-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, a/z/BvnnCh4A3Cv73sFkjpcwg5dvflWT5kophKot26XWUOXLPgbkdv+Kp8xGaS7A 6dB9Y08I+Jyr7T8szUH32w== 0000068100-95-000301.txt : 19950516 0000068100-95-000301.hdr.sgml : 19950516 ACCESSION NUMBER: 0000068100-95-000301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN J P & CO INC CENTRAL INDEX KEY: 0000068100 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132625764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05885 FILM NUMBER: 95539389 BUSINESS ADDRESS: STREET 1: 60 WALL ST CITY: NEW YORK STATE: NY ZIP: 10260 BUSINESS PHONE: 2124832323 MAIL ADDRESS: STREET 1: P O BOX 271 STREET 2: C/O WILLIAM D HALL CITY: WILMINGTON STATE: DE ZIP: 19899 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED MARCH 31, 1995 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-5885 J.P. MORGAN & CO. INCORPORATED (Exact name of registrant as specified in its charter) Delaware 13-2625764 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 60 Wall Street, New York, NY (Address of principal executive offices) 10260-0060 (Zip Code) (212) 483-2323 (Registrant's telephone number, including area code) 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 April 28, 1995: Common Stock, $2.50 Par Value 187,566,410 Shares 2 PART I -- FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Financial statement information is set forth within this document on the pages indicated: Page Three-month Consolidated statement of income J.P. Morgan & Co. Incorporated 3 Consolidated balance sheet J.P. Morgan & Co. Incorporated 4 Consolidated statement of changes in stockholders' equity J.P. Morgan & Co. Incorporated 5 Consolidated statement of cash flows J.P. Morgan & Co. Incorporated 6 Consolidated statement of condition Morgan Guaranty Trust Company of New York 7 Notes to Consolidated financial statements J.P. Morgan & Co. Incorporated 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Discussion of business sector results; Discussion of the financial condition and results of operations; Statements of consolidated average balances and net interest earnings of J.P. Morgan & Co. Incorporated ("J.P. Morgan") for the three months ended March 31, 1995; and Table of asset and liability management derivatives are set forth on pages 16 through 27 herein. PART II -- OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 29 SIGNATURES 30 3 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated ___________________________________________________________________________ _______
In millions, except per share data Three months ended ______________________________________________ _________ March March Increase December Increase 31 31 / 31 / 1995 1994 (Decreas 1994 (Decreas e) e) ______________________________________________ _________ NET INTEREST REVENUE Interest revenue $2,470 $1,837 $633 $2,369 $101 Interest expense 1,970 1,440 530 1,851 119 ___________________________________________________________________________ _________ Net interest revenue 500 397 103 518 (18) NONINTEREST REVENUE Trading revenue 303 356 (53) 153 150 Corporate finance 114 117 (3) 122 (8) revenue Credit-related fees 43 56 (13) 44 (1) Investment management 130 127 3 130 - fees Operational service fees 140 144 (4) 127 13 Net investment securities 9 91 (82) 23 (14) gains Other revenue 149 103 46 111 38 ___________________________________________________________________________ _________ Total noninterest 888 994 (106) 710 178 revenue Total revenue 1,388 1,391 (3) 1,228 160 OPERATING EXPENSES Employee compensation and 626 548 78 501 125 benefits Net occupancy 80 64 16 74 6 Technology and 172 129 43 209 (37) communications Other expenses 124 111 13 179 (55) ___________________________________________________________________________ _________ Total operating expenses 1,002 852 150 963 39 Income before income 386 539 (153) 265 121 taxes Income taxes 131 194 (63) 72 59 ___________________________________________________________________________ _________ Net income 255 345 (90) 193 62 PER COMMON SHARE Net income (a) $1.27 $1.69 ($0.42) $0.96 $0.31 Dividends declared 0.75 0.68 0.07 0.75 - ___________________________________________________________________________ _________ (a) Earnings per share amounts represent both primary and fully diluted earnings per share. See notes to financial statements.
4 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated ___________________________________________________________________________ _______
Dollars in millions March December March 31 31 31 1995 1994 1994 ____________________________ ____ ASSETS Cash and due from banks $ $ 2,210 $ 1,153 1,760 Interest-earning deposits with banks 1,650 1,362 2,037 Debt investment securities available-for- sale carried at fair value (cost: $21,428 in 21,655 22,657 18,436 March 1995, $22,503 in December 1994, and $17,907 in March 1994) Trading account assets 68,198 57,065 61,875 Securities purchased under agreements to resell ($27,434 in March 1995, $21,170 in December 27,478 21,350 30,261 1994, and $30,231 in March 1994) and federal funds sold Securities borrowed 11,073 12,127 10,285 Loans 24,434 22,080 25,388 Less: allowance for credit losses 1,132 1,131 1,143 ___________________________________________________________________________ _______ Net loans 23,302 20,949 24,245 Customers' acceptance liability 658 586 610 Accrued interest and accounts receivable 3,011 5,028 4,411 Premises and equipment 3,395 3,318 2,990 Less: accumulated depreciation 1,361 1,302 1,153 ___________________________________________________________________________ _______ Premises and equipment, net 2,034 2,016 1,837 Other assets 6,865 9,567 12,983 ___________________________________________________________________________ _______ Total assets 167,077 154,917 168,740 ___________________________________________________________________________ _______ LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 2,889 3,693 4,288 In offices outside the U.S. 682 767 617 Interest-bearing deposits: In offices in the U.S. 2,015 1,826 2,218 In offices outside the U.S. 41,238 36,799 36,435 ___________________________________________________________________________ _______ Total deposits 46,824 43,085 43,558 Trading account liabilities 45,210 36,407 36,576 Securities sold under agreements to repurchase ($32,884 in March 1995, $30,179 in December 35,843 35,768 51,522 1994, and $47,158 in March 1994) and federal funds purchased Commercial paper 2,309 3,507 4,539 Other liabilities for borrowed money 11,334 10,900 8,386 Accounts payable and accrued expenses 3,949 6,231 5,651 Liability on acceptances 658 586 617 Long-term debt not qualifying as risk- based 5,009 3,605 2,563 capital Other liabilities 3,018 2,063 2,544 ___________________________________________________________________________ _______ 154,154 142,152 155,956 Long-term debt qualifying as risk-based 3,283 3,197 2,933 capital ___________________________________________________________________________ _______ Total liabilities 157,437 145,349 158,889 STOCKHOLDERS' EQUITY Preferred stock (authorized shares: 10,000,000): Adjustable rate cumulative preferred stock 244 244 244 (issued and outstanding: 2,444,300) Variable cumulative preferred stock (issued and 250 250 250 outstanding: 250,000) Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,672,173 in March 1995, 502 502 501 200,668,373 in December 1994 and 200,279,108 in March 1994) Capital surplus 1,448 1,452 1,439 Retained earnings 7,149 7,044 6,595 Net unrealized gains on investment securities, 449 456 993 net of taxes Other 368 367 268 ___________________________________________________________________________ _______ 10,410 10,315 10,290 Less: treasury stock (13,272,339 shares in March 1995, 12,966,917 shares in 770 747 439 December 1994 and 8,019,142 shares in March 1994) at cost ___________________________________________________________________________ _______ Total stockholders' equity 9,640 9,568 9,851 ___________________________________________________________________________ _______ Total liabilities and stockholders' 167,077 154,917 168,740 equity ___________________________________________________________________________ _______ See notes to financial statements.
5 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated _____________________________________________________________________________ ___________
Dollars in millions Three months ended ____________________________ March 31 March 31 1995 1994 ____________________________ PREFERRED STOCK Adjustable rate cumulative preferred stock Balance, January 1 and March 31 $ 244 $ 244 Variable cumulative preferred stock Balance, January 1 and March 31 250 250 ___________________________________________________________________________ _____________ Total preferred stock, March 31 494 494 ___________________________________________________________________________ _____________ COMMON STOCK Balance, January 1 502 499 Shares issued under dividend reinvestment plan, various - 2 employee benefit plans, and conversion of debentures ___________________________________________________________________________ _____________ Balance, March 31 502 501 ___________________________________________________________________________ _____________ CAPITAL SURPLUS Balance, January 1 1,452 1,393 Shares issued under dividend reinvestment plan, various employee benefit plans, and conversion of (4) 46 debentures, and income tax benefits associated with stock options ___________________________________________________________________________ _____________ Balance, March 31 1,448 1,439 ___________________________________________________________________________ _____________ RETAINED EARNINGS Balance, January 1 7,044 6,386 Net income 255 345 Dividends declared on adjustable rate cumulative preferred stock (3) (3) Dividends declared on variable cumulative preferred stock (3) (1) Dividends declared on common stock (141) (131) Dividend equivalents on common stock issuable (3) (1) ___________________________________________________________________________ _____________ Balance, March 31 7,149 6,595 ___________________________________________________________________________ _____________ NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES Balance, January 1 456 1,165 Net change in net unrealized gains, net of taxes (7) (172) ___________________________________________________________________________ _____________ Balance, March 31 449 993 ___________________________________________________________________________ _____________ OTHER COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS Balance, January 1 369 253 Accrued deferred stock awards 19 25 Deferred stock awards distributed, net (16) (6) ___________________________________________________________________________ _____________ Balance, March 31 372 272 ___________________________________________________________________________ _____________ FOREIGN CURRENCY TRANSLATION Bala (2) (3) nce, January 1 Translation adjustments (3) (1) Income tax benefit 1 - ___________________________________________________________________________ _____________ Balance, March 31 (4) (4) ___________________________________________________________________________ ____________ Total other, March 31 368 268 ___________________________________________________________________________ _____________ LESS: TREASURY STOCK Balance, January 1 747 328 Purchases 67 118 Shares distributed under various employee benefit (44) (7) plans ___________________________________________________________________________ _____________ Balance, March 31 770 439 ___________________________________________________________________________ _____________ Total stockholders' equity, March 31 9,640 9,851 ___________________________________________________________________________ _____________ See notes to financial statements.
6 CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated _____________________________________________________________________________ ___________
Dollars in millions Three months ended ____________________________ March 31 March 31 1995 1994 ____________________________ NET INCOME $ 255 $ 345 Adjustments to reconcile to cash provided by (used in) operating activities: Noncash items: depreciation, amortization, deferred 80 (142) income taxes, and stock award plans (Increase) decrease in assets: Trading account assets (11,247) (20,481) Securities purchased under agreements to (6,293) (7,575) resell Securities borrowed 1,054 533 Accrued interest and accounts receivable 2,014 529 Increase (decrease) in liabilities: Trading account liabilities 8,715 18,390 Securities sold under agreements to 2,686 10,863 repurchase Accounts payable and accrued expenses (2,290) (678) Other changes in operating assets and 2,847 (6,025) liabilities, net Net investment securities gains included in cash flows from investing activities (9) (91) ___________________________________________________________________________ _____________ CASH USED IN OPERATING ACTIVITIES (2,188) (4,332) ___________________________________________________________________________ _____________ Increase in interest-earning deposits with banks (291) (814) Debt investment securities: Proceeds from sales 9,246 12,306 Proceeds from maturities, calls, and mandatory 747 868 redemptions Purchases (7,722) (16,683) Decrease in federal funds sold 136 31 Increase in loans (586) (1,018) Payments for premises and equipment (53) (44) Other changes, net (675) 4,220 ___________________________________________________________________________ _____________ CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 802 (1,134) ___________________________________________________________________________ _____________ Decrease in noninterest-bearing deposits (890) (614) Increase in interest-bearing deposits 4,559 3,801 Increase (decrease) in federal funds purchased (2,630) 1,258 Increase (decrease) in commercial paper (1,198) 1,966 Other liabilities for borrowed money: Proceeds 3,853 2,556 Payments (2,733) (4,506) Long-term debt: Proceeds 1,729 692 Payments (265) (500) Capital stock: Issued - 49 Purchased or redeemed (67) (118) Dividends paid (147) (136) Other changes, net (1,977) 1,760 ___________________________________________________________________________ _____________ CASH PROVIDED BY FINANCING ACTIVITIES 234 6,208 ___________________________________________________________________________ _____________ Effect of exchange rate changes on cash and due 95 10 from banks ___________________________________________________________________________ _____________ INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (1,057) 752 Cash and due from banks at December 31, 1994 and 2,210 1,008 1993 ___________________________________________________________________________ _____________ Cash and due from banks at March 31, 1995 and 1994 1,153 1,760 ___________________________________________________________________________ _____________ Cash disbursements were made for: Interest $1,890 $1,425 Income taxes 104 539 ___________________________________________________________________________ _____________ See notes to financial statements.
7 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York ___________________________________________________________________________ _______
Dollars in millions March 31 December 1995 31 1994 _____________________ ____ ASSETS Cash and due from banks $ 1,124 $ 2,182 Interest-earning deposits with banks 1,751 1,605 Debt investment securities available-for- sale 20,370 21,292 carried at fair value Trading account assets 54,201 45,386 Securities purchased under agreements to resell 20,303 16,562 and federal funds sold Loans 21,344 19,397 Less: allowance for credit losses 1,027 1,025 ___________________________________________________________________________ _______ Net loans 20,317 18,372 Customers' acceptance liability 628 556 Accrued interest and accounts receivable 2,968 3,594 Premises and equipment 3,031 2,967 Less: accumulated depreciation 1,197 1,149 ___________________________________________________________________________ _______ Premises and equipment, net 1,834 1,818 Other assets 5,931 7,360 ___________________________________________________________________________ _______ Total assets 129,427 118,727 ___________________________________________________________________________ _______ LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 2,847 3,698 In offices outside the U.S. 732 770 Interest-bearing deposits: In offices in the U.S. 1,726 1,480 In offices outside the U.S. 41,849 38,566 ___________________________________________________________________________ _______ Total deposits 47,154 44,514 Trading account liabilities 39,396 30,730 Securities sold under agreements to repurchase 19,217 22,099 and federal funds purchased Other liabilities for borrowed money 6,023 5,320 Accounts payable and accrued expenses 2,464 2,902 Liability on acceptances 628 556 Long-term debt not qualifying as risk-based capital (includes $663 in 1995 and $630 in 1994 of 2,360 1,968 notes payable to J.P. Morgan) Other liabilities 3,491 2,080 ___________________________________________________________________________ _______ 120,733 110,169 Long-term debt qualifying as risk-based capital (includes $1,034 in 1995 and $1,030 in 1,233 1,249 1994 of notes payable to J.P. Morgan) ___________________________________________________________________________ _______ Total liabilities 121,966 111,418 STOCKHOLDER'S EQUITY Preferred stock, $100 par value (authorized shares: 2,500,000) - - Common stock, $25 par value (authorized and outstanding shares: 250 250 10,000,000) Surplus 2,670 2,670 Undivided profits 4,398 4,266 Net unrealized gains on investment securities, net 147 124 of taxes Foreign currency translation (4) (1) ___________________________________________________________________________ _______ Total stockholder's equity 7,461 7,309 ___________________________________________________________________________ _______ Total liabilities and stockholder's equity 129,427 118,727 ___________________________________________________________________________ _______ Member of the Federal Reserve System and the Federal Deposit Insurance Corporation. See notes to financial statements.
8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF J.P. MORGAN & CO. INCORPORATED Supplementary to notes in the 1994 Annual report to stockholders 1. BASIS OF PRESENTATION The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. All adjustments made were of a normal recurring nature. Management consults with its independent accountants on significant accounting and reporting matters that arise during the year. 2. ACCOUNTING CHANGES ACCOUNTING FOR IMPAIRMENT OF A LOAN On January 1, 1995, J.P. Morgan adopted Statement of Financial Accounting Standards (SFAS) No. 114 and subsequent amendment SFAS No. 118, both entitled, Accounting by Creditors for Impairment of a Loan, which prescribe criteria for recognition of loan impairment as well as methods to measure impairment for certain loans, including loans whose terms were modified in troubled debt restructurings. The standards require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. In accordance with these standards, J.P. Morgan defines impaired loans as those loans on which the accrual of interest is discontinued because the contractual payment of principal or interest has become 90 days past due or management has serious doubts about future collectibility of principal or interest, even though the loans are currently performing (i.e., nonaccrual loans). The adoption of these standards did not have a material impact on J.P. Morgan's financial statements. For additional information, see Note 9 to the financial statements, Nonperforming assets and allowance for credit losses. 9 3. INTEREST REVENUE AND EXPENSE An analysis of interest revenue and expense derived from on-and off- balance-sheet financial instruments is presented in the table below. Interest revenue and expense associated with derivative financial instruments, such as swaps, forwards, spot, futures, options, and debt securities forwards, used as hedges or to modify the interest rate characteristics of assets and liabilities, are attributed to and included with the related balance sheet instrument. Net interest revenue associated with risk-adjusting swaps that are used to meet longer-term asset and liability management objectives, including the maximization of net interest revenue, is not attributed to a specific balance sheet instrument, but is included in the Other sources caption in the table below. First quarter In millions 1995 1994 ________________________________________________________________________ INTEREST REVENUE Deposits with banks $ $ 59 49 Debt investment securities (a) 399 272 Trading account assets 829 602 Securities purchased under agreements to resell and federal funds sold 412 372 Securities borrowed 214 115 Loans 415 334 Other sources, primarily risk-adjusting 142 93 swaps ___________________________________________________________________________ _________ Total interest revenue 2,47 1,83 0 7 ________________________________________________________________________ INTEREST EXPENSE Deposits 619 433 Trading account liabilities 428 267 Securities sold under agreements to repurchase and federal funds purchased 595 557 Other borrowed money 211 125 Long-term debt 117 58 ___________________________________________________________________________ _________ Total interest expense 1,97 1,44 0 0 ___________________________________________________________________________ _________ Net interest revenue 500 397 ________________________________________________________________________ (a) Interest revenue from debt investment securities included taxable revenue of $357 million and revenue exempt from U.S. income taxes of $42 million for the three months ended March 31, 1995. For the three months ended March 31, 1995, net interest revenue associated with asset and liability management derivatives was approximately $80 million. At March 31, 1995, approximately $100 million of net deferred gains on closed derivative contracts used for asset and liability management purposes were recorded on the balance sheet. Such amount is primarily composed of net deferred gains on closed hedge contracts included in the amortized cost of the debt investment portfolio, partially offset by net deferred losses on closed hedge contracts associated with risk-adjusting swaps. Net deferred gains (losses) are expected to amortize into Net interest revenue as follows: ($2) million - remainder of 1995; $4 million - 1996; $15 million - 1997; $25 million - 1998; $20 million - 1999; $10 million - 2000; and approximately $28 million thereafter. The amount of net deferred gains (losses) on closed derivative contracts will change from period to period, primarily due to amortization of such amounts to net interest revenue and the execution of our asset and liability management strategies, which may result in the sale of the underlying hedged instruments and/or termination of hedge contracts. 4. TRADING REVENUE An analysis of trading revenue for the three months ended March 31, 1995 and 1994, is presented in the following table. Reported Trading revenue does not include the net interest revenue associated with our trading activities. As our business objective is to maximize total revenue, trading-related net interest revenue should be considered when evaluating results. For additional information related to trading-related net interest revenue, refer to the trading revenue discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations. First quarter In millions 1995 1994 _____________________________________________________________________ Swaps and other interest rate contracts $ 76 $ 266 Debt instruments 94 36 Foreign exchange spot and option 70 10 contracts Equities and commodities 63 44 ____________________________________________________________________________ _____ Trading revenue 303 356 _____________________________________________________________________ 10 5. INVESTMENT SECURITIES Debt investment securities A comparison of the cost and carrying values of debt investment securities available for sale and carried at fair value at March 31, 1995, follows. Fair and carrying In millions Cost value ___________________________________________________________________________ ___ U.S. Treasury $ 3,806 $ 3,807 U.S. government agency, principally mortgage-backed 10,696 10,780 U.S. state and political 2,114 2,275 subdivision U.S. corporate and bank debt 266 280 Foreign government* 3,411 3,397 Foreign corporate and bank debt 1,032 1,012 Other 103 104 ___________________________________________________________________________ ___ Total debt investment securities 21,428 21,655 ___________________________________________________________________________ ___ * Primarily includes debt of countries that are members of the Organization for Economic Cooperation and Development. Net unrealized appreciation associated with debt investment securities available for sale carried at fair value at March 31, 1995, was $227 million, consisting of gross unrealized appreciation of $505 million and gross unrealized depreciation of $278 million. Such amounts represent the gross unrealized appreciation or depreciation on each debt security, including the effects of any related hedge. For additional detail of gross unrealized gains and losses associated with open derivative contracts used to hedge debt investment securities, see Note 7 to the financial statements, Off-balance-sheet financial instruments. The following table presents the components of Net realized investment securities gains. First quarter In millions 1995 1994 ___________________________________________________________________________ ___ Gross realized gains from sales $ $ 60 185 Gross realized losses from sales (51) (95) Net gains on maturities, calls and mandatory redemptions - 1 ___________________________________________________________________________ ___ Net investment securities gains 9 91 ___________________________________________________________________________ ___ Equity investment securities Net realized gains on the sale of equity investment securities of $163 million included in Other revenue for the three months ended March 31, 1995, include $168 million of gross realized gains. Gross unrealized gains and losses as well as a comparison of the cost, fair value, and carrying value of marketable equity investment securities at March 31, 1995, follows. Gross Gross Fair and unreali unreali carryin zed zed g In millions Cost gains losses value _________________________________________________________________________ _____ March 31, 1995 $205 $503 $5 $703 _________________________________________________________________________ _____ Securities without available market quotations: Nonmarketable equity investment securities, carried at a cost of $433 million, had an estimated fair value of $531 million at March 31, 1995. 11 6. TRADING ACCOUNT ASSETS AND LIABILITIES Trading account assets and liabilities, including derivative instruments used for trading purposes, are carried at fair value. The following table presents the carrying value of trading account assets and liabilities at March 31, 1995, and the average balance for the three- month period ended March 31, 1995. Carrying Average In millions value balance ___________________________________________________________________________ ___ TRADING ACCOUNT ASSETS U.S. Treasury $ 6,180 $ 8,290 U.S. government agency 2,805 3,714 Foreign government 19,833 20,754 Corporate debt and equity 8,589 8,083 Other securities 3,540 2,706 Interest rate and currency swaps 13,700 11,779 Foreign exchange contracts 7,462 4,836 Interest rate futures and forwards 254 162 Commodity and equity contracts 1,260 1,345 Purchased option contracts 4,575 3,812 ___________________________________________________________________________ ___ Total trading account assets 68,198 65,481 ___________________________________________________________________________ ___ TRADING ACCOUNT LIABILITIES U.S. Treasury 6,356 8,333 Foreign government 9,717 9,873 Corporate debt and equity 2,577 3,030 Other securities 1,144 1,308 Interest rate and currency swaps 12,809 10,792 Foreign exchange contracts 6,073 3,951 Interest rate futures and forwards 323 188 Commodity and equity contracts 1,350 1,631 Written option contracts 4,861 4,451 ___________________________________________________________________________ ___ Total trading account liabilities 45,210 43,557 ___________________________________________________________________________ ___ 12 7. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Derivatives Derivatives may be used either for trading or asset and liability management purposes. Accordingly, the notional amounts presented in the table below have been identified as relating to either trading or asset and liability management activities based on management's intent and ongoing usage. A summary of the credit exposure, which is represented by the positive market value associated with derivatives, after considering the benefit of approximately $20.3 billion of master netting agreements in effect at March 31, 1995, is also presented. Notional Credit In billions amounts exposure ___________________________________________________________________________ _______________ Interest rate and currency swaps Trading $ 872.1 Asset and liability 278.6 management(a)(b)(c) ___________________________________________________________________________ _______________ Total interest rate and currency 1,150.7 $13.7 swaps ___________________________________________________________________________ _______________ Foreign exchange spot, forward, and futures contracts Trading 442.3 Asset and liability 20.5 management(a)(b) ___________________________________________________________________________ _______________ Total foreign exchange spot, forward, 462.8 7.5 and futures contracts ___________________________________________________________________________ _______________ Interest rate futures, forward rate agreements, and debt securities forwards Trading 366.7 Asset and liability management 11.0 ___________________________________________________________________________ _______________ Total interest rate futures, forward rate agreements, and debt 377.7 0.2 securities forwards ___________________________________________________________________________ _______________ Commodity and equity swaps, forward, and 63.2 1.3 futures contracts, all trading ___________________________________________________________________________ _______________ Purchased options(e) Trading 393.2 Asset and liability management(a) 3.2 ___________________________________________________________________________ _______________ Total purchased options 396.4 4.6 ___________________________________________________________________________ _______________ Written options, all trading(f) 472.3 - ___________________________________________________________________________ _______________ Total credit exposure recorded as assets on the balance sheet 27.3 (d ) ___________________________________________________________________________ ____ (a) The majority of J.P. Morgan's asset and liability management derivatives are transacted with independently managed J.P. Morgan derivatives dealers that function as intermediaries for credit and administrative purposes. (b) The notional amounts of asset and liability management derivatives contracts conducted in the foreign exchange markets, primarily forward contracts, amounted to $22.9 billion at March 31, 1995, and were primarily denominated in the following currencies: Deutsche mark $5.0 billion, Japanese yen $3.0 billion, Italian lira $2.9 billion, Belgian franc $2.7 billion, British pound $1.7 billion, Spanish peseta $1.6 billion, Swiss franc $1.5 billion, and French franc $1.5 billion. (c) The notional amount of risk-adjusting swaps was $256.6 billion at March 31, 1995. (d) Total credit exposure related to derivatives increased from $19.5 billion at December 31, 1994, primarily due to the impact of changes in foreign exchange rates and the decline in the U.S. dollar during the first quarter of 1995, partially offset by increased benefit from master netting agreements at March 31, 1995. (e) At March 31, 1995, purchased options used for trading purposes included $290.3 billion of interest rate options, $67.8 billion of foreign exchange options, and $35.1 billion of commodity and equity options. Only interest rate options are used for asset and liability management purposes. Purchased options executed on an exchange amounted to $147.8 billion and those negotiated over-the-counter amounted to $248.6 billion at March 31, 1995. (f) At March 31, 1995, written options used for trading purposes included $365.8 billion of interest rate options, $70.6 billion of foreign exchange options, and $35.9 billion of commodity and equity options. Written option contracts executed on an exchange amounted to $210.9 billion and those negotiated over-the-counter amounted to $261.4 billion at March 31, 1995. 13 Asset and liability management derivatives As an end user, J.P. Morgan utilizes derivative instruments in the execution of its asset and liability management strategies. Derivatives used for these purposes primarily include interest rate swaps, foreign exchange forward contracts, forward rate agreements, interest rate futures, and debt securities forwards. 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. In addition, we utilize derivatives to adjust our overall interest rate risk profile primarily through the use of risk-adjusting swaps. Net unrealized losses associated with open derivative contracts used to hedge or modify the interest rate characteristics of related balance sheet instruments amounted to ($217) million at March 31, 1995. Gross unrealized gains and gross unrealized losses associated with open derivative contracts used for these purposes at March 31, 1995, are presented below. Such amounts primarily relate to interest rate and currency swaps and futures used to hedge or modify the interest rate characteristics of long-term debt and debt investment securities, principally mortgage-backed securities. See Note 8 to the financial statements, Fair value of financial instruments. Gross Gross Net unrealize unrealiz unrealized d ed In millions gains losses gains/(loss es) ___________________________________________________________________________ __ Debt investment $ 49 $244 $(195) securities Long-term debt 106 100 6 Other financial 65 93 (28) instruments ___________________________________________________________________________ __ Total 220 437 (217) ___________________________________________________________________________ __ Net unrealized gains associated with risk-adjusting swaps and their related hedges that are entered into to meet longer-term asset and liability management objectives approximated $0.7 billion at March 31, 1995. The net amount is composed of $2.8 billion of gross unrealized gains and $2.1 billion of gross unrealized losses. The unrealized gains and losses related to the derivative contracts used to hedge these risk-adjusting swaps were not material at March 31, 1995. There were no material terminations of risk-adjusting swaps during the three months ended March 31, 1995. Credit-related financial instruments Credit-related financial instruments include commitments to extend credit, standby letters of credit and guarantees, and indemnifications in connection with securities lending activities. The contractual amounts of these instruments represent the amounts at risk should the contract be fully drawn upon, the client default, and the value of any existing collateral become worthless. The credit risk associated with these instruments varies depending on the creditworthiness of the client and the value of any collateral held. The maximum credit risk associated with credit-related financial instruments is measured by the contractual amounts of these instruments. A summary of the contractual amount of credit-related financial instruments at March 31, 1995, is presented in the following table. March 31 In billions 1995 _________________________________________________________________________ __ Commitments to extend credit $48.0 Standby letters of credit and guarantees 10.1 Securities lending indemnifications (a) 18.5 _________________________________________________________________________ __ (a) At March 31, 1995, J.P. Morgan held cash and other collateral of $17.9 billion in support of securities lending indemnifications. Other Consistent with industry practice, amounts receivable and payable for securities that have not reached the contractual settlement dates are recorded net on the consolidated balance sheet. Amounts receivable for securities sold of $36.7 billion were netted against amounts payable for securities purchased of $38.2 billion to arrive at a net trade date payable of $1.5 billion, which was classified as Other liabilities on the consolidated balance sheet at March 31, 1995. 14 8. FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments, J.P. Morgan estimates that the aggregate net fair value of all balance sheet and off-balance-sheet financial instruments exceeded associated net carrying values at March 31, 1995, by approximately $2.1 billion before considering income taxes. Such amount was primarily attributable to net appreciation on net loans and risk- adjusting swaps of $1.2 billion and $0.7 billion, respectively. 9. NONPERFORMING ASSETS AND ALLOWANCE FOR CREDIT LOSSES Total nonperforming assets, net of charge-offs, at March 31, 1995, are presented in the following table. March 31 In millions 1995 __________________________________________________________________________ Nonaccrual loans: Commercial and industrial $148 Other 65 __________________________________________________________________________ 213 Restructuring countries 3 __________________________________________________________________________ Total nonaccrual loans 216 (a) __________________________________________________________________________ Other nonperforming assets 1 __________________________________________________________________________ Total nonperforming assets 217 __________________________________________________________________________ An analysis of the effect of nonaccrual loans, net of charge-offs, on interest revenue in the first quarter of 1995, is presented in the following table. First quarter In millions 1995 __________________________________________________________________________ Interest revenue that would have been recorded if accruing $ 5 Less interest revenue recorded 14 __________________________________________________________________________ Positive impact of nonaccrual loans on interest revenue 9 __________________________________________________________________________ An analysis of the allowance for credit losses at March 31, 1995, is presented in the following table. In millions 1995 ___________________________________________________________________________ _____________ Balance, January 1 $1,131 ___________________________________________________________________________ _____________ Recoveries 9 Charge-offs: Commercial and industrial (6) Restructuring countries - Other (2) __________________________________________________________________________ Net charge-offs 1 __________________________________________________________________________ Balance, March 31 (b) 1,132 (c) __________________________________________________________________________ (a) As of March 31, 1995, J.P. Morgan's nonaccrual loan balances do not require a related impairment allowance, as calculated in accordance with SFAS No. 114. Thus, the amount of total nonaccrual loans at March 31, 1995, for which there was no related allowance for credit losses in accordance with SFAS No. 114 was $216 million. For the first quarter of 1995, the average recorded investment in nonaccrual loans was $210 million. (b) In accordance with SFAS No. 5, Accounting for Contingencies, and SFAS No. 114, an allowance is maintained that is considered adequate to absorb losses inherent in the existing portfolios of loans and other undertakings to extend credit, such as irrevocable unused loan commitments, or to make payments to others for which a client is ultimately liable, such as standby letters of credit and guarantees, commercial letters of credit and acceptances, and all other credit exposures, including derivatives. A judgment as to the adequacy of the allowance is made at the end of each quarterly reporting period. (c) At March 31, 1995, the allocation of the allowance for credit losses was as follows: Specific allocation - borrowers in the U.S. $72 million, Specific allocation - borrowers outside the U.S. $111 million, Allocation to general risk $949 million. 15 10. CORPORATE FINANCE AND OTHER REVENUE In the first quarter of 1995 and 1994, Corporate finance revenue of $114 million and $117 million includes $22 million and $45 million of underwriting revenue, respectively. Other revenue of $149 million in the 1995 first quarter includes $163 million of net equity investment securities gains and $40 million of costs associated with hedging anticipated foreign currency revenues and expenses. Other revenue of $103 million in the 1994 first quarter includes net equity investment securities gains of $97 million and $41 million of hedging losses resulting from the management of non-trading foreign currency exposures. 11. INCOME TAXES Income tax expense in the 1995 first quarter was based on a 34% effective tax rate, compared to a 36% effective tax rate in the 1994 first quarter. Income tax expense related to the net investment securities gains was approximately $4 million and $37 million for the three months ended March 31, 1995 and 1994, respectively, computed at a rate of approximately 41%. The valuation allowance to reduce deferred tax assets to the amount expected to be realized totaled $140 million at December 31, 1994. The valuation allowance is primarily related to the ability to recognize tax benefits associated with foreign operations. The balance of the valuation allowance has not changed materially since December 31, 1994. 12. COMMITMENTS AND CONTINGENT LIABILITIES Excluding mortgaged properties, assets carried at approximately $49.6 billion in the consolidated balance sheet at March 31, 1995, were pledged as collateral for borrowings, to qualify for fiduciary powers, to secure public monies as required by law, and for other purposes. 13. EARNINGS PER COMMON SHARE In the calculation of primary and fully diluted earnings per common share, net income is adjusted by adding back to net income the interest expense on convertible debentures and the expense related to dividend equivalents on certain deferred incentive compensation awards, net of the related income tax effects, and deducting the preferred stock dividends. Primary and fully diluted earnings per common share are computed by dividing income components by the weighted-average number of common and common equivalent shares outstanding during the period. For the primary earnings per share calculation, the weighted-average number of common and common equivalent shares outstanding includes the average number of shares of common stock outstanding, the average number of shares issuable upon conversion of convertible debentures, and the average number of shares issuable under employee benefit plans that have a dilutive effect. The weighted-average number of common and common equivalent shares outstanding, assuming full dilution, includes the average number of shares of common stock outstanding, the average number of shares issuable upon conversion of convertible debentures, and the average number of shares issuable under various employee benefit plans. The maximum dilutive effect is computed using the period-end market price of J.P. Morgan common stock, if it is higher than the average market price used in calculating primary earnings per share. First quarter Dollars in millions 1995 1994 ___________________________________________________________________________ ____ Adjusted net income $249 $341 Primary earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 196,905,10 201,291,9 6 82 Fully diluted earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 196,998,25 201,192,5 0 72 ___________________________________________________________________________ ____ 16 PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS J.P. Morgan & Co. Incorporated reported net income of $255 million in the first quarter of 1995, 26% lower than in the first quarter of 1994 and up 32% from the fourth quarter. Earnings per share were $1.27 in the first quarter compared with $1.69 a year earlier. The 1995 first quarter earnings reflected a previously announced special charge of $55 million ($33 million after tax), or $0.17 per share, related primarily to severance. FIRST QUARTER RESULTS AT A GLANCE
In millions of dollars, First quarter Fourth quarter except per share data 1995 1994 1994 ___________________________________________________________________________ _____________ Revenues $1,388 $1,391 $1,228 Operating expenses (1,002) (852) (963) Income taxes (131) (194) (72) ___________________________________ _____________________________________________________ Net income $ 255 $ 345 $ 193 ___________________________________________________________________________ _____________ Net income per share $1.27 $1.69 $0.96 ___________________________________________________________________________ _____________ Dividends declared per share $0.75 $0.68 $0.75 ___________________________________________________________________________ _____________
REVENUES were approximately even with the first quarter of 1994 and 13% higher than in the fourth quarter: -Trading revenue declined 15% from a year earlier but nearly doubled from the fourth quarter on strong results in debt instruments, foreign exchange, and equities and commodities. -Net interest revenue rose 26% to $500 million from a year earlier. The rise was mostly attributable to improved results from asset and liability management. -Investment management fees, operational service fees, and corporate finance revenue were in line with levels of a year ago, while credit-related fees were lower. OPERATING EXPENSES, excluding the special charge, increased 11% from a year earlier and were essentially unchanged from the fourth quarter. The special charge related to an expense management program initiated during the first quarter to moderate the growth of expenses. 17 BUSINESS SECTOR RESULTS The firm reports financial results for five business sectors. Three are oriented toward client services: Asset Management and Servicing, Finance and Advisory, and Sales and Trading. The Equity Investments sector comprises management of the firm's own portfolio of equity securities. The Asset and Liability Management sector covers the management of the firm's overall interest rate exposure. These five sectors generally reflect the way we operate but do not correspond exactly with the firm's organizational structure. Presented below are the summary results for each sector for the quarters ended March 31, 1995, March 31, 1994, and December 31, 1994.
Asset Asset and Manage- Finance Sales Equity Liabilit y ment and and and Invest- Manage- Corpora Consol- te In millions Servicin Advisory Trading ments ment Items idated g ___________________________________________________________________________ _________________ MARCH 31, 1995 Total $410 $320 $385 $173 $240 ($140) $1,388 revenue Total 324 276 295 6 23 78 1,002 expenses ___________________________________________________________________________ _________________ Pretax 86 44 90 167 217 (218) 386 income ___________________________________________________________________________ _________________ MARCH 31, 1994 Total 434 292 320 107 281 (43) 1,391 revenue Total 301 244 257 5 22 23 852 expenses ___________________________________________________________________________ _________________ Pretax 133 48 63 102 259 (66) 539 income ___________________________________________________________________________ _________________ DEC. 31, 1994 Total 384 272 289 118 243 (78) 1,228 revenue Total 346 262 319 5 23 8 963 expenses ___________________________________________________________________________ _________________ Pretax 38 10 (30) 113 220 (86) 265 income ___________________________________________________________________________ _________________ Notes: (1) The firm's management reporting system and policies were used to determine the revenues and expenses directly attributable to each sector on a taxable-equivalent basis. In addition, earnings on stockholders' equity and certain overhead expenses not allocated for management reporting purposes were allocated to each business sector. Earnings on stockholders' equity were allocated based on management's assessment of the inherent risk of each sector. Overhead expenses were allocated based primarily on staff levels and represent costs associated with various support functions that exist for the benefit of the firm as a whole. (2) In the quarters ended March 31, 1995 and 1994, and December 31, 1994, $131 million, $194 million and $72 million respectively, related to income taxes were not allocated to the business sectors.
Asset Management and Servicing The Asset Management and Servicing sector recorded pretax income of $86 million in the first quarter of 1995 compared with $133 million in the year- earlier period, a decrease of $47 million or 35%. Pretax income in the fourth quarter of 1994 was $38 million. Total revenue decreased 6% to $410 million in the first quarter compared with $434 million in the first quarter of 1994. Revenues from custody and securities-related services declined, while increased revenues associated with higher levels of assets under management were somewhat offset by lower performance fees. First quarter 1995 revenue increased $26 million or 7% from the fourth quarter of 1994 primarily because of an increase in the volume of transactions in exchange traded products and securities processing. Expenses associated with Asset Management and Servicing were $324 million in the first quarter 1995 compared with $301 million in the first quarter of 1994. The 8% increase in expenses primarily relates to higher employee compensation and benefits associated with an increase in staff levels, and an increase in technology and communications expenses. Expenses declined 6% from the fourth quarter of 1994. 18 Finance and Advisory The Finance and Advisory sector recorded pretax income of $44 million in the first quarter compared with $48 million a year ago and $10 million in the 1994 fourth quarter. Total revenue in the first quarter increased 10% to $320 million from $292 million in the first quarter of 1994 primarily due to increased revenues related to loan syndications partially offset by lower underwriting revenues. First quarter revenue increased $48 million or 18% from the fourth quarter primarily as a result of higher revenues from municipal finance activities and loan syndication. Expenses in the first quarter for the Finance and Advisory sector were $276 million compared with $244 million in the first quarter of 1994, an increase of 13%. The increase relates primarily to higher technology expenses and increased salary expense. Expenses increased 5% from the fourth quarter of 1994. Sales and Trading The markets in the first quarter of 1995 were characterized by extreme volatility in the foreign exchange and emerging markets, and corrective rallies in most major bond markets, resulting in cautious investor behavior. The Sales and Trading sector recorded pretax income of $90 million in the first quarter of 1995 up 43% from the $63 million in the 1994 first quarter. The sector recorded a pretax loss of $30 million in the fourth quarter of 1994. Total revenue in the first quarter of 1995 was $385 million compared with $320 million in the first quarter of 1994. Revenue associated with market making activities in foreign exchange and commodities markets increased in the 1995 first quarter compared with the first quarter 1994. Revenue from proprietary trading activities, primarily in Europe and Asia, increased significantly in 1995 compared with losses in the first quarter of 1994. While swaps volumes were comparable, revenues from structured transactions were below the high level of last year's first quarter, and losses were recorded on positions arising from some client- related transactions. First quarter 1995 revenue increased $96 million or 33% from the fourth quarter of 1994 reflecting higher proprietary trading revenues and revenue related to foreign exchange and fixed income activities. Total expenses for the Sales and Trading sector increased by approximately 15% to $295 million from $257 million in the first quarter of 1994. The increase was primarily attributable to higher technology and communications costs. Expenses decreased 8% from the fourth quarter of 1994. 19 Equity Investments Equity Investments recorded pretax income of $167 million in the first quarter of 1995 compared with $102 million in the first quarter of 1994, and $113 million in the fourth quarter. Total revenue was $173 million, compared with $107 million in the first quarter of 1994, and $118 million in the 1994 fourth quarter. The increase is primarily because of higher net realized gains on equity investment securities. Net unrealized appreciation on the combined portfolio of marketable and nonmarketable equity investment securities was $596 million at March 31, 1995, compared with $672 million at December 31, 1994. The results of the Equity Investment portfolio are also evaluated on an economic basis using total return. In the first quarter of 1995, total return was $97 million. As our investment strategy covers a longer-term horizon, total return viewed over shorter periods will reflect the impact of short-term market movements, including industry specific events. Asset and Liability Management Asset and Liability Management recorded pretax income of $217 million in the first quarter of 1995 compared with $259 million in the same period a year ago and $220 million in the 1994 fourth quarter. Total revenue, which primarily includes net interest revenue and net investment securities gains, was $240 million and $281 million for the first quarter of 1995 and 1994 respectively, and $243 million in the fourth quarter. Declines in net investment securities gains were partially offset by increases in net interest revenue related principally to U.S. dollar asset and liability management activities. Total unrealized appreciation on asset and liability management financial instruments, principally risk adjusting swaps, was $961 million at March 31, 1995, and $1,072 million at December 31, 1994. As our objective in Asset and Liability Management is to create longer- term value through the management of interest rate and liquidity risk related to J.P. Morgan's assets, liabilities, and off-balance-sheet activities, the performance of the Asset and Liability Management sector, similar to that of the Equity Investments sector, is evaluated on an economic basis using total return. Total return in the first quarter of 1995 was $129 million. During the twelve months ended March 31, 1995, monthly value at risk averaged approximately $103 million and ranged from approximately $86 million to $122 million. (This equates to average daily earnings at risk of approximately $23 million and a range of approximately $19 million to $27 million.) During the same twelve-month period, monthly total return was consistently within the range of monthly value at risk. Corporate Items Corporate Items consists of certain revenue and expense items that have not been allocated to the sectors. Also included in Corporate Items are intercompany eliminations and the taxable equivalent adjustment, which is calculated to gross-up tax exempt interest on a taxable basis. Because of the nature of these items, revenues and expenses will vary from period to period. Included in Corporate Items in the first quarter of 1995 is the tax equivalent adjustment of $29 million and a $55 million special charge related primarily to severance. The tax equivalent adjustment in the first and fourth quarters of 1994 was $29 million and $31 million respectively. 20 FINANCIAL STATEMENT ANALYSIS REVENUES Revenues totaled $1.388 billion in the first quarter of 1995, about the same as a year earlier. Net interest revenue rose 26% to $500 million from the first quarter of 1994, due mostly to improved results from asset and liability management, principally in the United States, and to an increase in trading- related net interest revenue. The 1994 quarter included $20 million of past-due interest payments related to Brazilian and Argentine assets. The following table provides J.P. Morgan's interest-rate-sensitivity gap at March 31, 1995, including the asset and liability interest-rate- sensitivity gap and the effect of derivatives on the gap. The resulting interest-rate-sensitivity gap is presented by U.S. dollar and non-U.S. dollar currency components and reflects J.P. Morgan's market outlook at March 31, 1995. Significant variances in interest rate sensitivity may exist at other dates not presented in the table. Amounts in parentheses reflect liability sensitive positions. By repricing or maturity dates ___________________________________________________________________________ ________________________ After After six one months year Within but but After six within within five In millions months one five years year ___________________________________________________________________________ ________________________ MARCH 31, 1995 Asset and liability interest- rate-sensitivity gap $(2,915 $(1,303 $2,901 $10,85 ) ) 2 Derivatives affecting interest rate sensitivity 1,650 3,056 (1,797 (2,938 ) ) ___________________________________________________________________________ ________________________ Interest-rate-sensitivity gap (1,265) 1,753 1,104 7,914 (a) ___________________________________________________________________________ ________________________ (a) Components of interest- rate- sensitivity gap: U.S. dollar 5,147 (1,946) (4,792 8,390 ) Non-U.S. dollar* (6,412) 3,699 5,896 (476) ___________________________________________________________________________ ________________ Total (1,265) 1,753 1,104 7,914 ___________________________________________________________________________ ________________ * Primarily yen, deutsche mark, French franc, Belgian franc, and sterling positions. 21 Trading revenue declined 15% to $303 million from the first quarter of 1994. Reported trading revenue does not include net interest revenue associated with trading activities, which was $61 million in the first quarter of 1995 and $45 million in the first quarter of 1994. The following presents an analysis of trading results, including the related amount of net interest revenue, in the principal markets in which we participate, for the three months ended March 31, 1995 and 1994. Foreign Swaps and exchange other spot and Equities interest rate Debt option and In millions contractsinstruments contracts commoditiesTotal ___________________________________ _______________________________________________ [S] [C] [C] [C] [C] [C] FIRST QUARTER 1995 Trading revenue $ 76 $ 94 $ 70 $ 63 $303 Net interest revenue 7 68 (1) (13) 61 ___________________________________________________________________________ _______ Combined total 83 162 69 50 364 ___________________________________________________________________________ _______ ___________________________________________________________________________ _______ FIRST QUARTER 1994 Trading revenue 266 36 10 44 356 Net interest revenue 9 57 (5) (16) 45 ___________________________________________________________________________ _______ Combined total 275 93 5 28 401 ___________________________________________________________________________ _______ Combined trading and related net interest revenue declined 9% to $364 million from a year earlier. Combined revenue for swaps and other interest rate contracts declined to $83 million from the strong $275 million in the first quarter of 1994. While total swap volumes were comparable, revenues from structured transactions were below the high level of last year's first quarter, and losses were recorded on positions arising from some client- related transactions. Combined revenue from debt instrument trading rose to $162 million from $93 million a year earlier, mostly from activities in Europe and Asia. Foreign exchange trading produced combined revenue of $69 million, up from $5 million a year ago, primarily from increased market- making. Trading in equities and commodities recorded combined revenue of $50 million, an increase from $28 million in the year-earlier quarter. Market risk profile J.P. Morgan employs a value at risk methodology to estimate the potential losses that could arise from adverse changes in market conditions within a 95% confidence interval, referred to as "Daily Earnings at Risk" (DEaR). The DEaR estimate for our combined trading activities averaged approximately $14 million for the twelve-month period ended March 31, 1995, and ranged from approximately $10 million to $21 million. Daily combined trading-related revenue averaged $5.9 million during the twelve-month period ended March 31, 1995. The frequency distribution of daily revenues around this average, relative to related DEaR estimates, fell within our expected confidence bands. 22 Corporate finance revenue was $114 million in the first quarter, in line with the year-earlier quarter. Underwriting revenue declined 51% to $22 million from 1994's corresponding quarter. Advisory and syndication fees rose 28% to $92 million from the 1994 first quarter. Credit-related fees were $43 million in the first quarter, 23% lower than in the first quarter of 1994, primarily due to lower securities lending revenue. Investment management fees were $130 million in the first quarter, up slightly from a year ago as a result of an increase in assets under management, partially offset by lower performance fees. Operational service fees in the first quarter totaled $140 million, slightly lower than in the 1994 first quarter, due to a decline in custody and securities clearing fees. Net investment securities gains were $9 million in the first quarter, compared with gains of $91 million in the first quarter of 1994. The gains in the first quarter of 1994 were mostly attributable to the sale of European government securities. Other revenue was $149 million in the first quarter, compared with $103 million in the 1994 first quarter. The 1995 first quarter reflected net equity investment securities gains of $163 million, versus $97 million a year ago. Also included in the first quarter of 1995 was $40 million of costs associated with hedging anticipated foreign currency revenues and expenses. OPERATING EXPENSES Operating expenses were $1.002 billion in the first quarter of 1995, up 18% from a year earlier. Excluding the $55 million special charge, operating expenses were up 11% from the first quarter of 1994. Employee compensation and benefit expenses, excluding the special charge, rose 4% to $571 million, reflecting growth in staff from a year ago. Technology and communications expenses were higher than in the year-earlier quarter, primarily due to expenditures on systems support and development. The weakening in the dollar's value accounted for 3 percentage points of the increase in operating expenses from the year-earlier quarter. The firm initiated an expense management program during the first quarter. While the emphasis was on lowering overall expense growth, staff was reduced 4% to 16,443 employees at March 31, 1995, from 17,055 employees at December 31, 1994. Technology and communications expenses were also down from fourth quarter levels as the firm focused on high-priority projects. Incentive compensation accruals were higher than in the fourth quarter. Income tax expense of $131 million in the first quarter is based on an effective tax rate of 34%, down from an effective tax rate of 36% in the first quarter of 1994. ASSETS Total assets were $167 billion at March 31, 1995, compared with $155 billion at December 31, 1994. Nonperforming assets decreased by $3 million to $217 million during the first quarter as new classifications were more than offset by repayments and charge-offs. No provision for credit losses was deemed necessary in the 1995 first quarter. The allowance for credit losses was $1.132 billion at March 31, 1995. 23 FOREIGN-COUNTRY-RELATED OUTSTANDINGS Foreign-country-related outstandings represent outstandings to foreign borrowers that are denominated in U.S. dollars or currencies other than the borrower's local currency or, in the case of a guarantee, other than the guarantor's local currency. Countries in which J.P. Morgan's outstandings exceeded 1.0% of total assets at March 31, 1995, are listed in the following table. Outstandings include loans, interest-earning deposits with banks, investment securities, customers' acceptance liability, securities purchased under agreements to resell, trading account securities, accrued interest, and other monetary assets. Outstandings generally are distributed according to the location of the borrower. In the case of guaranteed outstandings or when tangible, liquid collateral is held and realizable outside the obligor's country, distribution is generally made according to the location of the guarantor or the location where the collateral is held and realizable. In millions Cross-border outstandings (a ) _____________________________________________________________________ United Kingdom $7,005 France 1,839 _____________________________________________________________________ At March 31, 1995, Switzerland's cross-border outstandings were $1,546 million, between 0.75% and 1.0% of total assets. (a) Mexican cross-border outstandings at March 31, 1995, were $1,051 million, less than 0.75% of total assets. Not included in Mexican cross- border outstandings are United Mexican States (UMS) bonds, substantially all of which have been sold forward, that are collateralized by U.S. Treasury securities. If the book value of these bonds, which is discussed below, had been included, total Mexican cross-border outstandings would have exceeded 1% of total assets at March 31, 1995. The UMS bonds are collateralized as to principal by zero-coupon U.S. Treasury securities with face value equal to the face value of the underlying bonds. The collateral, which will become available when the UMS bonds mature, is pledged to the holders of the bonds and is held by the Federal Reserve Bank of New York. U.S. Treasury In millions UMS collatera bonds l ___________________________ __________________ Book Face Market Fair value value value value ___________________________________________________________________________ ___________________ MARCH 31, 1995 Due in 2008 $1,087 $1,121 $ 868 $426 Due in 2019 873 1,081 642 163 ___________________________________________________________________________ ______ 24 CAPITAL
March 31 December March 31 31 Dollars in billions 1995 1994 1994 ___________________________________________________________________________ _________ Total stockholders' equity $ 9.6 $ 9.6 $ 9.9 Annualized rate of return on average common 11.1 % 8.1 % 14.7 % stockholders' equity (a) As percent of period-end total assets: Common equity 5.5 5.9 5.6 Total equity 5.8 6.2 5.8 Book value per common $47.19 $46.73 $47.14 share (a) Risk-based capital: Tier 1 risk-based capital $ 8.4 $ 8.3 $ 8.1 Total risk-based capital 12.4 12.2 11.8 Risk adjusted assets 94.1 86.2 90.4 Tier 1 ratio 8.9 % 9.6 % 8.9 % Total ratio 13.2 14.2 13.1 Leverage ratio 5.9 6.5 6.2 ___________________________________________________________________________ _____________ (a) Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 11.7%, 8.6% and 16.9% for the three months ended March 31, 1995, December 31, 1994, and March 31, 1994 respectively, and the book value per common share would have been $44.87, $44.39 and $42.14 for the three months ended March 31, 1995, December 31, 1994, and March 31, 1994 respectively. J.P. Morgan's risk-based capital and leverage ratios remain well above the minimum standards set by the Federal Reserve Board. In accordance with Federal Reserve Board guidelines, the risk-based capital and leverage ratios exclude the equity, assets and off-balance-sheet exposures of J.P. Morgan Securities, Inc. and the effect of SFAS No. 115. In addition, effective December 31, 1994, the risk-based capital ratios reflect Federal Reserve Board amendments to recognize risk-reducing benefits of bilateral netting arrangements. The decreases in the first quarter in the risk-based capital and leverage ratios related primarily to the increase in total assets. At March 31, 1995, stockholders' equity included approximately $449 million of net unrealized appreciation on debt investment and marketable equity investment securities, net the related deferred tax liability of $276 million. This compares with $456 million of net unrealized appreciation at December 31, 1994. The unrealized appreciation on debt investment securities was $227 million and $154 million at March 31, 1995, and December 31, 1994, respectively. The unrealized appreciation on marketable equity investment securities was $498 million and $576 million at March 31, 1995, and December 31, 1994, respectively. 25
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated ___________________________________________________________________________ _________________
Dollars in millions, Three months ended interest and average rates ______________________________________________ _________ on a taxable-equivalent basis March 31, 1995 March 31, 1994 ______________________________________________ _________ Avera Averag Avera Avera ge e ge ge balan Intere rate balan Intere rate ce st ce st ______________________________________________ _________ ASSETS Interest-earning deposits with banks, $ $ 59 10.54 % $2,40 $ 49 8.26 % mainly in offices outside 2,271 5 the U.S. Debt investment securities in offices in the U.S. (a): U.S. Treasury 1,795 28 6.33 1,201 19 6.42 U.S. state and political subdivision 2,149 65 12.27 2,224 67 12.22 Other 13,11 230 7.11 8,859 93 4.26 7 Debt investment securities in offices 5,659 98 7.02 7,072 116 6.65 outside the U.S. (a) Trading account assets: In offices in the U.S. 13,33 241 7.33 13,68 190 5.63 9 3 In offices outside the 27,94 590 8.56 23,12 413 7.24 U.S. 6 3 Securities purchased under agreements to resell and federal funds 28,20 412 5.92 36,58 372 4.12 sold, 2 2 mainly in offices in the U.S. Securities borrowed in offices in 15,32 214 5.66 15,26 115 3.06 the U.S. 1 1 Loans: In offices in the U.S. 7,092 131 7.49 8,290 99 4.84 In offices outside the 16,57 288 7.05 16,75 240 5.81 U.S. 5 7 Other interest-earning assets (b): In offices in the U.S. 1,237 86 * 593 37 * In offices outside the 607 57 * 875 56 * U.S. ___________________________________________________________________________ ________________ Total interest-earning assets 135,3 2,499 7.49 136,9 1,866 5.53 10 25 Allowance for credit losses (1,13 (1,15 1) 5) Cash and due from banks 1,842 1,846 Other noninterest-earning 39,67 38,15 assets 3 3 ___________________________________________________________________________ _________________ Total assets 175,6 175,7 94 69 ___________________________________________________________________________ _________________ 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 March 31, 1995 and 1994. (a) For the three months ended March 31, 1995 and 1994, 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
26 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated _____________________________________________________________________________ _______________
Dollars in millions, Three months ended interest and average rates ______________________________________________ _________ on a taxable-equivalent basis March 31, 1995 March 31, 1994 ______________________________________________ _________ Avera Averag Avera Averag ge e ge e balan Intere rate balan Intere rate ce st ce st ______________________________________________ _________ LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: In offices in the U.S. $ $ 24 4.69 % $ $ 27 4.46 % 2,074 2,454 In offices outside the 41,90 595 5.76 35,16 406 4.68 U.S. 9 0 Trading account liabilities: In offices in the U.S. 7,403 141 7.72 7,442 104 5.67 In offices outside the 12,57 288 9.29 9,873 163 6.70 U.S. 0 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices 43,43 595 5.56 55,22 557 4.09 in 7 6 the U.S. Commercial paper, mainly in offices 2,577 39 6.14 3,554 29 3.31 in the U.S. Other interest-bearing liabilities: In offices in the U.S. 9,537 145 6.17 7,703 62 3.26 In offices outside the 2,499 27 4.38 2,770 34 4.98 U.S. Long-term debt, mainly in offices in the 7,273 116 6.47 5,449 58 4.32 U.S. ___________________________________________________________________________ _________________ Total interest-bearing 129, 1,970 6.18 129,6 1,440 4.51 liabilities 279 31 Noninterest-bearing deposits: In offices in the U.S. 3,35 4,347 4 In offices outside the 1,13 1,540 U.S. 3 Other noninterest-bearing liabilities 32,3 30,40 62 5 ___________________________________________________________________________ ________________ Total liabilities 166,1 165,9 28 23 Stockholders' equity 9,566 9,846 ___________________________________________________________________________ _________________ Total liabilities and stockholders' 175,6 175,7 equity 94 69 Net yield on interest-earning 1.59 1.26 assets ___________________________________________________________________________ _________________ Net interest earnings 529 426 ___________________________________________________________________________ _________________
27 ASSET AND LIABILITY MANAGEMENT DERIVATIVES The objective of asset and liability management is to create longer-term value through the management of interest rate and liquidity risk related to J.P. Morgan's assets, liabilities, and off-balance-sheet activities. J.P. Morgan utilizes a variety of financial instruments, including derivatives, in an integrated manner to achieve these objectives. Additional information on asset and liability management derivatives, primarily interest rate swaps, is provided below. For more information about asset and liability management activities, see Note 7 to the financial statements, Off-balance-sheet financial instruments. The table below summarizes maturities and weighted-average interest rates to be received and paid on U.S. dollar and non-U.S. dollar asset and liability management interest rate swaps at March 31, 1995. The majority of asset and liability management interest rate swaps, as presented below, are risk-adjusting swaps. Also included in the table are swaps designated as hedges or used to modify the interest rate characteristics of assets and liabilities. Variable rates presented are generally based on the London Interbank Offered Rate (LIBOR) at March 31, 1995, and reset at predetermined dates. The table was prepared under the assumption that these variable interest rates remain constant. The variable interest rates to be received or paid will change to the extent that rates fluctuate. Such changes may be substantial. Not included in the table below are other derivatives used for asset and liability management purposes, such as currency swaps, basis swaps, foreign exchange contracts, interest rate futures, forward rate agreements, debt securities forwards, and purchased options, totaling $43.7 billion at March 31, 1995. The contractual maturities of these derivative contracts are primarily less than one year.
By expected maturities ___________________________________________________________________________ ____________ Aft Aft Aft Aft er er er er one two thr fou Wit yea yea ee r Aft hin r rs yea yea er Dollars in billions one but but rs rs fiv Tota yea wit wit but but e l r hin hin wit wit yea two thr hin hin rs ee fou fiv r e ___________________________________________________________________________ ___________ INTEREST RATE SWAPS - U.S. DOLLAR Receive fixed swaps Notional amount $16 $14 $ $ $ $ $42. .7 .7 1.4 3.0 3.0 3.9 7 Weighted average: Receive rate 6.2 % 6.8 % 6.7 % 8.3 % 7.2 % 7.46 % 6.79 % 5 1 3 8 7 Pay rate 6.2 6.3 6.2 6.4 6.3 6.28 6.30 7 1 9 6 1 Pay fixed swaps Notional amount $17 $12 $ $ $ $ $51. .2 .8 7.5 4.7 2.8 6.4 4 Weighted average: Receive rate 6.2 % 6.2 % 6.3 % 6.3 % 6.3 % 6.32 % 6.30 % 8 9 5 0 1 Pay rate 6.3 6.5 6.0 5.9 7.1 7.13 6.45 2 6 5 7 0 INTEREST RATE SWAPS - NON-U.S. DOLLAR Receive fixed swaps Notional amount $31 $26 $14 $ $ $ $91. .7 .4 .4 7.3 5.9 6.1 8 Weighted average: Receive rate 6.3 % 5.9 % 6.7 % 5.9 % 7.0 % 7.54 % 6.41 % 7 6 8 7 8 Pay rate 5.5 4.7 5.3 4.4 5.4 5.94 5.21 1 6 5 5 2 Pay fixed swaps Notional amount $28 $20 $14 $ $ $ $83. .7 .7 .9 7.6 5.2 6.6 7 Weighted average: Receive rate 5.7 % 5.3 % 5.4 % 4.5 % 5.5 % 5.92 % 5.46 % 0 5 1 0 2 Pay rate 6.3 6.2 6.3 5.5 6.9 7.70 6.38 2 5 4 1 5 ___________________________________________________________________________ ____________ Total notional amount $94 $74 $38 $22 $16 $23. $269 .3 .6 .2 .6 .9 0 .6 ___________________________________________________________________________ ____________ There is $2.4 billion and $6.6 billion of notional amounts related to currency swaps and basis swaps, respectively, not included in the table above.
28 PART II Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS SUMMARY OF J.P. MORGAN'S ANNUAL MEETING The 1995 annual meeting of stockholders of J.P. Morgan & Co. Incorporated was held on Wednesday, May 10, 1995 at the company's 60 Wall Street headquarters; 85.94% of the 187,356,003 shares of common stock outstanding and eligible to be voted was represented either in person or by proxy, constituting a quorum. Douglas A. Warner III, Chairman of the Board and President, presided. The stockholders took the following actions: 1. Elected all 14 nominees to one-year terms as members of the Board of Directors. The directors are: Percent Percent of of Shares in shares Shares shares Director favor voting withheld voting ___________________________________________________________________________ ___________________________ Douglas A. Warner * 159,395,8 98.99 % 1,622,53 1.01 % III 98 3 Martin Feldstein 159,419,1 99.01 1,599,23 0.99 93 8 Hanna H. Gray 159,369,8 98.98 1,648,57 1.02 55 6 James R. Houghton 159,416,5 99.01 1,601,91 0.99 21 0 James L. Ketelsen 159,147,4 98.84 1,870,98 1.16 46 5 William S. Lee 159,112,9 98.82 1,905,49 1.18 36 5 Roberto G. Mendoza ** 159,332,8 98.95 1,685,60 1.05 24 7 Lee R. Raymond 159,363,8 98.97 1,654,55 1.03 79 2 Richard D. Simmons 159,456,1 99.03 1,562,29 0.97 35 6 John G. Smale 159,401,4 99.00 1,616,94 1.00 83 8 Kurt F. Viermetz ** 159,391,8 98.99 1,626,54 1.01 86 5 Rodney B. Wagner ** 159,385,6 98.99 1,632,77 1.01 58 3 Dennis 159,429,9 99.01 1,588,44 0.99 Weatherstone 91 0 Douglas C. Yearley 159,456,5 99.03 1,561,90 0.97 22 9 * Chairman of the Board and President ** Vice Chairman of the Board 2. Approved the appointment of Price Waterhouse LLP as independent accountants to perform auditing functions during 1995. There were 160,087,714 shares in favor, or 99.79% of shares voting; 340,634 shares against, or 0.21% of shares voting; 590,083 shares abstained; and no shares reflecting broker nonvotes. 3. Approved the 1995 Stock Incentive Plan. There were 103,472,198 shares in favor, or 76.15% of shares voting; 32,399,831 shares against, or 23.85% of shares voting; 2,776,564 shares abstained; and 22,369,838 shares reflecting broker nonvotes. 4. Approved the 1995 Executive Officer Performance Plan. There were 139,830,035 shares in favor, or 88.66% of shares voting; 17,878,516 shares against, or 11.34% of shares voting; 3,309,880 shares abstained; and no shares reflecting broker nonvotes. 5. Defeated the stockholder proposal relating to cumulative voting. There were 103,765,604 shares against, or 75.97% of shares voting; 32,822,251 shares for, or 24.03% of shares voting; 2,060,738 shares abstained; and 22,369,838 shares reflecting broker nonvotes. 6. Defeated the stockholder proposal relating to political non- partisanship. There were 121,510,802 shares against, or 93.97% of shares voting; 7,802,472 shares for, or 6.03% of shares voting; 9,335,319 shares abstained; and 22,369,838 shares reflecting broker nonvotes. 7. Defeated the stockholder proposal relating to structural adjustment. There were 126,800,953 shares against, or 95.39% of shares voting; 6,133,515 shares for, or 4.61% of shares voting; 5,714,125 shares abstained; and 22,369,838 shares reflecting broker nonvotes. 29 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10h. Stock option award 12. Statement re computation of ratios (incorporated by reference to Exhibit 12 to J.P. Morgan's post-effective amendment No. 2 to Form S-3, Registration No. 33-55851) 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 March 31, 1995: January 12, 1995 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing its earnings for the three-month period and fiscal year ended December 31, 1994. February 14, 1995 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release responding to the ratings downgrade by Moody's Investors Service. February 27, 1995 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release responding to Standard & Poor's rating announcement. 30 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. (REGISTRANT) J.P. MORGAN & CO. INCORPORATED BY (SIGNATURE) /s/ JAMES T. FLYNN _______________________________________ (NAME AND TITLE) JAMES T. FLYNN CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) DATE: May 15, 1995 1 LIST OF EXHIBITS EXHIBIT 10h. Stock option award 27. Financial data schedule EX-27 2
9 1,000,000 U.S. DOLLAR 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 1 1,153 1,650 27,478 68,198 21,655 0 0 24,434 1,132 167,077 46,824 49,486 52,835 8,292 502 0 494 8,644 167,077 415 399 1,656 2,470 619 1,970 500 0 9 1,002 386 255 0 0 255 1.27 1.27 1.59 216 0 0 0 1,131 8 9 1,132 72 111 949
EX-10 3 STOCK OPTION AWARD FOR DENNIS WEATHERSTONE 1 Exhibit 10(h) J.P. MORGAN & CO. INCORPORATED STOCK OPTION AWARD 1. J.P. Morgan & Co. Incorporated (the "Company") on January 16, 1995 has granted and hereby evidences the grant to Dennis Weatherstone (the "Optionee"), subject to the terms and conditions set forth herein, a non-qualified stock option (the "Option") to purchase from the Company 150,000 shares of Common Stock of the Company at a per share price of $60.50. Fifty percent of the Option shall be exercisable beginning January 16, 1996 and one hundred percent of the Option shall be exercisable beginning January 16, 1997. Upon exercise of the Option, in whole or in part, the Company shall cause a certificate for shares of Common Stock to be issued to the Optionee. 2. Subject to the terms and conditions hereof, the Option shall be exercisable at the times set forth in paragraph 1. Shares may be purchased until the Option shall expire or be canceled or surrendered, by giving the Company written notice of exercise specifying the number of shares to be purchased, which number may not be less than five shares. The notice of exercise shall be accompanied by tender to the Company of the full purchase price of said shares and the related amount of income taxes required to be withheld by the Company, if applicable. Payment of the purchase price of said shares shall be made in cash, shares of Common Stock, a combination of cash and such shares, or any additional method of payment acceptable to the Company's Committee on Management Development and Executive Compensation or any successor thereto (the "Committee"). The preceding sentence notwithstanding, the Committee may, in its sole discretion, prohibit or limit the use of shares of Common Stock as part or full payment of the purchase price. Any such shares delivered as part or full payment of the purchase price shall be valued on the date of exercise at their fair market value determined in accordance with procedures established by the Committee. 3. Without limiting the generality of paragraph 1 or 2 hereof, the Option is subject to the following conditions: (a) the Option shall not in any event be exercisable after the close of business on January 14, 2005; (b) the Option shall not be transferred except by will or the laws of descent and distribution or, during the lifetime of the Optionee, to one or more members of the Optionee's immediate family, to a partnership of which the only partners are members of the Optionee's immediate family, or to a trust established by the Optionee for the benefit of one or more members of the Optionee's immediate family ("immediate family" meaning the Optionee's spouse, parents, children, grandchildren and the spouses of such parents, children and grandchildren); (c) upon the death of the Optionee prior to January 15, 2005, the person or persons to whom the Optionee's rights under the Option are transferred in accordance with subparagraph (b) hereof, may, on or prior to January 14, 2005, purchase any or all of the shares remaining subject to the Option at the time of such death at or after the time the Optionee would have been entitled to purchase such shares had the Optionee survived; (d) upon a "Change in Control" (which term shall have the same definition as that in Section 9.1 of the 1992 Stock Incentive Plan of J.P. Morgan & Co. Incorporated and Affiliated Companies), the Option shall, unless the Committee determines otherwise, immediately become exercisable in full; and (e) prior to the occurrence of a Change in Control, but not thereafter, the Committee may, in its sole discretion and with or without cause, cancel the Option in whole or in part to the extent it has not theretofore been exercised. 4. In the event the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event has affected the Common Stock of the Company, such adjustment may be made in the number and option price of the shares subject to the Option as may be determined to be appropriate by the Committee in its sole discretion. 5. Any notice given hereunder to the Company shall be addressed to the Company in the manner specified in the notice of exercise provided by the Committee, and any notice given hereunder to the Optionee shall be addressed to him at his address as shown on the records of the Company. 6. The Optionee shall be bound by the terms and conditions hereof. -----END PRIVACY-ENHANCED MESSAGE-----