<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
J.P. MORGAN & CO. INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-5885 13-2625764
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
60 Wall Street, New York, NY 10260-0060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 483-2323
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes..X.. No.....
Number of shares outstanding of each of the registrant's classes of common stock
at October 31, 2000:
Common Stock, $2.50 Par Value 160,039,517 Shares
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1
<PAGE> 2
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following financial statement information as of and for the three and nine
months ended September 30, 2000, is set forth within this document on the pages
indicated:
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Three month Consolidated statement of income
J.P. Morgan & Co. Incorporated ............................................................... 3
Nine month Consolidated statement of income
J.P. Morgan & Co. Incorporated ............................................................... 4
Consolidated balance sheet
J.P. Morgan & Co. Incorporated ............................................................... 5
Consolidated statement of changes in stockholders' equity
J.P. Morgan & Co. Incorporated ............................................................... 6
Consolidated statement of cash flows
J.P. Morgan & Co. Incorporated ............................................................... 7
Consolidated statement of condition
Morgan Guaranty Trust Company of New York .................................................... 8
Notes to Consolidated financial statements
J.P. Morgan & Co. Incorporated ............................................................ 9-26
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial highlights ........................................................................ 27
Segment results .......................................................................... 27-28
Financial review ......................................................................... 28-29
Capital and Risk management .............................................................. 30-36
Consolidated average balances and net interest earnings ....................................... 37-40
Cross-border and local outstandings under the regulatory basis ................................... 41
PART II -- OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K ......................................................... 42
SIGNATURES ....................................................................................... 43
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
In millions, except share data
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------------------------
September 30 September 30 Increase/ June 30 Increase/
2000 1999 (Decrease) 2000 (Decrease)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $3,354 $2,783 $571 $3,244 $110
Interest expense 3,004 2,394 610 2,865 139
------------------------------------------------------------------------------------------------------------
Net interest revenue 350 389 (39) 379 (29)
Reversal of provision for loan losses (7) (45) 38 (4) (3)
------------------------------------------------------------------------------------------------------------
Net interest revenue after loan loss
provisions 357 434 (77) 383 (26)
NONINTEREST REVENUES
Trading revenue 852 424 428 906 (54)
Advisory and underwriting fees 400 398 2 468 (68)
Investment management fees 284 270 14 303 (19)
Fees and commissions 233 206 27 232 1
Investment securities (loss) / revenue (1) 271 (272) 128 (129)
Other revenue / (loss) 197 (a) (18) (a) 215 59 (b) 138
------------------------------------------------------------------------------------------------------------
Total noninterest revenues 1,965 1,551 414 2,096 (131)
Total revenues, net 2,322 1,985 337 2,479 (157)
OPERATING EXPENSES
Employee compensation and benefits 1,118 889 229 1,097 21
Net occupancy 91 82 9 81 10
Technology and communications 247 229 18 246 1
Other expenses 153 141 12 236 (83)
------------------------------------------------------------------------------------------------------------
Total operating expenses 1,609 1,341 268 1,660 (51)
Income before income taxes 713 644 69 819 (106)
Income taxes 199 202 (3) 277 (78)
------------------------------------------------------------------------------------------------------------
Net income 514 442 72 542 (28)
PER COMMON SHARE
Net income:
Basic $2.97 $2.39 $0.58 $3.10 ($0.13)
Diluted 2.77 2.22 0.55 2.90 (0.13)
Dividends declared 1.00 0.99 0.01 1.00 -
------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a reversal of provision for credit losses on lending commitments
of $29 million and $15 million for the three months ended September 30,
2000 and 1999, respectively.
(b) Includes a provision for credit losses on lending commitments of $37
million for the three months ended June 30, 2000.
See notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
In millions, except share data
<TABLE>
<CAPTION>
Nine months ended
---------------------------------------------------
September 30 September 30 Increase/
2000 1999 (Decrease)
---------------------------------------------------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $9,629 $8,253 $1,376
Interest expense 8,447 7,050 1,397
-------------------------------------------------------------------------------------------------
Net interest revenue 1,182 1,203 (21)
Reversal of provision for loan losses (11) (150) 139
-------------------------------------------------------------------------------------------------
Net interest revenue after loan loss provisions 1,193 1,353 (160)
NONINTEREST REVENUES
Trading revenue 2,708 2,361 347
Advisory and underwriting fees 1,411 1,245 166
Investment management fees 863 776 87
Fees and commissions 749 611 138
Investment securities revenue 284 201 83
Other revenue (a) 429 120 309
-------------------------------------------------------------------------------------------------
Total noninterest revenues 6,444 5,314 1,130
Total revenues, net 7,637 6,667 970
OPERATING EXPENSES
Employee compensation and benefits 3,515 2,955 560
Net occupancy 254 244 10
Technology and communications 751 707 44
Other expenses 604 419 185
-------------------------------------------------------------------------------------------------
Total operating expenses 5,124 4,325 799
Income before income taxes 2,513 2,342 171
Income taxes 829 796 33
-------------------------------------------------------------------------------------------------
Net income 1,684 1,546 138
PER COMMON SHARE
Net income:
Basic $9.64 $8.33 $1.31
Diluted 9.05 7.76 1.29
Dividends declared 3.00 2.97 0.03
-------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a net provision for credit losses on lending commitments of $9
million and $20 million for the nine months ended September 30, 2000 and
1999, respectively.
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
September 30 December 31
In millions, except share data 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 881 $ 2,463
Interest-earning deposits with banks 5,156 2,345
Debt investment securities available-for-sale 5,050 14,286
Equity investment securities 1,484 1,734
Trading account assets:
U.S. and foreign governments 64,611 42,663
Corporate debt and equity and other securities 40,268 31,271
Derivative receivables 35,549 43,658
---------------------------------------------------------------------------------------------------------------
Total trading account assets 140,428 117,592
Securities purchased under agreements to resell ($42,713 at September 2000 and
$34,470 at December 1999) and federal funds sold 43,788 35,970
Securities borrowed 34,874 34,716
Loans, net of allowance for loan losses of $258 at September 2000 and $281 at
December 1999 26,729 26,568
Accrued interest and accounts receivable 6,050 10,119
Premises and equipment, net of accumulated depreciation of $1,271 at September
2000 and $1,319 at December 1999 2,086 1,997
Other assets 15,155 13,108
---------------------------------------------------------------------------------------------------------------
Total assets 281,681 260,898
---------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits (including interest-bearing deposits of $38,402 at September 2000 and
$43,922 at December 1999) 40,184 45,319
Trading account liabilities:
U.S. and foreign governments 30,675 19,378
Corporate debt and equity and other securities 14,976 16,063
Derivative payables 37,886 44,976
---------------------------------------------------------------------------------------------------------------
Total trading account liabilities 83,537 80,417
Securities sold under agreements to repurchase ($82,748 at September 2000 and
$58,950 at December 1999) and federal funds purchased 83,267 59,693
Commercial paper 12,124 11,854
Other liabilities for borrowed money 12,813 10,258
Accounts payable and accrued expenses 10,366 10,621
Long-term debt not qualifying as risk-based capital 16,681 19,048
Other liabilities, including allowance for credit losses of $134 at September
2000 and $125 at December 1999 4,801 5,897
---------------------------------------------------------------------------------------------------------------
263,773 243,107
Liabilities qualifying as risk-based capital:
Long-term debt 4,796 5,202
Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 1,150
---------------------------------------------------------------------------------------------------------------
Total liabilities 269,719 249,459
STOCKHOLDERS' EQUITY
Preferred stock (authorized shares: 10,000,000)
Adjustable rate cumulative preferred stock, $100 par value (issued: 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 September 2000 and December 1999) 502 502
Capital surplus 1,211 1,249
Common stock issuable under stock award plans 2,157 2,002
Retained earnings 12,052 10,908
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 25 44
Foreign currency translation, net of taxes (15) (18)
---------------------------------------------------------------------------------------------------------------
16,626 15,381
Less: treasury stock (41,228,441 common shares and 15,000 preferred shares at
September 2000, and 36,200,897 common shares at December 1999) at cost 4,664 3,942
---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,962 11,439
---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 281,681 260,898
---------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
2000 1999
------------------------- -----------------------
Compre- Compre-
Stockholders' hensive Stockholders' hensive
In millions: Nine months ended September 30 Equity Income Equity Income
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREFERRED STOCK
Adjustable-rate cumulative preferred stock balance, January 1 and September 30 $ 244 $ 244
Variable cumulative preferred stock balance, January 1 and September 30 250 250
Fixed cumulative preferred stock, January 1 and September 30 200 200
-----------------------------------------------------------------------------------------------------------------------------------
Total preferred stock, September 30 694 694
-----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, January 1 and September 30 502 502
-----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance, January 1 1,249 1,252
Shares issued or distributed under dividend reinvestment plan,
various employee benefit plans, and income tax benefits
associated with stock options (38) (11)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30 1,211 1,241
-----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 2,002 1,460
Deferred stock awards, net 155 253
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30 2,157 1,713
-----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, January 1 10,908 9,614
Net income 1,684 $1,684 1,546 $1,546
Dividends declared on preferred stock (29) (25)
Dividends declared on common stock (482) (523)
Dividend equivalents on common stock issuable (29) (26)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30 12,052 10,586
-----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized gains on investment securities:
Balance, net of taxes, January 1 44 147
------------- -------------
Net unrealized gains/(losses) arising during the period,
before taxes ($123 in 2000 and ($325) in 1999, net of taxes) 198 (550)
Reclassification adjustment for net (gains)/losses included in net income,
before taxes (($155) in 2000 and $69 in 1999, net of taxes) (243) 118
------------- -------------
Change in net unrealized (losses) on investment securities, before taxes (45) (432)
Income tax benefit 26 177
------------- -------------
Change in net unrealized gains / (losses) on investment securities, net of taxes (19) (19) (255) (255)
Balance, net of taxes, September 30 25 (108)
------------- -------------
Foreign currency translation:
Balance, net of taxes, January 1 (18) (46)
------------- -------------
Translation adjustment arising during the period, before taxes 6 (7)
Income tax (expense) / benefit (3) 7
------------- -------------
Translation adjustment arising during the period, net of taxes 3 3 - -
------------- -------------
Balance, net of taxes, September 30 (15) (46)
-----------------------------------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income,
net of taxes, September 30 10 (154)
-----------------------------------------------------------------------------------------------------------------------------------
LESS: TREASURY STOCK
Balance, January 1 3,942 2,362
Purchases 1,464 681
Shares issued/distributed, primarily related to various employee benefit plans (742) (469)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30 4,664 2,574
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 11,962 12,008
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME 1,668 1,291
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CONSOLIDATED STATEMENT OF CASH FLOWS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
In millions Nine months ended
----------------------------------------------------------------------------------------------------------
September 30 September 30
2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME $1,684 $ 1,546
Adjustments to reconcile to cash provided by operating activities:
Noncash items: provisions for credit losses, depreciation,
amortization, deferred income taxes, stock award plans, and
write-downs on investment securities 882 1,218
Net (increase)/decrease in assets:
Trading account assets (22,985) 7,259
Securities purchased under agreements to resell (8,266) (3,668)
Securities borrowed (158) (4,728)
Loans held for sale 156 1,485
Accrued interest and accounts receivable 4,062 858
Net increase/(decrease) in liabilities:
Trading account liabilities 3,009 1,304
Securities sold under agreements to repurchase 23,766 (1,824)
Accounts payable and accrued expenses (305) 542
Other changes in operating assets and liabilities, net 830 (2,569)
Net investment securities (gains), excluding SBICs,
included in cash flows from investing activities (257) (31)
----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 2,418 1,392
----------------------------------------------------------------------------------------------------------
Net (increase) decrease in interest-earning deposits with banks (2,822) 222
Debt investment securities:
Proceeds from sales 11,813 26,498
Proceeds from maturities, calls, and mandatory redemptions 2,021 6,267
Purchases (4,582) (21,416)
Net decrease (increase) in federal funds sold 425 (1,375)
Net (increase) in loans (349) (1,508)
Payments for premises and equipment (181) (227)
Other changes, net (397) (1,821)
----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ACTIVITIES 5,928 6,640
----------------------------------------------------------------------------------------------------------
Net increase in noninterest-bearing deposits 384 227
Net (decrease) in interest-bearing deposits (5,600) (6,516)
Net (decrease) increase in federal funds purchased (224) 216
Net increase in commercial paper 270 3,689
Other liabilities for borrowed money proceeds 4,774 8,552
Other liabilities for borrowed money payments (4,685) (11,877)
Long-term debt proceeds 4,924 5,356
Long-term debt payments (7,253) (7,389)
Capital stock issued or distributed 282 200
Capital stock purchased (1,464) (669)
Dividends paid (517) (549)
Other changes, net (894) 1,087
----------------------------------------------------------------------------------------------------------
CASH (USED IN) FINANCING ACTIVITIES (10,003) (7,673)
----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks 75 47
----------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND DUE FROM BANKS (1,582) 406
Cash and due from banks at December 31, 1999 and 1998 2,463 1,203
----------------------------------------------------------------------------------------------------------
Cash and due from banks at September 30, 2000 and 1999 881 1,609
----------------------------------------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 8,868 $ 6,884
Income taxes 515 764
----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
September 30 December 31
In millions, except share data 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 674 $ 2,382
Interest-earning deposits with banks 4,964 2,266
Debt investment securities available-for-sale 2,311 4,992
Trading account assets 89,366 84,786
Securities purchased under agreements to resell and federal funds sold 24,313 19,094
Securities borrowed 11,679 9,700
Loans, net of allowance for loan losses of $256 at September 2000 and
$280 at December 1999 26,286 26,072
Accrued interest and accounts receivable 4,404 4,426
Premises and equipment, net of accumulated depreciation of $1,110 at
September 2000 and $1,113 at December 1999 1,785 1,810
Other assets 12,482 12,138
-------------------------------------------------------------------------------------------------------
Total assets 178,264 167,666
-------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 992 907
In offices outside the U.S. 791 501
Interest-bearing deposits:
In offices in the U.S. 3,519 4,256
In offices outside the U.S. 36,716 42,052
-------------------------------------------------------------------------------------------------------
Total deposits 42,018 47,716
Trading account liabilities 73,443 72,066
Securities sold under agreements to repurchase and federal funds purchased 26,297 13,610
Other liabilities for borrowed money 9,128 5,482
Accounts payable and accrued expenses 6,673 6,310
Long-term debt not qualifying as risk-based capital (includes $837 at
September 2000 and $727 at December 1999 of notes payable to J.P. Morgan) 5,505 6,224
Other liabilities, including allowance for credit losses of $134 at
September 2000 and $125 at December 1999 1,663 2,719
-------------------------------------------------------------------------------------------------------
164,727 154,127
Long-term debt qualifying as risk-based capital (includes $2,673 at
September 2000 and $2,853 at December 1999 of notes payable to J.P. Morgan) 2,712 2,944
-------------------------------------------------------------------------------------------------------
Total liabilities 167,439 157,071
STOCKHOLDER'S EQUITY
Preferred stock, $100 par value (authorized shares: 2,500,000) - -
Common stock, $25 par value (authorized shares: 11,000,000; issued and
outstanding 10,599,027) 265 265
Surplus 3,305 3,305
Undivided profits 7,231 6,975
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 36 67
Foreign currency translation, net of taxes (12) (17)
-------------------------------------------------------------------------------------------------------
Total stockholder's equity 10,825 10,595
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity 178,264 167,666
-------------------------------------------------------------------------------------------------------
</TABLE>
Member of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
See notes to consolidated financial statements.
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan & Co. Incorporated (J.P. Morgan) is the holding company for a group
of subsidiaries that provide a range of financial services.
We serve a broad client base that includes corporations, governments,
institutions, and individuals. We also enter into transactions for our own
account.
J.P. Morgan and its subsidiaries use accounting and reporting policies and
practices that conform with U.S. Generally Accepted Accounting Principles.
Basis of presentation
Our consolidated financial statements include the accounts of J.P. Morgan and of
subsidiaries in which we have more than 50% ownership. All material intercompany
accounts and transactions are eliminated during consolidation.
For companies in which we have significant influence over operating and
financing decisions (generally defined as owning a voting or economic interest
of 20% to 50%), we use the equity method of accounting. These investments are
included in Other assets, and our share of income or loss is included in Other
revenue, with the exception of such investments held in our Equity Investments
segment, where our share of income or loss is recorded in Investment securities
revenue.
Assets that we hold in an agency or fiduciary capacity are not assets of J.P.
Morgan. They are therefore not included in our "Consolidated balance sheet."
The financial information as of and for the periods ended September 30, 2000 and
1999, and June 30, 2000, is unaudited. All adjustments which, in the opinion of
management, are necessary for a fair presentation have been made and were of a
normal, recurring nature. These unaudited financial statements should be read in
conjunction with the audited financial statements included in J.P. Morgan's
Annual report on Form 10-K for the year ended December 31, 1999. The nature of
J.P. Morgan's business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain prior year amounts
have been reclassified to conform with the current presentation.
Accounting developments
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a replacement of FASB Statement No. 125", which revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral. SFAS No. 140 is effective for transfers occurring after March 31,
2001 and for disclosures relating to securitizations and collateral for fiscal
years ending after December 15, 2000. We are currently in the process of
evaluating the impact of adopting SFAS No. 140, and do not expect the adoption
of this standard to have a material impact on our consolidated financial
statements.
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.
Pursuant to SFAS No. 137, we are required to adopt SFAS No. 133 effective
January 1, 2001. We assessed the impact of adopting the standard and Derivatives
Implementation Group guidance at September 30, 2000, and concluded the
effect was not material to J.P. Morgan's results of operations or financial
position. The transition adjustment at January 1, 2001 could vary
significantly from our estimate due to continuing Derivatives Implementation
Group deliberations, market conditions and changes in business strategies.
Adoption of this standard may cause volatility in quarterly earnings and equity,
prospectively, due to the methods used to measure hedges and our decision to no
longer apply hedge accounting to certain business strategies.
9
<PAGE> 10
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying value and fair value of J.P. Morgan's
financial instruments as of September 30, 2000 and December 31, 1999 in
accordance with SFAS No. 107. Accordingly, certain amounts which are not
considered financial instruments, including premises and equipment as well as
investments under the equity method of accounting, are excluded from the table.
Refer to note 1 of our 1999 Annual report for detailed information on how we
estimate the fair value of financial instruments.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------------------- ----------------------------------
Carrying Fair Appreciation / Carrying Fair Appreciation /
In billions value value (depreciation) value value (depreciation)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FAIR VALUE THROUGH EARNINGS
Financial assets:
Trading account assets:
Cash securities $104.9 $104.9 $- $73.9 $73.9 $-
Derivative receivables 35.5 35.5 - 43.7 43.7 -
Equity investments - SBICs 0.5 0.5 - 0.6 0.6 -
Financial liabilities:
Trading account liabilities:
Cash securities 45.6 45.6 - 35.4 35.4 -
Derivative payables 37.9 37.9 - 45.0 45.0 -
FAIR VALUE THROUGH EQUITY
Financial assets:
Debt investment securities 5.1 5.1 - 14.3 14.3 -
Equity investments - marketable securities 0.2 0.2 - 0.6 0.6 -
CARRIED AT COST (APPROXIMATES FAIR VALUE)
Financial assets:
Securities purchased under agreements to resell and
federal funds sold 43.8 43.8 - 36.0 36.0 -
Securities borrowed 34.9 34.9 - 34.7 34.7 -
Loans, net 8.9 8.9 - 8.2 8.2 -
Other financial assets, including cash and due from
banks, accrued interest and accounts receivable, and other
assets 12.9 12.9 - 17.8 17.8 -
Financial liabilities:
Noninterest-bearing deposits 1.8 1.8 - 1.4 1.4 -
Securities sold under agreements to repurchase and
federal funds purchased 83.3 83.3 - 59.7 59.7 -
Other financial liabilities, including securities lent,
accounts payable and other liabilities 19.5 19.5 - 18.7 18.7 -
CARRIED AT COST
Financial assets:
Interest-earnings deposits with banks 5.2 5.2 - 2.3 2.3 -
Loans, net 17.8 17.7 (0.1) 18.3 18.4 0.1
Related derivatives - - - - 0.1 0.1
Equity investments - nonmarketable securities 0.8 0.8 - 0.5 0.6 0.1
Other financial assets 7.5 7.6 0.1 6.4 6.4 -
Financial liabilities:
Interest-bearing deposits 38.4 38.5 (0.1) 43.9 44.2 (0.3)
Related derivatives - (0.1) 0.1 - (0.1) 0.1
Commercial paper 12.1 12.1 - 11.9 11.9 -
Other liabilities for borrowed money 8.1 8.1 - 7.2 7.2 -
Long-term debt 21.5 21.4 0.1 24.3 24.1 0.2
Related derivatives - 0.2 (0.2) - 0.3 (0.3)
Other financial liabilities - - - 0.7 0.7 -
Allowance - lending commitments 0.1 - 0.1 0.1 - 0.1
Company-obligated mandatorily redeemable preferred
securities of subsidiaries 1.2 1.1 0.1 1.2 1.1 0.1
Related derivatives - 0.1 (0.1) - 0.1 (0.1)
Lending commitments - (0.1) (0.1) - (0.2) (0.2)
-----------------------------------------------------------------------------------------------------------------------------------
Net depreciation before considering income taxes (0.1) (0.1)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
3. SEGMENTS
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in assessing
performance. In accordance with SFAS No. 131, we have presented results based on
the segments as reviewed separately by the chief operating decision maker, our
chairman and chief executive officer, as well as other members of senior
management. Each segment is defined by the products and services it provides
globally to our clients or the activities it undertakes solely for our own
account.
J.P. Morgan's segments, or activities, are Investment Banking, Equities,
Interest Rate and Currency Markets, Credit Markets, Asset Management Services,
Equity Investments, and Proprietary Positioning. During the second quarter of
2000, the firm announced organizational changes, which included the combination
of our Credit Markets and Credit Portfolio segments into a single Credit Markets
segment. In addition, revenue and expense allocations between Investment Banking
and the other segments, primarily Equities and Credit Markets, have been changed
to reflect the new organization. Prior period results have been restated.
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 Markets segment whose cost of equity
incorporates 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 of our 1999 Annual report, except for
management reporting policies related to the tax-equivalent adjustment and
reporting certain segments on a total return basis. For purposes of
comparability, segment results include an adjustment to gross-up tax-exempt
revenue to a taxable basis; this adjustment is eliminated in consolidation. In
addition, in arriving at pretax EVA an adjustment is made to record certain
segments on a total return basis; the Proprietary Positioning segment is the
only segment significantly affected by this adjustment (see footnote (c) to the
segment results table below.)
Our economic capital allocation model estimates the amount of equity required by
each business activity and the firm as a whole. Business economic capital is
estimated as if each activity were conducted as a standalone operating entity.
This estimate is based, to the extent possible, on observations of the capital
structures and risk profiles of public companies or benchmarks. In particular,
for our markets and asset management activities, required economic capital is
based on the revenue volatility and fixed expenses of public U.S. investment
banks and asset management companies, respectively; for Credit Markets, capital
is based on a simulation of unexpected credit losses; and, for Equity
Investments, capital is equal to the carrying value of the portfolio.
Diversification of Morgan's portfolio of businesses is reflected as a reduction
to the consolidated level of required equity and is a factor in assessing the
appropriate level of capitalization of the firm. The benefit of diversification
is not allocated to the segments.
The following table presents segment results for the three and nine months ended
September 30, 2000 and 1999, respectively.
11
<PAGE> 12
<TABLE>
<CAPTION>
Interest Asset
Invest- Rate Manage- Equity
ment and Currency Credit ment Invest-
In millions Banking Equities Markets Markets Services ments
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Net interest revenues $ 21 $ 36 $ 50 $124(a) $31 $2
---------------------------------------------------------------------------------------------------------
Trading revenue 88 241 291 94 17 -
Advisory and underwriting fees 315 21 17 61 4 2
Investment management fees 1 - - - 275 7
Fees and commissions (4) 125 31 36 31 -
Investment securities revenue 1 - 1 - - 5
Other revenue 4 25 36 31 32 (2)
---------------------------------------------------------------------------------------------------------
Total noninterest revenues 405 412 376 222 359 12
---------------------------------------------------------------------------------------------------------
Total revenues 426 448 426 346 390 14
---------------------------------------------------------------------------------------------------------
Total operating expenses 368 263 282 189 302 28
---------------------------------------------------------------------------------------------------------
Total pretax income 58 185 144 157 88 (14)
---------------------------------------------------------------------------------------------------------
Pretax EVA 22 152 64 6 60 (115)
---------------------------------------------------------------------------------------------------------
Total assets at period end (in billions) 1 27 106 70 13 1
---------------------------------------------------------------------------------------------------------
Avg. required economic capital 918 708 1,616 4,181 620 1,523
---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net interest revenues 93 30 79 126(a) 38 12
---------------------------------------------------------------------------------------------------------
Trading revenue 10 111 155 148 7 -
Advisory and underwriting fees 257 3 15 113 8 2
Investment management fees - - - - 267 5
Fees and commissions 5 93 39 36 16 3
Investment securities revenue - 1 (4) (3) 1 320
Other revenue 1 14 37 5 13 (1)
---------------------------------------------------------------------------------------------------------
Total noninterest revenues 273 222 242 299 312 329
---------------------------------------------------------------------------------------------------------
Total revenues 366 252 321 425 350 341
---------------------------------------------------------------------------------------------------------
Total operating expenses 292 168 288 153 276 52
---------------------------------------------------------------------------------------------------------
Total pretax income 74 84 33 272 74 289
---------------------------------------------------------------------------------------------------------
Pretax EVA 50 51 (65) 135 56 164
---------------------------------------------------------------------------------------------------------
Total assets at period end (in billions) 1 19 101 69 9 2
---------------------------------------------------------------------------------------------------------
Avg. required economic capital 517 524 2,012 3,716 565 1,488
---------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net interest revenues 43 82 295 403(a) 105 (3)
---------------------------------------------------------------------------------------------------------
Trading revenue 195 873 756 511 54 (10)
Advisory and underwriting fees 1,044 97 43 221 22 5
Investment management fees 4 - - - 851 11
Fees and commissions (7) 416 110 93 97 (4)
Investment securities revenue 14 - - 12 - 314
Other revenue 11 68 95 4 77 (1)
---------------------------------------------------------------------------------------------------------
Total noninterest revenues 1,261 1,454 1,004 841 1,101 315
---------------------------------------------------------------------------------------------------------
Total revenues 1,304 1,536 1,299 1,244 1,206 312
---------------------------------------------------------------------------------------------------------
Total operating expenses 1,160 821 896 615 905 99
---------------------------------------------------------------------------------------------------------
Total pretax income 144 715 403 629 301 213
---------------------------------------------------------------------------------------------------------
Pretax EVA 57 595 111 242 230 (2)
---------------------------------------------------------------------------------------------------------
Total assets at period end (in billions) 1 27 106 70 13 1
---------------------------------------------------------------------------------------------------------
Avg. required economic capital 730 734 1,712 3,864 595 1,689
---------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net interest revenues 102 71 308 625(a) 88 (4)
---------------------------------------------------------------------------------------------------------
Trading revenue 133 431 975 790 29 -
Advisory and underwriting fees 852 33 41 298 18 9
Investment management fees - - - - 769 12
Fees and commissions 16 287 120 89 66 (3)
Investment securities revenue (1) - (5) 1 - 320
Other revenue - 70 91 (51) 32 (1)
---------------------------------------------------------------------------------------------------------
Total noninterest revenues 1,000 821 1,222 1,127 914 337
---------------------------------------------------------------------------------------------------------
Total revenues 1,102 892 1,530 1,752 1,002 333
---------------------------------------------------------------------------------------------------------
Total operating expenses 893 546 968 633 801 79
---------------------------------------------------------------------------------------------------------
Total pretax income 209 346 562 1,119 201 254
---------------------------------------------------------------------------------------------------------
Pretax EVA 138 241 255 609 147 104
---------------------------------------------------------------------------------------------------------
Total assets at period end (in billions) 1 19 101 69 9 2
---------------------------------------------------------------------------------------------------------
Avg. required economic capital 521 598 2,042 4,225 553 1,377
---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Proprietary Consol-
In millions Positioning Corporate idated
----------------------------------------------------------------------------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Net interest revenues $ 25(b) $ 68 $357
----------------------------------------------------------------------------
Trading revenue 104 17 852
Advisory and underwriting fees - (20) 400
Investment management fees - 1 284
Fees and commissions - 14 233
Investment securities revenue (10) 2 (1)
Other revenue 191 (120) 197
----------------------------------------------------------------------------
Total noninterest revenues 285 (106) 1,965
----------------------------------------------------------------------------
Total revenues 310(c) (38) 2,322
----------------------------------------------------------------------------
Total operating expenses 72 105 1,609
----------------------------------------------------------------------------
Total pretax income 238 (143)(d) 713
----------------------------------------------------------------------------
Pretax EVA 235 (112)(e) 312
----------------------------------------------------------------------------
Total assets at period end (in billions) 52 12 282
----------------------------------------------------------------------------
Avg. required economic capital 347 (1,198)(f) 8,715
----------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net interest revenues 50(b) 6 434
----------------------------------------------------------------------------
Trading revenue (32) 25 424
Advisory and underwriting fees - - 398
Investment management fees - (2) 270
Fees and commissions 1 13 206
Investment securities revenue (45) 1 271
Other revenue 32 (119) (18)
----------------------------------------------------------------------------
Total noninterest revenues (44) (82) 1,551
----------------------------------------------------------------------------
Total revenues 6(c) (76) 1,985
----------------------------------------------------------------------------
Total operating expenses 37 75 1,341
----------------------------------------------------------------------------
Total pretax income (31) (151)(d) 644
----------------------------------------------------------------------------
Pretax EVA (193) (97)(e) 101
----------------------------------------------------------------------------
Total assets at period end (in billions) 41 13 255
----------------------------------------------------------------------------
Avg. required economic capital 1,503 (1,122)(f) 9,203
----------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net interest revenues 121(b) 147 1,193
----------------------------------------------------------------------------
Trading revenue 253 76 2,708
Advisory and underwriting fees - (21) 1,411
Investment management fees - (3) 863
Fees and commissions 2 42 749
Investment securities revenue (64) 8 284
Other revenue 469 (294) 429
----------------------------------------------------------------------------
Total noninterest revenues 660 (192) 6,444
----------------------------------------------------------------------------
Total revenues 781(c) (45) 7,637
----------------------------------------------------------------------------
Total operating expenses 181 447 5,124
----------------------------------------------------------------------------
Total pretax income 600 (492)(d) 2,513
----------------------------------------------------------------------------
Pretax EVA 582 (559)(e) 1,256
----------------------------------------------------------------------------
Total assets at period end (in billions) 52 12 282
----------------------------------------------------------------------------
Avg. required economic capital 444 (1,239)(f) 8,529
----------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net interest revenues 191(b) (28) 1,353
----------------------------------------------------------------------------
Trading revenue (37) 40 2,361
Advisory and underwriting fees - (6) 1,245
Investment management fees - (5) 776
Fees and commissions 2 34 611
Investment securities revenue (126) 12 201
Other revenue 126 (147) 120
----------------------------------------------------------------------------
Total noninterest revenues (35) (72) 5,314
----------------------------------------------------------------------------
Total revenues 156(c) (100) 6,667
----------------------------------------------------------------------------
Total operating expenses 112 293 4,325
----------------------------------------------------------------------------
Total pretax income 44 (393)(d) 2,342
----------------------------------------------------------------------------
Pretax EVA (382) (258)(e) 854
----------------------------------------------------------------------------
Total assets at period end (in billions) 41 13 255
----------------------------------------------------------------------------
Avg. required economic capital 2,111 (1,316)(f) 10,111
----------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
(a) The adjustment to gross up Credit Markets' revenue to a taxable basis was
$11 million and $7 million for the three months ended September 30, 2000
and 1999, respectively. For the nine months ended September 30, 2000 and
1999, the adjustment was $26 million and $20 million, respectively. These
amounts are eliminated in consolidation.
(b) The adjustment to gross up Proprietary Positioning's tax-exempt revenues to
a taxable basis was $122 million and $37 million for the three months ended
September 30, 2000 and 1999, respectively. For the nine months ended
September 30, 2000 and 1999, the adjustment was $312 million and $105
million, respectively. These amounts are eliminated in consolidation.
(c) Total return revenues, which combine reported revenues and the change in
net unrealized appreciation/depreciation, were $337 million and ($90)
million for the three months ended September 30, 2000 and 1999,
respectively. Total return for the nine months ended September 30, 2000 and
1999 was $849 million and $6 million, respectively.
(d) 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 $43 million and $19 million for the three months ended
September 30, 2000 and 1999, respectively. For the nine months ended
September 30, 2000 and 1999, these expenses were $143 million and $34
million, respectively.
- 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 ($38) million and ($101)
million for the three months ended September 30, 2000 and 1999,
respectively, and ($27) million and ($130) million for the nine months
ended September 30, 2000 and 1999, respectively. Consolidating and
management reporting offsets - which comprises offsets to certain
amounts recorded in the segments, including the allocation of earnings
on equity out of Corporate into the segments, adjustments to bring
segments to a tax-equivalent basis, and other management accounting
adjustments - were ($118) million and ($38) million for the three
months ended September 30, 2000 and 1999, respectively, and ($304)
million and ($170) million for the nine months ended September 30,
2000 and 1999, respectively.
- Nonrecurring items not allocated to segments - including gains on the
sale of businesses, revenues and expenses associated with businesses
that have been sold or are in the process of being discontinued,
including revenues and expenses related to Euroclear activities,
special charges, and other one-time corporate items. Nonrecurring
revenues were $6 million for the three months ended September 30, 2000
and 1999, and $13 million for the nine months ended September 30, 2000
and 1999. Corporate includes revenues, expenses and pretax income
related to Euroclear activities for the three months ended September
30, 2000 and 1999, respectively, as follows: revenues - $87 million
and $58 million; expenses - $8 million; and pretax income - $79
million and $50 million. For the nine months ended September 30, 2000
and 1999, revenues, expenses and pretax income related to
Euroclear-related activities were as follows: revenues - $244 million
and $188 million; expenses - $21 million and $20 million,; and pretax
income - $223 million and $168 million, respectively.
(e) 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 (f)1], the diversification effect, and excess/shortfall
capital.
(f) The following table provides a reconciliation of average common equity to
required capital for the three and nine months ended September 30, 2000 and
1999, respectively.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
-----------------------------------------------------------------------------------------------------------------------------------
In millions September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average common equity $11,030 $11,074 $10,853 $10,946
Trust preferred securities 1,150 1,150 1,150 1,150
Fixed and adjustable preferred stock 444 444 444 444
Other adjustments (101) (86) (71) (121)
-----------------------------------------------------------------------------------------------------------------------------------
Total available capital 12,523 12,582 12,376 12,419
-----------------------------------------------------------------------------------------------------------------------------------
Total required capital of business segments 9,913 10,325 9,768 11,427
Corporate (1) 1,272 1,491 1,282 1,484
Diversification (2,470) (2,613) (2,521) (2,800)
-----------------------------------------------------------------------------------------------------------------------------------
Total required capital 8,715 9,203 8,529 10,111
-----------------------------------------------------------------------------------------------------------------------------------
Excess available capital 3,808 3,379 3,847 2,308
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes capital related to goodwill, Euroclear, retirement plans and other
corporate assets.
4. BUSINESS CHANGES AND DEVELOPMENTS
Merger Announcement
In September 2000, J.P. Morgan and The Chase Manhattan Corporation ("Chase")
announced that they had entered into an agreement to merge (the "Merger") by
forming a new corporation named J.P. Morgan Chase & Co. As part of the Merger,
each share of J.P. Morgan common stock issued and outstanding immediately prior
to the effective date will be converted into 3.7 fully paid and nonassessable
shares of Chase common stock. In addition, each share of J.P. Morgan preferred
stock will be converted into one share of a corresponding series of
substantially identical J.P. Morgan Chase & Co. preferred stock. The Merger is
expected to be accounted for by Chase as a pooling of interests and to be
tax-free to J.P. Morgan and Chase stockholders. The Merger is expected to close
by the end of the first quarter of 2001 but we are preparing to close by
year-end 2000 if we have received the stockholder and regulatory approvals
required to do so.
Euroclear
Effective January 1, 2000, J.P. Morgan and the Boards of Euroclear Clearance
System PLC and Euroclear Clearance System Societe Cooperative executed a
definitive agreement to create a new, market-owned European bank to operate all
aspects of the Euroclear system. A new bank has been formed, based in Brussels
and known as Euroclear Bank, to succeed J.P. Morgan as operator and banker for
the Euroclear System. This new bank is expected to be ready to take over the
operations from J.P. Morgan by December 31, 2000. The management and staff of
Euroclear, comprising approximately 1,200 J.P. Morgan employees, will transfer
to the new entity.
Under the existing Operating Agreement, income from clearance and settlement
operations is earned by Euroclear Clearance System Societe Cooperative, while
J.P. Morgan retains earnings from providing banking services to the System's
participants. Under the definitive agreement, J.P. Morgan will continue to
receive pretax banking income for three years from January 1, 2000, with a
minimum of $195 million and maximum of $295 million per year, whether the income
is earned by J.P. Morgan prior to the changeover to the new bank or thereafter
by the new bank. After the new bank becomes operational, it will also pay J.P.
Morgan for certain assets and know-how transferred to it.
13
<PAGE> 14
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 minimum amounts due over the remaining part of the three-year
contract period, plus any gain on assets transferred to the new bank. This
amount will be subsequently adjusted based on the determination of the final
pretax banking income of Euroclear as specified in the definitive agreement.
Prior to the changeover to the successor bank, all banking income due to J.P.
Morgan under the agreement will be received as earned. Following the changeover,
50% of all banking income due to J.P. Morgan will be paid as earned and the
remaining 50% will be paid in monthly installments over the period starting the
next succeeding year and ending December 31, 2005. The successor bank will have
the option of prepaying its obligation for the remaining portion of the
three-year contract period at the higher of $245 million per year or the average
of the actual annual income (subject to the floor and cap noted above) for the
portion of the three-year period preceding the prepayment.
Pre-tax income from Euroclear-related activities reported by J.P. Morgan was
$223 million for the first nine months of 2000, $216 million for the full year
1999, and $261 million for 1998.
5. INTEREST REVENUE AND EXPENSE
The table below presents an analysis of interest revenue and expense obtained
from on- and off-balance-sheet financial instruments. Interest revenue and
expense associated with derivative financial instruments are included with
related balance sheet instruments. These derivative financial instruments are
used as hedges or to modify the interest rate characteristics of assets and
liabilities and include swaps, forwards, futures, options, and debt securities
forwards.
<TABLE>
<CAPTION>
Third quarter Nine months
---------------------------------------------------------------
In millions 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE
Deposits with banks $ 84 $ 61 $ 237 $ 221
Debt investment securities (a) 99 402 447 1,266
Trading account assets 1,325 970 3,700 2,763
Securities purchased under agreements to
resell and federal funds sold 641 407 1,792 1,188
Securities borrowed 584 456 1,605 1,374
Loans 498 415 1,447 1,249
Other sources 123 72 401 192
-------------------------------------------------------------------------------------------------------------
Total interest revenue 3,354 2,783 9,629 8,253
-------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 514 548 1,614 1,723
Trading account liabilities 534 298 1,399 866
Securities sold under agreements to
repurchase and federal funds purchased 1,083 792 2,893 2,260
Other borrowed money 508 376 1,419 1,070
Long-term debt 365 380 1,122 1,131
-------------------------------------------------------------------------------------------------------------
Total interest expense 3,004 2,394 8,447 7,050
-------------------------------------------------------------------------------------------------------------
Net interest revenue 350 389 1,182 1,203
-------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Interest revenue from debt investment securities included taxable revenue of
$91 million and $398 million and revenue exempt from U.S. income taxes of $8
million and $49 million for the three and nine months ended September 30, 2000,
respectively. Interest revenue from debt investment securities included taxable
revenue of $378 million and $1,187 million and revenue exempt from U.S. income
taxes of $24 million and $79 million for the three and nine months ended
September 30, 1999, respectively.
14
<PAGE> 15
Net interest (expense) revenue associated with derivatives used for purposes
other-than-trading was approximately ($7) million and ($59) million for the
three and nine months ended September 30, 2000, compared with approximately
($11) million and $16 million for the three and nine months ended September 30,
1999. As of September 30, 2000, approximately $5 million of net deferred losses
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 September 30, 2000. The amount of net deferred gains or losses
on closed derivative contracts changes from period to period, primarily due to
the amortization of such amounts to Net interest revenue. These changes are also
influenced by the execution of our investing strategies, which may result in the
sale of the underlying hedged instruments and/or termination of hedge contracts.
Net deferred losses / (gains) on closed derivative contracts as of September 30,
2000, are expected to amortize into Net interest revenue as follows: ($3)
million - remainder of 2000; ($9) million in 2001; ($5) million in 2002; ($5)
million in 2003; ($1) million in 2004; and approximately $18 million thereafter.
6. TRADING REVENUE
The following table presents trading revenue by principal product grouping for
the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Third quarter Nine months
-------------------------------
In millions 2000 1999 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income $510 $194 $1,538 $1,224
Equities 348 177 1,118 661
Foreign exchange (6) 53 52 476
-----------------------------------------------------------------------------------------
Total trading revenue 852 424 2,708 2,361
Trading-related net interest revenue 82 171 376 608
-----------------------------------------------------------------------------------------
Combined total 934 595 3,084 2,969
-----------------------------------------------------------------------------------------
</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, forward, and option contracts, and in
short-term interest rate products in order to help clients manage their foreign
currency exposure. Foreign exchange also includes the results from commodity
transactions in spot, forward, and option contracts, and in swaps.
7. ADVISORY AND UNDERWRITING FEES
<TABLE>
<CAPTION>
Third quarter Nine months
------------------------------
In millions 2000 1999 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisory fees $195 $204 $680 $560
Underwriting revenue and syndication fees 205 194 731 685
-----------------------------------------------------------------------------------------
Total 400 398 1,411 1,245
-----------------------------------------------------------------------------------------
</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.
15
<PAGE> 16
8. INVESTMENT SECURITIES REVENUE
<TABLE>
<CAPTION>
Third quarter Nine months
------------------------------
In millions 2000 1999 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEBT INVESTMENT SECURITIES
Gross realized gains from sales of securities $19 $55 $131 $162
Gross realized losses from sales of securities (25) (106) (187) (281)
Net gains on maturities, calls, and mandatory redemptions - - - 1
-----------------------------------------------------------------------------------------
Net debt investment securities (loss) (6) (51) (56) (118)
------------------------------------------------------------------------------------------
EQUITY INVESTMENT SECURITIES
Gross realized gains from marketable available-for-sale
securities 105 - 301 -
Gross realized gains from nonmarketable securities 10 141 14 150
Net (depreciation) / appreciation in SBIC securities (100) 249 21 255
Write-downs for other-than-temporary impairments in value (24) (112) (58) (150)
Dividend and other income 14 44 62 64
-----------------------------------------------------------------------------------------
Net equity investment securities revenue 5 322 340 319
-----------------------------------------------------------------------------------------
Total investment securities (loss) / revenue (1) 271 284 201
-----------------------------------------------------------------------------------------
</TABLE>
9. OTHER REVENUE AND OTHER EXPENSES
Other revenue
<TABLE>
<CAPTION>
Third quarter Nine months
------------------------------
In millions 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency hedging gains (a) $129 ($45) $222 $ 86
Equity earnings in certain affiliates, including related
goodwill amortization 12 (7) 57 31
Reversal of provision / (provision) for credit losses 29 15 (9) (20)
Other 27 19 159 23
-----------------------------------------------------------------------------------------------
Total other revenue 197 (18) 429 120
-----------------------------------------------------------------------------------------------
</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.
Other expenses
<TABLE>
<CAPTION>
Third quarter Nine months
------------------------------
In millions 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Professional services $39 $32 $132 $83
Marketing and business development 54 51 195 136
Other outside services 53 50 166 130
Other 7 8 111 70
-----------------------------------------------------------------------------------------------
Total other expenses 153 141 604 419
-----------------------------------------------------------------------------------------------
</TABLE>
10. INVESTMENT IN AMERICAN CENTURY COMPANIES, INC.
In January 1998, we completed the purchase of a 45% economic interest in
American Century Companies, Inc. (American Century) for $965 million. American
Century is a no-load U.S. mutual fund company selling directly to individuals.
The investment is accounted for under the equity method of accounting and
recorded in Other assets. The excess of our investment over our share of equity
(i.e., goodwill) in American Century was approximately $795 million at the time
of purchase. This amount is being amortized on a straight-line basis over a
period of 25 years resulting in annual amortization expense of approximately $32
million. As of September 30, 2000 and 1999, goodwill totaled $703 million and
$735 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.
16
<PAGE> 17
11. INVESTMENT SECURITIES
DEBT INVESTMENT SECURITIES
The following table presents the gross unrealized gains and losses and a
comparison of the cost, along with the fair and carrying value of our
available-for-sale debt investment securities as of September 30, 2000. The
gross unrealized gains or losses on each debt investment security include the
effects of any related hedge. See note 13 for additional detail of gross
unrealized gains and losses associated with open derivative contracts used to
hedge debt investment securities.
<TABLE>
<CAPTION>
Gross Gross Fair and
unrealized unrealized carrying
In millions: September 30, 2000 Cost gains losses value
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 339 $ 3 $ 1 $ 341
U.S. government agency, principally
mortgage-backed 3,015 15 129 2,901
U.S. state and political subdivision 769 90 16 843
U.S. corporate and bank debt 10 1 - 11
Foreign government 833 - - 833
Foreign corporate and bank debt 5 - 1 4
Other 108 9 - 117
-------------------------------------------------------------------------------------------------------------
Total debt investment securities 5,079 118 147 5,050
-------------------------------------------------------------------------------------------------------------
</TABLE>
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: September 30, 2000 Marketable Nonmarketable SBIC securities
--------------------------------------------------------------------------------------------------------------------------
Accounting (a) Fair value through equity Cost Fair value through earnings
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost $198 $774 $303
--------------------------------------------------------------------------------------------------------------------------
Gross unrealized gains 36 88 185
Gross unrealized losses (12) (13) -
--------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 24 (b) 75 (c) 185 (d)
--------------------------------------------------------------------------------------------------------------------------
Fair value 222 849 488
--------------------------------------------------------------------------------------------------------------------------
Carrying value on balance sheet 222 774 488
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) See note 1 of our 1999 Annual Report.
(b) Primarily relates to investments in the telecommunications and financial
services industries.
(c) Primarily relates to investments in the financial services and basic
industries.
(d) Primarily relates to investments in the telecommunications industry.
17
<PAGE> 18
12. TRADING ACCOUNT ASSETS AND LIABILITIES
The following table presents the fair and carrying value of trading account
assets and trading account liabilities as of September 30, 2000. It also
includes the average balances for the three and nine months ended September 30,
2000.
<TABLE>
<CAPTION>
Carrying value Average Balance
------------------- --------------------------------------
September 30 Third quarter Nine months
In millions: 2000 2000 2000
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRADING ACCOUNT ASSETS
U.S. Treasury $8,283 $6,200 $6,728
U.S. government agency 23,116 22,533 19,393
Foreign government 33,212 25,661 25,627
Corporate debt and equity 27,341 26,954 24,419
Other securities 12,927 11,224 9,278
Interest rate and currency swaps 16,273 13,605 15,657
Credit derivatives 1,185 996 780
Foreign exchange contracts 3,312 3,262 2,967
Interest rate futures and forwards 182 35 46
Equity and commodity contracts 2,999 1,539 3,841
Purchased option contracts 11,598 19,465 19,146
--------------------------------------------------------------------------------------------------------
140,428 131,474 127,882
--------------------------------------------------------------------------------------------------------
TRADING ACCOUNT LIABILITIES
U.S. Treasury 8,803 9,195 8,443
Foreign government 21,872 18,975 16,419
Corporate debt and equity 10,902 13,829 12,057
Other securities 4,074 6,622 5,349
Interest rate and currency swaps 15,054 11,422 14,211
Credit derivatives 1,164 997 816
Foreign exchange contracts 1,949 2,640 2,503
Interest rate futures and forwards 302 39 29
Equity and commodity contracts 4,189 1,629 2,920
Written option contracts 15,228 22,422 21,875
--------------------------------------------------------------------------------------------------------
83,537 87,770 84,622
--------------------------------------------------------------------------------------------------------
</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 $42.6 billion were netted against amounts payable for
securities purchased of $42.7 billion. This produced a net trade date payable of
$100 million, recorded in Accounts payable and accrued expenses as of September
30, 2000.
13. DERIVATIVES
In general, derivatives are contracts or agreements whose values are derived
from changes in interest rates, foreign exchange rates, credit spreads, prices
of securities, or financial or commodity indices. The timing of cash receipts
and payments for derivatives is generally determined by contractual agreement.
Derivatives are either standardized contracts executed on an exchange or
privately negotiated contracts. Futures and option contracts are examples of
standard exchange-traded derivatives. Forward and swap 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 and non-trading purposes. Non-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 associated with 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.
18
<PAGE> 19
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 table below 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.
The following table presents notional amounts for trading and non-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 of $35.5 billion reflects an $79.9 billion benefit due to the use of
legally enforceable master netting agreements in effect as of September 30,
2000.
<TABLE>
<CAPTION>
On-balance-sheet
In billions: September 30, 2000 Notional amounts credit exposure
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate and currency swaps:
Trading $4,821.2
Non-trading (a)(b) 31.6
---------------------------------------------------------------------------------------------------------------------------------
Total interest rate and currency swaps 4,852.8 $16.2
---------------------------------------------------------------------------------------------------------------------------------
Credit derivatives:
Trading 230.0
Non-trading (a) 30.4
---------------------------------------------------------------------------------------------------------------------------------
Total credit derivatives 260.4 1.2
---------------------------------------------------------------------------------------------------------------------------------
Foreign exchange spot, forward, and futures contracts:
Trading 617.8
Non-trading (a)(b) 22.6
---------------------------------------------------------------------------------------------------------------------------------
Total foreign exchange spot, forward, and futures contracts 640.4 3.3
---------------------------------------------------------------------------------------------------------------------------------
Interest rate futures, forward rate agreements, and debt securities forwards:
Trading 820.1
Non-trading 4.2
---------------------------------------------------------------------------------------------------------------------------------
Total interest rate futures, forward rate agreements,
and debt securities forwards 824.3 0.2
---------------------------------------------------------------------------------------------------------------------------------
Equity and commodity swaps, forward and futures contracts, all trading 101.5 3.0
---------------------------------------------------------------------------------------------------------------------------------
Purchased options: (c)
Trading 1,035.1
Non-trading (a) 2.7
---------------------------------------------------------------------------------------------------------------------------------
Total purchased options 1,037.8 11.6
---------------------------------------------------------------------------------------------------------------------------------
Written options, all trading (d) 1,184.2
---------------------------------------------------------------------------------------------------------------------------------
Total on-balance-sheet credit exposure 35.5
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Derivatives used as hedges of non-trading positions may be transacted with
third parties through independently managed J.P. Morgan derivative dealers that
function as intermediaries for credit and administrative purposes. In such
cases, the terms of the third-party transaction - notional, duration, currency,
etc. - are matched with the terms of the internal trade to ensure the hedged
risk has been offset with a third party. If such terms are not matched or a
third-party trade is not transacted, the intercompany trade is eliminated in
consolidation.
(b) The notional amounts of derivative contracts used for non-trading purposes,
conducted in the foreign exchange markets, primarily forward contracts, amounted
to $27.7 billion at September 30, 2000, and were primarily denominated in the
following currencies: Japanese yen $8.1 billion, Euro $8.0 billion, Swiss franc
$3.0 billion, French franc $3.0 billion, and Canadian dollar $1.8 billion.
(c) At September 30, 2000, purchased options used for trading purposes included
$744.1 billion of interest rate options, $97.9 billion of foreign exchange
options, and $193.1 billion of commodity and equity options. Options used for
non-trading purposes are primarily interest rate options. Purchased options
executed on an exchange amounted to $179.4 billion and those negotiated
over-the-counter amounted to $858.4 billion at September 30, 2000.
19
<PAGE> 20
(d) At September 30, 2000, written options included $894.8 billion of interest
rate options, $98.4 billion of foreign exchange options, and $191.0 billion of
commodity and equity options. Written option contracts executed on an exchange
amounted to $217.5 billion and those negotiated over-the-counter amounted to
$966.7 billion at September 30, 2000.
Derivatives are used to hedge or modify the interest rate characteristics of
debt investment securities, loans, deposits, other liabilities for borrowed
money, long-term debt, and other financial assets and liabilities. Net
unrealized losses associated with such derivatives contracts amounted to
approximately $100 million as of September 30, 2000. Gross unrealized gains and
gross unrealized losses associated with open derivatives contracts used for
these purposes as of September 30, 2000, are presented in the following table.
Such amounts primarily relate to interest rate and currency swaps used to hedge
or modify the interest rate characteristics of long-term debt; debt investment
securities, principally mortgage-backed securities; deposits; and other
financial instruments.
<TABLE>
<CAPTION>
Gross Gross Net
unrealized unrealized unrealized
In billions: September 30, 2000 gains (losses) gains (losses)
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt $0.2 ($0.4) ($0.2)
Debt investment securities -- (0.1) (0.1)
Deposits 0.1 (--) 0.1
Other financial instruments 0.1 (--) 0.1
------------------------------------------------------------------------------------
Total 0.4 (0.5) (0.1)
------------------------------------------------------------------------------------
</TABLE>
14. LOANS
Included in Loans are loans held for sale of approximately $3.0 billion at
September 30, 2000. These loans are recorded on the balance sheet at lower of
cost or fair value and are primarily to borrowers in the U.S. in various
industries.
15. OTHER CREDIT-RELATED PRODUCTS
Lending commitments include commitments to extend credit, standby letters of
credit and guarantees. The contractual amounts of these instruments represent
the amount at risk should the contract be fully drawn upon, the client default,
and the value of the collateral become worthless.
The total contractual amount of credit-related financial instruments does not
represent the future liquidity requirements, since we expect a significant
amount of commitments to expire or mature without being drawn. The credit risk
associated with these instruments varies according to each client's
creditworthiness and the value of any collateral held. Commitments to extend
credit generally require clients to meet certain credit-related terms and
conditions before drawdown. Market risk for commitments to extend credit,
standby letters of credit, and guarantees, while not significant, may arise as
availability of and access to credit markets change.
The following table summarizes the contractual amount of credit-related
instruments as of September 30.
<TABLE>
<CAPTION>
In billions: September 30, 2000
----------------------------------------------------------
<S> <C>
Commitments to extend credit $69.6
Standby letters of credit and
guarantees 15.5
----------------------------------------------------------
Total lending commitments 85.1
----------------------------------------------------------
</TABLE>
We also have securities lending indemnifications associated with our
Euroclear-related activities of $10.2 billion as of September 30, 2000. As of
September 30, 2000, J.P. Morgan held cash and other collateral in full support
of these securities lending indemnifications.
20
<PAGE> 21
PURCHASE OF CREDIT PROTECTION
Since December 1997, we have entered into three Synthetic Collateralized Loan
Obligations that have allowed us to reduce the credit risk on a portfolio of
counterparties totaling approximately $20 billion in notional amount. This
reduction was accomplished using credit default swaps, which transferred the
credit risk into the capital markets. The structures provide protection on all
exposures to a referenced counterparty. We have retained the first risk of loss
equity tranche in these transactions totaling $195 million. As a result of these
structures, we were able to reduce economic capital by approximately $477
million as of September 30, 2000. These structures have also allowed us to
reduce our risk-adjusted assets by approximately $2.5 billion as of September
30, 2000, thereby increasing our Tier I and Total risk-based capital ratios by
15 basis points (0.15%) and 20 basis points (0.20%), respectively. As of
September 30, 2000, these transactions have allowed us to shift the credit risk
associated with $11.6 billion of diversified exposure on our balance sheet - as
described in the following table - to what we believe is equivalent to AAA+
quality. The decrease from the original $20 billion notional amount reflects the
settlement of certain underlying counterparty exposures.
<TABLE>
<CAPTION>
Counterparty rating Notional exposure
----------------------------------------------
<S> <C>
AAA $ 569
AA 1,860
A 5,975
BBB 2,694
BB 485
B 25
CCC and below 10
----------------------------------------------
Total 11,618
----------------------------------------------
</TABLE>
The notional exposures in the above table are diversified by counterparty in the
following industries: banks - $1,139 million; nonbank financial institutions -
$1,873 million; governments - $410 million; commercial and industrial - $3,217
million; cyclical $2,724 million; and non-cyclical - $2,255 million. North
American counterparties are approximately 65% of the portfolio, European
counterparties comprise 20% of the portfolio and the remaining 15% of the
portfolio are Asia/Pacific counterparties.
The first table below summarizes the regional exposure, by industry category,
after the benefit of master netting agreements and collateral (derivatives
only), but before the benefit of purchased credit protection (i.e., credit
derivatives, including synthetic CLOs). The second table summarizes regional
exposure after the benefit of master netting agreements, collateral (derivatives
only) and purchased credit protection. The amounts below exclude exposures
related to the following: Private Banking and Euroclear-related activities,
exchange-traded derivatives, and commercial mortgage-backed securities included
in our Credit Markets segment.
BEFORE BENEFIT OF PURCHASED CREDIT PROTECTION:
<TABLE>
<CAPTION>
North America Europe Asia Pacific Latin America Total
------------------- ------------ ----------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Banks $3,390 $10,744 $1,651 $ 51 $15,836
Non-Bank Financial Institutions 25,228 6,670 1,086 2 32,986
Governments 9,569 2,000 419 408 12,396
Cyclicals 20,884 4,559 1,358 77 26,878
Non-Cyclicals 7,800 5,736 163 140 13,839
Other (Basic Materials, Healthcare, Utility) 18,030 4,487 563 508 23,588
-----------------------------------------------------------------------------------------------------------------------------------
84,901 34,196 5,240 1,186 125,523
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AFTER BENEFIT OF PURCHASED CREDIT PROTECTION:
<TABLE>
<CAPTION>
North America Europe Asia Pacific Latin America Total
------------------ ------------ ----------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Banks $3,079 $10,290 $1,277 $ 51 $14,697
Non-Bank Financial Institutions (a) 35,276 6,442 1,011 2 42,731
Governments 9,313 1,847 419 408 11,987
Cyclicals 18,815 4,020 1,241 77 24,153
Non-Cyclicals 5,790 5,494 159 140 11,583
Other (Basic Materials, Healthcare, Utility) 15,472 3,964 470 466 20,372
-----------------------------------------------------------------------------------------------------------------------------------
87,745 32,057 4,577 1,144 125,523
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The effect of the synthetic CLOs was a shift in exposure from different
regions and industries to a single, North American, non-bank financial
institutions counterparty.
21
<PAGE> 22
16. IMPAIRED LOANS
Total impaired loans, organized by the location of the counterparty - net of
charge-offs - at September 30, 2000 are presented in the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
In millions: September 30
-------------------------------------------------------------------
<S> <C>
COUNTERPARTIES IN THE U.S.
Commercial and industrial $ 20
Other 6
-------------------------------------------------------------------
26
-------------------------------------------------------------------
COUNTERPARTIES OUTSIDE THE U.S.
Commercial and industrial 93
Other 9
-------------------------------------------------------------------
102
-------------------------------------------------------------------
TOTAL IMPAIRED LOANS 128
-------------------------------------------------------------------
Allowance for impaired loans 71
-------------------------------------------------------------------
</TABLE>
Impaired loans for which no SFAS No. 114 reserve was deemed necessary were $18
million as of September 30, 2000. As of September 30, 2000, approximately 50% of
impaired loans were measured using the present value of future cash flows, 30%
of impaired loans were measured for impairment using observable market prices,
and the remainder using the fair value of collateral.
The following table presents an analysis of the changes in impaired loans.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Third quarter Nine months
In millions 2000 2000
------------------------------------------------------------------------------------
<S> <C> <C>
IMPAIRED LOANS, BEGINNING PERIOD $140 $77
------------------------------------------------------------------------------------
Additions to impaired loans 8 86
Less:
Repayments of principal, net of additional advances (3) (5)
Impaired loans returning to accrual status - -
Charge-offs:
Commercial and industrial (11) (11)
Other, primarily other financial institutions - (6)
Interest and other credits (6) (13)
------------------------------------------------------------------------------------
IMPAIRED LOANS, SEPTEMBER 30 128 128
------------------------------------------------------------------------------------
</TABLE>
An analysis of the effect of impaired loans - net of charge-offs - on interest
revenue for the three and nine months ended September 30, 2000 is presented in
the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Third quarter Nine months
In millions 2000 2000
-------------------------------------------------------------------------------------
<S> <C> <C>
Interest revenue that would have been recorded if
accruing $1 $9
Net interest revenue recorded related to the
current period - -
-------------------------------------------------------------------------------------
Negative impact of impaired loans on interest
revenue 1 9
-------------------------------------------------------------------------------------
</TABLE>
For the three and nine months ended September 30, 2000, the average recorded
investments in impaired loans was $129 million and $117 million, respectively.
As of September 30, 2000, loans of $64 million were over 90 days past due
(principal or interest) and still accruing interest, but not considered
impaired. Lending commitments to counterparties considered impaired totaled $58
million at September 30, 2000.
22
<PAGE> 23
17. ALLOWANCES FOR CREDIT LOSSES
The following table summarizes the activity of our allowance for loan losses.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Third quarter Nine months
In millions 2000 2000
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BEGINNING BALANCE $283 $281
------------------------------------------------------------------------------------------------------------------
(Reversal of provision) for loan losses in the U.S. (3) (46)
(Reversal of provision) / provision for loan losses outside the U.S. (4) 35
------------------------------------------------------------------------------------------------------------------
(7) (11)
------------------------------------------------------------------------------------------------------------------
Recoveries:
Counterparties in the U.S. - -
Counterparties outside the U.S. - 12
------------------------------------------------------------------------------------------------------------------
- 12
------------------------------------------------------------------------------------------------------------------
Charge-offs (a):
Counterparties in the U.S., primarily healthcare institutions (18) (24)
Counterparties outside the U.S.:
Commercial and industrial - -
Banks - -
Other - -
------------------------------------------------------------------------------------------------------------------
Net (charge-offs) (18) (12)
------------------------------------------------------------------------------------------------------------------
ENDING BALANCE, SEPTEMBER 30 258 258
------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Charge-offs include losses on loan sales of $6 million for the three and
nine months ended September 30, 2000.
The following table displays our allowance for loan losses by component as of
September 30, 2000.
<TABLE>
<CAPTION>
In millions
--------------------------------------------------------------------
<S> <C>
Specific counterparty components in the U.S. $ 6
Specific counterparty components outside the U.S. 65
--------------------------------------------------------------------
Total specific counterparty 71
Expected loss 187
--------------------------------------------------------------------
Total 258
--------------------------------------------------------------------
</TABLE>
The following table summarizes the activity of our allowance for credit losses
on lending commitments.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Third quarter Nine months
In millions 2000 2000
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BEGINNING BALANCE $163 $125
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
(Reversal of provision)/provision for credit losses in the U.S. (29) 17
(Reversal of provision) for credit losses outside the U.S. - (8)
--------------------------------------------------------------------------------------------------------------
(29) 9
--------------------------------------------------------------------------------------------------------------
ENDING BALANCE, SEPTEMBER 30 134 134
--------------------------------------------------------------------------------------------------------------
</TABLE>
The following table displays our allowance for credit losses on lending
commitments by component as of September 30, 2000.
<TABLE>
<CAPTION>
In millions
--------------------------------------------------------------------------------
<S> <C>
Specific counterparty components in the U.S. $ 2
Specific counterparty components outside the U.S. 4
--------------------------------------------------------------------------------
Total specific counterparty 6
Expected loss 128
--------------------------------------------------------------------------------
Total 134
--------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
18. INCOME TAXES
The effective tax rate for the three and nine months ended September 30, 2000
was 28% and 33%, respectively. The effective tax rate for the three and nine
months ended September 30, 1999 was 31% and 34%, respectively. The income tax
expense / (benefit) related to net realized gains / (losses) and write-downs for
other-than-temporary impairments in value on debt and equity investment
securities, excluding securities in SBICs, was approximately $32 million and $72
million for the three and nine months ended September 30, 2000, compared to ($9)
million and ($48) million for the three and nine months ended September 30,
1999. The applicable tax rate used to compute the income tax expense / (benefit)
related to net gains / (losses) on debt and equity investment securities for the
three and nine months ended September 30, 2000 was approximately 38% and 36%,
respectively.
19. CAPITAL REQUIREMENTS
J.P. Morgan, its subsidiaries, and certain foreign branches of its bank
subsidiary Morgan Guaranty Trust Company of New York are subject to regulatory
capital requirements of U.S. and foreign regulators. Our primary federal banking
regulator, the Board of Governors of the Federal Reserve System (Federal Reserve
Board), establishes minimum capital requirements for J.P. Morgan, the
consolidated bank holding company, and some of our subsidiaries, including
Morgan Guaranty. These requirements ensure that banks and bank holding companies
meet specific guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under generally
accepted accounting principles. Failure to meet these requirements can result in
actions by regulators that could have a direct material impact on our financial
statements. The capital of J.P. Morgan and our principal subsidiaries, Morgan
Guaranty and J.P. Morgan Securities Inc. (JPMSI), exceeded the minimum
requirements set by each regulator as of September 30, 2000.
J.P. Morgan's risk-based capital ratios are calculated in accordance with the
Federal Reserve Board's market risk capital guidelines. These guidelines require
our risk-based capital ratios to take into account general market risk and
specific issuer risk of our debt and equity trading portfolios, as well as
general market risk associated with all trading and nontrading foreign exchange
and commodity positions. The guidelines, however, continue to exclude the effect
of SFAS No. 115. The calculation of risk-based capital ratios for J.P. Morgan,
the bank holding company, includes the capital and assets of JPMSI, our U.S.
broker-dealer.
Capital ratios and amounts
The following tables show the risk-based capital and leverage ratios and amounts
for J.P. Morgan and Morgan Guaranty as of September 30, 2000.
<TABLE>
<CAPTION>
Dollars in millions Amounts Ratios(b)
----------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital(a)
J.P. Morgan $12,101 8.6%
Morgan Guaranty 10,769 9.0
----------------------------------------------------------------------------------------------
Total risk-based capital(a)
J.P. Morgan $16,960 12.0%
Morgan Guaranty 13,860 11.6
----------------------------------------------------------------------------------------------
Leverage
J.P. Morgan 4.5%
Morgan Guaranty 6.2
----------------------------------------------------------------------------------------------
</TABLE>
(a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required
minimum tier 1 capital of $5.6 billion and $4.8 billion, respectively. For
capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum
total risk-based capital of $11.3 billion and $9.6 billion, respectively.
(b) Pursuant to Federal Reserve Board guidelines, the minimum tier 1 capital,
total risk-based capital, and leverage ratios are 4%, 8%, and 3%, respectively,
for bank holding companies and banks.
Capital categories
Bank regulators use five capital category definitions for regulatory supervision
purposes. The categories range from "well capitalized" to "critically
undercapitalized." A bank is considered well capitalized if it has minimum tier
1 capital, total capital, and leverage ratios of 6%, 10%, and 5%, respectively,
under standards provided by the regulatory framework for prompt corrective
action and the Federal Reserve Board.
Bank holding companies also have guidelines that determine the capital levels at
which they shall be considered well capitalized. According to these guidelines,
a bank holding company is considered well capitalized if it has minimum tier 1
capital, total capital, and leverage ratios of 6%, 10%, and 3%, respectively.
24
<PAGE> 25
At September 30, 2000, the ratios of J.P. Morgan and Morgan Guaranty exceeded
the minimum standards required for a well capitalized bank holding company and
bank, respectively. Management is aware of no conditions or events that have
occurred since September 30, 2000, that would change J.P. Morgan's and Morgan
Guaranty's well capitalized status.
20. EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding, which includes
contingently issuable shares for which all necessary conditions for issuance
have been satisfied. Diluted EPS includes the determinants of basic EPS and, in
addition, takes into account dilutive potential common shares that were
outstanding during the period.
The following table presents the computation of basic and diluted EPS for the
three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Third quarter Nine months
----------------------------- -------------------------
Dollars in millions, except share data 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $514 $442 $1,684 $1,546
Preferred stock dividends and other (11) (9) (29) (27)
---------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings
per share - income available to
common stockholders $503 $433 $1,655 $1,519
---------------------------------------------------------------------------------------------------------
Denominator for basic earnings per share -
Weighted-average shares 169,246,855 181,511,850 171,685,117 182,405,166
Effect of dilutive securities:
Options (a) 5,100,992 5,191,290(b) 4,359,690 5,207,112(b)
Other stock awards (c) 7,131,038 7,968,493 6,888,326 8,252,293
---------------------------------------------------------------------------------------------------------
12,232,030 13,159,783 11,248,016 13,459,405
---------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
Weighted-average number of common
shares and dilutive potential common
shares 181,478,885 194,671,633 182,933,133 195,864,571
---------------------------------------------------------------------------------------------------------
Basic earnings per share $2.97 $2.39 $9.64 $8.33
Diluted earnings per share 2.77 2.22 9.05 7.76
---------------------------------------------------------------------------------------------------------
</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
exercise of outstanding stock options, reduced by the number of shares assumed
to be repurchased from the proceeds generated by the option exercise, using the
average market price of our common stock for the period. The related tax
benefits are also considered.
(b) The following options to purchase shares of our common stock were
outstanding at September 30, 1999, but were not included in the computation of
diluted EPS:
For the three months ended September 30, 1999: 4,830,000 shares at $130.94 per
share expiring July 15, 2008 and 6,074,000 shares at $135.72 per share expiring
July 15, 2009. For the nine months ended September 30, 1999: 6,074,000 shares at
$135.72 per share expiring July 15, 2009.
The inclusion of such options using the treasury stock method would have an
antidilutive effect on the diluted EPS calculation because the options' exercise
price was greater than the average market price of our common shares for the
respective period.
(c) Weighted-average incremental shares for other stock awards include
restricted stock and stock bonus awards. The related tax benefits are also
considered.
21. COMMITMENTS AND CONTINGENT LIABILITIES
Excluding mortgaged properties, assets on our "Consolidated balance sheet" of
approximately $124.4 billion at September 30, 2000, were pledged as collateral
for borrowings, to qualify for fiduciary powers, to secure public monies as
required by law, and for other purposes.
At September 30, 2000 we had commitments to enter into future resale and
repurchase agreements totaling $3.7 billion and $1.9 billion, respectively.
25
<PAGE> 26
22. INTERNATIONAL OPERATIONS
For financial reporting purposes, we divide our operations into domestic and
international components. As these operations are highly integrated, estimates
and subjective assumptions have been made to apportion revenue and expense
between domestic and international components. In 1999, we changed our estimates
and assumptions to be consistent with the allocations used for our business
segments as reported in note 3. Prior period amounts have been restated to
reflect this allocation methodology.
Revenues and expenses
- Client-focused revenues are allocated between the regions responsible for
managing the client relationship and the regions responsible for product
execution and risk management
- Revenues from proprietary investing and trading activities and equity
investments are allocated based on the location of the risk taker
- Expenses are allocated based on the estimated cost associated with
servicing each region's client base. Corporate revenues and expenses are
allocated primarily to the region in which they are recorded. Certain
centrally managed expenses are allocated based on the underlying activity.
The results for the three and nine months ended September 30, 2000 and 1999 were
distributed among domestic and international operations, as presented in the
following table.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Income
Pretax tax Net
Total Total income/ expense/ income/
In millions revenues(a) expenses (loss) (benefit) (loss)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THIRD QUARTER 2000
Europe (b) $ 1,055 $ 618 $ 437 $ 177 $ 260
Asia-Pacific 291 228 63 26 37
Latin America (c) 97 86 11 4 7
------------------------------------------------------------------------------------------------------------------------------
Total international operations 1,443 932 511 207 304
Domestic operations (d) 879 677 202 (8) 210
------------------------------------------------------------------------------------------------------------------------------
Total 2,322(e) 1,609 713 199 514
------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER 1999
Europe (b) 613 438 175 71 104
Asia-Pacific 25 140 (115) (47) (68)
Latin America (c) 37 164 (127) (51) (76)
------------------------------------------------------------------------------------------------------------------------------
Total international operations 675 742 (67) (27) (40)
Domestic operations (d) 1,310 599 711 229 482
------------------------------------------------------------------------------------------------------------------------------
Total 1,985(f) 1,341 644 202 442
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS 2000
Europe (b) 2,861 1,518 1,343 544 799
Asia-Pacific 796 525 271 110 161
Latin America (c) 288 255 33 13 20
------------------------------------------------------------------------------------------------------------------------------
Total international operations 3,945 2,298 1,647 667 980
Domestic operations (d) 3,692 2,826 866 162 704
------------------------------------------------------------------------------------------------------------------------------
Total 7,637(g) 5,124 2,513 829 1,684
------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS 1999
Europe (b) 2,527 1,377 1,150 466 684
Asia-Pacific 322 416 (94) (38) (56)
Latin America (c) 869 380 489 198 291
------------------------------------------------------------------------------------------------------------------------------
Total international operations 3,718 2,173 1,545 626 919
Domestic operations (d) 2,949 2,152 797 170 627
------------------------------------------------------------------------------------------------------------------------------
Total 6,667(h) 4,325 2,342 796 1,546
------------------------------------------------------------------------------------------------------------------------------
</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 revenues and
expenses relate substantially to United States operations.
(e) For the three months ended September 30, 2000, revenues include a net
reversal of provision for credit losses of ($36) million, which was
recorded as follows: ($4) million in Europe, and ($32) million in Domestic
operations.
(f) For the three months ended September 30, 1999, revenues include a net
reversal of provision for credit losses of ($60) million, which was
recorded as follows: ($32) million in Europe, ($32) million in Asia
Pacific, ($13) million in Latin America, and $17 million in Domestic
operations.
(g) For the nine months ended September 30, 2000, revenues include a net
reversal of provision for credit losses of ($2) million which was recorded
as follows: $27 million in Europe, and ($29) million in Domestic
operations.
(h) For the nine months ended September 30, 1999, revenues include a net
reversal of provision for credit losses of ($130) million which was
recorded as follows: ($22) million in Europe, ($70) million in Asia
Pacific, ($41) million in Latin America, and $3 million in Domestic
operations.
26
<PAGE> 27
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
J.P. Morgan reported third quarter net income of $514 million, up from $442
million in the third quarter of 1999. Earnings per share were $2.77, an increase
of 25% from $2.22 a year ago. Return on common equity was 18% in the quarter
compared with 16% in the third quarter of 1999.
Net income for the first nine months of 2000 was $1.684 billion compared with
$1.546 billion in the same period a year ago. Earnings per share were $9.05
compared with $7.76, an increase of 17%. Return on common equity increased to
20% from 19% in the first nine months of 1999.
MERGER ANNOUNCEMENT
On September 13, 2000, The Chase Manhattan Corporation and J.P. Morgan & Co.
Incorporated announced that they have agreed to merge. The merged firm will be
named J.P. Morgan Chase & Co. The transaction is expected to be accounted for as
a pooling of interests and to be tax-free to J.P. Morgan and Chase stockholders.
The deal is expected to close by the end of the first quarter of 2001 and is
subject to approval by shareholders of both companies, as well as by U.S.
Federal and state and foreign regulatory authorities.
OTHER HIGHLIGHTS FOR THE THIRD QUARTER:
- Economic value added (EVA) was $227 million, an increase of 170% over the
prior year's quarter
- Revenues of $2.322 billion rose 17% from a year ago
- Asset Management Services revenues rose 11% on strength in private banking
- Investment Banking revenues increased 16% on growth in capital raising and
advisory fees
- Combined revenues in Equities, Interest Rate Markets, and Credit Markets
increased $222 million
- Proprietary Positioning revenues of $310 million were strong while Equity
Investment revenues of $14 million reflected weakness in the
telecommunications sector
- Expenses of $1.609 billion increased 20%
SEGMENT RESULTS
Asset Management Services revenues in the third quarter were $390 million, an
increase of 11% over the prior-year period. Private banking revenues were the
primary driver of the increase. Revenues from institutional investment
management and our equity investment in American Century also rose. Assets under
management grew 15% from a year ago to approximately $373 billion at September
30, 2000. This excludes $114 billion of assets under management at American
Century, in which we have a 45% interest.
Investment Banking revenues were $426 million in the quarter, up $60 million
from the year-ago quarter. Advisory, capital raising, and derivatives
origination activities contributed to the increase. For the first nine months of
2000, Thomson Financial Securities Data ranked J.P. Morgan sixth in completed
worldwide mergers and acquisitions, with a market share of 16.2%. This compares
with a rank of sixth for the 1999 nine months and a share of 13.1%. We ranked
sixth among U.S. lead equity underwriters with a market share of 4.3%, compared
with sixth and a market share of 5.5% in the 1999 year-to-date period.
Equities revenues increased 78% to $448 million over the prior-year quarter,
with equity derivatives the largest contributor to this sector. Revenues from
equity derivatives doubled, reflecting sharply higher trading gains across all
regions as well as increased client demand, particularly in Europe. Cash
equities increased more than 50% on higher volumes in both the U.S. and Europe.
Interest Rate and Currency Markets revenues increased 33% to $426 million over
the prior-year quarter because of significantly improved derivatives trading
results, primarily in Europe. In the year-ago quarter we had very weak trading
27
<PAGE> 28
results, mainly associated with European markets. Compared to the prior year's
quarter, client flows were weaker across most interest rate and currency
markets.
Credit Markets revenues were $346 million, down 19% from the prior-year period.
While revenues from activities in debt capital markets, structured finance, and
Latin America rose, this increase was more than offset by lower revenues from
managing our credit risk portfolio. This quarter we recognized valuation gains
from improved credit quality in our portfolio, although a lower amount than in
last year's quarter, and we recorded mark-to-market losses of approximately $100
million on an equity position taken in a debt restructuring.
Equity Investments revenues were $14 million in the third quarter. The results
included realized gains of $118 million on investments in the financial services
sector, offset by a reduction of approximately $100 million in unrealized market
appreciation, primarily associated with an investment in the telecommunications
industry. In the third quarter of 1999, reported revenues were $341 million,
mainly as a result of an increase in unrealized appreciation in the portfolio.
Proprietary Positioning revenues were $310 million in the third quarter. Total
return - reported revenues and the change in net unrealized value - was $337
million. Proprietary Positioning returns were driven by excellent results in our
fixed income and equity relative value portfolios in the U.S. and Europe. In the
year-ago quarter Proprietary Positioning revenues were $6 million and total
return was a loss of $110 million. The weakness in the year-ago quarter resulted
from significant losses in our U.S. government agency investment and Asian
portfolios, where we have significantly reduced risk.
FINANCIAL REVIEW
REVENUES
Revenues were $2.322 billion in the third quarter of 2000, up 17% from the 1999
period. For the first nine months of 2000 revenues were $7.637 billion compared
to $6.667 billion for the year-ago period, an increase of 15%.
Before loan loss provisions, net interest revenues in the third quarter of 2000
were $350 million compared to $389 million in the year-ago quarter. This
decrease primarily reflected lower net interest revenues from activities in our
Credit Markets and Interest Rate and Currency Markets segments. Excluding loan
loss provisions, year-to-date net interest revenues were $1.182 billion for the
first nine months of 2000 compared to $1.203 billion in the year ago period.
Loss provisions for the third quarter of 2000 were negative $7 million
reflecting improvement in the credit quality of our portfolio. This compares to
loan loss provisions of negative $45 million in the third quarter of 1999 which
reflected ongoing improvements in the credit markets and the lowering of certain
emerging markets exposures in our traditional credit portfolio. For the first
nine months of 2000 and 1999, loan loss provisions were negative $11 million and
$150 million, respectively. The 1999 negative provision of $150 million was
taken in light of better credit market conditions, especially in emerging
markets and reduced credit risk exposures.
Total trading revenues were $852 million in the third quarter of 2000 compared
with $424 million a year-ago. The significant increase reflected strong results
across our activities in equity and interest rate derivatives and from trading
for our own account. These results were partially offset by lower revenues from
foreign exchange markets. Trading revenues for the first nine months of 2000
were $2.708 billion versus $2.361 billion in the corresponding period in 1999.
Advisory and underwriting fees were $400 million in the third quarter of 2000
compared to $398 million for the prior year period. Higher revenues from equity
and debt underwriting offset slightly lower advisory fees. For the first nine
months of 2000, Thomson Financial Securities Data ranked J.P. Morgan sixth in
completed mergers and acquisitions worldwide, with a market share of 16.2%. For
the nine months ended September 30, 2000, advisory and underwriting fees were
$1.411 billion compared to $1.245 billion in the year-ago period.
Investment management fees increased to $284 million in the 2000 third quarter
from $270 million a year-ago. The increase was primarily driven by higher
revenues from private banking clients. Assets under management were
approximately $373 billion at September 30, 2000, compared with $325 billion a
year ago. Investment management fees were $863 million for the first nine months
of 2000, an increase of 11% from the prior year.
28
<PAGE> 29
Fees and commissions were $233 million, up 13% from the year-ago quarter driven
by higher equity brokerage commissions. For the year-to-date, fees and
commissions were $749 million compared to $611 million in the same 1999 period.
Investment securities revenues were negative $1 million in the third quarter of
2000. This reflected gains of $118 million on investments in the financial
services sector, offset by a reduction of approximately $100 million in
unrealized market appreciation, primarily associated with an investment in the
telecommunications industry and other write-downs. The current quarter results
compare with investment securities revenues of $271 million in the third quarter
of 1999, primarily reflecting gains from investments in the cable television and
telecommunications industries. Investment securities revenues were $284 million
in the first nine months of 2000, compared with $201 million in 1999.
Other revenues were $197 million in the third quarter of 2000, compared with a
loss of $18 million a year earlier. The higher revenues were driven primarily by
increased gains on hedges of anticipated foreign currency revenues. These gains
were partially offset by the impact of exchange rate movements on reported
revenues and expenses. For the first nine months of 2000, other revenues were
$429 million versus $120 million in 1999.
OPERATING EXPENSES
Operating expenses for the third quarter of 2000 were $1.609 billion compared
with $1.341 billion in the prior-year quarter, an increase of 20%. Compensation
expenses, the primary driver of the increase, rose because of higher
performance-driven compensation and new hires, primarily in Investment Banking,
Equities, and our corporate e-finance initiatives. The firm's efficiency ratio
was 69% for the quarter and 67% for the year to date.
Operating expenses for the first nine months of 2000 were $5.124 billion
compared to $4.325 billion for the first nine months of last year.
At September 30, 2000, staff totaled 17,044 employees, compared with 15,988 at
June 30, 2000 and 15,287 employees at September 30, 1999.
Income-tax expenses in the third quarter totaled $199 million compared with $202
million in the year-earlier quarter and $277 million for the June 2000 quarter.
The effective tax rate was 28% in the quarter versus 31% in last year's quarter
and 34% for the second quarter of 2000, reflecting a favorable change in our mix
of income. Income tax expenses for the first nine months of 2000 were $829
million based on an effective rate of 33% compared to $796 million and an
effective rate of 34% for the same period a year ago.
29
<PAGE> 30
CAPITAL AND RISK MANAGEMENT
We seek to increase shareholder value through a firmwide discipline that links
capital allocation, risk management, performance measurement, investment
decisions, and incentive compensation into one integrated framework. This
framework buttresses our day-to-day operations at all levels of the firm and
employs consistent economic value added (EVA) and capital allocation
methodologies. EVA integrates traditional operating earnings with capital and
risk management by subtracting from income a charge for the equity used in
support of our business. Please refer to our 1999 Annual report filed on Form
10-K for a detailed discussion of capital and risk management.
CAPITAL
Our economic capital allocation model estimates the amount of equity required by
each business activity and the firm as a whole. Business economic capital is
estimated as if each activity were conducted as a standalone entity. This
estimate is based, to the extent possible, on observations of the capital
structures and risk profiles of public companies or benchmarks. Diversification
of Morgan's portfolio of businesses lowers the consolidated level of required
equity and is a factor in assessing the appropriate level of capitalization of
the firm. The benefit of diversification is not allocated to the businesses.
The related cost of equity for each business activity is based on observable
market returns of publicly held investments, with the exception of our Credit
Markets segment, whose cost of equity incorporates market pricing for credit
risk. To arrive at the charge for equity capital for each segment, we multiply
its allocated required economic capital by its market-based cost of equity (or
hurdle rate). To arrive at the consolidated charge for equity capital for J.P.
Morgan, we multiply the firm's common equity by its market-based cost of equity,
which currently is estimated at 10.5%.
Required versus available capital
J.P. Morgan's total required economic capital is compared with available capital
to evaluate overall capital utilization. It is our policy to maintain an
appropriate excess of capital to provide for growth and as additional protection
against losses. The following table compares average required versus available
capital for the periods ended September 30, 2000 and December 31, 1999,
respectively.
<TABLE>
<CAPTION>
Nine months ended Twelve months ended
Average (billions) September 30, 2000 December 31, 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stockholder's equity $10.9 $11.0
Preferred stock, excluding variable 0.4 0.4
Trust preferred securities 1.2 1.2
Other adjustments (0.1) (0.1)
-----------------------------------------------------------------------------------------------------------
Total available capital 12.4 12.5
-----------------------------------------------------------------------------------------------------------
Required economic capital:
Credit Markets 3.9 4.1
Interest Rate and Currency Markets 1.7 2.0
Equity Investments 1.7 1.5
Equities 0.7 0.7
Investment Banking 0.7 0.4
Asset Management Services 0.6 0.6
Proprietary Positioning 0.4 1.8
-----------------------------------------------------------------------------------------------------------
Total business segments 9.7 11.1
Corporate 1.3 1.5
Diversification (2.5) (2.7)
-----------------------------------------------------------------------------------------------------------
Total required economic capital 8.5 9.9
-----------------------------------------------------------------------------------------------------------
Excess available capital 3.9 2.6
-----------------------------------------------------------------------------------------------------------
</TABLE>
It is our policy to maintain an appropriate excess of capital to provide for
growth and as additional protection against losses. Excess available capital
averaged $3.9 billion in the nine-month period compared with $2.6 billion for
the 1999 full year, primarily reflecting lower economic capital requirements in
our Proprietary Positioning segment as we continued to reduce risk. This
decrease was partially offset by higher average economic capital requirements of
our Equity Investments segment reflecting net new investments and appreciation.
30
<PAGE> 31
RISK MANAGEMENT
Risk is inherent in our business, and sound risk management is key to our
success. The major types of risks to which we are exposed are market, credit,
liquidity, and operating risk. We have developed and implemented comprehensive
policies and procedures to identify, mitigate, and monitor risk across the firm.
DAILY EARNINGS AT RISK
Our tool for the systematic measuring and monitoring of market and credit risk
is the daily earnings at risk (DEaR) calculation. DEaR for each business is a
key input to our EVA calculation and capital allocation. DEaR is a statistical
measure used to estimate the firm's exposure in non-stressed markets to market
risk and credit risk in our trading derivatives portfolio.
DEaR is an upperband estimate of the potential loss in the value of our
portfolios, at a 95% confidence level, over a one-day time horizon. The firm's
DEaR measure is based on a model that uses historical simulations. It makes
assumptions about market behavior and takes into account numerous variables that
may cause a change in the value of our portfolios, including interest rates,
foreign exchange rates, equity and commodity prices and their volatilities, and
correlations among these variables.
STRESS TESTING
We regularly supplement our DEaR calculations with stress testing at both the
firmwide and business-specific levels. Stress testing measures the impact of
abnormal movements on the firm's portfolios. Some of the stress test assumptions
are very specific to businesses' specialized risks, while others are conducted
in conformity with firmwide stress scenarios that are distributed by our
Corporate Risk Management group. This provides senior management with an
analysis of the potential impact on the firm's revenue.
VULNERABILITY IDENTIFICATION
In 1999, we introduced vulnerability identification (VID) as a discipline to
highlight material risks which may or may not be captured by measures such as
DEaR. The discipline systemically captures potential "worst-case" losses
identified by traders and other risk takers. Once identified, these losses - or
VIDs - may be quantified through specific stress tests and assist senior
management in focusing on specific risks.
MARKET RISK PROFILES
<TABLE>
<CAPTION>
DEAR
===============================================================================================================================
Trading Investing Aggregate
---------------------------------- ------------------------------- -----------------------------
September 30 December 31 September 30 December 31 September 30 December 31
In millions 2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Period end $31(a) $29 (a) $2 $ 9 $31 $26
-------------------------------------------------------------------------------------------------------------------------------
12 month average 25 29 8 26 30 42
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) This includes, before diversification benefits, derivatives credit risk
DEaR of $12 million at September 30, 2000 and December 31, 1999.
31
<PAGE> 32
CREDIT EXPOSURES
The following section provides detailed information regarding the firm's
significant credit exposures.
<TABLE>
<CAPTION>
Credit exposure and related economic capital
================================================================ ==========================================================
Sept. 30, 2000 Dec. 31, 1999 Economic capital
----------------------------- ---------------------------- ----------------------------
Carrying Fair Carrying Fair Sept. 30 Dec. 31
IN BILLIONS value value value value 2000 1999
---------------------------------------------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Derivatives $35.5(a) $35.5 $43.7(a) $43.7 $1.0 $0.9
Loans and lending commitments 26.6(b) 26.5 26.4(b) 26.5 1.4 1.8
---------------------------------------------------------------- ---------------------------- ----------------------------
Total credit exposures(c) 62.1 62.0 70.1 70.2 2.4 2.7
---------------------------------------------------------------- ---------------------------- ----------------------------
</TABLE>
(a) Carried at fair value on the balance sheet with changes in fair value
recorded in the income statement. Includes credit valuation adjustment as
of September 30, 2000 and December 31, 1999 of $617 million and $670
million, respectively.
(b) Amount net of allowances for credit losses of $392 million as of September
30, 2000 and $406 million as of December 31, 1999. Carrying value excludes
the notional value of lending commitments, which are off-balance-sheet
instruments.
(c) Substantially all credit risk related to derivatives, loans, and lending
commitment exposures are managed by the Credit Markets segment. Economic
capital includes the impact of purchased credit protection and other credit
risk hedges.
<TABLE>
<CAPTION>
Credit exposure before and after collateral
====================================================================================================================
Sept. 30, 2000 Dec. 31, 1999
---------------------------------------- ----------------------------------------
Net exposure Net exposure
Gross after Gross after
IN BILLIONS exposure collateral(b) exposure collateral(b)
-------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
Derivatives $35.5(a) $30.2(a) $43.7(a) $37.7(a)
Loans (c) 27.0 18.8 26.8 18.9
Lending commitments (c) 85.1 83.7 83.1 82.3
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the benefit of master netting agreements of $79.9 billion and
$94.0 billion as of September 30, 2000 and December 31, 1999, respectively.
(b) Collateral held consisting of highly rated liquid securities (U.S.
government securities) and cash was as follows: derivatives - $5.3 billion
(September 2000) and $6 billion (December 1999); loans - $8.2 billion
(September 2000) and $7.9 billion (December 1999); and lending commitments
- $1.4 billion (September 2000) and $0.8 billion (December 1999).
(c) Before allowance for credit losses.
<TABLE>
<CAPTION>
Counterparty credit quality and economic capital (September 30, 2000)
===============================================================================
Loans and
lending
Derivatives commitments Economic capital
------------- ------------------ ------------------
(a) (b) (c) (d)
In billions
<S> <C> <C>
AAA / AA 52% 42% $0.4
A 34 31 0.5
BBB 9 16 0.5
BB 4 8 0.7
B 1 2 0.2
CCC and below - 1 0.1
-------------------------------------------------------------------------------
100% 100% 2.4
-------------------------------------------------------------------------------
</TABLE>
(a) Reflects economic capital after the benefits of master netting agreements,
collateral, single name credit default swaps, and synthetic CLOs.
(b) Economic capital for the senior and junior (first loss) positions in
synthetic CLOs equaled $55 million and $195 million, respectively. The
senior position in these transactions is reflected in the AAA / AA
category. The junior position is reflected in the CCC and below category.
(c) Synthetic CLOs reduced economic capital by approximately $477 million.
(d) Our economic capital model incorporates as an offsetting exposure credit
protection we have purchased for certain counterparties where there may be
no underlying exposure.
Estimated percentages of credit exposures by counterparty credit rating (as set
forth in the table above) are 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 reflect the
benefits of master netting agreements, collateral, and purchased credit
protection (i.e. credit derivatives).
32
<PAGE> 33
TRADITIONAL CREDIT PRODUCTS
The majority of credit risk from traditional credit products relates to
exposures managed by our Credit Markets segment. Exposures not managed by this
segment, primarily associated with our private banking activities, are largely
secured. The maximum credit risk for our traditional credit products is measured
by their contractual amounts, net of collateral. For example, the risk of a loan
is the amount of money lent to the client. For lending commitments, the risk is
the amount that would be owed should the contract be drawn upon, the client
default, and the collateral becomes worthless. A significant number of our
commitments expire, however, without being drawn upon. Moreover, commitments
usually include financial covenants and/or material adverse change clauses that,
if triggered, enable us to withdraw from the obligation to lend.
IMPAIRED LOANS
The following table presents impaired loans, net of charge-offs, as of September
30, 2000, June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
=====================================================================================================
In millions September 30, 2000 June 30, 2000 December 31, 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial and industrial $113 $122 $54
Other 15 18 23
-----------------------------------------------------------------------------------------------------
Total impaired loans 128 140 77
-----------------------------------------------------------------------------------------------------
</TABLE>
Impaired loans were $128 million as of September 30, 2000 versus $140 million at
June 30, 2000. The decrease of $12 million primarily relates to an exposure to
one U.S. counterparty in the chemical industry, which was sold during the
quarter.
ALLOWANCES FOR CREDIT LOSSES
We maintain allowances for credit losses to absorb losses inherent in our
traditional extensions of credit that we believe are probable and can be
reasonably estimated. We determine the appropriateness of our allowances on a
quarterly basis. This review is performed separately for each allowance
classification - loans and lending commitments. The actual amount of credit
losses or charge-offs, when they occur, may vary from estimated losses at each
period end, due to changing economic conditions or exposure management
decisions. Our process includes procedures to limit differences between
estimated and actual credit losses, which include detailed quarterly assessments
by senior management and model inputs that reflect current market indicators of
credit quality.
The following table summarizes the activity of our allowances for credit losses
for the three and nine months ended September 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
==========================================================================================================
ALLOWANCE FOR CREDIT
LOSSES ON LENDING
ALLOWANCE FOR LOAN LOSSES COMMITMENTS
----------------------------------------------------------------------------------------------------------
Third Third Third Third
quarter quarter quarter quarter
In millions 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, July 1 $283 $335 $163 $160
----------------------------------------------------------------------------------------------------------
Provision for credit losses - - - -
Reversal of provision for credit losses (7) (45) (29) (15)
----------------------------------------------------------------------------------------------------------
Recoveries - 17 - -
Charge-offs:
Commercial and industrial (5) (6) - -
Other, primarily healthcare
institutions in 2000 (13) - - -
----------------------------------------------------------------------------------------------------------
Net (charge-offs) / recoveries (18) 11 - -
----------------------------------------------------------------------------------------------------------
Balance, September 30 258 301 134 145
==========================================================================================================
<CAPTION>
ALLOWANCE FOR CREDIT
LOSSES ON LENDING
ALLOWANCE FOR LOAN LOSSES COMMITMENTS
----------------------------------------------------------------------------------------------------------
Nine Nine Nine Nine
months months months months
In millions 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1 $281 $470 $125 $125
----------------------------------------------------------------------------------------------------------
Provision for credit losses - - 9 20
Reversal of provision for credit losses (11) (150) - -
----------------------------------------------------------------------------------------------------------
Recoveries 12 23 - -
Charge-offs:
Commercial and industrial (5) (16) - -
Other, primarily other financial
institutions in 1999 (19) (26) - -
----------------------------------------------------------------------------------------------------------
Net (charge-offs) (12) (19) - -
----------------------------------------------------------------------------------------------------------
Balance, September 30 258 301 134 145
==========================================================================================================
</TABLE>
33
<PAGE> 34
The following table summarizes the period-end information of our allowances for
credit losses as of September 30, 2000, June 30, 2000 and December 31, 1999,
respectively.
<TABLE>
<CAPTION>
===================================================================================================================================
ALLOWANCE FOR CREDIT LOSSES ON
ALLOWANCE FOR LOAN LOSSES LENDING COMMITMENTS
-----------------------------------------------------------------------------------------------------------------------------------
September 30 June 30 December 31 September 30 June 30 December 31
2000 2000 1999 2000 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components:
Specific counterparty $ 71 $ 75 $ 24 $ 6 $ 23 $ 22
Expected loss 187 208 257 128 140 103
-----------------------------------------------------------------------------------------------------------------------------------
Total allowance 258 283 281 134 163 125
===================================================================================================================================
</TABLE>
The specific counterparty component of the allowance for loan losses was $71
million at September 30, 2000, essentially unchanged from June 30, 2000. The
specific counterparty component of the allowance for credit losses on lending
commitments was $6 million and $23 million at September 30, 2000 and June 30,
2000, respectively. The decrease in the specific counterparty component of the
allowance for credit losses on lending commitments was primarily due to the
removal of an allocation related to a single North American counterparty in the
healthcare industry.
The expected loss component of the allowance for loan losses decreased $21
million to $187 million as of September 30, 2000. The expected loss component of
our allowance for credit losses on lending commitments was $128 million as of
September 30, 2000 a decrease of $12 million from June 30, 2000. The combined
decrease of $33 million of our expected loss components reflects improved credit
quality in our portfolio.
34
<PAGE> 35
CAPITAL
STOCKHOLDERS' EQUITY
At September 30, 2000, stockholders' equity of $12.0 billion included $25
million of net unrealized appreciation on investment securities, net of the
related tax benefit of $4 million. This compares with $53 million of net
unrealized appreciation at June 30, 2000, net of the related tax liability of
$22 million. The net unrealized depreciation on debt investment securities was
$29 million at September 30, 2000 compared with a net unrealized depreciation of
$55 million at June 30, 2000. The net unrealized appreciation on marketable
equity investment securities was $24 million at September 30, 2000, and $114
million at June 30, 2000. The net unrealized appreciation on investment
securities held by unconsolidated affiliates was $26 million and $16 million,
respectively. Included in the table below are selected ratios based upon
stockholders' equity.
<TABLE>
<CAPTION>
September 30, June 30, December 31, September 30,
Dollars in billions, except share data 2000 2000 1999 1999
------------------------------------------------------------------ ------------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
Total stockholders' equity $12.0 $11.8 $11.4 $12.0
Rate of return on average common
stockholders' equity 18.2% 19.6% 18.1% 15.6%
As percent of period-end total assets:
Common equity 4.0% 4.2% 4.1% 4.4%
Total equity 4.3% 4.4% 4.4% 4.7%
Book value per common share $62.31 $60.76 $57.83 $58.42
</TABLE>
The firm purchased approximately $383 million of its common stock (2.8 million
shares) in the third quarter under its October 1999 authorization to repurchase
up to $3 billion of common stock. The purchases for the first nine months of
2000 totaled $1.5 billion (11.8 million shares). In conjunction with the merger
announcement, the Board of Directors cancelled the $142 million remaining under
the October 1999 authorization to purchase up to $3 billion of J.P. Morgan
common stock and terminated its dividend reinvestment plan.
REGULATORY CAPITAL REQUIREMENTS
At September 30, 2000, the capital of J.P. Morgan and Morgan Guaranty Trust
Company of New York (Morgan Guaranty) remained well above the minimum standards
set by regulators. Further, the capital ratios of J.P. Morgan and Morgan
Guaranty exceeded the minimum standards for a well capitalized bank holding
company and bank, respectively, at September 30, 2000.
At September 30, 2000, under the Federal Reserve Board market risk capital
guidelines for calculation of risk-based capital ratios, J.P. Morgan's tier 1
and total risk-based capital ratios were 8.6% and 12.0%, respectively; the
leverage ratio was 4.5%. At December 31, 1999, J.P. Morgan's tier 1 and total
risk-based capital ratios were 8.8% and 12.9%, respectively, and the leverage
ratio was 4.7%. Refer to note 19 for further information.
Risk-adjusted assets represent the total of all on- and off-balance-sheet
exposures adjusted for risk-based factors as prescribed by the Federal Reserve
Board. J.P. Morgan's risk-adjusted assets as of September 30, 2000 were $140.8
billion, compared with $140.4 billion at June 30, 2000.
35
<PAGE> 36
EXPOSURES TO EMERGING COUNTRIES
The following tables present exposures to certain emerging markets based on
management's view of total exposure as of September 30, 2000.
The management view takes into account the following cross-border and local
exposures: the notional or contract value of loans, commitments to extend
credit, securities purchased under agreements to resell, interest-earning
deposits with banks; the fair values of trading account assets (cash securities
and derivatives, excluding any collateral we hold to offset these exposures) and
investment securities; and other monetary assets. It also considers the impact
of credit derivatives, at their notional or contract value, where we have bought
or sold credit protection outside of the respective country. Trading assets
reflect the net of long and short positions of the same issuer. Management's
view differs from bank regulatory rules, which are established by the Federal
Financial Institutions Examination Council (FFIEC), because of its treatment of
credit derivatives, trading account short positions, and the use of fair values
versus cost of investment securities. In addition, management does not net local
funding or liabilities against local exposures as allowed by the FFIEC.
By type of financial instrument
<TABLE>
<CAPTION>
===============================================================================================================
Credit Total
In billions Deriva- Other out- deriva- Commit- Cross- Local Total
September 30, 2000 Loans tives standings tives ments border exposure exposure
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
China $ - $0.1 $ - ($0.1) $- $ - $ - $ -
Hong Kong 0.2 0.2 0.1 (0.1) - 0.4 0.1 0.5
Indonesia 0.1 - 0.1 - - 0.2 - 0.2
Malaysia - - - 0.1 - 0.1 - 0.1
Philippines - 0.1 0.1 - - 0.2 - 0.2
Singapore - 0.4 0.2 - - 0.6 0.1 0.7
South Korea 0.1 0.1 0.7 (0.1) - 0.8 0.3 1.1
Taiwan - - - - - - - -
Thailand - 0.1 0.1 - - 0.2 - 0.2
Other - - (0.1) - - (0.1) 0.2 0.1
---------------------------------------------------------------------------------------------------------------
Total Asia, excluding Japan 0.4 1.0 1.2 (0.2) - 2.4 0.7 3.1
---------------------------------------------------------------------------------------------------------------
Argentina - 0.1 0.5 (0.1) - 0.5 0.3 0.8
Brazil 0.1 - 0.2 - - 0.3 0.8 1.1
Chile 0.2 - 0.1 - - 0.3 - 0.3
Colombia 0.2 - - - - 0.2 - 0.2
Mexico 0.3 0.2 0.3 (0.2) - 0.6 0.5 1.1
Other 0.1 - 0.2 - - 0.3 - 0.3
---------------------------------------------------------------------------------------------------------------
Total Latin America, excluding
the Caribbean 0.9 0.3 1.3 (0.3) - 2.2 1.6 3.8
---------------------------------------------------------------------------------------------------------------
</TABLE>
FORWARD-LOOKING STATEMENTS
Certain sections of our Form 10-Q contain forward-looking statements. We use
words such as expect, believe, anticipate, and estimate to identify these
statements. In particular, disclosures made in the sections "Financial
Highlights" and "Financial Review," contain forward-looking statements. Such
statements are based on our current expectations and are subject to the risks
and uncertainties as discussed in our 1999 Annual Report, 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.
36
<PAGE> 37
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Three months ended
on a taxable-equivalent basis ------------------------------------------------------------------------------
September 30, 2000 September 30, 1999
------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $4,199 $ 84 7.96% $2,520 $ 61 9.60%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 287 4 5.54 455 10 8.72
U.S. state and political subdivision 907 19 8.33 1,322 40 12.00
Other 3,636 82 8.97 23,349 341 5.79
Debt investment securities in offices
outside the U.S. (a) 1,021 6 2.34 2,190 27 4.89
Trading account assets:
In offices in the U.S. 50,799 896 7.02 34,276 587 6.79
In offices outside the U.S. 23,721 429 7.19 23,957 383 6.34
Securities purchased under agreements to resell
and federal funds sold:
In offices in the U.S. 31,854 493 6.16 22,184 290 5.19
In offices outside the U.S. 10,851 148 5.43 13,013 117 3.57
Securities borrowed,
mainly in offices in the U.S. 35,810 584 6.49 37,037 456 4.88
Loans:
In offices in the U.S. 17,178 334 7.74 8,062 131 6.45
In offices outside the U.S. 8,925 164 7.31 17,964 284 6.27
Other interest-earning assets (b):
In offices in the U.S. 4,945 94 * 2,953 39 *
In offices outside the U.S. 1,569 29 * 896 33 *
----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 195,702 3,366 6.84 190,178 2,799 5.84
Cash and due from banks 1,671 1,141
Other noninterest-earning assets 73,052 64,590
----------------------------------------------------------------------------------------------------------------------------------
Total assets 270,425 255,909
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the three months ended September 30, 2000 and 1999.
(a) For the three months ended September 30, 2000 and 1999, average debt
investment securities are computed based on historical amortized cost, excluding
the effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance-sheet
transactions.
* Not meaningful
37
<PAGE> 38
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Three months ended
on a taxable-equivalent basis -----------------------------------------------------------------
September 30, 2000 September 30, 1999
-----------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
-----------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
In offices in the U.S. $ 2,842 $ 54 7.56% $ 4,785 $ 68 5.64%
In offices outside the U.S. 36,137 460 5.06 43,704 480 4.36
Trading account liabilities:
In offices in the U.S. 19,240 314 6.49 7,320 123 6.67
In offices outside the U.S. 12,288 220 7.12 14,400 175 4.82
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 70,132 1,083 6.14 62,583 792 5.02
Commercial paper, mainly in offices
in the U.S. 10,747 182 6.74 12,437 164 5.23
Other interest-bearing liabilities:
In offices in the U.S. 7,128 240 13.39 7,758 156 7.98
In offices outside the U.S. 5,039 86 6.79 2,726 56 8.15
Long-term debt,
mainly in offices in the U.S. 21,714 365 6.69 27,441 380 5.49
---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 185,267 3,004 6.45 183,154 2,394 5.19
Noninterest-bearing deposits:
In offices in the U.S. 751 899
In offices outside the U.S. 1,163 570
Other noninterest-bearing liabilities 71,520 59,518
---------------------------------------------------------------------------------------------------------------
Total liabilities 258,701 244,141
Stockholders' equity 11,724 11,768
---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 270,425 255,909
Net yield on interest-earning assets 0.74 0.84
---------------------------------------------------------------------------------------------------------------
Net interest earnings 362 405
---------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Nine months ended
on a taxable-equivalent basis -----------------------------------------------------------------
September 30, 2000 September 30, 1999
-----------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
-----------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 4,029 $ 237 7.86% $ 2,574 $ 221 11.48%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 295 16 7.24 555 35 8.43
U.S. state and political subdivision 1,128 93 11.01 1,483 130 11.72
Other 6,086 352 7.73 25,579 1,062 5.56
Debt investment securities in offices
outside the U.S. (a) 1,080 27 3.34 2,579 93 4.82
Trading account assets:
In offices in the U.S. 44,050 2,352 7.13 31,930 1,482 6.21
In offices outside the U.S. 26,033 1,348 6.92 27,055 1,282 6.34
Securities purchased under agreements
to resell and federal funds sold:
In offices in the U.S. 30,359 1,360 5.98 20,793 769 4.94
In offices outside the U.S. 11,715 432 4.93 13,415 419 4.18
Securities borrowed,
mainly in offices in the U.S. 34,918 1,605 6.14 37,889 1,374 4.85
Loans:
In offices in the U.S. 16,347 944 7.71 6,829 345 6.75
In offices outside the U.S. 10,037 503 6.70 19,529 906 6.20
Other interest-earning assets (b):
In offices in the U.S. 4,840 292 * 2,061 82 *
In offices outside the U.S. 1,121 109 * 946 110 *
--------------------------------------------------------------------------------------------------------------
Total interest-earning assets 192,038 9,670 6.73 193,217 8,310 5.75
Cash and due from banks 1,222 1,411
Other noninterest-earning assets 74,130 69,381
--------------------------------------------------------------------------------------------------------------
Total assets 267,390 264,009
--------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the nine months ended September 30, 2000 and 1999.
(a) For the nine months ended September 30, 2000 and 1999, average debt
investment securities are computed based on historical amortized cost, excluding
the effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance-sheet
transactions.
* Not meaningful
39
<PAGE> 40
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Nine months ended
on a taxable-equivalent basis --------------------------------------------------------------
September 30, 2000 September 30, 1999
--------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
--------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
In offices in the U.S. $ 3,070 $ 164 7.14% $ 7,137 $ 269 5.04%
In offices outside the U.S. 38,580 1,450 5.02 45,695 1,454 4.25
Trading account liabilities:
In offices in the U.S. 15,463 792 6.84 6,870 351 6.83
In offices outside the U.S. 12,733 607 6.37 13,949 515 4.94
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 67,139 2,893 5.76 62,322 2,260 4.85
Commercial paper, mainly in offices
in the U.S. 10,608 503 6.33 10,962 418 5.10
Other interest-bearing liabilities:
In offices in the U.S. 7,167 669 12.47 8,954 502 7.50
In offices outside the U.S. 4,284 247 7.70 3,595 150 5.58
Long-term debt,
mainly in offices in the U.S. 23,022 1,122 6.51 28,038 1,131 5.39
------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 182,066 8,447 6.20 187,522 7,050 5.03
Noninterest-bearing deposits:
In offices in the U.S. 906 896
In offices outside the U.S. 860 601
Other noninterest-bearing liabilities 72,011 63,350
------------------------------------------------------------------------------------------------------------
Total liabilities 255,843 252,369
Stockholders' equity 11,547 11,640
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 267,390 264,009
Net yield on interest-earning assets 0.85 0.87
------------------------------------------------------------------------------------------------------------
Net interest earnings 1,223 1,260
------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 41
CROSS-BORDER AND LOCAL OUTSTANDINGS UNDER THE REGULATORY BASIS
For financial reporting purposes only, the following table presents our
cross-border and local outstandings under the regulatory basis established by
the Federal Financial Institutions Examination Council (FFIEC). Bank regulatory
rules differ from management's view in the treatment of credit derivatives,
trading account short positions, and the use of fair value versus cost of
investment securities. In addition, management does not net local funding or
liabilities against any local exposures as allowed by the FFIEC. Refer to page
36 for more information on exposures based on the management view.
In accordance with the regulatory rules, cross-border outstandings include,
regardless of currency:
- all claims of our U.S. offices against foreign residents
- all claims of our foreign offices against residents of other foreign countries
Local outstandings include all claims of our foreign offices with residents of
the same foreign country, net of local funding.
All outstandings are primarily based on the location of the ultimate
counterparty; that is, if collateral or a formal guarantee exists, the country
presented is determined by the location where the collateral is held and
realizable, or the location of the guarantor. Cross-border and local
outstandings include the following: interest-earning deposits with banks;
investment securities; trading account assets including derivatives; securities
purchased under agreements to resell; loans; accrued interest; investments in
affiliates; and other monetary assets. Commitments include all cross-border
commitments to extend credit, standby letters of credit, and guarantees, and
securities lending indemnifications.
The following table shows each country where cross-border and local outstandings
exceed 0.75% of total assets, as of September 30, 2000.
<TABLE>
<CAPTION>
Total
out-
standings
Net local Total % of and
In millions Govern- out- out- total Commit- commit-
September 30, 2000 Banks ments Other(a) standings standings assets ments(b) ments
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Germany $7,732 $17,745 $ 3,723 $ - $29,200 10.37% $5,642 $34,842
United Kingdom 5,607 444 13,038 - 19,089 6.78 9,503 28,592
Netherlands 5,773 3,549 4,524 - 13,846 4.92 3,980 17,826
France 5,787 3,439 3,319 - 12,545 4.45 4,629 17,174
Italy 1,863 5,993 2,665 - 10,521 3.74 2,930 13,451
Japan 1,492 635 3,735 - 5,862 2.08 3,390 9,252
Switzerland 1,478 185 2,688 331 4,682 1.66 1,178 5,860
Spain 290 903 2,110 185 3,488 1.24 1,998 5,486
Luxembourg 935 7 1,982 - 2,924 1.04 338 3,262
Canada 418 1,175 590 168 2,351 0.83 2,716 5,067
South Africa 476 1,075 322 288 2,161 0.77 61 2,222
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes nonbank financial institutions and commercial and industrial
entities.
(b) In accordance with FFIEC requirements, commitments also include notional
amounts related to credit derivatives where we have provided (sold)
protection. These amounts are not reduced for protection that we have
purchased.
41
<PAGE> 42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. Statement re computation of ratios (incorporated by reference to
exhibit 12 to J.P. Morgan's report on Form 8-K, dated October 18,
2000)
27. Financial data schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended September 30, 2000:
September 19, 2000 (Items 5 and 7)
Reported the announced merger between The Chase Manhattan Corporation
and J.P. Morgan & Co. Incorporated.
July 13, 2000 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing its
earnings for the three month period ended June 30, 2000.
July 11, 2000 (Items 5 and 7)
Reported the issuance of a press release announcing restated segment
results, reflecting recent management reporting changes, for the first
quarter of 2000, for each of the four quarters of 1999 and 1998, and
the full years 1999, 1998, 1997, and 1996.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J.P. MORGAN & CO. INCORPORATED
------------------------------
(Registrant)
/s/ DAVID H. SIDWELL
-----------------------------------
NAME: DAVID H. SIDWELL
TITLE: MANAGING DIRECTOR AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
DATE: November 14, 2000
43
