Balance Sheet
Overview
Management continually monitors and evaluates on a daily basis the level and composition of the balance sheet.The following charts illustrate the composition of the balance sheets at December 29, 2000 and December 31, 1999.
In 2000, average total assets were $354 billion, up 18% from $300 billion in 1999. Average total liabilities in 2000 increased 17% to $335 billion from $286 billion in 1999, and average equity capital increased 31% to $19 billion during 2000. The major components of the increase in average total assets and liabilities are summarized as follows:
Average balances in 2000 were higher compared with 1999, primarily resulting from increases in marketable investment securities, receivables, demand and time deposits, and long-term borrowings. The discussion that follows analyzes the changes in year-end financial statement balances of major asset and liability categories.
Trading-Related Assets and Liabilities
Trading-related balances primarily consist of trading assets (including securities pledged as collateral) and liabilities, receivables under resale agreements and securities borrowed transactions, payables under repurchase agreements and securities loaned transactions, and certain receivable/payable balances that result from trading activities. At December 29, 2000 total trading-related assets and liabilities were $276 billion and $197 billion, respectively.Although trading-related balances comprise a significant portion of the balance sheet, the magnitude of these balances does not necessarily convey a sense of the risk profile assumed by Merrill Lynch. The market and credit risks associated with trading-related balances are mitigated through various hedging strategies, as discussed in the following sections (see Note 3 to the Consolidated Financial Statements for descriptions of market and credit risks).
Merrill Lynch reduces a significant portion of the credit risk associated with trading-related receivables by requiring counterparties to post cash or securities as collateral in accordance with collateral maintenance policies.
TRADING ASSETS AND LIABILITIES
Trading inventory principally represents securities purchased ("long" positions), securities sold but not yet purchased ("short" positions), and the fair value of derivative contracts (see Note 1 to the Consolidated Financial Statements). These positions are primarily the result of market-making, hedging, and proprietary activities.Merrill Lynch acts as a market-maker in a wide range of securities, resulting in a significant amount of trading inventory to facilitate customer transaction flow. To a lesser degree, Merrill Lynch also maintains proprietary trading inventory in seeking to profit from existing or projected market opportunities.
Merrill Lynch uses both cash instruments and derivatives to manage trading inventory market risks. As a result of these hedging techniques, a significant portion of trading assets and liabilities represents hedges of other trading positions. Long U.S. Government securities, for example, may be hedged with short interest rate futures contracts. These hedging techniques, which are generally initiated at the trading unit level, are supplemented by corporate risk management policies and procedures (see the Risk Management section for a description of risk management policies and procedures).
Trading assets, including securities pledged as collateral, at year-end 2000 were up 4% from year-end 1999, and trading liabilities increased 2% to $68.9 billion.
RESALE/REPURCHASE AGREEMENTS AND SECURITIES BORROWED/LOANED TRANSACTIONS
Repurchase agreements and, to a lesser extent, securities loaned transactions are used to fund a significant portion of trading assets. Likewise, Merrill Lynch uses resale agreements and securities borrowed transactions to obtain the securities needed for delivery on short positions. These transactions are typically short-term in nature with a significant portion entered into on an overnight or open basis. Resale and repurchase agreements entered into on a term basis typically mature within 90 days.Merrill Lynch also enters into these transactions to meet customers' needs. These "matched-book" repurchase and resale agreements or securities borrowed and loaned transactions are entered into with different customers using the same underlying securities, generating a spread between the interest revenue on the resale agreements or securities borrowed transactions and the interest expense on the repurchase agreements or securities loaned transactions. Exposures on these transactions are limited by their typically short-term nature and collateral maintenance policies.
Receivables under resale agreements and securities borrowed transactions and payables under repurchase agreements and securities loaned transactions in 2000 increased 15% and 44% from year-end 1999, respectively, as a result of higher matched-book activity.
OTHER TRADING-RELATED RECEIVABLES AND PAYABLES
Securities trading may lead to various customer or broker-dealer balances. Broker-dealer balances may also result from recording trading inventory on a trade date basis. Certain receivable and payable balances also arise when customers or broker-dealers fail to pay for securities purchased or fail to deliver securities sold, respectively. These receivables are generally fully collateralized by the securities that the customer or broker-dealer purchased but did not receive. Customer receivables also include margin loans collateralized by customer-owned securities held by Merrill Lynch. Collateral policies significantly limit Merrill Lynch's credit exposure to customers and broker-dealers. Merrill Lynch, in accordance with regulatory requirements, will sell securities that have not been paid for, or purchase securities sold but not delivered, after a relatively short period of time, or will require additional margin collateral, as necessary. These measures reduce market risk exposure related to these balances.Interest receivable and payable balances related to trading inventory are principally short-term in nature. Interest balances for resale and repurchase agreements, securities borrowed and loaned transactions, and customer margin loans are generally considered when determining the collateral requirements related to these transactions.
Trading-related receivables at year-end 2000 were up $5 billion from 1999, and trading-related payables declined $11 billion from year-end 1999, primarily due to changes in broker-dealer balances.
Non-Trading Assets
INVESTMENTS
Marketable investment securities, including those held for liquidity management purposes, consist of highly liquid debt and equity securities. Investments of insurance subsidiaries, primarily debt securities, are used to fund policyholder liabilities. Other investments consist of equity and debt securities, including those acquired in connection with merchant banking activities, and venture capital investments, including technology investments, such as Electronic Communications Networks ("ECNs"), and investments to hedge deferred compensation liabilities (see Note 4 to the Consolidated Financial Statements). Investments grew from $17.7 billion at year-end 1999 to $58.2 billion at year-end 2000, mainly as a result of growth in Marketable investment securities, which was funded by increased bank deposits at Merrill Lynch's U.S. banks (see the Non-Trading Liabilities - Borrowings section for further information).LOANS, NOTES, AND MORTGAGES
Merrill Lynch's portfolio of loans, notes, and mortgages includes mortgage loans on residences, working capital loans to small- and medium-sized businesses, and syndicated loans. Merrill Lynch generally maintains collateral on these extensions of credit in the form of securities, liens on real estate, perfected security interests in other assets of the borrower, and guarantees. Loans, notes, and mortgages rose $6.3 billion in 2000 to $17.5 billion due to increased consumer lending activities. Merrill Lynch maintained collateral of $14.1 billion at December 29, 2000 to reduce related default risk.OTHER
Other non-trading assets, which include cash and cash equivalents, goodwill (related primarily to the Mercury acquisition), equipment and facilities, and other assets, increased $11.3 billion from year-end 1999 levels. This increase is primarily due to increased cash equivalent balances at Merrill Lynch's U.S. banks.Non-Trading Liabilities
BORROWINGS
Portions of trading and non-trading assets are funded through deposits, long-term borrowings, and commercial paper (see the Capital Adequacy and Liquidity section for further information on funding sources).Commercial paper decreased from $24.2 billion at year-end 1999 to $14.0 billion at year-end 2000. Demand and time deposits increased $50.0 billion in 2000 as a result of higher customer deposits in U.S. banking subsidiaries which resulted from the redirection of cash inflows of certain CMA and other types of accounts from taxable money market funds to bank deposits. Outstanding long-term borrowings increased to $70.2 billion at December 29, 2000 from $54.0 billion at December 31, 1999. Major components of the change in long-term borrowings for 2000 and 1999 follow:
- At year-end 2000 and 1999, $48.8 and $45.0 billion, respectively, of long-term borrowings had maturity dates beyond one year.
OTHER
Other non-trading liabilities, which include liabilities of insurance subsidiaries and other payables, increased slightly from year-end 1999 levels.Preferred Securities Issued by Subsidiaries
Preferred securities issued by subsidiaries consist primarily of Trust Originated Preferred Securities SM ("TOPrS" SM ) (see Note 7 to the Consolidated Financial Statements for further information). TOPrS proceeds are utilized as part of general balance sheet funding (see the Capital Adequacy and Liquidity section for more information). Preferred securities issued by subsidiaries declined $11 million during 2000 as a result of foreign exchange-related fluctuations related to a yen-denominated TOPrS issuance.Stockholders' Equity
Stockholders' equity at December 29, 2000 increased 41% to $18.3 billion from $13.0 billion at year-end 1999. The 2000 increase primarily resulted from net earnings and the net effect of employee stock transactions, partially offset by dividends.In the third quarter of 2000, Merrill Lynch's Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend. The par value of the stock remained at $1.33 1/3 per share. Accordingly, adjustments from paid-in capital to common stock and shares exchangeable into common stock were made to preserve the par value of the post-split shares. In addition, as a result of the merger with Herzog, after giving effect to the stock split, Merrill Lynch issued 17.1 million shares of common stock. All share and per share data have been restated for the effect of the stock split and the merger.
At December 29, 2000, total common shares outstanding, excluding shares exchangeable into common stock, were 808.0 million, 7% higher than the 752.5 million shares outstanding at December 31, 1999. The increase was attributable principally to employee stock grants and option exercises.
Total shares exchangeable into common stock at year-end 2000, issued in connection with the Midland Walwyn merger, were 4.7 million, compared with 8.0 million at year-end 1999.
There were no common stock repurchases during 2000. In 1998, Merrill Lynch rescinded its share repurchase authority in order to facilitate pooling-of-interests accounting.
