0000068100-95-000393.txt : 19950815 0000068100-95-000393.hdr.sgml : 19950815 ACCESSION NUMBER: 0000068100-95-000393 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 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: 95563416 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 JUNE 30, 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 June 30, 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 July 31, 1995: Common Stock, $2.50 Par Value 187,888,760 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 Six-month Consolidated statement of income J.P. Morgan & Co. Incorporated 4 Consolidated balance sheet J.P. Morgan & Co. Incorporated 5 Consolidated statement of changes in stockholders' equity J.P. Morgan & Co. Incorporated 6 Consolidated statement of cash flows J.P. Morgan & Co. Incorporated 7 Consolidated statement of condition Morgan Guaranty Trust Company of New York 8 Notes to Consolidated financial statements J.P. Morgan & Co. Incorporated 9 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 and six months ended June 30, 1995; and Table of asset and liability management derivatives are set forth on pages 19 through 36 herein. PART II -- OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K 37 SIGNATURES 38 3 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated ___________________________________________________________________________ ___________________________________
In millions, except per share data Three months ended ___________________________________________________________________ June 30 June 30 Increase March Increase 1995 1994 (Decreas 31 (Decreas e) 1995 e) ___________________________________________________________________ NET INTEREST REVENUE Interest revenue $2,405 $2,031 $374 $2,470 ($65) Interest expense 1,897 1,491 406 1,970 (73) ___________________________________________________________________________ _________________ Net interest revenue 508 540 (32) 500 8 NONINTEREST REVENUE Trading revenue 305 228 77 303 2 Corporate finance revenue 117 87 30 114 3 Credit-related fees 41 55 (14) 43 (2) Investment management fees 138 127 11 130 8 Operational service fees 140 140 - 140 - Net investment securities 33 35 (2) 9 24 gains Other revenue 167 254 (87) 149 18 ___________________________________________________________________________ _________________ Total noninterest revenue 941 926 15 888 53 Total revenue 1,449 1,466 (17) 1,388 61 OPERATING EXPENSES Employee compensation and benefits 616 592 24 626 (10) Net occupancy 79 69 10 80 (1) Technology and 165 145 20 172 (7) communications Other expenses 124 130 (6) 124 - ___________________________________________________________________________ _________________ Total operating expenses 984 936 48 1,002 (18) Income before income taxes 465 530 (65) 386 79 Income taxes 150 180 (30) 131 19 ___________________________________________________________________________ _________________ Net income 315 350 (35) 255 60 PER COMMON SHARE Net income (a) $1.56 $1.73 ($0.17) $1.27 $0.29 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 STATEMENT OF INCOME J.P. Morgan & Co. Incorporated ___________________________________________________________________________ _______
In millions, except per share data Six months ended _______________________________________________________ June 30 June 30 Increase 1995 1994 (Decrease) _______________________________________________________ NET INTEREST REVENUE Interest revenue $4,875 $3,868 $1,007 Interest expense 3,867 2,931 936 ___________________________________________________________________________ _______ Net interest revenue 1,008 937 71 NONINTEREST REVENUE Trading revenue 608 584 24 Corporate finance revenue 231 204 27 Credit-related fees 84 111 (27) Investment management fees 268 254 14 Operational service fees 280 284 (4) Net investment securities 42 126 (84) gains Other revenue 316 357 (41) ___________________________________________________________________________ _______ Total noninterest revenue 1,829 1,920 (91) Total revenue 2,837 2,857 (20) OPERATING EXPENSES Employee compensation and 1,242 1,140 102 benefits Net occupancy 159 133 26 Technology and communications 337 274 63 Other expenses 248 241 7 ___________________________________________________________________________ _______ Total operating expenses 1,986 1,788 198 Income before income taxes 851 1,069 (218) Income taxes 281 374 (93) ___________________________________________________________________________ _______ Net income 570 695 (125) PER COMMON SHARE Net income (a) $2.83 $3.43 ($0.60) Dividends declared 1.50 1.36 0.14 ___________________________________________________________________________ _______ (a) For the six months ended June 30, 1995, the earnings per share amount represents primary earnings per share; fully diluted earnings per share for the six months ended June 30, 1995, were $2.81. For the six months ended June 30, 1994, the earnings per share amount represents both primary and fully diluted earnings per share. See notes to financial statements.
5 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated ___________________________________________________________________________ ______________
Dollars in millions June March December 30 31 31 1995 1995 1994 _______________________________________________________ ASSETS Cash and due from banks $ $ $ 2,210 1,812 1,153 Interest-earning deposits with banks 1,736 1,650 1,362 Debt investment securities available-for-sale carried at fair value (cost: $20,133 at June 1995, 20,416 21,655 22,657 $21,428 at March 1995, and $22,503 at December 1994) Trading account assets 68,259 68,198 57,065 Securities purchased under agreements to resell ($26,127 at June 1995, $27,434 at March 26,209 27,478 21,350 1995, and $21,170 at December 1994) and federal funds sold Securities borrowed 10,313 11,073 12,127 Loans 24,043 24,434 22,080 Less: allowance for credit losses 1,132 1,132 1,131 ___________________________________________________________________________ ______________ Net loans 22,911 23,302 20,949 Customers' acceptance liability 266 658 586 Accrued interest and accounts receivable 3,214 3,011 5,028 Premises and equipment 3,438 3,395 3,318 Less: accumulated depreciation 1,420 1,361 1,302 ___________________________________________________________________________ ______________ Premises and equipment, net 2,018 2,034 2,016 Other assets 9,406 6,865 9,567 ___________________________________________________________________________ ______________ Total assets 166,56 167,077 154,917 0 ___________________________________________________________________________ ______________ LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 3,494 2,889 3,693 In offices outside the U.S. 995 682 767 Interest-bearing deposits: In offices in the U.S. 2,156 2,015 1,826 In offices outside the U.S. 38,671 41,238 36,799 ___________________________________________________________________________ ______________ Total deposits 45,316 46,824 43,085 Trading account liabilities 42,404 45,210 36,407 Securities sold under agreements to repurchase ($32,864 at June 1995, $32,884 at March 1995, and 38,496 35,843 35,768 $30,179 at December 1994) and federal funds purchased Commercial paper 1,903 2,309 3,507 Other liabilities for borrowed money 12,068 11,334 10,900 Accounts payable and accrued expenses 4,804 3,949 6,231 Liability on acceptances 266 658 586 Long-term debt not qualifying as risk-based 5,759 5,009 3,605 capital Other liabilities 2,340 3,018 2,063 ___________________________________________________________________________ ______________ 153,35 154,154 142,152 6 Long-term debt qualifying as risk-based 3,333 3,283 3,197 capital ___________________________________________________________________________ ______________ Total liabilities 156,68 157,437 145,349 9 STOCKHOLDERS' EQUITY Preferred stock (authorized shares: 10,000,000): Adjustable rate cumulative preferred stock, $100 244 244 244 par value (issued and outstanding: 2,444,300) Variable cumulative preferred stock, $1,000 par 250 250 250 value(issued and outstanding: 250,000) Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,674,673 at June 1995, 502 502 502 200,672,173 at March 1995 and 200,668,373 at December 1994) Capital surplus 1,441 1,448 1,452 Retained earnings 7,315 7,149 7,044 Net unrealized gains on investment securities, net of 459 449 456 taxes Other 407 368 367 ___________________________________________________________________________ ______________ 10,618 10,410 10,315 Less: treasury stock (12,856,867 shares at June 1995, 13,272,339 shares at March 1995 and 747 770 747 12,966,917 shares at December 1994) at cost ___________________________________________________________________________ ______________ Total stockholders' equity 9,871 9,640 9,568 ___________________________________________________________________________ ______________ Total liabilities and stockholders' equity 166,56 167,077 154,917 0 ___________________________________________________________________________ ______________ See notes to financial statements.
6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated _____________________________________________________________________________ _________________
Dollars in millions Six months ended ____________________________ June 30 June 30 1995 1994 ____________________________ PREFERRED STOCK Adjustable rate cumulative preferred stock Balance, January 1 and June 30 $ 244 $ 244 Variable cumulative preferred stock Balance, January 1 and June 30 250 250 ___________________________________________________________________________ _____________ Total preferred stock, June 30 494 494 ___________________________________________________________________________ _____________ COMMON STOCK Balance, January 1 502 499 Shares issued under dividend reinvestment plan, various - 2 employee benefit plans, and conversion of debentures ___________________________________________________________________________ _____________ Balance, June 30 502 501 ___________________________________________________________________________ _____________ CAPITAL SURPLUS Balance, January 1 1,452 1,393 Shares issued under dividend reinvestment plan, various employee benefit plans, and conversion of (11) 58 debentures, and income tax benefits associated with stock options ___________________________________________________________________________ _____________ Balance, June 30 1,441 1,451 ___________________________________________________________________________ _____________ RETAINED EARNINGS Balance, January 1 7,044 6,386 Net income 570 695 Dividends declared on adjustable rate cumulative preferred (6) (6) stock Dividends declared on variable cumulative (6) (3) preferred stock Dividends declared on common stock (282) (261) Dividend equivalents on common stock issuable (5) (3) ___________________________________________________________________________ _____________ Balance, June 30 7,315 6,808 ___________________________________________________________________________ _____________ NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES Balance, January 1 456 1,165 Net change in net unrealized gains, net of taxes 3 (480) ___________________________________________________________________________ _____________ Balance, June 30 459 685 ___________________________________________________________________________ _____________ OTHER COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS Balance, January 1 369 253 Accrued deferred stock awards 61 52 Deferred stock awards distributed, net (20) (11) ___________________________________________________________________________ _____________ Balance, June 30 410 294 ___________________________________________________________________________ _____________ FOREIGN CURRENCY TRANSLATION Balance, January 1 (2) (3) Translation adjustments (1) (1) Income tax benefit - 1 ___________________________________________________________________________ _____________ Balance, June 30 (3) (3) ___________________________________________________________________________ ____________ Total other, June 30 407 291 ___________________________________________________________________________ _____________ LESS: TREASURY STOCK Balance, January 1 747 328 Purchases 103 229 Shares distributed under various employee benefit (103) (14) plans ___________________________________________________________________________ _____________ Balance, June 30 747 543 ___________________________________________________________________________ _____________ Total stockholders' equity, June 30 9,871 9,687 ___________________________________________________________________________ _____________ See notes to financial statements.
7 CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated _____________________________________________________________________________ ___________
Dollars in millions Six months ended ____________________________ June 30 June 30 1995 1994 ____________________________ NET INCOME $ 570 $ 695 Adjustments to reconcile to cash provided by (used in) operating activities: Noncash items: depreciation, amortization, deferred 166 267 income taxes, and stock award plans (Increase) decrease in assets: Trading account assets (11,258) (16,561) Securities purchased under agreements to (4,971) (2,178) resell Securities borrowed 1,814 (758) Accrued interest and accounts receivable 1,812 649 Increase (decrease) in liabilities: Trading account liabilities 5,947 22,807 Securities sold under agreements to 2,675 (7,916) repurchase Accounts payable and accrued expenses (1,449) (485) Other changes in operating assets and 1,110 (3,308) liabilities, net Net investment securities gains included in cash flows (42) (126) from investing activities ___________________________________________________________________________ _____________ CASH USED IN OPERATING ACTIVITIES (3,626) (6,914) ___________________________________________________________________________ _____________ Increase in interest-earning deposits with banks (375) (78) Debt investment securities: Proceeds from sales 24,147 30,388 Proceeds from maturities, calls, and mandatory 1,035 1,716 redemptions Purchases (21,142) (32,083) (Increase) decrease in federal funds sold 98 (34) Increase in loans (1,997) (1,633) Payments for premises and equipment (105) (160) Other changes, net (1,797) (191) ___________________________________________________________________________ _____________ CASH USED IN INVESTING ACTIVITIES (136) (2,075) ___________________________________________________________________________ _____________ Increase (decrease) in noninterest-bearing deposits 28 (433) Increase in interest-bearing deposits 2,166 3,729 Increase in federal funds purchased 43 1,866 Increase (decrease) in commercial paper (1,604) 1,310 Other liabilities for borrowed money: Proceeds 7,952 5,585 Payments (6,591) (6,799) Long-term debt: Proceeds 2,421 1,075 Payments (283) (518) Capital stock: Issued - 64 Purchased or redeemed (103) (229) Dividends paid (279) (272) Other changes, net (508) 4,443 ___________________________________________________________________________ _____________ CASH PROVIDED BY FINANCING ACTIVITIES 3,242 9,821 ___________________________________________________________________________ _____________ Effect of exchange rate changes on cash and due from 122 21 banks ___________________________________________________________________________ _____________ INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (398) 853 Cash and due from banks at December 31, 1994 and 2,210 1,008 1993 ___________________________________________________________________________ _____________ Cash and due from banks at June 30, 1995 and 1994 1,812 1,861 ___________________________________________________________________________ _____________ Cash disbursements were made for: Interest $3,717 $2,931 Income taxes 257 889 ___________________________________________________________________________ _____________ See notes to financial statements.
8 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York ___________________________________________________________________________ ___________________________________
Dollars in millions June 30 December 1995 31 1994 ___________________________________________ ASSETS Cash and due from banks $ $ 1,743 2,182 Interest-earning deposits with banks 1,791 1,605 Debt investment securities available-for-sale carried at 17,590 21,292 fair value Trading account assets 56,060 45,386 Securities purchased under agreements to resell and federal funds sold 17,396 16,562 Loans 20,980 19,397 Less: allowance for credit losses 1,027 1,025 ___________________________________________________________________________ _________________ Net loans 19,953 18,372 Customers' acceptance liability 216 556 Accrued interest and accounts receivable 3,182 3,594 Premises and equipment 3,054 2,967 Less: accumulated depreciation 1,247 1,149 ___________________________________________________________________________ _________________ Premises and equipment, net 1,807 1,818 Other assets 8,167 7,360 ___________________________________________________________________________ _________________ Total assets 127,905 118,727 ___________________________________________________________________________ _________________ LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 3,400 3,698 In offices outside the U.S. 1,030 770 Interest-bearing deposits: In offices in the U.S. 1,931 1,480 In offices outside the U.S. 38,444 38,566 ___________________________________________________________________________ _________________ Total deposits 44,805 44,514 Trading account liabilities 38,009 30,730 Securities sold under agreements to repurchase and federal funds 21,290 22,099 purchased Other liabilities for borrowed money 5,634 5,320 Accounts payable and accrued expenses 3,448 2,902 Liability on acceptances 216 556 Long-term debt not qualifying as risk-based capital (includes $779 3,167 1,968 at 1995 and $630 at 1994 of notes payable to J.P. Morgan) Other liabilities 2,243 2,080 ___________________________________________________________________________ _________________ 118,812 110,169 Long-term debt qualifying as risk-based capital (includes $1,025 at 1,224 1,249 1995 and $1,030 at 1994 of notes payable to J.P. Morgan) ___________________________________________________________________________ _________________ Total liabilities 120,036 111,418 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 2,820 2,670 Undivided profits 4,644 4,266 Net unrealized gains on investment securities, net of 158 124 taxes Foreign currency translation (3) (1) ___________________________________________________________________________ _________________ Total stockholder's equity 7,869 7,309 ___________________________________________________________________________ _________________ Total liabilities and stockholder's equity 127,905 118,727 ___________________________________________________________________________ _________________ Member of the Federal Reserve System and the Federal Deposit Insurance Corporation. See notes to financial statements.
9 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. 10 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. Second Six months quarter In millions 1995 1994 1995 1994 ____________________________________________________________________________ ________ INTEREST REVENUE Deposits with banks $ $ $ $ 44 46 103 95 Debt investment securities (a) 373 291 771 563 Trading account assets 782 672 1,61 1,27 1 4 Securities purchased under agreements to resell and federal funds sold 443 375 855 747 Securities borrowed 187 136 401 251 Loans 436 339 851 673 Other sources, primarily risk- 140 172 283 265 adjusting swaps ___________________________________________________________________________ _______________________ Total interest revenue 2,40 2,03 4,87 3,86 5 1 5 8 ____________________________________________________________________________ ________ INTEREST EXPENSE Deposits 616 436 1,23 869 5 Trading account liabilities 332 294 761 561 Securities sold under agreements to repurchase and federal funds 605 546 1,20 1,10 purchased 0 3 Other borrowed money 204 153 415 278 Long-term debt 140 62 256 120 ___________________________________________________________________________ _______________________ Total interest expense 1,89 1,49 3,86 2,93 7 1 7 1 ___________________________________________________________________________ _______________________ Net interest revenue 508 540 1,00 937 8 ____________________________________________________________________________ _______ (a) Interest revenue from debt investment securities included taxable revenue of $332 million and $688 million and revenue exempt from U.S. income taxes of $41 million and $83 million for the three months and six months ended June 30, 1995, respectively. For the three months and six months ended June 30, 1995, net interest revenue associated with asset and liability management derivatives was approximately $110 million and $190 million, respectively. At June 30, 1995, approximately ($370) million of net deferred losses 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 losses on closed hedge contracts included in the amortized cost of the debt investment portfolio. As discussed in Note 5 to the financial statements, Investment Securities, the net unrealized appreciation associated with debt investment securities was $283 million at June 30, 1995. Net deferred losses are expected to amortize into Net interest revenue as follows: ($60) million - remainder of 1995; ($100) million - 1996; ($70) million - 1997; ($50) million - 1998; ($40) million - 1999; ($30) million - 2000; and approximately ($20) million thereafter. The amount of net deferred gains or 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. 11 4. TRADING REVENUE An analysis of trading revenue for the three months and six months ended June 30, 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. Second Six months quarter In millions 1995 1994 1995 1994 ____________________________________________________________________________ ________ Swaps and other interest rate $ $ $ $ contracts 100 126 176 392 Debt instruments 73 (3) 167 33 Foreign exchange spot and option 24 27 94 37 contracts Equities and commodities 108 78 171 122 ____________________________________________________________________________ ________________________ Trading revenue 305 228 608 584 ____________________________________________________________________________ ________ 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 June 30, 1995, follows. Fair and carrying In millions Cost value ___________________________________________________________________________ _______ U.S. Treasury $ 3,564 $ 3,645 U.S. government agency, principally 12,075 12,107 mortgage-backed U.S. state and political subdivision 2,046 2,219 U.S. corporate and bank debt 262 272 Foreign government* 1,350 1,333 Foreign corporate and bank debt 743 746 Other 93 94 ___________________________________________________________________________ _______ Total debt investment securities 20,133 20,416 ___________________________________________________________________________ _______ * 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 June 30, 1995, was $283 million, consisting of gross unrealized appreciation of $523 million and gross unrealized depreciation of $240 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. Second Six months quarter In millions 1995 1994 1995 1994 ___________________________________________________________________________ ___ Gross realized gains from sales $ $ $ $ 211 107 271 292 Gross realized losses from sales (178 (88) (229 (183 ) ) ) Net gains on maturities, calls and mandatory redemptions - 16 - 17 ___________________________________________________________________________ ___ Net investment securities gains 33 35 42 126 ___________________________________________________________________________ ___ 12 Equity investment securities Net realized gains on the sale of equity investment securities of $132 million and $295 million included in Other revenue for the three months and six months ended June 30, 1995, respectively, include $148 million and $316 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 June 30, 1995, follows. Gross Gross Fair and unreali unreali carryin zed zed g In millions Cost gains losses value _________________________________________________________________________ _____ June 30, 1995 $210 $463 - $673 _________________________________________________________________________ _____ Securities without available market quotations: Nonmarketable equity investment securities, carried at a cost of $420 million, had an estimated fair value of $510 million at June 30, 1995. 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 June 30, 1995, and the average balance for the three-month and six-month periods ended June 30, 1995. Carrying Average value balance ___________ _____________________________ June 30 Second Six In millions 1995 quarter months 1995 1995 ___________________________________________________________________________ _______ TRADING ACCOUNT ASSETS U.S. Treasury $ 5,823 $ 4,957 $ 6,571 U.S. government agency 2,409 2,850 3,280 Foreign government 19,852 19,615 20,194 Corporate debt and equity 10,135 9,638 9,000 Other securities 3,371 6,036 4,276 Interest rate and currency 14,087 14,717 13,250 swaps Foreign exchange contracts 5,880 6,945 5,901 Interest rate futures and 366 308 235 forwards Commodity and equity 1,773 1,242 1,293 contracts Purchased option contracts 4,563 4,051 3,934 ___________________________________________________________________________ _______ Total trading account assets 68,259 70,359 67,934 ___________________________________________________________________________ _______ TRADING ACCOUNT LIABILITIES U.S. Treasury 4,411 6,054 7,141 Foreign government 8,716 10,354 10,175 Corporate debt and equity 2,392 4,255 3,699 Other securities 813 535 852 Interest rate and currency 14,266 13,312 12,053 swaps Foreign exchange contracts 5,341 5,574 4,771 Interest rate futures and 418 373 281 forwards Commodity and equity 1,661 1,099 1,364 contracts Written option contracts 4,386 3,980 4,216 ___________________________________________________________________________ _______ Total trading account 42,404 45,536 44,552 liabilities ___________________________________________________________________________ _______ 13 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 $21.8 billion of master netting agreements in effect at June 30, 1995, is also presented. Notional Credit In billions: June 30, 1995 amounts exposure ___________________________________________________________________________ ___________________ Interest rate and currency swaps Trading $ 984.0 Asset and liability 283.4 management(a)(b)(c) ___________________________________________________________________________ ___________________ Total interest rate and currency 1,267.4 $14.1 swaps ___________________________________________________________________________ ___________________ Foreign exchange spot, forward, and futures contracts Trading 452.0 Asset and liability 19.8 management(a)(b) ___________________________________________________________________________ ___________________ Total foreign exchange spot, forward, 471.8 5.9 and futures contracts ___________________________________________________________________________ ___________________ Interest rate futures, forward rate agreements, and debt securities forwards Trading 355.2 Asset and liability management 15.7 ___________________________________________________________________________ ___________________ Total interest rate futures, forward rate 370.9 0.3 agreements, and debt securities forwards ___________________________________________________________________________ ___________________ Commodity and equity swaps, forward, and 59.0 1.8 futures contracts, all trading ___________________________________________________________________________ ___________________ Purchased options(e) Trading 467.8 Asset and liability management(a) 3.1 ___________________________________________________________________________ ___________________ Total purchased options 470.9 4.6 ___________________________________________________________________________ ___________________ Written options, all trading(f) 471.2 ___________________________________________________________________________ ___________________ Total credit exposure recorded as assets on the balance sheet 26.7 (d ) ___________________________________________________________________________ 14 (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 $22.4 billion at June 30, 1995, and were primarily denominated in the following currencies: Deutsche mark $4.9 billion, Japanese yen $3.9 billion, Italian lira $2.2 billion, Belgian franc $1.9 billion, British pound $2.1 billion, Spanish peseta $1.6 billion, Swiss franc $1.5 billion, and French franc $1.4 billion. (c) The notional amount of risk-adjusting swaps was $263.7 billion at June 30, 1995. (d) Total credit exposure related to derivatives increased from $19.5 billion at December 31, 1994, primarily due to the impact of the weakening of the U.S. dollar and declines in European and Japanese interest rates, partially offset by increased benefit from master netting agreements at June 30, 1995. (e) At June 30, 1995, purchased options used for trading purposes included $370.8 billion of interest rate options, $66.0 billion of foreign exchange options, and $31.0 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 $222.3 billion and those negotiated over-the-counter amounted to $248.6 billion at June 30, 1995. (f) At June 30, 1995, written options used for trading purposes included $369.6 billion of interest rate options, $69.2 billion of foreign exchange options, and $32.4 billion of commodity and equity options. Written option contracts executed on an exchange amounted to $194.1 billion and those negotiated over-the-counter amounted to $277.1 billion at June 30, 1995. 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 gains associated with open derivative contracts used to hedge or modify the interest rate characteristics of related balance sheet instruments amounted to $128 million at June 30, 1995. Gross unrealized gains and gross unrealized losses associated with open derivative contracts used for these purposes at June 30, 1995, are presented below. Such amounts primarily relate to interest rate and currency swaps 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 $ 28 $ 19 $ 9 securities Long-term debt 199 59 140 Deposits 30 48 (18) Other financial 29 32 (3) instruments ___________________________________________________________________________ _______ Total 286 158 128 ___________________________________________________________________________ _______ 15 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 $0.6 billion at June 30, 1995. The net amount is composed of $3.5 billion of gross unrealized gains and $2.9 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 June 30, 1995. There were no material terminations of risk-adjusting swaps during the three months and six months ended June 30, 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 June 30, 1995, is presented in the following table. June 30 In billions 1995 _________________________________________________________________________ __ Commitments to extend credit $50.6 Standby letters of credit and guarantees 10.1 Securities lending indemnifications (a) 19.5 _________________________________________________________________________ __ (a) At June 30, 1995, J.P. Morgan held cash and other collateral of $19.4 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 $29.3 billion were netted against amounts payable for securities purchased of $27.4 billion to arrive at a net trade date receivable of $1.9 billion, which was classified as Other assets on the consolidated balance sheet at June 30, 1995. 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 June 30, 1995, by approximately $1.8 billion before considering income taxes, compared with $2.2 billion at December 31, 1994. Such amounts were primarily attributable to net appreciation on net loans and risk-adjusting swaps of $1.2 billion and $0.6 billion, respectively, at June 30, 1995 and $1.2 billion and $0.8 billion, respectively, at December 31, 1994. 16 9. NONPERFORMING ASSETS AND ALLOWANCE FOR CREDIT LOSSES Total nonperforming assets, net of charge-offs, at June 30, 1995, are presented in the following table. June 30 In millions 1995 ___________________________________________________________________________ _______ Nonaccrual loans: Commercial and industrial $127 Other 56 ___________________________________________________________________________ _______ 183 Restructuring countries 3 ___________________________________________________________________________ _______________________ Total nonaccrual loans 186 (a ) ___________________________________________________________________________ _______ Other nonperforming assets 1 ___________________________________________________________________________ _______ Total nonperforming assets 187 ___________________________________________________________________________ _______ An analysis of the effect of nonaccrual loans, net of charge-offs, on interest revenue in the three months and six months ended June 30, 1995, is presented in the following table. Second Six months quarter In millions 1995 1995 ___________________________________________________________________________ _______ Interest revenue that would have been recorded if accruing $4 $9 Less interest revenue recorded 5 19 ___________________________________________________________________________ _______________________ Positive impact of nonaccrual loans on interest revenue 1 10 ___________________________________________________________________________ _______ An analysis of the allowance for credit losses at June 30, 1995, is presented in the following table. Second Six months quarter In millions 1995 1995 ___________________________________________________________________________ _______________________ Beginning of period balance $1,132 $1,131 ___________________________________________________________________________ _______________________ Recoveries 18 27 Charge-offs: Commercial and industrial (14) (20) Restructuring countries - - Other (4) (6) ___________________________________________________________________________ _______ Net charge-offs - 1 ___________________________________________________________________________ _______ Balance, June 30, 1995 (b) 1,132 1,132 (c) ___________________________________________________________________________ _______ (a) As of June 30, 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 June 30, 1995, for which there was no related allowance for credit losses in accordance with SFAS No. 114 was $186 million. For the three months and six months ended June 30, 1995, the average recorded investment in nonaccrual loans was $206 million and $208 million, respectively. (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 June 30, 1995, the allocation of the allowance for credit losses was as follows: Specific allocation - borrowers in the U.S. $74 million, Specific allocation - borrowers outside the U.S. $111 million, Allocation to general risk $947 million. 17 10. CORPORATE FINANCE AND OTHER REVENUE In the second quarter of 1995 and 1994, Corporate finance revenue includes $41 million and $25 million, respectively, of underwriting revenue. For the six months ended June 30, 1995 and 1994, underwriting revenue was $63 million and $70 million, respectively. Other revenue of $167 million in the 1995 second quarter includes $132 million of net equity investment securities gains. Other revenue of $254 million in the 1994 second quarter includes net equity investment securities gains of $264 million, of which $255 million was generated from the sale of a portion of the firm's investment in Columbia/HCA common stock. For the six months ended June 30, 1995, Other revenue of $316 million primarily includes net equity investment securities gains of $295 million. Other revenue of $357 million for the six months ended June 30, 1994, primarily includes net equity investment securities gains of $361 million and $54 million of hedging losses related to the management of non-trading foreign currency exposures. 11. INCOME TAXES Income tax expense in the 1995 second quarter reflects a 32% effective tax rate, compared to a 34% effective tax rate in the 1994 second quarter. For the six months ended June 30, 1995, the effective tax rate was 33% versus 35% for the comparable 1994 period. Income tax expense related to net investment securities gains was approximately $13 million and $17 million for the three months and six months ended June 30, 1995, respectively, compared with approximately $14 million and $52 million for the respective 1994 periods, and was 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 $51.0 billion in the consolidated balance sheet at June 30, 1995, were pledged as collateral for borrowings, to qualify for fiduciary powers, to secure public monies as required by law, and for other purposes. 18 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. Second quarter Dollars in millions 1995 1994 ___________________________________________________________________________ ____ Adjusted net income $ 310 $ 346 Primary earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 198,241,30 200,011,0 1 49 Fully diluted earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 198,920,49 200,011,1 9 11 ___________________________________________________________________________ ____ Six months Dollars in millions 1995 1994 ___________________________________________________________________________ ____ Adjusted net income $ 559 $687 Primary earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 197,724,06 200,473,4 9 03 Fully diluted earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 199,082,09 200,473,7 5 49 ___________________________________________________________________________ ____ 19 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 $315 million in the second quarter of 1995, down 10% from the second quarter of 1994. Net income in the first quarter of this year was $255 million, including a special charge of $55 million ($33 million after tax, or $0.17 per share) related primarily to severance. Second quarter earnings per share were $1.56 versus $1.73 a year earlier and $1.27 in the 1995 first quarter. Net income for the first six months of 1995 totaled $570 million, including the special charge, compared with $695 million in the first six months of 1994. Six-month earnings per share were $2.83 versus $3.43 a year ago. SECOND QUARTER RESULTS AT A GLANCE
First In millions of dollars, Second quarter quarter except per share data 1995 1994 1995 ___________________________________________________________________________ __ Revenues $1,449 $1,466 $ 1,388 Operating expenses (984) (936) (1,002) Income taxes (150) (180) (131) ___________________________________________________________________________ ___ Net income $ 315 $ 350 $ 255 Net income per share $ 1.56 $ 1.73 $ 1.27 ___________________________________________________________________________ ___ Dividends declared per $ 0.75 $ 0.68 $ 0.75 share _________________________________________________________________________ _____
REVENUES in the second quarter were approximately even with those of a year ago: -Combined trading and related net interest revenue rose 10% to $333 million. -Corporate finance revenue was up 34% to $117 million. Morgan's market share in capital raising grew, and advisory fees increased. Investment management fees also rose, while credit- related fees were lower. -Net equity investment securities gains were $132 million in the second quarter versus $264 million in the corresponding 1994 quarter. OPERATING EXPENSES rose 5% from a year ago. IN OTHER DEVELOPMENTS, J.P. Morgan has agreed to sell its U.S., U.K., and global securities custody businesses, its local custody and securities clearing businesses in Continental Europe, and its U.S. commercial paper issuing and paying agency business. The firm also announced that it would outsource certain cash and check-processing services. These activities, which represented approximately 5% of consolidated total revenue for the six month period ended June 30, 1995, are expected to produce a net gain, to be recorded over time, and are expected to have no material effect on Morgan's ongoing consolidated results. 20 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 three months ended June 30, 1995 and 1994 and the six months ended June 30, 1995 and 1994.
Asset Asset Manageme Financ Sales Equit and nt e y and and and Inves Liabilit Corpora Consol t- y te i- In millions Servici Adviso Tradi ments Manageme Items dated ng ry ng nt ___________________________________________________________________________ ____________ Second quarter 1995 Total $418 $367 $344 $151 $290 ($121) $1,449 revenue Total 347 289 289 6 25 28 984 expenses ___________________________________________________________________________ _____________ Pretax 71 78 55 145 265 (149) 465 income ___________________________________________________________________________ _____________ Second quarter 1994 Total 424 263 278 267 216 18 1,466 revenue Total 311 273 289 7 24 32 936 expenses ___________________________________________________________________________ ____________ Pretax 113 (10) (11) 260 192 (14) 530 income ___________________________________________________________________________ _____________ Six months 1995 Total 828 687 729 324 530 (261) 2,837 revenue Total 671 565 584 12 48 106 1,986 expenses ___________________________________________________________________________ _____________ Pretax 157 122 145 312 482 (367) 851 income ___________________________________________________________________________ _____________ Six months 1994 Total 858 555 598 374 497 (25) 2,857 revenue Total 612 517 546 12 46 55 1,788 expenses ___________________________________________________________________________ _____________ Pretax 246 38 52 362 451 (80) 1,069 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 three months ended June 30, 1995 and 1994, $150 million and $180 million, respectively, related to income taxes were not allocated to the business sectors. In the six months ended June 30, 1995 and 1994, $281 million and $374 million respectively, related to income taxes were not allocated to the business sectors.
21 Asset Management and Servicing The Asset Management and Servicing sector recorded pretax income of $71 million in the second quarter of 1995 compared with $113 million in the year-earlier period, a decrease of $42 million or 37%. Revenues of $418 million in the second quarter of 1995 were essentially unchanged from the $424 million in the second quarter of 1994. Revenues from securities- related services declined, primarily due to lower securities lending fees, while revenues from asset management increased reflecting an increase in assets under management, primarily from net new business. Expenses associated with the Asset Management and Servicing sector were $347 million in the second quarter of 1995 compared with $311 million in the second quarter of 1994. The 12% increase in expenses primarily relates to higher employee compensation and benefits associated with an increase in staff levels. Revenues of $828 million for the six month period decreased $30 million from 1994. Expenses for the six month period ended June 30, 1995 increased 10% from 1994 to $671 million. As previously reported, J.P. Morgan agreed to sell its U.S., U.K., and global securities custody businesses, its local custody and securities clearing businesses in Continental Europe, and its U.S. commercial paper issuing and paying agency business. J.P. Morgan also announced that it would outsource certain cash and check-processing services. The moves reflect a sharpening of the firm's strategic focus on core global banking activities. These activities represented approximately 20% of the Asset Management and Servicing sector revenues for the six month period ended June 30, 1995. We will continue to provide operational services that complement our core global banking activities, such as the administration of American and other depositary receipts as well as U.S. money transfer, and global trust and agency services. J.P. Morgan's role as operator of the Euroclear System, the world's largest clearance and settlement system for internationally traded securities, will not be affected by these actions. Finance and Advisory The Finance and Advisory sector recorded pretax income of $78 million in the second quarter of 1995 compared with a loss of $10 million a year ago. Total revenue in the second quarter increased 40% to $367 million from $263 million in the second quarter of 1994 due to higher equities revenues, primarily from equity derivatives. Revenues from our underwriting activity and higher advisory and syndication fees also contributed to the increase. Expenses in the second quarter for the Finance and Advisory sector were $289 million compared with $273 million in the second quarter of 1994, an increase of 6% due primarily to increased staff levels. Revenues for the six month period increased $132 million from 1994. Expenses for the same period increased $48 million or 9% from 1994. 22 Sales and Trading The Sales and Trading sector recorded pretax income of $55 million in the second quarter of 1995 up $66 million from the $11 million pretax loss in the 1994 second quarter. Total revenue in the second quarter of 1995 was $344 million compared with $278 million in the second quarter of 1994. The increase in revenues reflects improved performance in Latin America and Asia that was partially offset by mortgage-backed securities results. Total expenses for the Sales and Trading sector of $289 million were unchanged from the second quarter of 1994. Total revenue of $729 million for the six months was an increase of $131 million from 1994. Total expenses increased $38 million or 7% from last year. Equity Investments Equity Investments recorded pretax income of $145 million in the second quarter of 1995 compared with $260 million in the second quarter of 1994. Total revenue was $151 million, compared with $267 million in the second quarter of 1994. The 1995 second quarter reflected net equity investment securities gains of $132 million, versus $264 million in the year-earlier quarter, when $255 million was generated from the sale of a portion of the firm's investment in Columbia / HCA Corporation common stock. Total revenue for the six month period was $324 million compared with $374 million in 1994. Net unrealized appreciation on the combined portfolio of marketable and nonmarketable equity investment securities was $553 million at June 30, 1995, compared with $596 million at March 31, 1995. The results of the Equity Investment portfolio are also evaluated on an economic basis using total return. In the second quarter of 1995, total return was $108 million. Total return for the six months ended June 30, 1995, was $205 million. As our investment strategy covers a longer- term horizon, total return viewed over short 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 $265 million in the second quarter of 1995 compared with $192 million in the same period a year ago. Total revenue, which primarily includes net interest revenue and net investment securities gains, was $290 million and $216 million for the second quarter of 1995 and 1994 respectively, with the increase due primarily to activities in the United States. Total unrealized appreciation on asset and liability management financial instruments, principally risk adjusting swaps and debt investment securities, was $701 million at June 30, 1995, and $961 million at March 31, 1995. The decline in unrealized appreciation was primarily due to the recognition of net interest revenue. Total revenue increased $33 million to $530 million for the six month period ended June 30, 1995. As our objective in Asset and Liability Management is to create longer-term value through the management of interest rate 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 second quarter of 1995 was $30 million. Total return for the six month period ended June 30, 1995 was $159 million. During the twelve months ended June 30, 1995, monthly value at risk averaged approximately $95 million and ranged from approximately $76 million to $111 million. (This equates to average daily earnings at risk of approximately $21 million and a range of approximately $17 million to $24 million.) During the same twelve-month period, monthly total return was consistently within the range of monthly value at risk. 23 Corporate Items Corporate Items consists of intercompany eliminations, the taxable equivalent adjustment, which is calculated to gross-up tax exempt interest on a taxable basis, and certain revenue and expense items that have not been allocated to the sectors. Because of the nature of these items, revenues and expenses will vary from period to period. Corporate Items in the second quarter of 1995 consisted primarily of intercompany eliminations and the taxable equivalent adjustment of $27 million. Corporate Items for the second quarter of 1994 included $50 million in interest revenue associated with income tax refunds, past due interest claims from Brazil, the taxable equivalent adjustment of $30 million, and intercompany eliminations. Corporate Items for the six months of 1995 consisted primarily of intercompany eliminations, the taxable equivalent adjustment of $56 million, a $55 million charge related primarily to severance, and other items not allocated to sectors. 24 FINANCIAL STATEMENT ANALYSIS REVENUES Revenues totaled $1.449 billion in the second quarter of 1995, compared with $1.466 billion a year earlier. Net interest revenue totaled $508 million in the second quarter of 1995, compared with $540 million in the year-earlier quarter. The 1994 quarter included approximately $35 million of past-due interest payments on Brazilian assets and $50 million in interest revenue associated with income tax refunds. Excluding these items, net interest revenue rose 12% from the 1994 second quarter, primarily due to asset and liability management activities, principally in the United States. Net interest revenue for the first six months of 1995 was $1.008 billion compared with $937 million earned in the first six months of 1994. Excluding $105 million related to past-due interest on Brazilian and Argentine assets and the interest on income tax refunds, net interest revenue increased 21% from the first half of 1994. The following table provides J.P. Morgan's interest-rate-sensitivity gap at June 30, 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 June 30, 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 ___________________________________________________________________________ ________________________ JUNE 30, 1995 Asset and liability interest- rate-sensitivity gap $(1,459 $(2,570 $8,060 $4,844 ) ) Derivatives affecting interest rate sensitivity 1,224 5,124 (6,962 613 ) ___________________________________________________________________________ ________________________ Interest-rate-sensitivity gap (235) 2,554 1,098 5,457 (a) ___________________________________________________________________________ ________________________ (a) Components of interest- rate- sensitivity gap: U.S. dollar (301) (2,344) 516 5,529 Non-U.S. dollar* 66 4,898 582 (72) ___________________________________________________________________________ _______________ Total (235) 2,554 1,098 5,457 ___________________________________________________________________________ _______________ * Primarily yen, deutsche mark, French franc, Belgian franc, and sterling positions. 25 Trading revenue increased 34% to $305 million from the second quarter of 1994. Reported trading revenue does not include net interest revenue associated with trading activities, which was $28 million in the second quarter of 1995 and $74 million in the second quarter of 1994. In the first six months of 1995 trading revenue was $608 million, compared with $584 million in the 1994 first half. 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 and six months ended June 30, 1995 and 1994. Foreign Swaps and exchange other spot and Equities interest Debt option and rate In millions contracts instrumen contract commoditi Total ts s es ___________________________________________________________________________ _______ SECOND QUARTER 1995 Trading revenue $100 $ 73 $ 24 $108 $305 Net interest 6 63 (1) (40) 28 revenue ___________________________________________________________________________ _______ Combined total 106 136 23 68 333 ___________________________________________________________________________ _______ SECOND QUARTER 1994 Trading revenue 126 (3) 27 78 228 Net interest 6 87 (5) (14) 74 revenue ___________________________________________________________________________ _______ Combined total 132 84 22 64 302 ___________________________________________________________________________ _______ SIX MONTHS 1995 Trading revenue 176 167 94 171 608 Net interest 13 131 (2) (53) 89 revenue ___________________________________________________________________________ _______ Combined total 189 298 92 118 697 ___________________________________________________________________________ _______ SIX MONTHS 1994 Trading revenue 392 33 37 122 584 Net interest 15 144 (10) (30) 119 revenue ___________________________________________________________________________ _______ Combined total 407 177 27 92 703 ___________________________________________________________________________ ________
26 Combined trading and related net interest revenue rose 10% to $333 million from a year earlier. Combined revenue from debt instruments was $136 million, an increase of $52 million from a year earlier, with improved performance in Latin America and Asia that was partially offset by mortgage- backed securities results. Combined revenue from equities and commodities was up slightly in the second quarter, as was combined revenue from foreign exchange. Combined trading and net interest revenue from swaps and other interest rate contracts totaled $106 million versus $132 million a year ago. Combined trading and related net interest revenue for the first six months of 1995 was $697 million, compared with $703 million in the same period in 1994. 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 $16 million for the twelve-month period ended June 30, 1995, and ranged from approximately $10 million to $31 million. Daily combined trading-related revenue averaged $6.2 million during the twelve-month period ended June 30, 1995. The frequency distribution of daily revenues around this average, relative to related DEaR estimates, fell within our expected confidence bands. Corporate finance revenue rose 34% to $117 million in the second quarter from the year-earlier quarter. Underwriting revenue totaled $41 million, 64% higher than the corresponding 1994 quarter, and advisory and syndication fees increased 23% to $76 million. Corporate finance revenue for the first six months of 1995 was $231 million, compared with $204 million for the six months of 1994. Underwriting revenue for the first six months of 1995 was $63 million, versus $70 million in the comparable 1994 period. Credit-related fees were $41 million in the second quarter, 25% lower than in the second quarter of 1994, primarily due to lower securities lending revenue. In the first six months of this year, credit-related fees were $84 million compared with $111 million in the same period of 1994. Investment management fees increased 9% to $138 million from a year earlier, reflecting an increase in assets under management, primarily from net new business. The six-month total increased 6% to $268 million. 27 Operational service fees in the second quarter totaled $140 million, unchanged from a year ago. For the first six months of 1995, operational service fees were $280 million, versus $284 million in the 1994 period. Net investment securities gains were $33 million in the second quarter, compared with net gains of $35 million in the second quarter of 1994. For the 1995 six-month period, net investment securities gains were $42 million, compared with $126 million in the first six months of 1994. Other revenue was $167 million in the second quarter, compared with $254 million in the 1994 second quarter. The 1995 second quarter reflected net equity investment securities gains of $132 million, versus $264 million in the year-earlier quarter, when $255 million was generated from the sale of a portion of the firm's investment in Columbia/HCA Corporation common stock. For the first six months of 1995, other revenue was $316 million, versus $357 million in the comparable 1994 period. Net equity investment securities gains in the first half were $295 million, compared with $361 million for the first six months of 1994. OPERATING EXPENSES Operating expenses were $984 million in the second quarter of 1995, 5% higher than a year earlier. The weakening in the dollar's value accounted for 3 percentage points of the increase. Employee compensation and benefits expenses rose, mostly due to an increase in salary expense reflecting growth in staff from a year ago. Technology and communications expenses were $165 million, 14% higher than a year ago, mainly reflecting expenditures on business support and development and increases in market information costs. Expense management initiatives begun in the first quarter of 1995 continued into the second quarter. Excluding the special charge in the first quarter of 1995, operating expenses rose 4% from the prior quarter because of an increase in accrued incentive compensation in line with higher earnings. Expenses other than employee compensation and benefits were lower than in the first quarter of 1995. At June 30, 1995, staff totaled 16,267 employees compared with 17,055 employees at December 31, 1994. Operating expenses in the first six months of 1995, including the $55 million charge in the first quarter, increased 11% to $1.986 billion. Excluding the special charge, operating expenses rose 8% from the comparable 1994 period. Income tax expense of $150 million in the second quarter reflects an effective tax rate of 32%, down from an effective tax rate of 34% in the second quarter of 1994. For the six months ended June 30, 1995, the effective tax rate was 33% versus 35% for the comparable 1994 period. ASSETS Total assets were $167 billion at June 30, 1995, unchanged from the total at March 31, 1995. Nonperforming assets decreased by $30 million to $187 million during the second quarter as new classifications were more than offset by charge-offs, and sales and repayments. No provision for credit losses was deemed necessary in the 1995 second quarter. The allowance for credit losses was $1.132 billion at June 30, 1995. 28 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 June 30, 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 $5,552 France 2,831 _____________________________________________________________________ At June 30, 1995, Switzerland's cross-border outstandings were $1,449 million, between 0.75% and 1.0% of total assets. (a) Mexican cross-border outstandings at June 30, 1995, were $917 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 1.0% of total assets at June 30, 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. Treasu ry In millions UMS bonds collateral ______________________________________ __________________ Book Face Market Fair value value value value ___________________________________________________________________________ ________________________ JUNE 30, 1995 Due in 2008 $1,093 $1,128 $996 $477 Due in 2019 941 1,165 833 205 ___________________________________________________________________________ _______ 29 CAPITAL
June 30 March 31 December June 30 31 Dollars in billions 1995 1995 1994 1994 _____________________________________________________________________________ _________________ Total stockholders' equity $ 9.9 $ 9.6 $ 9.6 $ 9.7 Annualized rate of return on average common 13.4 % 11.1 % 8.1 % 14.8 % stockholders' equity (a) (b) As percent of period-end total assets: Common equity 5.6 5.5 5.9 5.8 Total equity 5.9 5.8 6.2 6.1 Book value per common $48.14 $47.19 $46.73 $46.86 share (c) Risk-based capital: Tier 1 risk-based capital $ 8.6 $ 8.4 $ 8.3 $ 8.2 Total risk-based capital 12.7 12.4 12.2 11.9 Risk adjusted assets 99.0 94.1 86.2 87.9 Capital ratios: J.P. Morgan Tier 1 ratio 8.7 % 8.9 % 9.6 % 9.3 % Total ratio 12.8 13.2 14.2 13.5 Leverage ratio 6.0 5.9 6.5 6.2 Morgan Guaranty Trust Company of New York Tier 1 ratio 8.3 % 8.2 % 9.7 % 9.3 % Total ratio 10.7 10.6 12.6 12.6 Leverage ratio 5.2 5.1 5.5 5.2 ___________________________________________________________________________ _________________________ (a) Represents the annualized rate of return on average common stockholders' equity for the three months ended June 30, 1995, March 31, 1995, December 31, 1994, and June 30, 1994. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 14.1%, 11.7%, 8.6% and 16.6% for the three months ended June 30, 1995, March 31, 1995, December 31, 1994, and June 30, 1994, respectively. (b) The annualized rate of return on average common stockholders' equity for the six months ended June 30, 1995 and 1994 was 12.3% and 14.8%, respectively. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 12.9% and 16.7% for the six months ended June 30, 1995 and 1994, respectively. (c) Excluding the impact of SFAS No. 115, the book value per common share would have been $45.78, $44.87, $44.39 and $43.36 for the three months ended June 30, 1995, March 31, 1995, December 31, 1994, and June 30, 1994, respectively.
30 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 the 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. At June 30, 1995, stockholders' equity included approximately $459 million of net unrealized appreciation on debt investment and marketable equity investment securities, net the related deferred tax liability of $287 million. This compares with $449 million of net unrealized appreciation at March 31, 1995. The unrealized appreciation on debt investment securities was $283 million and $227 million at June 30, 1995, and at March 31, 1995, respectively. The unrealized appreciation on marketable equity investment securities was $463 million at June 30, 1995, and $498 million at March 31, 1995. 31 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 June 30, 1995 June 30, 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, $ $ 44 10.68 % $ $ 46 8.42 % mainly in offices outside 1,652 2,192 the U.S. Debt investment securities in offices in the U.S. (a): U.S. Treasury 2,785 43 6.19 1,536 19 4.96 U.S. state and political subdivision 2,066 64 12.43 2,231 68 12.23 Other 11,49 215 7.51 10,24 125 4.89 0 5 Debt investment securities in offices 4,318 73 6.78 6,232 104 6.69 outside the U.S. (a) Trading account assets: In offices in the U.S. 12,39 203 6.57 14,62 243 6.67 7 1 In offices outside the 23,58 580 9.86 25,14 429 6.84 U.S. 5 9 Securities purchased under agreements to resell and federal funds 30,24 443 5.87 31,71 375 4.74 sold, 6 7 mainly in offices in the U.S. Securities borrowed in offices in 12,89 187 5.81 14,71 136 3.71 the U.S. 9 4 Loans: In offices in the U.S. 6,602 115 6.99 7,807 106 5.45 In offices outside the 18,03 325 7.23 16,16 238 5.91 U.S. 7 1 Other interest-earning assets (b): In offices in the U.S. 1,128 72 * 924 49 * In offices outside the 1,030 68 * 648 123 * U.S. ___________________________________________________________________________ ________________ Total interest-earning assets 128,2 2,432 7.61 134,1 2,061 6.16 35 77 Allowance for credit losses (1,13 (1,14 2) 2) Cash and due from banks 1,829 1,882 Other noninterest-earning 45,57 38,71 assets 0 3 ___________________________________________________________________________ _________________ Total assets 174,5 173,6 02 30 ___________________________________________________________________________ _________________ Interest and average rates applying to the following asset categories have been adjusted to a taxable-equivalent basis: Debt investment securities in offices in the U.S., Trading account assets in offices in the U.S., and Loans in offices in the U.S. The applicable tax rate used to determine these adjustments was approximately 41% for the three months ended June 30, 1995 and 1994. (a) For the three months ended June 30, 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
32 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 June 30, 1995 June 30, 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. $ $ 28 5.14 % $ $ 26 4.68 % 2,184 2,230 In offices outside the 42,39 588 5.56 34,59 410 4.75 U.S. 0 8 Trading account liabilities: In offices in the U.S. 6,871 108 6.30 7,852 122 6.23 In offices outside the 10,96 224 8.20 10,78 172 6.40 U.S. 3 3 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices 39,45 605 6.15 51,24 546 4.27 in 8 8 the U.S. Commercial paper, mainly in offices 2,634 40 6.09 4,434 44 3.98 in the U.S. Other interest-bearing liabilities: In offices in the U.S. 9,254 146 6.33 7,558 79 4.19 In offices outside the 1,731 18 4.17 2,314 30 5.20 U.S. Long-term debt, mainly in offices in the 8,692 140 6.46 5,570 62 4.46 U.S. ___________________________________________________________________________ _________________ Total interest-bearing 124, 1,897 6.13 126,5 1,491 4.72 liabilities 177 87 Noninterest-bearing deposits: In offices in the U.S. 3,33 4,005 0 In offices outside the 1,36 1,754 U.S. 3 Other noninterest-bearing liabilities 35,8 31,46 83 0 ___________________________________________________________________________ _________________ Total liabilities 164,7 163,8 53 06 Stockholders' equity 9,749 9,824 ___________________________________________________________________________ _________________ Total liabilities and stockholders' 174,5 173,6 equity 02 30 Net yield on interest-earning 1.67 1.70 assets ___________________________________________________________________________ _________________ Net interest earnings 535 570 ___________________________________________________________________________ _________________
33 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated ___________________________________________________________________________ _________________
Dollars in millions, Six months ended interest and average rates ______________________________________________ _________ on a taxable-equivalent basis June 30, 1995 June 30, 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, $ $ 103 10.60 % $ $ 95 8.34 % mainly in offices outside 1,960 2,298 the U.S. Debt investment securities in offices in the U.S. (a): U.S. Treasury 2,253 71 6.35 1,369 38 5.60 U.S. state and political subdivision 2,108 129 12.34 2,227 135 12.22 Other 12,29 445 7.30 9,556 218 4.60 9 Debt investment securities in offices 5,024 171 6.86 6,649 220 6.67 outside the U.S. (a) Trading account assets: In offices in the U.S. 12,86 444 6.96 14,15 433 6.17 6 5 In offices outside the 25,75 1,170 9.16 24,14 842 7.03 U.S. 4 2 Securities purchased under agreements to resell and federal funds 29,23 855 5.90 34,13 747 4.41 sold, 0 6 mainly in offices in the U.S. Securities borrowed in offices in 14,10 401 5.73 14,98 251 3.38 the U.S. 3 6 Loans: In offices in the U.S. 6,846 246 7.25 8,047 205 5.14 In offices outside the 17,31 613 7.14 16,45 478 5.86 U.S. 0 7 Other interest-earning assets (b): In offices in the U.S. 1,577 158 * 759 86 * In offices outside the 839 125 * 762 179 * U.S. ___________________________________________________________________________ ________________ Total interest-earning assets 132,1 4,931 7.52 135,5 3,927 5.84 69 43 Allowance for credit losses (1,13 (1,14 2) 9) Cash and due from banks 1,835 1,864 Other noninterest-earning 42,22 38,43 assets 3 5 ___________________________________________________________________________ _________________ Total assets 175,0 174,6 95 93 ___________________________________________________________________________ _________________ Interest and average rates applying to the following asset categories have been adjusted to a taxable-equivalent basis: Debt investment securities in offices in the U.S., Trading account assets in offices in the U.S., and Loans in offices in the U.S. The applicable tax rate used to determine these adjustments was approximately 41% for the six months ended June 30, 1995 and 1994. (a) For the six months ended June 30, 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
34 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated _____________________________________________________________________________ _______________
Dollars in millions, Six months ended interest and average rates ______________________________________________ _________ on a taxable-equivalent basis June 30, 1995 June 30, 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. $ $ 52 4.93 % $ $ 53 4.57 % 2,129 2,341 In offices outside the 42,15 1,183 5.66 34,87 816 4.72 U.S. 1 8 Trading account liabilities: In offices in the U.S. 7,136 249 7.04 7,648 226 5.96 In offices outside the 11,76 512 8.78 10,33 335 6.54 U.S. 2 0 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices 41,43 1,200 5.84 53,22 1,103 4.18 in 5 6 the U.S. Commercial paper, mainly in offices 2,606 79 6.11 3,996 73 3.68 in the U.S. Other interest-bearing liabilities: In offices in the U.S. 9,395 291 6.25 7,630 141 3.73 In offices outside the 2,113 45 4.29 2,541 64 5.08 U.S. Long-term debt, mainly in offices in the 7,987 256 6.46 5,510 120 4.39 U.S. ___________________________________________________________________________ _________________ Total interest-bearing 126, 3,867 6.15 128,1 2,931 4.61 liabilities 714 00 Noninterest-bearing deposits: In offices in the U.S. 3,34 4,175 2 In offices outside the 1,24 1,647 U.S. 9 Other noninterest-bearing liabilities 34,1 30,93 32 6 ___________________________________________________________________________ _________________ Total liabilities 165,4 164,8 37 58 Stockholders' equity 9,658 9,835 ___________________________________________________________________________ _________________ Total liabilities and stockholders' 175,0 174,6 equity 95 93 Net yield on interest-earning 1.62 1.48 assets ___________________________________________________________________________ _________________ Net interest earnings 1,064 996 ___________________________________________________________________________ _________________
35 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 June 30, 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 June 30, 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 $43.2 billion at June 30, 1995. The contractual maturities of these derivative contracts are primarily less than one year. 36
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 $18 $14 $ $ $ $ $50. .7 .4 4.1 2.8 3.4 7.3 7 Weighted average: Receive rate 6.2 % 6.9 % 6.9 % 8.0 % 7.1 % 7.15 % 6.80 % 7 4 1 9 8 Pay rate 6.1 6.3 6.1 6.2 6.0 6.11 6.20 3 5 4 8 9 Pay fixed swaps Notional amount $14 $15 $ $ $ $ $53. .1 .1 9.2 3.7 4.7 6.9 7 Weighted average: Receive rate 6.1 % 6.1 % 6.1 % 6.2 % 6.1 % 6.21 % 6.16 % 1 8 6 1 0 Pay rate 5.2 6.6 6.1 5.9 6.8 7.24 6.23 7 1 2 7 0 INTEREST RATE SWAPS - NON-U.S. DOLLAR Receive fixed swaps Notional amount $37 $22 $13 $ $ $ $93. .3 .0 .4 8.0 5.9 6.7 3 Weighted average: Receive rate 5.9 % 6.8 % 6.7 % 5.9 % 7.0 % 7.49 % 6.46 % 8 1 0 8 4 Pay rate 4.8 5.6 5.4 4.3 5.6 5.91 5.23 8 8 7 2 8 Pay fixed swaps Notional amount $25 $22 $13 $ $ $ $81. .2 .0 .2 8.7 5.0 7.0 1 Weighted average: Receive rate 5.3 % 5.7 % 5.2 % 4.4 % 5.5 % 5.85 % 5.38 % 0 3 8 2 1 Pay rate 6.2 6.3 6.1 5.5 6.7 7.62 6.35 7 8 5 3 9 ___________________________________________________________________________ ____________ Total notional amount $95 $73 $39 $23 $19 $27. $278 .3 .5 .9 .2 .0 9 .8 ___________________________________________________________________________ ____________ There is $2.6 billion and $2.0 billion of notional amounts related to currency swaps and basis swaps, respectively, not included in the table above.
37 PART II Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12. Statement re computation of ratios 27. Financial data schedule (b) Reports on Form 8-K The following reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended June 30, 1995: April 13, 1995 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing its earnings for the three-month period ended March 31, 1995. May 23, 1995 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing the sale of its global custody business. June 21, 1995 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing the sale of its U.S commercial paper processing business and the outsourcing of certain cash services. 38 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/ DAVID H. SIDWELL _______________________________________ (NAME AND TITLE) DAVID H. SIDWELL MANAGING DIRECTOR AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) DATE: August 14, 1995 1 LIST OF EXHIBITS EXHIBIT 12. Statement of recomputation of ratios 27. Financial data schedule EX-12 2 COMPUTATION OF RATIOS 2 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges J.P. Morgan & Co. Incorporated Consolidated _____________________________________________________________________ _____________
Dollars in millions Six months 1995 _____________________________________________________________________ _____________ Earnings: Net income $ 570 Add: income taxes 281 Less: equity in undistributed income of all affiliates accounted for by the equity method 10 Add: fixed charges, excluding interest on deposits 2,651 _____________________________________________________________________ _____________ Earnings available for fixed charges, excluding interest on deposits 3,492 Add: interest on deposits 1,235 _____________________________________________________________________ _____________ Earnings available for fixed charges, including interest on deposits 4,727 _____________________________________________________________________ _____________ Fixed charges: Interest expense, excluding interest on deposits 2,632 Interest factor in net rental expense 19 _____________________________________________________________________ _____________ Total fixed charges, excluding interest on deposits 2,651 Add: interest on deposits 1,235 _____________________________________________________________________ _____________ Total fixed charges, including interest on deposits 3,886 _____________________________________________________________________ _____________ Ratio of earnings to fixed charges: Excluding interest on deposits 1.32 Including interest on deposits 1.22 _____________________________________________________________________ _____________
3 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends J.P. Morgan & Co. Incorporated Consolidated _______________________________________________________________________________ __
Dollars in millions Six months 1995 _______________________________________________________________________________ __ Earnings: Net income $ 570 Add: income taxes 281 Less: equity in undistributed income of all affiliates accounted for by the equity method 10 Add: fixed charges, excluding interest on deposits and preferred stock dividends 2,651 _______________________________________________________________________________ __ Earnings available for fixed charges, excluding interest on deposits 3,492 Add: interest on deposits 1,235 _______________________________________________________________________________ __ Earnings available for fixed charges, including interest on deposits 4,727 _______________________________________________________________________________ __ Fixed charges: Interest expense, excluding interest on deposits 2,632 Interest factor in net rental expense 19 Preferred stock dividends 18 _______________________________________________________________________________ __ Total fixed charges, excluding interest on deposits 2,669 Add: interest on deposits 1,235 _______________________________________________________________________________ __ Total fixed charges, including interest on deposits 3,904 _______________________________________________________________________________ __ Ratio of earnings to fixed charges: Excluding interest on deposits 1.31 Including interest on deposits 1.21 _______________________________________________________________________________ __
EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000,000 US DOLLARS 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 1 1812 1736 26209 68259 20416 0 0 24043 1132 166560 45316 52467 49814 9092 502 0 494 8875 166560 851 771 3253 4875 1235 3867 1008 0 42 1986 851 570 0 0 570 2.83 2.81 1.62 186 0 0 0 1131 26 27 1132 74 111 947