-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KO+tqqLipwU2sWfqH3EXQhyzUTkdkvJM6pQV1siP28TRqXznfszOwefbrc3vaVug Bld4B8J3kziwtw/V2tAXNg== /in/edgar/work/0000950123-00-010664/0000950123-00-010664.txt : 20001116 0000950123-00-010664.hdr.sgml : 20001116 ACCESSION NUMBER: 0000950123-00-010664 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN J P & CO INC CENTRAL INDEX KEY: 0000068100 STANDARD INDUSTRIAL CLASSIFICATION: [6022 ] IRS NUMBER: 132625764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05885 FILM NUMBER: 769328 BUSINESS ADDRESS: STREET 1: 60 WALL ST CITY: NEW YORK STATE: NY ZIP: 10260 BUSINESS PHONE: 2124832323 MAIL ADDRESS: STREET 1: 500 STANTON CHRISTIANA RD STREET 2: ATTN RANDY REDCAY CITY: NEWARK STATE: DE ZIP: 19713 10-Q 1 y42478e10-q.txt JP MORGAN & CO 1 ================================================================================ 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 ================================================================================ 1 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:
Page(s) 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
2 3 PART I ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated In millions, except share data
Three months ended --------------------------------------------------------------------- September 30 September 30 Increase/ June 30 Increase/ 2000 1999 (Decrease) 2000 (Decrease) --------------------------------------------------------------------- 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 - - ------------------------------------------------------------------------------------------------------------
(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 4 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated In millions, except share data
Nine months ended --------------------------------------------------- September 30 September 30 Increase/ 2000 1999 (Decrease) --------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------
(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 5 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated
September 30 December 31 In millions, except share data 2000 1999 - --------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 5 6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated
2000 1999 ------------------------- ----------------------- Compre- Compre- Stockholders' hensive Stockholders' hensive In millions: Nine months ended September 30 Equity Income Equity Income - ----------------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 6 7 CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated
- ---------------------------------------------------------------------------------------------------------- In millions Nine months ended - ---------------------------------------------------------------------------------------------------------- September 30 September 30 2000 1999 - ---------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 7 8 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York
- ------------------------------------------------------------------------------------------------------- September 30 December 31 In millions, except share data 2000 1999 - ------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------
Member of the Federal Reserve System and the Federal Deposit Insurance Corporation. See notes to consolidated financial statements. 8 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 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.
September 30, 2000 December 31, 1999 ----------------------------------- ---------------------------------- Carrying Fair Appreciation / Carrying Fair Appreciation / In billions value value (depreciation) value value (depreciation) - ----------------------------------------------------------------------------------------------------------------------------------- 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) - -----------------------------------------------------------------------------------------------------------------------------------
10 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 12
Interest Asset Invest- Rate Manage- Equity ment and Currency Credit ment Invest- In millions Banking Equities Markets Markets Services ments - --------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------
Proprietary Consol- In millions Positioning Corporate idated - ---------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------
12 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.
- ----------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended - ----------------------------------------------------------------------------------------------------------------------------------- In millions September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
(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 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.
Third quarter Nine months --------------------------------------------------------------- In millions 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------
(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 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.
Third quarter Nine months ------------------------------- In millions 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------
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
Third quarter Nine months ------------------------------ In millions 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------- Advisory fees $195 $204 $680 $560 Underwriting revenue and syndication fees 205 194 731 685 - ----------------------------------------------------------------------------------------- Total 400 398 1,411 1,245 - -----------------------------------------------------------------------------------------
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 16 8. INVESTMENT SECURITIES REVENUE
Third quarter Nine months ------------------------------ In millions 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------
9. OTHER REVENUE AND OTHER EXPENSES Other revenue
Third quarter Nine months ------------------------------ In millions 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------
(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
Third quarter Nine months ------------------------------ In millions 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------
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 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.
Gross Gross Fair and unrealized unrealized carrying In millions: September 30, 2000 Cost gains losses value - ------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------
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.
In millions: September 30, 2000 Marketable Nonmarketable SBIC securities - -------------------------------------------------------------------------------------------------------------------------- Accounting (a) Fair value through equity Cost Fair value through earnings - -------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------
(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 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.
Carrying value Average Balance ------------------- -------------------------------------- September 30 Third quarter Nine months In millions: 2000 2000 2000 - -------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------
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 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.
On-balance-sheet In billions: September 30, 2000 Notional amounts credit exposure - --------------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------------
(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 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.
Gross Gross Net unrealized unrealized unrealized In billions: September 30, 2000 gains (losses) gains (losses) - ------------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------------
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.
In billions: September 30, 2000 - ---------------------------------------------------------- Commitments to extend credit $69.6 Standby letters of credit and guarantees 15.5 - ---------------------------------------------------------- Total lending commitments 85.1 - ----------------------------------------------------------
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 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.
Counterparty rating Notional exposure - ---------------------------------------------- AAA $ 569 AA 1,860 A 5,975 BBB 2,694 BB 485 B 25 CCC and below 10 - ---------------------------------------------- Total 11,618 - ----------------------------------------------
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:
North America Europe Asia Pacific Latin America Total ------------------- ------------ ----------------- ------------------ ------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
AFTER BENEFIT OF PURCHASED CREDIT PROTECTION:
North America Europe Asia Pacific Latin America Total ------------------ ------------ ----------------- ------------------ ------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
(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 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.
- ------------------------------------------------------------------- In millions: September 30 - ------------------------------------------------------------------- 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 - -------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------ Third quarter Nine months In millions 2000 2000 - ------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------- Third quarter Nine months In millions 2000 2000 - ------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------
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 23 17. ALLOWANCES FOR CREDIT LOSSES The following table summarizes the activity of our allowance for loan losses.
- ------------------------------------------------------------------------------------------------------------------ Third quarter Nine months In millions 2000 2000 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
(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.
In millions - -------------------------------------------------------------------- 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 - --------------------------------------------------------------------
The following table summarizes the activity of our allowance for credit losses on lending commitments.
- -------------------------------------------------------------------------------------------------------------- Third quarter Nine months In millions 2000 2000 - -------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------
The following table displays our allowance for credit losses on lending commitments by component as of September 30, 2000.
In millions - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
23 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.
Dollars in millions Amounts Ratios(b) - ---------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------
(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 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.
Third quarter Nine months ----------------------------- ------------------------- Dollars in millions, except share data 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------
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 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.
- ------------------------------------------------------------------------------------------------------------------------------ Income Pretax tax Net Total Total income/ expense/ income/ In millions revenues(a) expenses (loss) (benefit) (loss) - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------
(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 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 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 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 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.
Nine months ended Twelve months ended Average (billions) September 30, 2000 December 31, 1999 - ----------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------
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 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
DEAR =============================================================================================================================== Trading Investing Aggregate ---------------------------------- ------------------------------- ----------------------------- September 30 December 31 September 30 December 31 September 30 December 31 In millions 2000 1999 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Period end $31(a) $29 (a) $2 $ 9 $31 $26 - ------------------------------------------------------------------------------------------------------------------------------- 12 month average 25 29 8 26 30 42 - -------------------------------------------------------------------------------------------------------------------------------
(a) This includes, before diversification benefits, derivatives credit risk DEaR of $12 million at September 30, 2000 and December 31, 1999. 31 32 CREDIT EXPOSURES The following section provides detailed information regarding the firm's significant credit exposures.
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 - ---------------------------------------------------------------- ---------------------------- ---------------------------- 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 - ---------------------------------------------------------------- ---------------------------- ----------------------------
(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.
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) - -------------------------------------------------------------------- ---------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------
(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.
Counterparty credit quality and economic capital (September 30, 2000) =============================================================================== Loans and lending Derivatives commitments Economic capital ------------- ------------------ ------------------ (a) (b) (c) (d) In billions 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 - -------------------------------------------------------------------------------
(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 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.
===================================================================================================== In millions September 30, 2000 June 30, 2000 December 31, 1999 - ----------------------------------------------------------------------------------------------------- Commercial and industrial $113 $122 $54 Other 15 18 23 - ----------------------------------------------------------------------------------------------------- Total impaired loans 128 140 77 - -----------------------------------------------------------------------------------------------------
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.
========================================================================================================== 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 - ---------------------------------------------------------------------------------------------------------- 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 ========================================================================================================== 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 - ---------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================
33 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.
=================================================================================================================================== 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 ===================================================================================================================================
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 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.
September 30, June 30, December 31, September 30, Dollars in billions, except share data 2000 2000 1999 1999 - ------------------------------------------------------------------ ------------------- ------------------ ---------------------- 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
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 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
=============================================================================================================== Credit Total In billions Deriva- Other out- deriva- Commit- Cross- Local Total September 30, 2000 Loans tives standings tives ments border exposure exposure - --------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------
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 37 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ---------------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------ 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 - ----------------------------------------------------------------------------------------------------------------------------------
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 38 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------------------------------------- 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 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 - ---------------------------------------------------------------------------------------------------------------
38 39 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- -------------------------------------------------------------------------------------------------------------- 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 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 - --------------------------------------------------------------------------------------------------------------
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 40 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ------------------------------------------------------------------------------------------------------------ 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 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 - ------------------------------------------------------------------------------------------------------------
40 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.
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 - ---------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------
(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 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 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 EX-27 2 y42478ex27.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND DISCLOSURES. 1,000,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 881 5,156 43,788 140,428 5,050 0 0 26,987 258 281,681 40,184 108,204 99,854 21,477 0 694 502 10,766 281,681 1,447 447 7,735 9,629 1,614 8,447 1,182 (11) 284 5,124 2,513 1,684 0 0 1,684 9.64 9.05 .85 128 64 0 0 406 (24) 12 392 8 69 315 Includes securities purchased under agreements to resell and / or federal funds sold. Includes securities sold under agreements to repurchase and federal funds purchased, commercial paper, and other liabilities for borrowed money. Includes trading account liabilities, accounts payable and accrued expenses, other liabilities, and company-obligated mandatorily redeemable preferred securities of subsidiaries. Includes gain and losses on debt and equity investment securities, other-than-temporary impairments or write-downs in value, and related dividend income. Includes employee compensation and benefits, net occupancy, technology and communications, and other expenses. Amounts relate to the firm's allowance for loan losses and allowance for credit losses on lending commitments, such as commitments, standby letter of credit, and guarantees. The unallocated allowance represents the expected loss components of our allowances for credit losses. The allocated amounts represent our allowances to specific counterparties determined in accordance with SFAS No. 114 and SFAS No. 5, for loans and off-balance-sheet credit instruments, respectively.
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