1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001 COMMISSION FILE NUMBER 1-5805
------------- ------
J.P. MORGAN CHASE & CO.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2624428
------------------------------ -------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
270 PARK AVENUE, NEW YORK, NEW YORK 10017
----------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 270-6000
--------------
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
---- ----
COMMON STOCK, $1 PAR VALUE 1,986,285,709
--------------------------------------------------------------------------------
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK ON
JULY 31, 2001.
2
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FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
------------------------------ ----
Item 1
Financial Statements - J.P. Morgan Chase & Co.:
Consolidated Statement of Income for three and six months ended
June 30, 2001 and June 30, 2000 3
Consolidated Balance Sheet at June 30, 2001 and
December 31, 2000 4
Consolidated Statement of Changes in Stockholders' Equity for
the six months ended June 30, 2001 and June 30, 2000 5
Consolidated Statement of Cash Flows for the six months
ended June 30, 2001 and June 30, 2000 6
Notes to Consolidated Financial Statements 7-13
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-49
Glossary of Terms 50
Item 3 Quantitative and Qualitative Disclosures about Market Risk 51
PART II - OTHER INFORMATION
---------------------------
Item 1 Legal Proceedings 51-52
Item 2 Sales of Unregistered Common Stock 52
Item 4 Submission of Matters to a Vote of Security Holders 53-54
Item 6 Exhibits and Reports on Form 8-K 54
================================================================================
The Management's Discussion and Analysis contains statements that are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements are based upon the current beliefs and expectations
of J.P. Morgan Chase & Co.'s management and are subject to significant risks and
uncertainties. Actual results may differ from those set forth in the
forward-looking statements. Factors that could cause J.P. Morgan Chase & Co.'s
results to differ materially from those described in the forward-looking
statements can be found in the 2000 Annual Report on Form 10-K of J.P. Morgan
Chase & Co. filed with the Securities and Exchange Commission.
-2-
3
Part I
Item 1
J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
SECOND QUARTER SIX MONTHS
----------------------- ---------------------
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
REVENUE
Investment Banking Fees $ 929 $ 1,107 $ 1,870 $ 2,298
Trading Revenue 1,261 1,730 3,262 3,701
Fees and Commissions 2,388 2,218 4,453 4,415
Private Equity - Realized Gains (Losses) (46) 630 366 1,022
Private Equity - Unrealized Gains (Losses) (783) (171) (1,068) 111
Securities Gains 67 24 522 21
Other Revenue 274 67 520 392
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Total Noninterest Revenue 4,090 5,605 9,925 11,960
------------------------------------------------------------------------------------------------------------
Interest Income 8,469 8,858 17,649 17,298
Interest Expense 5,688 6,564 12,450 12,590
------------------------------------------------------------------------------------------------------------
Net Interest Income 2,781 2,294 5,199 4,708
------------------------------------------------------------------------------------------------------------
Revenue before Provision for Loan Losses 6,871 7,899 15,124 16,668
Provision for Loan Losses 525 328 972 670
------------------------------------------------------------------------------------------------------------
Total Net Revenue 6,346 7,571 14,152 15,998
------------------------------------------------------------------------------------------------------------
EXPENSE
Compensation Expense 3,052 2,963 6,409 6,303
Occupancy Expense 327 297 675 605
Technology and Communications 674 574 1,328 1,154
Merger and Restructuring Costs 478 50 806 50
Amortization of Intangibles 183 92 360 185
Other Expense 1,047 1,099 2,109 2,131
------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,761 5,075 11,687 10,428
------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT
OF ACCOUNTING CHANGE 585 2,496 2,465 5,570
Income Tax Expense 207 863 863 1,949
------------------------------------------------------------------------------------------------------------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE $ 378 $ 1,633 $ 1,602 $ 3,621
Net Effect of Change in Accounting Principle -- -- (25) --
------------------------------------------------------------------------------------------------------------
NET INCOME $ 378 $ 1,633 $ 1,577 $ 3,621
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NET INCOME APPLICABLE TO COMMON STOCK $ 359 $ 1,607 $ 1,537 $ 3,570
------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE (a)
Basic $ 0.18 $ 0.87 $ 0.78 $ 1.92
Diluted $ 0.18 $ 0.83 $ 0.76 $ 1.84
--------------------------------------------------------------------------------------------------------------
(a) Basic and diluted earnings per share have been reduced by $(0.01) in the
first six months of 2001 due to the impact of the adoption of SFAS 133
relating to the accounting for derivative instruments and hedging
activities.
--------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
-3-
4
Part I
Item 1 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
JUNE 30, December 31,
2001 2000
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ASSETS
Cash and Due from Banks $ 24,219 $ 23,972
Deposits with Banks 11,903 8,333
Federal Funds Sold and Securities Purchased under Resale Agreements 61,308 69,474
Securities Borrowed 38,296 32,371
Trading Assets: Debt and Equity Instruments 139,135 139,249
Derivative Receivables 68,910 76,373
Securities: Available-for-Sale 67,974 73,106
Held-to-Maturity (Fair Value: $520 at June 30, 2001 and $593
at December 31, 2000) 514 589
Loans (Net of Allowance for Loan Losses of $3,673 at June 30, 2001
and $3,665 at December 31, 2000) 216,245 212,385
Goodwill and Other Intangibles 16,224 15,833
Private Equity Investments 9,855 11,428
Accrued Interest and Accounts Receivable 17,080 20,618
Premises and Equipment 7,186 7,087
Other Assets 33,853 24,530
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TOTAL ASSETS $ 712,702 $ 715,348
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LIABILITIES
Deposits:
Noninterest-Bearing $ 64,231 $ 62,713
Interest-Bearing 212,573 216,652
---------- ---------
Total Deposits 276,804 279,365
Federal Funds Purchased and Securities Sold under Repurchase Agreements 155,062 131,738
Commercial Paper 19,985 24,851
Other Borrowed Funds 18,418 19,840
Trading Liabilities: Debt and Equity Instruments 53,571 52,157
Derivative Payables 62,373 76,517
Accounts Payable and Other Liabilities (including the Allowance for
Credit Losses of $285 at June 30, 2001 and $283 at December 31, 2000) 38,157 40,754
Long-Term Debt 40,917 43,299
Guaranteed Preferred Beneficial Interests in the Firm's
Junior Subordinated Deferrable Interest Debentures 4,439 3,939
-------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 669,726 672,460
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PREFERRED STOCK OF SUBSIDIARY 550 550
-------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 1,025 1,520
Common Stock (Authorized 4,500,000,000 Shares, Issued 1,989,576,087 Shares
at June 30, 2001 and 1,940,109,081 Shares at December 31, 2000) 1,990 1,940
Capital Surplus 12,000 11,598
Retained Earnings 28,265 28,096
Accumulated Other Comprehensive Income (Loss) (834) (241)
Treasury Stock, at Cost (391,153 Shares at June 30, 2001
and 11,618,856 Shares at December 31, 2000) (20) (575)
-------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 42,426 42,338
-------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 712,702 $ 715,348
-------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of
these Statements.
-4-
5
Part I
Item 1 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 2001 2000
------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at Beginning of Year $ 1,520 $ 1,622
Redemption of Stock (450) (100)
Purchase of Treasury Stock (45) --
-------------------------------------------------------------------------------------------------------------
Balance at End of Period 1,025 1,522
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COMMON STOCK
Balance at Beginning of Year 1,940 1,625
Issuance of Common Stock for a Three-for-Two Stock Split -- 441
Issuance of Common Stock 48 --
Issuance of Common Stock for Purchase Accounting Acquisitions 2 --
-------------------------------------------------------------------------------------------------------------
Balance at End of Period 1,990 2,066
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CAPITAL SURPLUS
Balance at Beginning of Year 11,598 12,724
Issuance of Common Stock for a Three-for-Two Stock Split -- (441)
Issuance of Common Stock for Purchase Accounting Acquisitions 79 --
Shares Issued and Commitments to Issue Common Stock for
Employee Stock-Based Awards and Related Tax Effects 323 (78)
-------------------------------------------------------------------------------------------------------------
Balance at End of Period 12,000 12,205
------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at Beginning of Year 28,096 28,455
Net Income 1,577 3,621
Cash Dividends Declared: Preferred Stock (40) (51)
Common Stock ($0.68 and $0.64 per share) (1,368) (1,138)
-------------------------------------------------------------------------------------------------------------
Balance at End of Period 28,265 30,887
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at Beginning of Year (241) (1,428)
Other Comprehensive Income (Loss) (593) 147
-------------------------------------------------------------------------------------------------------------
Balance at End of Period (834) (1,281)
-------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance at Beginning of Year (575) (7,942)
Purchase of Treasury Stock -- (2,153)
Reissuance of Treasury Stock 555 1,331
-------------------------------------------------------------------------------------------------------------
Balance at End of Period (20) (8,764)
-------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 42,426 $ 36,635
-------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net Income $ 1,577 $ 3,621
Other Comprehensive Income (Loss) (593) 147
-------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 984 $ 3,768
-------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of
these Statements.
-5-
6
Part I
Item 1 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
SIX MONTHS ENDED JUNE 30, 2001 2000
------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 1,577 $ 3,621
Adjustments to Reconcile Net Income to Net Cash (Used in)
Provided by Operating Activities:
Provision for Loan Losses 972 670
Merger and Restructuring Costs 806 50
Depreciation and Amortization 1,381 1,113
Private Equity Unrealized (Gains) Losses and Write-offs 1,223 (111)
Net Change in:
Trading-Related Assets 7,577 (3,863)
Securities Borrowed (5,925) 1,357
Accrued Interest and Accounts Receivable 3,538 3,565
Other Assets (10,267) (3,137)
Trading-Related Liabilities (12,939) (2,303)
Accounts Payable and Other Liabilities (3,279) 2,058
Other, Net (172) (1,415)
------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Operating Activities (15,508) 1,605
------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net Change in:
Deposits with Banks (3,570) 21,644
Federal Funds Sold and Securities Purchased under Resale Agreements 8,166 (17,228)
Loans Due to Sales and Securitizations 25,164 12,468
Other Loans, Net (28,718) (18,085)
Other, Net 2,834 (858)
Held-to-Maturity Securities: Proceeds 75 236
Purchases -- (66)
Available-for-Sale Securities: Proceeds from Maturities 5,349 5,603
Proceeds from Sales 84,974 41,882
Purchases (88,679) (43,011)
Cash Used in Acquisitions (1,677) --
Proceeds from Divestitures of Nonstrategic Businesses and Assets 106 --
-------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 4,024 2,585
-------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Change in:
Domestic Deposits 5,486 (2,415)
Foreign Deposits (8,047) (13,807)
Federal Funds Purchased and Securities Sold under
Repurchase Agreements 23,324 21,632
Commercial Paper and Other Borrowed Funds (6,288) (7,369)
Other, Net (7) (441)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 7,289 7,557
Repayments of Long-Term Debt (9,164) (4,660)
Proceeds from the Issuance of Stock and Stock-Related Awards 926 776
Redemption of Preferred Stock (450) (100)
Treasury Stock Purchased (45) (2,153)
Cash Dividends Paid (1,325) (1,113)
-------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 11,699 (2,093)
-------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Due from Banks 32 70
Net Increase in Cash and Due from Banks 247 2,167
Cash and Due from Banks at December 31, 2000 and 1999 23,972 18,692
-------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at June 30, 2001 and 2000 $ 24,219 $ 20,859
Cash Interest Paid $ 12,352 $ 11,599
Taxes Paid $ 390 $ 1,535
-------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
-6-
7
Part I
Item 1 (continued)
--------------------------------------------------------------------------------
See Glossary of Terms on page 50 for definition of terms used throughout the
Notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MERGER WITH J.P. MORGAN & CO. INCORPORATED
On December 31, 2000, J.P. Morgan & Co. Incorporated ("J.P. Morgan") merged with
and into The Chase Manhattan Corporation ("Chase"). Upon consummation of the
merger, Chase changed its name to J.P. Morgan Chase & Co. ("JPMorgan Chase",
"JPMC" or "the Firm"). The merger was accounted for as a pooling of interests
and, accordingly, the information included in these financial statements and
consolidated notes reflects the combined results of Chase and J.P. Morgan as if
the merger had been in effect for all periods presented. In addition, certain
amounts have been reclassified to conform to the current presentation.
NOTE 2 - BASIS OF PRESENTATION
The accounting and financial reporting policies of JPMorgan Chase and its
subsidiaries conform to U.S. generally accepted accounting principles ("GAAP")
and prevailing industry practices for interim reporting. Additionally, where
applicable, the policies conform to the accounting and reporting guidelines
prescribed by bank regulatory authorities. The unaudited consolidated financial
statements prepared in conformity with GAAP require management to make estimates
and assumptions that affect reported revenues, expenses, assets, liabilities and
disclosure of contingent assets and liabilities. Actual results could be
different from these estimates. In the opinion of management, all necessary
adjustments, consisting only of normal recurring adjustments, have been included
for a fair presentation of this interim financial information. These unaudited
financial statements should be read in conjunction with the audited financial
statements included in JPMorgan Chase's 2000 Annual Report on Form 10-K ("2000
Annual Report"), with the exception of Note 3 below, "Accounting for Derivative
Instruments and Hedging Activities."
NOTE 3 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, JPMorgan Chase adopted SFAS 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and used for hedging
activities. The adoption of SFAS 133 resulted in an after-tax reduction to net
income of $25 million and an after-tax reduction to other comprehensive income
("OCI") of $36 million. The impact of reclassifying certain SFAS 115 securities
from available-for-sale to trading was not material at the adoption date.
The majority of JPMorgan Chase's derivatives are entered into for trading
purposes and were not affected by the adoption of SFAS 133. The Firm also uses
derivatives as an end user to hedge market exposures, modify the interest rate
characteristics of related balance sheet instruments or meet longer-term
investment objectives. Both trading and end-user derivatives are recorded in
trading assets and liabilities. For further discussion of the Firm's use of
derivative instruments, see Note 3 of the JPMorgan Chase March 31, 2001 Form
10-Q in addition to Note 25 and page 50 of the JPMorgan Chase 2000 Annual
Report.
The following table presents derivative instrument and hedging related
activities for the periods indicated:
==========================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
-------------- ------------
2001 2001
-------- ---------
Fair Value Ineffective Hedging Net Gains (a) $ 70 $ 76
Cash Flow Ineffective Hedging Net Gains (Losses) (a) 1 (3)
Cash Flow Hedging Gains (Losses) on Forecasted
Transactions that did not occur -- 40
Expected Reclassifications from OCI to Earnings (46) (b) (87) (b)
Net Investment Hedging (Losses) on Forward Points (10) (c) (27) (c)
----------------------------------------------------------------------------------------------------------
(a) Includes ineffectiveness and the portion of the hedging instrument
excluded from the assessment of hedge effectiveness.
(b) Represents the reclassification of net losses on derivative instruments
from OCI to earnings that are expected to occur over the next 12 months.
(c) Represents the forward points on forward foreign exchange ("FX")
contracts used to hedge the investments in foreign subsidiaries in
foreign currencies.
================================================================================
-7-
8
Part I
Item 1 (continued)
NOTE 4 - MERGER AND RESTRUCTURING COSTS
The following table shows the activity in the merger liability for the six
months ended June 30, 2001:
================================================================================
(dollars in millions)
MERGER LIABILITY 2001
----------
Liability Balance at December 31, 2000 $ 917
Liability Utilized in the six months ended June 30 (421)
---------
Liability Balance at June 30, 2001 $ 496
=========
Employee Reductions as a result of the Merger during 2001 4,508
Cumulative Employee Reductions as a result of the Merger since the
Merger announcement (including attrition of approximately 28% of the total) 4,663
================================================================================
Additionally, during the second quarter of 2001, the Firm incurred $478 million
of costs relating to previously announced merger actions ($405 million) and to
relocation and other business initiatives ($73 million). Under current
accounting pronouncements, these costs (primarily system integration costs,
facilities costs and retention payments) are not recognized until incurred. For
a discussion of JPMorgan Chase's merger and restructuring costs, refer to Note 7
and page 42 of JPMorgan Chase's 2000 Annual Report.
NOTE 5 - TRADING ASSETS AND LIABILITIES
For a discussion of the accounting policies relating to trading assets and
liabilities, see Note 1 of JPMorgan Chase's 2000 Annual Report.
The following table presents trading assets and trading liabilities for the
dates indicated.
================================================================================
(in millions) JUNE 30, December 31,
2001 2000
----------- ------------
TRADING ASSETS
Debt and Equity Instruments:
U.S. Government, Federal Agencies and
Municipal Securities $ 41,598 $ 43,251
Certificates of Deposit, Bankers' Acceptances
and Commercial Paper 8,455 7,258
Debt Securities Issued by Foreign Governments 40,519 41,631
Corporate Securities and Other 48,563 47,109
------------ ----------
Total Trading Assets - Debt and Equity Instruments $ 139,135 $ 139,249
============ ==========
Derivative Receivables:
Interest Rate Contracts $ 36,253 $ 41,124
Foreign Exchange Contracts 15,455 15,484
Debt, Equity, Commodity and Other Contracts 17,202 19,765
------------ ----------
Total Trading Assets - Derivative Receivables $ 68,910 $ 76,373
============ ==========
TRADING LIABILITIES
Debt and Equity Instruments:
Securities Sold, Not Yet Purchased $ 53,190 $ 51,762
Structured Notes 381 395
------------ ----------
Total Trading Liabilities - Debt and Equity Instruments $ 53,571 $ 52,157
============ ==========
Derivative Payables:
Interest Rate Contracts $ 27,845 $ 27,968
Foreign Exchange Contracts 14,174 17,759
Debt, Equity, Commodity and Other Contracts 20,354 30,790
------------ ----------
Total Trading Liabilities - Derivative Payables $ 62,373 $ 76,517
============ ==========
================================================================================
Debt and equity instruments pledged as collateral that can be sold or repledged
by the secured party amounted to $56.3 billion at June 30, 2001 and $53.6
billion at December 31, 2000.
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9
Part I
Item 1 (continued)
NOTE 6 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note 1
of JPMorgan Chase's 2000 Annual Report.
The following table presents realized gains and losses from available-for-sale
("AFS") securities.
================================================================================
(in millions) SECOND QUARTER SIX MONTHS
----------------------------- ------------------------
2001 2000 2001 2000
---------- ---------- --------- ---------
Realized Gains $ 176 $ 142 $ 827 $ 251
Realized Losses (109) (118) (305) (230)
-------- ------- -------- -------
Net Realized Gains $ 67 $ 24 $ 522 $ 21
======== ======= ======== =======
================================================================================
The amortized cost and estimated fair value of securities were as follows for
the dates indicated:
================================================================================
(in millions) JUNE 30, 2001 December 31, 2000
----------------------------- ------------------------
AMORTIZED FAIR Amortized Fair
AVAILABLE-FOR-SALE SECURITIES COST VALUE Cost Value
----------- --------- --------- --------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 30,444 $ 29,712 $ 38,107 $ 37,168
Collateralized Mortgage Obligations 2,567 2,419 5,130 5,215
U.S. Treasuries 16,366 16,015 16,250 16,294
Obligations of State and Political Subdivisions 1,211 1,297 896 967
Debt Securities Issued by Foreign Governments 16,943 16,931 10,749 10,800
Corporate Debt, Equity and Other (a) 1,593 1,600 2,434 2,662
--------- --------- --------- ---------
Total Available-for-Sale Securities $ 69,124 $ 67,974 $ 73,566 $ 73,106
========= ========= ========= =========
HELD-TO-MATURITY SECURITIES (b) $ 514 $ 520 $ 589 $ 593
========= ========= ========= =========
--------------------------------------------------------------------------------
(a) Includes collateralized mortgage obligations of private issuers, which
generally have underlying collateral consisting of obligations of U.S.
government and federal agencies and corporations.
(b) Primarily mortgage-backed securities.
================================================================================
AFS securities pledged as collateral that can be sold or repledged by the
secured party amounted to $30.6 billion and $28.7 billion at June 30, 2001 and
December 31, 2000, respectively.
NOTE 7 - MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in residential mortgage servicing
rights ("MSRs"):
================================================================================
(in millions) SIX MONTHS
------------------------------------
2001 2000
--------- ----------
Balance at Beginning of Period $ 6,362 $ 5,187
Originations and Purchases of MSRs 1,848 909
Sales (83) (159)
Pre-SFAS 133 Hedging Activities -- 112
Amortization of MSRs (499) (310)
SFAS 133 Hedge Valuation Adjustments (81) --
Change in Valuation Allowance (474) --
---------- --------
Balance at June 30, $ 7,073 $ 5,739
========= ========
Estimated Fair Value at June 30, $ 7,100
=========
Weighted-Average Prepayment Speed Assumption 11.07% CPR
Weighted-Average Discount Rate 9.27%
--------------------------------------------------------------------------------
CPR - Constant prepayment rate.
================================================================================
-9-
10
Part I
Item 1 (continued)
Various interest rate derivatives are designated as fair value hedges of
residential mortgage servicing rights. SFAS 133 hedge valuation adjustments are
adjustments to the carrying value of the MSRs. For the six months ended June 30,
2001, the SFAS 133 hedge valuation adjustments, which include the impact of
adopting SFAS 133, totaled $81 million. These losses were partially offset by
derivative gains, including SFAS 133 hedges, of $66 million. In addition,
certain AFS securities are used as economic hedges of the MSRs with gains on
sales of the securities partially offsetting impairment losses on the MSRs.
During the six months 2001, there was a $474 million unfavorable change in the
valuation allowance, partially offset by $315 million of realized AFS security
gains.
NOTE 8 - SUBORDINATED DEFERRABLE INTEREST DEBENTURES
At June 30, 2001, 11 wholly owned Delaware statutory business trusts established
by JPMorgan Chase had issued an aggregate $4,439 million of capital securities,
net of discount. There were no issuances or redemptions of capital securities
during the second quarter of 2001. For a discussion of these business trusts,
see page 78 of JPMorgan Chase's 2000 Annual Report and Note 8 of JPMorgan
Chase's March 31, 2001 Form 10-Q.
NOTE 9 - EARNINGS PER SHARE
For a discussion of JPMorgan Chase's earnings per share ("EPS"), see Note 17 of
the 2000 Annual Report. For the calculation of basic and diluted EPS for the
second quarter and six months ended June 30, 2001 and 2000, see Exhibit 11 on
page 57.
NOTE 10 - COMPREHENSIVE INCOME
Comprehensive income is composed of net income and other comprehensive income,
which includes the after-tax change in unrealized gains and losses on AFS
securities, cash flow hedging activities and foreign currency translation
adjustments.
================================================================================
SIX MONTHS ENDED JUNE 30,
(in millions) 2001
--------------------------------------------------------------------------
ACCUMULATED
OTHER
UNREALIZED TRANSLATION CASH FLOW COMPREHENSIVE
GAINS(LOSSES) ADJUSTMENTS HEDGES INCOME (LOSS)
------------- ----------- ------ -------------
Beginning Balance $ (244) $ 3 $ -- $ (241)
Change during Period (457) (9) (b) (127) (d) (593)
--------- ------------ ---------- --------
Ending Balance $ (701) (a) $ (6) (c) $ (127) $ (834)
========== =========== ======== ========
2000
--------------------------------------------------------------------------
Accumulated
Other
Unrealized Translation Cash Flow Comprehensive
Gains(Losses) Adjustments Hedges Income (Loss)
------------- ----------- ------ -------------
Beginning Balance $ (1,427) $ (1) $ N/A $ (1,428)
Change during Period 143 4 N/A 147
--------- -------- -------- --------
Ending Balance $ (1,284) (a) $ 3 (c) $ N/A $ (1,281)
========== ========= ======== ========
-----------------------------------------------------------------------------------------------------------
(a) Primarily represents the after-tax difference between the fair value and
amortized cost of the available-for-sale securities portfolio.
(b) Includes $313 million of after-tax losses on foreign currency translation
from operations for which the functional currency is other than the U.S.
dollar, which are offset by $304 million of after-tax gains on hedges.
(c) Includes after-tax gains and losses on foreign currency translation from
operations for which the functional currency is other than the U.S. dollar.
(d) Includes $16 million of after-tax losses reclassified to income and $143
million of after-tax losses representing the net change in derivative fair
values and the impact of the adoption of SFAS 133 that were recorded in
comprehensive income. The net derivative amounts included in OCI as of June
30, 2001 are expected to be reclassified into earnings through 2011.
N/A - Not applicable, as SFAS 133 was adopted effective January 1, 2001.
================================================================================
-10-
11
Part I
Item 1 (continued)
NOTE 11 - CAPITAL
For a discussion of the calculation of risk-based capital ratios, see Note 23 of
JPMorgan Chase's 2000 Annual Report.
The following table presents the risk-based capital ratios for JPMorgan Chase
and its significant banking subsidiaries. At June 30, 2001, the Firm and each of
its depository institutions, including those listed in the table below, were
"well-capitalized" as defined by banking regulators.
================================================================================
SIGNIFICANT BANKING SUBSIDIARIES
-------------------------------------------------
JUNE 30, 2001 THE CHASE MORGAN
(in millions, except ratios) JPMORGAN CHASE (a) MANHATTAN BANK GUARANTY TRUST CO. CHASE USA
-------------- -------------- ------------------ ---------
Tier 1 Capital $ 39,069 $ 21,804 $ 10,873 $ 3,338
Total Capital 55,027 29,814 13,356 5,138
Risk-Weighted Assets (b) 451,191 274,378 117,104 43,709
Adjusted Average Assets 727,078 406,428 173,306 46,812
Tier 1 Capital Ratio 8.66% 7.95% 9.28% 7.64%
Total Capital Ratio 12.20 10.87 11.41 11.76
Tier 1 Leverage Ratio 5.37 5.36 6.27 7.13
-----------------------------------------------------------------------------------------------------------
(a) Assets and capital amounts for JPMorgan Chase's significant banking
subsidiaries reflect intercompany transactions, whereas the respective
amounts for JPMorgan Chase reflect the elimination of intercompany
transactions.
(b) Risk-weighted assets include off-balance sheet risk-weighted assets in the
amounts of $147,395 million, $87,525 million, $56,041 million and $3,565
million, respectively.
================================================================================
NOTE 12 - INTEREST INCOME AND INTEREST EXPENSE
The following table details the components of interest income and interest
expense.
================================================================================
(in millions) SECOND QUARTER SIX MONTHS
----------------------------- ------------------------
INTEREST INCOME 2001 2000 2001 2000
--------------- ----------- -------- --------- ---------
Loans $ 4,090 $ 4,118 $ 8,558 $ 8,059
Securities 985 1,082 2,038 2,234
Trading Assets 1,860 1,753 3,691 3,270
Federal Funds Sold and Securities
Purchased under Resale Agreements 1,076 1,201 2,272 2,291
Securities Borrowed 347 528 840 1,056
Deposits with Banks 111 176 250 388
-------- ------- --------- --------
TOTAL INTEREST INCOME 8,469 8,858 17,649 17,298
INTEREST EXPENSE
----------------
Deposits 2,122 2,644 4,758 5,151
Short-Term and Other Liabilities 2,932 3,147 6,314 5,931
Long-Term Debt 634 773 1,378 1,508
-------- ------- --------- --------
TOTAL INTEREST EXPENSE 5,688 6,564 12,450 12,590
-------- ------- --------- --------
NET INTEREST INCOME 2,781 2,294 5,199 4,708
Provision for Loan Losses 525 328 972 670
-------- ------- --------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 2,256 $ 1,966 $ 4,227 $ 4,038
======== ======= ========= ========
================================================================================
NOTE 13 - COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
-11-
12
Part I
Item 1 (continued)
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of JPMorgan Chase's fair value methodologies, see Note 28 of
JPMorgan Chase's 2000 Annual Report. The following table presents the financial
assets and liabilities valued under SFAS 107.
================================================================================
(in billions) JUNE 30, 2001 December 31, 2000
---------------------------------------- -------------------------------------
CARRYING ESTIMATED APPRECIATION/ Carrying Estimated Appreciation/
VALUE FAIR VALUE (DEPRECIATION) Value Fair Value (Depreciation)
----------------------------------------------------------------------------------------------------------
Total Financial Assets $ 689.5 $ 693.4 $ 3.9 $ 691.0 $ 693.1 $ 2.1
========= ========= ======== =========
Total Financial
Liabilities $ 668.9 $ 668.8 0.1 $ 670.3 $ 670.3 --
========= ========= -------- ======== ========= -----
Estimated Fair Value in
Excess of Carrying Value $ 4.0 $ 2.1
======== =====
==========================================================================================================
NOTE 15 - ACCOUNTING DEVELOPMENTS
For a discussion of JPMorgan Chase's recent accounting developments, see page 44
of this Form 10-Q.
NOTE 16 - SEGMENT INFORMATION
JPMorgan Chase is organized into five major businesses: Investment Bank,
Investment Management & Private Banking, Treasury & Securities Services,
JPMorgan Partners and Retail & Middle Market Financial Services. These
businesses are segmented based on the products and services provided, or the
type of customer serviced, and reflect the manner in which financial information
is currently evaluated by the Firm's management. For a further discussion
concerning JPMorgan Chase's business segments, see Lines of Business Results in
the Management's Discussion and Analysis ("MD&A") section of this Form 10-Q on
pages 17 through 25.
Shareholder Value Added ("SVA") is JPMorgan Chase's primary performance measure
of its businesses. SVA represents operating earnings excluding the amortization
of goodwill and certain other intangibles (i.e., cash operating earnings) minus
preferred dividends and an explicit charge for capital. The Firm implemented an
integrated cost of capital during the first quarter of 2001. A 12% cost of
capital has been used for all businesses except JPMorgan Partners. This business
is charged a 15% cost of equity capital, which is equivalent to a representative
after-tax hurdle rate for private equity investments. The effective cost of
equity capital used in the SVA framework for JPMorgan Chase overall is 12%. All
prior periods have been restated. See Management Performance Measurements in the
MD&A on page 25 and Note 29 of JPMorgan Chase's 2000 Annual Report for a further
discussion of performance measurements and policies for cost allocation.
The table below presents a reconciliation of the combined segment information to
the Firm's reported net income as included in the Consolidated Statement of
Income.
================================================================================
(in millions) SECOND QUARTER SIX MONTHS
--------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- --------- ---------
SEGMENTS' CASH OPERATING EARNINGS $ 899 $ 1,890 $ 2,658 $ 4,039
Corporate/Reconciling Items (26) (41) (172) (109)
-------- -------- -------- --------
CONSOLIDATED CASH OPERATING EARNINGS 873 1,849 2,486 3,930
Amortization of Intangibles (183) (92) (360) (185)
-------- -------- -------- --------
CONSOLIDATED OPERATING EARNINGS 690 1,757 2,126 3,745
Special Items and Restructuring Costs (312) (124) (524) (124)
Net Effect of Change in Accounting Principle -- -- (25) --
-------- -------- -------- --------
CONSOLIDATED NET INCOME $ 378 $ 1,633 $ 1,577 $ 3,621
======== ======== ======== ========
================================================================================
-12-
13
Part I
Item 1 (continued)
The following table provides the Firm's segment results.
================================================================================
INVESTMENT RETAIL &
MANAGEMENT TREASURY & MIDDLE MARKET CORPORATE/
INVESTMENT & PRIVATE SECURITIES JPMORGAN FINANCIAL RECONCILING
(in millions, except ratios) BANK BANKING SERVICES PARTNERS SERVICES ITEMS (a) TOTAL
--------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2001
-------------------
Operating Revenue (b) $ 3,775 $ 788 $ 909 $ (894) $ 2,642 $ (76) $ 7,144
Intersegment Revenue (b) (52) 30 41 (12) (5) (2) --
Operating Earnings 750 47 148 (618) 403 (40) 690
Cash Operating Earnings (c) 790 117 167 (613) 438 (26) 873
Average Managed Assets (d) 510,954 33,495 18,612 11,683 165,177 12,573 752,494
SVA 233 (62) 76 (857) 183 33 (394)
Cash Return on Common
Equity (e) 17.1% 7.8% 22.2% NM 20.8% NM 8.2%
-----------------------------------------------------------------------------------
SECOND QUARTER 2000
-------------------
Operating Revenue (b) $ 3,899 $ 749 $ 899 $ 390 $ 2,513 $ (168) $ 8,282
Intersegment Revenue (b) (101) 37 47 (7) 9 15 --
Operating Earnings 919 117 157 201 414 (51) 1,757
Cash Operating Earnings (c) 936 127 173 203 451 (41) 1,849
Average Managed Assets (d) 468,645 27,862 16,094 13,397 144,460 16,617 687,075
SVA 445 52 85 (76) 198 110 814
Cash Return on Common
Equity (e) 23.1% 20.5% 23.9% 10.8% 21.7% NM 21.7%
SIX MONTHS 2001
---------------
Operating Revenue (b) $ 8,213 $ 1,595 $ 1,816 $ (837) $ 5,201 $ (350) $ 15,638
Intersegment Revenue (b) (112) 58 80 11 3 (40) --
Operating Earnings (f) 1,769 76 309 (643) 811 (196) 2,126
Cash Operating
Earnings (c)(f) 1,849 216 346 (633) 880 (172) 2,486
Average Managed Assets (d) 511,938 34,364 17,900 12,415 161,353 12,128 750,098
SVA 716 (147) 168 (1,130) 382 (12) (23)
Cash Return on Common
Equity (e) 19.7% 7.1% 23.6% NM 21.3% NM 11.9%
-----------------------------------------------------------------------------------
SIX MONTHS 2000
---------------
Operating Revenue (b) $ 8,394 $ 1,554 $ 1,768 $ 991 $ 4,909 $ (311) $ 17,305
Intersegment Revenue (b) (210) 83 99 (8) 11 25 --
Operating Earnings 2,090 254 301 507 723 (130) 3,745
Cash Operating Earnings (c) 2,124 275 332 511 797 (109) 3,930
Average Managed Assets (d) 464,260 26,740 16,101 13,257 142,940 15,152 678,450
SVA 1,127 124 156 (42) 288 228 1,881
Cash Return on Common
Equity (e) 25.9% 22.2% 22.8% 13.8% 18.9% NM 23.3%
--------------------------------------------------------------------------------
(a) Corporate/Reconciling Items include LabMorgan, Support Units, Corporate and
the net effect of management accounting policies.
(b) Operating Revenue includes Intersegment Revenue, which includes intercompany
revenue and revenue sharing agreements, net of intersegment expenses.
Transactions between business segments are primarily conducted at fair
value.
(c) Cash Operating Earnings exclude the impact of restructuring costs, special
items, and amortization of goodwill and certain other intangibles.
(d) Excludes the impact of credit card securitizations.
(e) Based on annualized amounts.
(f) Excludes the after-tax impact of SFAS 133 cumulative transition adjustment
for the Investment Bank $(19) million, Retail & Middle Market Financial
Services $(3) million and Corporate $(3) million.
NM - Not meaningful.
================================================================================
-13-
14
Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
OVERVIEW
Results for all periods give effect to the merger of The Chase Manhattan
Corporation and J.P. Morgan & Co. Incorporated on December 31, 2000.
FINANCIAL RESULTS: Reported net income, which includes merger and restructuring
costs, was $378 million, or $0.18 per share, in the second quarter of 2001. This
compares with $1,199 million, or $0.58 per share, in the first quarter of 2001
and $1,633 million, or $0.83 per share, in the second quarter of 2000. For the
first six months of 2001, reported net income was $1,577 million, or $0.76 per
share, compared with $3,621 million, or $1.84 per share, in the same period last
year.
-------------------------------------------------------------------------------------------------------------
SECOND QUARTER SIX MONTHS
------------------------------------- ----------------------------------
(in millions, except per share Over(Under) Over(Under)
and ratio data) 2001 2000 2000 2001 2000 2000
-------- -------- ----------- --------- -------- ----------
REPORTED BASIS
Revenue $ 6,871 $ 7,899 (13)% $ 15,124 $ 16,668 (9)%
Net Income 378 1,633 (77) 1,577 3,621 (56)
Diluted Net Income per Share 0.18 0.83 (78) 0.76 1.84 (59)
Return on Average
Common Equity ("ROCE") 3.5% 19.1% (1,560)bp 7.5% 21.4% (1,390)bp
Tier 1 Capital Ratio 8.7 8.6 10
Total Capital Ratio 12.2 12.3 (10)
Tier 1 Leverage 5.4 5.8 (40)
-------------------------------------------------------------------------------------------------------------
bp - Denotes basis points; 100 bp equals 1%.
================================================================================
In addition to disclosing its results on a reported basis, JPMorgan Chase
reviews and discloses the financial performance of the Firm on an operating
basis. In the view of JPMorgan Chase's management, "operating basis" excludes
the impact of credit card securitizations, merger and restructuring costs,
special items and the net effect of a change in accounting principle.
Management's Discussion and Analysis ("MD&A") in this Form 10-Q discusses the
Firm's performance on an operating basis unless otherwise noted. For a
reconciliation between reported results and results on an operating basis, see
page 26.
-------------------------------------------------------------------------------------------------------------
SECOND QUARTER SIX MONTHS
------------------------------------ --------------------------------
(in millions, except per share Over(Under) Over(Under)
and ratio data) 2001 2000 2000 2001 2000 2000
--------- ------- --------- --------- -------- ---------
OPERATING BASIS (a)
Revenue $ 7,144 $ 8,282 (14)% $ 15,638 $ 17,305 (10)%
Earnings 690 1,757 (61) 2,126 3,745 (43)
Diluted Earnings per Share ("EPS") 0.33 0.89 (63) 1.03 1.90 (46)
ROCE 6.5% 20.6% (1,410)bp 10.1% 22.2% (1,210)bp
Cash Operating Earnings (b) $ 873 $ 1,849 (53)% $ 2,486 $ 3,930 (37)%
Diluted Cash EPS 0.42 0.94 (55) 1.20 2.00 (40)
Cash ROCE 8.2% 21.7% (1,350)bp 11.9% 23.3% (1,140)bp
-------------------------------------------------------------------------------------------------------------
(a) Operating basis excludes the impact of credit card securitizations, merger
and restructuring costs, special items and the net effect of a change in
accounting principle.
(b) Cash operating earnings also exclude the impact of the amortization of
goodwill and certain other intangibles. For a further discussion, see
Glossary of Terms on page 50.
================================================================================
-14-
15
Part I
Item 2 (continued)
On an operating basis, JPMorgan Chase's diluted earnings per share for the
second quarter of 2001 were $0.33, compared with $0.70 in the first quarter of
2001 and $0.89 in the second quarter of 2000. Operating earnings were $690
million in the 2001 second quarter, compared with $1,436 million in the first
quarter of 2001 and $1,757 million one year ago. For the first half of 2001,
operating earnings were $2,126 million, or $1.03 per share, as against $3,745
million, or $1.90 per share, in last year's same period.
Management also tracks the operating performance of JPMorgan Chase excluding
JPMorgan Partners' ("JPMP") results. Over the past few years, volatile stock
markets and financing environments have yielded significant fluctuations in the
values of the securities held by JPMorgan Partners, resulting in unrealized and
realized valuation adjustments for various periods that have significantly
affected, both favorably and unfavorably, the Firm's operating results.
Excluding the results of JPMorgan Partners, operating earnings were $1,308
million in the second quarter of 2001, compared with $1,461 million in the first
quarter of 2001 and $1,556 million in the 2000 second quarter. Operating
earnings excluding JPMP for the first six months of 2001 were $2,769 million,
compared with $3,239 million in the first half of 2000.
-------------------------------------------------------------------------------------------------------------
SECOND QUARTER SIX MONTHS
----------------------------------- -------------------------------
(in millions, except per share Over(Under) Over(Under)
and ratio data) 2001 2000 2000 2001 2000 2000
--------- ------- --------- -------- -------- ---------
OPERATING BASIS
(EXCLUDING JPMORGAN PARTNERS)
Revenue $ 8,038 $ 7,892 2% $ 16,475 $ 16,314 1%
Earnings 1,308 1,556 (16) 2,769 3,239 (15)
Diluted EPS 0.64 0.79 (19) 1.35 1.65 (18)
Cash Operating Earnings 1,486 1,646 (10) 3,119 3,419 (9)
Diluted Cash EPS 0.72 0.84 (14) 1.52 1.74 (13)
Cash ROCE 16.7% 24.7% (800)bp 17.8% 25.9% (810)bp
------------------------------------------------------------------------------------------------------------
bp - Denotes basis points; 100 bp equals 1%.
================================================================================
The contribution of JPMP to operating earnings per share was a loss of $0.31 in
the second quarter of 2001, compared with a $0.01 loss in the first quarter of
2001 and income of $0.10 in the second quarter of 2000. Excluding the results of
JPMP, operating earnings per share were $0.64 in the second quarter of 2001.
This compares with $0.71 in the first quarter of 2001 and $0.79 in the second
quarter of 2000. The annualized cash operating return on common equity for the
second quarter of 2001 was 16.7% excluding the results of JPMorgan Partners.
The impact of the amortization of intangibles was $0.09 per share in the second
quarter of 2001, $0.08 per share in the first quarter of 2001 and $0.05 per
share one year ago.
For a reconciliation of diluted EPS from reported net income to cash operating
earnings (excluding JPMP), see the table below.
------------------------------------------------------------------------------------------------------------
SECOND QUARTER SIX MONTHS
-------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- --------- --------
DILUTED EPS
REPORTED NET INCOME $ 0.18 $ 0.83 $ 0.76 $ 1.84
Special Items 0.15 0.06 0.27 0.06
-------- --------- -------- -------
OPERATING EARNINGS 0.33 0.89 1.03 1.90
Less: JPMorgan Partners (0.31) 0.10 (0.32) 0.25
-------- --------- -------- -------
OPERATING EARNINGS (EXCLUDING JPMP) 0.64 0.79 1.35 1.65
Add Back: Amortization of Intangibles 0.08(a) 0.05 0.17 0.09 (a)
-------- --------- -------- -------
CASH OPERATING EARNINGS (EXCLUDING JPMP) $ 0.72 $ 0.84 $ 1.52 $ 1.74
======== ========= ======== =======
------------------------------------------------------------------------------------------------------------
(a) Amortization of intangibles excludes $0.01 related to JPMP.
================================================================================
-15-
16
Part I
Item 2 (continued)
SUMMARY OF SECOND QUARTER 2001 OPERATING RESULTS:
Weak global market conditions adversely affected the results of the 2001 second
quarter. The decline in operating income was driven primarily by losses at
JPMorgan Partners. (All periods in 2000 give pro forma effect to the purchase of
Robert Fleming Holdings Limited ("Flemings"), which is treated as if it had
occurred at the beginning of that year.)
- Results of JPMorgan Partners were negatively affected by $1.02 billion
of write-downs and write-offs, particularly from telecommunications
investments in the privately held portion of the portfolio.
- Total operating expenses declined by 6%, or $315 million, from the
first quarter of 2001 and declined by 4% from the second quarter of
2000.
- Investment banking fees were down 1% from the first quarter,
reflecting market share gains in a weaker market.
- Treasury & Securities Services and Retail & Middle Market Financial
Services posted solid results, with cash ROE in excess of 20% for
each.
- Investment Management & Private Banking expense initiatives led to 18%
growth in cash operating earnings from a weak first quarter. Assets
under management, associated management fees and cash operating
earnings declined versus one year ago as a consequence of the weaker
market conditions.
Despite the poor performance in second quarter of 2001, management of JPMorgan
Chase continues to believe in the long-term value of the Firm's business model,
which combines the best of an investment bank and a commercial bank. In a
difficult business environment, the Firm maintained during the first six months
of 2001, its position as No. 1 arranger of leveraged and syndicated loans and as
No. 2 arranger of U.S. high-grade bonds. The Firm improved its global announced
mergers and acquisitions ("M&A") ranking to No. 5, as compared with No. 7 during
the same period one year ago. Management reiterated its commitment to capital
discipline, as evidenced by the common stock repurchase authorization discussed
more fully below, and to continued expense discipline. JPMorgan Chase continues
to target cash operating expenses for full-year 2001 to be lower than cash
operating expenses for full-year 2000.
Nonperforming assets were $2.50 billion at June 30, 2001, compared with $2.23
billion and $2.04 billion at March 31, 2001 and June 30, 2000, respectively. The
increase from March 31 primarily relates to U.S. commercial and industrial
loans. Net charge-offs on a managed basis (i.e., treating securitized credit
card receivables as if owned by JPMC) were $798 million in the 2001 second
quarter, up from $688 million in the first quarter of 2001 and $577 million in
the second quarter of 2000.
Total assets as of June 30, 2001 were $713 billion, compared with $714 billion
as of March 31, 2001 and $662 billion one year ago. JPMorgan Chase's Tier One
capital ratio was 8.7% at June 30, 2001 and at March 31, 2001 and 8.6% one
year ago.
JPMorgan Chase's second quarter 2001 special items were $478 million (pre-tax)
of merger and restructuring costs. Special items in the second quarter of 2000
included a $141 million loss resulting from the economic hedge of the purchase
price of Flemings prior to its acquisition and $50 million of restructuring
costs associated with previously announced relocation initiatives.
COMMON STOCK REPURCHASE AUTHORIZATION:
The Board of Directors of J.P. Morgan Chase & Co. has authorized, effective July
19, 2001, the repurchase of up to $6 billion of JPMorgan Chase's common stock in
the open market or through negotiated transactions. This authorization is in
addition to any amounts necessary to provide for issuances under JPMorgan
Chase's dividend reinvestment plan and its various stock-based director and
employee benefits plans.
MERGER UPDATE:
- The merger of Chase Securities Inc. and J.P. Morgan Securities Inc.
occurred on May 1, 2001. The merger of The Chase Manhattan Bank and
Morgan Guaranty Trust Company of New York currently is scheduled to
occur in October 2001.
- JPMC management anticipates that revenue synergies from the merger for
full-year 2001 are likely to be lower than previously estimated
because of weak market conditions. The level of M&A and equity
underwriting activity are not expected to improve in the second half
of 2001.
- Total expense savings are expected to be larger than originally
estimated for 2001 and in excess of the original three
year target of $2 billion.
-16-
17
Part I
Item 2 (continued)
--------------------------------------------------------------------------------
LINES OF BUSINESS RESULTS
--------------------------------------------------------------------------------
The table below provides summary financial information on a cash operating basis
for the five major business segments. All periods below have been restated on a
comparable basis to reflect the changes in capital allocation adopted in the
first quarter of 2001; restatements may occur in future periods to reflect
further alignment of management accounting policies or changes in organizational
structures between businesses.
Shareholder Value Added ("SVA") is JPMorgan Chase's primary performance measure
of its businesses. SVA represents operating earnings excluding the amortization
of goodwill and certain other intangibles (i.e., cash operating earnings) minus
preferred dividends and an explicit charge for capital. During the first quarter
of 2001, JPMorgan Chase adopted a new framework for capital allocation and for
business performance measurement across the Firm. The SVA framework now utilizes
a 12% cost of equity capital for each business, with the exception of JPMorgan
Partners. That business is charged a 15% cost of equity capital, which is
equivalent to a representative after-tax hurdle rate for private equity
investments. The effective cost of equity capital used in the SVA framework for
JPMorgan Chase overall is 12%. For a discussion of each business profile, see
pages 28-36 of the JPMorgan Chase 2000 Annual Report.
================================================================================
(in millions) SECOND QUARTER SIX MONTHS
---------------------------------------- ----------------------------
Over (Under) Over (Under)
-------------------------- -----------------
Pro Forma (a) Pro Forma (a)
2001 2Q 2000 1Q 2001 2Q 2000 2001 2000 2000
-------- ------- ------- ------- -------- ------ --------
OPERATING REVENUE
-----------------
Investment Bank $ 3,775 (3)% (15)% (11)% $ 8,213 (2)% (9)%
Investment Management & Private
Banking 788 5 (2) (15) 1,595 3 (19)
Treasury & Securities Services 909 1 -- 1 1,816 3 3
Retail & Middle Market Financial
Services 2,642 5 3 5 5,201 6 6
Corporate (b) (76) NM NM NM (350) NM NM
------- --------
OPERATING REVENUE EXCLUDING JPMP 8,038 2 (5) (4) 16,475 1 (5)
JPMorgan Partners (894) NM NM NM (837) NM NM
------- --------
OPERATING REVENUE INCLUDING JPMP $ 7,144 (14) (16) (18) $ 15,638 (10) (15)
======= ========
CASH OPERATING EARNINGS
-----------------------
Investment Bank $ 790 (16)% (25)% (20)% $ 1,849 (13)% (17)%
Investment Management & Private
Banking 117 (8) 18 (26) 216 (21) (40)
Treasury & Securities Services 167 (3) (6) (3) 346 4 4
Retail & Middle Market Financial
Services 438 (3) (1) (3) 880 10 10
Corporate (b) (26) NM NM NM (172) NM NM
------- --------
CASH OPERATING EARNINGS EXCLUDING
JPMP 1,486 (10) (9) (14) 3,119 (9) (14)
JPMorgan Partners (613) NM NM NM (633) NM NM
------- --------
CASH OPERATING EARNINGS INCLUDING
JPMP $ 873 (53) (46) (55) $ 2,486 (37) (40)
======= ========
-----------------------------------------------------------------------------------------------------------
(a) Pro forma results assume that the purchase of Flemings occurred at the
beginning of 2000 and primarily affected Investment Bank, Investment
Management & Private Banking and total consolidated results.
(b) Includes LabMorgan, Support Units and the effects remaining at the corporate
level after the implementation of management accounting policies.
NM - Not meaningful.
================================================================================
-17-
18
Part I
Item 2 (continued)
INVESTMENT BANK
The following table sets forth selected financial data of the Investment Bank.
================================================================================
(in millions, except ratios) SECOND QUARTER SIX MONTHS
------------------------------------------ --------------------------------
Over (Under) Over (Under)
----------------------------- ------------------
Pro Forma (a) Pro Forma (a)
2001 2Q 2000 1Q 2001 2000 2001 2000 2000
-------- ------- ------- --------- --------- ---- --------
Trading-Related Revenue $ 1,614 (10)% (24)% (11)% $ 3,740 (5)% (6)%
Investment Banking Fees 921 (16) (2) (21) 1,860 (18) (22)
Net Interest Income 748 20 3 12 1,477 11 4
Fees and Commissions 400 21 (15) (16) 867 22 (13)
All Other Revenue 92 30 (47) (19) 269 62 5
---------- ----------
OPERATING REVENUE 3,775 (3) (15) (11) 8,213 (2) (9)
Compensation Expense 1,499 -- (14) (11) 3,240 (1) (11)
Noncompensation Expense 867 6 (2) (1) 1,754 12 4
---------- ----------
CASH EXPENSE 2,366 2 (10) (8) 4,994 4 (7)
CASH OPERATING EARNINGS $ 790 (16) (25) (20) $ 1,849 (13) (17)
========== ==========
Average Common Equity $ 18,340 14 (4) -- $ 18,751 15 1
Average Assets 510,954 9 -- 6 511,938 10 7
Shareholder Value Added 233 (48) (52) (46) 716 (36) (35)
Cash Return on Common Equity 17.1% (600)bp (510)bp (440)bp 19.7% (620)bp (420)bp
Cash Overhead Ratio 63 400 400 200 61 400 200
-----------------------------------------------------------------------------------------------------------
(a) Pro forma results assume that the purchase of Flemings occurred at the
beginning of 2000.
bp - Denotes basis points; 100 bp equals 1%.
================================================================================
(All comments related to 2000 give pro forma effect to the purchase of Flemings,
which is treated as if it had occurred at the beginning of that year.)
The Investment Bank's operating revenue in the second quarter of 2001 was $3.78
billion, down 11% from the second quarter of 2000 and for the first half of the
year was $8.21 billion, down 9% from last year. The declines in revenue were
primarily a consequence of the continuing difficult market environment in 2001.
Cash operating expense declined 8% from the second quarter of 2000 and 7% from
the first six months of 2000, benefiting from expense discipline that included
net headcount reductions in excess of 3,000 since the start of the year and
lower incentive accruals. Further net headcount reductions and expense
reductions are planned as the merger integration continues through 2001 and
2002. Cash operating earnings declined 20% from the second quarter of 2000 and
17% from the first half of 2000.
Trading revenue (including the associated net interest income ("NII")) of $1.61
billion in the second quarter declined by 11% from the second quarter of 2000.
Year-to-date trading revenue was lower by 6%, compared with the same period last
year. The declines were a result of overall challenging market conditions and
slower market activity and were experienced across most of the Firm's trading
activities. For additional comments on trading revenue products, see page
28. Trading-related revenue for the remainder of the year is likely to be lower
than trading-related revenue realized in the first half of 2001 due to both
seasonal patterns and market conditions.
Investment banking fees declined by 21% from the second quarter of 2000 and by
22% from the first half of 2000. The declines were driven by the lower level of
M&A and equity underwriting activity in 2001. Investment banking revenues for
the remainder of the year will be largely dependent upon the level of market
activity for underwriting and M&A advisory work, which are currently expected to
remain at the same weak levels as experienced during the first half of the year.
Double-digit percentage decreases in fees and commissions from both the second
quarter and first half of last year were driven by lower equity brokerage
commissions.
All other revenue includes securities gains and reflected increases in
securities gains of $70 million in the second quarter of 2001 and $247 million
in the first half of 2001. The increases are the result of the Firm's
asset/liability management ("A/L") activities in a declining interest rate
environment.
The Investment Bank's cash overhead ratio for the second quarter of 2001 was 63%
and 61% for the first half of 2001. The Investment Bank is targeting a cash
overhead ratio of 60% for the full-year 2001 assuming no further deterioration
in market conditions.
-18-
19
Part I
Item 2 (continued)
JPMORGAN PARTNERS
The following table sets forth selected financial data of JPMorgan Partners.
================================================================================
(in millions, except ratios)
SECOND QUARTER SIX MONTHS
---------------------------------------- ------------------------------
Over (Under) Over (Under)
------------------------ ------------
2001 2Q 2000 1Q 2001 2001 2000
--------- ------- ------- -------- ----
Private Equity:
Realized Gains (Losses) $ (60) NM NM $ 353 (65)%
Unrealized Gains (Losses) (767) NM NM (1,048) NM
Net Interest Income (81) 17% (9)% (170) 31
Fees and Other Revenue 14 17 -- 28 40
--------- ---------
OPERATING REVENUE (894) NM NM (837) NM
Compensation Expense 33 (3) (21) 75 (17)
Noncompensation Expense 35 (17) (31) 85 (22)
--------- ---------
CASH EXPENSE 68 (11) (27) 160 (20)
CASH OPERATING EARNINGS (LOSS) $ (613) NM NM $ (633) NM
========== =========
Average Common Equity $ 6,447 (12) (5) $ 6,599 (9)
Average Assets 11,683 (13) (11) 12,415 (6)
Shareholder Value Added (857) NM NM (1,130) NM
Cash Return on Common Equity NM NM NM NM NM
Cash Overhead Ratio NM NM NM NM NM
-----------------------------------------------------------------------------------------------------------
NM - Not meaningful.
================================================================================
JPMorgan Partners generated net private equity losses of $827 million in the
second quarter of 2001, compared with gains of $447 million in the second
quarter of 2000. Included in the second quarter of 2001 were write-downs and
write-offs of $1.02 billion taken on JPMP's direct private investments and fund
positions as a result of lower overall valuation levels of its investments.
A majority of the write-downs and write-offs were associated with technology,
media and telecommunications ("TMT") investments, with particular focus on
transactions funded during 1999 and 2000. During this period, investments made
in the TMT sector reflected historically high valuations. JPMP's TMT investments
from 1999 and 2000 currently are valued at 55% of initial cost. (Exclusive of
investments with increased valuation adjustments recognized upon the initial
public offering of such securities or as a result of an additional round of
private financing). At June 30, 2001, TMT investments represented approximately
32% of the total of JPMP's portfolio.
The carrying values of the equity investments recorded on JPMC's financial
statements are net of interests of investors other than JPMC. JPMP has sold
interests in certain of its fund investments to unaffiliated third parties and
is in the process of offering interests in a new investment fund that will
co-invest with JPMP in its direct investments. As a result, JPMC's proportional
ownership share of investments to be made by JPMP in the future will be reduced.
-19-
20
Part I
Item 2 (continued)
JPMORGAN PARTNERS INVESTMENT PORTFOLIO
The following table presents the carrying values and costs of the JPMP
investment portfolio for the dates indicated.
================================================================================
(in millions) JUNE 30, 2001 March 31, 2001 June 30, 2000
----------------------- --------------------- ----------------
CARRYING Carrying Carrying
VALUE COST Value Cost Value Cost
---------- --------- ---------- -------- --------- --------
Public Securities (198 companies) (a) (b) $ 1,680 $ 974 $ 1,611 $ 1,018 $ 3,585 $ 1,219
Private Direct Securities (930
companies) (b) 6,089 6,998 7,144 7,318 6,500 6,453
Private Fund Investments (329 funds) (b) 2,086 2,201 2,122 2,141 2,492 2,476
-------- --------- --------- -------- --------- -------
Total Investment Portfolio $ 9,855 $ 10,173 $ 10,877 $ 10,477 $ 12,577 $10,148
======== ========= ========= ======== ========= =======
--------------------------------------------------------------------------------
(a) Publicly traded positions only.
(b) Represents the number of companies and funds at June 30, 2001.
================================================================================
The following table presents information about the 10 largest holdings of public
securities in the JPMP investment portfolio.
================================================================================
PUBLIC SECURITIES INVESTMENTS AT JUNE 30, 2001 (a)
----------------------------------------------
(in millions) QUOTED
SYMBOL SHARES PUBLIC VALUE COST
------ ------ ------------ ----
Triton PCS Holdings, Inc. TPCS 20.2 $ 829 $ 88
Telecorp PCS TLCP 11.4 221 8
American Tower Corp. AMT 5.8 121 18
Northern Border Partners, L.P. NBP 3.1 117 24
Guitar Center Inc. GTRC 4.7 100 51
Fisher Scientific FSH 3.0 85 27
Encore Acquisition Company EAC 6.4 74 44
Packaging Corp. of America PKG 3.9 60 18
1-800 FLOWERS.com FLWS 4.1 60 15
Crown Media Holdings Inc. CRWN 2.7 51 40
--------- ---------
TOP 10 PUBLIC SECURITIES $ 1,718 $ 333
Other Public Securities (188 companies) 697 641
--------- ---------
TOTAL PUBLIC SECURITIES (198 companies) $ 2,415 $ 974
========= =========
--------------------------------------------------------------------------------
(a) Policy: Public securities held by JPMorgan Partners are marked-to-market at
the quoted public value less liquidity discounts, with the resulting
unrealized gains/losses included in the income statement. JPMorgan Partners'
valuation policy for public securities incorporates the use of liquidity
discounts and price averaging methodologies in certain circumstances to take
into account the fact that JPMorgan Partners cannot immediately realize the
quoted public values as a result of the regulatory, corporate and
contractual sales restrictions generally imposed on these holdings. Private
investments are initially carried at cost, which is viewed as an
approximation of fair value. The carrying value of private investments is
adjusted to reflect valuation changes resulting from unaffiliated party
transactions and for evidence of a decline in value.
================================================================================
The Firm continues to believe JPMP's equity-related investments will create
long-term value for JPMC. During the first half of 2001, JPMP invested $0.5
billion in direct equity. The pace of investments may increase over the next
12-18 months. JPMP intends to increase industry and geographic diversification
in its portfolio over time. The Firm is currently prepared to commit at least
$1.5 billion of its own funds to JPMP in each of the next four years.
-20-
21
Part I
Item 2 (continued)
INVESTMENT MANAGEMENT & PRIVATE BANKING
The following table reflects selected financial data for Investment Management &
Private Banking ("IMPB").
==================================================================================================================================
(in millions, except ratios) SECOND QUARTER SIX MONTHS
---------------------------------------------------- -------------------------------------
Over (Under) Over (Under)
----------------------------------- ----------------------
Pro Forma (a) Pro Forma (a)
2001 2Q 2000 1Q 2001 2000 2001 2000 2000
---------- ------- ------- ----------- ----------- ---- ----------
Fees and Commissions $ 592 20% (1)% (8)% $ 1,190 22% (9)%
Net Interest Income 126 (19) (5) (21) 258 (19) (21)
Trading-Related Revenue 19 (44) (14) (44) 41 (59) (59)
All Other Revenue 51 (24) (6) (44) 106 (34) (56)
----------- ----------
OPERATING REVENUE 788 5 (2) (15) 1,595 3 (19)
Compensation Expense 340 12 (10) (9) 717 12 (10)
Noncompensation Expense 304 21 (1) (2) 612 26 --
----------- ----------
CASH EXPENSE 644 16 (6) (6) 1,329 18 (6)
CASH OPERATING EARNINGS $ 117 (8) 18 (26) $ 216 (21) (40)
=========== ==========
Average Common Equity $ 5,885 139 (4) (6) $ 5,998 144 (4)
Average Assets 33,495 20 (5) (8) 34,364 29 (3)
Shareholder Value Added (62) NM (27) 107 (147) NM NM
Cash Return on Common Equity 7.8% (1,270)bp 140bp (230)bp 7.1% (1,510)bp (440)bp
Cash Overhead Ratio 82 800 (300) 800 83 1,100 1,200
----------------------------------------------------------------------------------------------------------------------------------
(a) Pro forma results assume that the purchase of Flemings occurred at the
beginning of 2000.
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
================================================================================
(All comments related to 2000 give pro forma effect to the purchase of Flemings,
which is treated as if it had occurred at the beginning of that year.)
IMPB had operating revenues of $788 million, down 15% from the second quarter of
2000. For the first half of 2001, revenues decreased 19% from the same period a
year ago. The declines were mainly due to lower investment fees as a result of
the lower values of funds under management in a weaker market environment. Also
a consequence of the weaker markets was the reduction in brokerage commissions
and trading revenues that are related to the wealth management activities of
Private Banking.
IMPB's cash operating expenses of $644 million declined 6% from both the second
quarter of 2001 and the first half of 2000, driven by lower compensation
expense. Cash operating earnings were $117 million, down from $159 million in
the second quarter of 2000. For the first half of 2001, cash operating earnings
were $216 million, a 40% decline from 2000.
The table below reflects the assets under management in IMPB as of June 30, 2001
and 2000, respectively.
========================================================================================================
ASSETS UNDER MANAGEMENT
----------------------------
(in billions) JUNE 30,
----------------------------
Pro Forma (a)
2001 2000
-------- ------------
Institutional/Retail $ 467 $ 499
Private Bank 144 152
-------- ---------
Total $ 611 $ 651
======== =========
--------------------------------------------------------------------------------------------------------
(a) Pro forma results assume that the purchase of Flemings occurred at the
beginning of 2000.
================================================================================
Market conditions in the second quarter of 2001 led to a 6% decline in assets
under management from the second quarter of 2000 level. This excludes assets
managed by other lines of business and assets attributable to the Firm's 45%
interest in American Century Companies, Inc. ("American Century").
-21-
22
Part I
Item 2 (continued)
TREASURY & SECURITIES SERVICES
The following table sets forth selected financial data of Treasury & Securities
Services ("T&SS").
=================================================================================================================================
(in millions, except ratios)
SECOND QUARTER SIX MONTHS
------------------------------------------------- ----------------------------------
Over (Under) Over (Under)
----------------------------- ------------
2001 2Q 2000 1Q 2001 2001 2000
----------- ------- ------- ---------- ----
Fees and Commissions $ 521 4% 3% $ 1,026 6%
Net Interest Income 342 2 (5) 702 4
All Other Revenue 46 (27) 12 88 (30)
----------- -----------
OPERATING REVENUE 909 1 -- 1,816 3
Compensation Expense 284 3 (4) 579 6
Noncompensation Expense 367 3 9 703 (1)
----------- -----------
CASH EXPENSE 651 3 3 1,282 2
CASH OPERATING EARNINGS $ 167 (3) (6) $ 346 4
=========== ===========
Average Common Equity $ 3,003 4 5 $ 2,928 1
Average Assets 18,612 16 8 17,900 11
Shareholder Value Added 76 (11) (17) 168 8
Cash Return on Common Equity 22.2% (170)bp (290)bp 23.6% 80bp
Cash Overhead Ratio 72 200 200 71 --
---------------------------------------------------------------------------------------------------------------------------------
bp - Denotes basis points; 100 bp equals 1%.
================================================================================
Treasury & Securities Services' operating revenues were $909 million in the
second quarter of 2001 and $1,816 million in the first half of this year, an
increase of 1% and 3% from the respective periods last year. Revenues were
stronger for Treasury Services and Institutional Trust, reflecting new business
and higher volume from existing customers, partially offset by the negative
effect of declining short-term interest rates on deposits. Revenue declines at
Investor Services were primarily the result of lower asset-based fees, lower
foreign exchange and reduced net asset growth.
Cash expense in the second quarter of 2001 rose 3%, resulting in a 3% decline in
cash operating earnings. For the first six months of 2001, however, cash expense
grew by only 2%, contributing to an increase in cash operating earnings of 4%.
Under current market conditions, revenue growth at Investor Services will be
slower in 2001 than in 2000. Expense discipline will continue, and management is
still working towards its previously-announced long-term targeted cash overhead
ratio for T&SS of approximately 65%.
-22-
23
Part I
Item 2 (continued)
RETAIL & MIDDLE MARKET FINANCIAL SERVICES
The following table reflects selected financial data for Retail & Middle Market
Financial Services ("RMMFS").
=================================================================================================================================
(in millions, except ratios)
SECOND QUARTER SIX MONTHS
------------------------------------------------ ----------------------------------
Over (Under) Over (Under)
--------------------------- ------------
2001 2Q 2000 1Q 2001 2001 2000
----------- ------- ------- ---------- ----
Net Interest Income $ 1,685 7% 5% $ 3,289 7%
Fees and Commissions 838 6 80 1,304 (18)
Securities Gains -- NM NM 316 NM
All Other Revenue 119 (6) (31) 292 29
------------ ------------
OPERATING REVENUE 2,642 5 3 5,201 6
Compensation Expense 593 9 6 1,155 4
Noncompensation Expense 746 1 3 1,472 --
------------ ------------
CASH EXPENSE 1,339 4 4 2,627 2
CASH OPERATING EARNINGS $ 438 (3) (1) $ 880 10
============ ============
Average Common Equity $ 8,380 1 3 $ 8,241 (1)
Average Managed Assets (a) 165,177 14 5 161,353 13
Shareholder Value Added 183 (8) (8) 382 33
Cash Return on Common Equity 20.8% (90)bp (120)bp 21.3% 240bp
Cash Overhead Ratio 51 -- 100 51 (200)
----------------------------------------------------------------------------------------------------------------------------------
(a) Excludes the impact of credit card securitizations.
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
================================================================================
Operating revenue for RMMFS in the second quarter of 2001 rose to $2.64 billion,
5% over last year's second quarter and, for the first six months, revenue
increased to $5.20 billion, 6% over the first half of 2000. These increases are
attributable to significant increases in business volumes. Home Finance,
Cardmember Services and Auto Finance, realized substantial increases in
originations. In addition, comparisons to the first six months of 2000 benefit
from the $100 million charge for auto lease residual taken in the first quarter
of 2000. The risk of future charges for residual values has been substantially
mitigated in the first quarter of 2001 by obtaining a residual value insurance
policy to cover previously uninsured auto leases in the portfolio.
Cash operating expenses of $1.34 billion in the second quarter of 2001 increased
4% from last year's quarter but were relatively flat in the first half of 2001
versus the first half of 2000. Cash operating earnings in the second quarter
decreased by 3% from the same quarter in 2000, partly as a result of the sale of
the consumer banking operations in Hong Kong and Panama at the end of 2000. For
the first half of 2001, however, cash operating earnings increased by 10% from
the first half of 2000, reflecting the benefit of operating efficiencies and the
$100 million charge in 2000 mentioned above.
-23-
24
Part I
Item 2 (continued)
Management's goal is double-digit cash operating earnings growth for RMMFS in
2001. Current conditions in the mortgage market may continue to affect adversely
the valuation of mortgage servicing rights and may impact management's ability
to meet this target.
The following table sets forth certain key financial performance measures of the
businesses within RMMFS.
================================================================================================================================
(in millions)
SECOND QUARTER SIX MONTHS
------------------------------------------------- ---------------------------------
Over (Under) Over (Under)
---------------------------- ------------
2001 2Q 2000 1Q 2001 2001 2Q 2000
----------- ------- ------- ---------- -------
OPERATING REVENUE
-----------------
Cardmember Services $ 1,061 15% 7% $ 2,050 12%
Regional Banking Group 759 (3) (1) 1,527 (1)
Home Finance 393 25 15 736 16
Middle Markets 263 (5) (6) 544 (1)
Auto Finance 133 23 21 242 97
Other 33 NM NM 102 NM
---------- ----------
Total $ 2,642 5 3 $ 5,201 6
========== ==========
CASH OPERATING EARNINGS
-----------------------
Cardmember Services $ 135 7% 15% $ 252 14%
Regional Banking Group 131 (9) (6) 271 (5)
Home Finance 90 25 8 173 24
Middle Markets 58 (16) (22) 131 (4)
Auto Finance 34 36 55 56 NM
Other (10) NM NM (3) NM
----------- ----------
Total $ 438 (3) (1) $ 880 10
========== ==========
----------------------------------------------------------------------------------------------------------------------------------
NM - Not meaningful.
==================================================================================================================================
-24-
25
Part I
Item 2 (continued)
CARDMEMBER SERVICES
Cardmember Services operating revenues were up 15% for the second quarter and
12% for the first six months of 2001 compared with the same periods last year.
Cash operating earnings were up 7% and 14% for the second quarter and first six
months of 2001, respectively, compared with the same periods in 2000. The higher
revenue was driven by an increase in new accounts over the last several
quarters, higher purchase volume and higher fee-based revenue. Credit card
outstandings grew by 16% from one year ago and over two million new
accounts were added in the first six months of 2001. The increase in cash
operating earnings was partially offset by higher expenses reflecting higher
business volumes and higher marketing costs. In addition, credit costs increased
in the 2001 second quarter reflecting the slowing economy and higher bankruptcy
filings.
REGIONAL BANKING GROUP
Regional Banking Group's operating revenues for the second quarter of 2001 and
the first six months of 2001 declined slightly from the respective periods of
2000, and cash operating earnings for the second quarter of 2001 and the first
six months of 2001 declined 9% and 5%, when compared with the second quarter and
first half of 2000, respectively. These results reflect the adverse effects of
declining interest rates on deposit spreads and lower investment brokerage
volume as a result of weaker market conditions in 2001.
HOME FINANCE
Home Finance's operating revenues and cash operating earnings each rose 25% in
the second quarter of 2001 versus the prior year's quarter and were up 16% and
24%, respectively, for the first six months of 2001 over the same period last
year. The increases in 2001 were due to a 200% growth in origination volume, a
24% growth in servicing balances and higher net interest margin. Home Finance
revenues were reduced in the first half of 2001 by $207 million, due to
impairments on MSRs and other assets, partially offset by gains on hedging
instruments, AFS securities and other derivative instruments. This reduction in
revenue resulted from accelerated prepayments due to the decline in interest
rates. Originations (residential, home equity and manufactured housing) for the
second quarter of 2001 were $54 billion, a record level, and included
originations from the retail, wholesale and correspondent (traditional and
negotiated) channels. The Home Finance servicing portfolio exceeded $400 billion
at June 30, 2001.
MIDDLE MARKETS
Middle Markets' operating revenues and cash operating earnings for the second
quarter of 2001 declined 5% and 16%, respectively, from the second quarter of
2000. Operating revenues and cash operating earnings each were essentially flat,
compared with the first six months of 2000. The decrease in cash operating
earnings in the second quarter reflected the negative impact of narrower spreads
on deposits, partially offset by higher deposit volume.
AUTO FINANCE
Auto Finance's operating revenues and cash operating earnings were $242 million
and $56 million, respectively, in the first half of 2001. Year-to-date auto
originations of $9 billion, a record increase in origination volume, the impact
of lower interest rates, and the effect of a $100 million charge recognized last
year for the estimated decrease in auto lease residual value contributed to the
growth over last year.
SUPPORT UNITS AND CORPORATE
JPMorgan Chase's support units include LabMorgan, Enterprise Technology Services
and Corporate Business Services.
For the second quarter of 2001, Support Units and Corporate had a cash operating
loss of $26 million, compared with a cash operating loss of $41 million in the
second quarter of 2000. Included in the second quarter of 2001 was a net loss at
LabMorgan primarily as a result of a $30 million (pre-tax) write-down of
investments and equity investment losses.
-25-
26
Part I
Item 2 (continued)
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following section provides a discussion of JPMorgan Chase's results of
operations on both a reported and operating basis. The table below provides a
reconciliation between the Firm's reported and operating results.
===================================================================================================================================
(in millions, except per share data) SECOND QUARTER 2001 Second Quarter 2000
----------------------------------------------- --------------------------------------------
REPORTED CREDIT SPECIAL OPERATING Reported Credit Special Operating
RESULTS CARD ITEMS BASIS Results Card Items Basis
(a) (b) (c) (a) (b) (c)
---------- -------- --------- ----------- --------- ------- --------- ----------
INCOME STATEMENT
Revenue $ 6,871 $ 273 $ -- $ 7,144 $ 7,899 $ 242 $ 141 $ 8,282
Cash Expense 5,100 -- -- 5,100 4,933 -- -- 4,933
Amortization of Intangibles 183 -- -- 183 92 -- -- 92
---------- ------- ------- --------- --------- ------- ------- ---------
Operating Margin 1,588 273 -- 1,861 2,874 242 141 3,257
Credit Costs 525 273 -- 798 328 242 -- 570
---------- ------- ------- --------- --------- ------- ------- ---------
Income before Merger and
Restructuring Costs 1,063 -- -- 1,063 2,546 -- 141 2,687
Merger and Restructuring Costs 478 -- (478) -- 50 -- (50) --
---------- ------- -------- --------- --------- ------- ------- ---------
Income before Income Tax Expense 585 -- 478 1,063 2,496 -- 191 2,687
Tax Expense 207 -- 166 373 863 -- 67 930
---------- ------- ------- --------- --------- ------- ------- ---------
Net Income $ 378 $ -- $ 312 $ 690 $ 1,633 $ -- $ 124 $ 1,757
Add Back: Amortization of
Intangibles 183 -- -- 183 92 -- -- 92
---------- ------- ------- --------- --------- ------- ------- ---------
Cash Earnings $ 561 $ -- $ 312 $ 873 $ 1,725 $ -- $ 124 $ 1,849
========== ======= ======= ========= ========= ======= ======= =========
NET INCOME PER SHARE
Basic $ 0.18 $ 0.34 $ 0.87 $ 0.93
Diluted 0.18 0.33 0.83 0.89
CASH EARNINGS PER SHARE
Basic $ 0.43 $ 0.98
Diluted 0.42 0.94
----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 2001 Six Months 2000
----------------------------------------------- ------------------------------------------
INCOME STATEMENT
Revenue $ 15,124 $ 514 $ -- $ 15,638 $ 16,668 $ 496 $ 141 $ 17,305
Cash Expense 10,521 -- -- 10,521 10,193 -- -- 10,193
Amortization of Intangibles 360 -- -- 360 185 -- -- 185
---------- ------- ------- ---------- --------- ------- ------- ---------
Operating Margin 4,243 514 -- 4,757 6,290 496 141 6,927
Credit Costs 972 514 -- 1,486 670 496 -- 1,166
---------- ------- ------- ---------- --------- ------- ------- ---------
Income before Merger and
Restructuring Costs 3,271 -- -- 3,271 5,620 -- 141 5,761
Merger and Restructuring Costs 806 -- (806) -- 50 -- (50) --
---------- ------- ------- ---------- --------- ------- -------- ---------
Income before Income Tax Expense
and Effect of Accounting Change 2,465 -- 806 3,271 5,570 -- 191 5,761
Tax Expense 863 -- 282 1,145 1,949 -- 67 2,016
---------- ------- ------- ---------- --------- ------- ------- ---------
Income before Effect of Accounting
Change 1,602 -- 524 2,126 3,621 -- 124 3,745
Net Effect of Change in Accounting
Principle (25) -- 25 -- -- -- -- --
----------- ------- ------- ---------- --------- ------- ------- ---------
Net Income $ 1,577 $ -- $ 549 $ 2,126 $ 3,621 $ -- $ 124 $ 3,745
Add Back: Amortization of
Intangibles 360 -- -- 360 185 -- -- 185
---------- ------- ------- ---------- --------- ------- ------- ---------
Cash Earnings $ 1,937 $ -- $ 549 $ 2,486 $ 3,806 $ -- $ 124 $ 3,930
========== ======= ======= ========== ========= ======= ======= =========
NET INCOME PER SHARE
Basic $ 0.78 (d) $ 1.06 $ 1.92 $ 1.99
Diluted 0.76 (d) 1.03 1.84 1.90
CASH EARNINGS PER SHARE
Basic $ 1.24 $ 2.09
Diluted 1.20 2.00
----------------------------------------------------------------------------------------------------------------------------------
(a) Represents condensed results as reported in JPMorgan Chase's financial
statements.
(b) This column excludes the impact of credit card securitizations. For
receivables that have been securitized, amounts that would have been
reported as net interest income and as provision for loan losses are
instead reported as components of noninterest revenue.
(c) Includes merger and restructuring costs and special items. The 2001 second
quarter and six months include $478 million and $806 million (pre-tax),
respectively, in merger and restructuring expenses. The 2000 second quarter
and six months included a $141 million loss (pre-tax) resulting from the
economic hedge of the purchase price of Flemings prior to its acquisition
and $50 million (pre-tax) of restructuring costs associated with previously
announced relocation initiatives.
(d) Includes the effect of the accounting change. Excluding the accounting
change, basic and diluted net income per share for the first six months of
2001 were $0.79 and $0.77, respectively.
================================================================================
-26-
27
Part I
Item 2 (continued)
REVENUES
=================================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
--------------------------------------- ------------------------------------
Pro Forma Pro Forma
OPERATING REVENUE: 2001 2000 2000 (a) 2001 2000 2000 (a)
---------- ---------- -------- --------- ---------- --------
Investment Banking Fees $ 929 $ 1,107 $ 1,152 $ 1,870 $ 2,298 $ 2,387
Trading-Related Revenue
(including Trading NII) 1,594 1,879 1,918 3,761 4,096 4,174
Fees and Commissions 2,350 2,114 2,446 4,366 4,242 4,971
Private Equity - Realized Gains (Losses) (46) 630 630 366 1,022 1,022
Private Equity - Unrealized Gains (Losses) (783) (171) (171) (1,068) 111 111
Securities Gains 67 24 23 522 21 20
Other Revenue 274 205 233 525 525 645
Net Interest Income
(excluding Trading NII) 2,759 2,494 2,534 5,296 4,990 5,061
---------- --------- --------- ---------- --------- ---------
TOTAL OPERATING REVENUE $ 7,144 $ 8,282 $ 8,765 $ 15,638 $ 17,305 $ 18,391
========== ========= ========= ========== ========= =========
----------------------------------------------------------------------------------------------------------------------------------
(a) Pro forma revenue assumes that the purchase of Flemings occurred at the
beginning of 2000.
================================================================================
INVESTMENT BANKING FEES
Investment banking fees in the second quarter and first half of 2001 declined
significantly from last year's respective periods. The declines were due to the
much weaker market for all products, including M&A advisory, loan syndication
and securities underwriting.
==============================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
---------------------------- ------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Advisory $ 308 $ 392 $ 648 $ 754
Underwriting and Other Fees 621 715 1,222 1,544
---------- ---------- ---------- ---------
TOTAL INVESTMENT BANKING FEES $ 929 $ 1,107 $ 1,870 $ 2,298
========== ========== ========== =========
==============================================================================================================================
-27-
28
Part I
Item 2 (continued)
TRADING-RELATED REVENUE
Trading-related revenue (including associated NII) in the second quarter of 2001
was lower by 15% from last year's same period and for the first six months was
down 8% from 2000. The declines were due to challenging market conditions, which
reduced the overall volume of activities and volatility. Also contributing to
the depressed levels were the losses realized on economic hedges of mortgage
servicing rights at Home Finance.
==================================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
--------------------------------- -----------------------------
TRADING-RELATED REVENUE: (a) 2001 2000 2001 2000
-------------- --------- ------------ ----------
Equities (b) $ 450 $ 486 $ 955 $ 1,064
Debt Instruments (c) 262 346 487 913
Foreign Exchange Revenue (d) 178 280 427 622
Interest Rate Contracts, Commodities and Other (e) 704 767 1,892 1,497
---------- -------- ---------- ---------
TOTAL TRADING-RELATED REVENUE (f) $ 1,594 $ 1,879 $ 3,761 $ 4,096
========== ======== ========== =========
TRADING REVENUE $ 1,261 $ 1,730 $ 3,262 $ 3,701
Net Interest Income Impact (g) 333 149 499 395
---------- -------- ---------- ---------
TOTAL TRADING-RELATED REVENUE $ 1,594 $ 1,879 $ 3,761 $ 4,096
========== ======== ========== =========
----------------------------------------------------------------------------------------------------------------------------------
(a) Trading-related revenue includes net interest income attributable to
trading activities. Trading-related net interest income has been restated
in the prior periods in order to conform to the current presentation.
(b) Includes equity securities and equity derivatives revenue.
(c) Includes credit-related products such as bonds and commercial paper issued
by U.S. and non-U.S. entities, as well as credit derivatives revenue.
(d) Includes foreign exchange spot and option contracts, excluding emerging
markets product revenues.
(e) Includes various types of interest rate products across bonds and
derivatives, combined with commodities and other trading revenue.
(f) Derivative and foreign exchange contracts are marked-to-market, and
valuation adjustments are included in trading-related revenue.
(g) Includes interest recognized on interest-earning and interest-bearing
trading-related positions, as well as management allocations reflecting the
funding costs or benefits associated with trading positions. These amounts
are included in net interest income on the Consolidated Statement of
Income.
================================================================================
- Revenues from equities were down 10% from the first half of last year
due to difficulties in the equities market, particularly lower
over-the-counter activities. This was partly offset by the strong
demand for equity derivatives, one of the Firm's product capabilities
strengthened by the merger.
- The declines of debt instruments from both periods largely reflected
the less active market for these products.
- The lower levels of foreign exchange revenues were a result of the
much slower environment for foreign currency flows, when compared with
last year.
- Interest rate contracts, commodities and other in the 2001 second
quarter and six months were lower than the second quarter of 2000 but
were 26% higher than the first half of last year. Results for the six
months of 2001 were primarily driven by the results of the first
quarter, which benefited from the increased market demand for
interest rate contracts and which produced volatility in their prices
as a result of the substantial decline in interest rates during the
first quarter.
-28-
29
Part I
Item 2 (continued)
FEES AND COMMISSIONS
Fees and commissions for the second quarter of 2001 rose 11%, when compared with
the second quarter of 2000 and for the first six months increased slightly
versus last year's same period. The table below provides the significant
components of fees and commissions.
==================================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
--------------------------- -------------------------
2001 2000 2001 2000
----------- ---------- --------- -----------
Investment Management, Custody and Processing Services $ 943 $ 859 $ 1,917 $ 1,657
Credit Card Revenue - Operating 427 339 811 667
Brokerage and Investment Services 308 246 671 572
Mortgage Servicing Fees, Net of Amortization and Write-downs 75 131 (158) 281
Other Lending-Related Service Fees 122 154 252 304
Deposit Service Charges 258 226 484 447
Other Fees 217 159 389 314
---------- --------- --------- ----------
Total Fees and Commissions - Operating $ 2,350 $ 2,114 $ 4,366 $ 4,242
========== ========= ========= ==========
==================================================================================================================================
Investment Management, Custody and Processing Services
Investment management, custody and processing services fees in the second
quarter of 2001 rose 10% from the prior year's quarter and 16% from the first
six months of 2000. Investment management fees were higher than last year,
primarily as a result of the contributions of Flemings, which increased the
level of funds under management. Custody and processing services decreased
slightly from the second quarter of 2000 but increased from the first six months
of 2000. The decrease for the quarter was largely due to the impact of lower
security values on custody fees, partly offset by higher institutional trust
fees related to new business and increased volume from existing clients. The
increase for the first half reflected the higher aforementioned institutional
trust fees from new business and cash management fees related to treasury
activities.
Credit Card Revenue
The increases in credit card revenue for the second quarter and first half of
2001 reflect the impact of an increase in average receivables outstanding and
higher late and overlimit fees. The increases also reflect higher interchange
income due to stronger customer purchase volume, as well as higher other
fee-based revenue.
The following table reconciles JPMorgan Chase's reported credit card revenue and
operating credit card revenue (which excludes the impact of credit card
securitizations).
=============================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
---------------------------- ------------------------------
2001 2000 2001 2000
----------- ---------- ----------- -----------
Reported Credit Card Revenue $ 465 $ 443 $ 898 $ 840
Less Impact of Credit Card Securitizations (38) (104) (87) (173)
-------- --------- ---------- ---------
Operating Credit Card Revenue $ 427 $ 339 $ 811 $ 667
======== ========= ========== =========
=============================================================================================================================
Brokerage and Investment Services
Brokerage and investment services in the 2001 second quarter increased $62
million from the prior year's same quarter and $99 million in the first six
months of 2001 as a result of the Flemings acquisition. This increase was partly
offset by the effect of the weaker markets that reduced the volume of
institutional brokerage and retail investment activities.
-29-
30
Part I
Item 2 (continued)
Mortgage Servicing Fees
Mortgage servicing fees in the second quarter and first half of 2001 declined
$56 million and $439 million from the same periods last year, respectively,
reflecting the net impact of mortgage servicing rights related impairment due to
the decline in mortgage rates. Securities gains of $315 million for the first
half of 2001 partially offset the decline in mortgage servicing fees. Securities
are used to economically hedge the mortgage servicing rights. While lower
mortgage rates had a negative impact on mortgage servicing revenue, they had a
positive impact on loan origination revenue through increased residential
mortgage originations.
Other Lending-Related Service Fees
Other lending-related service fees were lower by $32 million than the second
quarter of 2000 and $52 million than the first six months of last year. The
declines were primarily attributable to the repositioning of the trade finance
business.
Deposit Service Charges
Deposit service charges in the 2001 second quarter increased $32 million from
the prior year's quarter and for the first six months of 2001 increased by $37
million from the prior year. The increases reflected the impact of the lower
interest rates as customers who customarily would pay for deposit products and
services by maintaining a higher level of compensating balances instead reduced
their balances and paid for the services through separate fees. Also
contributing to the increase were new pricing schedules implemented for the
deposit products in the second quarter of 2001.
Other Fees
The increases in all other fees of $58 million and $75 million in the second
quarter and first six months of 2001 from the same periods in the prior year,
respectively, primarily reflected the growth in the volume of variable annuity
sales. Also contributing to the increases were the acquisitions of Flemings and
Colson Services Corp., a provider of record keeping, paying agent and other
financial services.
PRIVATE EQUITY GAINS
Private equity gains (losses) were significantly affected by the downturn in the
equities market. In the second quarter of 2001, both realized and unrealized
categories had losses. These unfavorable results were attributable to write-offs
and write-downs, particularly in JPMP's investment in the technology, media and
telecommunications sectors. In addition, the ability of JPMP to realize cash
gains upon the sale of an investment has become more difficult, as the weaker
initial public offering and M&A environment during the first six months of 2001
has limited JPMP's ability to implement various "exit" strategies for its
investments. For a further discussion of JPMorgan Chase's private equity
results, see the JPMP line of business results on pages 19-20 of this Form 10-Q.
==============================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
---------------------------- ------------------------------
2001 2000 2001 2000
------------ ----------- ----------- ------------
Realized Gains (Losses) $ (46) $ 630 $ 366 $ 1,022
Unrealized Gains (Losses) (783) (171) (1,068) 111
---------- ---------- --------- ---------
PRIVATE EQUITY GAINS (LOSSES) $ (829) $ 459 $ (702) $ 1,133
========== ========== ========= =========
==============================================================================================================================
SECURITIES GAINS
Securities gains in the second quarter of 2001 were up $43 million from last
year's same quarter. For the first half, gains were $501 million above the same
period last year. These increases resulted from the decline in
interest rates since the fourth quarter of 2000, compared with the rate
increases in the same period last year. As a consequence of the interest rate
declines in the first half of 2001, the value of debt securities held this year
rose and produced significant gains upon the sale of those securities.
Home Finance utilized debt securities in addition to derivatives to hedge the
value of the mortgage servicing rights it carries on the Balance Sheet. In the
2001 first quarter, Home Finance realized $315 million of gains from the sale of
debt securities used to economically hedge the mortgage servicing rights which
partially offset the decline in mortgage servicing fees. In the 2001 second
quarter, no material gains were recorded from the sale of securities. (However,
hedge contracts were acquired to cover impairment losses and the results were
recorded within mortgage servicing fees.)
-30-
31
Part I
Item 2 (continued)
OTHER REVENUE
================================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
------------------------- --------------------------
2001 2000 2001 2000
------------ ---------- ----------- ----------
Residential Mortgage Origination / Sales Activities $ 146 $ 41 $ 245 $ 85
All Other Revenue 128 164 280 440
---------- ------- --------- -------
Operating Other Revenue 274 205 525 525
Loss on Economic Hedge of the Flemings
Purchase Price -- (141) -- (141)
Other Revenue - Credit Card Securitizations -- 3 (5) 8
---------- ------- --------- -------
Reported Other Revenue $ 274 $ 67 $ 520 $ 392
========== ======= ========= =======
================================================================================================================================
Residential mortgage activities (which include originations and sales of loans
and selective dispositions of mortgage servicing rights) in the 2001 second
quarter and first six months rose $105 million and $160 million, respectively,
from the comparable periods last year. The increases were the result of the
higher volume of mortgage loans sold in 2001. The decline in mortgage interest
rates and a strong housing market led to the growth of residential loan
originations.
All other revenue decreased $36 million in the second quarter of this year
versus the 2000 second quarter and decreased $160 million in the 2001 first six
months compared with the prior year. These decreases were attributable to lower
equity income from the American Century investment, reflecting the decline in
the value of its funds under management. In addition, the second quarter and
first half of 2001 included lower results related to economic hedges for planned
overseas revenues.
On a reported basis, the second quarter and six months of 2000 results also
included a $141 million loss resulting from the economic hedge for the purchase
price of Flemings prior to its acquisition. (The offsetting appreciation in the
dollar versus pound sterling exchange rate was reflected as a reduction in the
purchase price and corresponding goodwill.)
NET INTEREST INCOME
OPERATING NII adjusts reported NII for the impact of credit card securitizations
and trading-related NII that is considered part of total trading-related
revenue. The following table reconciles reported and operating NII.
==================================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
--------------------------------------- ---------------------------------
NET INTEREST INCOME 2001 2000 Change 2001 2000 Change
---------- -------- ------ ---------- ---------- ------
Reported NII $ 2,781 $ 2,294 21% $ 5,199 $ 4,708 10%
Add Impact of Credit Card Securitizations 311 349 596 677
Less Trading-Related NII (333) (149) (499) (395)
---------- -------- ---------- ---------
Operating NII $ 2,759 $ 2,494 11% $ 5,296 $ 4,990 6%
========== ======== ========== =========
==================================================================================================================================
Net Interest Income in the 2001 second quarter and first six months, both on a
reported and operating basis, grew from the comparable periods last year,
primarily as a result of the interest rate environment this year. Since the
start of 2001, the lower interest rate environment contributed to growth in
consumer loans, and a decline in the funding costs to support these loans. Last
year, on the other hand, interest rates were on the rise, and this depressed the
growth of, and spread on, interest earning assets.
Also contributing to the increase in both 2001 periods was the receipt in the
second quarter of 2001 of several interest refunds aggregating $71 million on
prior years' taxes. The first quarter of 2000 included a charge of $100 million
for an estimated decrease in the residual value of auto leases.
-31-
32
Part I
Item 2 (continued)
NONINTEREST EXPENSE
Total operating noninterest expenses were $5.3 billion in the second quarter of
2001, up 5% from the second quarter of 2000. The increase reflected the higher
investments in businesses and, in particular, the acquisition of Flemings. On a
pro forma basis, total 2001 operating expenses declined from last year as a
result of focused expense management initiatives, which include headcount
reductions. The following table presents the components of noninterest expense
on an operating and reported basis.
==================================================================================================================================
(in millions, except ratios) SECOND QUARTER SIX MONTHS
------------------------------------- ------------------------------------
Pro Forma Pro Forma
EXPENSE: 2001 2000 2000 (a) 2001 2000 2000 (a)
---------- --------- --------- ---------- ---------- ----------
Compensation Expense $ 3,052 $ 2,963 $ 3,249 $ 6,409 $ 6,303 $ 6,938
Occupancy Expense 327 297 315 675 605 642
Technology and Communications 674 574 599 1,328 1,154 1,206
Other Expense 1,047 1,099 1,175 2,109 2,131 2,275
---------- --------- --------- ---------- ---------- ----------
CASH OPERATING NONINTEREST EXPENSE 5,100 4,933 5,338 10,521 10,193 11,061
Amortization of Intangibles 183 92 182 360 185 365
---------- --------- --------- ---------- ---------- ----------
OPERATING NONINTEREST EXPENSE 5,283 5,025 5,520 10,881 10,378 11,426
Merger and Restructuring Costs 478 50 50 806 50 50
---------- --------- --------- ---------- ---------- ----------
REPORTED NONINTEREST EXPENSE $ 5,761 $ 5,075 $ 5,570 $ 11,687 $ 10,428 $ 11,476
========== ========= ========= ========== ========== ==========
Operating Overhead Ratio (b) 74% 61% 63% 70% 60% 62%
Cash Operating Overhead Ratio (b) 71 60 61 67 59 60
----------------------------------------------------------------------------------------------------------------------------------
(a) Pro forma expense treats the purchase of Flemings as if it had occurred at
the beginning of 2000.
(b) The overhead ratio is defined as noninterest expense as a percentage of
total operating revenue (excluding merger and restructuring costs and
special items). The cash overhead ratio also excludes the impact of the
amortization of intangibles.
================================================================================
COMPENSATION EXPENSE
Compensation expense rose 3% from the 2000 second quarter and 2% from the first
half of last year. The increases were attributable to the additions of Flemings
and the mortgage business of Advanta. Partially offsetting the increases were
the effect of headcount reductions, in particular in the Investment Bank and
Investment Management & Private Banking, and lower incentive costs as a result
of the decrease in revenues. Further reductions in headcount are anticipated
during the rest of the year and in 2002.
==================================================================================================================================
FULL-TIME EQUIVALENT EMPLOYEES JUNE 30,
-------------------------------------
2001 2000
----------- ---------
Domestic Offices 58,369 56,351
Foreign Offices 38,855 33,849
---------- ---------
Total Full-Time Equivalent Employees 97,224 90,200
========== =========
==================================================================================================================================
The increase in full-time equivalent employees was attributable to the
acquisition of Flemings and the mortgage business of Advanta.
OCCUPANCY EXPENSE
The increases from the second quarter and first half of last year reflected
Flemings, as well as growing occupancy requirements of Investment Bank, IMPB and
T&SS. Also contributing to the increases were higher leasing costs for several
locations. These increases were partially offset by the impact of relocations of
certain T&SS operations from the New York area to the South and Southwest.
TECHNOLOGY AND COMMUNICATIONS
Technology and Communications expense rose from both the second quarter and
first half of 2000, primarily due to the addition of Flemings and the
depreciation of more sophisticated hardware systems and software applications
throughout the Firm. The increases also were attributable to higher leasing of
and maintenance expenses for advanced computer and other office equipment.
-32-
33
Part I
Item 2 (continued)
OTHER EXPENSE
Other expense declined 5% from the second quarter and 1% from the first half of
2000. The following table presents the components of other expense.
=================================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
----------------------------- ---------------------------
2001 2000 2001 2000
----------- ---------- ---------- ----------
Professional Services $ 288 $ 281 $ 583 $ 563
Outside Services 166 157 332 316
Marketing 144 144 285 261
Travel and Entertainment 137 120 259 232
All Other 312 397 650 759
---------- --------- ---------- ---------
TOTAL OTHER EXPENSE $ 1,047 $ 1,099 $ 2,109 $ 2,131
========== ========= ========== =========
=================================================================================================================================
- The increase in PROFESSIONAL SERVICES for the first half of 2001 was mainly
driven by higher applications and systems consulting services to support
various business-related projects.
- OUTSIDE SERVICES increased in both periods of 2001, primarily due to higher
outside data processing fees related to the rise in volume of activities at
Home Finance and Investor Services.
- MARKETING expense rose for the six months of 2001, principally due to the
branding campaigns to introduce the new Firm, coupled with more active
efforts to reach retail customers nationwide, particularly for the credit
card business.
- The increase in TRAVEL AND ENTERTAINMENT in both periods of 2001 reflected
the higher travel and hotel expenses in connection with global businesses
generated by the Investment Bank, coupled with nonreservable activities
related to the merger.
- The declines in ALL OTHER expense of 21% for the second quarter and 14% for
the first half of 2001 were partly the result of decreases in recruitment
costs associated with the reduced requirements across the Firm.
AMORTIZATION OF INTANGIBLES
The increases in amortization of intangibles over both periods in 2000 were
attributable to the acquisitions of Flemings and The Beacon Group, LLC in the
third quarter of 2000.
MERGER AND RESTRUCTURING COSTS
The Firm incurred $478 million of restructuring costs in the second quarter of
2001 related to previously announced merger actions and relocation and other
business initiatives ($405 million and $73 million, respectively). Under current
accounting pronouncements, these costs (primarily systems integration costs,
facilities costs and retention payments) are not recognized until incurred. For
a further discussion of JPMorgan Chase's merger and restructuring costs, refer
to Note 4 of this Form 10-Q and Note 7 and page 42 of JPMorgan Chase's 2000
Annual Report.
CREDIT COSTS
Credit costs on an operating basis are composed of the provision for loan losses
related to loans on the Consolidated Balance Sheet and to the credit costs
associated with credit card receivables that have been securitized.
==============================================================================================================================
(in millions) SECOND QUARTER SIX MONTHS
--------------------------- ----------------------------
2001 2000 2001 2000
------------ ----------- ------------ ----------
Provision for Loan Losses $ 525 $ 328 $ 972 $ 670
Credit Costs Associated with
Credit Card Securitizations 273 242 514 496
--------- -------- --------- ---------
Operating Credit Costs $ 798 $ 570 $ 1,486 $ 1,166
========= ======== ========= =========
==============================================================================================================================
Credit costs in the second quarter and six months of 2001 increased $228 million
and $320 million, respectively, as a result of increases in charge-offs in the
commercial loan portfolios, primarily in the telecommunications industry, and in
the consumer loan portfolio due to increased bankruptcies. See page 39 of this
Form 10-Q for a discussion of the allowance for credit losses.
-33-
34
Part I
Item 2 (continued)
INCOME TAXES
JPMorgan Chase recognized income tax expense of $207 million in the second
quarter of 2001 compared with $863 million in the second quarter of 2000. For
the first half of 2001, JPMorgan Chase recorded income tax expense of $863
million, compared with $1,949 million for the first half of 2000. The effective
tax rates were 35.4% in the second quarter of 2001 and 35.0% in the first half
of 2001, compared with 34.6% and 35.0% in the second quarter of 2000 and first
half of 2000, respectively.
--------------------------------------------------------------------------------
RISK MANAGEMENT
--------------------------------------------------------------------------------
JPMorgan Chase is in the business of managing risk to create shareholder value.
The major risks to which the Firm is exposed are credit, market, operational and
liquidity risk. For a discussion of these risks and definition of terms
associated with managing these risks, please refer to the Glossary of Terms on
page 50 of this Form 10-Q and pages 43-59 of JPMorgan Chase's 2000 Annual
Report.
--------------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
--------------------------------------------------------------------------------
The following discussion of credit risk management focuses primarily on
developments since December 31, 2000 and should be read in conjunction with
pages 46-53 and 67-68 of JPMorgan Chase's 2000 Annual Report.
The following table presents the Firm's credit-related information for the dates
indicated.
====================================================================================================================================
PAST DUE 90 DAYS
CREDIT-RELATED ASSETS NONPERFORMING ASSETS (c) & OVER AND ACCRUING
----------------------------- --------------------------- ------------------------
JUNE 30, Dec 31, JUNE 30, Dec 31, JUNE 30, Dec 31,
(in millions) 2001 2000 2001 2000 2001 2000
------------- --------- ------------ --------- ------------ ---------
Commercial Loans $ 112,790 $ 119,460 $ 1,890 $ 1,434 $ 82 $ 99
Derivative and FX Contracts (a) 68,910 76,373 88 37 -- --
Consumer Loans (b) 124,881 114,461 401 384 767 788
------------ ----------- ---------- --------- --------- -------
TOTAL MANAGED CREDIT-RELATED $ 306,581 $ 310,294 $ 2,379 $ 1,855 $ 849 $ 887
============ =========== ========= =======
Assets Acquired as Loan Satisfactions 119 68
---------- ---------
TOTAL NONPERFORMING ASSETS $ 2,498 $ 1,923
========== =========
====================================================================================================================================
NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (d)
------------------------------------ -------------------------------------------
(in millions, except ratios) SECOND QUARTER SECOND QUARTER
------------------------------------ ----------------------------------
2001 2000 2001 2000
----------- ---------- ----------- ----------
Commercial Loans $ 212 $ 95 0.77% 0.32%
Consumer Loans 586 482 1.89 1.81
-------- --------
TOTAL MANAGED CREDIT-RELATED $ 798 $ 577 1.37% 1.03%
======== ========
NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (d)
------------------------------------ -------------------------------------------
SIX MONTHS SIX MONTHS
------------------------------------ ----------------------------------
2001 2000 2001 2000
----------- ---------- ----------- ----------
Commercial Loans $ 360 $ 158 0.64% 0.27%
Consumer Loans 1,126 1,006 1.87 1.89
-------- --------
TOTAL MANAGED CREDIT-RELATED $ 1,486 $ 1,164 1.28% 1.05%
======== ========
----------------------------------------------------------------------------------------------------------------------------------
(a) Charge-offs for derivative receivables are included in trading revenue.
(b) Includes credit card receivables that have been securitized.
(c) Nonperforming assets have not been reduced for credit protection (single
name credit default swaps and collateralized loan obligations) aggregating
$112 million related to nonperforming counterparties.
(d) Annualized.
================================================================================
-34-
35
Part I
Item 2 (continued)
JPMorgan Chase's managed credit-related assets of $307 billion at June 30, 2001
decreased 1%, when compared with year-end 2000. Commercial loans decreased $6.7
billion, or 6%, reflecting the Firm's ongoing discipline of originating loans
for distribution and sale. Derivative and foreign exchange instruments decreased
by 10% from $76.4 billion at year-end 2000. Consumer managed credit-related
assets increased $10.4 billion, or 9%, from December 31, 2000, largely in the
1-4 family residential mortgage and auto finance portfolios.
The increase in nonperforming assets was primarily related to three domestic
commercial credits. The portion of the commercial loan portfolio and
counterparty credit outstanding considered investment grade was 67% at June 30,
2001, unchanged from year-end 2000. Management currently believes that credit
conditions in the United States will remain challenging over the remainder of
the year, which could cause a further increase in nonperforming assets in 2001.
However, management believes that JPMC's credit performance this year will
continue to be better than the industry average.
Net charge-offs in the managed portfolio were $798 million and $1,486 million in
the second quarter and six months 2001, respectively, an increase of $221
million and $322 million, respectively, from the same periods one year ago,
primarily reflecting increased net charge-offs in the telecommunications portion
of the domestic commercial loan portfolio and in the consumer credit card
portfolio.
For the remainder of the year, management expects commercial loan net
charge-offs to remain at approximately the same level as in the first half of
the year.
COMMERCIAL PORTFOLIO
===================================================================================================================================
(in millions) PAST DUE 90 DAYS & OVER
CREDIT-RELATED ASSETS NONPERFORMING ASSETS (b) AND ACCRUING
----------------------------- --------------------- ------------------
JUNE 30, Dec 31, JUNE 30, Dec 31, JUNE 30, Dec 31,
COMMERCIAL LOANS: 2001 2000 2001 2000 2001 2000
------------- ---------- ------------ --------- ------------ ---------
Domestic Commercial:
Commercial and Industrial $ 62,932 $ 64,031 $ 1,211 $ 727 $ 20 $ 95
Commercial Real Estate 4,740 4,834 68 65 28 3
Financial Institutions 6,891 7,342 249 29 -- --
------------ ----------- --------- ------- --------- -------
Total Domestic Commercial Loans 74,563 76,207 1,528 821 48 98
Foreign Commercial:
Commercial and Industrial 34,117 37,002 312 556 34 1
Commercial Real Estate 1,665 1,470 9 9 -- --
Financial Institutions 1,880 3,976 8 13 -- --
Foreign Governments 565 805 33 35 -- --
------------ ----------- --------- ------- --------- -------
Total Foreign Commercial Loans 38,227 43,253 362 613 34 1
------------ ----------- --------- ------- --------- -------
TOTAL COMMERCIAL LOANS 112,790 119,460 1,890 1,434 82 99
DERIVATIVE AND FX CONTRACTS (a) 68,910 76,373 88 37 -- --
------------ ----------- --------- ------- --------- -------
TOTAL COMMERCIAL CREDIT-RELATED $ 181,700 $ 195,833 $ 1,978 $ 1,471 $ 82 $ 99
============ =========== ========= ======= ========= =======
===================================================================================================================================
(in millions, except ratios) NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (c)
------------------------------- -----------------------------------
SECOND QUARTER SECOND QUARTER
----------------------------- -------------------------------
COMMERCIAL LOANS: 2001 2000 2001 2000
----------- --------- ---------- ---------
Domestic Commercial:
Commercial and Industrial $ 158 $ 64 0.89% 0.34%
Commercial Real Estate -- (1) -- NM
Financial Institutions 19 17 1.29 0.98
------- -------
Total Domestic Commercial 177 80 0.90 0.38
Foreign Commercial:
Commercial and Industrial 39 21 0.54 0.28
Commercial Real Estate -- -- -- --
Financial Institutions (4) (6) NM NM
Foreign Governments -- -- -- --
------- -------
Total Foreign Commercial 35 15 0.46 0.18
------- -------
TOTAL COMMERCIAL LOANS $ 212 $ 95 0.77% 0.32%
======= =======
-35-
36
Part I
Item 2 (continued)
(in millions, except ratios) NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (c)
------------------------------- -----------------------------------
SIX MONTHS SIX MONTHS
--------------------------- ------------------------------
COMMERCIAL LOANS: 2001 2000 2001 2000
----------- --------- ---------- -------
Domestic Commercial:
Commercial and Industrial $ 272 $ 100 0.77% 0.27%
Commercial Real Estate (1) (3) NM NM
Financial Institutions 32 25 1.06 0.73
------- -------
Total Domestic Commercial 303 122 0.76 0.29
Foreign Commercial:
Commercial and Industrial 61 39 0.39 0.27
Commercial Real Estate -- -- -- --
Financial Institutions (4) (4) NM NM
Foreign Governments -- 1 -- 0.21
------- -------
Total Foreign Commercial 57 36 0.35 0.22
------- -------
TOTAL COMMERCIAL LOANS $ 360 $ 158 0.64% 0.27%
======= =======
--------------------------------------------------------------------------------------------------------------------------
(a) Charge-offs for derivative receivables are included in trading revenue.
(b) Nonperforming assets have not been reduced for credit protection (single
name credit default swaps and collateralized loan obligations) aggregating
$112 million related to nonperforming counterparties.
(c) Annualized.
NM - Not meaningful.
--------------------------------------------------------------------------------
COMMERCIAL AND INDUSTRIAL: The domestic commercial and industrial portfolio
decreased $1.1 billion from 2000 year-end. Domestic commercial and industrial
net charge-offs in the 2001 second quarter amounted to $158 million, compared
with $64 million in the 2000 second quarter. Nonperforming domestic commercial
and industrial loans were $1.2 billion, an increase of $484 million from the
2000 year-end. The foreign commercial and industrial portfolio totaled $34.1
billion at June 30, 2001, a decrease of 8% from the 2000 year-end level.
Nonperforming foreign commercial and industrial loans were $312 million, a
decrease of $244 million from year-end 2000 due in large part to continuing
improvement in the Asian loan portfolio. Net charge-offs in the foreign
commercial and industrial loan portfolio for the second quarter of 2001
increased to $39 million, from $21 million in the same period last year.
The telecommunications credit-related asset portfolio at June 30, 2001 was $10.1
billion, representing 5.5% of total JPMorgan Chase commercial credit-related
assets, which is consistent with the Firm's strategy of maintaining portfolio
diversification. The portion of the telecommunications portfolio considered
investment grade as of June 30, 2001 was 60%, which compares with 67% for the
aggregate portfolio. At June 30, 2001, 2.3% of the telecommunications portfolio
was nonperforming. The more traditional (wireless and wireline) components of
total telecommunications credit-related assets represented 86% of the total
telecommunications portfolio, with 69% considered investment grade, while
emerging telecommunications represented the balance.
FINANCIAL INSTITUTIONS: Loans to financial institutions decreased $2.5 billion
during 2001, when compared with year-end, primarily as a result of reductions in
the foreign portion of the portfolio. Nonperforming financial institution loans
increased to $257 million from $42 million at December 31, 2000, primarily
because of one borrower in the domestic portion of that portfolio.
-36-
37
Part I
Item 2 (continued)
DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
For a discussion of the derivative and foreign exchange contracts used by
JPMorgan Chase, see Note 3 of this Form 10-Q, and page 50 and Notes 1 and 25 of
JPMorgan Chase's 2000 Annual Report. The following table provides the remaining
maturities of derivative and foreign exchange contracts outstanding at June 30,
2001 and December 31, 2000.
==================================================================================================================================
AT JUNE 30, 2001 At December 31, 2000
----------------------------------------------------- ----------------------------------------------------
INTEREST FOREIGN EQUITY, Interest Foreign Equity,
RATE EXCHANGE COMMODITY AND Rate Exchange Commodity and
CONTRACTS CONTRACTS OTHER CONTRACTS TOTAL Contracts Contracts Other Contracts Total
--------- --------- --------------- ----- --------- --------- --------------- -----
Less Than 1 Year 13% 82% 37% 24% 12% 89% 40% 28%
1 to 5 Years 45 15 59 42 45 9 57 41
Over 5 Years 42 3 4 34 43 2 3 31
--- --- --- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
==================================================================================================================================
COUNTRY EXPOSURE
The following table presents JPMorgan Chase's exposure to selected countries.
This disclosure is based on management's view of country exposure. The
difference between the current presentation and that used at the two prior
quarter-ends is primarily as follows: (1) collateral held is used to reduce
exposure on counterparty trades within a country; and (2) disclosure is based on
total exposure, which includes local exposure funded locally in addition to
cross-border exposure. Management believes the current presentation more
accurately reflects JPMorgan Chase's country exposure. Amounts as of December
31, 2000 have been restated to conform to the current presentation.
==============================================================================================================================
SELECTED COUNTRY EXPOSURE
AT JUNE 30, 2001 At Dec 31, 2000
--------------------------------------------------------------------------------- ---------------
TOTAL Total
CROSS BORDER LOCAL (d) EXPOSURE (e) Exposure
--------------------------------------------- ----- -------- --------
(in billions) LENDING (a) TRADING (b) OTHER (c)
------- ------- -----
Mexico $ 1.2 $ 1.2 $ -- $ 0.7 $ 3.1 $ 3.3
Brazil 0.9 0.2 0.8 0.9 2.8 2.4
Argentina 0.4 0.8 0.1 0.1 1.4 1.4
South Africa 0.2 0.8 0.1 -- 1.1 1.3
Indonesia 0.4 0.1 -- -- 0.5 0.9
Turkey 0.2 -- -- -- 0.2 0.7
Russia -- 0.1 -- -- 0.1 0.3
------------------------------------------------------------------------------------------------------------------------------
(a) Lending includes loans and accrued interest receivable, interest-bearing
deposits with banks, acceptances, other monetary assets, issued letters of
credit, and undrawn commitments to extend credit.
(b) Trading includes (1) issuer exposure on cross-border debt and equity
instruments, held in both trading and investment accounts, adjusted for the
impact of issuer hedges including credit derivatives; and (2) counterparty
exposure on derivative and foreign exchange contracts as well as
security financing trades (resale agreements and securities borrowed).
The amounts associated with derivative and foreign exchange contracts are
presented after taking into account the impact of legally enforceable
master netting agreements.
(c) Mainly local exposure funded cross border.
(d) Local exposure is defined as exposure to a country denominated in local
currency, booked and funded locally.
(e) Total exposure includes exposure to both government and private sector
entities in a country.
================================================================================
-37-
38
Part I
Item 2 (continued)
CONSUMER PORTFOLIO
====================================================================================================================================
PAST DUE 90 DAYS & OVER
CREDIT-RELATED ASSETS NONPERFORMING ASSETS AND ACCRUING
--------------------- -------------------- -------------------------
(in millions) JUNE 30, Dec 31, JUNE 30, Dec 31, JUNE 30, Dec 31,
2001 2000 2001 2000 2001 2000
CONSUMER LOANS: ------------- ------------ ------------ --------- ------------ ---------
1-4 Family Residential Mortgages $ 56,743 $ 50,302 $ 263 $ 269 $ -- $ 2
Credit Card - Reported 19,531 18,495 25 26 326 327
Credit Card Securitizations (a) 17,753 17,871 -- -- 374 387
------------ ------------ --------- ------- --------- -------
Credit Card - Managed 37,284 36,366 25 26 700 714
Auto Financings 23,322 19,802 97 76 1 1
Other Consumer (b) 7,532 7,991 16 13 66 71
------------ ------------ --------- ------- --------- -------
TOTAL CONSUMER LOANS $ 124,881 $ 114,461 $ 401 $ 384 $ 767 $ 788
============ ============ ========= ======= ========= =======
====================================================================================================================================
NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (c)
------------------------------ -----------------------------------
(in millions, except ratios) SECOND QUARTER SECOND QUARTER
------------------------- ----------------------------
CONSUMER LOANS: 2001 2000 2001 2000
---------- --------- --------- ---------
1-4 Family Residential Mortgages $ 7 $ 10 0.05% 0.09%
Credit Card - Reported 234 166 4.69 5.52
Credit Card Securitizations (a) 273 242 6.55 4.93
-------- --------
Credit Card - Managed 507 408 5.54 5.16
Auto Financings 26 22 0.46 0.47
Other Consumer (b) 46 42 2.30 1.72
-------- --------
TOTAL CONSUMER LOANS $ 586 $ 482 1.89% 1.81%
======== ========
NET CHARGE-OFFS ANNUAL AVERAGE NET CHARGE-OFF RATES (c)
------------------------------ -----------------------------------
(in millions, except ratios) SIX MONTHS SIX MONTHS
------------------------- --------------------------------
CONSUMER LOANS: 2001 2000 2001 2000
---------- --------- --------- ---------
1-4 Family Residential Mortgages $ 17 $ 19 0.06% 0.08%
Credit Card - Reported 452 354 4.59 5.40
Credit Card Securitizations (a) 514 496 6.20 5.25
-------- --------
Credit Card - Managed 966 850 5.33 5.31
Auto Financings 55 43 0.51 0.46
Other Consumer (b) 88 94 2.11 1.89
-------- --------
TOTAL CONSUMER LOANS $ 1,126 $ 1,006 1.87% 1.89%
======== ========
--------------------------------------------------------------------------------
(a) Represents the portion of JPMorgan Chase's credit card receivables that have
been securitized.
(b) Consists of installment loans (direct and indirect types of consumer
finance), student loans, unsecured lines of credit and foreign consumer.
(c) Annualized.
================================================================================
RESIDENTIAL MORTGAGE LOANS: Residential mortgage loans were $56.7 billion at
June 30, 2001, a $6.4 billion increase from year-end. During the first six
months of 2001, the level of nonperforming residential mortgage loans decreased
2%. The net charge-off rate of 0.05% for the second quarter of 2001 was four
basis points lower than for the second quarter 2000.
CREDIT CARD LOANS: JPMorgan Chase analyzes its credit card portfolio on a
"managed basis," which includes credit card receivables on the balance sheet as
well as credit card receivables that have been securitized.
Managed credit card receivables of $37.3 billion as of June 30, 2001 increased
3% when compared with year-end 2000 and increased over 16% from June 30 last
year. During the 2001 second quarter, net charge-offs as a percentage of average
credit card receivables increased to 5.54%, compared with 5.16% in the
prior-year period. Loans over 90 days past due decreased to 1.88% of the
portfolio at June 30, 2001, compared with 1.96% at December 31, 2000. Management
anticipates that the managed credit card net charge-off ratio for full-year 2001
will be higher than for full-year 2000.
-38-
39
Part I
Item 2 (continued)
AUTO FINANCINGS: Auto financings outstanding increased 18% at June 30, 2001,
when compared with year-end 2000. The charge-off rate of 0.46% for the 2001
second quarter, unchanged from full-year 2000, continues to be indicative of
this portfolio's selective approach to asset origination. Total originations
were $9.1 billion for the six months of 2001, compared with $5.1 billion for the
same 2000 period.
OTHER CONSUMER LOANS: The level of other consumer loans of $7.5 billion at June
30, 2001 decreased 6% from year-end 2000. The net charge-off rates related to
this portfolio were higher in the second quarter, when compared with the second
quarter of 2000 due to higher bankruptcy losses for certain installment loans
and revolving lines of credit.
ALLOWANCE FOR CREDIT LOSSES
Loans: JPMorgan Chase's allowance for loan losses is intended to cover probable
credit losses as of June 30, 2001, for which either the asset is not
specifically identified or the size of the loss has not been fully determined.
Within the allowance, there are both specific and expected loss components and a
residual component. For a further discussion of the specific loss, expected loss
and residual components of the allowance for loan losses, see page 53 of
JPMorgan Chase's 2000 Annual Report.
The provision for loan losses for the second quarter of 2001 increased $197
million or 60%, when compared with the second quarter of 2000.
Foreign commercial loan net charge-offs increased $21 million during the first
six months of 2001, when compared with the first six months of 2000, while
foreign commercial nonperforming loans decreased $536 million from June 30, 2000
to $362 million at June 30, 2001. However, domestic commercial loan net
charge-offs and nonperforming loans increased $181 million and $935 million,
respectively, during the same periods.
============================================================================================================================
ALLOWANCE COMPONENTS
(in millions) AT JUNE 30, 2001 At December 31, 2000 At June 30, 2000
---------------- -------------------- ----------------
Specific Loss $ 881 $ 602 $ 577
Expected Loss:
Consumer 1,637 1,444 1,455
Commercial 769 919 817
----------- ----------- ----------
Total Expected Loss 2,406 2,363 2,272
----------- ----------- ----------
Residual Component 386 700 893
----------- ----------- ----------
Total $ 3,673 $ 3,665 $ 3,742
=========== =========== ==========
============================================================================================================================
Lending-Related Commitments: JPMorgan Chase also has an allowance for its
lending-related commitments, using a methodology similar to that used for the
loan portfolio. This allowance, which is reported in Other Liabilities, was $285
million at June 30, 2001, $283 million at December 31, 2000 and $333 million at
June 30, 2000.
-39-
40
Part I
Item 2 (continued)
--------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
--------------------------------------------------------------------------------
AGGREGATE VAR EXPOSURE
Value-at-Risk ("VAR") is a measure of the dollar amount of potential loss from
adverse market moves in an everyday market environment. VAR calculations are
performed for all material trading and investment portfolios and for market
risk-related A/L activities. Due to procedural differences at the heritage
firms, combined VAR is not available for periods prior to the merger date.
Although no single risk statistic can reflect all aspects of market risk, the
tables that follow provide an overview of the market risk exposure of JPMorgan
Chase at the dates indicated. The following table represents JPMorgan Chase's
average and period-end VARs for its trading portfolios and its A/L activities.
================================================================================
AGGREGATE PORTFOLIO
-------------------
SIX MONTHS ENDED JUNE 30, 2001
--------------------------------------------------
AVERAGE MINIMUM MAXIMUM AT JUNE 30, 2001
(in millions) VAR VAR VAR
---------------------------------------------------------------------------------------------------------------------------
Trading Portfolio $ 65.7 $ 48.9 $ 87.0 $ 61.8
Investment Portfolio and
A/L Activities (a) 105.0 79.8 120.2 106.3
Less: Portfolio Diversification (41.5) NM NM (51.5)
----------- ---------- --------- -----------
Total VAR $ 129.2 $ 99.4 $ 163.8 $ 116.6
=========== ========= ========= ===========
---------------------------------------------------------------------------------------------------------------------------
(a) Substantially all of the risk is interest rate related.
NM - Because the minimum and maximum may occur on different days for different
risk components, it is not meaningful to compute a portfolio
diversification effect. JPMorgan Chase's average and period-end VARs are
less than the sum of the VARs of its market risk components due to risk
offsets resulting from portfolio diversification.
================================================================================
MARKET RISK-RELATED ACTIVITIES
Value-at-Risk: JPMorgan Chase is exposed to interest rate-, foreign exchange-,
equity- and commodity-market risks in its trading portfolio. The table below
reflects VAR data for the trading portfolio by risk category. See the Aggregate
VAR Exposure section above for average and period-end VARs for the total trading
portfolio.
================================================================================
MARKED-TO-MARKET TRADING PORTFOLIO (a)
----------------------------------
SIX MONTHS ENDED JUNE 30, 2001
--------------------------------------------
AVERAGE MINIMUM MAXIMUM AT JUNE 30, 2001
(in millions) VAR VAR VAR
---------------------------------------------------------------------------------------------------
Interest Rate $ 41.6 $ 23.5 $ 69.2 $ 39.9
Foreign Exchange 6.1 3.6 10.9 6.3
Equities 22.2 14.1 32.6 22.7
Commodities 3.9 2.5 6.2 4.5
Hedge Fund Investments 3.0 2.5 4.2 2.5
Less: Portfolio Diversification (11.1) NM NM (14.1)
--------- -------- --------- ----------
Total Trading VAR $ 65.7 $ 48.9 $ 87.0 $ 61.8
========= ======== ========= ==========
---------------------------------------------------------------------------------------------------
(a) While integrated VAR computations are available for the aggregate
portfolio, integrated VAR by risk category has not yet been implemented.
Accordingly, this table has been prepared using certain estimates and
assumptions. Each risk category VAR was computed based on the methodologies
used by the heritage firms, assuming no correlation between the heritage
firms' exposures. Actual risk category VAR may differ from these estimates.
NM - Because the minimum and maximum may occur on different days for different
risk components, it is not meaningful to compute a portfolio
diversification effect. JPMorgan Chase's average and period-end VARs are
less than the sum of the VARs of its market risk components due to risk
offsets resulting from portfolio diversification.
================================================================================
-40-
41
Part I
Item 2 (continued)
HISTOGRAM:
The following histogram illustrates JPMorgan Chase's daily market risk-related
revenue, which is defined as the daily change in value of the marked-to-market
trading portfolios plus any trading-related net interest income, brokerage
commissions, underwriting fees or other revenue.
In the first half of 2001, JPMorgan Chase posted positive daily market
risk-related revenue for 112 out of 126 business days, with 91 days exceeding
positive $20 million. Losses were sustained on 14 of the 126 days represented in
the histogram. JPMorgan Chase incurred four daily trading losses in excess of
$20 million in the first half of 2001.
Due to significant differences in the definition of market risk-related revenues
used in the preparation of histograms at Chase and J.P. Morgan, it is not
feasible to include a histogram for fiscal-year 2000.
[ SEE APPENDIX 1 -- NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL]
Stress Testing: Whereas VAR captures exposure to unlikely events in normal
markets, stress testing discloses market risk under plausible events in abnormal
markets.
-41-
42
Part I
Item 2 (continued)
The following table represents the potential stress test loss (pre-tax) in
JPMorgan Chase's trading portfolio predicted by JPMorgan Chase's stress test
scenarios.
===========================================================================================================
LARGEST MONTHLY STRESS TEST LOSS - PRE-TAX
------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
--------------------------------------------
(in millions) AVERAGE MINIMUM MAXIMUM AT JUNE 30, 2001
-------------------------------------------------------------------------------------------------------
Stress Test Loss - Pre-Tax $ (277) $ (118) $ (447) $ (344)
-------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO AND ASSET/LIABILITY ACTIVITIES
JPMorgan Chase also is exposed to market risk in its investment portfolio and
A/L activities. Market risk measurements for JPMorgan Chase's investment
portfolio and A/L activities reflect all significant market risk-related factors
that have an effect on these activities. Non-market factors that are not
included in market risk measurements, such as changes in credit quality, also
may have an affect on these activities.
Value-at-Risk: See the VAR Aggregate Exposure section on page 40 for JPMorgan
Chase's average and period-end VARs for its investment portfolio and market
risk-related A/L activities.
Stress Testing:
Economic value stress testing measures the potential change in the market value
of JPMorgan Chase's investment portfolio and A/L activities. As of June 30,
2001, the largest potential loss under the various economic value stress test
scenarios utilized by the Firm on the value of JPMorgan Chase's investment
portfolio and A/L activities would have been equivalent to less than 1% of
JPMorgan Chase's market capitalization.
The NII stress test measures the potential change in JPMorgan Chase's interest
earnings over a one-year time horizon. At June 30, 2001, JPMorgan Chase's
largest potential NII stress test loss was estimated to be approximately 3.8% of
projected net income for the full-year 2001.
Nonstatistical Risk Measures: Exposure to interest rate risk is assessed using a
Basis Point Value ("BPV") method. BPV measures the change in market value of
JPMorgan Chase's investment portfolio and A/L activities to a one basis point
increase in interest rates (directional risk) or one basis point widening of
interest rate spreads (basis risk). The table that follows shows that JPMorgan
Chase had a directional BPV of $(6.5) million (pre-tax) at June 30, 2001. This
indicates that the market value of JPMorgan Chase's A/L positions would have
declined by approximately $6.5 million for every one basis point increase in
interest rates along the interest rate yield curve. The table also shows that
the economic value of JPMorgan Chase's investment portfolio and A/L activities
would have declined by $(14.6) million (pre-tax) for every one basis point
widening of interest rate spreads (basis risk).
===========================================================================================================
MARKET RISK-RELATED A/L ACTIVITIES
----------------------------------
SIX MONTHS ENDED JUNE 30, 2001
--------------------------------------------
(in millions) AVERAGE MINIMUM MAXIMUM AT JUNE 30, 2001
-----------------------------------------------------------------------------------------------------------
Directional Risk $ (7.6) $ (6.0) $ (8.9) $ (6.5)
Basis Risk (14.5) (11.1) (18.4) (14.6)
===========================================================================================================
-42-
43
Part I
Item 2 (continued)
--------------------------------------------------------------------------------
CAPITAL MANAGEMENT
--------------------------------------------------------------------------------
The following discussion of JPMorgan Chase's capital management focuses
primarily on the developments since December 31, 2000 and should be read in
conjunction with pages 44-45 and Note 23 of JPMorgan Chase's 2000 Annual Report.
CAPITAL
JPMorgan Chase's capital levels at June 30, 2001 continued to improve with
ratios well in excess of regulatory guidelines. At June 30, 2001, the Tier 1 and
Total Capital ratios were 8.7% and 12.2%, respectively.
The following table shows JPMorgan Chase's capital generation and use during the
periods indicated.
===========================================================================================================
SECOND QUARTER SIX MONTHS
---------------------- ---------------------
(in billions) 2001 2000 2001 2000
-------- -------- -------- --------
SOURCES OF FREE CASH FLOW
Cash Operating Earnings Less Dividends $ 0.2 $ 1.3 $ 1.1 $ 2.7
Plus: Preferred Stock and Equivalents/Special Items (0.7) (0.3) (0.5) (0.3)
Less: Capital for Internal Asset Growth (0.5) (0.7) (1.0) (1.2)
------- ------ ------- -----
Total Sources of Free Cash Flow $ (1.0) $ 0.3 $ (0.4) $ 1.2
======= ====== ======= =====
USES OF FREE CASH FLOW
Increases (Decreases) in Capital Ratios $ (0.7) $ 0.4 $ 0.5 $ 0.3
Acquisitions -- -- 0.1 --
Repurchases Net of Stock Issuances (0.3) (0.1) (1.0) 0.9
------- ------ ------- -----
Total Uses of Free Cash Flow $ (1.0) $ 0.3 $ (0.4) $ 1.2
======= ====== ======= =====
===========================================================================================================
In the first quarter of 2001, JPMorgan Chase raised the quarterly cash dividend
on its common stock to $0.34 per share from $0.32 per share. The Firm's current
dividend policy is to pay over time common stock dividends equal to
approximately 25% to 35% of operating earnings less preferred stock dividends,
although in any given quarter the common stock dividend may be higher or lower
than this range. The current quarterly dividend exceeds the target range given
this quarter's lower operating earnings. Future dividend policies will be
determined by JPMorgan Chase's Board of Directors after taking into
consideration the Firm's earnings, financial condition and applicable
governmental regulations and policies.
At June 30, 2001, the total capitalization of JPMorgan Chase (the sum of Tier 1
and Tier 2 Capital) was $55.0 billion, an increase of $1.6 billion from December
31, 2000. This increase reflects retained earnings (net income less common and
preferred dividends) generated during the period, aggregate common stock
issuances and treasury stock reissuances of $1.0 billion and the issuance of an
aggregate $2.5 billion in trust preferred capital securities and subordinated
debt. These sources of capital were partially offset by the redemption of
preferred stock and subordinated debt and by capital needed for internal asset
growth.
The Board of Directors of J.P. Morgan Chase & Co. has authorized, effective July
19, 2001, the repurchase of up to $6 billion of JPMorgan Chase's common stock.
This authorization is in addition to any amounts necessary to provide for
issuances under JPMorgan Chase's dividend reinvestment plan and its various
stock-based director and employee benefits plans.
--------------------------------------------------------------------------------
LIQUIDITY RISK MANAGEMENT
--------------------------------------------------------------------------------
The following discussion of JPMorgan Chase's liquidity risk management focuses
primarily on the developments since December 31, 2000 and should be read in
conjunction with page 59 of JPMorgan Chase's 2000 Annual Report.
-43-
44
Part I
Item 2 (continued)
LIQUIDITY
During the first six months of 2001, JPMorgan Chase issued approximately $6.8
billion of long-term debt and $500 million of trust preferred capital
securities. During the same period, $9.2 billion of long-term debt matured or
was redeemed and $0.5 billion of preferred stock was called.
--------------------------------------------------------------------------------
OPERATIONAL RISK MANAGEMENT
--------------------------------------------------------------------------------
For a discussion of JPMorgan Chase's operational risk management, refer to page
58 of JPMorgan Chase's 2000 Annual Report.
--------------------------------------------------------------------------------
SUPERVISION AND REGULATION
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 1 through 6 of JPMorgan Chase's 2000 Form 10-K.
DIVIDENDS
JPMorgan Chase's bank subsidiaries, without the approval of their relevant
banking regulators, could pay dividends to their respective bank holding
companies in amounts up to the limitations imposed upon such banks by regulatory
restrictions. These dividend limitations, in the aggregate, totaled
approximately $3.8 billion at June 30, 2001.
--------------------------------------------------------------------------------
ACCOUNTING DEVELOPMENTS
--------------------------------------------------------------------------------
LEGAL ISOLATION
In July 2001, the FASB issued a Technical Bulletin that would delay the
effective date of SFAS 140 for certain provisions that impact entities subject
to possible receivership by the FDIC. For those entities, the Technical Bulletin
delays the isolation standards of SFAS 140 until at least December 31, 2001. The
Firm currently is reviewing its transactions to determine what modifications
will be required to conform with SFAS 140 and the Technical Bulletin.
BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS 141, which revises the financial accounting
and reporting for business combinations, and also issued SFAS 142, which revises
the financial accounting and reporting for goodwill and other intangible assets.
SFAS 141 requires that all business combinations be accounted for using the
purchase method. Accounting for business combinations using the pooling of
interests method no longer is allowed. SFAS 141 also requires that intangible
assets acquired in a business combination be recognized apart from goodwill if
the intangible assets meet one of two criteria -- the contractual-legal
criterion or the separability criterion. The provisions of SFAS 141 apply to all
business combinations initiated after June 30, 2001 as well as business
combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001 or later. Certain transition provisions could affect
the accounting for business combinations using the purchase method that were
completed before July 1, 2001.
SFAS 142 establishes how intangible assets (other than those acquired in a
business combination) should be accounted for upon acquisition. It also
addresses how goodwill and other intangible assets should be accounted for
subsequent to their acquisition. Goodwill and intangible assets that have
indefinite useful lives no longer will be amortized but will be tested at least
annually for impairment. Intangible assets with finite lives will continue to be
amortized over their useful lives. The provisions of SFAS 142 are required to be
adopted by the Firm beginning January 1, 2002. Impairment losses that arise due
to the initial application of SFAS 142 are required to be reported as a change
in accounting principle.
The Firm currently is assessing the impact of SFAS 141 and SFAS 142 on its
financial condition and operating performance.
-44-
45
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
SECOND QUARTER Over/(Under) SIX MONTHS Over/(Under)
-------------------- ----------------
REPORTED BASIS 2001 2000 2000 2001 2000 2000
-------- -------- ----------- -------- -------- -----------
Revenue $ 6,871 $7,899 (13)% $ 15,124 $ 16,668 (9)%
Noninterest Expense (excluding Merger
and Restructuring Costs) 5,283 5,025 5 10,881 10,378 5
Merger and Restructuring Costs 478 50 NM 806 50 NM
Provision for Loan Losses 525 328 60 972 670 45
Net Income (a) $ 378 $1,633 (77)% $ 1,577 $ 3,621 (56)%
Net Income per Share:
--------------------
Basic (a) $ 0.18 $ 0.87 (79)% $ 0.78 $ 1.92 (59)%
Diluted (a) 0.18 0.83 (78) 0.76 1.84 (59)
Cash Dividends Declared 0.34 0.32 6 0.68 0.64 6
Share Price at Period End 44.60 46.06 (3)
Book Value at Period End 20.81 19.19 8
Common Shares Outstanding:
-------------------------
Average Common Shares:
Basic 1,978.4 1,853.1 7% 1,972.6 1,858.9 6%
Diluted 2,033.6 1,939.2 5 2,033.0 1,942.3 5
Common Shares at Period End 1,989.2 1,829.7 9 1,989.2 1,829.7 9
Performance Ratios:
------------------
Return on Average Total Assets (b) 0.21% 0.98% (77)bp 0.43% 1.10% (67)bp
Return on Average Common Equity (b) 3.5 19.1 (1,560) 7.5 21.4 (1,390)
Capital Ratios:
--------------
Tier 1 Capital Ratio 8.7% 8.6% 10bp
Total Capital Ratio 12.2 12.3 (10)
Tier 1 Leverage 5.4 5.8 (40)
---------------------------------------------------------------------------------------------------------------------
INCLUDING JPMORGAN PARTNERS (f)
-------------------------------------------------------------------
OPERATING BASIS (c)
Revenue $ 7,144 $8,282 (14)% $ 15,638 $ 17,305 (10)%
Noninterest Expense 5,283 5,025 5 10,881 10,378 5
Credit Costs 798 570 40 1,486 1,166 27
Earnings 690 1,757 (61) 2,126 3,745 (43)
Diluted Earnings per Share 0.33 0.89 (63) 1.03 1.90 (46)
Return on Average Common Equity (b) 6.5% 20.6% (1,410)bp 10.1% 22.2% (1,210)bp
Overhead Ratio (d) 74 61 1,300 70 60 1,000
CASH OPERATING BASIS:
Cash Earnings $ 873 $1,849 (53)% $ 2,486 $ 3,930 (37)%
Cash Diluted Earnings per Share 0.42 0.94 (55) 1.20 2.00 (40)
Shareholder Value Added (e) (394) 814 NM (23) 1,881 NM
Cash Return on Average Common Equity(b) 8.2% 21.7% (1,350)bp 11.9% 23.3% (1,140)bp
Cash Overhead Ratio (d) 71 60 1,100 67 59 800
EXCLUDING JPMORGAN PARTNERS (f)
-------------------------------------------------------------------
OPERATING BASIS (c)
Revenue $ 8,038 $7,892 2% $ 16,475 $ 16,314 1%
Noninterest Expense 5,209 4,945 5 10,707 10,172 5
Credit Costs 798 570 40 1,486 1,166 27
Earnings 1,308 1,556 (16) 2,769 3,239 (15)
Diluted Earnings per Share 0.64 0.79 (19) 1.35 1.65 (18)
Return on Average Common Equity (b) 14.7% 23.3% (860)bp 15.8% 24.5% (870)bp
Overhead Ratio (d) 65 63 200 65 62 300
CASH OPERATING BASIS:
Cash Earnings $ 1,486 $1,646 (10)% $ 3,119 $ 3,419 (9)%
Cash Diluted Earnings per Share 0.72 0.84 (14) 1.52 1.74 (13)
Shareholder Value Added (e) 463 890 (48) 1,107 1,923 (42)
Cash Return on Average Common Equity(b) 16.7% 24.7% (800)bp 17.8% 25.9% (810)bp
Cash Overhead Ratio (d) 63 62 100 63 61 200
------------------------------------------------------------------------------------------------------------
(a) Reported basis for the six months of 2001 includes the cumulative effect of
a transition adjustment of $(25) million, net of taxes, and basic and
diluted earnings per share have been reduced by $(0.01) in the first six
months of 2001 due to the impact of the adoption of SFAS 133 relating to the
accounting for derivative instruments and hedging activities.
(b) Based on annualized amounts.
(c) Operating basis excludes the impact of credit card securitizations, merger
and restructuring costs, and special items. See page 26 for a reconciliation
of results on a reported and operating basis.
(d) The overhead ratio is noninterest expense as a percentage of the total of
net interest income and noninterest revenue (excluding merger and
restructuring costs and special items). The cash overhead ratio also
excludes the impact of amortization of goodwill and certain other
intangibles.
(e) SVA represents operating earnings excluding the amortization of goodwill and
certain other intangibles minus preferred dividends and an explicit charge
for capital. An integrated cost of capital was implemented during the second
quarter of 2001. A 12% cost of capital has been used for all businesses
except JPMP, which has a 15% cost of capital. The effective cost of equity
capital used in the SVA framework for JPMorgan Chase overall is 12%. Prior
periods have been restated to conform with current methodologies.
(f) JPMP is JPMorgan Chase's private equity business. See pages 19 through 20
for its line of business results.
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
--------------------------------------------------------------------------------
-45-
46
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS, EXCEPT RATES)
THREE MONTHS ENDED JUNE 30, 2001 Three Months Ended June 30, 2000
----------------------------------- -----------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
Deposits with Banks $ 9,535 $ 111 4.65% $ 8,956 $ 176 7.92%
Federal Funds Sold and
Securities Purchased under
Resale Agreements 86,556 1,076 4.98 82,245 1,201 5.87
Securities and Trading Assets 194,736 2,864 5.90 (a) 173,870 2,855 6.60 (a)
Securities Borrowed 38,006 347 3.66 35,421 528 6.00
Loans 217,447 4,090 7.55 205,419 4,121 8.06
--------- ------- --------- ------
Total Interest-Earning Assets 546,280 8,488 6.23% 505,911 8,881 7.06%
Allowance for Loan Losses (3,708) (3,705)
Cash and Due from Banks 21,499 16,579
Trading Assets - Derivative Receivables 77,794 74,943
Other Assets 93,903 73,610
--------- ---------
Total Assets $ 735,768 $ 667,338
========= =========
LIABILITIES
Interest-Bearing Deposits $ 215,987 $ 2,122 3.94% $ 213,124 $2,644 4.99%
Federal Funds Purchased and
Securities Sold under
Repurchase Agreements 167,126 1,787 4.29 131,700 1,873 5.72
Commercial Paper 17,818 195 4.39 14,424 226 6.29
Other Borrowings (b) 63,038 950 6.04 57,939 1,048 7.28
Long-Term Debt 45,173 634 5.63 46,195 773 6.73
--------- ------ --------- ------
Total Interest-Bearing Liabilities 509,142 5,688 4.48 463,382 6,564 5.70
--------- ------ --------- ------
Noninterest-Bearing Deposits 60,073 52,700
Trading Liabilities - Derivative Payables 71,980 70,809
Other Liabilities 51,065 44,472
--------- ---------
Total Liabilities 692,260 631,363
--------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 1,239 1,621
Common Stockholders' Equity 41,719 33,804
--------- ---------
Total Stockholders' Equity 42,958 35,425
--------- ---------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 735,768 $ 667,338
========= =========
INTEREST RATE SPREAD 1.75% 1.36%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 2,800 2.06% $2,317 1.84%
======= ==== ====== ====
--------------------------------------------------------------------------------
(a) For the three months ended June 30, 2001 and June 30, 2000, the annualized
rate for available-for-sale securities based on historical cost was 5.63%
and 6.05%, respectively, and the annualized rate for available-for-sale
securities based on fair value was 5.71% and 6.32%, respectively.
(b) Includes securities sold but not yet purchased and structured notes and
trust preferred notes.
--------------------------------------------------------------------------------
-46-
47
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS, EXCEPT RATES)
SIX MONTHS ENDED JUNE 30, 2001 Six Months Ended June 30, 2000
----------------------------------- ---------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
Deposits with Banks $ 8,531 $ 250 5.90% $ 9,576 $ 388 8.15%
Federal Funds Sold and
Securities Purchased under
Resale Agreements 84,706 2,272 5.41 78,732 2,291 5.85
Securities and Trading Assets 197,789 5,765 5.88 (a) 168,999 5,547 6.60 (a)
Securities Borrowed 37,635 840 4.50 35,710 1,056 5.95
Loans 218,285 8,559 7.91 204,556 8,063 7.93
--------- ------- --------- ------
Total Interest-Earning Assets 546,946 17,686 6.52% 497,573 17,345 7.01%
Allowance for Loan Losses (3,703) (3,702)
Cash and Due from Banks 21,440 16,332
Trading Assets - Derivative Receivables 77,021 75,217
Other Assets 91,672 74,047
--------- ---------
Total Assets $ 733,376 $ 659,467
========= =========
LIABILITIES
Interest-Bearing Deposits $ 216,366 $ 4,758 4.43% $ 214,793 $5,151 4.82%
Federal Funds Purchased and
Securities Sold under
Repurchase Agreements 159,940 3,923 4.95 125,462 3,439 5.51
Commercial Paper 17,890 460 5.18 16,527 497 6.05
Other Borrowings (b) 66,801 1,931 5.83 55,029 1,995 7.29
Long-Term Debt 46,303 1,378 6.00 45,639 1,508 6.64
--------- ------- --------- ------
Total Interest-Bearing Liabilities 507,300 12,450 4.95 457,450 12,590 5.53
--------- ------- --------- ------
Noninterest-Bearing Deposits 57,656 52,519
Trading Liabilities - Derivative Payables 73,354 69,670
Other Liabilities 51,660 44,180
--------- ---------
Total Liabilities 689,970 623,819
--------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 1,362 1,621
Common Stockholders' Equity 41,494 33,477
--------- ---------
Total Stockholders' Equity 42,856 35,098
--------- ---------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 733,376 $ 659,467
========= =========
INTEREST RATE SPREAD 1.57% 1.48%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 5,236 1.93% $4,755 1.92%
======= ==== ====== ====
--------------------------------------------------------------------------------
(a) For the six months ended June 30, 2001 and June 30, 2000, the annualized
rate for available-for-sale securities based on historical cost was 5.79%
and 6.07%, respectively, and the annualized rate for available-for-sale
securities based on fair value was 5.83% and 6.40%, respectively.
(b) Includes securities sold but not yet purchased and structured notes and
trust preferred notes.
--------------------------------------------------------------------------------
-47-
48
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
QUARTERLY CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
2001 2000
------------------ --------------------------------------
SECOND First Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter Quarter
-------- -------- ------- -------- -------- --------
REVENUE
Investment Banking Fees $ 929 $ 941 $ 1,051 $ 1,013 $ 1,107 $ 1,191
Trading Revenue 1,261 2,001 1,142 1,455 1,730 1,971
Fees and Commissions 2,388 2,065 2,387 2,427 2,218 2,197
Private Equity - Realized Gains (Losses) (46) 412 373 656 630 392
Private Equity - Unrealized Gains (Losses) (783) (285) (471) (676) (171) 282
Securities Gains (Losses) 67 455 118 90 24 (3)
Other Revenue 274 246 1,482 415 67 325
-------- -------- ------- ------- -------- --------
TOTAL NONINTEREST REVENUE 4,090 5,835 6,082 5,380 5,605 6,355
-------- -------- ------- ------- -------- --------
Interest Income 8,469 9,180 9,922 9,423 8,858 8,440
Interest Expense 5,688 6,762 7,461 7,080 6,564 6,026
-------- -------- ------- ------- -------- --------
NET INTEREST INCOME 2,781 2,418 2,461 2,343 2,294 2,414
-------- -------- ------- ------- -------- --------
REVENUE BEFORE PROVISION FOR LOAN LOSSES 6,871 8,253 8,543 7,723 7,899 8,769
Provision for Loan Losses 525 447 409 298 328 342
-------- -------- ------- ------- -------- --------
TOTAL NET REVENUE 6,346 7,806 8,134 7,425 7,571 8,427
-------- -------- ------- ------- -------- --------
EXPENSE
Compensation Expense 3,052 3,357 3,310 3,135 2,963 3,340
Occupancy Expense 327 348 351 338 297 308
Technology and Communications 674 654 668 632 574 580
Merger and Restructuring Costs 478 328 1,302 79 50 --
Amortization of Intangibles 183 177 186 157 92 93
Other Expense 1,047 1,062 1,227 1,011 1,099 1,032
-------- -------- ------- ------- -------- --------
TOTAL NONINTEREST EXPENSE 5,761 5,926 7,044 5,352 5,075 5,353
-------- -------- ------- ------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE AND
EFFECT OF ACCOUNTING CHANGE 585 1,880 1,090 2,073 2,496 3,074
Income Tax Expense 207 656 382 675 863 1,086
-------- -------- ------- ------- -------- --------
INCOME BEFORE EFFECT OF
ACCOUNTING CHANGE $ 378 $ 1,224 $ 708 $ 1,398 $ 1,633 $ 1,988
Net Effect of Change in Accounting Principle -- (25) -- -- -- --
-------- -------- ------- ------- -------- --------
NET INCOME $ 378 $ 1,199 $ 708 $ 1,398 $ 1,633 $ 1,988
======== ======== ======= ======= ======== ========
NET INCOME APPLICABLE TO COMMON STOCK $ 359 $ 1,178 $ 687 $ 1,374 $ 1,607 $ 1,963
======== ======== ======= ======= ======== ========
NET INCOME PER SHARE (a)
Basic $ 0.18 $ 0.60 $ 0.36 $ 0.73 $ 0.87 $ 1.06
======== ======== ======= ======= ======== ========
Diluted $ 0.18 $ 0.58 $ 0.34 $ 0.69 $ 0.83 $ 1.01
======== ======== ======= ======= ======== ========
--------------------------------------------------------------------------------
(a) Basic and diluted earnings per share have been reduced by $(0.01) in the
first quarter of 2001 due to the impact of the adoption of SFAS 133 relating
to the accounting for derivative instruments and hedging activities.
--------------------------------------------------------------------------------
-48-
49
Part I
Item 2 (continued)
J.P. MORGAN CHASE & CO.
QUARTERLY CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
JUNE 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2001 2001 2000 2000 2000 2000
--------- --------- --------- --------- --------- ---------
ASSETS
Cash and Due from Banks $ 24,219 $ 22,371 $ 23,972 $ 20,284 $ 20,859 $ 18,159
Deposits with Banks 11,903 7,979 8,333 8,669 8,768 8,190
Federal Funds Sold and Securities
Purchased under Resale Agreements 61,308 71,147 69,474 69,413 69,421 70,048
Securities Borrowed 38,296 37,264 32,371 36,424 34,681 35,027
Trading Assets: Debt & Equity Instruments 139,135 138,270 139,249 140,992 115,730 124,225
Derivative Receivables 68,910 78,907 76,373 67,028 68,728 78,258
Securities 68,488 69,731 73,695 71,282 71,050 72,075
Loans (Net of Allowance for Loan Losses) 216,245 213,116 212,385 214,496 203,611 198,870
Goodwill and Other Intangibles 16,224 15,351 15,833 15,678 10,012 9,858
Private Equity Investments 9,855 10,877 11,428 11,502 12,102 11,742
Accrued Interest and Accounts Receivable 17,080 15,352 20,618 15,491 18,122 18,681
Premises and Equipment 7,186 7,085 7,087 6,863 6,584 6,460
Other Assets 33,853 26,174 24,530 29,375 22,700 24,453
---------- --------- --------- --------- --------- ---------
TOTAL ASSETS $ 712,702 $ 713,624 $ 715,348 $ 707,497 $ 662,368 $ 676,046
========== ========= ========= ========= ========= =========
LIABILITIES
Deposits:
Noninterest-Bearing $ 64,231 $ 59,686 $ 62,713 $ 54,903 $ 57,904 $ 55,554
Interest-Bearing 212,573 212,886 216,652 214,882 213,012 203,441
---------- --------- --------- -------- --------- ---------
Total Deposits 276,804 272,572 279,365 269,785 270,916 258,995
Federal Funds Purchased and Securities
Sold under Repurchase Agreements 155,062 145,703 131,738 145,210 125,237 139,520
Commercial Paper 19,985 16,281 24,851 19,462 13,354 15,031
Other Borrowed Funds 18,418 28,716 19,840 20,065 15,124 16,271
Trading Liabilities: Debt & Equity Instruments 53,571 52,501 52,157 58,972 52,506 54,633
Derivative Payables 62,373 73,312 76,517 65,253 65,531 72,117
Accounts Payable, Accrued Expenses and
Other Liabilities, Including the Allowance
for Credit Losses 38,157 33,575 40,754 37,225 34,298 33,820
Long-Term Debt 40,917 42,609 43,299 45,634 44,528 45,825
Guaranteed Preferred Beneficial Interests in
the Firm's Junior Subordinated Deferrable
Interest Debentures 4,439 4,439 3,939 3,939 3,689 3,688
---------- --------- --------- -------- --------- ---------
TOTAL LIABILITIES 669,726 669,708 672,460 665,545 625,183 639,900
---------- --------- --------- -------- --------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 550 550 550 550 550
STOCKHOLDERS' EQUITY
Preferred Stock 1,025 1,362 1,520 1,522 1,522 1,622
Common Stock 1,990 1,984 1,940 2,066 2,066 1,625
Capital Surplus 12,000 11,663 11,598 12,427 12,205 12,280
Retained Earnings 28,265 28,592 28,096 31,678 30,887 29,848
Accumulated Other Comprehensive
Income (Loss) (834) (214) (241) (995) (1,281) (1,266)
Treasury Stock, at Cost (20) (21) (575) (5,296) (8,764) (8,513)
---------- --------- --------- -------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 42,426 43,366 42,338 41,402 36,635 35,596
---------- --------- --------- -------- --------- ---------
TOTAL LIABILITIES, PREFERRED
STOCK OF SUBSIDIARY AND
STOCKHOLDERS' EQUITY $ 712,702 $ 713,624 $ 715,348 $ 707,497 $ 662,368 $ 676,046
========== ========= ========= ========= ========= =========
======================================================================================================================
-49-
50
Part I
Item 2 (continued)
--------------------------------------------------------------------------------
GLOSSARY OF TERMS
--------------------------------------------------------------------------------
The page numbers included after each definition represent the pages in this Form
10-Q where the term primarily is used.
Basis Point Value ("BPV"): This measurement quantifies the change in the market
value of JPMorgan Chase's assets and liabilities (that are not part of its
trading activities) that would result from a one basis point change in interest
rates. (Page 42)
Cash Operating Earnings: Operating earnings excluding the impact of the
amortization of certain other intangibles. (Pages 12-19, 21-25, 43 and 45)
Cash Overhead Ratio: Noninterest expense, excluding amortization of certain
other intangibles, as a percentage of the total of net interest income and
noninterest revenue (excluding merger and restructuring costs and special
items). (Pages 18-19, 21-23, 32 and 45)
Chase USA: Chase Manhattan Bank USA, National Association. (Page 11)
FASB: Financial Accounting Standards Board. (Page 44)
Managed Credit Card Receivables or Managed Basis: JPMorgan Chase uses this
terminology to refer to its credit card receivables on the balance sheet plus
credit card receivables that have been securitized. (Pages 13, 16, 23, 34-35 and
38)
Merger: The term refers to the December 31, 2000 merger of The Chase Manhattan
Corporation and J.P. Morgan & Co. Incorporated. (Pages 7-8, 14, 16, 18, 26, 28,
32-33, 40 and 45)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Pages 46 and 47)
Operating Basis or Operating Earnings: Reported results excluding the impact of
credit card securitizations, merger and restructuring costs, and special items.
(Pages 12-19, 21-27, 29, 31-33, 43 and 45)
Overhead Ratio: Noninterest expense as a percentage of the total of net interest
income and noninterest revenue (excluding merger and restructuring costs and
special items). (Pages 32 and 45)
SFAS: Statement of Financial Accounting Standards.
SFAS 107: "Disclosures about Fair Value of Financial Instruments." (Page 12)
SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities."
(Page 7)
SFAS 133: "Accounting for Derivative Instruments and Hedging Activities." (Pages
7, 9-10, 13, 45 and 57)
SFAS 140: "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125."
(Pages 8, 9 and 44)
SFAS 141: "Business Combinations." (Page 44)
SFAS 142: "Goodwill and Other Intangible Assets." (Page 44)
Shareholder Value Added ("SVA"): Represents operating earnings excluding the
amortization of goodwill and certain other intangibles (i.e., cash operating
earnings) minus preferred dividends and an explicit charge for capital. (Pages
12-13, 17-19, 21-23 and 45)
Special Items: The first six months of 2001 included $806 million (pre-tax) in
merger and restructuring expenses and the cumulative effect of a transition
adjustment of $(25) million (after-tax) related to the adoption of SFAS 133.
Special items in the first half of 2000 include a $141 million loss resulting
from the economic hedge of the purchase price of Flemings prior to its
acquisition and $50 million of restructuring costs associated with previously
announced initiatives. (Pages 12-16, 26, 32, 43 and 45)
Stress Testing: Discloses market risk under plausible events in abnormal
markets. (Pages 41 and 42)
Value-at-Risk ("VAR"): A measure of the dollar amount of potential loss from
adverse market moves in an everyday market environment. (Pages 40, 41 and 42)
-50-
51
Item 3 Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the quantitative and qualitative
disclosures about market risk, see the market risk management
section of the MD&A on pages 40-42 of this Form 10-Q.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
In June 1999, Sumitomo Corporation filed a lawsuit against The
Chase Manhattan Bank in the United States District Court for
the Southern District of New York. The complaint alleges that
during the period from 1994 to 1996, the Bank assisted a
Sumitomo employee in making copper trades by funding
unauthorized loans to the Sumitomo employee. The complaint
alleges that the Bank knew the employee did not have authority
to enter into the transactions on behalf of Sumitomo. The
complaint asserts claims under the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and New York common law and
alleges damages of $532 million (subject to trebling under
RICO), plus punitive damages.
In August 1999, Sumitomo Corporation filed a separate action
against J.P. Morgan & Co., Morgan Guaranty Trust Company of New
York and a former Morgan employee (collectively, "Morgan") in
the United States District Court for the Southern District of
New York. The complaint in this action contains allegations,
similar to the allegations in the complaint filed by Sumitomo
against Chase, that during the period from 1993 to 1996, Morgan
assisted a Sumitomo employee in making copper trades by funding
unauthorized loans to the Sumitomo employee. The complaint
alleges that Morgan knew the employee did not have authority to
enter into the transactions on behalf of Sumitomo. The
complaint asserts claims under RICO and New York common law and
alleges damages of $735 million (subject to trebling under
RICO), plus punitive damages. The separate actions against
Chase and Morgan have been consolidated for discovery purposes.
Chase Securities Inc. (now known as J.P. Morgan Securities Inc.
("JPMSI")) has been named as a defendant or third-party
defendant in 14 actions that were filed in either the United
States District Court for the Northern District of Oklahoma or
Oklahoma state court or New York state court beginning in
October 1999 arising out of the failure of Commercial Financial
Services, Inc. ("CFS"). Plaintiffs in these actions are
institutional investors who purchased over $1.6 billion in
original face amount of asset-backed securities issued by CFS.
The securities were backed by delinquent credit card
receivables. In addition to JPMSI, the defendants in various of
the actions are the founders and key executives of CFS, as well
as its auditors, its outside counsel and the rating agencies
that rated the securities. JPMSI is alleged to have been the
investment banker to CFS and to have acted as an initial
purchaser and as placement agent in connection with the
issuance of certain of the securities. Plaintiffs allege that
defendants either knew or were reckless in not knowing that the
securities were sold to plaintiffs on the basis of misleading
misrepresentations and omissions of material facts. The
complaints against JPMSI assert claims under the Securities
Exchange Act of 1934, the Oklahoma Securities Act, and under
common law theories of fraud and negligent misrepresentation.
In the actions against JPMSI, damages in the amount of
approximately $1.2 billion allegedly suffered as a result of
defendants' misrepresentations and omissions, plus punitive
damages, are being claimed.
The Securities and Exchange Commission ("SEC") has investigated
the question of whether, in connection with the bond paying
agency function within JPMorgan Chase's Institutional Trust
Services group, there had been violations of its transfer
agency recordkeeping or reporting regulations and whether
JPMorgan Chase's disclosure regarding these issues had been
adequate and timely. The conditions giving rise to the alleged
violations have since been addressed, and JPMorgan Chase has
made an offer of settlement to the SEC, which is under
consideration. If accepted in its present form, the settlement
will have no material adverse effect on the consolidated
financial condition of JPMorgan Chase.
-51-
52
PART II - OTHER INFORMATION (CONTINUED)
Item 1 Legal Proceedings (continued)
Beginning in May 2001, JPMC and certain of its securities
subsidiaries (each referred to in this paragraph as "JPMC")
have been named, along with numerous other firms in the
securities industry, as defendants in a large number of
putative class action lawsuits filed in the United States
District Court for the Southern District of New York. These
suits purport to challenge alleged improprieties in the
allocation of stock in various public offerings, including some
offerings for which a JPMC entity served as an underwriter. The
suits allege violations of securities and antitrust laws
arising from alleged material misstatements and omissions in
registration statements and prospectuses for the initial public
offerings and with respect to aftermarket transactions in the
offered securities. The securities claims allege, among other
things, misrepresentations concerning commissions paid to JPMC
and aftermarket transactions by customers who received
allocations of shares in the respective initial public
offerings. The antitrust claims allege an illegal conspiracy to
require customers, in exchange for initial public offering
allocations, to pay undisclosed and excessive commissions and
to make aftermarket purchases of the initial public offering
securities at a price higher than the offering price, as a
precondition to receiving allocation. JPMC has also received
various subpoenas and informal requests from governmental and
other agencies seeking information relating to initial public
offering allocation practices. JPMC is cooperating with these
agencies and has responded or is in the process of responding
to these requests.
In addition to the matters described above, JPMorgan Chase and
its subsidiaries have been named from time to time as
defendants in various legal actions and proceedings arising in
connection with their respective businesses and have been
involved from time to time in investigations and proceedings by
governmental agencies. In view of the inherent difficulty of
predicting the outcome of such matters, JPMorgan Chase cannot
state what the eventual outcome of these pending matters will
be. JPMorgan Chase is contesting the allegations made in each
pending matter and believes, based on current knowledge and
after consultation with counsel, that the outcome of such
matters will not have a material adverse effect on the
consolidated financial condition of JPMorgan Chase but may be
material to JPMorgan Chase's operating results for any
particular period, depending on the level of JPMorgan Chase's
income for such period.
Item 2 Sales of Unregistered Common Stock
During the second quarter of 2001, shares of common stock of
J.P. Morgan Chase & Co. were issued in a transaction exempt
from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof as follows: On April 2, 2001, 498 shares
of common stock were issued to a retired director who had
deferred receipt of such common stock pursuant to the Deferred
Compensation Plan for Non-Employee Directors.
-52-
53
PART II - OTHER INFORMATION (CONTINUED)
Item 4 Submission of Matters to a Vote of Security Holders
The following is a summary of matters submitted to vote at the
Annual Meeting of Stockholders of JPMorgan Chase held on May
15, 2001. A total of 1,593,686,386 shares, or 80.4% of the
1,982,943,058 shares entitled to vote at the Annual Meeting,
were represented at the meeting.
(A) Election of Directors
The following fifteen (15) directors were elected to hold
office until the 2002 Annual Meeting or until their successors
are elected and have qualified.
Votes Received Votes Withheld
-------------- --------------
Hans W. Becherer 1,580,957,106 12,729,280
Riley P. Bechtel 1,581,216,371 12,470,015
Frank A. Bennack Jr. 1,580,842,556 12,843,830
Lawrence A. Bossidy 1,580,919,066 12,767,320
M. Anthony Burns 1,581,287,828 12,398,558
H. Laurance Fuller 1,581,364,676 12,321,710
Ellen V. Futter 1,580,751,079 12,935,307
William H. Gray III 1,579,581,252 14,105,134
William B. Harrison, Jr. 1,581,261,404 12,424,982
Helene L. Kaplan 1,530,025,114 63,661,272
Lee R. Raymond 1,581,239,934 12,446,452
John R. Stafford 1,580,817,728 12,868,658
Lloyd D. Ward 1,581,136,747 12,549,639
Douglas A. Warner III 1,580,116,044 13,570,342
Marina v.N. Whitman 1,580,999,632 12,686,754
(B) (1) Ratifying Independent Accountants
A proposal to ratify PricewaterhouseCoopers LLP as independent
accountants was approved by 99.26% of the votes cast. The
proposal received a "for" vote of 1,561,863,267 and an
"against" vote of 11,602,254. The number of votes abstaining
was 20,217,485. There were 3,380 broker non-votes.
(2) Approval of Employee Stock Purchase Plan
A proposal to approve the Firm's Employee Stock Purchase Plan
was approved by 97.75% of the votes cast. The proposal received
a "for" vote of 1,534,982,883 and an "against" vote of
35,273,770. The number of votes abstaining was 23,348,045.
There were 81,688 broker non-votes.
(3) Stockholder Proposal Re: Executive Compensation Disclosure
A proposal by Evelyn Y. Davis requiring that management
disclose in future proxy statements the names and titles of
certain executive officers receiving annual compensation in
excess of $250,000 was rejected by 93.83% of the votes cast.
The vote "for" was 78,564,128, and the vote "against" was
1,194,448,616. The number of votes abstaining was 34,622,968,
and there were 286,050,674 broker non-votes.
-53-
54
Item 4 (4) Stockholder Proposal Re: Director Nomination Procedures
A proposal by Richard A. Dee requesting that the Board of
Directors adopt a policy requiring the Governance Committee to
nominate two candidates for each directorship to be filled upon
voting at the annual meetings was rejected by 95.43% of the
votes cast. The vote "for" was 57,878,960, and the vote
"against" was 1,208,455,330. The number of votes abstaining was
41,326,765, and there were 286,025,331 broker non-votes.
(5) Stockholder Proposal Re: International Financial
Stabilization
A proposal by the Sisters of Charity of St. Elizabeth and other
church groups that the Board of Directors develop a policy
regarding short-term lending and exposure of other financial
instruments to emerging market countries was rejected by 96.72%
of the votes cast. The vote "for" was 39,302,185, and the vote
"against" was 1,160,726,592. The number of votes abstaining was
107,595,216, and there were 286,062,393 broker non-votes.
Item 6 Exhibits and Reports on Form 8-K
(A)Exhibits:
11 - Computation of Earnings per Common Share
12(a) - Computation of Ratio of Earnings to Fixed Charges
12(b) - Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividend Requirements
(B)Reports on Form 8-K:
JPMorgan Chase filed three reports on Form 8-K during the
quarter ended June 30, 2001, as follows:
Form 8-K dated April 5, 2001: JPMorgan Chase disclosed a
summary of the performance of the direct private equity
investments of JPMorgan Partners.
Form 8-K dated April 18, 2001: JPMorgan Chase announced first
quarter 2001 results.
Form 8-K dated June 5, 2001: JPMorgan Chase announced its
business outlook at an investor presentation held on June 5,
2001.
-54-
55
SIGNATURE
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 CHASE & CO.
------------------------------
(Registrant)
Date August 14, 2001 By /s/ Joseph L. Sclafani
--------------- ------------------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-55-
56
APPENDIX 1
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations.
GRAPHIC
NUMBER PAGE DESCRIPTION
------ ---- -----------
1 41 Bar Graph entitled "Daily Market Risk-Related Revenues For
Six Months Ending June 30, 2001" presenting the following
information:
Millions of Dollars 0><10 10><20 20><30 30><40 40><50 50><60
-------------------- ------- ------ ------ ------ ------ ------
Number of trading
days revenue was
within the above
prescribed positive
range 9 12 13 16 14 13
60><70 70><80 80><90 90><100 100><110 over 110
------ ------ ------ -------- -------- --------
6 14 4 3 4 4
Millions of Dollars 0><(10) (10)><(20) (20)><(30) Over (30)
-------------------- -------- --------- --------- ---------
Number of trading
days revenue was
within the above
prescribed negative
range 6 4 1 3
Average Daily Revenue: $41 million
57
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
---------- -------- ---------------------
11 Computation of Earnings 57
per Common Share
12(a) Computation of Ratio of 58
Earnings to Fixed Charges
12(b) Computation of Ratio of 59
Earnings to Fixed Charges
and Preferred Stock Dividend
Requirements
-56-