-----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, N1iWuHI08AzfXB/J5fM55YU7muNX5aRcUy8ycwEtWPmQPyKJNy+dhkdbyV5ACLB3 iXyH5Jn2r4M2jZq+tCU5yg== 0000950123-96-006596.txt : 19961118 0000950123-96-006596.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950123-96-006596 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96663978 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 September 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 October 31, 1996: Common Stock, $2.50 Par Value 185,205,628 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 Nine-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 9-17 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; Discussion of risk management; Statements of consolidated average balances and net interest earnings of J.P. Morgan & Co. Incorporated ("J.P. Morgan") for the three months and nine months ended September 30, 1996; and Table of asset and liability management derivatives. 18-35 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 -------------------------------------------------------------------- September 30 September 30 Increase/ June 30 Increase/ 1996 1995 (Decrease) 1996 (Decrease) ------------ ------------ --------- ------- ---------- NET INTEREST REVENUE Interest revenue $ 2,675 $ 2,453 $ 222 $ 2,559 $ 116 Interest expense 2,250 1,946 304 2,162 88 - -------------------------------------------------------------------------------------------------- Net interest revenue 425 507 (82) 397 28 NONINTEREST REVENUE Trading revenue 510 399 111 697 (187) Investment banking revenue 233 195 38 210 23 Credit-related fees 39 38 1 38 1 Investment management fees 164 150 14 172 (8) Operational service fees 98 137 (39) 104 (6) Net investment securities gains (losses) 11 (22) 33 (51) 62 Other revenue 69 145 (76) 194 (125) - -------------------------------------------------------------------------------------------------- Total noninterest revenue 1,124 1,042 82 1,364 (240) Total revenue 1,549 1,549 -- 1,761 (212) OPERATING EXPENSES Employee compensation and benefits 685 648 37 737 (52) Net occupancy 74 87 (13) 76 (2) Technology and communications 248 169 79 158 90 Other expenses 130 118 12 133 (3) - -------------------------------------------------------------------------------------------------- Total operating expenses 1,137 1,022 115 1,104 33 Income before income taxes 412 527 (115) 657 (245) Income taxes 136 167 (31) 217 (81) - -------------------------------------------------------------------------------------------------- Net income 276 360 (84) 440 (164) PER COMMON SHARE Net income (a) $ 1.32 $ 1.78 ($ 0.46) $ 2.14 ($ 0.82) 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 Nine months ended ------------------------------------ September 30 September 30 Increase/ 1996 1995 (Decrease) ------------ ------------ ---------- NET INTEREST REVENUE Interest revenue $ 7,788 $ 7,328 $ 460 Interest expense 6,570 5,813 757 - ------------------------------------------------------------------------------- Net interest revenue 1,218 1,515 (297) NONINTEREST REVENUE Trading revenue 1,965 1,007 958 Investment banking revenue 644 426 218 Credit-related fees 115 122 (7) Investment management fees 493 418 75 Operational service fees 315 417 (102) Net investment securities gains (losses) (28) 20 (48) Other revenue 328 461 (133) - ------------------------------------------------------------------------------- Total noninterest revenue 3,832 2,871 961 Total revenue 5,050 4,386 664 OPERATING EXPENSES Employee compensation and benefits 2,152 1,890 262 Net occupancy 223 246 (23) Technology and communications 564 506 58 Other expenses 387 366 21 - ------------------------------------------------------------------------------- Total operating expenses 3,326 3,008 318 Income before income taxes 1,724 1,378 346 Income taxes 569 448 121 - ------------------------------------------------------------------------------- Net income 1,155 930 225 PER COMMON SHARE Net income (a) $ 5.60 $ 4.62 $ 0.98 Dividends declared 2.43 2.25 0.18 - -------------------------------------------------------------------------------
(a) Earnings per share amounts represent primary earnings per share for the nine months ended September 30, 1996 and 1995. Fully diluted earnings per share were $5.57 and $4.57 for the nine months ended September 30, 1996 and 1995, respectively. See notes to financial statements. 5 5 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated - --------------------------------------------------------------------------------
Dollars in millions September 30 June 30 December 31 1996 1996 1995 ------------ ------- ----------- ASSETS Cash and due from banks $ 1,088 $ 651 $ 1,535 Interest-earning deposits with banks 2,193 1,427 1,986 Debt investment securities available for sale carried at fair value (Cost: $26,341 at September 1996, $22,486 at June 1996, and $24,154 at December 1995) 26,565 22,712 24,638 Trading account assets 80,784 69,375 69,408 Securities purchased under agreements to resell ($34,658 at September 1996, $36,488 at June 1996, and $32,157 at December 1995)and federal funds sold 34,686 36,544 32,157 Securities borrowed 25,430 25,620 19,830 Loans 30,002 29,588 23,453 Less: allowance for credit losses 1,113 1,125 1,130 - ---------------------------------------------------------------------------------------------------- Net loans 28,889 28,463 22,323 Customers' acceptance liability 287 236 237 Accrued interest and accounts receivable 3,585 3,738 3,539 Premises and equipment 3,068 3,387 3,339 Less: accumulated depreciation 1,236 1,492 1,412 - ---------------------------------------------------------------------------------------------------- Premises and equipment, net 1,832 1,895 1,927 Other assets 6,309 8,104 7,299 - ---------------------------------------------------------------------------------------------------- Total assets 211,648 198,765 184,879 - ---------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 2,115 1,906 3,287 In offices outside the U.S. 917 750 744 Interest-bearing deposits: In offices in the U.S. 6,016 2,498 2,003 In offices outside the U.S. 40,860 43,303 40,404 - ---------------------------------------------------------------------------------------------------- Total deposits 49,908 48,457 46,438 Trading account liabilities 45,601 44,267 45,289 Securities sold under agreements to repurchase ($58,318 at September 1996, $51,604 at June 1996, and $40,803 at December 1995) and federal funds purchased 61,094 55,114 45,099 Commercial paper 4,448 5,102 2,801 Other liabilities for borrowed money 19,966 16,510 15,129 Accounts payable and accrued expenses 6,255 6,159 5,643 Liability on acceptances 287 236 237 Long-term debt not qualifying as risk-based capital 8,176 6,109 5,737 Other liabilities 1,095 2,047 4,465 - ---------------------------------------------------------------------------------------------------- 196,830 184,001 170,838 Long-term debt qualifying as risk-based capital 3,740 3,733 3,590 - ---------------------------------------------------------------------------------------------------- Total liabilities 200,570 187,734 174,428 STOCKHOLDERS' EQUITY Preferred stock (authorized shares: 10,400,000 at September 1996 and June 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 September 1996 and June 1996) 200 200 -- Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,684,623 at September 1996, 200,683,373 at June 1996, and 200,678,373 at December 1995) 502 502 502 Capital surplus 1,442 1,435 1,430 Retained earnings 8,392 8,281 7,731 Net unrealized gains on investment securities, net of taxes 317 367 566 Other 754 686 552 - ---------------------------------------------------------------------------------------------------- 12,101 11,965 11,275 Less: treasury stock (14,767,312 shares at September 1996, 14,083,799 shares at June 1996, and 13,562,755 shares at 1,023 934 824 December 1995) at cost - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 11,078 11,031 10,451 - ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 211,648 198,765 184,879 - ----------------------------------------------------------------------------------------------------
See notes to financial statements. 6 6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated - --------------------------------------------------------------------------------
Dollars in millions Nine months ended --------------------------- September 30 September 30 1996 1995 ---------------------------- PREFERRED STOCK Adjustable rate cumulative preferred stock Balance, January 1 and September 30 $ 244 $ 244 - -------------------------------------------------------------------------------------------------------------------- Variable cumulative preferred stock Balance, January 1 and September 30 250 250 - -------------------------------------------------------------------------------------------------------------------- Fixed cumulative preferred stock Balance, January 1 -- -- Shares issued 200 -- - -------------------------------------------------------------------------------------------------------------------- Balance, September 30 200 -- - -------------------------------------------------------------------------------------------------------------------- Total preferred stock, September 30 694 494 - -------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, January 1 and September 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 12 (19) - -------------------------------------------------------------------------------------------------------------------- Balance, September 30 1,442 1,433 - -------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, January 1 7,731 7,044 Net income 1,155 930 Dividends declared on adjustable rate cumulative preferred stock (9) (9) Dividends declared on variable cumulative preferred stock (7) (9) Dividends declared on fixed cumulative preferred stock (8) -- Dividends declared on common stock (454) (422) Dividend equivalents on common stock issuable (16) (8) - -------------------------------------------------------------------------------------------------------------------- Balance, September 30 8,392 7,526 - -------------------------------------------------------------------------------------------------------------------- NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES Balance, January 1 566 456 Net change in net unrealized gains, net of taxes (249) 39 - -------------------------------------------------------------------------------------------------------------------- Balance, September 30 317 495 - -------------------------------------------------------------------------------------------------------------------- OTHER COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS Balance, January 1 556 369 Deferred stock awards, net 207 75 - -------------------------------------------------------------------------------------------------------------------- Balance, September 30 763 444 - -------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION Balance, January 1 (4) (2) Translation adjustments (7) (4) Income tax benefit 2 1 - -------------------------------------------------------------------------------------------------------------------- Balance, September 30 (9) (5) - -------------------------------------------------------------------------------------------------------------------- Total other, September 30 754 439 - -------------------------------------------------------------------------------------------------------------------- LESS: TREASURY STOCK Balance, January 1 824 747 Purchases 445 194 Shares distributed under various employee benefit plans (246) (165) - -------------------------------------------------------------------------------------------------------------------- Balance, September 30 1,023 776 - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity, September 30 11,078 10,113 - --------------------------------------------------------------------------------------------------------------------
See notes to financial statements. 7 7 CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated - --------------------------------------------------------------------------------
Dollars in millions Nine months ended ------------------------------ September 30 September 30 1996 1995 ------------------------------ NET INCOME $1,155 $ 930 Adjustments to reconcile to cash provided by (used in)operating activities: Noncash items: depreciation, amortization, deferred income taxes, and stock award plans 597 290 (Increase) decrease in assets: Trading account assets (11,372) (7,654) Securities purchased under agreements to resell (2,500) (9,384) Securities borrowed (5,600) (5,713) Accrued interest and accounts receivable (46) 2,029 Increase (decrease) in liabilities: Trading account liabilities 314 8,582 Securities sold under agreements to repurchase 17,515 8,165 Accounts payable and accrued expenses 765 (692) Other changes in operating assets and liabilities, net (4,357) 711 Net investment securities (gains) losses included in cash flows from investing activities 28 (20) - ----------------------------------------------------------------------------------------------------------- CASH USED IN OPERATING ACTIVITIES (3,501) (2,756) - ----------------------------------------------------------------------------------------------------------- Decrease in interest-earning deposits with banks (207) (142) Debt investment securities: Proceeds from sales 24,701 33,920 Proceeds from maturities, calls, and mandatory redemptions 5,813 1,988 Purchases (32,963) (33,669) (Increase) decrease in federal funds sold (28) 42 Increase in loans (6,560) (3,201) Payments for premises and equipment (83) (160) Other changes, net 1,251 (2,254) - ----------------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (8,076) (3,476) - ----------------------------------------------------------------------------------------------------------- Decrease in noninterest-bearing deposits (999) (41) Increase in interest-bearing deposits 4,471 3,621 Decrease in federal funds purchased (1,520) (2,057) Increase (decrease) in commercial paper 1,647 (553) Other liabilities for borrowed money: Proceeds 19,369 13,771 Payments (16,342) (10,022) Long-term debt: Proceeds 3,840 3,320 Payments (1,102) (798) Capital stock: Issued or distributed 200 -- Purchased (446) (194) Dividends paid (481) (434) Other changes, net 2,500 (1,095) - ----------------------------------------------------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES 11,137 5,518 - ----------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and due from banks (7) 23 - ----------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS (447) (691) Cash and due from banks at December 31, 1995 and 1994 1,535 2,210 - ----------------------------------------------------------------------------------------------------------- Cash and due from banks at September 30, 1996 and 1995 1,088 1,519 - ----------------------------------------------------------------------------------------------------------- Cash disbursements made for: Interest 6,549 $ 5,578 Income taxes 536 422 - -----------------------------------------------------------------------------------------------------------
See notes to financial statements. 8 8 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York - --------------------------------------------------------------------------------
Dollars in millions September 30 December 31 1996 1995 ---------------------------- ASSETS Cash and due from banks $ 1,044 $ 1,429 Interest-earning deposits with banks 2,196 1,995 Debt investment securities available for sale carried at fair value 21,899 23,767 Trading account assets 64,424 55,373 Securities purchased under agreements to resell and federal funds sold 26,262 20,996 Loans 29,837 23,319 Less: allowance for credit losses 1,112 1,129 - ------------------------------------------------------------------------------------------------------------------ Net loans 28,725 22,190 Customers' acceptance liability 287 237 Accrued interest and accounts receivable 3,230 3,420 Premises and equipment 2,737 2,967 Less: accumulated depreciation 1,082 1,232 - ------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 1,655 1,735 Other assets 2,778 4,571 - ------------------------------------------------------------------------------------------------------------------ Total assets 152,500 135,713 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 2,114 3,275 In offices outside the U.S. 961 839 Interest-bearing deposits: In offices in the U.S. 6,029 1,975 In offices outside the U.S. 41,166 40,985 - ------------------------------------------------------------------------------------------------------------------ Total deposits 50,270 47,074 Trading account liabilities 38,650 39,197 Securities sold under agreements to repurchase and federal funds purchased 27,795 20,274 Other liabilities for borrowed money 13,417 8,509 Accounts payable and accrued expenses 4,464 4,187 Liability on acceptances 287 237 Long-term debt not qualifying as risk-based capital (includes $632 at 1996 and $418 at 1995 of notes payable to J.P. Morgan) 4,275 2,786 Other liabilities 1,315 3,324 - ------------------------------------------------------------------------------------------------------------------ 140,473 125,588 Long-term debt qualifying as risk-based capital (includes $2,318 at 1996 and $1,310 at 1995 of notes payable to J.P. Morgan) 2,517 1,659 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 142,990 127,247 STOCKHOLDER'S EQUITY Preferred stock, $100 par value(authorized shares: 2,500,000) -- -- Common stock, $25 par value (authorized shares: 11,000,000 at September 1996, and 10,000,000 at December 1995; outstanding: 10,599,027 at September 1996 and 10,000,000 at December 1995) 265 250 Surplus 3,140 2,820 Undivided profits 5,971 5,136 Net unrealized gains on investment securities, net of taxes 143 264 Foreign currency translation (9) (4) - ------------------------------------------------------------------------------------------------------------------ Total stockholder's equity 9,510 8,466 - ------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholder's equity 152,500 135,713 - ------------------------------------------------------------------------------------------------------------------
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.
Third quarter Nine months In millions 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------- INTEREST REVENUE Deposits with banks $ 30 $ 31 $ 81 $ 134 Debt investment securities (a) 393 377 1,183 1,148 Trading account assets 819 735 2,256 2,346 Securities purchased under agreements to resell and federal funds sold 569 500 1,739 1,355 Securities borrowed 338 203 919 604 Loans 435 407 1,315 1,258 Other sources, primarily risk-adjusting swaps 91 200 295 483 - --------------------------------------------------------------------------------------------- Total interest revenue 2,675 2,453 7,788 7,328 - --------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 626 619 1,895 1,854 Trading account liabilities 358 305 957 1,066 Securities sold under agreements to repurchase and federal funds purchased 799 633 2,384 1,833 Other borrowed money 310 238 902 653 Long-term debt 157 151 432 407 - --------------------------------------------------------------------------------------------- Total interest expense 2,250 1,946 6,570 5,813 - --------------------------------------------------------------------------------------------- Net interest revenue 425 507 1,218 1,515 - ---------------------------------------------------------------------------------------------
(a) Interest revenue from debt investment securities included taxable revenue of $362 million and $1,094 million and revenue exempt from U.S. income taxes of $31 million and $89 million for the three months and nine months ended September 30, 1996, respectively. Interest revenue from debt investment securities included taxable revenue of $342 million and $1,030 million and revenue exempt from U.S. income taxes of $35 million and $118 million for the three months and nine months ended September 30, 1995, respectively. 10 10 For the three months and nine months ended September 30, 1996, net interest revenue associated with asset and liability management derivatives was approximately $25 million and $90 million respectively, compared with approximately $90 million and $280 million for the respective 1995 periods. At September 30, 1996, approximately ($170) 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 $224 million at September 30, 1996. Net deferred losses on closed derivative contracts are expected to amortize into Net interest revenue as follows: ($20) million - remainder of 1996; ($55) million in 1997; ($40) million in 1998; ($25) million in 1999; ($20) million in 2000; ($9) 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 nine months ended September 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.
Third quarter Nine months In millions 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Fixed Income $ 403 $ 267 $1,267 $ 420 Equities 43 75 261 213 Foreign Exchange 59 26 236 190 Commodities (15) 6 24 37 Proprietary Unit 20 25 177 147 - -------------------------------------------------------------------------------- Trading revenue 510 399 1,965 1,007 - --------------------------------------------------------------------------------
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 September 30, 1996, follows.
Fair and carrying In millions Cost value - -------------------------------------------------------------------------------- U.S. Treasury $ 4,379 $ 4,445 U.S. government agency, principally mortgage-backed 16,123 16,086 U.S. state and political subdivision 1,550 1,696 U.S. corporate and bank debt 249 251 Foreign government* 1,511 1,545 Foreign corporate and bank debt 2,431 2,443 Other 98 99 - -------------------------------------------------------------------------------- Total debt investment securities 26,341 26,565 - --------------------------------------------------------------------------------
* 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 September 30, 1996, was $224 million, consisting of gross unrealized appreciation of $385 million and gross unrealized depreciation of $161 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 debt investment securities gains (losses).
Third quarter Nine months In millions 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------- Gross realized gains from sales $ 23 $ 49 $ 140 $ 320 Gross realized losses from sales (12) (83) (168) (312) Net gains on maturities, calls and mandatory redemptions -- 12 -- 12 - -------------------------------------------------------------------------------------------- Net debt investment securities gains (losses) 11 (22) (28) 20
Equity investment securities Net realized gains on the sale of equity investment securities of $56 million and $238 million included in Other revenue for the three months and nine months ended September 30, 1996, respectively, include $60 million and $263 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 September 30, 1996, follows.
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value - -------------------------------------------------------------------------------------- September 30, 1996 $199 $271 -- $470 - --------------------------------------------------------------------------------------
Nonmarketable Securities: Nonmarketable equity investment securities, carried at a cost of $709 million, had an estimated fair value of $821 million at September 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 September 30, 1996, and the average balance for the three-month and nine-month periods ended September 30, 1996.
Carrying Average value balance ------------------------------------------- September 30, Third quarter Nine months In millions 1996 1996 1996 - -------------------------------------------------------------------------------- TRADING ACCOUNT ASSETS U.S. Treasury $ 9,300 $ 9,023 $ 9,405 U.S. government agency 5,022 3,139 2,994 Foreign government 23,928 21,755 19,413 Corporate debt and equity 15,464 14,227 13,890 Other securities 4,006 5,725 6,254 Interest rate and currency swaps 10,399 9,420 10,330 Foreign exchange contracts 2,336 2,503 2,902 Interest rate futures and forwards 341 280 322 Commodity and equity contracts 3,706 3,677 2,848 Purchased option contracts 6,282 5,641 5,430 - -------------------------------------------------------------------------------- Total trading account assets 80,784 75,390 73,788 - -------------------------------------------------------------------------------- TRADING ACCOUNT LIABILITIES U.S. Treasury 6,245 9,643 8,672 Foreign government 9,571 9,399 9,130 Corporate debt and equity 3,642 3,975 4,462 Other securities 894 2,614 2,644 Interest rate and currency swaps 10,429 9,331 9,517 Foreign exchange contracts 3,941 5,464 4,483 Interest rate futures and forwards 616 540 540 Commodity and equity contracts 3,557 3,547 3,205 Written option contracts 6,706 5,495 5,560 - -------------------------------------------------------------------------------- Total trading account liabilities 45,601 50,008 48,213 - --------------------------------------------------------------------------------
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 $29.0 billion and $27.7 billion of master netting agreements in effect at September 30, 1996 and December 31, 1995, respectively, is also presented.
Notional amounts Credit exposure ----------------------------------------------------------- SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30 DECEMBER 31 In billions 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------------------- Interest rate and currency swaps Trading $1,737.5 $1,233.3 Asset and liability management(a)(b)(c) 267.9 282.3 - --------------------------------------------------------------------------------------------------------- Total interest rate and currency swaps 2,005.4 1,515.6 $ 10.4 $ 12.4 - --------------------------------------------------------------------------------------------------------- Foreign exchange spot, forward, and futures contracts Trading 584.8 443.7 Asset and liability management(a)(b) 37.8 18.1 - --------------------------------------------------------------------------------------------------------- Total foreign exchange spot, forward, and futures contracts 622.6 461.8 2.3 3.3 - --------------------------------------------------------------------------------------------------------- Interest rate futures, forward rate agreements, and debt securities forwards Trading 485.2 412.7 Asset and liability management 17.8 2.7 - --------------------------------------------------------------------------------------------------------- Total interest rate futures, forward rate agreements, and debt securities forwards 503.0 415.4 0.3 0.5 - --------------------------------------------------------------------------------------------------------- Commodity and equity swaps, forward, and futures contracts, all trading 89.7 65.1 3.7 1.4 - --------------------------------------------------------------------------------------------------------- Purchased options(d) Trading 551.1 462.2 Asset and liability management(a) 2.1 2.6 - --------------------------------------------------------------------------------------------------------- Total purchased options 553.2 464.8 6.3 5.2 - --------------------------------------------------------------------------------------------------------- Written options, all trading(e) 740.8 524.0 -- -- - --------------------------------------------------------------------------------------------------------- Total credit exposure recorded as assets on the balance sheet 23.0 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 $41.6 billion at September 30, 1996, and were primarily denominated in the following currencies: Italian lire $8.1 billion, French franc $7.1 billion, deutsche mark $5.8 billion, Swiss franc $2.4 billion, Japanese yen $2.4 billion, European currency unit $2.3 billion, Belgian franc $1.7 billion, Spanish peseta $1.6 billion, Netherlands guilder $1.3 billion, Australian dollar $1.3 billion, Swedish krona $1.2 billion, and British pound $1.2 billion. (c) The notional amount of risk-adjusting swaps was $236.2 billion at September 30, 1996. (d) At September 30, 1996, purchased options used for trading purposes included $432.8 billion of interest rate options, $88.5 billion of foreign exchange options, and $29.8 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 $114.8 billion and those negotiated over-the-counter amounted to $438.4 billion at September 30, 1996. (e) At September 30, 1996, written options used for trading purposes included $607.2 billion of interest rate options, $99.3 billion of foreign exchange options, and $34.3 billion of commodity and equity options. Written option contracts executed on an exchange amounted to $268.3 billion and those negotiated over-the-counter amounted to $472.5 billion at September 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 $72 million at September 30, 1996. Gross unrealized gains and gross unrealized losses associated with open derivative contracts used for these purposes at September 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 $ 181 ($102) $ 79 Debt investment securities 61 (113) (52) Deposits 49 (19) 30 Other financial instruments 39 (24) 15 - -------------------------------------------------------------------------------- Total 330 (258) 72 - --------------------------------------------------------------------------------
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 September 30, 1996. The net amount is composed of $2.6 billion of gross unrealized gains and $2.4 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 September 30, 1996. There were no material terminations of risk-adjusting swaps during the three months and nine months ended September 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 September 30, 1996, is presented in the following table.
September 30 In billions 1996 - -------------------------------------------------------------------------------- Commitments to extend credit $62.3 Standby letters of credit and guarantees 14.1 - --------------------------------------------------------------------------------
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 $35.8 billion were netted against amounts payable for securities purchased of $35.2 billion to arrive at a net trade date receivable of $0.6 billion, which was classified as Other assets on the consolidated balance sheet at September 30, 1996. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with Statement of Financial Accounting Standards (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 September 30, 1996 and December 31,1995, by approximately $1.4 billion before considering income taxes. 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 September 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 September 30, 1996, are presented in the following table. At September 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, and the remainder is based on the fair value of the collateral.
September 30 In millions 1996 - -------------------------------------------------------------------------------- Impaired loans: Commercial and industrial 125 Other 34 - -------------------------------------------------------------------------------- 159 Restructuring countries 2 - -------------------------------------------------------------------------------- Total impaired loans 161 (a) - -------------------------------------------------------------------------------- Other nonperforming assets -- - -------------------------------------------------------------------------------- Total nonperforming assets 161 - --------------------------------------------------------------------------------
An analysis of the effect of impaired loans, net of charge-offs, on interest revenue for the three months and nine months ended September 30, 1996 and 1995, is presented in the following table.
Third quarter Nine months In millions 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------ Interest revenue that would have been recorded if accruing $ 2 $ 5 $ 9 $ 14 Less interest revenue recorded 3 4 4 23 - ------------------------------------------------------------------------------------------------------------ (Negative)/ positive impact of impaired loans on interest revenue 1 (1) (5) 9 - ------------------------------------------------------------------------------------------------------------
An analysis of the allowance for credit losses at September 30, 1996, is presented in the following table.
Third quarter Nine months In millions 1996 1996 - ------------------------------------------------------------------------------- Beginning of period balance $ 1,125 $ 1,130 - ------------------------------------------------------------------------------- Recoveries 4 18 Charge-offs: Commercial and industrial (12) (28) Other (4) (7) - ------------------------------------------------------------------------------- Net charge-offs (12) (17) - ------------------------------------------------------------------------------- Balance, September 30, 1996 (b)(c) 1,113 1,113 - -------------------------------------------------------------------------------
(a) As of September 30, 1996, no reserve is required under SFAS No. 114, Accounting by Creditors for Impairment of a Loan, for the $161 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 nine months ended September 30, 1996, the average recorded investment in impaired loans was $140.7 million and $139.6 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 September 30, 1996, the allocation of the allowance for credit losses was as follows: Specific allocation-borrowers in the U.S. $116 million, Specific allocation-borrowers outside the U.S. $73 million, Allocation to general risk $924 million. 16 16 9. INVESTMENT BANKING AND OTHER REVENUE In the third quarter of 1996 and 1995, investment banking revenue of $233 million and $195 million includes $83 million and $71 million, respectively, of underwriting revenue. For the nine months ended September 30, 1996 and 1995, underwriting revenue was $259 million and $134 million, respectively. Other revenue of $69 million in the 1996 third quarter includes $56 million of net equity investment securities gains. Other revenue of $145 million in the 1995 third quarter includes $91 million of net equity investment securities gains and $35 million of revenue associated with hedging anticipated foreign currency revenues and expenses. For the nine months ended September 30, 1996 and 1995, Other revenue of $328 million and $461 million, respectively, primarily includes net equity investment securities gains of $238 million and $386 million, respectively. 10. OPERATING EXPENSES In July 1996, JP Morgan entered into an agreement with a consortium of firms to form a strategic alliance to manage parts of the firm's global technology infrastructure (the "Alliance"). The formation of the Alliance resulted in a technology-related special charge incurred in the third quarter of $71 million, which is reflected in technology and communication expenses. The charge related primarily to payments for training and other personnel costs incurred and to the sale at a loss of certain technology equipment to the Alliance. 11. INCOME TAXES Income tax expense in the 1996 third quarter reflects a 33% effective tax rate, compared to a 32% effective tax rate in the 1995 third quarter. For the nine months ended September 30, 1996, the effective tax rate remained unchanged at 33% from the comparable 1995 period. Income tax expense (benefit) related to net investment securities gains (losses) was approximately $5 million and ($11) million for the three months and nine months ended September 30, 1996, respectively. Income tax expense (benefit) related to net investment securities gains (losses) was approximately ($9) million and $8 million for the three months and nine months ended September 30, 1995, respectively. The applicable tax rate used to compute the income tax expense (benefit) related to net investment securities gains (losses) was approximately 41% for the three months and nine months ended September 30, 1996 and 1995. The valuation allowance to reduce deferred tax assets to the amount expected to be realized totaled approximately $125 million at September 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. 12. COMMITMENTS AND CONTINGENT LIABILITIES Excluding mortgaged properties, assets carried at approximately $64.1 billion in the consolidated balance sheet at September 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 13. EARNINGS PER COMMON SHARE In the calculation of primary and fully diluted earnings per common share, net income is adjusted by adding back to net income the interest expense on convertible debentures and the expense related to dividend equivalents on certain deferred incentive compensation awards, net of the related income tax effects, and deducting the preferred stock dividends. Primary and fully diluted earnings per common share are computed by dividing income components by the weighted-average number of common and common equivalent shares outstanding during the period. For the primary earnings per share calculation, the weighted-average number of common and common equivalent shares outstanding includes the average number of shares of common stock outstanding, the average number of shares issuable upon conversion of convertible debentures, and the average number of shares issuable under employee benefit plans, that have a dilutive effect. The weighted-average number of common and common equivalent shares outstanding, assuming full dilution, includes the average number of shares of common stock outstanding, the average number of shares issuable upon conversion of convertible debentures, and the average number of shares issuable under various employee benefit plans. The maximum dilutive effect is computed using the period-end market price of J.P. Morgan common stock, if it is higher than the average market price used in calculating primary earnings per share.
Third quarter Nine months Dollars in millions 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Adjusted net income $ 267 $ 356 $ 1,130 $ 915 Primary earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 201,755,770 199,300,749 202,029,375 198,179,495 Fully diluted earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 201,968,519 200,069,670 202,792,562 200,232,610 - -------------------------------------------------------------------------------------------------------------------
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 $276 million in the third quarter of 1996, 23% lower than in the third quarter of 1995. Earnings per share for the quarter were $1.32 compared with $1.78 a year ago. The 1996 third quarter earnings reflected a special charge of $71 million ($42 million after tax, or $0.21 per share),related to the previously announced formation of a strategic alliance to manage parts of the firm's global technology infrastructure. Excluding the charge, net income totaled $318 million in the third quarter of 1996, 12% lower than in the third quarter of 1995. Net income for the first nine months of 1996, including the third quarter special charge, totaled $1.155 billion, up 24% from $930 million a year earlier. Earnings per share in the first nine months were $5.60 compared with $4.62 a year ago. Nine-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. THIRD QUARTER RESULTS AT A GLANCE
In millions of dollars, Third quarter Second except per share data quarter 1996 1995 1996 - -------------------------------------------------------------------------------- Revenues $ 1,549 $ 1,549 $ 1,761 Operating expenses (1,137) (1,022) (1,104) Income taxes (136) (167) (217) - -------------------------------------------------------------------------------- Net income $ 276 $ 360 $ 440 Net income per share $ 1.32 $ 1.78 $ 2.14 - -------------------------------------------------------------------------------- Dividends declared per share $ 0.81 $ 0.75 $ 0.81
REVENUES equaled the level in the third quarter of 1995: - Trading revenue rose 28% to $510 million due to higher results in fixed income and foreign exchange. Combined trading and related net interest revenue was up 35% to $575 million. - Investment banking revenue was up 19% to $233 million. - Investment management fees grew 9%. Credit-related fees were flat, and operational service fees were lower as a result of the sale of the firm's custody business in late 1995. - Net interest revenue declined 16% to $425 million. - Other revenue decreased 52% to $69 million due to lower net equity investment securities gains. OPERATING EXPENSES, excluding the special charge, rose 4% from a year ago. IN OTHER DEVELOPMENTS, Morgan announced in August an agreement to sell its institutional U.S. cash-processing business. The sale is expected to close in the fourth quarter, subject to regulatory approvals, and is not expected to have any material effect on Morgan's ongoing financial results. Morgan completed the agreement to form the Pinnacle Alliance in July. The firm expects to achieve aggregate savings of approximately 15% on projected technology costs over the seven-year life of the Alliance agreement after the special charge. 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 nine months ended September 30, 1996 and 1995.
Asset Asset Manage- and Finance Sales ment Equity Liability Cor- and and and Invest- Manage- porate Consol- In millions Advisory Trading Servicing ments ment Items idated - ----------------------------------------------------------------------------------------------------------------- Third quarter 1996 Total revenue $ 425 $ 558 $ 336 $ 88 $ 176 $ (34) $1,549 Total expenses 354 332 282 7 28 134 1,137 - ----------------------------------------------------------------------------------------------------------------- Pretax income 71 226 54 81 148 (168) 412 - ----------------------------------------------------------------------------------------------------------------- Third quarter 1995 Total revenue 453 431 314 102 244 5 1,549 Total expenses 312 312 234 6 27 131 1,022 - ----------------------------------------------------------------------------------------------------------------- Pretax income 141 119 80 96 217 (126) 527 - ----------------------------------------------------------------------------------------------------------------- Nine months 1996 Total revenue 1,383 1,962 1,040 333 463 (131) 5,050 Total expenses 1,056 1,022 827 23 90 308 3,326 - ----------------------------------------------------------------------------------------------------------------- Pretax income 327 940 213 310 373 (439) 1,724 - ----------------------------------------------------------------------------------------------------------------- Nine months 1995 Total revenue 1,140 1,160 941 426 774 (55) 4,386 Total expenses 877 896 677 18 75 465 3,008 - ----------------------------------------------------------------------------------------------------------------- Pretax income 263 264 264 408 699 (520) 1,378 - -----------------------------------------------------------------------------------------------------------------
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 September 30, 1996 and 1995, $136 million and $167 million, respectively, related to income taxes were not allocated to the business sectors. In the nine months ended September 30, 1996 and 1995, $569 million and $448 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 $71 million in the third quarter of 1996 compared with $141 million a year ago. Total revenue in the 1996 third quarter decreased 6% to $425 million in the third quarter of 1995 reflecting a decline in equities trading revenue. The decline was partially offset by an increase in investment banking revenue principally due to higher levels of advisory, syndication, and underwriting activities. Expenses in the third quarter of 1996 were $354 million compared with $312 million in the third quarter of 1995, an increase of 13%, primarily due to higher employee compensation and benefits expenses. Revenues for the nine month period increased 21% to $1,383 million from the corresponding prior period. Expenses for the same period increased 20% to $1,056 million from the nine months ended September 30, 1995. For the third quarter of 1996, J.P. Morgan ranked as the fourth largest underwriter of U.S. debt and equity issues, according to Securities Data Co. In advisory activities, Securities Data Co. ranked J.P. Morgan sixth in completed mergers and acquisitions worldwide and fourth in pending transactions in the first nine months of 1996. As an arranger of bank credit facilities, J.P. Morgan ranked second globally, according to Loan Pricing Corp., for the first nine months of 1996. SALES AND TRADING The Sales and Trading sector recorded pretax income of $226 million in the third quarter of 1996 compared with $119 million in the third quarter of 1995. Total revenue in the third quarter of 1996 increased 29% to $558 million in the third quarter of 1995 due primarily to higher results in fixed income markets driven by continued strong client demand for swaps and for government and corporate securities. Total expenses of $332 million increased 6% from the third quarter of 1995 primarily due to higher employee compensation and benefits expense. Total revenue of $1,962 million for the nine months ended September 30, 1996, increased 69% from 1995. Total expenses increased 14% to $1,022 million when compared to the same period last year. ASSET MANAGEMENT AND SERVICING The Asset Management and Servicing sector recorded pretax income of $54 million in the third quarter of 1996 compared with $80 million in the year-earlier period. Total revenue increased 7% to $336 million in the third quarter of 1996 compared with the third 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. Assets under management at September 30, 1996 were $197 billion. Expenses associated with Asset Management and Servicing were $282 million in the third quarter of 1996 compared with $234 million in the third 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 $1,040 million for the nine month period ended September 30, 1996, increased 11% from 1995. Expenses of $827 million for the nine month period ended September 30, 1996, increased 22% from 1995. In strategic dispositions, J.P. Morgan sold its custody business and discontinued certain of its cash services during 1995 and, as previously mentioned, has agreed to sell its 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 the firm's 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 $81 million in the third quarter of 1996 compared with $96 million in the third quarter of 1995. Total revenue was $88 million in the third quarter of 1996 compared with $102 million in the third quarter of 1995. The 1996 third quarter reflected net equity investment securities gains of $56 million versus $91 million in the year-earlier quarter. Total revenue for the nine month period was $333 million compared with $426 million in 1995. Net unrealized appreciation on the combined portfolio of marketable and nonmarketable equity investment securities was $383 million at September 30, 1996, compared with $490 million at June 30, 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 third quarter of 1996 was ($19) million compared with $65 million in the third quarter of 1995. Total return for the nine months ended September 30, 1996, was $191 million compared with $270 million for the nine months ended September 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 $148 million in the third quarter of 1996 compared with $217 million in the same period a year ago. Total revenue, which primarily includes net interest revenue and net investment securities gains (losses), was $176 million and $244 million for the third quarter of 1996 and 1995, respectively. The decline in total revenue, primarily due to the decrease in net interest revenue as a result of the maturity of higher-yielding instruments, was partially offset by net investment securities gains in the third quarter of 1996. Net investment securities gains in the third quarter of 1996 were $11 million compared with net losses of $22 million in the third 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 $279 million at September 30, 1996 and $317 million at June 30, 1996. Total revenue was $463 million for the nine months ended September 30, 1996 compared with $774 million for the year-earlier period. 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 $138 million in the third quarter of 1996 from $187 million in the third quarter of 1995. Total return for the nine month period ended September 30, 1996 was $189 million compared with $346 million for the nine months ended September 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 third quarter and nine months of 1996 and 1995 also included the revenues and expenses of the custody and cash processing 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 for the third quarter and the nine months of 1996 also included the previously announced special charge of $71 million related to the formation of the Pinnacle Alliance; and the taxable equivalent adjustment of $20 million and $27 million for the third quarter of 1996 and 1995 respectively. Corporate Items for the nine months of 1996 consisted primarily of intercompany eliminations, the taxable equivalent adjustment of $64 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 September 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 third quarter of 1996 averaged approximately $19 million and ranged from $13 million to $25 million. The DEaR estimate for our combined trading activities for the second quarter of 1996 averaged approximately $22 million and ranged from $17 million to $26 million. For the twelve months ended September 30, 1996, the DEaR estimate for our combined trading activities averaged approximately $21 million and ranged from approximately $13 million to $28 million. Daily combined trading-related revenue averaged $11.6 million during the twelve-month period ended September 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 September 30, 1996. Asset and liability management activities During the twelve months ended September 30, 1996, value at risk measured over a weekly horizon averaged approximately $44 million and ranged from $21 million to $82 million. These amounts approximate average DEaR of $20 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 $1.549 billion in the third quarter of 1996, equal to the level of the year earlier quarter. Revenues in the third quarter trailed the levels in the first two quarters of 1996 primarily because of lower trading results and lower net equity investment securities gains. For the first nine months of 1996, revenues were up 15% to $5.050 billion from the corresponding 1995 period. 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 16% to $425 million from the third quarter of 1995. The principal factor in the decline was the maturing of higher yielding asset and liability management instruments. For the first nine months of 1996, net interest revenue decreased 20% to $1,218 million from the corresponding 1995 period. The following table provides J.P. Morgan's interest-rate-sensitivity gap at September 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 September 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 one six year Within months but After six but within within five In millions months one year five years - ------------------------------------------------------------------------------------------------ SEPTEMBER 30, 1996 Asset and liability interest- rate-sensitivity gap (410) (4,155) 2,795 10,661 Derivatives affecting interest rate sensitivity 1,842 1,317 (5,885) 2,726 - ------------------------------------------------------------------------------------------------ Interest-rate-sensitivity gap (a) 1,432 (2,838) (3,090) 13,387 - ------------------------------------------------------------------------------------------------ (a) Components of interest-rate- sensitivity gap: U.S. dollar 12,911 (2,767) (7,450) 12,935 Non-U.S. dollar* (11,479) (71) 4,360 452 - ------------------------------------------------------------------------------------------------ Total 1,432 (2,838) (3,090) 13,387 - ------------------------------------------------------------------------------------------------
* Primarily Japanese yen, deutsche mark, French franc, Italian lira and British pound positions. 24 24 Trading revenue rose 28% to $510 million in the third quarter from $399 million a year earlier. Trading revenue for the first nine months of 1996 totaled $1.965 billion, up from $1.007 billion in the corresponding 1995 period. Year-to-date trading revenues in both developed and emerging markets were strong and diversified across the firm's products. Reported trading revenue does not include net interest revenue associated with trading activities, which was $65 million in the third quarter of 1996 and $26 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 Commod- Proprietary In millions Income Equities Exchange ities Unit Total - ----------------------------------------------------------------------------------------------------------- Third Quarter 1996 Trading revenue $ 403 $ 43 $ 59 ($ 15) $ 20 $ 510 Net interest revenue 45 (4) 5 4 15 65 - ----------------------------------------------------------------------------------------------------------- Combined total 448 39 64 (11) 35 575 - ----------------------------------------------------------------------------------------------------------- Third Quarter 1995 Trading revenue 267 75 26 6 25 399 Net interest revenue 41 (23) 3 -- 5 26 - ----------------------------------------------------------------------------------------------------------- Combined total 308 52 29 6 30 425 - ----------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------- Nine Months 1996 Trading revenue 1,267 261 236 24 177 1,965 Net interest revenue 168 (56) 15 (3) 13 137 - ----------------------------------------------------------------------------------------------------------- Combined total 1,435 205 251 21 190 2,102 - ----------------------------------------------------------------------------------------------------------- Nine Months 1995 Trading revenue 420 213 190 37 147 1,007 Net interest revenue 163 (80) 10 2 20 115 - ----------------------------------------------------------------------------------------------------------- Combined total 583 133 200 39 167 1,122
25 25 Combined trading and related net interest revenue rose to $575 million in the third quarter from $425 million a year earlier. Combined revenue from fixed income rose to $448 million in the third quarter from $308 million in the year-earlier quarter, driven by continued strong client demand for swaps and for government and corporate securities. Combined revenue from equities was $39 million compared with $52 million a year earlier. Foreign exchange combined revenue increased to $64 million from $29 million in the third quarter of 1995, largely in emerging markets. Combined revenue for the first nine months of 1996 was $2,102, compared with $1,122 in the same 1995 period. Investment banking revenue increased 19% to $233 million in the third quarter. Underwriting revenue grew to $83 million from $71 million a year ago. Advisory and syndication fees in the third quarter rose to $150 million from $124 million a year earlier. Investment banking revenue for the first nine months of 1996 was $644 million, compared with $426 million for the first nine months of 1995. Underwriting revenue for the first nine months of 1996 was $259 million, versus $134 million in the comparable 1995 period. Credit-related fees of $39 million in the third quarter were flat compared with the third quarter of 1995. Excluding revenues from the custody business, which was sold in 1995, and from the discontinued cash-processing businesses, credit related fees rose 13% from a year earlier. In the first nine months of this year, credit-related fees excluding revenues from the custody and cash-processing businesses, rose 7% from the same period of 1995. Investment management fees advanced 9% to $164 million from a year ago, as assets under management rose, primarily from net new business. Investment management fees for the first nine months of 1996 were $493 million, versus $418 million in the same 1995 period. Assets under management at September 30, 1996, were $197 billion. Operational service fees in the third quarter totaled $98 million, 28% lower than in the third quarter of 1995. Excluding revenues associated with the custody and cash-processing businesses, operational service fees were unchanged. For the first nine months of 1996, operational service fees excluding revenues from the custody and cash-processing businesses, increased 6% from the corresponding 1995 period. Net investment securities gains were $11 million in the third quarter, compared with net losses of $22 million in the third quarter of 1995. For the nine-month period, net investment securities losses were $28 million, versus net gains of $20 million in the first nine months of 1995. Other revenue was $69 million in the third quarter, compared with $145 million a year earlier. The 1996 third quarter reflected net equity investment securities gains of $56 million, compared with $91 million in the year-earlier quarter. For the first nine months of 1996, other revenue was $328 million, versus $461 million in the comparable 1995 period. Net equity investment securities gains in the first nine months were $238 million, compared with $386 million for the first nine months of 1995. 26 26 OPERATING EXPENSES Operating expenses were $1.137 billion in the third quarter, compared with $1.022 billion in the third quarter of 1995. Excluding the technology-related special charge and expenses associated with the custody and cash-processing businesses, 1996 third quarter operating expenses grew 10% from a year earlier. Employee compensation and benefits rose primarily due to higher incentive compensation accruals, reflecting the increasing proportion of revenue from our client-based businesses and more competitive market conditions. Other expenses increased due to higher levels of business activity. The firm incurred a $71 million special charge in the third quarter, which is reflected in technology & communications expenses, in conjunction with the formation of the Pinnacle Alliance. Approximately 700 employees in areas covered by the agreement were transferred to Alliance firms. Costs associated with the transferred employees, previously reflected in employee compensation & benefits, are now reflected in payments to the Alliance and included in technology & communications expenses. At September 30, 1996, staff totaled 15,188 employees compared with 16,394 employees at September 30, 1995. Operating expenses in the first nine months of 1996 increased 11% to $3.326 billion. Excluding the 1995 first quarter charge related primarily to severance, the 1996 technology-related special charge and expenses associated with the custody and cash-processing businesses, operating expenses rose 16%. Income tax expense of $136 million in the third quarter was based on an effective tax rate of 33% versus 32% in the third quarter of 1995. For the nine months ended September 30, 1996 and 1995, the effective tax rate was 33%. ASSETS Total assets were $212 billion at September 30, 1996, compared with $199 billion at June 30, 1996. Nonperforming assets increased by $27 million to $161 million during the third quarter as repayments and charge-offs were more than offset by assets newly classified as nonperforming. No provision for credit losses was deemed necessary in the 1996 third quarter. The allowance for credit losses was $1.113 billion at September 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 September 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 - -------------------------------------------------------------------------------- United Kingdom $4,404 France 4,924 Switzerland 3,082 - --------------------------------------------------------------------------------
28 28 CAPITAL
September 30 June 30 December 31 September 30 Dollars in billions 1996 1996 1995 1995 - -------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 11.1 $ 11.0 $ 10.5 $ 10.1 Annualized rate of return on average common stockholders' equity (a) (b) 10.3% 17.1% 14.7% 14.9% As percent of period-end total assets: Common equity 4.9 5.2 5.4 5.4 Total equity 5.2 5.5 5.7 5.7 Book value per common share (c) $ 52.62 $ 52.40 $ 50.71 $ 49.36 Risk-based capital: Tier 1 risk-based capital $ 9.9 $ 9.8 $ 9.0 $ 8.8 Total risk-based capital 14.2 14.1 13.4 13.0 Risk adjusted assets 122.1 120.3 103.1 103.8 Capital ratios: J.P. Morgan Tier 1 ratio 8.1% 8.2% 8.8% 8.5% Total ratio 11.7 11.7 13.0 12.5 Leverage ratio 6.2 6.3 6.1 6.3 Morgan Guaranty Trust Company of New York Tier 1 ratio 7.7% 7.7% 8.5% 8.2% Total ratio 10.5 10.7 11.0 10.6 Leverage ratio 5.9 5.7 5.5 5.7 - --------------------------------------------------------------------------------------------------------
(a) Represents the annualized rate of return on average common stockholders' equity for the three months ended September 30, 1996, June 30, 1996, December 31, 1995, and September 30, 1995. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 10.6%, 17.8%, 15.5%, and 15.6% for the three months ended September 30, 1996, June 30, 1996, December 31, 1995, and September 30, 1995, respectively. (b) The annualized rate of return on average common stockholders' equity for the nine months ended September 30, 1996 and 1995 was 14.8% and 13.2%, respectively. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 15.5% and 13.8% for the nine months ended September 30, 1996 and 1995, respectively. (c) Excluding the impact of SFAS No. 115, the book value per common share would have been $51.01, $50.54, $47.83, and $46.82 for the three months ended September 30, 1996, June 30, 1996, December 31, 1995, and September 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 September 30, 1996, stockholders' equity included approximately $317 million of net unrealized appreciation on debt investment and marketable equity investment securities, net the related deferred tax liability of $178 million. Net unrealized appreciation was $367 million at June 30, 1996. The net unrealized appreciation on debt investment securities was $224 million and $226 million at September 30, 1996 and June 30, 1996, respectively. The net unrealized appreciation on marketable equity investment securities was $271 million and $343 million at September 30, 1996 and June 30, 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 September 30, 1996 September 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. $ 2,406 $ 30 4.96% $ 1,316 $ 31 9.35% Debt investment securities in offices in the U.S. (a): U.S. Treasury 1,367 25 7.28 2,179 36 6.55 U.S. state and political subdivision 1,523 44 11.49 1,916 56 11.60 Other 16,541 273 6.57 14,042 245 6.92 Debt investment securities in offices outside the U.S. (a) 3,740 66 7.02 3,405 62 7.22 Trading account assets: In offices in the U.S. 15,596 240 6.12 12,231 196 6.36 In offices outside the U.S. 30,369 579 7.58 24,779 540 8.65 Securities purchased under agreements to resell and federal funds sold, mainly in offices in the U.S. 44,649 569 5.07 31,721 500 6.25 Securities borrowed in offices in the U.S. 26,485 338 5.08 14,350 203 5.61 Loans: In offices in the U.S. 5,633 100 7.06 6,364 109 6.80 In offices outside the U.S. 21,343 340 6.34 17,413 302 6.88 Other interest-earning assets (b): In offices in the U.S. 824 29 * 739 53 * In offices outside the U.S. 933 62 * 1,968 147 * - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 171,409 2,695 6.25 132,423 2,480 7.43 Allowance for credit losses (1,114) (1,132) Cash and due from banks 622 1,809 Other noninterest-earning assets 40,535 40,914 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 211,452 174,014 - ----------------------------------------------------------------------------------------------------------------------------------
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 September 30, 1996 and 1995. (a) For the three months ended September 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 September 30, 1996 September 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. $ 3,754 $ 48 5.09% $ 2,056 $ 24 4.63% In offices outside the U.S. 44,029 578 5.22 38,763 595 6.09 Trading account liabilities: In offices in the U.S. 9,199 154 6.66 5,329 90 6.70 In offices outside the U.S. 11,094 204 7.32 11,550 215 7.39 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. 62,522 799 5.08 42,623 633 5.89 Commercial paper, mainly in offices in the U.S. 4,489 61 5.41 2,583 40 6.14 Other interest-bearing liabilities: In offices in the U.S. 13,900 196 5.61 10,193 158 6.15 In offices outside the U.S. 2,322 53 9.08 1,702 40 9.32 Long-term debt, mainly in offices in the U.S. 10,866 157 5.75 9,643 151 6.18 - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 162,175 2,250 5.52 124,442 1,946 6.20 Noninterest-bearing deposits: In offices in the U.S. 1,981 3,355 In offices outside the U.S. 437 1,597 Other noninterest-bearing liabilities 35,838 34,661 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 200,431 164,055 Stockholders' equity 11,021 9,959 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity 211,452 174,014 Net yield on interest-earning assets 1.03 1.60 - ------------------------------------------------------------------------------------------------------------------------ Net interest earnings 445 534 - ------------------------------------------------------------------------------------------------------------------------
32 32 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated - --------------------------------------------------------------------------------
Dollars in millions, Nine months ended interest and average rates ---------------------------------------------------------------------------------------- on a taxable-equivalent basis September 30, 1996 September 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. $ 2,006 $ 81 5.39% $ 1,743 $ 134 10.28% Debt investment securities in offices in the U.S. (a): U.S. Treasury 1,103 62 7.51 2,228 107 6.42 U.S. state and political subdivision 1,622 140 11.53 2,043 185 12.11 Other 17,632 834 6.32 12,887 690 7.16 Debt investment securities in offices outside the U.S. (a) 4,093 197 6.43 4,478 233 6.96 Trading account assets: In offices in the U.S. 15,748 714 6.06 12,652 640 6.76 In offices outside the U.S. 26,745 1,545 7.72 25,425 1,710 8.99 Securities purchased under agreements to resell and federal funds sold, mainly in offices in the U.S. 43,937 1,739 5.29 30,069 1,355 6.02 Securities borrowed in offices in the U.S. 24,441 919 5.02 14,186 604 5.69 Loans: In offices in the U.S. 6,441 326 6.76 6,684 355 7.10 In offices outside the U.S. 21,162 1,000 6.31 17,345 915 7.05 Other interest-earning assets (b): In offices in the U.S. 1,030 88 * 1,295 211 * In offices outside the U.S. 1,095 207 * 1,220 272 * - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 167,055 7,852 6.28 132,255 7,411 7.49 Allowance for credit losses (1,122) (1,132) Cash and due from banks 886 1,827 Other noninterest-earning assets 41,864 41,781 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 208,683 174,731 - ----------------------------------------------------------------------------------------------------------------------------------
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 nine months ended September 30, 1996 and 1995. (a) For the nine months ended September 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, Nine months ended interest and average rates ------------------------------------------------------------------------------ on a taxable-equivalent basis September 30, 1996 September 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. $ 2,625 $ 95 4.83% $ 2,104 $ 76 4.83% In offices outside the U.S. 45,181 1,800 5.32 41,009 1,778 5.80 Trading account liabilities: In offices in the U.S. 8,351 395 6.32 6,527 339 6.94 In offices outside the U.S. 10,802 562 6.95 11,691 727 8.31 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. 61,381 2,384 5.19 41,836 1,833 5.86 Commercial paper, mainly in offices in the U.S. 4,151 169 5.44 2,598 119 6.12 Other interest-bearing liabilities: In offices in the U.S. 13,847 588 5.67 9,664 449 6.21 In offices outside the U.S. 2,057 145 9.42 1,974 85 5.76 Long-term debt, mainly in offices in the U.S. 9,976 432 5.78 8,545 407 6.36 - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 158,371 6,570 5.54 125,948 5,813 6.17 Noninterest-bearing deposits: In offices in the U.S. 2,441 3,346 In offices outside the U.S. 823 1,366 Other noninterest-bearing liabilities 36,187 34,312 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 197,822 164,972 Stockholders' equity 10,861 9,759 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity 208,683 174,731 Net yield on interest-earning assets 1.03 1.62 - ------------------------------------------------------------------------------------------------------------------------ Net interest earnings 1,282 1,598 - ------------------------------------------------------------------------------------------------------------------------
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 September 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 September 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 $64.2 billion at September 30, 1996. The contractual maturities of these derivative contracts are primarily less than one year. 35 35
By expected maturities - --------------------------------------------------------------------------------------------------------------- After After two After After one year years three four but but years but but After Within within within within within five Dollars in billions one year two three four five years Total - --------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS - U.S. DOLLAR Receive fixed swaps Notional amount $ 18.6 $ 14.8 $ 4.0 $ 3.8 $ 1.7 $ 11.5 $ 54.4 Weighted average: Receive rate 6.6% 6.0% 6.9% 6.8% 6.5% 6.6% 6.5% Pay rate 5.4 5.6 5.6 5.6 5.6 5.6 5.5 Pay fixed swaps Notional amount $ 20.3 $ 18.6 $ 2.9 $ 8.9 $ 5.3 $ 9.9 $ 65.9 Weighted average: Receive rate 5.6% 5.6% 5.6% 5.4% 5.6% 5.6% 5.6% Pay rate 6.3 5.7 6.4 6.3 5.5 7.1 6.2 INTEREST RATE SWAPS - NON-U.S. DOLLAR Receive fixed swaps Notional amount $ 30.5 $ 19.0 $ 8.8 $ 6.2 $ 3.8 $ 6.8 $ 75.1 Weighted average: Receive rate 6.1% 5.1% 6.1% 6.5% 6.7% 7.1% 6.1% Pay rate 3.5 3.4 3.3 4.0 4.3 3.5 3.5 Pay fixed swaps Notional amount $ 26.3 $ 14.8 $ 9.3 $ 6.2 $ 3.3 $ 6.1 $ 66.0 Weighted average: Receive rate 3.8% 2.8% 3.3% 3.9% 4.2% 3.4% 3.5% Pay rate 6.1 5.5 5.8 6.5 7.4 7.2 6.3 - --------------------------------------------------------------------------------------------------------------- Total notional amount $ 95.7 $ 67.2 $ 25.0 $ 25.1 $ 14.1 $ 34.3 $261.4 - ---------------------------------------------------------------------------------------------------------------
Not included in the table above are $3.8 billion and $2.7 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 September 30, 1996: July 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 June 30, 1996. August 13, 1996 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing an agreement to sell its institutional cash processing business to HSBC Financial Institutions, a division of Marine Midland Bank. 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: November 14, 1996 38 1 LIST OF EXHIBITS EXHIBIT 12. Statement re computation of ratios 27. Financial data schedule EX-12 2 STATEMENT RE COMPUTATION OF RATIOS 1 2 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges J.P. Morgan & Co. Incorporated Consolidated
Dollars in millions Nine months 1996 - -------------------------------------------------------------------------------- Earnings: Net income $1,155 Add: income taxes 569 Less: equity in undistributed income of all affiliates accounted for by the equity method 19 Add: fixed charges, excluding interest on deposits 4,700 - -------------------------------------------------------------------------------- Earnings available for fixed charges, excluding interest on deposits 6,405 Add: interest on deposits 1,895 - -------------------------------------------------------------------------------- Earnings available for fixed charges, including interest on deposits 8,300 - -------------------------------------------------------------------------------- Fixed charges: Interest expense, excluding interest on deposits 4,675 Interest factor in net rental expense 25 - -------------------------------------------------------------------------------- Total fixed charges, excluding interest on deposits 4,700 Add: interest on deposits 1,895 - -------------------------------------------------------------------------------- Total fixed charges, including interest on deposits 6,595 - -------------------------------------------------------------------------------- Ratio of earnings to fixed charges: Excluding interest on deposits 1.36 Including interest on deposits 1.26 - --------------------------------------------------------------------------------
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 Nine months 1996 - -------------------------------------------------------------------------------- Earnings: Net income $1,155 Add: income taxes 569 Less: equity in undistributed income of all affiliates accounted for by the equity method 19 Add: fixed charges, excluding interest on deposits and preferred stock dividends 4,700 - -------------------------------------------------------------------------------- Earnings available for fixed charges, excluding interest on deposits 6,405 Add: interest on deposits 1,895 - -------------------------------------------------------------------------------- Earnings available for fixed charges, including interest on deposits 8,300 - -------------------------------------------------------------------------------- Fixed charges: Interest expense, excluding interest on deposits 4,675 Interest factor in net rental expense 25 Preferred stock dividends 36 - -------------------------------------------------------------------------------- Total fixed charges, excluding interest on deposits 4,736 Add: interest on deposits 1,895 - -------------------------------------------------------------------------------- Total fixed charges, including interest on deposits 6,631 - -------------------------------------------------------------------------------- Ratio of earnings to fixed charges and preferred stock dividends: Excluding interest on deposits 1.35 Including interest on deposits 1.25 - --------------------------------------------------------------------------------
EX-27 3 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the consolidated financial statements as of and for the nine months ended September 30, 1996 included in the form 10-Q for the quarter ended September 30, 1996. 1,000,000 U.S. DOLLARS 9-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 1 1,088 2,193 34,686 80,784 26,565 0 0 30,002 1,113 211,648 49,908 85,508 53,238 11,916 0 694 502 9,882 211,648 1,315 1,183 5,290 7,788 1,895 6,570 1,218 0 (28) 3,326 1,724 1,155 0 0 1,155 5.60 5.57 1.03 161 0 0 0 1,130 35 18 1,113 116 73 924
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