10-Q 1 e10-q.txt J. P. MORGAN & CO. INCORPORATED 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 J.P. MORGAN & CO. INCORPORATED (Exact name of registrant as specified in its charter) Delaware 1-5885 13-2625764 (State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) Identification No.)

~~60 Wall Street, New York, NY 10260-0060 (Address of principal executive offices) (Zip Code)~~

Registrant's telephone number, including area code: (212) 483-2323 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X.. No..... Number of shares outstanding of each of the registrant's classes of common stock at July 31, 2000: Common Stock, $2.50 Par Value 159,039,256 Shares 1 2 PART I -- FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS The following financial statement information as of and for the three and six months ended June 30, 2000, is set forth within this document on the pages indicated:

2 3 PART I ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated In millions, except share data

(a) Includes a provision for credit losses on lending commitments of $37 million, $35 million and $1 million for the three months ended June 30, 2000 and 1999, and March 31, 2000 respectively. See notes to consolidated financial statements. 3 4 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated In millions, except share data

(a) Includes a provision for credit losses on lending commitments of $38 million and $35 million for the six months ended June 30, 2000 and 1999, respectively. See notes to consolidated financial statements. 4 5 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated

See notes to consolidated financial statements. 5 6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated

See notes to consolidated financial statements. 6 7 CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated

See notes to consolidated financial statements. 7 8 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York

Member of the Federal Reserve System and the Federal Deposit Insurance Corporation. See notes to consolidated financial statements. 8 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES J.P. Morgan & Co. Incorporated (J.P. Morgan) is the holding company for a group of subsidiaries that provide a range of financial services. We serve a broad client base that includes corporations, governments, institutions, and individuals. We also enter into transactions for our own account. J.P. Morgan and its subsidiaries use accounting and reporting policies and practices that conform with U.S. generally accepted accounting principles. Basis of presentation Our consolidated financial statements include the accounts of J.P. Morgan and of subsidiaries in which we have more than 50% ownership. All material intercompany accounts and transactions are eliminated during consolidation. For companies in which we have significant influence over operating and financing decisions (generally defined as owning a voting or economic interest of 20% to 50%), we use the equity method of accounting. These investments are included in Other assets, and our share of income or loss is included in Other revenue, with the exception of such investments held in our Equity Investments segment, where our share of income or loss is recorded in Investment securities revenue. Assets that we hold in an agency or fiduciary capacity are not assets of J.P. Morgan. They are therefore not included in our "Consolidated balance sheet." The financial information as of and for the periods ended June 30, 2000 and 1999, and March 31, 2000, is unaudited. All adjustments which, in the opinion of management, are necessary for a fair presentation have been made and were of a normal, recurring nature. These unaudited financial statements should be read in conjunction with the audited financial statements included in J.P. Morgan's Annual report on Form 10-K for the year ended December 31, 1999. The nature of J.P. Morgan's business is such that the results of any interim period are not necessarily indicative of results for a full year. Certain prior year amounts have been reclassified to conform with the current presentation. Accounting developments Accounting for derivative instruments and hedging activities In June 1998 the FASB issued SFAS No. 133, which will require us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings or be recognized in Other comprehensive income until the hedged item affects earnings. If the change in fair value or cash flows of a derivative designated as a hedge is not effectively offset, as defined, by the change in value or cash flows of the item it is hedging, this difference will be immediately recognized in earnings. On June 15, 2000, the FASB issued SFAS No. 138, an amendment to SFAS No. 133, which, coupled with guidance from the Derivatives Implementation Group through the end of June, will allow us over the next few months to assess the impact of these standards on our financial position. Broadly, our current hedging activities that would be most affected by the new standard would be those of our Proprietary Positioning segment, which uses derivatives to hedge its investment portfolio, deposits, and issuance of debt. Pursuant to SFAS No. 137, we are required to adopt SFAS No. 133 effective January 1, 2001. 9 10 2. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying value and fair value of J.P. Morgan's financial instruments as of June 30, 2000 and December 31, 1999 in accordance with SFAS No. 107. Accordingly, certain amounts which are not considered financial instruments, including premises and equipment as well as investments under the equity method of accounting, are excluded from the table. Refer to note 1 of our 1999 Annual report for detailed information on how we estimate the fair value of financial instruments.

10 11 3. SEGMENTS Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in assessing performance. In accordance with SFAS No. 131, we have presented results based on the segments as reviewed separately by the chief operating decision maker, our chairman and chief executive officer, as well as other members of senior management. Each segment is defined by the products and services it provides globally to our clients or the activities it undertakes solely for our own account. J.P. Morgan's segments, or activities, are Investment Banking, Equities, Interest Rate and Currency Markets, Credit Markets, Asset Management Services, Equity Investments, and Proprietary Positioning. During the second quarter of 2000, the firm announced organizational changes, which included the combination of our Credit Markets and Credit Portfolio segments into a single Credit Markets segment. In addition, revenue and expense allocations between Investment Banking and the other segments, primarily Equities and Credit Markets, have been changed to reflect the new organization. Prior period results have been restated. The assessment of segment performance by senior management includes a review for each segment of pretax economic value added, pretax income, revenues, and expenses, as well as related trends among these items. We define economic value added (EVA) as operating income, adjusted to reflect certain segments on a total return basis, less preferred stock dividends and a charge for the cost of equity capital. At the business level, EVA is currently evaluated on a pretax basis, while at the firm level EVA is assessed after the impact of taxes. To arrive at the charge for equity capital for each segment, we multiply its allocated required economic capital by its market-based cost of equity (or hurdle rate), with the exception of our Credit Markets segment whose cost of equity incorporates market pricing for credit risk. The cost of equity for each business activity is separately determined from observable market returns of publicly held investments. To arrive at the charge for equity capital for J.P. Morgan consolidated, we multiply the firm's equity by its market-based cost of equity, which is currently estimated at 10.5%. Our management reporting system and policies were used to determine income (revenues minus expenses) attributable to each segment. Earnings on stockholders' equity were allocated based on management's estimate of the economic capital of each segment. Overhead, which represents costs associated with various support functions that exist for the benefit of the firm as a whole, is allocated to each segment based on that segment's expenses. Transactions between segments are recorded within segment results as if conducted with a third party and are eliminated in consolidation. The accounting policies of our segments are, in all material respects, consistent with those described in note 1 of our 1999 Annual report, except for management reporting policies related to the tax-equivalent adjustment and reporting certain segments on a total return basis. For purposes of comparability, segment results include an adjustment to gross-up tax-exempt revenue to a taxable basis; this adjustment is eliminated in consolidation. In addition, in arriving at pretax EVA an adjustment is made to record certain segments on a total return basis; the Proprietary Positioning segment is the only segment significantly affected by this adjustment (see footnote d to the segment results table below.) Our economic capital allocation model estimates the amount of equity required by each business activity and the firm as a whole. Business economic capital is estimated as if each activity were conducted as a standalone operating entity. This estimate is based, to the extent possible, on observations of the capital structures and risk profiles of public companies or benchmarks. In particular, for our markets and asset management activities, required economic capital is based on the revenue volatility and fixed expenses of public U.S. investment banks and asset management companies, respectively; for Credit Markets, capital is based on a simulation of unexpected credit losses; and, for Equity Investments, capital is equal to the carrying value of the portfolio. Diversification of Morgan's portfolio of businesses is reflected as a reduction to the consolidated level of required equity and is a factor in assessing the appropriate level of capitalization of the firm. The benefit of diversification is not allocated to the segments. The following table presents segment results for the three and six months ended June 30, 2000 and 1999, respectively. 11 12

12 13 (a) The adjustment to gross up Credit Markets' revenue to a taxable basis was $7 million and $7 million for the three months ended June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000 and 1999, the adjustment was $15 million and $13 million, respectively. These amounts are eliminated in consolidation. (b) The adjustment to gross up Proprietary Positioning's tax-exempt revenues to a taxable basis was $115 million and $32 million for the three months ended June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000 and 1999, the adjustment was $190 million and $68 million, respectively. These amounts are eliminated in consolidation. (c) Total return revenues, which combine reported revenues and the change in net unrealized appreciation/depreciation, were $277 million and $5 million for the three months ended June 30, 2000 and 1999, respectively. Total return for the six months ended June 30, 2000 and 1999 was $512 million and $96 million, respectively. (d) We classify the revenues and expenses of Corporate into three broad categories: - Corporate research and development initiatives that involve strategic investments in new client segments or services, but are managed separately from existing business lines. Expenses related to this area totaled $52 million and $15 million for the three months ended June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000 and 1999, these expenses were $100 million and $15 million, respectively. - Other corporate revenues and expenses that are recurring but unallocated to the business segments, including but not limited to: the results of hedging anticipated net foreign currency revenues and expenses across all business segments; corporate-owned life insurance; certain equity earnings in affiliates; and consolidation and management reporting offsets to certain revenues and expenses recorded in the business segments. Excluding consolidation and management reporting offsets, recurring revenues were ($11) million and ($46) million for the three months ended June 30, 2000 and 1999, respectively, and $11 million and ($29) million for the six months ended June 30, 2000 and 1999, respectively. Consolidating and management reporting offsets - which comprises offsets to certain amounts recorded in the segments, including the allocation of earnings on equity out of Corporate into the segments, adjustments to bring segments to a tax-equivalent basis, and other management accounting adjustments - were ($96) million and ($64) million for the three months ended June 30, 2000 and 1999, respectively, and ($186) million and ($132) million for the six months ended June 30, 2000 and 1999, respectively. - Nonrecurring items not allocated to segments - including gains on the sale of businesses, revenues and expenses associated with businesses that have been sold or are in the process of being discontinued, including revenues and expenses related to Euroclear activities, special charges, and other one-time corporate items. Nonrecurring revenues were $4 million and $14 million for the three months ended June 30, 2000 and 1999, respectively, and $7 million for the six months ended June 30, 2000 and 1999. Corporate includes revenues, expenses and pretax income related to Euroclear activities for the three months ended June 30, 2000 and 1999, respectively, as follows: revenues - $81 million and $65 million; expenses - $4 million and $3 million; and pretax income - $77 million and $62 million. For the six months ended June 30, 2000 and 1999, revenues, expenses and pretax income related to Euroclear-related activities were as follows: revenues - $157 million and $130 million; expenses - $13 million and $12 million,; and pretax income - $144 million and $118 million, respectively. (e) Pretax EVA for Corporate includes the cost of equity adjustment related to the following items, among others: assets and investments not allocated to the segments [note (f)1], the diversification effect, and excess/shortfall capital. (f) The following table provides a reconciliation of average common equity to required capital for the three and six months ended June 30, 2000 and 1999, respectively.

(1) Includes capital related to goodwill, Euroclear, retirement plans and other corporate assets. 4. BUSINESS CHANGES AND DEVELOPMENTS Euroclear Effective January 1, 2000, J.P. Morgan and the Boards of Euroclear Clearance System PLC and Euroclear Clearance System Societe Cooperative executed a definitive agreement to create a new, market-owned European bank to operate all aspects of the Euroclear system. This agreement anticipates the formation of a bank, based in Brussels and to be known as Euroclear Bank, to succeed J.P. Morgan as operator and banker for the Euroclear System. J.P. Morgan will remain as operator and banker of Euroclear until the successor bank is established and is ready to take over the operations from J.P. Morgan, a process that we expect to be completed by December 31, 2000. The management and staff of Euroclear, comprising approximately 1,200 J.P. Morgan employees, will transfer to the new entity. Under the existing Operating Agreement, income from clearance and settlement operations is earned by Euroclear Clearance System Societe Cooperative, while J.P. Morgan retains earnings from providing banking services to the System's participants. Under the definitive agreement, J.P. Morgan will continue to receive pretax banking income for three years from January 1, 2000, with a minimum of $195 million and maximum of $295 million per year, whether the income is earned by J.P. Morgan prior to the changeover to the new bank or thereafter by the new bank. After the new bank becomes operational, it will also pay J.P. Morgan for certain assets and know-how transferred to it. Until the new bank becomes operational, J.P. Morgan will continue to record pretax banking income over the period during which it is earned. Upon the changeover to the new bank, J.P. Morgan will recognize as income on that date all expected minimum amounts due over the remaining part of the three-year contract period, plus any gain on assets transferred to the new bank. This amount will be subsequently adjusted based on the determination of the final pretax banking income of Euroclear as specified in the definitive agreement. Prior to the changeover to the successor bank, all banking income due to J.P. Morgan under the agreement will be received as earned. Following the changeover, 50% of all banking income due to J.P. Morgan will be paid as earned and the remaining 50% will be paid in monthly installments over the period starting the next succeeding year and ending December 31, 2005. The successor bank will have the option of prepaying its obligation for the remaining portion of the three-year contract period at the higher of $245 million per year or the average of the actual annual income (subject to the floor and cap noted above) for the portion of the three-year period preceding the prepayment. 13 14 Pre-tax income from Euroclear-related activities reported by J.P. Morgan was $144 million for the first six months of 2000, $216 million for the full year 1999, and $261 million for 1998. 5. INTEREST REVENUE AND EXPENSE The table below presents an analysis of interest revenue and expense obtained from on- and off-balance-sheet financial instruments. Interest revenue and expense associated with derivative financial instruments are included with related balance sheet instruments. These derivative financial instruments are used as hedges or to modify the interest rate characteristics of assets and liabilities and include swaps, forwards, futures, options, and debt securities forwards.

(a) Interest revenue from debt investment securities included taxable revenue of $110 million and $307 million and revenue exempt from U.S. income taxes of $19 million and $41 million for the three and six months ended June 30, 2000, respectively. Interest revenue from debt investment securities included taxable revenue of $380 million and $809 million and revenue exempt from U.S. income taxes of $25 million and $55 million for the three and six months ended June 30, 1999, respectively. Net interest (expense) revenue associated with derivatives used for purposes other-than-trading was approximately ($46) million and ($52) million for the three and six months ended June 30, 2000, compared with approximately $1 million and $27 million for the three and six months ended June 30, 1999. As of June 30, 2000, approximately $10 million of net deferred losses on closed derivative contracts used for purposes other-than-trading were recorded on the "Consolidated balance sheet." These amounts primarily relate to closed hedge contracts included in the amortized cost of the debt investment portfolio as of June 30, 2000. The amount of net deferred gains or losses on closed derivative contracts changes from period to period, primarily due to the amortization of such amounts to Net interest revenue. These changes are also influenced by the execution of our investing strategies, which may result in the sale of the underlying hedged instruments and/or termination of hedge contracts. Net deferred losses / (gains) on closed derivative contracts as of June 30, 2000, are expected to amortize into Net interest revenue as follows: $4 million remainder of 2000; $6 million in 2001; $3 million in 2002; $3 million in 2003; $3 million in 2004; and approximately ($9) million thereafter. 6. TRADING REVENUE The following table presents trading revenue by principal product grouping for the three and six months ended June 30, 2000 and 1999.

14 15 Fixed-income trading revenue includes the results of making markets in both developed and emerging countries in government securities, U.S. government agency securities, corporate debt securities, money market instruments, interest rate and currency swaps, and options and other derivatives. Equities trading revenue includes the results of making markets in global equity securities; equity derivatives such as swaps, options, futures, and forward contracts; and convertible debt securities. Foreign exchange trading revenue includes the results of making markets in spot, forward, and option contracts, and in short-term interest rate products in order to help clients manage their foreign currency exposure. Foreign exchange also includes the results from commodity transactions in spot, forward, and option contracts, and in swaps. 7. ADVISORY AND UNDERWRITING FEES

Advisory fees include revenues earned from advising clients on such corporate strategies as mergers and acquisitions, privatizations, and changes in capital structures. Underwriting revenue includes fees from both debt and equity underwriting. Syndication fees include revenue earned from the arrangement and syndication of credit facilities. 8. INVESTMENT SECURITIES REVENUE

9. OTHER REVENUE AND OTHER EXPENSES Other revenue

(a) Includes gains and losses on hedges of anticipated foreign currency revenues and expenses. These gains and losses are partially offset by the impact of exchange rate movements on reported revenues and expenses over the year. Other expenses

15 16 10. INVESTMENT IN AMERICAN CENTURY COMPANIES, INC. In January 1998, we completed the purchase of a 45% economic interest in American Century Companies, Inc. (American Century) for $965 million. American Century is a no-load U.S. mutual fund company selling directly to individuals. The investment is accounted for under the equity method of accounting and recorded in Other assets. The excess of our investment over our share of equity (i.e., goodwill) in American Century was approximately $795 million at the time of purchase. This amount is being amortized on a straight-line basis over a period of 25 years resulting in annual amortization expense of approximately $32 million. As of June 30, 2000 and 1999, goodwill totaled $715 million and $743 million, respectively. Our share of equity income in American Century and the amortization of goodwill related to this investment is recorded in Other revenue. The results of this investment are included in the Asset Management Services segment. 11. INVESTMENT SECURITIES DEBT INVESTMENT SECURITIES The following table presents the gross unrealized gains and losses and a comparison of the cost, along with the fair and carrying value of our available-for-sale debt investment securities as of June 30, 2000. The gross unrealized gains or losses on each debt investment security include the effects of any related hedge. See note 13 for additional detail of gross unrealized gains and losses associated with open derivative contracts used to hedge debt investment securities.

EQUITY INVESTMENT SECURITIES Equity investment securities are generally owned by J.P. Morgan Capital Corporation, a wholly owned nonbank subsidiary of J.P. Morgan. Many of these equity investment securities are subject to legal, regulatory, and contractual restrictions that limit our ability to dispose of them freely. The following table shows gross unrealized gains and losses, a comparison of the cost, fair value and carrying value of marketable, nonmarketable, and SBIC securities portfolios of J.P. Morgan consolidated. A substantial portion of these are included in our Equity Investments segment.

(a) See note 1 of our 1999 Annual Report. (b) Primarily relates to investments in the telecommunications and financial services industries. (c) Primarily relates to investments in the financial services and basic industries. (d) Primarily relates to investments in the telecommunications industry. 16 17 12. TRADING ACCOUNT ASSETS AND LIABILITIES The following table presents the fair and carrying value of trading account assets and trading account liabilities as of June 30, 2000. It also includes the average balances for the three and six months ended June 30, 2000.

Trade date receivables/payables Amounts receivable and payable for securities that have not reached their contractual settlement dates in our trading and investing activities are recorded net in the "Consolidated balance sheet." Amounts receivable for securities sold of $25.8 billion were netted against amounts payable for securities purchased of $24.7 billion. This produced a net trade date receivable of $1.1 billion, recorded in Accrued interest and accounts receivable as of June 30, 2000. 13. DERIVATIVES In general, derivatives are contracts or agreements whose values are derived from changes in interest rates, foreign exchange rates, credit spreads, prices of securities, or financial or commodity indices. The timing of cash receipts and payments for derivatives is generally determined by contractual agreement. Derivatives are either standardized contracts executed on an exchange or privately negotiated contracts. Futures and option contracts are examples of standard exchange-traded derivatives. Forward, swap, and option contracts are examples of privately negotiated derivatives. Privately negotiated derivatives are generally not traded like securities. In the normal course of business, however, they may be terminated or assigned to another counterparty if the original holder agrees. We use derivatives for trading or other-than-trading purposes. Other-than-trading purposes are primarily related to our investing activities. Interest rate swaps are contractual agreements to exchange periodic interest payments at specified intervals. The notional amounts of interest rate swaps are not exchanged; they are used solely to calculate the periodic interest payments. Currency swaps generally involve exchanging principal (the notional amount) and periodic interest payments in one currency for principal and periodic interest payments in another currency. Credit derivatives include credit default swaps and related swap and option contracts. Credit default swaps are contractual agreements that provide insurance against a credit event associated with one or more referenced credits. The nature of the credit event is established by the protection buyer and seller at the inception of the transaction. Events include bankruptcy, insolvency, and failure to meet payment obligations when due. The protection buyer pays a periodic fee in return for a contingent payment by the protection seller following a credit event. The contingent payment is typically the loss - the difference between the notional and the recovery amount incurred by the creditor of the reference credit as a result of the event. Foreign exchange contracts involve an agreement to exchange one country's currency for another at an agreed-upon price and settlement date. Most of the contracts reported in the following table are forward contracts. 17 18 Interest rate futures are standardized exchange-traded agreements to receive or deliver a specific financial instrument at a specific future date and price. Forward rate agreements provide for the payment or receipt of the difference between a specified interest rate and a reference rate at a future settlement date. Debt security forwards include to-be-announced and when-issued securities contracts. Equity and commodity contracts include swaps and futures in the equity and commodity markets and commodity forward agreements. Equity swaps are contractual agreements to receive the appreciation or depreciation in value based on a specific strike price on an equity instrument in return for paying another rate, which is usually based on equity index movements or interest rates. Commodity swaps are contractual commitments to exchange the fixed price of a commodity for a floating price. Equity and commodity futures are exchange-traded agreements to receive or deliver a financial instrument or commodity at a specific future date and price. Equity and commodity forwards are privately negotiated agreements to purchase or sell a specific amount of a financial instrument or commodity at an agreed-upon price and settlement date. An option provides the option purchaser, for a fee, the right - but not the obligation - to buy or sell a security at a fixed price on or before a specified date. The option writer is obligated to buy or sell the security if the purchaser chooses to exercise the option. These options include contracts in the interest rate, foreign exchange, equity, and commodity markets. Interest rate options include caps and floors. The following table presents notional amounts for trading and other-than-trading derivatives, based on management's intent and ongoing usage. A summary of the on-balance-sheet credit exposure, which is represented by the net positive fair value associated with trading derivatives and recorded in Trading account assets, is also included in the following table. Our on-balance-sheet credit exposure of $39.1 billion reflects an $88.6 billion benefit due to the use of legally enforced master netting agreements in effect as of June 30, 2000.

(a) Derivatives used as hedges of other-than-trading positions may be transacted with third parties through independently managed J.P. Morgan derivative dealers that function as intermediaries for credit and administrative purposes. In such cases, the terms of the third-party transaction - notional, duration, currency, etc. - are matched with the terms of the internal trade to ensure the hedged risk has been offset with a third party. If such terms are not matched or a third-party trade is not transacted, the intercompany trade is eliminated in consolidation. (b) The notional amounts of derivative contracts used for purposes other-than-trading, conducted in the foreign exchange markets, primarily forward contracts, amounted to $26.0 billion at June 30, 2000, and were primarily denominated in the following currencies: Euro $8.0 billion, Japanese yen $4.1 billion, Canadian dollar $2.7 billion, and Swiss franc $2.3 billion. (c) At June 30, 2000, purchased options used for trading purposes included $1,020.8 billion of interest rate options, $118.1 billion of foreign exchange options, and $203.0 billion of commodity and equity options. Options used for purposes other-than-trading are primarily interest rate options. Purchased options executed on an exchange amounted to $203.7 billion and those negotiated over-the-counter amounted to $1,141.0 billion at June 30, 2000. 18 19 (d) At June 30, 2000, written options included $1,127.6 billion of interest rate options, $142.6 billion of foreign exchange options, and $191.0 billion of commodity and equity options. Written option contracts executed on an exchange amounted to $203.1 billion and those negotiated over-the-counter amounted to $1,258.1 billion at June 30, 2000. Derivatives are used to hedge or modify the interest rate characteristics of debt investment securities, loans, deposits, other liabilities for borrowed money, long-term debt, and other financial assets and liabilities. Net unrealized losses associated with such derivatives contracts amounted to $188 million as of June 30, 2000. Gross unrealized gains and gross unrealized losses associated with open derivatives contracts used for these purposes as of June 30, 2000, are presented in the following table. Such amounts primarily relate to interest rate and currency swaps used to hedge or modify the interest rate characteristics of long-term debt; debt investment securities, principally mortgage-backed securities; deposits; and other financial instruments.

14. LOANS Included in Loans are loans held for sale of approximately $3.1 billion at June 30, 2000. These loans are recorded on the balance sheet at lower of cost or fair value and are primarily to borrowers in the U.S. in various industries. 15. OTHER CREDIT-RELATED PRODUCTS Lending commitments include commitments to extend credit, standby letters of credit and guarantees. The contractual amounts of these instruments represent the amount at risk should the contract be fully drawn upon, the client default, and the value of the collateral become worthless. The total contractual amount of credit-related financial instruments does not represent the future liquidity requirements, since we expect a significant amount of commitments to expire or mature without being drawn. The credit risk associated with these instruments varies according to each client's creditworthiness and the value of any collateral held. Commitments to extend credit generally require clients to meet certain credit-related terms and conditions before drawdown. Market risk for commitments to extend credit, standby letters of credit, and guarantees, while not significant, may arise as availability of and access to credit markets change. The following table summarizes the contractual amount of credit-related instruments as of June 30.

We also have securities lending indemnifications associated with our Euroclear-related activities of $10.2 billion as of June 30, 2000. As of June 30, 2000, J.P. Morgan held cash and other collateral in full support of these securities lending indemnifications. PURCHASE OF CREDIT PROTECTION Since December 1997, we have entered into three Synthetic Collateralized Loan Obligations that have allowed us to reduce the credit risk on a portfolio of counterparties totaling approximately $20 billion in notional amount. This reduction was accomplished using credit default swaps, which transferred the credit risk into the capital markets. The structures provide protection on all exposures to a referenced counterparty. We have retained the first risk of loss equity tranche in these transactions totaling $203 million. As a result of these structures, we were able to reduce economic capital by approximately $477 million as of June 30, 2000. These structures have also allowed us to reduce our risk-adjusted assets by approximately $2.6 billion as of June 30, 2000, thereby increasing our Tier I and Total risk-based capital ratios by 15 basis points (0.15%) and 22 basis points (0.22%), respectively. In particular, these transactions have allowed us to shift the credit risk associated with $20 billion of diversified exposure on our balance sheet - as described in the following table - to what we believe is equivalent to AAA+ quality. 19 20

The notional exposures in the above table are diversified by counterparty in the following industries: banks - $2,717 million; nonbank financial institutions - $2,915 million; governments - $851 million; commercial and industrial - $5,196 million; cyclical $4,586 million; and non-cyclical - $3,907 million. North American counterparties are approximately 80% of the portfolio; the remaining 20% of the portfolio are European counterparties. The first table below summarizes the regional exposure, by industry category, after the benefit of master netting agreements and collateral (derivatives only), but before the benefit of purchased credit protection (i.e., credit derivatives, including synthetic CLOs). The second table summarizes regional exposure after the benefit of master netting agreements, collateral (derivatives only) and purchased credit protection. The amounts below exclude exposures related to the following: Private Banking and Euroclear-related activities, exchange-traded derivatives, and commercial mortgage-backed securities included in our Credit Markets segment. BEFORE BENEFIT OF PURCHASED CREDIT PROTECTION:

AFTER BENEFIT OF PURCHASED CREDIT PROTECTION:

(a) The effect of the synthetic CLOs was a shift in exposure from different regions and industries to a single, North American, non-bank financial institutions counterparty. 20 21 16. IMPAIRED LOANS Total impaired loans, organized by the location of the counterparty - net of charge-offs - at June 30, 2000 are presented in the following table.

Impaired loans for which no SFAS No. 114 reserve was deemed necessary were $24 million as of June 30, 2000. As of June 30, 2000, approximately 40% of impaired loans were measured using the present value of future cash flows, 40% of impaired loans were measured for impairment using observable market prices, and the remainder using the fair value of collateral. The following table presents an analysis of the changes in impaired loans.

An analysis of the effect of impaired loans - net of charge-offs - on interest revenue for the three and six months ended June 30, 2000 is presented in the following table.

For the three and six months ended June 30, 2000, the average recorded investments in impaired loans was $141 million and $113 million, respectively. As of June 30, 2000, loans of $27 million were over 90 days past due (principal or interest) and still accruing interest, but not considered impaired. Lending commitments to counterparties considered impaired totaled $61 million at June 30, 2000. 21 22 17. ALLOWANCES FOR CREDIT LOSSES The following table summarizes the activity of our allowance for loan losses.

The following table displays our allowance for loan losses by component as of June 30, 2000.

The following table summarizes the activity of our allowance for credit losses on lending commitments.

The following table displays our allowance for credit losses on lending commitments by component as of June 30, 2000.

22 23 18. INCOME TAXES The effective tax rate for the three and six months ended June 30, 2000 was 34% and 35%, respectively. The effective tax rate for the three and six months ended June 30, 1999 was 35%. The income tax expense / (benefit) related to net realized gains / (losses) and write-downs for other-than-temporary impairments in value on debt and equity investment securities, excluding securities in SBICs, was approximately $24 million and $40 million for the three and six months ended June 30, 2000, compared to ($17) million and ($39) million for the three and six months ended June 30, 1999. The applicable tax rate used to compute the income tax expense / (benefit) related to net gains / (losses) on debt and equity investment securities for the three and six months ended June 30, 2000 was approximately 34%. 19. CAPITAL REQUIREMENTS J.P. Morgan, its subsidiaries, and certain foreign branches of its bank subsidiary Morgan Guaranty Trust Company of New York are subject to regulatory capital requirements of U.S. and foreign regulators. Our primary federal banking regulator, the Board of Governors of the Federal Reserve System (Federal Reserve Board), establishes minimum capital requirements for J.P. Morgan, the consolidated bank holding company, and some of our subsidiaries, including Morgan Guaranty. These requirements ensure that banks and bank holding companies meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under generally accepted accounting principles. Failure to meet these requirements can result in actions by regulators that could have a direct material impact on our financial statements. The capital of J.P. Morgan and our principal subsidiaries, Morgan Guaranty and J.P. Morgan Securities Inc. (JPMSI), exceeded the minimum requirements set by each regulator as of June 30, 2000. J.P. Morgan's risk-based capital ratios are calculated in accordance with the Federal Reserve Board's market risk capital guidelines. These guidelines require our risk-based capital ratios to take into account general market risk and specific issuer risk of our debt and equity trading portfolios, as well as general market risk associated with all trading and nontrading foreign exchange and commodity positions. The guidelines, however, continue to exclude the effect of SFAS No. 115. The calculation of risk-based capital ratios for J.P. Morgan, the bank holding company, includes the capital and assets of JPMSI, our U.S. broker-dealer. Capital ratios and amounts The following tables show the risk-based capital and leverage ratios and amounts for J.P. Morgan and Morgan Guaranty as of June 30, 2000.

(a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum tier 1 capital of $5.6 billion and $5.0 billion, respectively. For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum total risk-based capital of $11.2 billion and $9.9 billion, respectively. (b) Pursuant to Federal Reserve Board guidelines, the minimum tier 1 capital, total risk-based capital, and leverage ratios are 4%, 8%, and 3%, respectively, for bank holding companies and banks. Capital categories Bank regulators use five capital category definitions for regulatory supervision purposes. The categories range from "well capitalized" to "critically undercapitalized." A bank is considered well capitalized if it has minimum tier 1 capital, total capital, and leverage ratios of 6%, 10%, and 5%, respectively, under standards provided by the regulatory framework for prompt corrective action and the Federal Reserve Board. Bank holding companies also have guidelines that determine the capital levels at which they shall be considered well capitalized. According to these guidelines, a bank holding company is considered well capitalized if it has minimum tier 1 capital, total capital, and leverage ratios of 6%, 10%, and 3%, respectively. 23 24 At June 30, 2000, the ratios of J.P. Morgan and Morgan Guaranty exceeded the minimum standards required for a well capitalized bank holding company and bank, respectively. Management is aware of no conditions or events that have occurred since June 30, 2000, that would change J.P. Morgan's and Morgan Guaranty's well capitalized status. 20. EARNINGS PER SHARE Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding, which includes contingently issuable shares for which all necessary conditions for issuance have been satisfied. Diluted EPS includes the determinants of basic EPS and, in addition, takes into account dilutive potential common shares that were outstanding during the period. The following table presents the computation of basic and diluted EPS for the three and six months ended June 30, 2000 and 1999.

Earnings per share amounts are based on actual numbers before rounding. (a) The dilutive effect of stock options was computed using the treasury stock method. This method computes the number of incremental shares by assuming the exercise of outstanding stock options, reduced by the number of shares assumed to be repurchased from the proceeds generated by the option exercise, using the average market price of our common stock for the period. The related tax benefits are also considered. (b) The following options to purchase shares of our common stock were outstanding at June 30, 2000, but were not included in the computation of diluted EPS: For the three and six months ended June 30, 2000: 4,599,911 shares at $130.94 per share expiring July 15, 2008; 100,000 shares at $128.21 per share expiring January 20, 2009; 5,827,000 shares at $135.72 per share expiring July 19, 2009; 50,000 shares at $129.19 per share expiring December 12, 2009; 75,000 shares at $134.88 per share expiring December 12, 2009; 100,000 shares at $145.28 per share expiring January 18, 2010; and 22,800 shares at $131.91 per share expiring January 18, 2010. The inclusion of such options using the treasury stock method would have an antidilutive effect on the diluted EPS calculation because the options' exercise price was greater than the average market price of our common shares for the respective period. (c) Weighted-average incremental shares for other stock awards include restricted stock and stock bonus awards. The related tax benefits are also considered. 21. COMMITMENTS AND CONTINGENT LIABILITIES Excluding mortgaged properties, assets on our "Consolidated balance sheet" of approximately $115.8 billion at June 30, 2000, were pledged as collateral for borrowings, to qualify for fiduciary powers, to secure public monies as required by law, and for other purposes. At June 30, 2000 we had commitments to enter into future resale and repurchase agreements totaling $4.1 billion and $1.4 billion, respectively. 24 25 22. INTERNATIONAL OPERATIONS For financial reporting purposes, we divide our operations into domestic and international components. As these operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expense between domestic and international components. In 1999, we changed our estimates and assumptions to be consistent with the allocations used for our business segments as reported in note 3. Prior period amounts have been restated to reflect this allocation methodology. Revenues and expenses - Client-focused revenues are allocated between the regions responsible for managing the client relationship and the regions responsible for product execution and risk management - Revenues from proprietary investing and trading activities and equity investments are allocated based on the location of the risk taker - Expenses are allocated based on the estimated cost associated with servicing each region's client base. Corporate revenues and expenses are allocated primarily to the region in which they are recorded. Certain centrally managed expenses are allocated based on the underlying activity. The results for the three and six months ended June 30, 2000 and 1999 were distributed among domestic and international operations, as presented in the following table.

(a) Includes net interest revenue and noninterest revenues. (b) Includes the Middle East and Africa. (c) Includes Mexico, Central America, and South America. (d) Includes the United States, Canada, and the Caribbean. Total revenues and expenses relate substantially to United States operations. (e) For the three and six months ended June 30, 2000, revenues include a net $33 million provision for credit losses, which was recorded in Europe. (f) For the three and six months ended June 30, 1999, revenues include a net $70 million negative provision for credit losses, which was recorded as follows: ($11) million in Europe, $38 million in Asia Pacific, $29 million in Latin America, and $14 million in Domestic operations. 25 26 PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS J.P. Morgan reported second quarter net income of $542 million, up from $504 million in the second quarter of 1999. Earnings per share were $2.90, an increase of 15% from $2.52 a year ago. Return on common equity was 20% in the quarter compared with 18% in the second quarter of 1999. Net income for the first half of 2000 was $1.170 billion compared with $1.104 billion in the same period a year ago. Earnings per share were $6.27 compared with $5.53, an increase of 13%. Return on common equity increased to 22% from 20% in the first half 1999. OTHER HIGHLIGHTS FOR THE SECOND QUARTER: - Economic value added (EVA) was $258 million, an increase of 32% from a year ago - Revenues of $2.479 billion were up 13% in a challenging market environment - Momentum continued in Asset Management Services, Equities, and Investment Banking and our proprietary activities produced excellent results, offsetting the impact of depressed fixed income and currency markets - Expenses rose 17% as a result of performance-related compensation and investment in Equities, Investment Banking, and e-finance initiatives - We repurchased $480 million of common stock (3.8 million shares) during the quarter SEGMENT RESULTS Asset Management Services revenues in the second quarter increased 19% to $409 million from a year ago. Revenues from private banking clients grew significantly as a result of new client acquisition and higher revenues from existing clients. Revenues from institutional investment management and our equity investment in American Century also rose. The segment's pre-tax margin expanded to 26% in the first half of 2000 from 19% in the prior-year period. Assets under management grew 13% from a year ago to approximately $372 billion at June 30, 2000. This excludes $113 billion of assets under management at American Century, in which we have a 45% interest. Investment Banking revenues were $426 million, up 4% from last year's strong quarter. Record advisory revenues were driven by strong activity with clients in Europe and in the technology sector. Debt underwriting revenues were lower owing to reduced issuance in the markets. For the first half of 2000, Thompson Financial Securities Data Corporation ranked J.P. Morgan fifth in completed worldwide mergers and acquisitions, with a market share of 20%, up from sixth and 15% in the first half of 1999. In Europe, our share increased from 25% to 36%. We ranked sixth among U.S. lead equity underwriters with a market share of 5.8%, compared with eighth and a market share of 4.4% for the first half of 1999. Equities revenues increased 31% to $504 million over the prior year on strength in both derivatives and cash securities. Revenues from equity derivatives were well diversified across regions and increased as a result of significant trading gains. Revenues from cash equities rose materially on higher volumes and market share gains, particularly in Europe. Interest Rate and Currency Markets revenues declined 31% to $384 million from the prior year quarter owing to lower trading results and client activity across all products. Issuers and investors were cautious throughout much of the quarter because of uncertainty about interest rate policy. Credit Markets revenues were $348 million, 30% below the prior-year quarter. The decline reflected lower underwriting results in both high-grade and high-yield debt, as well as lower trading results, particularly in Latin America. Clients' uncertainty about rising interest rates and equity market volatility slowed issuance and adversely affected our results. Despite these market conditions, the overall quality of our credit portfolio remained high and its risk stable. 26 27 Equity Investments revenues were $145 million in the second quarter, resulting primarily from gains realized on investments in the financial services sector. The accumulated market appreciation of the portfolio, excluding sales, declined by $65 million in the period. We invested $107 million during the quarter, approximately one-half of which was committed to the financial services and telecommunications industries. Equity Investments revenues were $6 million in the second quarter of 1999. Proprietary Positioning revenues were $283 million in the quarter, up from $23 million a year ago. Total return - reported revenues and the change in net unrealized value - was $277 million compared with $5 million a year ago. We achieved excellent results in several market-neutral trading strategies. Risk levels were unchanged from the first quarter and partially offset risks in other business segments. LabMorgan continued to expand its portfolio of e-finance ventures. Since its inception in March, LabMorgan has received over 1,000 business ideas from outside and within the firm. Of these, 48 are in various stages of validation and acceleration; in addition we continued development of previously launched ventures. Significant initiatives announced during the quarter included: - SynDirect Wireless, the first wireless communication platform for bond issuers and investors; - FXAll, a multi-dealer, on-line foreign exchange service and Volbroker.com, the first real time global electronic trading service for currency options; - several fixed income initiatives in Europe and Asia: Coredeal, a European inter-dealer platform for credit products; Bondclick, a European government bond multi-dealer brokerage; and Asia Bond Portal, a multi-dealer platform in Asia. FINANCIAL REVIEW REVENUES Revenues were $2.479 billion in the second quarter of 2000, up 13% from the 1999 period. Before loan loss provisions, net interest revenue in the second quarter of 2000 was $379 million compared to $425 million in the year ago quarter. This decrease primarily reflected lower net interest revenue from our interest rate activities and a decrease in higher yielding positions in local markets, particularly Latin America. Excluding loan loss provisions, year-to-date net interest revenue was $832 million for the second quarter of 2000 compared to $814 million in the year ago period. Loan loss provisions were negative $4 million and $105 million for second quarters of 2000 and 1999, respectively. The June 1999 negative provision of $105 million was taken in light of better credit market conditions, especially in emerging markets and reduced credit risk exposures. Total trading revenue was $906 million in the second quarter of 2000 compared with $803 million a year ago. The increase reflected strong results in equity derivatives and trading for our own account. These results were partially offset by lower revenues from interest rate and foreign exchange markets and in our credit-related activities particularly in Latin America. Trading revenue for the first half of 2000 was $1.856 billion versus $1.937 billion in the corresponding period in 1999. Advisory and underwriting fees were $468 million in the second quarter of 2000, up slightly from $457 million in the second quarter of 1999. Advisory fees grew 36% to $249 million driven by strong activity with clients in Europe and in the technology sector. For the first six months of 2000, Thompson Financial Securities Data Company, Inc. ranked J.P. Morgan fifth in completed mergers and acquisitions worldwide, with a market share of 20%. In Europe our share increased from 25% to 36%. Underwriting revenue and syndication fees declined 20% to $219 million driven by lower debt underwriting due to reduced issuance in the markets. For the six months ended June 30, 2000, advisory and underwriting fees were $1.011 billion compared to $847 million in the year ago period. 27 28 Investment management fees increased 17% to $303 million in the 2000 second quarter from a year ago, reflecting higher revenues from private banking clients as a result of new client acquisition and higher revenues from existing clients. Revenues from institutional management clients also contributed to the increase. Assets under management were $372 billion at June 30, 2000, compared with $329 billion a year ago. Investment management fees were $579 million for the first half of 2000, an increase of 14% from the prior year. Fees and commissions were $232 million, up 21% from $191 million in the year ago quarter driven by higher equity brokerage commissions on higher volumes and market share gains, particularly in Europe. Investment securities revenue was $128 million in the second quarter of 2000. This reflects gains realized on investments in the financial services sector, partially offset by losses on the sale of debt investment securities. The current quarter results compares with negative investment securities revenue of $29 million in the second quarter of 1999, primarily reflecting net losses of $46 million on the sale of debt investment securities. Investment securities revenue was $285 million in the first half of 2000, compared with negative revenues of $70 million in 1999. Other revenue was $59 million in the first quarter of 2000, compared with a loss of $21 million a year earlier. For the first half of 2000, other revenue was $232 million versus $138 million in 1999. OPERATING EXPENSES Operating expenses were $1.660 billion compared with $1.417 billion in the prior-year quarter, up 17%. The increase was mostly due to higher performance-driven compensation; expenses associated with expanding our Equities and Investment Banking businesses, where we hired approximately 100 experienced bankers, research analysts, and other professionals; and ongoing investment in corporate e-finance initiatives. Business productivity gains continued to help fund our investments. The firm's efficiency ratio was 67% in the second quarter of 2000; compensation expense, which represents two-thirds of our total expenses, remained stable at 44% of revenues. Operating expenses for the first half of 2000 were $3.515 billion compared to $2.984 billion for the first half of last year. At June 30, 2000, staff totaled 15,988 employees, compared with 15,622 at March 31, 2000 and 14,902 employees at June 30, 1999. Income-tax expense in the second quarter totaled $277 million, based on an effective tax rate of 34%, compared with $270 million in the year-earlier quarter. The increase in expense reflects higher pretax income. 28 29 CAPITAL AND RISK MANAGEMENT We seek to increase shareholder value through a firmwide discipline that links capital allocation, risk management, performance measurement, investment decisions, and incentive compensation into one integrated framework. This framework buttresses our day-to-day operations at all levels of the firm and employs consistent economic value added (EVA) and capital allocation methodologies. EVA integrates traditional operating earnings with capital and risk management by subtracting from income a charge for the equity used in support of our business. Please refer to our 1999 Annual report filed on Form 10-K for a detailed discussion of capital and risk management. CAPITAL Our economic capital allocation model estimates the amount of equity required by each business activity and the firm as a whole. Business economic capital is estimated as if each activity were conducted as a standalone entity. This estimate is based, to the extent possible, on observations of the capital structures and risk profiles of public companies or benchmarks. Diversification of Morgan's portfolio of businesses lowers the consolidated level of required equity and is a factor in assessing the appropriate level of capitalization of the firm. The benefit of diversification is not allocated to the businesses. The related cost of equity for each business activity is based on observable market returns of publicly held investments, with the exception of our Credit Markets segment, whose cost of equity incorporates market pricing for credit risk. To arrive at the charge for equity capital for each segment, we multiply its allocated required economic capital by its market-based cost of equity (or hurdle rate). To arrive at the consolidated charge for equity capital for J.P. Morgan, we multiply the firm's common equity by its market-based cost of equity, which currently is estimated at 10.5%. Required versus available capital J.P. Morgan's total required economic capital is compared with available capital to evaluate overall capital utilization. It is our policy to maintain an appropriate excess of capital to provide for growth and as additional protection against losses. The following table compares average required versus available capital for the periods ended June 30, 2000 and December 31, 1999, respectively.

It is our policy to maintain an appropriate excess of capital to provide for growth and as additional protection against losses. Excess available capital averaged $3.9 billion in the six-month period compared with $2.6 billion for the 1999 full year, primarily reflecting lower economic capital requirements in our Proprietary Positioning and Credit Markets segments as we continued to reduce risk. This decrease was partially offset by higher average economic capital requirements of our Equity Investments segment reflecting net new investments and appreciation. 29 30 RISK MANAGEMENT Risk is inherent in our business, and sound risk management is key to our success. The major types of risks to which we are exposed are market, credit, liquidity, and operating risk. We have developed and implemented comprehensive policies and procedures to identify, mitigate, and monitor risk across the firm. DAILY EARNINGS AT RISK Our tool for the systematic measuring and monitoring of market and credit risk is the daily earnings at risk (DEaR) calculation. DEaR for each business is a key input to our EVA calculation and capital allocation. DEaR is a statistical measure used to estimate the firm's exposure in non-stressed markets to market risk and credit risk in our trading derivatives portfolio. DEaR is an upperband estimate of the potential loss in the value of our portfolios, at a 95% confidence level, over a one-day time horizon. The firm's DEaR measure is based on a model that uses historical simulations. It makes assumptions about market behavior and takes into account numerous variables that may cause a change in the value of our portfolios, including interest rates, foreign exchange rates, equity and commodity prices and their volatilities, and correlations among these variables. STRESS TESTING We regularly supplement our DEaR calculations with stress testing at both the firmwide and business-specific levels. Stress testing measures the impact of abnormal movements on the firm's portfolios. Some of the stress test assumptions are very specific to businesses' specialized risks, while others are conducted in conformity with firmwide stress scenarios that are distributed by our Corporate Risk Management group. This provides senior management with an analysis of the potential impact on the firm's revenue. VULNERABILITY IDENTIFICATION In 1999 we introduced vulnerability identification (VID) as a discipline to highlight material risks which may or may not be captured by measures such as DEaR. The discipline systemically captures potential "worst-case" losses identified by traders and other risk takers. Once identified, these losses - or VIDs - may be quantified through specific stress tests and assist senior management in focusing on specific risks. MARKET RISK PROFILES

(a) This includes, before diversification benefits, derivatives credit risk DEaR of $19 million at June 30, 2000 ($12 million at December 31, 1999). (b) The averages for the twelve month periods ended June 30, 2000 and December 31, 1999 do not include derivative credit risk DEaR because we only began to incorporate derivative credit risk into our DEaR measurement beginning October 1, 1999. 30 31 CREDIT EXPOSURES The following section provides detailed information regarding the firm's significant credit exposures.

(a) Carried at fair value on the balance sheet with changes in fair value recorded in the income statement. Includes credit valuation adjustment as of June 30, 2000 and December 31, 1999 of $605 million and $670 million, respectively. (b) Amount net of allowances for credit losses of $446 million as of June 30, 2000 and $406 million as of December 31, 1999. Carrying value excludes the notional value of lending commitments, which are off-balance-sheet instruments. (c) Substantially all credit risk related to derivatives, loans, and lending commitment exposures are managed by the Credit Markets segment. Economic capital includes the impact of purchased credit protection and other credit risk hedges.

(a) Includes the benefit of master netting agreements of $88.6 billion and $94.0 billion as of June 30, 2000 and December 31, 1999, respectively. (b) Collateral held consisting of highly rated liquid securities (U.S. government securities) and cash was as follows: derivatives - $5.6 billion (June 2000) and $6 billion (December 1999); loans - $7.5 billion (June 2000) and $7.9 billion (December 1999); and lending commitments - $1.1 billion (June 2000) and $0.8 billion (December 1999). (c) Before allowance for credit losses.

(a) Reflects economic capital after the benefits of master netting agreements, collateral, single name credit default swaps, and synthetic CLOs. (b) Economic capital for the senior and junior (first loss) positions in synthetic CLOs equaled $73 million and $203 million, respectively. The senior position in these transactions is reflected in the AAA, AA category. The junior position is reflected in the CCC and below category. (c) Synthetic CLOs reduced economic capital by approximately $477 million. (d) Our economic capital model incorporates as an offsetting exposure credit protection we have purchased for certain counterparties where there may be no underlying exposure. Estimated percentages of credit exposures by counterparty credit rating (as set forth in the table above) are based on internal credit ratings. Ratings of AAA/ AA, A and BBB represent investment-grade ratings and are analogous to those of public rating agencies in the United States. Credit exposures reflect the benefits of master netting agreements, collateral, and purchased credit protection (i.e. credit derivatives). 31 32 TRADITIONAL CREDIT PRODUCTS The majority of credit risk from traditional credit products relates to exposures managed by our Credit Markets segment. Exposures not managed by this segment, primarily associated with our private banking activities, are largely secured. The maximum credit risk for our traditional credit products is measured by their contractual amounts, net of collateral. For example, the risk of a loan is the amount of money lent to the client. For lending commitments, the risk is the amount that would be owed should the contract be drawn upon, the client default, and the collateral becomes worthless. A significant number of our commitments expire, however, without being drawn upon. Moreover, commitments usually include financial covenants and/or material adverse change clauses that, if triggered, enable us to withdraw from the obligation to lend. IMPAIRED LOANS The following table presents impaired loans, net of charge-offs, as of June 30, 2000, March 31, 2000 and December 31, 1999.

Impaired loans were $140 million as of June 30, 2000, unchanged from March 31, 2000. ALLOWANCES FOR CREDIT LOSSES We maintain allowances for credit losses to absorb losses inherent in our traditional extensions of credit that we believe are probable and can be reasonably estimated. We determine the appropriateness of our allowances on a quarterly basis. This review is performed separately for each allowance classification - loans and lending commitments. The actual amount of credit losses or charge-offs, when they occur, may vary from estimated losses at each period end, due to changing economic conditions or exposure management decisions. Our process includes procedures to limit differences between estimated and actual credit losses, which include detailed quarterly assessments by senior management and model inputs that reflect current market indicators of credit quality. The following table summarizes the activity of our allowances for credit losses for the three and six months ended June 30, 2000 and 1999, respectively.

32 33 The following table summarizes the period-end information of our allowances for credit losses as of June 30, 2000, March 31, 2000 and December 31, 1999, respectively.

The specific counterparty component of the allowance for loan losses was $75 million and $46 million at June 30, 2000 and March 31, 2000, respectively. The increase in the specific counterparty component for loans from the prior quarter primarily reflects an increased allocation to an industrial counterparty in Europe. The specific counterparty component of the allowance for credit losses on lending commitments was $23 million, unchanged from March 31, 2000. The expected loss component of the allowance for loan losses and allowance for credit losses on lending commitments was $348 million and $347 million as of June 30, 2000 and March 31, 2000, respectively. The expected loss component of our allowance for credit losses on lending commitments increased $37 million as of June 30, 2000, offset by a $36 million decrease in the expected loss component of our allowance for loan losses. This reflects a refinement in the expected loss model to more accurately determine the expected loss amount between loans and lending commitments. 33 34 CAPITAL STOCKHOLDERS' EQUITY At June 30, 2000, stockholders' equity of $11.8 billion included $53 million of net unrealized appreciation on investment securities, net of the related tax liability of $22 million. This compares with $119 million of net unrealized appreciation at March 31, 2000, net of the related tax liability of $58 million. The net unrealized depreciation on debt investment securities was $55 million at June 30, 2000 compared with a net unrealized depreciation of $72 million at March 31, 2000. The decrease primarily related to the realization of losses on sales of investment securities during the quarter. The net unrealized appreciation on marketable equity investment securities was $114 million at June 30, 2000, and $200 million at March 31, 2000. The net unrealized appreciation on investment securities held by unconsolidated affiliates was $16 million and $49 million, respectively. Included in the table below are selected ratios based upon stockholders' equity.

The firm purchased approximately $480 million of its common stock (3.8 million shares) in the second quarter under its October 1999 authorization to repurchase up to $3 billion of common stock. The purchases for the first half of 2000 totaled $1.1 billion (9.0 million shares). As of June 30, 2000, approximately $2.5 billion of the authorization had been utilized; we intend to use the remaining $500 million over the next three to nine months, subject to market conditions, business considerations, and other factors. REGULATORY CAPITAL REQUIREMENTS At June 30, 2000, the capital of J.P. Morgan and Morgan Guaranty Trust Company of New York (Morgan Guaranty) remained well above the minimum standards set by regulators. Further, the capital ratios of J.P. Morgan and Morgan Guaranty exceeded the minimum standards for a well capitalized bank holding company and bank, respectively, at June 30, 2000. At June 30, 2000, under the Federal Reserve Board market risk capital guidelines for calculation of risk-based capital ratios, J.P. Morgan's tier 1 and total risk-based capital ratios were 8.4% and 12.1%, respectively; the leverage ratio was 4.4%. At December 31, 1999, J.P. Morgan's tier 1 and total risk-based capital ratios were 8.8% and 12.9%, respectively, and the leverage ratio was 4.7%. Refer to note 19 for further information. Risk-adjusted assets represent the total of all on- and off-balance sheet exposures adjusted for risk-based factors as prescribed by the Federal Reserve Board. J.P. Morgan's risk-adjusted assets as of June 30, 2000 were $140.4 billion, compared with $140.1 billion at March 31, 2000. 34 35 EXPOSURES TO EMERGING COUNTRIES The following tables present exposures to certain emerging markets based on management's view of total exposure as of June 30, 2000. The management view takes into account the following cross-border and local exposures: the notional or contract value of loans, commitments to extend credit, securities purchased under agreements to resell, interest-earning deposits with banks; the fair values of trading account assets (cash securities and derivatives, excluding any collateral we hold to offset these exposures) and investment securities; and other monetary assets. It also considers the impact of credit derivatives, at their notional or contract value, where we have bought or sold credit protection outside of the respective country. Trading assets reflect the net of long and short positions of the same issuer. Management's view differs from bank regulatory rules, which are established by the Federal Financial Institutions Examination Council (FFIEC), because of its treatment of credit derivatives, trading account short positions, and the use of fair values versus cost of investment securities. In addition, management does not net local funding or liabilities against local exposures as allowed by the FFIEC.

FORWARD-LOOKING STATEMENTS J.P. Morgan and its subsidiaries operate in an intensely competitive industry. We compete globally with investment banks, commercial banks, and a wide range of nonbank financial institutions. Our non-U.S. competitors may have advantages in their home markets. We have also seen new competitors such as insurance companies and Internet companies compete with us for clients, market share, and people. We anticipate further competitive pressures from industry consolidation, which we expect to accelerate in the wake of the November 1999 passage of the Gramm-Leach-Bliley Act. In addition to a competitive marketplace, we also operate in an unpredictable global market environment. Our results are directly affected by factors outside our control, including general economic and market conditions; volatility of market prices, rates, and indices; and legislative and regulatory developments. They are also dependent on our ability to attract and retain skilled individuals and our ability to develop and support technology and information systems that are critical to our operations. Consequently, our results may vary significantly from period to period, and we may not be able to achieve our strategic objectives. Certain sections of our Form 10-Q contain forward-looking statements. We use words such as expect, believe, anticipate, and estimate to identify these statements. In particular, disclosures made in the sections "Financial Highlights" and "Financial Review," contain forward-looking statements. Such statements are based on our current expectations and are subject to the risks and uncertainties discussed above, which could cause actual results to differ materially from those currently anticipated. J.P. Morgan claims the protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. 35 36 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated

Interest and average rates applying to the following asset categories have been adjusted to a taxable-equivalent basis: Debt investment securities in offices in the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in the U.S. The applicable tax rate used to determine these adjustments was approximately 41% for the three months ended June 30, 2000 and 1999. (a) For the three months ended June 30, 2000 and 1999, average debt investment securities are computed based on historical amortized cost, excluding the effects of SFAS No. 115 adjustments. (b) Interest revenue includes the effect of certain off-balance-sheet transactions. * Not meaningful 36 37 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated

37 38 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated

Interest and average rates applying to the following asset categories have been adjusted to a taxable-equivalent basis: Debt investment securities in offices in the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in the U.S. The applicable tax rate used to determine these adjustments was approximately 41% for the six months ended June 30, 2000 and 1999. (a) For the six months ended June 30, 2000 and 1999, average debt investment securities are computed based on historical amortized cost, excluding the effects of SFAS No. 115 adjustments. (b) Interest revenue includes the effect of certain off-balance-sheet transactions. * Not meaningful 38 39 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated

39 40 CROSS-BORDER AND LOCAL OUTSTANDINGS UNDER THE REGULATORY BASIS For financial reporting purposes only, the following table presents our cross-border and local outstandings under the regulatory basis established by the Federal Financial Institutions Examination Council (FFIEC). Bank regulatory rules differ from management's view in the treatment of credit derivatives, trading account short positions, and the use of fair value versus cost of investment securities. In addition, management does not net local funding or liabilities against any local exposures as allowed by the FFIEC. Refer to page 35 for more information on exposures based on the management view. In accordance with the regulatory rules, cross-border outstandings include, regardless of currency: - all claims of our U.S. offices against foreign residents - all claims of our foreign offices against residents of other foreign countries Local outstandings include all claims of our foreign offices with residents of the same foreign country, net of local funding. All outstandings are primarily based on the location of the ultimate counterparty; that is, if collateral or a formal guarantee exists, the country presented is determined by the location where the collateral is held and realizable, or the location of the guarantor. Cross-border and local outstandings include the following: interest-earning deposits with banks; investment securities; trading account assets including derivatives; securities purchased under agreements to resell; loans; accrued interest; investments in affiliates; and other monetary assets. Commitments include all cross-border commitments to extend credit, standby letters of credit, and guarantees, and securities lending indemnifications. The following table shows each country where cross-border and local outstandings exceed 0.75% of total assets, as of June 30, 2000.

(a) Includes nonbank financial institutions and commercial and industrial entities. (b) Beginning this quarter, in accordance with FFIEC requirements, commitments also include notional amounts related to credit derivatives where we have provided (sold) protection. These amounts are not reduced for protection that we have purchased. 40 41 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12. Statement re computation of ratios (incorporated by reference to exhibit 12 to J.P. Morgan's report on Form 8-K, dated July 13, 2000) 27. Financial data schedule (b) Reports on Form 8-K The following reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended June 30, 2000: June 6, 2000 (Items 5 and 7) Reported the issuance of a joint press release announcing that along with six leading financial institutions (Bank of America, Credit Suisse First Boston, Goldman Sachs, HSBC, Morgan Stanley Dean Witter and UBS Warburg), the creation of Fxall.com(TM), which will offer clients low cost one-stop electronic access to a range of services in foreign exchange, from execution to research. Reported the issuance of a press release announcing the launching, in partnership with EDS, of Arcordia, the world's first independent internet-based derivative management and settlement company. Arcordia will provide transaction management and settlement services via the Internet for derivative products to financial institutions and corporations worldwide. April 24, 2000 (Items 5 and 7) Reported the issuance of a press release announcing the introduction of www.muniderivatives.com, a site that provides unparalleled access to information about municipal derivatives products and strategies as well as proprietary models and tools designed to help a user analyze market risk and develop customized derivatives-based solutions on-line. Reported the issuance of a press release announcing the creation of SynDirect(TM) Wireless, the world's first wireless communication platform for bond issuers and investors that will allow investors to check current pricing and express interest for bonds remotely. Reported the issuance of a press release announcing the introduction of www.morgancredit.com, a global credit risk trading web site. This site is the first to offer two-way (bid and offer) prices on credit derivatives with the ability to trade through a phone link to trading desks. Reported the issuance of a joint press release with Audible, Inc. announcing that daily research information from J.P. Morgan will soon be available for listening in digital audio format at www.audible.com/jpmorgan. April 6, 2000 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing its earnings for the three month period ended March 31, 2000. Reported the issuance of a press release announcing the formation of eSolutions, a new global business development group within Investment Banking that will bring together strategic advice, financing, risk management, and investment in one unit. Reported the issuance of a joint press release announcing a partnership, with AngloGold and Produits Artistiques de Metaux Precieux, to form GoldAvenue, an independent company that will be the first to offer a comprehensive range of products and services for businesses, investors and consumers in the gold market primarily through the use of the Internet. Reported the issuance of a joint press release announcing that along with five of the leading derivative dealers (Chase Manhattan Bank, Citigroup, Deutsche Bank, Morgan Stanley Dean Witter and Warburg Dillon Read), the intention to create a joint venture called SwapsWire. The venture will be dedicated to developing the electronic trading of interest rate derivative transactions. Reported the issuance of a press release announcing the creation of TransactPlus, Inc. - an independent firm that provides a global network for companies to plug into and gain instant access to universal business to business integration services. 41 42 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J.P. MORGAN & CO. INCORPORATED ------------------------------ (Registrant) /s/ DAVID H. SIDWELL ----------------------------------- NAME: DAVID H. SIDWELL TITLE:MANAGING DIRECTOR AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) DATE: August 14, 2000 42

MORGAN J P & CO INC 10-Q