-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F8KOJjADAdwTfDyzxdH32rMA7feYZz0CkG1A8ajsg2Y+1bjkO2hIzKFMxqwEcnfW RrqOSnStf5pDI1r2loT1dw== 0000950123-96-004450.txt : 19960816 0000950123-96-004450.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950123-96-004450 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96612983 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 FORM 10-Q 1 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, 1996 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 of (I.R.S. Employer incorporation or organization) Identification No.) 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, 1996: Common Stock, $2.50 Par Value 186,461,330 Shares 2 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, 1996; and Table of asset and liability management derivatives are set forth on pages 18 through 35 herein. PART II -- OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K 36 SIGNATURES 37 3 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 31 Increase/ 1996 1995 (Decrease) 1996 (Decrease) -------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue $2,559 $2,405 $ 154 $2,554 $ 5 Interest expense 2,162 1,897 265 2,158 4 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest revenue 397 508 (111) 396 1 NONINTEREST REVENUE Trading revenue 697 305 392 758 (61) Investment banking revenue 210 117 93 201 9 Credit-related fees 38 41 (3) 38 - Investment management fees 172 138 34 157 15 Operational service fees 104 140 (36) 113 (9) Net investment securities gains (losses) (51) 33 (84) 12 (63) Other revenue 194 167 27 65 129 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue 1,364 941 423 1,344 20 Total revenue 1,761 1,449 312 1,740 21 OPERATING EXPENSES Employee compensation and benefits 737 616 121 730 7 Net occupancy 76 79 (3) 73 3 Technology and communications 158 165 (7) 158 - Other expenses 133 124 9 124 9 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 1,104 984 120 1,085 19 Income before income taxes 657 465 192 655 2 Income taxes 217 150 67 216 1 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 440 315 125 439 1 PER COMMON SHARE Net income (a) $2.14 $1.56 $0.58 $2.13 $0.01 Dividends declared 0.81 0.75 0.06 0.81 - - -----------------------------------------------------------------------------------------------------------------------------------
(a) Earnings per share amounts represent both primary and fully diluted earnings per share. See notes to financial statements. 4 4 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated
- ----------------------------------------------------------------------------------------------------------------------------------- In millions, except per share data Six months ended -------------------------------------------------------------------------------------------------------- June 30 June 30 Increase/ 1996 1995 (Decrease) -------------------------------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue $5,113 $4,875 $238 Interest expense 4,320 3,867 453 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest revenue 793 1,008 (215) NONINTEREST REVENUE Trading revenue 1,455 608 847 Investment banking revenue 411 231 180 Credit-related fees 76 84 (8) Investment management fees 329 268 61 Operational service fees 217 280 (63) Net investment securities gains (losses) (39) 42 (81) Other revenue 259 316 (57) - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue 2,708 1,829 879 Total revenue 3,501 2,837 664 OPERATING EXPENSES Employee compensation and benefits 1,467 1,242 225 Net occupancy 149 159 (10) Technology and communications 316 337 (21) Other expenses 257 248 9 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 2,189 1,986 203 Income before income taxes 1,312 851 461 Income taxes 433 281 152 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 879 570 309 PER COMMON SHARE Net income (a) $4.28 $2.83 $1.45 Dividends declared 1.62 1.50 0.12 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Earnings per share amounts represent primary earnings per share for the six months ended June 30, 1996 and 1995. Fully diluted earnings per share were $4.27 and $2.81 for the six months ended June 30, 1996 and 1995, respectively. See notes to financial statements. 5 5 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------------------------------------------------- Dollars in millions June 30 March 31 December 31 1996 1996 1995 ------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 651 $ 732 $ 1,535 Interest-earning deposits with banks 1,427 1,183 1,986 Debt investment securities available for sale carried at fair value (Cost: $22,486 at June 1996, $27,115 at March 1996, and $24,154 at December 1995) 22,712 27,446 24,638 Trading account assets 69,375 69,844 69,408 Securities purchased under agreements to resell ($36,488 at June 1996, $39,683 at March 1996, and $32,157 at December 1995)and federal funds sold 36,544 39,692 32,157 Securities borrowed 25,620 22,901 19,830 Loans 29,588 28,645 23,453 Less: allowance for credit losses 1,125 1,117 1,130 - --------------------------------------------------------------------------------------------------------------------------- Net loans 28,463 27,528 22,323 Customers' acceptance liability 236 339 237 Accrued interest and accounts receivable 3,738 4,766 3,539 Premises and equipment 3,387 3,354 3,339 Less: accumulated depreciation 1,492 1,445 1,412 - ---------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 1,895 1,909 1,927 Other assets 8,104 8,407 7,299 - ---------------------------------------------------------------------------------------------------------------------------- Total assets 198,765 204,747 184,879 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 1,906 2,784 3,287 In offices outside the U.S. 750 677 744 Interest-bearing deposits: In offices in the U.S. 2,498 1,765 2,003 In offices outside the U.S. 43,303 44,978 40,404 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 48,457 50,204 46,438 Trading account liabilities 44,267 46,766 45,289 Securities sold under agreements to repurchase ($51,604 at June 1996, $55,952 at March 1996, and $40,803 at December 1995) and federal funds purchased 55,114 58,765 45,099 Commercial paper 5,102 4,229 2,801 Other liabilities for borrowed money 16,510 15,659 15,129 Accounts payable and accrued expenses 6,159 7,265 5,643 Liability on acceptances 236 339 237 Long-term debt not qualifying as risk-based capital 6,109 5,710 5,737 Other liabilities 2,047 1,272 4,465 - --------------------------------------------------------------------------------------------------------------------------- 184,001 190,209 170,838 Long-term debt qualifying as risk-based capital 3,733 3,691 3,590 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 187,734 193,900 174,428 STOCKHOLDERS' EQUITY Preferred stock (authorized shares: 10,400,000 at June 1996 and March 1996, and 10,000,000 at December 1995): Adjustable rate cumulative preferred stock, $100 par value (issued and outstanding: 2,444,300) 244 244 244 Variable cumulative preferred stock, $1,000 par value (issued and outstanding: 250,000) 250 250 250 Fixed cumulative preferred stock, $500 par value (issued and outstanding: 400,000 at June 1996 and March 1996) 200 200 - Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,683,373 at June 1996, 200,682,873 at March 1996, and 200,678,373 at December 1995) 502 502 502 Capital surplus 1,435 1,432 1,430 Retained earnings 8,281 8,006 7,731 Net unrealized gains on investment securities, net of taxes 367 470 566 Other 686 593 552 - --------------------------------------------------------------------------------------------------------------------------- 11,965 11,697 11,275 Less: treasury stock (14,083,799 shares at June 1996, 13,382,388 shares at March 1996, and 13,562,755 shares at December 1995) at cost 934 850 824 - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 11,031 10,847 10,451 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 198,765 204,747 184,879 - ----------------------------------------------------------------------------------------------------------------------------
See notes to financial statements. 6 6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated
- ----------------------------------------------------------------------------------------------------------------------------------- Dollars in millions Six months ended ------------------------------------------- June 30 June 30 1996 1995 ------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- Fixed cumulative preferred stock Balance, January 1 - - Shares issued 200 - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 200 - - ----------------------------------------------------------------------------------------------------------------------------------- Total preferred stock, June 30 694 494 - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, January 1 and June 30 502 502 - ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL SURPLUS Balance, January 1 1,430 1,452 Shares issued or distributed under dividend reinvestment plan, various employee benefit plans, and conversion of debentures, and income tax benefits associated with stock options 5 (11) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 1,435 1,441 - ----------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, January 1 7,731 7,044 Net income 879 570 Dividends declared on adjustable rate cumulative preferred stock (6) (6) Dividends declared on variable cumulative preferred stock (4) (6) Dividends declared on fixed cumulative preferred stock (5) - Dividends declared on common stock (303) (282) Dividend equivalents on common stock issuable (11) (5) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 8,281 7,315 - ----------------------------------------------------------------------------------------------------------------------------------- NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES Balance, January 1 566 456 Net change in net unrealized gains, net of taxes (199) 3 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 367 459 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS Balance, January 1 556 369 Deferred stock awards, net 133 41 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 689 410 - ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION Balance, January 1 (4) (2) Translation adjustments 2 (1) Income tax expense (1) - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 (3) (3) - ----------------------------------------------------------------------------------------------------------------------------------- Total other, June 30 686 407 - ----------------------------------------------------------------------------------------------------------------------------------- LESS: TREASURY STOCK Balance, January 1 824 747 Purchases 291 103 Shares distributed under various employee benefit plans (181) (103) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 934 747 - ----------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity, June 30 11,031 9,871 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements. 7 7 CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated
- -------------------------------------------------------------------------------------------------------------------------------- Dollars in millions Six months ended ----------------------------------------- June 30 June 30 1996 1995 ----------------------------------------- NET INCOME $ 879 $ 570 Adjustments to reconcile to cash provided by (used in) operating activities: Noncash items: depreciation, amortization, deferred income taxes, and stock award plans 401 166 (Increase) decrease in assets: Trading account assets 11 (11,258) Securities purchased under agreements to resell (4,336) (4,971) Securities borrowed (5,790) 1,814 Accrued interest and accounts receivable (200) 1,812 Increase (decrease) in liabilities: Trading account liabilities (1,038) 5,947 Securities sold under agreements to repurchase 10,797 2,675 Accounts payable and accrued expenses 693 (1,449) Other changes in operating assets and liabilities, net (5,066) 1,110 Net investment securities (gains) losses included in cash flows from investing activities 39 (42) - ----------------------------------------------------------------------------------------------------------------------------------- CASH USED IN OPERATING ACTIVITIES (3,610) (3,626) - ----------------------------------------------------------------------------------------------------------------------------------- (Increase) decrease in interest-earning deposits with banks 559 (375) Debt investment securities: Proceeds from sales 31,434 24,147 Proceeds from maturities, calls, and mandatory redemptions 4,802 1,035 Purchases (35,793) (21,142) (Increase) decrease in federal funds sold (56) 98 Increase in loans (6,139) (1,997) Payments for premises and equipment (72) (105) Other changes, net 992 (1,797) - ----------------------------------------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (4,273) (136) - ----------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in noninterest-bearing deposits (1,375) 28 Increase in interest-bearing deposits 3,380 2,166 Increase (decrease) in federal funds purchased (786) 43 Increase (decrease) in commercial paper 2,301 (1,604) Other liabilities for borrowed money: Proceeds 11,708 7,952 Payments (11,043) (6,591) Long-term debt: Proceeds 1,152 2,421 Payments (391) (283) Capital stock: Issued or distributed 200 - Purchased (291) (103) Dividends paid (317) (279) Other changes, net 2,467 (508) - ----------------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES 7,005 3,242 - ----------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and due from banks (6) 122 - ----------------------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS (884) (398) Cash and due from banks at December 31, 1995 and 1994 1,535 2,210 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at June 30, 1996 and 1995 651 1,812 - ----------------------------------------------------------------------------------------------------------------------------------- Cash disbursements made for: Interest $4,180 $3,717 Income taxes 413 257 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements. 8 8 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York
- ---------------------------------------------------------------------------------------------------------------------------- Dollars in millions June 30 December 31 1996 1995 -------------------------------------------- ASSETS Cash and due from banks $ 659 $ 1,429 Interest-earning deposits with banks 1,428 1,995 Debt investment securities available for sale carried at fair value 17,824 23,767 Trading account assets 55,999 55,373 Securities purchased under agreements to resell and federal funds sold 23,613 20,996 Loans 29,437 23,319 Less: allowance for credit losses 1,125 1,129 - -------------------------------------------------------------------------------------------------------------------------- Net loans 28,312 22,190 Customers' acceptance liability 236 237 Accrued interest and accounts receivable 3,651 3,420 Premises and equipment 2,999 2,967 Less: accumulated depreciation 1,294 1,232 - -------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 1,705 1,735 Other assets 5,061 4,571 - -------------------------------------------------------------------------------------------------------------------------- Total assets 138,488 135,713 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 1,908 3,275 In offices outside the U.S. 788 839 Interest-bearing deposits: In offices in the U.S. 2,510 1,975 In offices outside the U.S. 43,670 40,985 - ------------------------------------------------------------------------------------------------------------------------- Total deposits 48,876 47,074 Trading account liabilities 39,240 39,197 Securities sold under agreements to repurchase and federal funds purchased 18,456 20,274 Other liabilities for borrowed money 10,606 8,509 Accounts payable and accrued expenses 4,346 4,187 Liability on acceptances 236 237 Long-term debt not qualifying as risk-based capital (includes $546 at 1996 and $418 at 1995 of notes payable to J.P. Morgan) 2,809 2,786 Other liabilities 1,974 3,324 - ------------------------------------------------------------------------------------------------------------------------- 126,543 125,588 Long-term debt qualifying as risk-based capital (includes $2,396 at 1996 and $1,310 at 1995 of notes payable to J.P. Morgan) 2,596 1,659 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 129,139 127,247 STOCKHOLDER'S EQUITY Preferred stock, $100 par value (authorized shares: 2,500,000) - - Common stock, $25 par value (authorized shares: 11,000,000; outstanding: 10,599,027 at June 1996, and authorized and outstanding: 10,000,000 at December 1995) 265 250 Surplus 3,155 2,820 Undivided profits 5,797 5,136 Net unrealized gains on investment securities, net of taxes 135 264 Foreign currency translation (3) (4) - ----------------------------------------------------------------------------------------------------------------------------------- Total stockholder's equity 9,349 8,466 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholder's equity 138,488 135,713 - ----------------------------------------------------------------------------------------------------------------------------------- Prior period balances were restated to reflect the merger of J.P. Morgan Delaware with Morgan Guaranty Trust Company effective June 1996. Member of the Federal Reserve System and the Federal Deposit Insurance Corporation.
See notes to financial statements. 9 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF J.P. MORGAN & CO. INCORPORATED Supplementary to notes in the 1995 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. 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 quarter Six months In millions 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------- INTEREST REVENUE Deposits with banks $ 24 $ 44 $ 51 $ 103 Debt investment securities (a) 396 373 790 771 Trading account assets 682 782 1,437 1,611 Securities purchased under agreements to resell and federal funds sold 593 443 1,170 855 Securities borrowed 318 187 581 401 Loans 440 436 880 851 Other sources, primarily risk-adjusting swaps 106 140 204 283 - ------------------------------------------------------------------------------------------------- Total interest revenue 2,559 2,405 5,113 4,875 - ------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 619 616 1,269 1,235 Trading account liabilities 306 332 599 761 Securities sold under agreements to repurchase and federal funds purchased 798 605 1,585 1,200 Other borrowed money 303 204 592 415 Long-term debt 136 140 275 256 - ------------------------------------------------------------------------------------------------- Total interest expense 2,162 1,897 4,320 3,867 - ------------------------------------------------------------------------------------------------- Net interest revenue 397 508 793 1,008 - -------------------------------------------------------------------------------------------------
(a) Interest revenue from debt investment securities included taxable revenue of $338 million and $698 million and revenue exempt from U.S. income taxes of $58 million and $92 million for the three months and six months ended June 30, 1996, respectively. 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. 10 10 For the three months and six months ended June 30, 1996, net interest revenue associated with asset and liability management derivatives was approximately $25 million and $65 million respectively, compared with approximately $110 million and $190 million for the respective 1995 periods. At June 30, 1996, approximately ($165) 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 4 to the financial statements, Investment securities, the net unrealized appreciation associated with the debt investment portfolio was $226 million at June 30, 1996. Net deferred losses on closed derivative contracts are expected to amortize into Net interest revenue as follows: ($30) million - remainder of 1996; ($50) million in 1997; ($35) million in 1998; ($25) million in 1999; ($20) million in 2000; ($6) million in 2001; and approximately $1 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. 3. TRADING REVENUE Trading revenue disaggregated by principal product groupings for the three months and six months ended June 30, 1996 and 1995, is presented in the following table. Trading-related net interest revenue should be considered when evaluating trading results since the firm manages its trading activities based on combined revenues. For additional information refer to the Trading revenue discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Second quarter Six months In millions 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Fixed Income $ 331 $ 96 $ 864 $ 153 Equities 124 96 218 138 Foreign Exchange 109 62 177 164 Commodities 5 12 39 31 Proprietary Unit 128 39 157 122 - ------------------------------------------------------------------------------ Trading revenue 697 305 1,455 608 - ------------------------------------------------------------------------------
4. 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, 1996, follows.
Fair and carrying In millions Cost value - ------------------------------------------------------------------------------- U.S. Treasury $ 936 $ 992 U.S. government agency, principally mortgage-backed 16,684 16,675 U.S. state and political subdivision 1,670 1,811 U.S. corporate and bank debt 142 143 Foreign government* 922 947 Foreign corporate and bank debt 2,029 2,040 Other 103 104 - ------------------------------------------------------------------------------- Total debt investment securities 22,486 22,712 - -------------------------------------------------------------------------------
* 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, 1996, was $226 million, consisting of gross unrealized appreciation of $496 million and gross unrealized depreciation of $270 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 6 to the financial statements, Off-balance-sheet financial instruments. 11 11 The following table presents the components of Net realized investment securities gains (losses).
Second quarter Six months In millions 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------- Gross realized gains from sales $ 16 $ 211 $ 117 $ 271 Gross realized losses from sales (67) (178) (156) (229) - ------------------------------------------------------------------------------------------- Net investment securities gains (losses) (51) 33 (39) 42 - -------------------------------------------------------------------------------------------
Equity investment securities Net realized gains on the sale of equity investment securities of $118 million and $182 million included in Other revenue for the three months and six months ended June 30, 1996, respectively, include $130 million and $203 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, 1996, follows.
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value - ---------------------------------------------------------------------------------- June 30, 1996 $208 $344 $ 1 $551 - ----------------------------------------------------------------------------------
Securities without available market quotations: Nonmarketable equity investment securities, carried at a cost of $627 million, had an estimated fair value of $774 million at June 30, 1996. 5. 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, 1996, and the average balance for the three-month and six-month periods ended June 30, 1996.
Carrying Average value balance ----------- ------------------------- June 30 Second Six months In millions 1996 quarter 1996 1996 - ------------------------------------------------------------------------------- TRADING ACCOUNT ASSETS U.S. Treasury $ 5,796 $ 7,271 $ 9,594 U.S. government agency 2,960 3,309 2,801 Foreign government 20,288 16,888 18,229 Corporate debt and equity 13,779 13,815 13,719 Other securities 3,724 6,336 6,642 Interest rate and currency swaps 10,218 10,263 10,782 Foreign exchange contracts 3,039 3,356 3,112 Interest rate futures and forwards 259 294 343 Commodity and equity contracts 2,972 3,164 2,434 Purchased option contracts 6,340 5,651 5,322 - ------------------------------------------------------------------------------- Total trading account assets 69,375 70,347 72,978 - ------------------------------------------------------------------------------- TRADING ACCOUNT LIABILITIES U.S. Treasury 6,105 7,656 8,169 Foreign government 11,170 8,482 8,996 Corporate debt and equity 3,491 5,669 4,717 Other securities 1,079 2,841 2,659 Interest rate and currency swaps 8,258 8,929 9,614 Foreign exchange contracts 4,332 4,053 3,977 Interest rate futures and forwards 515 559 540 Commodity and equity contracts 3,070 3,506 3,036 Written option contracts 6,247 6,219 5,596 - ------------------------------------------------------------------------------- Total trading account liabilities 44,267 47,914 47,304 - -------------------------------------------------------------------------------
12 12 6. 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 $25.8 billion and $27.7 billion of master netting agreements in effect at June 30, 1996 and December 31, 1995, respectively, is also presented.
Notional amounts Credit exposure --------------------------- ----------------------- June 30 December 31 June 30 December 31 In billions 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------- Interest rate and currency swaps Trading $ 1,481.7 $ 1,233.3 Asset and liability management(a)(b)(c) 268.5 282.3 - ----------------------------------------------------------------------------------------------------- Total interest rate and currency swaps 1,750.2 1,515.6 $ 10.2 $ 12.4 - ----------------------------------------------------------------------------------------------------- Foreign exchange spot, forward, and futures contracts Trading 495.5 443.7 Asset and liability management(a)(b) 27.3 18.1 - ----------------------------------------------------------------------------------------------------- Total foreign exchange spot, forward, and futures contracts 522.8 461.8 3.0 3.3 - ----------------------------------------------------------------------------------------------------- Interest rate futures, forward rate agreements, and debt securities forwards Trading 479.5 412.7 Asset and liability management 11.0 2.7 - ----------------------------------------------------------------------------------------------------- Total interest rate futures, forward rate agreements, and debt securities forwards 490.5 415.4 0.3 0.5 - ----------------------------------------------------------------------------------------------------- Commodity and equity swaps, forward, and futures contracts, all trading 83.8 65.1 3.0 1.4 - ----------------------------------------------------------------------------------------------------- Purchased options(d) Trading 521.4 462.2 Asset and liability management(a) 2.1 2.6 - ----------------------------------------------------------------------------------------------------- Total purchased options 523.5 464.8 6.3 5.2 - ----------------------------------------------------------------------------------------------------- Written options, all trading(e) 692.5 524.0 -- -- - ----------------------------------------------------------------------------------------------------- Total credit exposure recorded as assets on the balance sheet 22.8 22.8 - -----------------------------------------------------------------------------------------------------
13 13 (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 $30.6 billion at June 30, 1996, and were primarily denominated in the following currencies: deutsche mark $5.1 billion, French franc $5.0 billion, Italian lira $3.4 billion, Swiss franc $3.3 billion, Spanish peseta $2.6 billion, Japanese yen $1.9 billion, and Belgian franc $1.6 billion. (c) The notional amount of risk-adjusting swaps was $240.8 billion at June 30, 1996. (d) At June 30, 1996, purchased options used for trading purposes included $400.2 billion of interest rate options, $92.0 billion of foreign exchange options, and $29.2 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 $125.9 billion and those negotiated over-the-counter amounted to $397.6 billion at June 30, 1996. (e) At June 30, 1996, written options used for trading purposes included $557.1 billion of interest rate options, $102.3 billion of foreign exchange options, and $33.1 billion of commodity and equity options. Written option contracts executed on an exchange amounted to $249.3 billion and those negotiated over-the-counter amounted to $443.2 billion at June 30, 1996. 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 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 $70 million at June 30, 1996. Gross unrealized gains and gross unrealized losses associated with open derivative contracts used for these purposes at June 30, 1996, 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, deposits, and debt investment securities, principally mortgage-backed securities. See Note 7 to the financial statements, Fair value of financial instruments.
Gross Gross Net unrealized unrealized unrealized In millions gains (losses) gains/(losses) - ------------------------------------------------------------------------------- Long-term debt $ 146 ($121) $ 25 Debt investment securities 75 (56) 19 Deposits 32 (14) 18 Other financial instruments 56 (48) 8 - ------------------------------------------------------------------------------- Total 309 (239) 70 - -------------------------------------------------------------------------------
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 $0.2 billion at June 30, 1996. The net amount is composed of $2.5 billion of gross unrealized gains and $2.3 billion of gross unrealized losses. The unrealized gains and losses related to the derivative contracts used to hedge these risk-adjusting swaps, included above, were not material at June 30, 1996. There were no material terminations of risk-adjusting swaps during the three months and six months ended June 30, 1996. 14 14 Credit-related financial instruments Credit-related financial instruments include commitments to extend credit and standby letters of credit and guarantees. 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, 1996, is presented in the following table.
June 30 In billions 1996 - ---------------------------------------------------------------------------- Commitments to extend credit $ 60.6 Standby letters of credit and guarantees 13.4 - ----------------------------------------------------------------------------
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 $46.7 billion were netted against amounts payable for securities purchased of $45.8 billion to arrive at a net trade date receivable of $0.9 billion, which was classified as Other assets on the consolidated balance sheet at June 30, 1996. 7. 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, 1996, by approximately $1.5 billion before considering income taxes, compared with $1.4 billion at December 31, 1995. Such amounts were primarily attributable to net appreciation on net loans and risk-adjusting swaps of $1.2 billion and $0.2 billion, respectively, at June 30, 1996 and $1.2 billion and $0.4 billion, respectively, at December 31, 1995. 15 15 8. IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES Total impaired loans, net of charge-offs, at June 30, 1996, are presented in the following table. At June 30, 1996, more than half of the impaired loan balance is measured based upon the present value of expected future cash flows discounted at an individual loan's effective interest rate, one third is based on the fair value of the collateral, and the remainder is measured by an observable market price.
June 30 In millions 1996 - ---------------------------------------------------------------------- Impaired loans: Commercial and industrial $ 96 Other 36 - ---------------------------------------------------------------------- 132 Restructuring countries 2 - ---------------------------------------------------------------------- Total impaired loans 134(a) - ---------------------------------------------------------------------- Other nonperforming assets -- - ---------------------------------------------------------------------- Total nonperforming assets 134 - ----------------------------------------------------------------------
An analysis of the effect of impaired loans, net of charge-offs, on interest revenue in the three months and six months ended June 30, 1996 and 1995, is presented in the following table.
Second quarter Six months In millions 1996 1995 1996 1995 - ------------------------------------------------------------------------------------- Interest revenue that would have been recorded if accruing $ 3 $ 4 $ 7 $ 9 Less interest revenue recorded -- 5 1 19 - ------------------------------------------------------------------------------------- (Negative)/ positive impact of impaired loans on interest revenue (3) 1 (6) 10 - -------------------------------------------------------------------------------------
An analysis of the allowance for credit losses at June 30, 1996, is presented in the following table.
Second quarter Six months In millions 1996 1996 - ---------------------------------------------------------------------------- Beginning of period balance $ 1,117 $ 1,130 - ---------------------------------------------------------------------------- Recoveries 9 14 Charge-offs: Commercial and industrial (1) (16) Other -- (3) - ---------------------------------------------------------------------------- Net charge-offs 8 (5) - ---------------------------------------------------------------------------- Balance, June 30, 1996 (b) 1,125 1,125 (c) - ----------------------------------------------------------------------------
(a) As of June 30, 1996, no reserve is required under Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, for the $134 million recorded investment in impaired loans. Charge-offs and interest applied to principal have reduced the recorded investment values to amounts that are less than the SFAS No. 114 calculated values. For the three months and six months ended June 30, 1996, the average recorded investment in impaired loans was $149 million and $138 million, respectively. (b) In accordance with SFAS No. 5, Accounting for Contingencies, and SFAS No. 114, as amended by SFAS No. 118, 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, 1996, the allocation of the allowance for credit losses was as follows: Specific allocation - borrowers in the U.S. $120 million, Specific allocation - borrowers outside the U.S. $63 million, Allocation to general risk $942 million. 16 16 9. INVESTMENT BANKING AND OTHER REVENUE In the second quarter of 1996 and 1995, investment banking revenue of $210 million and $117 million includes $111 million and $41 million, respectively, of underwriting revenue. For the six months ended June 30, 1996 and 1995, underwriting revenue was $176 million and $63 million, respectively. Other revenue of $194 million in the 1996 second quarter includes $118 million of net equity investment securities gains. Other revenue of $167 million in the 1995 second quarter includes net equity investment securities gains of $132 million. For the six months ended June 30, 1996 and 1995, Other revenue of $259 million and $316 million, respectively, primarily includes net equity investment securities gains of $182 million and $295 million respectively. 10. INCOME TAXES Income tax expense in the 1996 second quarter reflects a 33% effective tax rate, compared to a 32% effective tax rate in the 1995 second quarter. For the six months ended June 30, 1996 and 1995, the effective tax rate was 33%. Income tax benefit related to net investment securities losses was approximately $21 million and $16 million for the three months and six months ended June 30, 1996, respectively. Income tax expense related to net investment securities gains was approximately $13 million and $17 million for the three month and six months ended June 30, 1995, respectively. The applicable tax rate used to compute the income tax benefit and income tax expense related to net investment securities gains (losses) was approximately 41% for the three months and six months ended June 30, 1996 and 1995. The valuation allowance to reduce deferred tax assets to the amount expected to be realized totaled approximately $130 million at June 30, 1996, compared with $140 million at December 31, 1995. The valuation allowance is primarily related to the ability to recognize tax benefits associated with foreign operations. 11. COMMITMENTS AND CONTINGENT LIABILITIES Excluding mortgaged properties, assets carried at approximately $64.9 billion in the consolidated balance sheet at June 30, 1996, were pledged as collateral for borrowings, to qualify for fiduciary powers, to secure public monies as required by law, and for other purposes. 17 17 12. EARNINGS PER COMMON SHARE In the calculation of primary and fully diluted earnings per common share, net income is adjusted by adding back to net income the interest expense on convertible debentures and the expense related to dividend equivalents on certain deferred incentive compensation awards, net of the related income tax effects, and deducting the preferred stock dividends. Primary and fully diluted earnings per common share are computed by dividing income components by the weighted-average number of common and common equivalent shares outstanding during the period. For the primary earnings per share calculation, the weighted-average number of common and common equivalent shares outstanding includes the average number of shares of common stock outstanding, the average number of shares issuable upon conversion of convertible debentures, and the average number of shares issuable under employee benefit plans that have a dilutive effect. The weighted-average number of common and common equivalent shares outstanding, assuming full dilution, includes the average number of shares of common stock outstanding, the average number of shares issuable upon conversion of convertible debentures, and the average number of shares issuable under various employee benefit plans. The maximum dilutive effect is computed using the period-end market price of J.P. Morgan common stock, if it is higher than the average market price used in calculating primary earnings per share.
First quarter Second quarter Dollars in millions 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------------------------- Adjusted net income $ 431 $ 249 $ 432 $ 310 Primary earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 202,133,593 196,905,106 202,063,927 198,241,301 Fully diluted earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 202,539,222 196,998,250 202,075,297 198,920,499 - ---------------------------------------------------------------------------------------------------------------
Six months Dollars in millions 1996 1995 - ------------------------------------------------------------------------------ Adjusted net income $ 863 $ 559 Primary earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 202,048,817 197,724,069 Fully diluted earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 202,395,067 199,082,095 - ------------------------------------------------------------------------------
18 18 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 $440 million in the second quarter of 1996, 40% higher than in the second quarter of 1995. Earnings per share for the quarter were $2.14 versus $1.56 a year ago. Net income for the first six months of 1996 totaled $879 million, up 54% from $570 million a year earlier. Earnings per share in the first six months were $4.28 versus $2.83 a year ago. Six-month earnings in 1995 included a first quarter charge of $55 million ($33 million after tax), or $0.17 per share, related primarily to severance. SECOND QUARTER RESULTS AT A GLANCE
In millions of dollars, First except per share data Second quarter quarter 1996 1995 1996 - ------------------------------------------------------------------------- Revenues $ 1,761 $ 1,449 $ 1,740 Operating expenses (1,104) (984) (1,085) Income taxes (217) (150) (216) - ------------------------------------------------------------------------- Net income $ 440 $ 315 $ 439 Net income per share $ 2.14 $ 1.56 $ 2.13 - ------------------------------------------------------------------------- Dividends declared per share $ 0.81 $ 0.75 $ 0.81
REVENUES rose 22% in the second quarter from a year ago. - Trading revenue more than doubled to $697 million as client activity remained strong. Combined trading and related net interest revenue rose to $739 million from $333 million. - Investment banking revenue rose 79% to $210 million. - Investment management fees grew 25%. Operational service and credit-related fees were lower as a result of the sale of the firm's custody business in late 1995. - Net interest revenue declined 22% to $397 million. OPERATING EXPENSES were up 12% from a year ago, as incentive compensation accruals for the second quarter increased in line with higher earnings. IN OTHER DEVELOPMENTS, in July 1996, Morgan finalized an agreement to form a strategic alliance to manage activities that represent about a third of the firm's $1 billion of annual technology expenditures. Morgan expects to achieve aggregate savings of about 15% on projected technology costs over the seven-year life of the agreement. In addition, on August 13, 1996, J.P. Morgan announced it has agreed to sell its institutional U.S. cash processing business to HSBC Financial Institutions, a division of Marine Midland Bank. The sale is expected to close by the end of the year, subject to regulatory approvals, and is expected to have no material effect on Morgan's ongoing consolidated results. 19 19 BUSINESS SECTOR RESULTS The firm reports financial results for five business sectors. Three are oriented toward client services: Finance and Advisory, Sales and Trading, and Asset Management and Servicing. 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 and six months ended June 30, 1996 and 1995.
Asset Asset Manage- and Finance Sales ment Equity Liability Corp- and and and Inves- Manage- orate Consol- In millions Advisory Trading Servicing tments ment Items idated - ---------------------------------------------------------------------------------------------------------- Second quarter 1996 Total revenue $ 507 $ 663 $ 355 $ 155 $ 96 $ (15) $1,761 Total expenses 365 351 274 8 33 73 1,104 - ---------------------------------------------------------------------------------------------------------- Pretax income 142 312 81 147 63 (88) 657 - ---------------------------------------------------------------------------------------------------------- Second quarter 1995 Total revenue 367 344 310 151 290 (13) 1,449 Total expenses 289 289 227 6 25 148 984 - ---------------------------------------------------------------------------------------------------------- Pretax income 78 55 83 145 265 (161) 465 - ---------------------------------------------------------------------------------------------------------- Six months 1996 Total revenue 958 1,404 704 245 287 (97) 3,501 Total expenses 702 690 545 16 62 174 2,189 - ---------------------------------------------------------------------------------------------------------- Pretax income 256 714 159 229 225 (271) 1,312 - ---------------------------------------------------------------------------------------------------------- Six months 1995 Total revenue 687 729 627 324 530 (60) 2,837 Total expenses 565 584 443 12 48 334 1,986 - ---------------------------------------------------------------------------------------------------------- Pretax income 122 145 184 312 482 (394) 851 - ----------------------------------------------------------------------------------------------------------
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, 1996 and 1995, $217 million and $150 million, respectively, related to income taxes were not allocated to the business sectors. In the six months ended June 30, 1996 and 1995, $433 million and $281 million, respectively, related to income taxes were not allocated to the business sectors. 20 20 FINANCE AND ADVISORY The Finance and Advisory sector recorded pretax income of $142 million in the second quarter of 1996 compared with $78 million a year ago. Total revenue in the 1996 second quarter increased 38% to $507 million from $367 million in the second quarter of 1995 reflecting an increase in investment banking revenue principally due to higher levels of advisory and underwriting activities. Higher revenues from equity derivatives also contributed to the increase. Expenses in the second quarter of 1996 for the Finance and Advisory sector were $365 million compared with $289 million in the second quarter of 1995, an increase of 26%, primarily due to higher employee compensation and benefits expenses. Revenues for the six month period increased 39% to $958 million. Expenses for the same period increased 24% to $702 million from the six months ended June 30, 1995. For the first half of 1996, J.P. Morgan ranked as the sixth largest underwriter of U.S. debt and equity issues, according to Securities Data Co. In advisory activities, Securities Data Co. ranked J.P. Morgan seventh in completed mergers and acquisitions worldwide and fourth in pending transactions in the first half of the year. SALES AND TRADING The Sales and Trading sector recorded pretax income of $312 million in the second quarter of 1996 compared with $55 million in the second quarter of 1995. Total revenue in the second quarter of 1996 increased 93% to $663 million compared with $344 million in the second quarter of 1995 as revenues in both developed and emerging markets were strong. Total revenue increased due to higher results in fixed income markets driven by continued client demand for swaps, government, and corporate securities. Revenues from our proprietary trading unit increased in the quarter due to favorable positioning, primarily in the United States and Europe. Total expenses for the Sales and Trading sector of $351 million increased $62 million or 21% from the second quarter of 1995 primarily due to higher employee compensation and benefits expense. Total revenue of $1,404 million for the six months ended June 30, 1996, increased 93% or $675 million from 1995. Total expenses increased 18% to $690 million when compared to the same period from last year. ASSET MANAGEMENT AND SERVICING The Asset Management and Servicing sector recorded pretax income of $81 million in the second quarter of 1996 compared with $83 million in the year-earlier period. Total revenue increased 15% to $355 million in the second quarter of 1996 compared with $310 million in the second quarter of 1995. This increase was primarily driven by an increase in revenue from asset management, reflecting an increase in assets under management primarily from net new business. Expenses associated with Asset Management and Servicing were $274 million in the second quarter of 1996 compared with $227 million in the second quarter of 1995. The 21% increase in expenses primarily relates to higher employee compensation and benefits, in part due to higher staff levels. Revenues of $704 million for the six month period ended June 30, 1996, increased $77 million from 1995. Expenses of $545 million for the six month period ended June 30, 1996, increased $102 million from 1995. In strategic dispositions, we sold our securities custody and clearing business and discontinued certain of our cash services during 1995 and, as previously mentioned, have agreed to sell our U.S. institutional cash processing business. Revenues and expenses for 1996 and 1995 associated with these businesses are included in the Corporate Items section. These actions do not affect the cash management and processing services Morgan offers for private clients or our role as operator of the Euroclear System, the world's largest clearance and settlement system for internationally traded securities. 21 21 EQUITY INVESTMENTS Equity Investments recorded pretax income of $147 million in the second quarter of 1996 compared with $145 million in the second quarter of 1995. Total revenue was $155 million in the second quarter of 1996 compared with $151 million in the second quarter of 1995. The 1996 second quarter reflected net equity investment securities gains of $118 million versus net gains of $132 million in the year-earlier quarter. Total revenue for the six months period was $245 million compared with $324 million in 1995. Net unrealized appreciation on the combined portfolio of marketable and nonmarketable equity investment securities was $490 million at June 30, 1996, compared with $513 million at March 31, 1996. The results of the Equity Investment portfolio are also evaluated on an economic basis using total return, which combines revenue and the change in net unrealized appreciation. Total return for the second quarter of 1996 was $132 million compared with $108 million in the second quarter of 1995. Total return for the six months ended June 30, 1996, was $210 million compared with $205 million for the six months ended June 30, 1995. As our investment strategy covers a longer-term horizon, total return viewed over shorter periods will reflect the impact of short-term market movements, including industry specific events. ASSET AND LIABILITY MANAGEMENT Asset and Liability Management recorded pretax income of $63 million in the second quarter of 1996 compared with $265 million in the same period a year ago. Total revenue, which primarily includes net interest revenue and net investment securities gains (losses), was $96 million and $290 million for the second quarter of 1996 and 1995, respectively. The decline in total revenue was primarily due to the decrease in net interest revenue as a result of the maturity of higher-yielding instruments. In addition, net investment securities losses were $51 million in the second quarter of 1996, versus net gains of $33 million in the second quarter of 1995. Net unrealized appreciation on asset and liability management financial instruments, which included appreciation associated with risk-adjusting swaps and debt investment securities, was $317 million at June 30, 1996 and $444 million at March 31, 1996. Total revenue declined $243 million to $287 million for the six months ended June 30, 1996. 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 nontrading 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, which combines reported revenue and the change in net unrealized appreciation, decreased to ($31) million in the second quarter of 1996 from $30 million in the second quarter of 1995. Total return for the six month period ended June 30, 1996 was $51 million compared with $159 million for the six months ended June 30, 1995. CORPORATE ITEMS Corporate Items includes revenues and expenses that have not been allocated to the five business sectors, intercompany eliminations, and the taxable equivalent adjustment, which is calculated to gross-up tax exempt interest to a taxable basis. Corporate Items for the second quarter and six months of 1996 and 1995 also included the revenues and expenses of the securities custody and clearing and cash services businesses. As mentioned in the discussion of Asset Management and Servicing, these businesses have been sold or discontinued during 1995 or are expected to be sold by year end. Corporate Items in the second quarter of 1996 and 1995 also included the taxable equivalent adjustment of $22 million and $27 million respectively. Corporate Items for the six months of 1996 consisted primarily of intercompany eliminations, the taxable equivalent adjustment of $44 million, and other items not allocated to a sector. 22 22 RISK MANAGEMENT The following presents the market risk profiles related to our trading activities and asset and liability management activities for the three months and twelve months ended June 30, 1996. Trading activities 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 for the second quarter of 1996 averaged approximately $22 million, unchanged from the first quarter of 1996, and ranged from $17 million to $26 million. For the twelve months ended June 30, 1996, the DEaR estimate for our combined trading activities averaged approximately $21 million and ranged from approximately $16 million to $31 million. Daily combined trading-related revenue averaged $11.3 million during the twelve-month period ended June 30, 1996. Consistent with statistical expectations, daily revenue fell short of expected results by amounts greater than related DEaR estimates within 5% of the trading days during the twelve months ended June 30, 1996. Asset and liability management activities During the twelve months ended June 30, 1996, value at risk measured over a weekly horizon averaged approximately $40 million and ranged from $21 million to $82 million. These amounts approximate average DEaR of $18 million and a range of $10 million to $37 million. Weekly total return related to asset and liability management activities fell short of expected weekly results by amounts greater than related weekly value at risk estimates within 5% of the time. 23 23 FINANCIAL STATEMENT ANALYSIS REVENUES Revenues totaled $1.761 billion in the second quarter of 1996, up 22% from $1.449 billion a year earlier. Net interest revenue, the aggregate of interest revenue and expense generated by the firm's asset and liability management, credit-related, and trading activities, declined 22% to $397 million from the second quarter of 1995. Asset and liability management was the principal factor in the decline as higher-yielding positions continued to mature. The following table provides J.P. Morgan's interest-rate-sensitivity gap at June 30, 1996, including the asset and liability interest-rate- sensitivity gap and the effect of derivatives on the gap. The resulting interest-rate-sensitivity gap is presented by U.S. dollar and non-U.S. dollar currency components and reflects J.P. Morgan's market outlook at June 30, 1996. Significant variances in interest rate sensitivity may exist at other dates not presented in the table. Amounts in parentheses reflect liability sensitive positions. By repricing or maturity dates
- ----------------------------------------------------------------------------------------------------------------------------------- After After six one months year Within but but After six within within five In millions months one year five years - ----------------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1996 Asset and liability interest- rate-sensitivity gap ($ 2,842) ($ 2,614) $ 2,098 $ 9,653 Derivatives affecting interest rate sensitivity 1,397 4,158 (8,266) 2,711 - ----------------------------------------------------------------------------------------------------------------------------------- Interest-rate-sensitivity gap (a) (1,445) 1,544 (6,168) 12,364 - ----------------------------------------------------------------------------------------------------------------------------------- (a) Components of interest-rate- sensitivity gap: U.S. dollar 7,004 1,580 (10,749) 12,131 Non-U.S. dollar* (8,449) (36) 4,581 233 - ----------------------------------------------------------------------------------------------------------------------------------- Total (1,445) 1,544 (6,168) 12,364 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------ * Primarily yen, deutsche mark, French franc, and sterling positions. 24 24 Trading revenue rose to $697 million in the second quarter from $305 million a year earlier. First-half trading revenue also more than doubled from the first six months of 1995. Revenues in both developed and emerging markets were strong and diversified across nearly all the firm's trading products. Reported trading revenue does not include net interest revenue associated with trading activities, which was $42 million in the second quarter of 1996 and $28 million a year ago. The following table presents trading revenue and net interest revenue associated with the firm's trading activities, in both developed and emerging markets, disaggregated by principal product groupings. The table does not represent total revenues generated by business activities as discussed in Business sector results. For example, underwriting revenues and equities commissions, which are reported in Investment banking revenue and Operational service fees respectively on the Consolidated Statement of Income, are not included below.
Fixed Foreign Commo- Proprietary In millions Income Equities Exchange dities Unit Total - ----------------------------------------------------------------------------------------------------------------------------------- Second Quarter 1996 Trading revenue $331 $124 $109 $ 5 $128 $ 697 Net interest revenue 54 (9) 5 (5) (3) 42 - ----------------------------------------------------------------------------------------------------------------------------------- Combined total 385 115 114 - 125 739 - ----------------------------------------------------------------------------------------------------------------------------------- Second Quarter 1995 Trading revenue 96 96 62 12 39 305 Net interest revenue 56 (40) 3 (1) 10 28 - ----------------------------------------------------------------------------------------------------------------------------------- Combined total 152 56 65 11 49 333 - ----------------------------------------------------------------------------------------------------------------------------------- Six Months 1996 Trading revenue 864 218 177 39 157 1,455 Net interest revenue 123 (52) 10 (7) (2) 72 - ----------------------------------------------------------------------------------------------------------------------------------- Combined total 987 166 187 32 155 1,527 Six Months 1995 Trading revenue 153 138 164 31 122 608 Net interest revenue 122 (57) 7 2 15 89 - ----------------------------------------------------------------------------------------------------------------------------------- Combined total 275 81 171 33 137 697
25 25 Combined trading and related net interest revenue rose to $739 million from $333 million a year earlier. Combined revenue from fixed income rose to $385 million in the second quarter from $152 million in the year-earlier quarter, driven by continued client demand for swaps and for government and corporate securities. Combined revenue from equities more than doubled to $115 million from $56 million a year earlier, reflecting strong demand for equity derivative products. Foreign exchange combined revenue totaled $114 million versus $65 million in the second quarter of 1995. Commodities trading, which posted combined revenue of $11 million in the second quarter a year ago, broke even on a combined revenue basis in the period just ended. Combined revenue from the firm's proprietary trading unit more than doubled to $125 million from $49 million in the second quarter of 1995, due to favorable positioning, primarily in the United States and Europe. Combined revenue for the first six months of 1996 was $1,527 million, compared with $697 million in the same 1995 period. Investment banking revenue increased 79% to $210 million in the second quarter. Underwriting revenue grew to $111 million from $41 million a year ago, as Morgan raised more debt and equity capital for a broad range of clients. Advisory fees in the second quarter rose to $99 million from $76 million a year earlier. Investment banking revenue for the first six months of 1996 was $411 million, compared with $231 million for the first six months of 1995. Underwriting revenue for the first six months of 1996 was $176 million, versus $63 million in the comparable 1995 period. Credit-related fees were $38 million in the second quarter, 7% lower than in the second quarter of 1995 because of the sale of the custody business. In the first six months of this year, credit-related fees were $76 million compared with $84 million in the same period of 1995. Investment management fees advanced 25% to $172 million from a year ago, as assets under management rose, primarily from net new business. Assets under management at June 30, 1996, were approximately $190 billion. Investment management fees for the first six months of 1996 were $329 million, versus $268 million in the same 1995 period. Operational service fees in the second quarter totaled $104 million, 26% lower than in the second quarter of 1995. Excluding revenues associated with the custody business, which was sold in 1995, operational service fees for the second quarter rose 5% on increased brokerage commissions. For the first six months of 1996, operational service fees were $217 million, versus $280 million in the 1995 period. Excluding revenues associated with the custody business, operational service fees for the six months rose 5%. Net investment securities losses were $51 million in the second quarter, versus net gains of $33 million in the second quarter of 1995. The losses in the second quarter of 1996 resulted primarily from the sale of government agency securities to realign the risk profile of the portfolio. For the six-month period, net investment securities losses were $39 million, versus net gains of $42 million in the first six months of 1995. Other revenue was $194 million in the second quarter, compared with $167 million in the 1995 second quarter. The 1996 second quarter reflected net equity investment securities gains of $118 million, compared with $132 million in the same quarter of 1995. For the first six months of 1996, other revenue was $259 million, versus $316 million in the comparable 1995 period. Net equity investment securities gains in the first half were $182 million, compared with $295 million for the first six months of 1995. 26 26 OPERATING EXPENSES Operating expenses were $1.104 billion in the second quarter of 1996, up 12% from a year earlier, primarily reflecting higher incentive compensation accruals in line with higher earnings. Excluding the 1995 expenses associated with the custody business, operating expenses were up 18%. Expenses other than employee compensation and benefits increased due to higher levels of business activity. In July 1996, the firm formed a strategic alliance to manage parts of the firm's global technology infrastructure. Morgan expects to achieve aggregate savings of approximately 15% on projected technology costs over the life of the agreement, after an estimated $100 million transition expense. The transition expense is expected to be recorded in the 1996 third quarter. With the establishment of the alliance, some costs previously included in employee compensation and benefits will be reflected in technology and communications expenses. At June 30, 1996, staff totaled 15,391 employees compared with 16,267 employees at June 30, 1995. Operating expenses in the first six months of 1996 increased 10% to $2.189 billion. Excluding the 1995 first quarter charge and the 1995 expenses associated with the custody business, operating expenses rose 20%. Income tax expense of $217 million in the second quarter was based on an effective tax rate of 33% versus 32% in the second quarter of 1995. For the six months ended June 30, 1996 and 1995, the effective tax rate was 33%. ASSETS Total assets were $199 billion at June 30, 1996, compared with $205 billion at March 31, 1996. Nonperforming assets decreased by $22 million to $134 million during the second quarter as assets newly classified as nonperforming were more than offset by repayments and loan sales. No provision for credit losses was deemed necessary in the 1996 second quarter. The allowance for credit losses was $1.125 billion at June 30, 1996. 27 27 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, 1996, 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 $4,765 France 5,363 Switzerland 2,230 --------------------------------------------------------------------------
(a) Mexican cross-border outstandings at June 30, 1996, were $1,214 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, which 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 0.75% of total assets at June 30, 1996. The UMS bonds are collateralized as to principal by zero-coupon U.S. Treasury securities with a face value equal to the face value of the underlying bonds. The collateral, which will become available when the UMS bonds mature, is pledged to the holders of the bonds and is held by the Federal Reserve Bank of New York.
U.S. Treasury In millions UMS bonds collateral - --------------------------------------------------------------------------------- Book Face Market Fair value value value value - --------------------------------------------------------------------------------- JUNE 30, 1996 Due in 2008 $ 28 $ 29 $ 28 $ 13 Due in 2019 523 637 501 116 - ---------------------------------------------------------------------------------
28 28 CAPITAL
June 30 March 31 December 31 June 30 Dollars in billions 1996 1996 1995 1995 - -------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 11.0 $ 10.8 $ 10.5 $ 9.9 Annualized rate of return on average common stockholders' equity (a) (b) 17.1% 17.2% 14.7% 13.4% As percent of period-end total assets: Common equity 5.2 5.0 5.4 5.6 Total equity 5.5 5.3 5.7 5.9 Book value per common share (c) $ 52.40 $ 51.57 $ 50.71 $ 48.14 Risk-based capital: Tier 1 risk-based capital $ 9.7 $ 9.5 $ 9.0 $ 8.6 Total risk-based capital 14.1 13.9 13.4 12.7 Risk adjusted assets 120.3 113.8 103.1 99.0 Capital ratios: J.P. Morgan Tier 1 ratio 8.1% 8.3% 8.8% 8.7% Total ratio 11.7 12.2 13.0 12.8 Leverage ratio 6.2 6.2 6.1 6.0 Morgan Guaranty Trust Company of New York Tier 1 ratio 7.7% 8.1% 8.5% 8.3% Total ratio 10.7 11.4 11.0 10.7 Leverage ratio 5.7 5.6 5.5 5.2 - --------------------------------------------------------------------------------------------------------
(a) Represents the annualized rate of return on average common stockholders' equity for the three months ended June 30, 1996, March 31, 1996, December 31, 1995, and June 30, 1995. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 17.8%, 18.1%, 15.5%, and 14.1% for the three months ended June 30, 1996, March 31, 1996, December 31, 1995, and June 30, 1995, respectively. (b) The annualized rate of return on average common stockholders' equity for the six months ended June 30, 1996 and 1995 was 17.1% and 12.3%, respectively. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 18.0% and 12.9% for the six months ended June 30, 1996 and 1995, respectively. (c) Excluding the impact of SFAS No. 115, the book value per common share would have been $50.54, $49.18, $47.83, and $45.78 for the three months ended June 30, 1996, March 31, 1996, December 31, 1995, and June 30, 1995, respectively. 29 29 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, 1996, stockholders' equity included approximately $367 million of net unrealized appreciation on debt investment and marketable equity investment securities, net the related deferred tax liability of $202 million. Net unrealized appreciation was $470 million at March 31, 1996. The unrealized appreciation on debt investment securities was $226 million and $331 million at June 30, 1996 and March 31, 1996, respectively. The net unrealized appreciation on marketable equity investment securities was $343 million and $429 million at June 30, 1996 and March 31, 1996, respectively. 30 30
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, 1996 June 30, 1995 ---------------------------------------------------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate ---------------------------------------------------------------------------------------- ASSETS Interest-earning deposits with banks, mainly in offices outside the U.S. $ 1,812 $ 24 5.33% $ 1,652 $ 44 10.68% Debt investment securities in offices in the U.S. (a): U.S. Treasury 922 18 7.85 2,785 43 6.19 U.S. state and political subdivision 1,651 47 11.45 2,066 64 12.43 Other 19,685 292 5.97 11,490 215 7.51 Debt investment securities in offices outside the U.S. (a) 3,622 57 6.33 4,318 73 6.78 Trading account assets: In offices in the U.S. 14,343 224 6.28 12,397 203 6.57 In offices outside the U.S. 22,911 460 8.08 23,585 580 9.86 Securities purchased under agreements to resell and federal funds sold, mainly in offices in the U.S. 45,394 593 5.25 30,246 443 5.87 Securities borrowed in offices in the U.S. 26,042 318 4.91 12,899 187 5.81 Loans: In offices in the U.S. 7,020 114 6.53 6,602 115 6.99 In offices outside the U.S. 21,494 328 6.14 18,037 325 7.23 Other interest-earning assets (b): In offices in the U.S. 1,126 26 * 1,128 72 * In offices outside the U.S. 1,065 80 * 1,030 68 * - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 167,087 2,581 6.21 128,235 2,432 7.61 Allowance for credit losses (1,122) (1,132) Cash and due from banks 785 1,829 Other noninterest-earning assets 42,941 45,570 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets 209,691 174,502 - -----------------------------------------------------------------------------------------------------------------------------------
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, 1996 and 1995. (a) For the three months ended June 30, 1996 and 1995, 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 31 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, 1996 June 30, 1995 ---------------------------------------------------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate ---------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: In offices in the U.S. $ 2,177 $ 24 4.43 % $ 2,184 $ 28 5.14 % In offices outside the U.S. 46,008 595 5.20 42,390 588 5.56 Trading account liabilities: In offices in the U.S. 7,921 124 6.30 6,871 108 6.30 In offices outside the U.S. 9,665 182 7.57 10,963 224 8.20 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. 62,286 798 5.15 39,458 605 6.15 Commercial paper, mainly in offices in the U.S. 4,274 57 5.36 2,634 40 6.09 Other interest-bearing liabilities: In offices in the U.S. 14,270 200 5.64 9,254 146 6.33 In offices outside the U.S. 1,899 46 9.74 1,731 18 4.17 Long-term debt, mainly in offices in the U.S. 9,623 136 5.69 8,692 140 6.46 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 158,123 2,162 5.50 124,177 1,897 6.13 Noninterest-bearing deposits: In offices in the U.S. 2,329 3,330 In offices outside the U.S. 933 1,363 Other noninterest-bearing liabilities 37,422 35,883 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 198,807 164,753 Stockholders' equity 10,884 9,749 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 209,691 174,502 Net yield on interest-earning assets 1.01 1.67 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest earnings 419 535 - -----------------------------------------------------------------------------------------------------------------------------------
32 32
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, 1996 June 30, 1995 ---------------------------------------------------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate ---------------------------------------------------------------------------------------- ASSETS Interest-earning deposits with banks, mainly in offices outside the U.S. $ 1,803 $ 51 5.69% $ 1,960 $ 103 10.60% Debt investment securities in offices in the U.S. (a): U.S. Treasury 970 37 7.67 2,253 71 6.35 U.S. state and political subdivision 1,672 96 11.55 2,108 129 12.34 Other 18,182 561 6.20 12,299 445 7.30 Debt investment securities in offices outside the U.S. (a) 4,272 131 6.17 5,024 171 6.86 Trading account assets: In offices in the U.S. 15,825 474 6.02 12,866 444 6.96 In offices outside the U.S. 24,913 966 7.80 25,754 1,170 9.16 Securities purchased under agreements to resell and federal funds sold, mainly in offices in the U.S. 43,577 1,170 5.40 29,230 855 5.90 Securities borrowed in offices in the U.S. 23,408 581 4.99 14,103 401 5.73 Loans: In offices in the U.S. 6,849 226 6.64 6,846 246 7.25 In offices outside the U.S. 21,071 660 6.30 17,310 613 7.14 Other interest-earning assets (b): In offices in the U.S. 1,132 59 * 1,577 158 * In offices outside the U.S. 1,180 145 * 839 125 * - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 164,854 5,157 6.29 132,169 4,931 7.52 Allowance for credit losses (1,126) (1,132) Cash and due from banks 1,019 1,835 Other noninterest-earning assets 42,537 42,223 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets 207,284 175,095 - -----------------------------------------------------------------------------------------------------------------------------------
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, 1996 and 1995. (a) For the six months ended June 30, 1996 and 1995, 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 33 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, 1996 June 30, 1995 ---------------------------------------------------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate ---------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: In offices in the U.S. $ 2,054 $ 47 4.60 % $ 2,129 $ 52 4.93 % In offices outside the U.S. 45,764 1,222 5.37 42,151 1,183 5.66 Trading account liabilities: In offices in the U.S. 7,923 241 6.12 7,136 249 7.04 In offices outside the U.S. 10,654 358 6.76 11,762 512 8.78 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. 60,804 1,585 5.24 41,435 1,200 5.84 Commercial paper, mainly in offices in the U.S. 3,980 108 5.46 2,606 79 6.11 Other interest-bearing liabilities: In offices in the U.S. 13,827 392 5.70 9,395 291 6.25 In offices outside the U.S. 1,916 92 9.66 2,113 45 4.29 Long-term debt, mainly in offices in the U.S. 9,526 275 5.81 7,987 256 6.46 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 156,448 4,320 5.55 126,714 3,867 6.15 Noninterest-bearing deposits: In offices in the U.S. 2,674 3,342 In offices outside the U.S. 1,015 1,249 Other noninterest-bearing liabilities 36,367 34,132 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 196,504 165,437 Stockholders' equity 10,780 9,658 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 207,284 175,095 Net yield on interest-earning assets 1.02 1.62 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest earnings 837 1,064 - -----------------------------------------------------------------------------------------------------------------------------------
34 34 ASSET AND LIABILITY MANAGEMENT DERIVATIVES The objective of asset and liability management is to create longer-term value through the management of interest rate risk related to J.P. Morgan's nontrading 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 6 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, 1996. 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) in effect on the swaps at June 30, 1996, 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 $44.8 billion at June 30, 1996. The contractual maturities of these derivative contracts are primarily less than one year. 35 35
By expected maturities - ----------------------------------------------------------------------------------------------------------------------------------- After After After After one two three four year years years years Within but but but but After one within within within within five Dollars in billions year two three four five years Total - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS - U.S. DOLLAR Receive fixed swaps Notional amount $17.6 $15.6 $4.3 $3.8 $2.0 $10.8 $54.1 Weighted average: Receive rate 6.7 % 5.8 % 7.1 % 7.0 % 6.4 % 6.8 % 6.5 % Pay rate 5.5 5.5 5.5 5.5 5.5 5.6 5.5 Pay fixed swaps Notional amount $21.8 $20.0 $4.7 $9.0 $6.1 $9.4 $71.0 Weighted average: Receive rate 5.5 % 5.5 % 5.5 5.5 % 5.5 % 5.5 % 5.5 % Pay rate 6.4 5.7 5.7 6.4 6.2 7.1 6.2 INTEREST RATE SWAPS - NON-U.S. DOLLAR Receive fixed swaps Notional amount $26.7 $21.0 $8.4 $7.8 $3.1 $7.0 $74.0 Weighted average: Receive rate 6.2 % 5.4 % 6.2 % 6.5 % 7.0 % 7.0 % 6.1 % Pay rate 3.9 3.7 3.5 3.9 4.8 3.7 3.8 Pay fixed swaps Notional amount $22.6 $16.3 $8.4 $7.8 $3.2 $6.7 $65.0 Weighted average: Receive rate 3.9 % 3.2 % 3.5 % 3.9 % 4.8 % 3.6 % 3.7 % Pay rate 6.2 5.8 5.8 6.4 7.4 7.2 6.3 - ----------------------------------------------------------------------------------------------------------------------------------- Total notional amount $88.7 $72.9 $25.8 $28.4 $14.4 $33.9 $264.1 - -----------------------------------------------------------------------------------------------------------------------------------
Not included in the table above are $3.3 billion and $1.1 billion of notional amounts related to currency swaps and basis swaps respectively. 36 36 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 March 31, 1996: April 11, 1996 (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, 1996. May 13, 1996 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing its intent to join a Computer Sciences Corporation, Andersen Consulting, AT&T Solutions, and Bell Atlantic Network Integration in a global alliance to manage parts of J.P. Morgan's global technology infrastructure. 37 37 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, 1996 38 1 LIST OF EXHIBITS EXHIBIT 12. Statement re computation of ratios 27. Financial data schedule EX-12 2 COMPUTATION OF RATIO OF EARNINGS 1 2 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges J.P. Morgan & Co. Incorporated Consolidated - --------------------------------------------------------------------------------
Dollars in millions Six months 1996 - -------------------------------------------------------------------------------- Earnings: Net income $ 879 Add: income taxes 433 Less: equity in undistributed income of all affiliates accounted for by the equity method 12 Add: fixed charges, excluding interest on deposits 3,068 - -------------------------------------------------------------------------------- Earnings available for fixed charges, excluding interest on deposits 4,368 Add: interest on deposits 1,269 - -------------------------------------------------------------------------------- Earnings available for fixed charges, including interest on deposits 5,637 - -------------------------------------------------------------------------------- Fixed charges: Interest expense, excluding interest on deposits 3,051 Interest factor in net rental expense 17 - -------------------------------------------------------------------------------- Total fixed charges, excluding interest on deposits 3,068 Add: interest on deposits 1,269 - -------------------------------------------------------------------------------- Total fixed charges, including interest on deposits 4,337 - -------------------------------------------------------------------------------- Ratio of earnings to fixed charges: Excluding interest on deposits 1.42 Including interest on deposits 1.30 - --------------------------------------------------------------------------------
2 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 1996 - -------------------------------------------------------------------------------- Earnings: Net income $ 879 Add: income taxes 433 Less: equity in undistributed income of all affiliates accounted for by the equity method 12 Add: fixed charges, excluding interest on deposits and preferred stock dividends 3,068 - -------------------------------------------------------------------------------- Earnings available for fixed charges, excluding interest on deposits 4,368 Add: interest on deposits 1,269 - -------------------------------------------------------------------------------- Earnings available for fixed charges, including interest on deposits 5,637 - -------------------------------------------------------------------------------- Fixed charges: Interest expense, excluding interest on deposits 3,051 Interest factor in net rental expense 17 Preferred stock dividends 24 - -------------------------------------------------------------------------------- Total fixed charges, excluding interest on deposits 3,092 Add: interest on deposits 1,269 - -------------------------------------------------------------------------------- Total fixed charges, including interest on deposits 4,361 - -------------------------------------------------------------------------------- Ratio of earnings to fixed charges: Excluding interest on deposits 1.41 Including interest on deposits 1.29 - --------------------------------------------------------------------------------
EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED JULY 30, 1996 INCLUDED IN THE FORM 10-Q. 1,000,000 US DOLLARS 6-MOS DEC-31-1996 JAN-1-1996 JUN-30-1996 1 651 1,427 36,544 69,375 22,712 0 0 29,588 1,125 198,765 48,457 76,726 52,709 9,842 0 694 502 9,835 198,765 880 790 3,443 5,113 1,269 4,320 793 0 (39) 2,189 1,312 879 0 0 879 4.28 4.27 1.02 134 0 0 0 1,130 19 14 1,125 120 63 942
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