... 7.19 5 146 381 7.40
In offices outside the U.S. .......... 6.74 25 490 1 661 6.52
Other interest-earning assets:(b)
In offices in the U.S. ............... * 774 168 *
In offices outside the U.S. .......... * 707 282 *
- --------------------------------------------------------------------------------------------------
Total interest-earning assets .......... 6.14 199 049 12 425 6.24
Cash and due from banks ................ 797
Other noninterest-earning assets ....... 53 049
- --------------------------------------------------------------------------------------------------
Total assets 252 895
- --------------------------------------------------------------------------------------------------
</TABLE>
The percentage of average interest-earning assets attributable to offices
outside the U.S. was 37% in 1999, 45% in 1998, and 52% in 1997. Average balances
are derived from daily balances except in the case of some subsidiaries, which
are derived from month-end balances. 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 adjust tax-exempt interest to a taxable-equivalent basis was
approximately 41% in 1999, 1998, and 1997.
Impaired loans are included in the determination of average total loans.
(a) For the 12 months ended December 31, 1999, 1998, and 1997, average debt
investment securities were 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.
116 Consolidated average balances and taxable-equivalent net interest earnings
<PAGE> 119
<TABLE>
<CAPTION>
===========================================================================================================================
1999
Dollars in millions ------------------------------------ --------------------------
Interest and average rates on Average Average Average
a taxable-equivalent basis balance Interest rate balance Interest
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. ................................. $ 6 495 $ 338 5.20% $ 7 674 $ 397
In offices outside the U.S. ............................ 44 000 1 916 4.35 49 044 2 426
Trading account liabilities:
In offices in the U.S. ................................. 7 113 470 6.61 9 424 665
In offices outside the U.S. ............................ 13 591 704 5.18 15 085 876
Securities sold under agreements to repurchase and
federal funds purchased, mainly in offices in the U.S. ... 61 839 3 030 4.90 70 537 3 846
Commercial paper, mainly in offices in the U.S. .......... 11 047 581 5.26 9 682 539
Other interest-bearing liabilities:
In offices in the U.S. ................................. 8 511 680 7.99 12 323 811
In offices outside the U.S. ............................ 3 378 204 6.04 3 360 263
Long-term debt, mainly in offices in the U.S. ............ 27 179 1 506 5.54 26 066 1 537
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ....................... 183 153 9 429 5.15 203 195 11 360
Noninterest-bearing deposits:
In offices in the U.S. ................................. 898 884
In offices outside the U.S. ............................ 552 784
Other non-interest-bearing liabilities ................... 63 627 66 812
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities ........................................ 248 230 271 675
Stockholders' equity ..................................... 11 647 11 509
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ............... 259 877 283 184
Net yield on interest-earning assets: .................... 0.85
Attributable to offices in the U.S.(a) ................. 0.44
Attributable to offices outside the U.S.(a) ............ 1.55
Taxable-equivalent net interest earnings: ................ 1 616 1 357
Attributable to offices in the U.S.(a) ................. 529 11
Attributable to offices outside the U.S.(a) ............ 1 087 1 346
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
1998 1997
Dollars in millions ----------- -----------------------------------
Interest and average rates on Average Average Average
a taxable-equivalent basis rate balance Interest rate
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. ........................ 5.17% $ 9 676 $ 538 5.56%
In offices outside the U.S. ................... 4.95 46 254 2 215 4.79
Trading account liabilities:
In offices in the U.S. ........................ 7.06 11 390 785 6.89
In offices outside the U.S. ................... 5.81 14 291 867 6.07
Securities sold under agreements to repurchase
and federal funds purchased, mainly in offices
in the U.S. ................................... 5.45 67 121 3 532 5.26
Commercial paper, mainly in offices in the U.S. .. 5.57 4 858 262 5.39
Other interest-bearing liabilities:
In offices in the U.S. ........................ 6.58 15 590 958 6.14
In offices outside the U.S. ................... 7.83 4 026 227 5.64
Long-term debt, mainly in offices in the U.S. ... 5.90 18 155 1 097 6.04
- ---------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities .............. 5.59 191 361 10 481 5.48
Noninterest-bearing deposits:
In offices in the U.S. ........................ 1 033
In offices outside the U.S. ................... 452
Other non-interest-bearing liabilities .......... 48 696
- ---------------------------------------------------------------------------------------------------------
Total liabilities ............................... 241 542
Stockholders' equity ............................ 11 353
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 252 895
Net yield on interest-earning assets: ........... 0.66 0.98
Attributable to offices in the U.S.(a) ........ 0.01 0.13
Attributable to offices outside the U.S.(a) ... 1.44 1.78
Taxable-equivalent net interest earnings: ....... 1 944
Attributable to offices in the U.S.(a) ........ 121
Attributable to offices outside the U.S.(a) ... 1 823
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The percentage of average interest-bearing liabilities attributable to offices
outside the U.S. was 36% in 1999, 44% in 1998, and 47% in 1997.
(a) Funding costs are allocated based on the location of the office recording
each asset. No allocation is made for capital.
Consolidated average balances and taxable-equivalent net interest earnings 117
<PAGE> 120
ANALYSIS OF YEAR-TO-YEAR CHANGES IN TAXABLE-EQUIVALENT NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
===============================================================================================================================
1999/98 Increase 1998/97 Increase
(decrease) due to change in: (decrease) due to change in:
-------------------------------- -----------------------------
Average Average Increase Average Average Increase
In millions balance rate (decrease) balance rate (decrease)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-earning deposits with banks, mainly in offices
outside the U.S. ....................................... $ 52 ($ 92) ($ 40) $ 4 $ 91 $ 95
Debt investment securities in offices in the U.S.:
U.S. Treasury .......................................... (19) 1 (18) (47) 13 (34)
U.S. state and political subdivision ................... (12) 11 (1) 30 (10) 20
Other .................................................. 130 0 130 226 (136) 90
Debt investment securities in offices outside the U.S. .... 70 (45) 25 (159) (5) (164)
Trading account assets:
In offices in the U.S. ................................. 122 78 200 315 (65) 250
In offices outside the U.S. ............................ (626) (193) (819) (219) 35 (184)
Securities purchased under agreements to resell and
federal funds sold:
In offices in the U.S. .............................. 192 (54) 138 94 (50) 44
In offices outside the U.S. ......................... (376) (184) (560) (162) 90 (72)
Securities borrowed, mainly in offices in the U.S. (184) (71) (255) 225 79 304
Loans:
In offices in the U.S. ................................. 117 (14) 103 94 (11) 83
In offices outside the U.S. ............................ (407) (137) (544) (66) 55 (11)
Other interest-earning assets:
In offices in the U.S. ................................. 12 (1) 11 141 (187) (46)
In offices outside the U.S. ............................ (5) (37) (42) 76 (159) (83)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (934) (738) (1 672) 552 (260) 292
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
In offices in the U.S. ................................. (61) 2 (59) (105) (36) (141)
In offices outside the U.S. ............................ (234) (276) (510) 136 75 211
Trading account liabilities:
In offices in the U.S. ................................. (155) (40) (195) (139) 19 (120)
In offices outside the U.S. ............................ (82) (90) (172) 47 (38) 9
Securities sold under agreements to repurchase and
federal funds purchased, mainly in offices in the U.S... (449) (367) (816) 184 130 314
Commercial paper, mainly in offices in the U.S. ........... 73 (31) 42 268 9 277
Other interest-bearing liabilities:
In offices in the U.S. ................................. (283) 152 (131) (212) 65 (147)
In offices outside the U.S. ............................ 1 (60) (59) (42) 78 36
Long-term debt, mainly in offices in the U.S. ............. 65 (96) (31) 467 (27) 440
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (1 125) (806) (1 931) 604 275 879
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN TAXABLE-EQUIVALENT NET INTEREST EARNINGS 191 68 259 (52) (535) (587)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in the average balance/rate are allocated based on the percentage
relationship of the change in average balance or average rate to the total
increase (decrease). Included in the above analysis is approximately $2 million
of interest revenue recorded in 1997 but related to previous years. No interest
revenue recorded in 1998 was related to previous years.
TAXABLE-EQUIVALENT NET INTEREST EARNINGS AND THE CONSOLIDATED STATEMENT OF
INCOME
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
===============================================================================================================
In millions 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxable interest revenue ..................................................... $10 851 $12 511 $12 208
Tax-exempt interest revenue, adjusted to a taxable-equivalent basis .......... 194 206 217
- ---------------------------------------------------------------------------------------------------------------
Total interest revenue, adjusted to a taxable-equivalent basis ............... 11 045 12 717 12 425
Less: interest expense ....................................................... 9 429 11 360 10 481
- ---------------------------------------------------------------------------------------------------------------
Taxable-equivalent net interest earnings ..................................... 1 616 1 357 1 944
Less: adjustment of tax-exempt interest revenue .............................. 75 76 72
- ---------------------------------------------------------------------------------------------------------------
Net interest revenue, as in the "Consolidated statement of income" 1 541 1 281 1 872
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
118 Consolidated average balances and taxable-equivalent net interest earnings
<PAGE> 121
MANAGEMENT
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
======================================================================================================
<S> <C> <C>
DOUGLAS A. WARNER III RAMON DE OLIVEIRA MARTHA J. GALLO
Chairman of the Board Asset Management Services Auditor
Chief Executive Officer
CLAYTON S. ROSE DAVID H. SIDWELL
WALTER A. GUBERT Investment Banking Controller
ROBERTO G. MENDOZA
MICHAEL E. PATTERSON WILLIAM T. WINTERS RACHEL F. ROBBINS
Vice Chairmen of the Board Markets General Counsel
PETER D. HANCOCK NICOLAS S. ROHATYN JOHN F. BRADLEY
Chief Financial Officer E-business Initiatives NANCY BAIRD HARWOOD
Chairman of Risk Management Human Resources
Committee and Capital Committee JOHN A. MAYER JR.
Equity Investments LAURA W. DILLON
THOMAS B. KETCHUM Corporate Communication
Chief Administrative Officer PILAR CONDE
Proprietary Positioning JOHN G. DANIELLO
ERNEST STERN Corporate Services
Managing Director BART J. BROADMAN
BRUCE N. CARNEGIE-BROWN
Asia Pacific
JOSEPH P. MACHALE
Europe, Middle East, Africa
MIGUEL GUTIERREZ
CARLOS M. HERNANDEZ
Latin America
LUC BOMANS
Euroclear System
</TABLE>
Management 119
<PAGE> 122
BOARD OF DIRECTORS
- -------------------------------------------------------------------------------
J.P. Morgan & Co. Incorporated
===============================================================================
DOUGLAS A. WARNER III
Chairman of the Board
Chief Executive Officer
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PAUL A. ALLAIRE WALTER A. GUBERT LEE R. RAYMOND
Chairman of the Board Vice Chairman of the Board Chairman of the Board and
Xerox Corporation Chief Executive Officer
JAMES R. HOUGHTON Exxon Mobil Corporation
RILEY P. BECHTEL Chairman Emeritus of the Board
Chairman and Chief Executive Officer Corning Incorporated RICHARD D. SIMMONS
Bechtel Group, Inc. Retired President
JAMES L. KETELSEN The Washington Post Company and
LAWRENCE A. BOSSIDY Retired Chairman of the Board and International Herald Tribune
Chairman of the Board Chief Executive Officer
Honeywell International Inc. Tenneco Inc. KURT F. VIERMETZ
Retired Vice Chairman of the Board
MARTIN FELDSTEIN JOHN A. KROL
President and Chief Executive Officer Retired Chairman of the Board LLOYD D. WARD
National Bureau of Economic Research, Inc. E.I. du Pont de Nemours and Company Chairman of the Board and
Chief Executive Officer
ELLEN V. FUTTER ROBERTO G. MENDOZA Maytag Corporation
President Vice Chairman of the Board
American Museum of Natural History DOUGLAS C. YEARLEY
MICHAEL E. PATTERSON Chairman of the Board
HANNA H. GRAY Vice Chairman of the Board Phelps Dodge Corporation
President Emeritus and Harry Pratt Judson
Distinguished Service Professor of History
The University of Chicago
Committees of the Board
==================================================================================================================================
EXECUTIVE COMMITTEE COMMITTEE ON RISK POLICIES COMMITTEE ON DIRECTOR NOMINATIONS
J.P. MORGAN AND MORGAN GUARANTY J.P. MORGAN AND BOARD AFFAIRS
Messrs. Warner (Chairman), Gubert, Dr. Feldstein (Chairman), Mr. Bossidy, J.P. MORGAN
Houghton, Mendoza, Patterson Ms. Futter Mr. Raymond (Chairman), Dr. Gray,
Messrs. Krol, Yearley
AUDIT COMMITTEE COMMITTEE ON FIDUCIARY MATTERS
J.P. MORGAN J.P. MORGAN COMMITTEE ON EMPLOYMENT POLICIES
EXAMINING COMMITTEE Dr. Gray (Chairman), Messrs. Allaire, AND BENEFITS
MORGAN GUARANTY Bechtel, Ketelsen, Simmons MORGAN GUARANTY
Messrs. Ketelsen (Chairman), Allaire, Messrs. Simmons (Chairman), Bossidy,
Krol, Ward COMMITTEE ON MANAGEMENT Dr. Feldstein, Ms. Futter
DEVELOPMENT AND EXECUTIVE
COMPENSATION
J.P. MORGAN
Messrs. Houghton (Chairman), Bechtel,
Raymond, Yearley
</TABLE>
120 Board of Directors
<PAGE> 123
INTERNATIONAL COUNCIL
- -------------------------------------------------------------------------------
J.P. Morgan & Co. Incorporated
===============================================================================
Formed in 1967 and composed of business leaders and prominent individuals from
public life, the International Council advises the senior management of J.P.
Morgan on matters relating to its global business. It meets approximately every
eight months to discuss relevant issues of international concern and interest.
In 1999 William Johnson, Cees van Lede, and Jaime Augusto Zobel de Ayala became
members, and John Chambers, Claes Dahlback, and Karl Otto Pohl retired from the
Council.
===============================================================================
HON. GEORGE P. SHULTZ
Chairman of the Council
Distinguished Fellow
Hoover Institution, Stanford University
Stanford, California
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
H.E. SHEIKH MOHAMMED ABALKHAIL KAREN KATEN JESS S0DERBERG
Former Minister of Finance and Economy President, U.S. Pharmaceuticals Partner and Chief Executive Officer
Kingdom of Saudi Arabia Pfizer Inc. A.P. Moller
Riyadh, Saudi Arabia New York, New York Copenhagen, Denmark
H. MIGUEL ETCHENIQUE DEREK L. KEYS WILLIAM S. STAVROPOULOS
Chairman of the Board and President Executive Director President and Chief Executive Officer
Brasmotor S.A. Gencor Limited The Dow Chemical Company
Sao Paulo, Brazil Johannesburg, South Africa Midland, Michigan
CLAUDIO X. GONZALEZ YOTARO KOBAYASHI MARCO TRONCHETTI PROVERA
Chairman and Chief Executive Officer Chairman and Chief Executive Officer Chairman and Chief Executive Officer
Kimberly-Clark de Mexico, S.A. de C.V. Fuji Xerox Co., Ltd. Pirelli S.p.A.
Mexico City, Mexico Tokyo, Japan Milan, Italy
SIR CHRISTOPHER HOGG HON. LEE KUAN YEW CEES J. A. VAN LEDE
Chairman Senior Minister Chairman, Board of Management
Reuters Holdings PLC Singapore Akzo Nobel
London, England Arnhem, The Netherlands
JOHN B. PRESCOTT, A.C.
THE RT. HON. THE LORD HOWE OF Executive Chairman DENNIS WEATHERSTONE
ABERAVON, CH, QC Horizon Private Equity Management Pty Ltd. Retired Chairman
House of Lords Melbourne, Australia J.P. Morgan & Co. Incorporated
London, England New York, New York
CONDOLEEZZA RICE
DURK I. JAGER Stanford University L. R. WILSON, O.C.
President and Chief Executive Officer Stanford, California Chairman of the Board
The Procter & Gamble Company BCE Inc.
Cincinnati, Ohio JURGEN E. SCHREMPP Toronto, Canada
Chairman of the Board of Management
WILLIAM R. JOHNSON DaimlerChrysler A.G. JAIME AUGUSTO ZOBEL DE AYALA
President and Chief Executive Officer Stuttgart, Germany President and Chief Executive Officer
H.J. Heinz Company Ayala Corporation
Pittsburgh, Pennsylvania Makati City, Philippines
ALAIN A. JOLY FREDERICK H. S. ALLEN
Chairman and Chief Executive Officer Executive Secretary of the Council
L'Air Liquide S.A. New York, New York
Paris, France
</TABLE>
International Council 121
<PAGE> 124
DIRECTORS ADVISORY COUNCIL
- -------------------------------------------------------------------------------
Morgan Guaranty Trust Company of New York
===============================================================================
The Directors Advisory Council of Morgan Guaranty Trust Company, whose members
are retired directors of J.P. Morgan, provides counsel to management and the
Board.
===============================================================================
ELLMORE C. PATTERSON
Chairman
Directors Advisory Council
Retired Chairman of the Board
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
RALPH E. BAILEY LEWIS W. FOY DONALD E. PROCKNOW
Former Vice Chairman of the Board Former Chairman of the Board Former Vice Chairman of the Board and
E.I. du Pont de Nemours and Company Bethlehem Steel Corporation Chief Operating Officer
and Retired Chairman of the Board and AT&T Technologies, Inc.
Chief Executive Officer HOWARD GOLDFEDER
Conoco Inc. Retired Chairman of the Board and THOMAS RODD
Chief Executive Officer Retired Vice Chairman of the Board
BORIS S. BERKOVITCH Federated Department Stores, Inc. J.P. Morgan & Co. Incorporated
Retired Vice Chairman of the Board
J.P. Morgan & Co. Incorporated JOHN J. HORAN WARREN M. SHAPLEIGH
Former Chairman of the Board and Retired Vice Chairman of the Board
JAMES O. BOISI Chief Executive Officer Ralston Purina Company
Retired Vice Chairman of the Board Merck & Co., Inc.
J.P. Morgan & Co. Incorporated JOHN G. SMALE
HOWARD W. JOHNSON Chairman of the Executive
CARTER L. BURGESS President Emeritus and Former Committee of the Board
Chairman of the Corporation General Motors Corporation
FRANK T. CARY Massachusetts Institute of Technology and Retired Chairman of the Board and
Retired Chairman of the Board Chief Executive Officer
International Business Machines EDWARD R. KANE The Procter & Gamble Company
Corporation Former President
E.I. du Pont de Nemours and Company
CHARLES D. DICKEY JR. RALPH F. LEACH OLCOTT D. SMITH
Retired Chairman of the Board Retired Chairman of the Retired Chairman of the Board
Scott Paper Company Executive Committee Aetna Life and Casualty Company
J.P. Morgan & Co. Incorporated
WALTER A. FALLON ROBERT V. LINDSAY
Former Chairman of the Board Retired President
Eastman Kodak Company J.P. Morgan & Co. Incorporated
</TABLE>
122 Directors Advisory Council
<PAGE> 125
J.P. MORGAN DIRECTORY
- -------------------------------------------------------------------------------
Offices of J.P. Morgan & Co. Incorporated and its subsidiaries and affiliates
North America
===============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
NEW YORK LOS ANGELES SILICON VALLEY
60 Wall Street 333 South Hope Street, 35th Floor 2420 Sand Hill Road, Suite 204
New York, NY 10260-0060 Los Angeles, CA 90071 Menlo Park, CA 94025
(1-212) 483-2323 (1-213) 437-9300 (1-650) 233-7260
BOSTON MONTREAL WASHINGTON, D.C.
2 International Place, 18th Floor 1501 McGill College Avenue, Suite 510 800 Connecticut Avenue, NW, 9th Floor
Boston, MA 02110 Montreal, Quebec H3A 3M8, Canada Washington, DC 20006
(1-617) 428-4777 (1-514) 840-1300 (1-202) 962-7200
CHICAGO NEWARK, DELAWARE TORONTO
227 West Monroe Street, Suite 2700 500 Stanton Christiana Road Royal Bank Plaza, South Tower, Suite 1800
Chicago, IL 60606 Newark, DE 19713 Toronto, Ontario M5J 2J2, Canada
(1-312) 541-3300 (1-302) 634-1000 (1-416) 981-9200
DALLAS PALM BEACH NASSAU
300 Crescent Court, Suite 400 109 Royal Palm Way P.O. Box N 4899, Bahamas Financial Centre
Dallas, TX 75201 Palm Beach, FL 33480 Charlotte and Shirley Streets
(1-214) 758-2000 (1-561) 838-4600 Nassau, Bahamas
(1-242) 326-5519
HOUSTON PHILADELPHIA CAYMAN ISLANDS
1 Houston Center 1650 Market Street, 47th Floor c/o CIBC Bank and Trust Company (Cayman)
1221 McKinney Street Philadelphia, PA 19103 Limited
Suites 3131 and 3150 (1-215) 640-3400 P.O. Box 694
Houston, TX 77010-2009 George Town, Grand Cayman
(1-713) 276-4600 SAN FRANCISCO Cayman Islands
101 California Street, 38th Floor (1-345) 949-8666
San Francisco, CA 94111
(1-415) 954-3200
Latin America
==================================================================================================================================
BUENOS AIRES MEXICO CITY SANTIAGO
Avenida Corrientes 411, 2nd Floor Avenida de las Palmas 405 Alcantara 200, 10th Floor
1043 Buenos Aires, Argentina Torre Optima Pisos 14, 15, y 16 Oficina 1001 Las Condes
(54-11) 4325-8046 Colonia Lomas de Chapultepec Santiago, Chile
11000 Mexico D.F. (56-2) 206-6474
(52-5) 540-9333
CARACAS RIO DE JANEIRO SAO PAULO
Centro Profesional Eurobuilding Praia de Botafogo, 228 - bloco A Av. Brigadeiro Faria Lima,
Piso 8, Oficina 8-B 14th Floor - Room 1405 3729 - Itaim Bibi
Calle LaGuairita, Chuao 22250-040 Rio de Janeiro 11(0) to 15(0) Floors
Caracas 1060, Venezuela RJ, Brazil Sao Paulo SP, Brazil
(58-2) 993-6944 (55-21) 553-1142 (55-11) 3048-3700
LIMA
Centro Empresarial Pardo y Aliaga
Pardo y Aliaga 699, Oficina 302
San Isidro
L 27 Lima, Peru
(51-1) 440-2611
Africa
==================================================================================================================================
JOHANNESBURG
11th Floor, The Forum For a listing of significant subsidiaries of
2 Maude Street, Sandton Square J.P. Morgan and the state or jurisdiction of
Sandown, 2196 their incorporation, please refer to Exhibit
Johannesburg, South Africa 21 to Form 10-K.
(27-11) 302-1600
J.P. Morgan directory 123
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
<S> <C> <C>
Europe
===============================================================================================================================
LONDON
60 Victoria Embankment ISTANBUL PRAGUE
London EC4Y 0JP 195 Buyukdere Plaza Mala Stupartska 7
United Kingdom Buyukdere Cad. No 195 110 00 Praha 1
(44-20) 7600-2300 80650 Levent, Istanbul, Turkey Czech Republic
(90-212) 339-2300 (42-02) 2482-6569
BRUSSELS MADRID ROME
1, Boulevard du Roi Albert 11 Jose Ortega y Gasset, 29 Via Po, 23
B-1210 Brussels, Belgium 28006 Madrid, Spain 00198 Rome, Italy
(32-2) 208-8811 (34-19) 435-6041 (39-06) 8530-1236
FRANKFURT MILAN WARSAW
Borsenstrasse 2-4 Corso Venezia, 54 LIM Center, 19th Floor, Suite 1911
60313 Frankfurt am Main 20121 Milan, Italy A1, Jerozolimskie 65/79
Germany (39-02) 7744-1 00-697 Warsaw, Poland
(49-69) 7124-0 (48-22) 630-6752
MOSCOW
GENEVA Paveletskaya Square 2, Building 1 ZURICH
8, rue de la Confederation 113054 Moscow Dreikoenigstrasse 21
1204 Geneva, Switzerland Russian Federation 8002 Zurich, Switzerland
(41-22) 739-1111 (7-095) 937-7300 (41-1) 206-8111
PARIS
14, Place Vendome
75001 Paris, France
(33-1) 4015-4500
Asia-Pacific
===============================================================================================================================
TOKYO LABUAN SEOUL
Akasaka Park Building Level 9 (G2), Main Office Tower 13th Floor, KorAm Bank Building
2-20 Akasaka 5-chome Financial Park Labuan 39, Da-dong, Chung-ku
Minato-ku, Tokyo 107-6151, Japan Jalan Merdeka Seoul 100-180, Korea
(81-3) 5573-1100 87000 Labuan F.T. (82-2) 3705-6699
Malaysia
BANGKOK (6087) 459000 SHANGHAI
27/F Sindhorn Tower 3 Shanghai Center, East Tower, Room 667
130 Wireless Road MANILA 1376 Nan Jing Road West
Lumpini Patumwan Tower One Ayala Triangle, 22nd Floor Shanghai 200040, China
Bangkok 10330, Thailand Ayala Avenue, Corner (86-21) 6279-7301
(66-2) 263-3933 Paseo de Roxas
Makati City SINGAPORE
BEIJING Metro Manila 1226, Philippines 32-08 DBS Building, Tower 2
27th Floor, CITIC Building (63-2) 848-6088 6, Shenton Way
No. 19, Jianguomenwai Dajie Singapore, 068809
Beijing 100004, China MELBOURNE (65) 220-8144
(86-10) 6522-7488 Level 8, 90 Collins Street
Melbourne, Victoria 3000, Australia SYDNEY
HONG KONG (61-3) 9631-8300 1 O'Connell Street
32/F One, International Finance Centre GPO Box 5248
1 Harbor View Street MUMBAI (BOMBAY) Sydney, NSW 2001, Australia
Central Vakils House (61-2) 9551-6117
Hong Kong 18, Sprott Road, Ballard Estate
(852) 2231-1000 Mumbai 400 001, India TAIPEI
(91-22) 270 2201/6 Bank Tower, 10th Floor
JAKARTA 205 Tun Hwa North Road
World Trade Center, 14th Floor Taipei, Taiwan
Jalan Jendral Sudirman Kav. 29-31 (886-2) 2712-2333
Jakarta 12920, Indonesia
(62-21) 522-9229
</TABLE>
124 J.P. Morgan directory
(C) 2000 J.P. Morgan & Co. Incorporated
Printed in USA on recycled paper
<PAGE> 127
INSIDE BACK COVER:
CORPORATE HEADQUARTERS
J.P. Morgan & Co. Incorporated
60 Wall Street
New York, NY 10260-0060
(1-212) 483-2323
ANNUAL MEETING
The Annual Meeting of stockholders of J.P. Morgan will be held on Wednesday,
April 12, 2000, at 11:00 a.m. in Morgan Hall West, 46th floor, 60 Wall
Street, New York.
LISTING
The Common Stock of J.P. Morgan is listed on the New York, Amsterdam,
Frankfurt, London, Paris, Swiss, and Tokyo stock exchanges. International
depository receipts for the stock are listed on the Brussels and London stock
exchanges. NYSE Symbol: JPM
The Adjustable Rate Cumulative Preferred Stock, Series A, of J.P. Morgan is
listed on the New York Stock Exchange. NYSE SYMBOL: JPM Pr A
Depository Shares representing a one-tenth interest in 6 5/8% Cumulative
Preferred Stock, Series H, of J.P. Morgan are listed on the New York Stock
Exchange. NYSE Symbol: JPM Pr H
TRANSFER AGENT AND REGISTRAR
Common Stock, Adjustable Rate Cumulative Preferred Stock, Series A,
Depository Shares on 6 5/8% Cumulative Preferred Stock, Series H:
First Chicago Trust Company, a Division of Equiserve
P.O. Box 2500
Jersey City, NJ 07303-2500
(1-800) 519-3111
Variable Cumulative Preferred Stock,
Series B through F:
Bankers Trust Company
4 Albany Street, 4th floor
New York, NY 10006-1500
(1-212) 250-6850
FORM 10-K
This Annual Report contains much of the financial information that is
included in the J.P. Morgan 1999 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. J.P. Morgan will furnish a copy of its
1999 Annual Report on Form 10-K (including financial statements and financial
schedules but excluding other exhibits), without charge, to any person. To
request a copy, call (1-212) 648-9607.
DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN
Stockholders wishing to receive a prospectus for the Dividend Reinvestment
and Stock Purchase Plan are invited to write or call:
First Chicago Trust Company, a Division of Equiserve
J.P. Morgan Dividend Reinvestment Plan
P.O. Box 2500
Jersey City, NJ 07303-2500
(1-800) 519-3111
1999 REPORT ON CONTRIBUTIONS
For a copy of J.P. Morgan's report on philanthropic activities in 1999,
write or call Corporate Communication - Publications
<PAGE> 128
J.P. Morgan & Co. Incorporated
60 Wall Street
New York, NY 10260-0060
(1-212) 648-9607
CONTACTS
Investor Relations: (1-212) 648-9446
Media Relations: (1-212) 648-9553
Please visit us on the Internet:
www.jpmorgan.com
EQUAL OPPORTUNITY AT J.P. MORGAN
J.P. Morgan is committed to providing equal opportunity in the workplace.
The firm, through this commitment, benefits from the full use and development
of its employees.
125
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF J.P. MORGAN & CO. INCORPORATED
DECEMBER 31, 1999
----------------------------------------------
J.P. MORGAN & CO. INCORPORATED
DELAWARE
SUBSIDIARIES OF J.P. MORGAN & CO. INCORPORATED
- ----------------------------------------------
(All wholly owned, except where noted)
J.P. Morgan Acceptance Corporation I
Delaware
J.P. Morgan Advisors Inc.
Delaware
J.P. Morgan Advisory Services Inc.
Delaware
J.P. Morgan Capital Asia Assets Ltd.
Mauritius
J.P. Morgan Capital Asia Holdings, LLC (47.50% owned) (10)
Mauritius
J.P. Morgan Capital Asia Investments Ltd.
Mauritius
J.P. Morgan Capital Bahamas Limited
Commonwealth of The Bahamas
J.P. Morgan Capital Corporation
Delaware
J.P. Morgan Capital Emerging Markets K Corporation
Delaware
J.P. Morgan Capital Nassau Limited
Commonwealth of The Bahamas
J.P. Morgan & Co. Limited
United Kingdom
J.P. Morgan Commercial Mortgage Finance Corp.
Delaware
J.P. Morgan Community Development Corporation
Delaware
<PAGE> 2
J.P. Morgan Commercial Mortgage Investment Corp.
Delaware
J.P. Morgan Communication Partnership Holdings Inc.
Delaware
Dai-Ichi Kangyo J.P. Morgan Investment Management Co. Ltd. (50% owned) (14)
Japan
J.P. Morgan Energy Partnership Corporation
Delaware
J.P. Morgan Florida Holdings Corp. (50% owned) (1)
Delaware
J.P. Morgan Franchise Loan Acceptance Corp.
Delaware
J.P. Morgan FSB
Florida
J.P. Morgan Funding Corp.
United Kingdom
J.P. Morgan Futures Inc.
Delaware
J.P. Morgan Futures Hong Kong Limited
Crown Colony of Hong Kong
J.P. Morgan Global Capital Limited (47.50% owned) (9)
Commonwealth of The Bahamas
J.P. Morgan GT Corporation
Delaware
J.P. Morgan Hotel Partnership Corporation
Delaware
J.P. Morgan Index Funding Company I (11)
Delaware
J.P. Morgan International Capital Corporation
Delaware
J.P. Morgan International Holdings Corp.
Delaware
J.P. Morgan Investment Corporation
Delaware
<PAGE> 3
J.P. Morgan Investment Management Inc.
Delaware
J.P. Morgan Leasefunding Corp.
Delaware
J.P. Morgan Life Assurance Limited
United Kingdom
J.P. Morgan Mortgage Funding Inc.
Delaware
J.P. Morgan News Partnership Corporation
Delaware
J.P. Morgan (1992-I) Foreign Sales Corporation
Barbados
J.P. Morgan Partnership Capital Corporation
Delaware
J.P. Morgan Partnership Investment Corporation
Delaware
J.P. Morgan Pine Street Corporation
Delaware
J.P. Morgan Private Investments Inc.
Delaware
J.P. Morgan Private Investments International Inc.
Cayman Islands
J.P. Morgan Real Estate Partnership Corporation
Delaware
J.P. Morgan Securities Holdings Inc.
Delaware
J.P. Morgan Securities Inc.
Delaware
J.P. Morgan Services Inc.
Delaware
J.P. Morgan Structured Finance Corp.
Delaware
J.P. Morgan Structured Obligations Corporation
Delaware
J.P. Morgan Technology Partnership Corporation
Delaware
<PAGE> 4
J.P. Morgan Trading and Finance
United Kingdom
J.P. Morgan Trust Company of Delaware
Delaware
J.P. Morgan Ventures Corporation
Delaware
J.P. Morgan Ventures Energy Corporation
Delaware
J.P. Morgan Whitney Partnership Corporation
Delaware
American Century Companies (12)
Missouri
Corsair, Inc.
Delaware
DNT Asset Trust
Delaware
Financial Institutions Network and Information Services (25% owned)
Delaware
JPMAC Holdings Inc.
Delaware
JPM Capital Trust I
Delaware
JPM Capital Trust II
Delaware
JPM Pork Partnership Corporation
Delaware
Morgan Fonciere Cayman Islands Ltd.
Cayman Islands
Morgan Guaranty Trust Company of New York
New York
Morgan Trust Company of The Bahamas Limited
Commonwealth of The Bahamas
Morgan Trust Company of the Cayman Islands Ltd.
Cayman Islands
<PAGE> 5
Peabody Real Estate Partnership Corporation
Delaware
The Peabody Fund Consultants, Inc.
Delaware
721 Participacoes Limitada (99.99% owned) (7)
Brazil
Sixty Wall Street Corporation
Delaware
Trading and Finance Management Limited
United Kingdom
Ventures Business Trust
Maryland
SUBSIDIARIES OF MORGAN GUARANTY TRUST COMPANY OF NEW YORK
- ---------------------------------------------------------
Cedar Hill International Corp.
Delaware
J.P. Morgan Energy Products Inc.
Delaware
J.P. Morgan Interfunding Corp.
Delaware
J.P. Morgan Mortgage Capital Inc.
Delaware
J.P. Morgan V.E. 92 Ltd.
New York
MGT-EOC Nominees Limited
United Kingdom
Morgan Guaranty Executor and Trustee Company Limited
United Kingdom
Morgan Guaranty Nominees Bahamas Limited
Commonwealth of The Bahamas
Morprop Incorporated
Delaware
Oil Tankers Leasing Corporation
New York
Ship Holding Corp.
<PAGE> 6
New York
Whitkath Inc.
New York
Morgan Guaranty International Finance Corporation
Section 25(a) of the Federal Reserve Act of the United States
SUBSIDIARIES OF MORGAN GUARANTY INTERNATIONAL FINANCE
CORPORATION
- ------------------------------------------------------------
J.P. Morgan Argentina Sociedad de Bolsa S.A. (99.00% owned) (4)
Argentina
J.P. Morgan (Bahamas) Portfolio Co. Ltd. (77.06% owned) (13)
Commonwealth of The Bahamas
J.P. Morgan Benelux S.A./N.V.
Kingdom of Belgium
J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan
Grupo Financiero (99.9980% owned) (8)
Mexico City, Mexico
J.P. Morgan Cayman Limited
Cayman Islands
J.P. Morgan & Cie S.A.
France
J.P. Morgan Chile Limitada (99.80% owned) (4)
Chile
J.P. Morgan Fonds (Luxembourg) S.A.
Grand Duchy of Luxembourg
J.P. Morgan Funds Bahamas Ltd.
Commonwealth of The Bahamas
J.P. Morgan Fund Services S.A. (99.09% owned) (4)
Grand Duchy of Luxembourg
J.P. Morgan GmbH (97.00% owned) (6)
Federal Republic of Germany
J.P. Morgan Grupo Financiero, S.A. de C.V. (99.00% owned) (4)
Mexico City, Mexico
J.P. Morgan Holding Deutschland GmbH (72.69% owned) (2)
Federal Republic of Germany
<PAGE> 7
J.P. Morgan International Ltd.
Delaware
J.P. Morgan Investimentos e Financas Ltda.
Brazil
J.P. Morgan Investment GmbH
Federal Republic of Germany
J.P. Morgan Japanese Fund Services S.A. (99.98% owned) (4)
Grand Duchy of Luxembourg
J.P. Morgan Japanese Investor Fund Services S.A. (99.98% owned) (4)
Grand Duchy of Luxembourg
J.P. Morgan Jersey Limited
Jersey, The Channel Islands
J.P. Morgan Malaysia Ltd.
Labuan, Malaysia
J.P. Morgan Overseas Capital Corporation
Delaware
J.P. Morgan Polska Sp. z o.o.
Warsaw, Poland
J.P. Morgan Scotland (Services) Ltd.
United Kingdom
J.P. Morgan Securities Asia Private Limited
Republic of Singapore
J.P. Morgan Securities India Private Limited
India
J.P. Morgan Securities South Africa (Proprietary) Limited
South Africa
J.P. Morgan Servicios, S.A. de C.V.,
J.P. Morgan Grupo Financiero (99.00% owned) (8)
Mexico City, Mexico
J.P. Morgan Services Ltd.
Singapore
J.P. Morgan Societa di Gestione del Risparmio S.p.A.. (99.90% owned) (4)
Italy
J.P. Morgan S.p.A. (99.99% owned) (4)
Italy
J.P. Morgan (Suisse) S.A.
Switzerland
<PAGE> 8
J.P. Morgan Trust Bank Ltd. (72.16% owned) (3)
Japan
J.P. Morgan Venezuela S.A.
Venezuela
Banco J.P. Morgan, S.A. (53.79% owned) (5)
Brazil
Banco J.P. Morgan, S.A., Institucion de Banca Multiple,
J.P. Morgan Grupo Financiero (99.9997% owned) (8)
Mexico City, Mexico
JPM Corretora de Cambio, Titulos e Valores Mobiliarios S.A.
Brazil
Morgan Conseil S.A.
France
Morgan Guaranty Finance Limited
Bermuda
Morgan Guaranty International Bank
Delaware
Morgan Property Development Company Limited
United Kingdom
Pushkin Capital Ltd. (98% owned) (4)
Moscow, Russia Federation
ZAO J.P. Morgan Bank
Moscow, Russia Federation
SUBSIDIARIES OF J.P. MORGAN OVERSEAS CAPITAL CORPORATION
- ---------------------------------------------------------
J.P. Morgan Australia Holdings Limited
Victoria, Australia
J.P. Morgan Australia Pty Limited
Victoria, Australia
J.P. Morgan Australia Securities Limited
Victoria, Australia
J.P. Morgan Canada
Ontario, Canada
J.P. Morgan Espana S.A.
Spain
<PAGE> 9
J.P. Morgan Holdings (UK) Limited
United Kingdom
J.P. Morgan International Bank Limited
United Kingdom
J.P. Morgan Nederland N.V.
Amsterdam, The Netherlands
J.P. Morgan Nominees Pty. Limited
Victoria, Australia
J.P. Morgan Securities Canada Inc.
Ontario, Canada
J.P. Morgan Securities Hong Kong Ltd.
Crown Colony of Hong Kong
J.P. Morgan Securities Ltd.
United Kingdom
J.P. Morgan Sociedad de Valores, S.A.
Spain
J.P. Morgan Whitefriars Inc.
Delaware
J.P. Morgan Whitefriars (UK)
United Kingdom
Morgan Bank of Canada (Receivables Purchase Financing) Ltd.
Ontario, Canada
Morgan Gestion, S.A. Sociedad Gestora de Instituciones de Inversion Colectiva
Spain
Morgan Guaranty Trust Company Limited
United Kingdom
- -------------------------------
1. J.P. MORGAN INTERNATIONAL HOLDINGS CORP. HAS A 50% NON-VOTING OWNERSHIP
INTEREST.
2. J.P. MORGAN & CIE S.A. AND J.P. MORGAN SECURITIES LTD. HAVE A 7.49% AND
19.82% OWNERSHIP INTEREST RESPECTIVELY.
3. J.P. MORGAN & CIE S.A. OWNS PREFERRED SHARES CARRYING 27.84% VOTING POWER.
4. J.P. MORGAN OVERSEAS CAPITAL CORPORATION OWNS THE REMAINING MINORITY
INTEREST IN THE COMPANY.
5. MORGAN GUARANTY INTERNATIONAL FINANCE CORPORATION HAS A 46.21% OWNERSHIP
INTEREST.
6. MORGAN GUARANTY TRUST COMPANY OF NEW YORK HAS A 3% OWNERSHIP INTEREST.
7. J.P. MORGAN INVESTIMENTOS E FINANCAS LTDA. HAS A .01% OWNERSHIP INTEREST.
8. MORGAN GUARANTY INTERNATIONAL FINANCE CORPORATION OWNS THE REMAINING
MINORITY INTEREST IN THE COMPANY.
9. J.P. MORGAN CAPITAL NASSAU LIMITED HAS A 47.5% OWNERSHIP INTEREST; SIXTY
WALL STREET FUND, L.P. HAS A 5% OWNERSHIP INTEREST.
<PAGE> 10
10. J.P. MORGAN CAPITAL ASIA ASSETS LTD. HAS A 47.5% OWNERSHIP INTEREST; SIXTY
WALL STREET FUND, L.P. HAS A 5% OWNERSHIP INTEREST.
11. J.P. MORGAN VENTURES CORPORATION HAS A 1% OWNERSHIP INTEREST.
12. JPMAC HOLDINGS INC. HAS A 45% NON-VOTING OWNERSHIP INTEREST AND AN 8.7%
VOTING INTEREST.
13. J.P. MORGAN & CIE S.A. AND J.P. MORGAN (SUISSE) S.A. HAVE AN 8% AND 14.94%
OWNERSHIP INTEREST, RESPECTIVELY.
14. JOINT VENTURE WITH DAI-ICHI KANGYO BANK.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 33-44312, 33-45651, 33-49775, 33-55851, 333-64193,
333-01723, 333-01121, 333-01121-01, 333-15079, 333-15079-01 through 04,
333-20427, 333-20427-01 through 03, 333-37315, 333-40447, 333-38633,
333-38633-01,333-47753, 333-51961, and 333-85283) and in the Registration
Statements on Form S-8, as amended, (Nos. 33-61167, 33-61181, 33-65065,
33-49267, 33-32659, 33-49419, and 33-63659) of our report dated January 12, 2000
appearing on page 57 of the J. P. Morgan & Co. Incorporated Annual Report, which
is included as Exhibit 13 to this Annual Report on Form 10-K for the year ended
December 31, 1999.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, New York
March 8, 2000
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Douglas A. Warner III
<PAGE> 2
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Paul A. Allaire
<PAGE> 3
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Riley P. Bechtel
<PAGE> 4
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Lawrence A. Bossidy
<PAGE> 5
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Martin Feldstein
<PAGE> 6
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Ellen V. Futter
<PAGE> 7
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Hanna H. Gray
<PAGE> 8
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Walter A. Gubert
<PAGE> 9
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ James R. Houghton
<PAGE> 10
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ James L. Ketelsen
<PAGE> 11
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ John A. Krol
<PAGE> 12
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Roberto G. Mendoza
<PAGE> 13
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Michael E. Patterson
<PAGE> 14
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Lee R. Raymond
<PAGE> 15
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Richard D. Simmons
<PAGE> 16
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Kurt F. Viermetz
<PAGE> 17
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Lloyd D. Ward
<PAGE> 18
Exhibit 24
POWER OF ATTORNEY
(Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Douglas A. Warner III, Walter A. Gubert, Roberto G. Mendoza, Michael E.
Patterson, Rachel F. Robbins, James C.P. Berry and Gene A. Capello and each of
them, with full power to act without the others, as the undersigned's true and
lawful attorney-in-fact and agent, with full and several power of substitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign any and all Annual Reports of J.P. Morgan & Co.
Incorporated on Form 10-K and any and all amendments thereto pursuant to the
Securities Exchange Act of 1934, as amended, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 8th day of March, 2000.
/s/ Douglas C. Yearley
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CURRENT ANNUAL REPORT ON FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,463
<INT-BEARING-DEPOSITS> 2,345
<FED-FUNDS-SOLD> 35,970<F1>
<TRADING-ASSETS> 117,592
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 26,849
<ALLOWANCE> 281
<TOTAL-ASSETS> 260,898
<DEPOSITS> 45,319
<SHORT-TERM> 81,805<F2>
<LIABILITIES-OTHER> 98,085<F3>
<LONG-TERM> 24,250
0
694
<COMMON> 502
<OTHER-SE> 10,243
<TOTAL-LIABILITIES-AND-EQUITY> 260,898
<INTEREST-LOAN> 1,670
<INTEREST-INVEST> 1,588
<INTEREST-OTHER> 7,712
<INTEREST-TOTAL> 10,970
<INTEREST-DEPOSIT> 2,253
<INTEREST-EXPENSE> 9,429
<INTEREST-INCOME-NET> 1,541
<LOAN-LOSSES> (175)<F4>
<SECURITIES-GAINS> 332<F5>
<EXPENSE-OTHER> 5,742<F6>
<INCOME-PRETAX> 3,114
<INCOME-PRE-EXTRAORDINARY> 2,055
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,055
<EPS-BASIC> 11.16
<EPS-DILUTED> 10.39
<YIELD-ACTUAL> .85
<LOANS-NON> 77
<LOANS-PAST> 29
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 595<F7>
<CHARGE-OFFS> 47<F7>
<RECOVERIES> 33<F7>
<ALLOWANCE-CLOSE> 406<F7>
<ALLOWANCE-DOMESTIC> 30<F7>
<ALLOWANCE-FOREIGN> 16<F7>
<ALLOWANCE-UNALLOCATED> 360<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 a reversal of provision for loan losses of ($175) million, and no
provision for credit losses on lending commitments, recorded in Other revenue.
<F5>Includes gain and losses on debt and equity investment securities,
other-than-temporary impairments or write-downs in value, and related dividend
income.
<F6>Includes employee compensation and benefits, net occupancy, technology and
communications, and other expenses.
<F7>Amounts relate to the firm's allowance for loan losses and allowance for credit
losses on lending commitments, such as commitments, standby letter of credit,
and guarantees. The unallocated allowance represents our statistical
estimate of probable loss inherent in our performing portfolio of traditional
credit products, net of recoveries, determined in accordance with SFAS No. 5
(Our expected loss component). 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>
