-----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, MiE+mvumdo64hJCZH67XHNV0JBuEZt99Goan2QgYA/evMNOhMMe9FEeKgB0VGs3w HEZa4/OW/v8mS5JDu/tFkg== 0000950123-97-002398.txt : 19970325 0000950123-97-002398.hdr.sgml : 19970325 ACCESSION NUMBER: 0000950123-97-002398 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05885 FILM NUMBER: 97561662 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-K 1 FORM 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 10260-0060 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (212) 483-2323 ------------------------------------------------------------------ Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class which registered - ------------------- ------------------------ Common Stock, $2.50 Par Value New York Stock Exchange Adjustable Rate Cumulative Preferred New York Stock Exchange Stock, Series A, No Par Value, Stated Value $100 Depositary shares representing a one- New York Stock Exchange tenth interest in 6 5/8% Cumulative Preferred Stock, Series H, No Par Value, Stated Value $500 4 3/4% Convertible Debentures due 1998 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE 2 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of J.P. Morgan totaled $19,344,804,150 at February 28, 1997. The number of shares outstanding of J.P. Morgan's Common Stock, $2.50 Par Value, at February 28, 1997, totaled 184,236,230 shares. DOCUMENTS INCORPORATED BY REFERENCE J.P. Morgan's Annual report to Stockholders for the year ended December 31, 1996, is incorporated by reference in response to Part I, Items 1, 2, 3, and 4; Part II, Items 5, 6, 7, 8, and 9; and Part IV, Item 14 of Form 10-K. J.P. Morgan's definitive Proxy Statement dated March 24, 1997, is incorporated by reference in response to Part III, Items 10, 11, 12, and 13 of Form 10-K. 3 FORM 10-K CROSS-REFERENCE INDEX -------------------------------
Part I Page No. * Item 1. Business Description of business 2-10, 97-100 Number of employees 78 Financial information about foreign and domestic operations 73, 86-88 Distribution of assets, liabilities, and stockholders' equity; interest rates and interest differential 80-82 Investment portfolio 46-49 Loan portfolio 41,56-57,83-88 Summary of loan loss experience 85-87 Deposits 80-82,91 Return on equity and assets 78-79 Short-term borrowings 92 Item 2. Properties 100 Item 3. Legal proceedings (a) Item 4. Submission of matters to a vote of security holders (a) Part II Item 5. Market for registrant's common equity and related stockholder matters 77-79,93 Item 6. Selected financial data 78-79 Item 7. Management's discussion and analysis of financial condition and results of operations 2-32 Item 8. Financial statements and supplementary data Report of independent accountants 34 J.P. Morgan & Co. Incorporated Consolidated statement of income 35 Consolidated balance sheet 36 Consolidated statement of changes in stockholders' equity 37 Consolidated statement of cash flows 38 Morgan Guaranty Trust Company of New York - Consolidated statement of condition 39 Notes to financial statements 40-77 Selected consolidated quarterly financial data (b)93 Item 9. Changes in and disagreements with accountants on accounting and financial disclosure (a)
4
Part III Page No. * Item 10. Directors and executive officers of the registrant (c) Item 11. Executive compensation (c) Item 12. Security ownership of certain beneficial owners and management (c) Item 13. Certain relationships and related transactions (c) Part IV Item 14. Exhibits, financial statement schedules, and reports on Form 8-K 1. Financial statements have been included in Item 8. 2. Financial statement schedules Schedule III - Condensed financial information of J.P. Morgan & Co. Incorporated (parent) 74-76
Exhibits 3a. Restated certificate of incorporation, as amended (incorporated by reference to Exhibit 3a to J.P. Morgan's post-effective amendment No. 1 to Form S-3, Registration No. 33-55851) 3b. By-laws of J.P. Morgan as amended through April 10, 1996 (incorporated by reference to Exhibit 3b to J.P. Morgan's report on Form 8-K, dated April 11, 1996) 4. Instruments defining the rights of security holders, including indentures. J.P. Morgan hereby agrees to furnish to the Commission, upon request, a copy of any unfiled agreements defining the rights of holders of long-term debt of J.P. Morgan and of all subsidiaries of J.P. Morgan for which consolidated or unconsolidated financial statements are required to be filed. 10a. 1992 stock incentive plan, as amended (incorporated by reference to Exhibit 10a to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10b. Director stock plan, as amended (incorporated by reference to Exhibit 10b to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10c. Deferred compensation plan for directors' fees, as amended (incorporated by reference to Exhibit 10c to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1992, File No, 1-5885) 10d. 1989 stock incentive plan, as amended (incorporated by reference to Exhibit 10d to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10e. 1987 stock incentive plan, as amended (incorporated by reference to Exhibit 10e to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 5 10f. Stock option plan, as amended (incorporated by reference to Exhibit 10f to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10g. Incentive compensation plan, as amended (incorporated by reference to Exhibit 10g to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10h. Stock option award (incorporated by reference to Exhibit 10h to J.P. Morgan's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-5885) 10i. 1995 stock incentive plan, as amended 10j. 1995 executive officer performance plan (incorporated by reference to Exhibit 10j to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1995, File No. 1-5885) 12. Statements re computation of ratios 13. Annual report to stockholders. Only those sections of the annual report to stockholders referenced in the cross-reference index above are incorporated in the report on Form 10-K. 21. Subsidiaries of J.P. Morgan 23. Consent of independent accountants 24. Powers of attorney 27. Financial data schedule Other schedules and exhibits are omitted because the required information either is not applicable or is shown in the consolidated financial statements or the notes thereto. Reports on Form 8-K Report on Form 8-K dated October 10, 1996, was filed with the Securities and Exchange Commission during the quarter ended December 31, 1996, which reported the issuance by J.P. Morgan of a press release reporting its earnings for the three- and nine-month periods ended September 30, 1996. In addition, Form 8-K dated December 11, 1996, was filed announcing a dividend increase, a stock repurchase program, and that John A. Krol had been elected a director of both J.P. Morgan and Morgan Guaranty effective January 1, 1997. *Refers to pages appearing in the J.P. Morgan & Co. Incorporated annual report to stockholders for the year ended December 31, 1996. Such annual report was mailed to stockholders and a copy is attached hereto as Exhibit 13. The aforementioned pages are incorporated herein by reference in accordance with General Instruction G to Form 10-K. This document shall be deemed to have been "filed" only to the extent of the material incorporated herein by reference. 6 (a) Nothing to report. (b) Fourth quarter 1996 results are incorporated by reference to the report on Form 8-K dated January 13, 1997, filed with the Securities and Exchange Commission. (c) Incorporated by reference to the definitive Proxy Statement dated March 24, 1997. 7 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on March 24, 1997, on its behalf by the undersigned, thereunto duly authorized. (Registrant) J.P. MORGAN & CO. INCORPORATED By (SIGNATURE) /s/ RACHEL F. ROBBINS ----------------------------- (Name and Title) Rachel F. Robbins Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 24, 1997, by the following persons on behalf of the registrant in the capacities indicated. By (SIGNATURE) /s/ JOHN A. MAYER JR. ----------------------------- (Name and Title) John A. Mayer Jr. Chief Financial Officer (Principal financial officer) By (SIGNATURE) /s/ DAVID H. SIDWELL ----------------------------- (Name and Title) David H. Sidwell Managing Director and Controller (Principal accounting officer) By (SIGNATURE) /s/ DOUGLAS A. WARNER III * ----------------------------- (Name and Title) Douglas A. Warner III Chairman of the Board and Director (Principal executive officer) By (SIGNATURE) /s/ RILEY P. BECHTEL * ----------------------------- (Name and Title) Riley P. Bechtel, Director By (SIGNATURE) /s/ MARTIN FELDSTEIN * ----------------------------- (Name and Title) Martin Feldstein, Director By (SIGNATURE) /s/ HANNA H. GRAY * ----------------------------- (Name and Title) Hanna H. Gray, Director By (SIGNATURE) /s/ JAMES R. HOUGHTON * ----------------------------- (Name and Title) James R. Houghton, Director By (SIGNATURE) /s/ JAMES L. KETELSEN * ----------------------------- (Name and Title) James L. Ketelsen, Director 8 By (SIGNATURE) /s/ JOHN A. KROL * ----------------------------- (Name and Title) John A. Krol, Director By (SIGNATURE) /s/ ROBERTO G. MENDOZA * ----------------------------- (Name and Title) Roberto G. Mendoza Vice Chairman of the Board and Director By (SIGNATURE) /s/ MICHAEL E. PATTERSON * ----------------------------- (Name and Title) Michael E. Patterson Vice Chairman of the Board and Director By (SIGNATURE) /s/ LEE R. RAYMOND * ----------------------------- (Name and Title) Lee R. Raymond, Director By (SIGNATURE) /s/ RICHARD D. SIMMONS * ----------------------------- (Name and Title) Richard D. Simmons, Director By (SIGNATURE) /s/ KURT F. VIERMETZ * ----------------------------- (Name and Title) Kurt F. Viermetz Vice Chairman of the Board and Director By (SIGNATURE) /s/ DENNIS WEATHERSTONE * ----------------------------- (Name and Title) Dennis Weatherstone, Director By (SIGNATURE) /s/ DOUGLAS C. YEARLEY * ----------------------------- (Name and Title) Douglas C. Yearley, Director * By /s/ JAMES C.P. BERRY -------------------------- James C.P. Berry (Attorney-in-fact) 9 LIST OF EXHIBITS 3a. Restated certificate of incorporation, as amended (incorporated by reference to Exhibit 3a to J.P. Morgan's post-effective amendment No. 1 to Form S-3, Registration No. 33-55851) 3b. By-laws of J.P. Morgan as amended through April 10, 1996 (incorporated by reference to Exhibit 3b to J.P. Morgan's report on Form 8-K, dated April 11, 1996) 4. Instruments defining the rights of security holders, including indentures. J.P. Morgan hereby agrees to furnish to the Commission, upon request, a copy of any unfiled agreements defining the rights of holders of long-term debt of J.P. Morgan and of all subsidiaries of J.P. Morgan for which consolidated or unconsolidated financial statements are required to be filed. 10a. 1992 stock incentive plan, as amended (incorporated by reference to Exhibit 10a to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10b. Director stock plan, as amended (incorporated by reference to Exhibit 10b to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10c. Deferred compensation plan for directors' fees, as amended (incorporated by reference to Exhibit 10c to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1992, File No, 1-5885) 10d. 1989 stock incentive plan, as amended (incorporated by reference to Exhibit 10d to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10e. 1987 stock incentive plan, as amended (incorporated by reference to Exhibit 10e to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10f. Stock option plan, as amended (incorporated by reference to Exhibit 10f to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10g. Incentive compensation plan, as amended (incorporated by reference to Exhibit 10g to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10h. Stock option award (incorporated by reference to Exhibit 10h to J.P. Morgan's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-5885) 10i. 1995 stock incentive plan, as amended 10j. 1995 executive officer performance plan (incorporated by reference to Exhibit 10j to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1995, File No. 1-5885) 12. Statements re computation of ratios 10 13. Annual report to stockholders. Only those sections of the annual report to stockholders referenced in the cross-reference index above are incorporated in the report on Form 10-K. 21. Subsidiaries of J.P. Morgan 23. Consent of independent accountants 24. Powers of attorney 27. Financial data schedule EX-10.I 2 1995 STOCK INCENTIVE PLAN AS AMENDED 1 EXHIBIT 10(i) As Amended December 11, 1996 1995 Stock Incentive Plan of J.P. Morgan & Co. Incorporated and Affiliated Companies Article I Purpose The purpose of the 1995 Stock Incentive Plan (the "Plan") is to afford an incentive to key employees of J.P. Morgan & Co. Incorporated (the "Company") and its affiliates to acquire a proprietary interest in the Company, to encourage such employees to increase their efforts on behalf of the Company and remain in its employ, and to more closely align the interests of such key employees with those of the Company's stockholders. Article II Definitions 2.1. The following terms shall have the meanings described below when used in the Plan: (a) "Award" shall refer to a Restricted Stock Award granted under Article VIII or a Stock Unit Award granted under Article IX. (b) "Board of Directors" shall mean the Board of Directors of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (d ) "Committee" shall mean the committee appointed by the Board of Directors to administer the Plan pursuant to Article III. (e) "Common Stock" shall mean common stock, par value $2.50, of the Company. 1 2 (f) "Company" shall mean J.P. Morgan & Co. Incorporated or any successor to it in ownership of all or substantially all of its assets. (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (h) "Fair Market Value" of Common Stock on any day shall mean the average of the highest and lowest price of Common Stock as reported on the composite tape for such day, unless the Committee determines that another procedure for determining Fair Market Value would be more appropriate. (i) "Incentive Stock Option" shall mean a stock option granted under Article VI which is intended to meet the requirements of Section 422 of the Code. (j) "Nonqualified Stock Option" shall mean a stock option granted under Article VI which is not intended to be an Incentive Stock Option. (k) "Option" shall mean an Incentive Stock Option or a Nonqualified Stock Option. (l) "Optionee" shall mean a Participant who is granted an Option. (m) "Participant" shall mean an eligible employee who has been granted an Option, Stock Appreciation Right or Award under the Plan. (n) "Participating Company" shall mean the Company, the Trust Company or any subsidiary or other affiliated entity (whether or not incorporated). (o) "Plan" shall mean this 1995 Stock Incentive Plan of J.P. Morgan & Co. Incorporated and Affiliated Companies. (p) "Related Right" shall mean a Stock Appreciation Right described in Section 7.2. (q) "Restricted Period" shall mean the period during which a Restricted Stock Award is being earned in accordance with Section 8.3. (r) "Restricted Stock Award" shall mean an award granted under Article VIII. (s) "Stand Alone Right" shall mean a Stock Appreciation Right described in Section 7.3. (t) "Stock Appreciation Right" shall mean a right granted under Article VII. (u) "Stock Unit Award" shall mean an award granted under Article IX. 2 3 (v) "Trust Company" shall mean Morgan Guaranty Trust Company of New York or any successor to it in ownership of all or substantially all of its assets. Article III 3.1. (a) The Board of Directors shall appoint not less than three Directors to the Committee which shall administer the Plan. With respect to determinations regarding the grant, amount, acceleration or forfeiture of Options, Stock Appreciation Rights or awards with respect to an eligible employee who is a member of the Board of Directors, the Committee shall be composed of all directors of the Company who are not employees of the Company or any other Participating Company. No individual shall be a member of the Committee unless such individual is disinterested within the meaning of Rule 16b-3 under the Exchange Act. The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be issued or adopted by the Board of Directors, to grant to eligible persons Options, Stock Appreciation Rights and Awards under the Plan; to waive any restrictions or limitations, or impose additional limitations or restrictions, on previously granted Options, Stock Appreciation Rights, or Awards (within the parameters of the Plan); to interpret the provisions of the Plan and any agreements relating to Options, Stock Appreciation Rights or Awards granted under the Plan; to supervise the administration of the Plan and to delegate to senior officers of the Company or the Trust Company the power to act for the Committee as the Committee shall specify. (b) All decisions made by the Committee (or such persons acting under a delegation by the Committee pursuant to subsection 3.1 (a) ) pursuant to the provisions of the Plan and related orders of the Board of Directors shall be within the absolute discretion of the Committee or its delegate, as the case may be, and shall be conclusive and binding on all persons, including the Company, stockholders, employees and beneficiaries of employees. Article IV Shares Subject To The Plan 4.1. (a) Subject to adjustment pursuant to subsection 4.1 (d), the maximum number of shares of Common Stock with respect to which Options, Stock Appreciation Rights and Awards may be granted shall be 28,000,000 shares of Common Stock. Shares of Common Stock may be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market. If an Option, Stock Appreciation Right or Award granted under the Plan shall expire or terminate for any reason other than the exercise of a Related Right (to the extent set forth in subsection 7.2(c) ), the shares subject to such Option, Stock Appreciation Right or Award shall be 3 4 available for other Options, Stock Appreciation Rights and Awards to the same Participant or other eligible employees. Any shares delivered in payment of the exercise price of an Option shall be available for other Options, Stock Appreciation Rights and Awards to the same Participant or other eligible employees. (b) Subject to adjustment pursuant to subsection 4.1 (d), of the total shares of Common Stock referred to in subsection 4.1 (a), the number of shares of Common Stock with respect to which Awards may be granted shall not exceed 7,000,000 shares of Common Stock. (c) Subject to adjustment pursuant to subsection 4.1 (d), of the total shares of Common Stock referred to in subsection 4.1 (a), the number of shares of Common Stock with respect to which Options or Stock Appreciation Rights may be granted to any Participant during the term of the Plan shall not exceed 2,800,000 shares of Common Stock. (d) In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under this Plan, then the Committee shall, in its sole discretion, and in such manner as the Committee may deem equitable, adjust any or all of ( 1 ) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options, Stock Appreciation Rights and Awards, and (3) the option price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a Participant. The number of shares subject to any Option, Stock Appreciation Right or Award shall always be a whole number. Article V Eligibility 5.1. The employees eligible to participate in the Plan and receive Options, Stock Appreciation Rights and Awards under the Plan shall consist of key employees of the Company and other Participating Companies. 4 5 Article VI Stock Options 6.1. Grant of Options. Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible employees those Participants to be granted Options and determine the time when each Option shall be granted and the number of shares subject to each Option. Options may be either Incentive Stock Options or Nonqualified Stock Options and more than one Option may be granted to the same person. Options shall be evidenced in such manner as may be approved by the Committee. Options may be amended or supplemented from time to time as approved by the Committee, provided that the terms of such Options after being amended or supplemented conform to the terms of the Plan. 6.2. Option Price. The price at which shares may be purchased upon exercise of a particular Option shall be not less than 100% of the Fair Market Value of such shares on the date such Option is granted. 6.3. Medium and Time of Payment. No shares shall be delivered pursuant to any exercise of an Option until payment in full of the Option price therefor is received by the Company. Such payment shall be made in cash or, unless prohibited by the Committee, through the delivery of shares of Common Stock of the Company with a Fair Market Value equal to the total Option price or a combination of cash and shares. The Committee may prescribe additional methods of payment to the extent permitted by applicable law. Any shares so delivered shall be valued at their Fair Market Value on the exercise date, or on such other date as determined by the Committee for administrative convenience. No Optionee, transferee, legal representative, legatee or distributee of any Optionee shall be deemed to be a holder of any shares subject to any Option prior to the issuance of such shares upon exercise of such Option or any related Stock Appreciation Right. 6.4. Term and Exercisability of Options. An Option shall be exercisable ratably on each of the first three anniversaries of the date of grant of such Option or as otherwise determined by the Committee, but in no event shall such Option be exercised earlier than one year or later than ten years from the date the Option is granted. The Committee may require that an Option only be exercised upon the achievement of such performance objectives as the Committee shall designate. An Option shall be subject to earlier termination as provided in Section 6.6 with respect to death, retirement and termination of employment or as provided in Section 10.6. 6.5. Transferability of Options. (a) Except as provided in subsection (b) below, an Option may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution and, during the lifetime of the 5 6 Optionee, may be exercised only by such Optionee. (b) Notwithstanding subsection (a) above, the Committee may determine that an Option may be transferred by the Optionee to one or more members of the Optionee's immediate family, to a partnership of which the only partners are members of the Optionee's immediate family, or to a trust established by the Optionee for the benefit of one or more members of the Optionee's immediate family. For this purpose immediate family means the Optionee's spouse, parents, children, grandchildren and the spouses of such parents, children and grandchildren. A transferee described in this subsection may not further transfer an Option. An Option transferred pursuant to this subsection shall remain subject to the provisions of the Plan, including, but not limited to, the provisions of Section 6.6 relating to the exercise of the Option upon the death, retirement or termination of employment of the Optionee, and shall be subject to such other rules as the Committee shall determine. 6.6. Death, Retirement and Termination of Employment. Subject to the condition that no Option be exercised in whole or in part after the expiration of the Option period specified by the Committee, and subject to the Committee's right to cancel any Option in accordance with Section 10.6, unless otherwise determined by the Committee: (a) Upon termination of employment prior to an Optionee's attainment of age 55 but after the Optionee is eligible for retirement pursuant to a retirement plan of the Company or any of its subsidiaries, an Optionee or a transferee described in subsection 6.5(b), may, within three years after the date of such termination, purchase any or all of the shares subject to an Option granted at least one year prior to such termination of employment, at or after the time or times the Optionee would have been entitled to purchase such shares had the Optionee not terminated employment; (b) Upon termination of employment on or after an Optionee's attainment of age 55 and after the Optionee is eligible for retirement pursuant to a retirement plan of the Company or any of its subsidiaries, an Optionee or a transferee described in subsection 6.5(b), may, at any time prior to the expiration of the Option period, purchase any or all of the shares subject to an Option granted at least one year prior to such termination of employment, at or after the time or times the Optionee would have been entitled to purchase such shares had the Optionee not terminated employment; (c) Upon the death of an Optionee after a termination of employment described in subsections (a) or (b) above, the Optionee's designated beneficiary, or if none, the person or persons to whom such Optionee's rights under the Option are transferred by will or the laws of descent and distribution, or a transferee described in subsection 6.5(b), may, at any time prior to the expiration of the Option period determined under subsection (a) or (b), as the case may be, purchase any or all of the shares subject to an Option at or after the time the Optionee would have been entitled to purchase such shares had the Optionee survived; 6 7 (d) Upon the death of an Optionee while employed, the Optionee's designated beneficiary, or if none, the person or persons to whom such Optionee's rights under the Option are transferred by will or the laws of descent and distribution, or a transferee described in subsection 6.5(b), may, within three years after the date of such death, but no later than the expiration of the Option period, purchase any or all of the shares subject to an Option at or after the time the Optionee would have been entitled to purchase such shares had the Optionee survived; and (e) Upon termination of employment for any reason other than death or retirement as aforesaid, an Optionee's Options, including any Options transferred pursuant to subsection 6.5(b), shall be cancelled to the extent not theretofore exercised. In addition, the Optionee shall repay to the Company the value of the difference between the Fair Market Value on the date of exercise over the Option price of any Options exercised within the six month period preceding the date of such termination and the value of any Related Right described in Section 7.2 exercised during such period. Article VII Stock Appreciation Rights 7.1. Grant of Stock Appreciation Rights. Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible employees those Participants to be granted Stock Appreciation Rights and determine the time when each Stock Appreciation Right shall be granted and such other terms of each Stock Appreciation Right pursuant to this Article VII. Stock Appreciation Rights may be granted either alone ("Stand Alone Rights") or in conjunction with all or part of any Option granted under the Plan ( "Related Rights" ) . In the case of a Nonqualified Stock Option, Related Rights may be granted either at or after the time of the grant of the Nonqualified Stock Option. In the case of an Incentive Stock Option, Related Rights may be granted only at the time of the grant of the Incentive Stock Option. 7.2. Related Rights. (a) A Related Right shall be exercisable only at such time or times and to the extent that the Option to which it relates shall be exercisable in accordance with Article 6, provided that the Committee may, for administrative convenience, determine that, for any Related Right which can only be exercised during a limited period of time in order to satisfy rules imposed by the Securities and Exchange Commission, the exercise of any such Related Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Common Stock is the highest. A Related Right granted with respect to an Option shall terminate and no longer be exercisable upon the termination or exercise of the related Option, provided that, unless otherwise provided by the Committee, a Related Right granted with 7 8 respect to less than the full number of shares covered by a related Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Option exceeds the number of shares not covered by the Related Right, provided further that, in the event of the death of the Participant, the Related Right shall be cancelled to the extent not theretofore exercised, whether or not the related Option is cancelled. (b) Upon the exercise of a Related Right, a Participant shall be entitled to receive up to, but not more than, an amount in cash or shares of Common Stock equal in value to the excess of the Fair Market Value of one share of Common Stock over the Option price per share of Common Stock of the related Option multiplied by the number of shares of Common Stock in respect of which the Related Right shall have been exercised. The Committee shall have the right to determine the form of payment. Any shares delivered in payment shall be valued at their Fair Market Value on the date of exercise. No fractional shares shall be issued and the Participant shall receive cash in lieu thereof. (c) Upon the exercise of a Related Right, the Option or part thereof to which such Related Right is related shall be deemed to have been exercised for the purpose of the limitations set forth in Section 4.1 on the number of shares of Common Stock to be issued under the Plan, but only to the extent of the number of shares of Common Stock issued under the Related Right. 7.3. Stand Alone Rights. (a) A Stand Alone Right shall be exercisable ratably on each of the first three anniversaries of the grant of such Stand Alone Right or as otherwise determined by the Committee, but in no event shall such Stand Alone Right be exercised earlier than one year or later than ten years from the date the Stand Alone Right is granted. The Committee may require that a Stand Alone Right only be exercised upon the achievement of such performance objectives as the Committee shall designate. The Committee may, for administrative convenience, determine that, for any Stand Alone Right which can only be exercised during a limited period of time in order to satisfy rules imposed by the Securities and Exchange Commission, the exercise of any such Stand Alone Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Common Stock is the highest. A Stand Alone Right shall be subject to earlier termination as provided in subsection 7.3(c) with respect to death, retirement and termination of employment. (b) Upon the exercise of a Stand Alone Right, a Participant shall be entitled to receive up to, but not more than, an amount in cash or shares of Common Stock equal in value to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the Fair Market Value of one share of Common Stock on the date of grant multiplied by the number of shares in respect of which the right is being exercised. The Committee shall have the right to determine the form of payment. Any shares delivered in payment shall be valued at their Fair Market Value on the date of exercise. No fractional shares shall be issued and the 8 9 Participant shall receive cash in lieu thereof. (c) Subject to the condition that no Stand Alone Right may be exercised in whole or in part after the expiration of the period specified by the Committee, and subject to the Committee's right to cancel any Stock Appreciation Right in accordance with Section 10.6, unless otherwise determined by the Committee: (i) Upon termination of employment prior to a Participant's attainment of age 55 but after the Participant is eligible for retirement pursuant to a retirement plan of the Company or any of its subsidiaries, a Participant may, within three years after the date of such termination, exercise any or all of the Stand Alone Right granted at least one year prior to such termination of employment, at or after the time or times the Participant would have been entitled to exercise such Stand Alone Right had the Participant not terminated employment; (ii) Upon termination of employment on or after a Participant's attainment of age 55 and after the Participant is eligible for retirement pursuant to a retirement plan of the Company or any of its subsidiaries, a Participant may, at any time prior to the expiration of the Stock Appreciation Right exercise period, exercise any or all of the Stand Alone Right granted at least one year prior to such termination of employment, at or after the time or times the Participant would have been entitled to exercise such Stand Alone Right had the Participant not terminated employment; and (iii) Upon termination of employment for any reason other than retirement as aforesaid, a Participant's Stand Alone Rights shall be cancelled to the extent not theretofore exercised. In addition, except in the event of death, the Participant shall repay to the Company the value of any Stand Alone Right exercised within the six month period preceding the date of such termination. 7.4. Transfer of Stock Appreciation Rights. A Stock Appreciation Right may not be transferred to anyone and may only be exercised by the Participant to whom it is granted Article VIII Restricted Stock Awards 8.1. Grant of Restricted Stock Awards. Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible employees those Participants to be granted Restricted Stock Awards and determine the time when each Award shall be granted, the vesting date or vesting dates for each Award, the time or times as of which vested Awards shall be paid and the number of share credits (each of which shall be equivalent to one share of Common Stock) subject to each Award. Restricted Stock Awards 9 10 shall be evidenced in such manner as may be approved by the Committee. Restricted Stock Awards may be amended or supplemented from time to time as approved by the Committee, provided that the terms of such Awards after being amended or supplemented conform to the terms of the Plan. No provision of this Plan shall be interpreted to prohibit the grant of a Restricted Stock Award hereunder in connection with awards granted pursuant to the 1995 Executive Officer Performance Plan of J.P. Morgan & Co. Incorporated and Affiliated Companies or any other plan of the Company, provided that any such Award conforms to the terms of this Plan. 8.2. Number of Share Credits. Each Restricted Stock Award shall state the number of share credits to be subject to the Award. 8.3. Restrictions. A Restricted Stock Award may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for a period of five years from the date of grant of the Award or such other period as the Committee shall determine, and for such further period as the payment of Awards may be deferred pursuant to Section 8.5. The Committee may define the Restricted Period in terms of the passage of time, the satisfaction of performance criteria, a combination of time and performance, or in any other manner it deems appropriate. Restricted Stock Awards shall not be paid until the successful completion of the Restricted Period except as may be otherwise provided in circumstances of death or retirement pursuant to Section 8.4, or until the end of any deferral period described in subsection 8.5(b). 8.4. Death, Retirement and Termination of Employment. Unless otherwise determined by the Committee: (a) Upon termination of a Participant's employment prior to the end of the Restricted Period for any reason except for death, as described below, the Participant's Awards shall be forfeited and the Participant shall have no right with respect to such Award. (b) Upon the death of a Participant, an Award granted to such Participant shall be (i) 100% (or such other percentage as the Committee shall have determined at the time of grant of such Award) vested and nonforfeitable and (ii) shall be payable to the Participant's beneficiary, or if none, the person or persons to whom such Participant's rights under the Award are transferred by will or the laws of descent and distribution, subject to any further deferral of the Award in accordance with subsection 8.5(b), provided that with respect to an Award subject to performance restrictions, the Committee shall make such determination with respect to such Award as it deems appropriate. 8.5. Payment of Awards. (a) Subject to the provisions of subsection (b) hereof, as soon as practicable after the successful completion of the Restricted Period, such Award shall be paid to the Participant or, in the case of the death of the Participant, the Participant's beneficiary, or if none, the person or persons to whom such Participant's rights under the 10 11 Award are transferred by will or the laws of descent and distribution. (b) The Committee may, in its discretion, provide that payment of Awards be deferred until such time or times as the Committee shall specify, or such time or times as the Participant may elect. Any election of a Participant pursuant to the preceding sentence shall be filed with the Committee in accordance with such rules and regulations, including any deadline for the making of such an election, as the Committee may provide. (c) Except as otherwise determined pursuant to subsection 8.6(c), payments pursuant to this Section 8.5, including any dividend equivalents determined under subsection 8.6(b), shall be made in shares of Common Stock, except there may be paid in cash the value of any partial shares of Common Stock and that part of the total payment determined by the Company to be necessary to satisfy tax withholding requirements. 8.6. Dividend Equivalents. (a) Except as may be otherwise determined by the Committee, in addition to the payment provided for in Section 8.5, each Participant (or beneficiary) entitled to payment under Section 8.5 shall receive the dividend equivalent amount calculated under subsection (b) hereof. (b) The dividend equivalent amount is the number of additional share credits attributable to the number of share credits awarded plus additional share credits calculated hereunder. Such additional share credits shall be determined and credited as of the end of each calendar year by dividing (1) the aggregate cash dividends which would have been paid had the share credits awarded or credited under this subsection (b), as the case may be, been actual shares of Common Stock on the record date for each such dividend during such calendar year by (2) the average market prices per shares of Common Stock on the last trading day of each calendar month during the 12 months ending on the November 30 preceding the date such determination is being made. For this purpose, the market price on any day shall be the average of the highest and lowest price of a share of Common Stock as reported on the composite tape for such day. The Committee may designate any other manner for determining and crediting dividend equivalents as it deems appropriate. (c) In such cases as the Committee may deem advisable, the Committee may, in lieu of the crediting provided for in subsection (b), determine to pay all or part of the dividend equivalent amount in cash or stock as dividends are actually paid on Common Stock, or at such other time or times as the Committee may otherwise determine. 11 12 Article IX Stock Unit Awards 9.1. Grant of Stock Unit Awards. The Committee shall have authority to grant to eligible employees Stock Unit Awards which can be in the form of Common Stock or units, the value of which is based, in whole or in part, on the value of Common Stock. Subject to the provisions of the Plan, including Section 9.2 below, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules (all of which are sometimes hereinafter collectively referred to as "rules" ) as the Committee may determine in its sole discretion, all such rules applicable to a particular Stock Unit Award to be reflected in writing and furnished to the Participant. In no event shall any Award vest less than one year from the date of grant. The rules need not be identical for each Stock Unit Award. No provision of this Plan shall be interpreted to prohibit the grant of a Stock Unit Award hereunder in connection with awards granted pursuant to the 1995 Executive Officer Performance Plan or any other plan of the Company, provided that any such Award conforms to the terms of the Plan. 9.2. Rules. In the sole discretion of the Committee, a Stock Unit Award shall be granted subject to the following rules (a) Any shares of Common Stock which are part of a Stock Unit Award may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, prior to the date on which the shares are issued or such other date provided by the Committee at the time of grant of the Award or thereafter. (b) Stock Unit Awards may provide for the payment of cash consideration by the person to whom such Award is granted or provide that the Award, and Common Stock to be issued in connection therewith, if applicable, shall be delivered without the payment of cash consideration. (c) Stock Unit Awards may relate in whole or in part to performance criteria established by the Committee at the time of grant. (d) Stock Unit Awards may provide for deferred payment schedules, vesting over a specified period of employment, the payment (on a current or deferred basis) of dividend equivalent amounts, with respect to the number of shares of Common Stock covered by the Award, and elections by the Participant to defer payment of the Award or the lifting of restrictions on the Award, if any. 12 13 Article X General Provisions 10.1. Change in Control. (a) (i) In the case of a Change in Control (as defined below) of the Company, each Option and Stock Appreciation Right then outstanding shall (unless the Committee determines otherwise) immediately be nonforfeitable and exercisable in full; (ii) In the case of a Change in Control (as defined below) of the Company, each Award shall (unless the Committee determines otherwise) immediately be fully vested and nonforfeitable and shall thereupon be paid as soon as practicable. (b) Any determination by the Committee made pursuant to this Section 10.1 may be made as to all outstanding Options, Stock Appreciation Rights or Awards or only as to certain Options, Stock Appreciation Rights or Awards specified by the Committee, and all such determinations shall be made in cases covered by paragraphs (c) (i) or (ii) below, prior to or as soon as practicable after the occurrence of such event and in the cases covered by paragraphs (c) (iii) and (iv) below, prior to the occurrence of such event. (c) A Change in Control shall occur if: (i) any "person" or "group of persons" as such terms are used in Section 13(d) and 14(d) of the Exchange Act directly or indirectly purchases or otherwise becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) or has the right to acquire such beneficial ownership (whether or not such right is exercisable immediately, with the passage of time, or subject to any condition), of voting securities representing 25% or more of the combined voting power of all outstanding voting securities of the Company; (ii) during any period of two consecutive years, the individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority of the members thereof, unless ( 1 ) there are seven or more directors then still in office who were directors at the beginning of the period, and (2) the election, or the nomination for election by the Company's stockholders, of each new director was approved by at least two-thirds of the directors then still in office who were directors at the beginning of the period; (iii) the stockholders of the Company shall approve an agreement to merge or consolidate the Company with or into another corporation as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are or are to be owned by the former shareholders of the Company (excluding from former shareholders, a shareholder who is or, as a result of the transaction in question, becomes an "affiliate," as defined in Rule 12b-2 under the Exchange Act, of any party to such consolidation or merger); or 13 14 (iv) the stockholders of the Company shall approve the sale of all or substantially all of the Company's business and/or assets to a person or entity which is not a wholly-owned subsidiary of the Company. 10.2. Designation of Beneficiary. Subject to such rules and regulations as the Committee may prescribe, including the right of the Committee to limit the types of designations which are acceptable for purposes of the Plan, each Participant who shall be granted an Option or Award under the Plan may designate a beneficiary or beneficiaries and may change such designation from time to time by filing a written designation of beneficiaries with the Committee on a form to be prescribed by it, provided that no such designation shall be effective unless so filed prior to the death of such Participant. 10.3. No Right of Continued Employment. Neither the establishment of the Plan, the granting of Options, Stock Appreciation Rights or Awards, nor the payment of any benefits hereunder nor any action of the Company or of the Board of Directors or of the Committee shall be held or construed to confer upon any person any legal right to be continued in the employ of the Company or its subsidiaries, each of which expressly reserves the right to discharge any employee whenever the interest of any such company in its sole discretion may so require without liability to such company, the Board of Directors or the Committee except as to any rights which may be expressly conferred upon such employee under the Plan. 10.4. No Segregation of Cash or Shares. The Company shall not be required to segregate any cash or any shares of Common Stock which may at any time be represented by Options, Stock Appreciation Rights, Awards, share credits or dividend equivalent amounts and the Plan shall constitute an "unfunded" plan of the Company. No employee shall have voting or other rights with respect to shares of Common Stock prior to the delivery of such shares. The Company shall not, by any provisions of the Plan, be deemed to be a trustee of any Common Stock or any other property, and the liabilities of the Company to any employee pursuant to the Plan shall be those of a debtor pursuant to such contract obligations as are created by or pursuant to the Plan, and the rights of any employee, former employee or beneficiary under the Plan shall be limited to those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations of the Company and each other Participating Company under the Plan, provided, however, that existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. 10.5. Delivery of Shares. No shares shall be delivered pursuant to any exercise of an Option or Stock Appreciation Right or pursuant to the payment of any Award until the requirements of such laws and regulations as may be deemed by the Committee to be applicable thereto are satisfied. 10.6. Cancellation of Options, Stock Appreciation Rights and Awards. 14 15 (a) Prior to the occurrence of a Change in Control, but not thereafter, the Committee may, in its sole discretion and with or without cause, cancel any Option, Stock Appreciation Right or Award in whole or in part to the extent it has not theretofore been exercised or, in the case of Awards, become vested. Such cancellation shall be effective as of the date specified by the Committee. (b) Notwithstanding subsection (a) above, prior to payment of any Award, the Committee may, in its sole discretion, in cases involving a serious breach of conduct by an employee or former employee, or activity of a former employee in competition with the business of a Participating Company, cancel any Award, whether or not vested, in whole or in part. Such cancellation shall be effective as of the date specified by the Committee. The determination of whether an employee or former employee has engaged in a serious breach of conduct or activity in competition with the business of a Participating Company shall be determined by the Committee in good faith and in its sole discretion. 10.7. Transfer, Leave of Absence, etc. For purposes of the Plan: (1 ) a transfer of a Participant from a Participating Company to an affiliated company, (2) a leave of absence, duly authorized in writing by the Participating Company, for military service or sickness, or for any other purpose approved by the Participating Company H the period of such leave does not exceed ninety days, and (3) a leave of absence in excess of ninety days, duly authorized in writing by the Participating Company, provided the Participant's right to reemployment is guaranteed either by a statute or by contract, shall not be deemed a termination of employment. 10.8. New York Law to Govern. All questions pertaining to the construction, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of New York. 10.9. Payments and Tax Withholding. The delivery of any shares of Common Stock and the payment of any amount in respect of a Stock Appreciation Right or Award shall be of the account of the applicable Participating Company and any such delivery or payment shall not be made until the recipient shall have made satisfactory arrangements for the payment of any applicable withholding taxes. Article XI Amendment and Termination 11.1. Amendments, Suspension or Discontinuance. The Board of Directors may amend, suspend or discontinue the Plan, provided, however, that the Board of Directors may not, without the prior approval of the stockholders of the Company, make any amendment for which stockholder approval is necessary to comply with any applicable tax 15 16 or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief under Section 16(b) of the Exchange Act, and provided, further, that upon or following the occurrence of a Change in Control no amendment may adversely affect the rights of any person in connection with any Option, Stock Appreciation Right or Award previously granted. 11.2. Termination. No Option, Stock Appreciation Right or Award shall be granted under the Plan after expiration of ten years from the date upon which the Plan is approved by vote of the stockholders of the Company. 16 EX-12 3 STATEMENTS RE COMPUTATION OF RATIOS 1 EXHIBIT 12 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends J.P. Morgan & Co. Incorporated Consolidated - -------------------------------------------------------------------------------- Dollars in millions
Twelve months ended December 31 - ------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- Earnings: Net income $ 1 574 $1 296 $1 215 $1 723 $1 130 Add: income taxes 758 610 610 968 619 Less: equity in undistributed income of all affiliates accounted for by the equity method 25 16 21 50 3 Add: fixed charges, excluding interest on deposits and preferred stock dividends 6 502 5 452 4 483 3 781 3 292 - ------------------------------------------------------------------------------------------------------------------------------- Earnings available for fixed charges, excluding interest on deposits 8 809 7 342 6 287 6 422 5 038 Add: interest on deposits 2 541 2 520 1 946 1 917 2 306 - ------------------------------------------------------------------------------------------------------------------------------- Earnings available for fixed charges, including interest on deposits 11 350 9 862 8 233 8 339 7 344 - ------------------------------------------------------------------------------------------------------------------------------- Fixed charges: Interest expense, excluding interest on deposits 6 470 5 414 4 452 3 753 3 267 Interest factor in net rental expense 32 38 31 28 25 Preferred stock dividends 49 35 30 28 29 - ------------------------------------------------------------------------------------------------------------------------------- Total fixed charges, excluding interest on deposits 6,551 5 487 4 513 3 809 3 321 Add: interest on deposits 2,541 2 520 1 946 1 917 2 306 - ------------------------------------------------------------------------------------------------------------------------------- Total fixed charges, including interest on deposits 9,092 8 007 6 459 5 726 5 627 - ------------------------------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges: Excluding interest on deposits 1.34 1.34 1.39 1.69(a) 1.52(b) Including interest on deposits 1.25 1.23 1.27 1.46(a) 1.31(b) - -------------------------------------------------------------------------------------------------------------------------------
(a) For the year ended December 31, 1993, the ratio of earnings to combined fixed charges and preferred stock dividends, including the cumulative effect of a change in the method of accounting for postretirement benefits other than pensions, was 1.63 excluding interest on deposits and 1.42 including interest on deposits. (b) For the year ended December 31, 1992, the ratio of earnings to combined fixed charges and preferred stock dividends, including the cumulative effect of a change in the method of accounting for income taxes, was 1.65 excluding interest on deposits and 1.39 including interest on deposits. 2 EXHIBIT 12 Computation of Ratio of Earnings to Fixed Charges J.P. Morgan & Co. Incorporated Consolidated - -------------------------------------------------------------------------------- Dollars in millions
Twelve months ended December 31 - --------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- Earnings: Net income $ 1 574 $ 1 296 $ 1 215 $ 1 723 $ 1 130 Add: income taxes 758 610 610 968 619 Less: equity in undistributed income of all affiliates accounted for by the equity method 25 16 21 50 3 Add: fixed charges, excluding interest on deposits 6 502 5 452 4 483 3 781 3 292 - --------------------------------------------------------------------------------------------------------------------------- Earnings available for fixed charges, excluding interest on deposits 8 809 7 342 6 287 6 422 5 038 Add: interest on deposits 2 541 2 520 1 946 1 917 2 306 - --------------------------------------------------------------------------------------------------------------------------- Earnings available for fixed charges, including interest on deposits 11 350 9 862 8 233 8 339 7 344 - --------------------------------------------------------------------------------------------------------------------------- Fixed charges: Interest expense, excluding interest on deposits 6 470 5 414 4 452 3 753 3 267 Interest factor in net rental expense 32 38 31 28 25 - --------------------------------------------------------------------------------------------------------------------------- Total fixed charges, excluding interest on deposits 6 502 5 452 4 483 3 781 3 292 Add: interest on deposits 2 541 2 520 1 946 1 917 2 306 - --------------------------------------------------------------------------------------------------------------------------- Total fixed charges, including interest on deposits 9 043 7 972 6 429 5 698 5 598 - --------------------------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges: Excluding interest on deposits 1.35 1.35 1.40 1.70(a) 1.53(b) Including interest on deposits 1.26 1.24 1.28 1.46(a) 1.31(b) - ---------------------------------------------------------------------------------------------------------------------------
(a) For the year ended December 31, 1993, the ratio of earnings to fixed charges, including the cumulative effect of a change in the method of accounting for postretirement benefits other than pensions, was 1.64 excluding interest on deposits and 1.43 including interest on deposits. (b) For the year ended December 31, 1992, the ratio of earnings to fixed charges, including the cumulative effect of a change in the method of accounting for income taxes, was 1.67 excluding interest on deposits and 1.39 including interest on deposits. EX-13 4 ANNUAL REPORT TO STOCKHOLDERS 1 J.P. Morgan & Co. Incorporated 1 9 9 6 Annual report [J.P. Morgan LOGO] 2 J.P. Morgan is a leading global financial firm that meets critical financial needs for business enterprises, governments, financial institutions, and individuals worldwide. We advise on corporate strategy and structure, raise capital, make markets in a range of financial instruments, and manage investment assets. Morgan also commits its own capital to promising enterprises and invests and trades to capture market opportunities. We are committed to offering advice and execution of the highest quality, conducting our business in a principled way, and maintaining the global market power that helps our clients succeed while enhancing returns for our stockholders. FINANCIAL HIGHLIGHTS J.P. Morgan & Co. Incorporated
In millions, except per share data 1996 1995 -------------------------------------------------------------------------------------- FOR THE YEAR Pretax income ......................................... $ 2 332 $ 1 906 Net income ............................................ 1 574 1 296 Dividends declared on common stock .................... 617 574 -------------------------------------------------------------------------------------- PRIMARY EARNINGS PER SHARE ............................ $ 7.63 $ 6.42 -------------------------------------------------------------------------------------- PER COMMON SHARE Dividends declared .................................... $ 3.31 $ 3.06 Book value ............................................ 54.43 50.71 -------------------------------------------------------------------------------------- AT YEAR-END Total stockholders' equity ............................ $ 11 432 $ 10 451 Total assets .......................................... 222 026 184 879 -------------------------------------------------------------------------------------- SELECTED RATIOS Return on average common stockholders' equity ......... 14.9% 13.6% Common stockholders' equity as % of year-end assets ... 4.8 5.4 Total stockholders' equity as % of year-end assets .... 5.2 5.7 Tier 1 risk-based capital ratio ....................... 8.8 8.8 Total risk-based capital ratio ........................ 12.2 13.0 --------------------------------------------------------------------------------------
CONTENTS 1 Introduction 2 Business sector analysis 11 Risk management 18 Financial review 33 Responsibility for financial reporting 34 Report of independent accountants 35 Consolidated statement of income 36 Consolidated balance sheet 37 Consolidated statement of changes in stockholders' equity 38 Consolidated statement of cash flows 39 Consolidated statement of condition -- Morgan Guaranty Trust Company of New York 40 Notes to consolidated financial statements 78 Additional selected data 80 Consolidated average balances and taxable-equivalent net interest earnings 83 Asset-quality analysis 89 Derivatives used for purposes other-than-trading 90 Capital and funding analysis 93 Selected consolidated quarterly financial data 95 Form 10-K cross-reference index 97 Description of business 101 Management and Senior officers 104 J.P. Morgan directory 109 Corporate information
3 INTRODUCTION We are proud to report vigorous, diversified growth in J.P. Morgan's earnings last year. Net income rose to $1.6 billion, up 21 percent. Per share, earnings were $7.63 compared with $6.42 in 1995. In December 1996, the Board of Directors approved an 8.6% increase in the quarterly dividend on common stock to 88 cents per share, the twenty-first consecutive annual increase. The Board also authorized the repurchase of up to $750 million of J.P. Morgan common stock, which is expected to be completed in 1997. In addition, the Board approved the purchase of up to 7 million shares of common stock to lessen the dilutive impact on earnings per share of the firm's employee benefit plans. Growth in earnings generated by our activities for clients, and a shift in the mix of earnings toward client-related income, were notable achievements last year. They reflect more than a decade of investment in an expanded set of core capabilities and success in putting more of those capabilities to work for our clients. In this Annual report, we explain the firm's results for 1996 in detail, starting with a discussion of performance in five sectors of business activity and continuing with a presentation of our approach to risk management and an extensive financial review. Consolidated financial statements for the firm follow. To complement the detailed presentation of results provided here, we publish a companion Annual review that offers my added perspective on our strategy and performance, a visual and textual review of our work for clients around the world, information on our history, and a summary of the year's financial results. We encourage you to read these two publications in tandem for a rounded view of our firm and its business. /s/ Douglas A. Warner III Douglas A. Warner III Chairman of the Board Chief Executive Officer March 7, 1997 For a copy of J.P. Morgan's Annual review, the companion publication to this Annual report, please write to Corporate Communication - Publications, J.P. Morgan & Co. Incorporated, 60 Wall Street, New York, NY 10260-0060, or call our publications request line at 1-212-648-9607. 1 4 BUSINESS SECTOR ANALYSIS J.P. Morgan produced strong earnings growth in 1996, as our business around the world expanded across the range of the firm's advisory, capital raising, asset management, risk management, and market-making activities. Pretax income rose 22% to $2.3 billion, benefiting, in part, from favorable global markets. The environment for our business in 1996 featured active markets and opportunities that increased client demand for the firm's array of global capabilities. In the U.S., the logic of strategic business consolidation and the low cost of capital contributed to record levels of merger and acquisition activity and continued strength in capital raising activities. Elsewhere in the world, decentralization, deregulation, and a continuing trend toward more open markets generated investor interest in emerging markets and a greater demand for risk management strategies and tools. Revenues rose 16% to $6.9 billion and reflected a significant shift in revenue mix, with a greater proportion of total revenues - 82% versus 72% in 1995 - generated by client-focused activities, more than offsetting the decline in revenues from proprietary activities undertaken solely for Morgan's own account. Roughly 60% of pretax income, compared with 40% last year, was earned from services we provide for clients. Pretax income from client-focused business rose to $1.7 billion from $1.0 billion in 1995, and proprietary activities generated pretax income of $1.0 billion, compared with $1.5 billion in 1995. Expenses for the year rose 13%. Continued allocation of resources to areas of strategic importance, including investment banking, equities, asset management, and private client services, more than offset the reduction in expenses achieved through Morgan's exit from securities custody and cash processing activities. Employee compensation and benefits costs increased as a result of higher incentive compensation. The growth of earnings, the increasing proportion of revenues earned in client-focused activities (more people intensive than proprietary activities), and more competitive market conditions accounted for this rise. The growth of client-focused activities was also an important factor in the rise of the firm's other expenses. We describe the activities of J.P. Morgan using five business sectors, as discussed below. Three of these sectors - Finance and Advisory, Market Making, and Asset Management and Servicing - focus on services we provide for clients, including positions taken to facilitate client transactions. Two sectors comprise activities that we conduct exclusively for our own account: Equity Investments and Proprietary Investing and Trading. While presenting our results in sector format helps simplify the complexity of Morgan's business, it is also important to understand the shared benefits of our strategy: our focus on building long-term client relationships; the synergy we create by acting as one firm with singular dedication to clients, not a collection of separate businesses; the global diversification of activities across a range of products and locations; our comprehensive approach to risk management; the integration of global capabilities to capitalize on opportunities; and commitment to high standards of business conduct, for which J.P. Morgan has been known throughout its 150-year history. 2 5 SUMMARY OF SECTOR RESULTS
Asset TOTAL Finance Manage- CLIENT- Equity Proprietary TOTAL and Market ment and FOCUSED Invest- Investing PROPRIETARY Corporate CONSOL- In millions Advisory Making Servicing ACTIVITIES ments and Trading ACTIVITIES Items IDATED --------------------------------------------------------------------------------------------------------------------------- 1996 Total revenues $1 620 $2 622 $1 413 $5 655 $296 $ 904 $1 200 $ -- $6 855 Total expenses 1 108 1 739 1 140 3 987 34 153 187 349 4 523 --------------------------------------------------------------------------------------------------------------------------- Pretax income 512 883 273 1 668 262 751 1 013 (349) 2 332 --------------------------------------------------------------------------------------------------------------------------- 1995 Total revenues 1 296 1 661 1 304 4 261 512 1 120 1 632 11 5 904 Total expenses 872 1 462 920 3 254 24 129 153 591 3 998 --------------------------------------------------------------------------------------------------------------------------- Pretax income 424 199 384 1 007 488 991 1 479 (580) 1 906 ---------------------------------------------------------------------------------------------------------------------------
The firm's management reporting system and policies were used to determine the revenues and expenses directly attributable to each business sector. Earnings on stockholders' equity were allocated based on management's assessment of the inherent risk of the components of each sector. In addition, certain overhead expenses not allocated for management reporting purposes were allocated to each business 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. Certain prior-year amounts have been reclassified to conform with the 1996 presentation. See Description of business on page 97 for further information. Intensive efforts to expand our business with existing clients and to add new clients produced substantial gains in the client-focused sectors of our business in 1996. Market Making reported the biggest gain, with pretax income rising to $883 million from a relatively low $199 million in 1995, as client demand increased for securities and derivatives products in highly active developed and emerging markets. Finance and Advisory pretax income was up 21% to $512 million, as J.P. Morgan increased its share of merger and acquisition and debt and equity capital raising activity. Asset Management and Servicing contributed $273 million, less than in 1995; higher revenues were more than offset by costs associated with further development of our global capabilities. Equity Investments produced lower pretax income than in 1995, when gains on a highly profitable investment were recognized. In Proprietary Investing and Trading, revenues declined as higher-yielding instruments continued to mature. However, on a total return basis, which combines reported revenues and the change in net unrealized appreciation, results from these proprietary activities were essentially level with a year ago. The advances of the past year represent significant progress toward J.P. Morgan's strategic goal: to be the leading global financial services firm meeting the critical needs of the world's most active and sophisticated financial markets participants. We will continue our investment in strategic areas such as investment banking, equities, asset management, and private client services in 1997 to complement our strong capabilities in fixed income, emerging markets, and other areas. We will also continue to strengthen our presence in Eastern Europe and Asia, as economic growth and deregulation in those areas continue. Our own risk-taking activities continue to be integral to our global business. Success in committing our own capital makes a critical contribution to producing superior returns over time for stockholders. In all our activities and in management of resources, we strive to continue to improve our return on equity to a target level of 15% to 20%. Discussion of the 1996 results of the client-focused and proprietary sectors of J.P.Morgan's business follows. More detailed information on the activities conducted within the sectors is included in the Description of business beginning on page 97. 3 6 CLIENT-FOCUSED ACTIVITIES J.P. Morgan's clients are an increasingly global and diverse group of growing and established companies, governments and their agencies, and privately held firms, entrepreneurs, families, and individuals. We continue to broaden and deepen client relationships in North America; Latin America; Europe, Middle East, and Africa; and Asia Pacific. Regional results can be analyzed in a number of ways. In the table below, combined results for our client-focused business sectors are broken down by region responsible for managing the client relationship.
EUROPE TOTAL NORTH LATIN MIDDLE EAST ASIA CLIENT- In millions AMERICA AMERICA AND AFRICA PACIFIC FOCUSED -------------------------------------------------------------------------------------- 1996 Revenues ........ $2 750 $ 523 $1 809 $ 573 $5 655 Expenses ........ 2 063 213 1 273 438 3 987 -------------------------------------------------------------------------------------- Pretax income ... 687 310 536 135 1 668 -------------------------------------------------------------------------------------- 1995 Revenues ........ 2 091 438 1 327 405 4 261 Expenses ........ 1 655 173 1 023 403 3 254 -------------------------------------------------------------------------------------- Pretax income ... 436 265 304 2 1 007 --------------------------------------------------------------------------------------
The firm's management reporting system was used to determine the revenues and expenses attributable to each region. For finance and advisory products, this is the location of the client's head office; for most other products, it is based on the location where activity is transacted. Market-making revenues that cannot be specifically attributed to individual clients (i.e., gains/losses arising from client-related positions) and earnings on stockholders' equity are generally allocated based on the proportion of other regional revenues. Expenses are allocated based on the estimated cost associated with servicing the client base in the region. Client revenues in North America increased 32% in 1996, reflecting strong performance in investment banking and fixed income market-making activities. We captured increased market share in mergers and acquisitions, and equities underwriting revenue doubled over the prior year. Fixed income revenues in 1996 were boosted by a greater volume of business with clients and gains on positions taken to facilitate client transactions; year to year comparisons were also made more favorable because of losses related to mortgage-backed securities activities in 1995. Revenues from asset management and private client services also increased. Revenues from our business with Latin American clients were up 19%, as economic activity across the region rebounded from the impact of the December 1994 Mexican peso devaluation. Demand for financing in both credit and capital markets by governments, financial institutions, and corporations was brisk. Morgan's strategic advice continues to be sought throughout the region, where we are the market leader in mergers and acquisitions and debt and equity underwriting. Results from local market-making activities benefited from increased client demand for risk management and investment products but were offset by narrowing spreads between emerging and developed markets. European client revenues increased 36% in 1996, spurred by growth in our investment banking franchise and strong market activity across the region, largely driven by client demand for fixed income and foreign exchange products. Merger and acquisition assignments were up significantly as we benefited from our leading market position and the quick pace of European restructuring activity. Increased market share resulting from advances in our equities capabilities led to substantial growth in underwriting revenues. Results also benefited from our growing asset management client base and private client services. Asia Pacific client revenues increased 41% in 1996, driven by significant growth in activity across the full spectrum of our capabilities. Momentum was particularly strong in emerging Asia, reflecting rapid economic development and growing sophistication of the client base. Following is a discussion of the results of the sectors that cover services we provide globally to clients - Finance and Advisory, Market Making, and Asset Management and Servicing. 4 7 FINANCE AND ADVISORY (Advisory, Debt and Equity Underwriting, and Credit)
In millions 1996 1995 ----------------------------------------------------------------------- Investment banking revenue .................. $ 880 $ 559 Net interest revenue ........................ 488 505 Fees and commissions ........................ 152 141 Other sector revenues ....................... 100 91 ----------------------------------------------------------------------- Total revenues .............................. 1 620 1 296 Total expenses .............................. 1 108 872 ----------------------------------------------------------------------- Pretax income ............................... 512 424 -----------------------------------------------------------------------
Fueled by the availability of low cost funds, record levels of merger and acquisition activity, strength in most equities markets, and improving economies in emerging countries, investment banking activity surged in 1996. New debt and equity issues surpassed the record levels of 1993. In 1996, J.P. Morgan continued to benefit from its strategic development of investment banking expertise. Revenues rose for the sector as business with new and existing clients expanded worldwide and we participated in some of the most noteworthy transactions of the year. Advisory revenue increased over 70%. Morgan advised on 141 merger and acquisition transactions with a value of $123 billion, including seven of the 15 largest transactions announced in 1996, and in a number of the most active industries, including telecommunications, defense, and health care. Transactions completed for clients enabled Morgan to remain the leading merger and acquisition advisor in Latin America for the third consecutive year and, for the second year, ranked second in Europe. We advanced to sixth in the U.S. and were fifth in completed mergers and acquisitions globally. Revenues from debt and equity underwriting, in both developed and emerging markets, increased more than 75% in 1996 as a growing number of issuers took advantage of favorable market conditions. Morgan ranked as the sixth largest underwriter of U.S. debt and equity issues, up from seventh a year ago. As an underwriter of non-U.S. securities, Morgan ranked seventh in both 1996 and 1995. Revenues from global credit activities accounted for approximately one-half of total Finance and Advisory revenues and were flat compared with 1995. Increased demand for credit products, particularly in the U.S. and Latin America, was offset by tighter pricing, reflecting increasingly competitive market conditions. Morgan ranked as the second largest arranger of syndicated loans in 1996, up from third a year ago. This sector includes all of the costs associated with our global network of senior client relationship managers who market the full spectrum of our capabilities and provide the link between our clients' needs and J.P. Morgan's financing, advisory, asset management, market-making, and risk management products and services. Total Finance and Advisory revenues increased $324 million to $1,620 million in 1996. Expenses increased to $1,108 million from $872 million in 1995, due to higher employee compensation and benefits, largely incentive compensation in line with higher earnings. 5 8 MARKET MAKING (Fixed Income, Equities, Foreign Exchange, and Commodities)
In millions 1996 1995 ----------------------------------------------------------------------- Trading revenue ........................... $2 088 $1 111 Net interest revenue ...................... 378 424 Fees and commissions ...................... 95 61 Other sector revenues ..................... 61 65 ----------------------------------------------------------------------- Total revenues ............................ 2 622 1 661 Total expenses ............................ 1 739 1 462 ----------------------------------------------------------------------- Pretax income ............................. 883 199 -----------------------------------------------------------------------
Market Making results grew significantly in 1996, reflecting the continuation of favorable market conditions and increased demand by a wide variety of clients for our fixed income, equity, and foreign exchange products, including related derivatives. Expansion into new markets, for example in Eastern Europe, and new products, such as credit derivatives, continued. In making markets, we also take positions to facilitate client transactions and to benefit from our role as an intermediary. Fixed income revenues in developed markets rose dramatically in 1996, accounting for more than 75% of the total sector increase and approximately one-half of the sector's total revenues. An increase in demand for swaps and swap derivatives, including more complex, customized transactions, fueled the rise, and volumes increased across most of our fixed income products. Revenues included gains on client-related positions. In addition, 1995 included losses recorded when we curtailed mortgage-backed activities in a strategic realignment of resources. J.P. Morgan continued to be a leading participant in emerging markets, with revenues growing 12% for the year and accounting for about a fifth of total sector revenues. Client demand was strong for external and local country debt and derivatives across Latin America, Eastern Europe, and Asia. Gains on positions taken to capitalize on short-term trading opportunities also added to revenues. Most major equity markets continued to rally throughout 1996. J.P. Morgan benefited from this trend, with equities revenues increasing 50% as our client base in both the cash and derivative markets broadened. Market Making revenues from equities accounted for approximately 15% of the sector's revenues. Equity derivative revenues were up 50%, reflecting increased client demand. Equity commissions increased more than 30% on higher volumes, primarily on U.S. exchanges. Foreign exchange revenue rose 19%, as client demand and transaction volumes grew, primarily in developed markets; commodities revenues were 30% lower, reflecting declines in base metal trading. Total Market Making revenues increased $961 million to $2,622 million in 1996. Expenses increased $277 million from $1,462 million in 1995, reflecting increased incentive compensation in line with higher earnings and expansion of our equities capabilities as part of our strategic objectives. 6 9 ASSET MANAGEMENT AND SERVICING (Asset Management, Private Client Services, Futures and Options Brokerage, and Euroclear System)
In millions 1996 1995 ----------------------------------------------------------------------- Investment management revenue ............. $ 681 $ 580 Fees and commissions ...................... 405 397 Net interest revenue ...................... 312 329 Other sector revenues ..................... 15 (2) ----------------------------------------------------------------------- Total revenues ............................ 1 413 1 304 Total expenses ............................ 1 140 920 ----------------------------------------------------------------------- Pretax income ............................. 273 384 -----------------------------------------------------------------------
This was a year of continued growth in our asset management and private client activities. We continued to invest in people and technology to expand our global platform, develop additional distribution channels, and broaden our core investment capabilities. Assets under management for both private and institutional clients grew 16% to $208 billion in 1996 and are widely diversified by asset class among money market, fixed income, equity, and real estate products and across markets globally. Revenues generated by asset management and services for private clients increased 14% in 1996, providing over 60% of the sector's revenues. J.P. Morgan won a record level of new business from institutional clients around the world. More than 40% of new assets were awarded to manage international portfolios. J.P. Morgan assists individuals, families, and privately held enterprises worldwide in structuring and managing wealth through a range of advisory, investment, and liquidity products. We manage $49 billion of private client assets, up approximately 20% in 1996. Our full service brokerage unit, which offers investors who manage their own portfolios access to a complete range of global securities, generated sharply higher revenues due to significant growth in volume from both new and existing clients. While most of the revenues from our private client business are reported in this sector, approximately $100 million are included in our Finance and Advisory and Market Making sectors, reflecting transactions undertaken for private clients in other business areas. Private clients accounted for approximately $500 million of our revenues from all client-focused activities, up 20% from the prior year. Our futures and options brokerage unit experienced volume growth of approximately 20% in 1996 as we increased our market share on most major exchanges. Revenues earned increased slightly from the prior year as revenue gains from increased volume were offset by competitive pricing pressures. As a futures and options broker, we are active dealers on 53 exchanges around the world, establishing a presence on 12 exchanges in 1996. Morgan operates the Euroclear System, the world's largest clearance and settlement house for internationally traded securities, and provides credit and deposit services to Euroclear System participants. Euroclear-related revenues, primarily included in Net interest revenue and Fees and commissions, were essentially unchanged from the prior year. Total Asset Management and Servicing revenues increased $109 million to $1,413 million. Expenses increased $220 million from $920 million in 1995 due to strategic investments in our private client and institutional asset management businesses. 7 10 PROPRIETARY ACTIVITIES J.P. Morgan employs a small group of professionals who use their expertise and Morgan's resources, within clearly established risk parameters, to enter into proprietary transactions for our own account. The results of these activities, which complement our client-focused activities, are provided below. EQUITY INVESTMENTS (Equity Investment Portfolio Management)
In millions 1996 1995 ----------------------------------------------------------------------- Investment securities revenue ........... $293 $503 Other sector revenues ................... 3 9 ----------------------------------------------------------------------- Total revenues .......................... 296 512 Total expenses .......................... 34 24 ----------------------------------------------------------------------- Pretax income ........................... 262 488 ----------------------------------------------------------------------- Total return ............................ 363 365 -----------------------------------------------------------------------
J.P. Morgan invests globally in privately held growth companies, management buyouts, privatizations, and recapitalizations. Investments are made and managed with the objective of maximizing total return, which is a measure of both long term appreciation and recognized gains. Our $842 million portfolio, at cost, consists of approximately 90 investments diversified by industry, geographic area, and stage of investment. Approximately 25% of our investments are committed to opportunities in Latin America, Europe, and Asia. In 1996, we invested a record $356 million globally in the private equity of 34 companies in the insurance, retail, telecommunications, health care, and technology industries. Our largest investment was $200 million in Travelers/Aetna Property Casualty Corp. We expanded the team dedicated to private equity investing in 1996, with particular emphasis on increasing our presence in Latin America, Asia, and Europe -- regions where we see increasingly attractive investment opportunities. In addition, the team worked closely with other areas of the firm to capture the competitive advantage of Morgan's global presence and expertise in sourcing, evaluating, and managing investments. Opportunities often develop through relationships with clients. We have also managed initial public offerings and high yield debt issues, arranged credit facilities, and provided mergers and acquisitions advice to portfolio companies at later stages of their development. Reported revenues of $296 million in 1996 were down from the high level attained in 1995 when significant gains were harvested from a large position in Columbia/HCA Healthcare Corporation. Total return, which equals reported revenues plus the change in net unrealized appreciation, was $363 million in 1996, essentially level with 1995. Net unrealized appreciation as of December 31 is presented below.
In millions 1996 1995 1994 ----------------------------------------------------------------------- Marketable equity investment securities ....... $477 $440 $576 Nonmarketable equity investment securities .... 115 85 96 ----------------------------------------------------------------------- Total net unrealized appreciation ............. 592 525 672 -----------------------------------------------------------------------
8 11 PROPRIETARY INVESTING AND TRADING (Market Risk Positioning and Capital and Liquidity Management)
In millions 1996 1995 ----------------------------------------------------------------------- Net interest revenue ...................... $ 623 $ 868 Trading revenue ........................... 241 154 Investment securities revenue ............. 12 20 Other sector revenues ..................... 28 78 ----------------------------------------------------------------------- Total revenues ............................ 904 1 120 Total expenses ............................ 153 129 ----------------------------------------------------------------------- Pretax income ............................. 751 991 ----------------------------------------------------------------------- Total return .............................. 594 601 -----------------------------------------------------------------------
J.P. Morgan actively takes market risk positions for its own account, employing directional and relative value risk-taking strategies, diversified across markets and instruments. Directional strategies anticipate changes in absolute rate and price levels, while relative value strategies anticipate changes in relationships between markets and classes of instruments. These strategies are conducted across many currencies and types of instruments, both on- and off-balance-sheet, where we perceive opportunities exist to generate value for the firm. Instruments typically used in these positioning activities include fixed income securities, foreign exchange, equity securities, commodity products, and related derivative instruments. Positions may be held for short or long periods of time, depending on our strategy and actual market performance. Certain longer-term strategies are considered to be investment activities and primarily utilize government and mortgage-backed fixed income securities and interest rate swaps. The securities and interest rate swaps used in these investment activities are classified as "available-for-sale" and "risk-adjusting" respectively. In addition to these risk-taking activities, and included in this sector's results, are the firm's capital and liquidity management activities. Revenues declined 19% in 1996 to $904 million, primarily due to lower net interest earnings as higher-yielding investments, principally interest rate swaps, continue to mature. Expenses increased 19% to $153 million, primarily as a result of higher employee compensation and benefits. Total return, which combines reported revenues and the change in net unrealized appreciation, is the more meaningful measure of performance for this sector. Total return for 1996 of $594 million was essentially unchanged from the $601 million reported in 1995. Returns from activities in Asia were strong in 1996, but were down from the particularly high levels of 1995. This decline was offset primarily by higher returns in most activities in the U.S. The following table represents the components of net unrealized appreciation for this sector. Net unrealized appreciation declined to $243 million in 1996, mainly as a result of the recognition of net interest revenue. UNREALIZED APPRECIATION (DEPRECIATION)
In millions 1996 1995 1994 ----------------------------------------------------------------------- Debt investment securities ........... $ 255 $ 484 $ 154 Risk-adjusting swaps ................. 123 389 776 Long-term repurchase agreements ...... (80) (152) 46 Other financial instruments .......... (55) (168) 96 ----------------------------------------------------------------------- Total net unrealized appreciation .... 243 553 1 072 -----------------------------------------------------------------------
9 12 CORPORATE ITEMS Corporate Items include 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 also include the results of sold or discontinued businesses. In line with strategic steps begun in 1995, we completed the sale of our institutional U.S. cash processing business in December. The sale did not have a material impact on earnings. This disposition was made in addition to the sale of our securities custody and clearing activities and the discontinuance of certain cash services during 1995. Revenues and expenses included in Corporate Items for 1996 and 1995 related to these businesses were as follows: Total revenues were $144 million in 1996, down from $397 million in 1995; total expenses were $149 million in 1996, down from $433 million in 1995. Our role as operator of the Euroclear System and the cash management and processing services we offer private clients were not affected by these sales. Revenues reported in Corporate Items in 1996 also included a gain of $77 million related to the partial sale of a minority investment. Expenses in 1996 included a $71 million technology-related special charge. Revenues in 1995 included a $40 million gain related to the sale of the firm's global and local custody and U.S. commercial paper issuing and paying agency businesses. Expenses included a $55 million charge related to expense management efforts. 10 13 RISK MANAGEMENT The major risks inherent in J.P. Morgan's businesses are market, liquidity, credit, and operating risk. Comprehensive risk management processes have been established to facilitate, control, and monitor risk-taking. These processes are built on a foundation of early identification and analytically rigorous measurement of risks by each of our businesses. Control mechanisms are in place at different levels throughout the organization. The Corporate Risk Management Group and individual businesses, as well as the audit, legal, financial, and operations groups, are all involved in monitoring risks from a variety of perspectives with the objective of determining whether the businesses are operating within established corporate policies and limits. New businesses and material changes to existing businesses are subjected to reviews to assure management that significant risks are identified and appropriate control procedures are in place. Morgan's business managers are responsible for managing risks in the activities and markets in which they do business. These managers, located in markets around the world, have firsthand knowledge of changes in market, industry, credit, economic, and political conditions in their host countries and use their experience and insights, supported by various risk management tools, to adjust positions and revise strategies in an efficient and timely manner. Our business managers protect against losses from unexpected events by limiting the magnitude of the risks they take and diversifying exposures and activities across a variety of instruments, markets, clients, and geographic regions. The Corporate Risk Management Group oversees our firmwide risk management processes. The primary objective of the group is to preserve our capital base by developing, communicating, and implementing an institutional view of and process for managing risk across Morgan. The Corporate Risk Management Group also supports the firm in efforts to identify and implement opportunities to optimize return on capital. This unit, which is independent of our business groups, is managed by the head of the Market Risk and Credit Policy committees. The Corporate Risk Management Group performs independent reviews of significant risk concentrations and has the authority to challenge any risk position. The group establishes and controls market risk limits and concentration limits for credit risk by considering exposure to particular products, counterparties, industries, and geographic regions. The Corporate Risk Management Group maintains a common risk management framework by developing, communicating, and assisting business groups in implementing corporate risk management policies, information systems, and methodologies. The group also supports Morgan's professionals with training related to risk management policies and methodologies. The Market Risk and Credit Policy committees, along with the Operating Risk and Investment committees, are composed of members of senior management. The Market Risk Committee reviews trends in the firm's market and liquidity risk profiles, and the Credit Policy Committee reviews credit risk developments. The Operating Risk Committee is primarily responsible for monitoring Morgan's overall operating environment and anticipating future operating trends in the marketplace. The Investment Committee provides oversight for our Equity Investments activities, approving all investments made in excess of defined limits, advising on portfolio strategy, and monitoring portfolio issues. The Board of Directors periodically reviews trends in our risk profiles and performance as well as any significant developments in risk management policies and controls. The processes and procedures by which we manage our risk profile continually evolve as our business activities change in response to market, credit, product, and other developments. We are always seeking to strengthen the risk management process through continuous investments in technology and training. Periodic reviews performed by internal auditors, regulators, and independent accountants subject our practices to additional scrutiny and further strengthen our processes. 11 14 MARKET RISK Market risk is the uncertainty to which future earnings are exposed as a result of changes in the value of portfolios of financial instruments. This risk is a consequence of our trading and investing activities in the interest rate, foreign exchange, equity, and commodity markets. The estimation of potential losses that could arise from adverse changes in market conditions is a key element of managing market risk. J.P. Morgan generally employs a value at risk methodology to estimate such potential losses; our Equity Investments activities are monitored separately by the Investment Committee as discussed earlier. The firm's primary measure of value at risk is referred to as "Daily Earnings at Risk" (DEaR). This measure takes into account numerous variables that may cause a change in the value of our portfolios, including interest rates, foreign exchange rates, securities and commodities prices, and their volatilities, as well as correlations among these variables. Option risks are measured using simulation analysis and other analytical techniques. These methods produce risk measures that are comparable to those generated for nonoption positions in trading and investing activities assuming normal market conditions and market liquidity. These estimates also take into account the potential diversification effect of the different positions in each of our portfolios. On a regular basis, the Corporate Risk Management Group, with support from the financial group, calculates, reviews, and updates the historic volatilities and correlations that serve as the basis for these estimates. DEaR's one-day horizon allows for a consistent and uniform measure of market risk across all applicable products and activities. It also facilitates regular comparison of risk estimates to daily trading results, providing an indication of the quality of these estimates as well as opportunities to enhance our risk measurement processes. DEaR measures potential losses that are expected to occur within a 95% confidence level, implying that a loss might exceed DEaR approximately 5% of the time. In estimating DEaR, it is necessary to make assumptions about market behavior. The standard forecast used by J.P. Morgan assumes normal distributions and an adverse market movement of 1.65 standard deviations. Morgan utilizes DEaR as one tool to estimate potential market risk related to our trading and investing activities. In addition, the Corporate Risk Management Group sets DEaR limits for each trading activity, as well as firmwide limits for all trading activities combined, and for investing and trading activities combined (aggregate market risk). The level of risk to be assumed by a business is based on our overall objectives, business manager experience, client requirements, market liquidity, and volatility. Within these limits, business managers set regional, local, product, currency, and trader limits as appropriate. On a daily basis, we estimate DEaR for each trading activity, as well as for firmwide trading and aggregate market risk. Management reviews daily reports of profit and loss, aggregate positions, and the firm's market risk profile. These reports compare estimated DEaR for the above-mentioned activities by individual business and by principal market with relevant DEaR limits, and include a description of significant positions and a discussion of market conditions. Risk managers meet daily to discuss the firm's global market risk profile and trading and investing strategies. The DEaR methodology is a uniform measure to communicate and evaluate the relative level of market risk within and across businesses and major markets. However, since no single measure can capture all the dimensions of market risk, we supplement DEaR with additional market risk information and tools such as stress testing. Stress tests measure the effect on portfolio values of unusual market movements and are performed on a portfolio and firmwide basis to help identify potential sensitivities to abnormal events. Stress testing can take several forms, including simulation analysis; sensitivity analysis, for moves in values of specific key variables such as volatilities and shifts in yield curves; and specific event analysis, for measuring the impact of abnormal market conditions associated with a specific market event. In selective cases, we supplement DEaR with "tail risk" limits (i.e., risk of loss beyond the expected confidence level) for portfolios that are particularly susceptible to extreme market-related valuation losses. 12 15 MARKET RISK PROFILES The following presents the market risk profiles for the firm as of and for the years ended December 31, 1996 and 1995. The level of market risk, which is measured on a diversified basis, will vary with market factors, the level of client activity, and our expectations of price and market movements. AGGREGATE MARKET RISK ACTIVITIES DEaR for our aggregate trading and investing activities across all market risks averaged approximately $31 million and ranged from $24 million to $44 million in 1996. This compares with average DEaR of approximately $26 million and a range from $20 million to $38 million in 1995. Aggregate market risk levels increased in 1996, primarily as a result of higher risk levels in our proprietary investing activities. Trading market risk activities The market risk profiles as measured by DEaR for our trading activities combined for each business day in 1996 and 1995 are presented in the table below. [GRAPH] In 1996, average DEaR for our trading activities across all market risks was approximately $21 million, as compared with approximately $19 million in 1995. The modest increase reflects higher risk levels in most trading businesses offset by lower risk levels in emerging markets activities. The primary sources of market risk associated with our trading activities relate to movements in interest rates, foreign exchange rates, and equity and commodity prices, each of which is measured on a diversified basis. For 1996, average DEaR of approximately $21 million represented the combination of interest rate risk of approximately $14 million, foreign exchange rate risk of approximately $6 million, equities risk of approximately $5 million, commodity risk of approximately $4 million and all other market risks of approximately $6 million, offset by approximately ($14) million reflecting additional diversification among these risks. 13 16 The frequency distribution of our 1996 daily trading-related revenues, generated by our trading businesses, is presented below. [GRAPH] The above distribution around average daily revenue of $12.6 million (which includes trading, trading-related net interest revenue, and other related sources of revenue) reflects the diversified and client-oriented nature of our global trading market risk activities. Average daily revenue was $7.6 million in 1995. J.P. Morgan evaluates the reasonableness of DEaR estimates by comparing DEaR to actual trading results. In 1996, the quality of our risk estimates remained strong. The number of occurrences where daily revenue fell short of expected daily results by amounts greater than related DEaR estimates was consistent with statistical expectations. In addition, the confidence bands depicted in the above histogram, which represent 1.65 standard deviations around average daily revenue, would imply an average DEaR of $19 million, compared to our actual average DEaR estimate of $21 million for 1996. We also evaluate various downside risk indicators. For example, average daily revenue, for the nine days that fell short of the downside confidence band, was a loss of ($12) million in 1996, compared with a loss of ($15) million for 10 days in 1995. Proprietary investing activities The primary sources of market risk associated with our proprietary investing activities relate to interest rate risk associated with fixed income securities and interest rate swaps and spread risk associated with our mortgage-backed securities portfolio. Average DEaR for proprietary investing activities was approximately $22 million and ranged from $10 million to $37 million in 1996 as compared with approximately $17 million and a range from $12 million to $25 million in 1995. The increase in average DEaR is primarily related to the mortgage-backed securities portfolio. Due to the longer-term nature of our investing activities, we use a weekly time horizon to evaluate our risk estimates relative to total return. In 1996, the number of occurrences where weekly total return fell short of expected weekly results by amounts greater than related weekly risk estimates was consistent with statistical expectations. 14 17 LIQUIDITY RISK Liquidity risk arises in the general funding of the firm's activities and in the management of positions. It includes both the risk of being unable to fund our portfolio of assets at appropriate maturities and rates and the risk of being unable to liquidate a position in a timely manner at a reasonable price. The Global Liquidity Management Group is responsible for the identification, measurement, and monitoring of Morgan's liquidity risks, for maintaining an adequate liquidity surplus, and for long-term liquidity planning. Funds are raised globally from a broad range of instruments including deposits, commercial paper, bank notes, repurchase agreements, federal funds purchased, long-term debt, capital securities and stockholders' equity. A strong capital position is integral to our ability to manage liquidity. Morgan's liquidity policy is to maintain sufficient capital plus long-term debt and capital securities in order to maintain the capacity to be funded on a fully collateralized basis. The strategy ensures that, even under adverse conditions, we have access to funds necessary to cover client needs, maturing liabilities, and the capital requirements of our subsidiaries. In addition, stress tests are performed to monitor future funding requirements under various market conditions that might adversely impact our ability to liquidate investment and trading positions or our ability to access the markets. The Liquidity Risk Committee, which is composed of senior business, financial, and credit risk management officers, meets monthly to review trends in the firm's overall liquidity risk profile and communicates any significant changes to the Market Risk Committee. The liquidity of trading asset inventories is monitored continuously by the appropriate business managers. On a periodic basis the Corporate Risk Management Group reviews the liquidity and turnover of inventories as part of its overall business risk review. CREDIT RISK Credit risk arises from the possibility that counterparties may default on their obligations to the firm. These obligations arise from our lending activities, the extension of credit in our trading and investment activities, and participation in payment and securities settlement transactions on our own behalf and as agent for our clients. The growing diversity of our business through an expanded range of products and services and participation in international markets has increased the complexity of managing credit risk. J.P. Morgan manages credit risk on an individual transaction, counterparty level, and portfolio basis. Credit limits for individual clients and counterparties are established by credit officers with direct knowledge of the client's creditworthiness. These officers and our business managers are responsible for credit screening and monitoring. At a portfolio level, exposure concentrations that do not relate to individual counterparties, such as country, industry, and product exposures, are reviewed regularly by the Credit Policy Committee. Credit concentration limits for various industries, products, and countries are set by the Corporate Risk Management Group. The Global Credit Group is responsible for evaluating the likelihood that a counterparty will be able to fulfill its obligations in a particular transaction or group of transactions, including an assessment of the covenants, collateral, and other protections available to the firm in the event a counterparty's creditworthiness deteriorates. An internal credit rating, which is analogous to those of public rating agencies in the United States, is established as a result of this evaluation. To reduce individual counterparty credit risk, we attempt to deal with creditworthy counterparties, obtain collateral where appropriate, and utilize master netting agreements, primarily in connection with derivative products. 15 18 Established credit limits and actual levels of exposures are reviewed regularly by senior management on both an individual counterparty and portfolio basis. When our credit review procedures identify counterparty, country, industry, or product exposures that require a higher-than-normal degree of scrutiny, these exposures are carefully monitored by the Asset Quality Review Committee, which meets quarterly. In assessing the adequacy of our aggregate allowance for credit losses, this group of senior officers recommends the portion of credit exposures that should be charged off and the amount of any provisions needed for credit losses. The size of our aggregate allowance is based upon senior management's evaluations of required reserves to cover potential losses on either an individual counterparty, industry, or country basis, along with statistical evaluations of the inherent default losses within J.P. Morgan's remaining credit exposures. From a portfolio perspective, the estimation of potential default losses that could arise from adverse changes in our counterparties' credit quality is a key element of managing credit risk. J.P. Morgan employs a number of qualitative and quantitative processes and methodologies to estimate such potential losses. The primary qualitative aspect is determining the creditworthiness of our counterparties, which we express in terms of the internal credit ratings described above. Through statistical analysis, these ratings are used to estimate the default probabilities and volatilities of our counterparties. The correlation of default among different counterparties, and the recoveries the firm may realize in the event of a default, are other variables that reflect the judgment of senior credit officers. The quantitative aspect of potential default loss estimation incorporates measurements of credit exposure to our counterparties. The Corporate Risk Management Group is responsible for establishing the framework of policies and practices required to measure such exposure. We measure credit exposure in terms of both current and potential credit exposure. Current credit exposure is generally represented by the notional or principal value of on-balance-sheet financial instruments and off-balance-sheet direct credit substitutes such as standby letters of credit and guarantees. Current credit exposure also includes the positive market value of derivative instruments. Since many of our exposures vary with changes in market prices and the borrowing needs of our clients, we also estimate the potential credit exposure over the remaining term of transactions through statistical analysis of market prices and borrowing patterns. We estimate the likelihood of various potential default losses by evaluating credit exposures in the context of our counterparties' creditworthiness. These estimates incorporate management's evaluation of several variables including the credit quality of our counterparties, the amount and duration of our credit exposure, default probabilities, collateral values, and expected recovery rates in the event of default. We also consider the volatility of corporate defaults as well as our portfolio's diversification across counterparties, industries, and geographic regions. The development of uniform estimates of credit exposure and potential loss is useful in evaluating the relative level of credit risk within and across counterparties, products, industries, and geographic regions of our global credit portfolio. However, no single measure can capture all dimensions of credit risk. To ensure our understanding about the potential range of adverse outcomes from the firm's credit risk, we supplement these measures with additional credit risk information and tools, including stress tests and sensitivity analyses aimed at estimating the potential exposure and losses resulting from changes to the parameters of J.P. Morgan's credit risk models. A strong capital position provides the firm and its shareholders with additional protection in the event of adverse outcomes. 16 19 OPERATING RISK Operating risk is the potential for loss arising from firm activities or external events caused by breakdowns in information, communication, physical safeguards, business continuity, supervision, transaction processing, settlement systems and procedures, and the execution of legal, fiduciary, and agency responsibilities. J.P. Morgan attempts to mitigate operating risk by maintaining a comprehensive system of internal controls. The goal of an internal control framework begins with the identification and prioritization of business objectives, and the business processes through which they are attained. J.P. Morgan's business managers are responsible for establishing and maintaining an appropriate system of internal controls after considering the risks of their businesses and the standards and policies of the firm. Risks inherent in business processes are identified, and control objectives and associated procedures required are established to mitigate those risks. The impact of the controls is evaluated against business objectives to ensure that cost and benefit remain in balance. Monitoring the effectiveness of our control procedures by means of performance measures is also a component of this framework. In addition to the establishment of a system of internal controls, we also invest in the development of key backup facilities worldwide, and update systems and equipment as required in response to changes in business conditions and technology needs. Contingency plans are periodically tested and communicated throughout the firm. The Operating Risk Committee monitors necessary changes to the firm's operating environment, in response to changes in the marketplace, in technology, and in the firm's strategic initiatives and organizational structures. J.P. Morgan's business managers are responsible for establishing and maintaining internal control procedures that are appropriate for their local operating environments. Local operating committees also evaluate the control environment on a regular basis. The firm's achievement of its operational control objectives is further enhanced by a strategic alliance with a consortium of world-class technology firms that assist in the management of Morgan's global technology infrastructure. Legal risk, a component of operating risk, arises from the uncertainty of the enforceability, through legal or judicial processes, of the obligations of J.P. Morgan's clients and counterparties, including contractual provisions intended to reduce credit exposure by providing for the offsetting or netting of mutual obligations. The firm seeks to minimize such uncertainty through consultation with internal and external legal advisors in all countries in which we conduct business. Fiduciaries and agents have obligations to act on behalf of others. Fiduciary or agency risks exist in our investment management activities and to a lesser extent in many of our other agency and brokerage activities. The firm has a number of policies and procedures to ensure that our obligations to clients are discharged faithfully and in compliance with applicable legal and regulatory requirements. Such policies and procedures include "know your client" and suitability policies and procedures regarding management of the firm's investment products, trade execution, counterparty selection, and the evaluation of potential investment opportunities. Our control environment encompasses all of the above elements and is enhanced by the integrity and competence of our professionals, the way our professionals are developed and supervised, and management's philosophy and operating style. This comprehensive system of internal controls enables management to ensure compliance with firm policies and external regulations. 17 20 FINANCIAL REVIEW NET INTEREST REVENUE Net interest revenue aggregates interest revenue and expense generated from the firm's client-focused and proprietary activities, which use a variety of asset, liability, and off-balance-sheet instruments. Net interest revenue is affected by changes in interest rates, funding strategies, and the relative proportion and composition of interest-bearing and noninterest-bearing financial instruments. The levels of equity capital and net noninterest-bearing liabilities reduce the requirement to incur interest-bearing liabilities to fund the firm's activities. Proprietary Investing and Trading sector activities remain the largest contributor to net interest revenue, representing approximately one-third of total net interest revenue, down from approximately 45% in the prior year. The Finance and Advisory and Asset Management and Servicing sectors, which generate net interest revenue from loans and other credit and deposit products, account for about one-half of the firm's net interest revenue. In addition, net interest revenue is generated from various financial instruments used in our trading-related businesses within the Market Making sector. Net interest revenue was $1,702 million in 1996, compared with $2,003 million in 1995. The 15% decline from 1995 is primarily attributable to a decline in net interest revenue from Proprietary Investing and Trading positions as a result of the continuing maturity of higher-yielding financial instruments. Net interest revenue was $2,003 million in 1995, compared with $1,981 million in 1994. Net interest revenue in 1994 included $66 million of interest revenue primarily related to past due interest claims from Brazil and Argentina, and $50 million of interest revenue associated with income tax refunds. Excluding these items, net interest revenue was 7% higher in 1995 than in 1994. Net interest revenue associated with the Finance and Advisory sector increased in 1995, primarily driven by increases from credit-related products. Net interest revenue from Proprietary Investing and Trading activities in the United States and Asia also increased, while net interest revenue related to the Market Making sector declined. TRADING REVENUE Trading revenue is generated primarily by activities included within the Market Making and Proprietary Investing and Trading sectors. Trading revenue increased 80% to $2,477 million in 1996 from 1995 and 35% to $1,376 million in 1995 from 1994, due to strong client demand in the firm's market-making activities in both developed and emerging markets, and higher results in our proprietary trading activities. The following table presents trading revenue, disaggregated by principal product groupings. Such revenue represents only a portion of the total revenues generated by the business activities discussed in the Business sector analysis, and does not include related net interest revenue.
In millions 1996 1995 1994 - -------------------------------------------------------------------------------- Fixed Income ..................... $1 540 $ 668 $ 766 Equities ......................... 330 249 115 Foreign Exchange ................. 320 253 168 Commodities ...................... 34 42 82 Proprietary Trading .............. 253 164 (112) - -------------------------------------------------------------------------------- Total trading revenue ............ 2 477 1 376 1 019 - --------------------------------------------------------------------------------
18 21 Fixed Income Fixed Income includes the results of making markets in both developed and emerging countries in government securities, interest rate and currency swaps, options and other derivative instruments, money market instruments, U.S. government agency securities, and corporate debt securities. Trading revenue of $1,540 million in 1996 grew $872 million from 1995. The growth in 1996 is due to increased demand for swaps and swap derivatives, including more complex, customized transactions, and for government and corporate securities. In addition, results were positively impacted by gains on client-related positions compared with losses in the prior year. Trading revenue of $668 million in 1995 decreased $98 million from 1994. While demand for risk management products was higher, revenue declined from 1994 due to losses in positions arising from some client activities. Additionally, losses were recorded in 1995 when we curtailed mortgage-backed activities in a strategic realignment of resources. Partially offsetting these declines were higher results from emerging markets activities. Equities Equities include the results of making markets in global equity securities and equity derivatives such as swaps, options, futures, and forward contracts. Trading revenue advanced $81 million to $330 million in 1996, and $134 million to $249 million in 1995, reflecting strong client demand in our equity derivatives activities. Foreign Exchange Foreign Exchange includes the results of making markets in spot, options, and short-term interest rate products, including forwards and forward rate agreements in multiple currencies. Trading revenue grew $67 million to $320 million in 1996, and $85 million to $253 million in 1995, primarily as a result of an increase in client demand and greater volatility in the foreign exchange markets. Commodities Commodities include the results of making markets in spot, forwards, options, and swaps, and advising clients on developing hedging, investment, and commodity-linked financing strategies. Trading revenue of $34 million in 1996 decreased $8 million from 1995, due primarily to declines in base metals revenues caused by extreme market movements. Trading revenue of $42 million in 1995 decreased $40 million from the exceptional 1994 results, due primarily to declines in base metals revenues. Proprietary Trading The Proprietary Investing and Trading sector engages in transactions for our own account across all markets. Trading revenue increased $89 million to $253 million in 1996, reflecting an increase in revenues from relative value trading activities. Trading revenue of $164 million in 1995 reflected gains, primarily in Asian markets, compared with losses of $112 million in 1994, primarily in European markets. 19 22 TRADING-RELATED ASSETS AND LIABILITIES
In billions: Average balances 1996 1995 1994 ---------------------------------------------------------------------------------------------------- TRADING-RELATED ASSETS: Trading account assets ............................. $78.2 $68.0 $62.0 Securities purchased under agreements to resell .... 42.7 31.6 32.1 Securities borrowed ................................ 25.3 15.2 15.6 TRADING-RELATED LIABILITIES: Trading account liabilities ........................ 49.1 45.2 38.6 Securities sold under agreements to repurchase ..... 59.8 40.1 45.5 ----------------------------------------------------------------------------------------------------
The level of trading account assets, securities purchased under agreements to resell (resale agreements), securities borrowed, trading account liabilities, and securities sold under agreements to repurchase (repurchase agreements) fluctuates daily depending upon client needs as well as market opportunities. The firm uses resale agreements and securities borrowed to facilitate deliveries to customers and to meet the inventory financing needs of clients. We use repurchase agreements as a source of short-term financing for trading-related positions and as one source of financing for the debt investment securities portfolio. Trading account assets and liabilities are mainly composed of U.S. Treasury and foreign government securities, trading-related derivatives, and corporate debt and equity securities. Average trading account assets grew 15% in 1996, and 10% in 1995, as a result of increased holdings of government securities and corporate debt and equity securities, reflecting the continued expansion of activities within the Market Making sector. Additionally, average balances for resale agreements, securities borrowed, and repurchase agreements have increased to meet the needs of clients and to profit from interest rate spreads. The average balance of trading-related assets represented 68% of average total assets in 1996, compared with 64% in 1995 and 1994. For financial statement reporting purposes, beginning December 31, 1996, a portion of the aggregate allowance for credit losses relating to derivatives, amounting to $350 million, which had previously been reported as a reduction of loans, is presented as a reduction of Trading account assets. Such change in presentation had no material impact on 1996 averages. Refer to page 28 for a detailed discussion of the aggregate allowance for credit losses. DERIVATIVES In general terms, derivative instruments are contracts or agreements whose value is derived from interest rates, foreign exchange rates, prices of securities, or financial or commodity indices. Derivatives include swaps, futures, forwards, and option contracts. Derivatives are generally either negotiated over-the-counter contracts or standardized contracts executed on an exchange. Standardized exchange-traded derivatives include futures and option contracts. Negotiated over-the-counter derivatives include forwards, swaps, and option contracts. Over-the-counter derivatives are generally not traded like securities; however, in the normal course of business, with the agreement of the original counterparty, they may be terminated or assigned to another counterparty. The timing of cash receipts and payments related to derivatives is generally determined by contractual agreement. J.P. Morgan's competitive strength in derivatives activities results from our strong capital base, expertise developed over many years, global distribution capabilities, long-standing client relationships, sophisticated research and technological support, and integrated approach to these activities. J.P. Morgan utilizes derivatives in its trading and investing activities. As part of our trading activities, we act as a dealer in derivative instruments to satisfy the risk management needs of our clients by structuring transactions that allow clients to manage their exposure to interest rates, foreign exchange rates, prices of securities, and financial or commodity indices. In addition, we assume trading positions based on our market expectations and to benefit from price differentials between instruments and markets. We also utilize derivatives as hedges of trading instruments. Derivative instruments used for trading purposes include interest rate swaps, currency swaps, foreign exchange forward contracts, interest 20 23 rate futures, forward rate agreements, commodity forwards, equity swaps, equity futures, interest rate options, foreign exchange options, commodity options, and equity options. As an end user, J.P. Morgan utilizes derivative instruments in the execution of its investing strategies. Such derivatives primarily include interest rate swaps, foreign exchange forward contracts, interest rate futures, and debt securities forwards. Derivatives are used to hedge exposures to interest rate or currency fluctuations, primarily on or related to debt investment securities, and to modify the interest rate characteristics of related balance sheet instruments, principally loans, short-term borrowings, and long-term debt. In addition, we utilize derivatives to adjust our overall interest rate risk profile, primarily through the use of risk-adjusting swaps. These swaps do not contain leverage or embedded option features and are used to replicate the cash flows of nonamortizing cash instruments. As with balance sheet financial instruments, derivatives are subject to market and credit risk. As discussed in the Risk management section, we evaluate the risks associated with derivatives in much the same way as the risks associated with balance sheet financial instruments. However, unlike balance sheet financial instruments, where the credit exposure is generally represented by the notional or principal value, the credit exposure associated with derivatives is generally a small fraction of the notional value of the instrument and is represented by the positive market value of the derivative instrument. The following table presents the percentages of credit exposure associated with all derivatives by counterparty credit quality, based on J.P. Morgan's internal credit ratings. J.P. Morgan's internal ratings are analogous to those of public rating agencies in the United States. Ratings of AAA, AA, A, and BBB represent investment grade ratings, and ratings of BB and below represent noninvestment grade ratings. The percentages presented below do not consider the credit enhancement effect of collateral securing these instruments or the benefit of master netting agreements. Total derivative credit exposure by counterparty credit quality Percentage at December 31 1996 1995 ------------------------------------------------------------- AAA, AA .......................... 42% 45% A ................................ 37 38 BBB .............................. 16 12 BB and below ..................... 5 5 ------------------------------------------------------------- Total ............................ 100 100 ------------------------------------------------------------- The following tables provide the aggregate notional amount of each category of derivative financial instruments and the contractual maturities for the 1996 balances. For detail of the notional amounts segregated by trading and investing activities, refer to Note 9 to the consolidated financial statements, Off-balance-sheet financial instruments. The following tables also provide the total amount of credit exposure, after considering the benefit of $36.5 billion, $27.7 billion, and $12.7 billion of master netting agreements in effect at December 31, 1996, 1995, and 1994, respectively, and the contractual maturities for the 1996 balances. Our use of master netting agreements has increased as our market-making activities have grown since 1994 and as the legal enforceability of these agreements has expanded to new jurisdictions. The expanded use of these agreements resulted in a decrease in credit exposure in 1996 for interest rate and currency swaps and foreign exchange spot, forward, and futures contracts. Interest rate and currency swaps
After one After five Within year but years but After one within within ten Total In billions: December 31 year five ten years 1996 1995 1994 --------------------------------------------------------------------------------------------------------------- Notional amount ................... $681.1 $999.2 $382.6 $58.0 $2 120.9 $1 515.6 $974.9 Credit exposure ................... 1.6 4.6 4.3 1.2 11.7 12.4 10.9 ---------------------------------------------------------------------------------------------------------------
A swap is a contractual agreement in which a series of cash flows are exchanged at specified intervals. The notional principal is not exchanged for interest rate swaps, but is generally exchanged for currency swaps. The notional amount of swaps, particularly interest rate swaps, grew during 1996 and 1995 as client demand for risk management products increased. 21 24 Foreign exchange spot, forward, and futures contracts
After one After five Within year but years but After one within within ten Total In billions: December 31 year five ten years 1996 1995 1994 --------------------------------------------------------------------------------------------------------------------- Notional amount ............ $ 599.9 $ 19.4 $ 0.8 $ -- $ 620.1 $ 461.8 $ 397.7 Credit exposure ............ 2.3 0.2 -- -- 2.5 3.3 3.6 ---------------------------------------------------------------------------------------------------------------------
Foreign exchange contracts involve an agreement to exchange the currency of one country for the currency of another country at an agreed-upon price and settlement date. The contracts reported above primarily include forwards. The increases in notional amounts of foreign exchange contracts during 1996 and 1995 reflect increased activity in foreign exchange forward contracts consistent with our increased market-making activities. Interest rate futures, forward rate agreements, and debt securities forwards
After one After five Within year but years but After one within within ten Total In billions: December 31 year five ten years 1996 1995 1994 --------------------------------------------------------------------------------------------------------------------- Notional amount ............ $ 476.7 $ 85.9 $ 5.6 $ -- $ 568.2 $ 415.4 $ 426.5 Credit exposure ............ 0.3 0.1 -- -- 0.4 0.5 0.2 ---------------------------------------------------------------------------------------------------------------------
Interest rate futures, with a notional amount of $270.1 billion, $180.5 billion, and $210.4 billion at December 31, 1996, 1995, and 1994, respectively are standardized exchange-traded agreements to receive or deliver a specified financial instrument at a specified future date and price. The credit risk associated with futures contracts is limited due to the daily settlement of open contracts with the exchange on which the instrument is traded. The contracts reported above also include forward rate agreements and debt securities forwards. A forward rate agreement is an agreement that provides for payment or receipt of the difference between a specified interest rate and a reference rate at a future settlement date. Debt securities forwards include to-be-announced and when-issued securities contracts. These contracts represent agreements to purchase or sell fixed income securities and are executed prior to issuance of the security. The increase in the notional amounts during 1996 is in line with the growth of activity in our market-making businesses. Commodity and equity swaps, forward, and futures contracts
After one After five Within year but years but After one within within ten Total In billions: December 31 year five ten years 1996 1995 1994 ----------------------------------------------------------------------------------------------------------------- Notional amount ................ $ 62.4 $ 14.1 $ 0.6 $ 0.1 $ 77.2 $ 65.1 $ 43.9 Credit exposure ................ 2.0 0.8 -- -- 2.8 1.4 1.1 -----------------------------------------------------------------------------------------------------------------
The contracts shown above primarily include swaps and futures in the commodity and equity markets, and commodity forward agreements. The growth in the notional amounts during 1996 is primarily related to an increase in client demand for energy contracts and the execution of several large precious metals transactions. The increase in notional amounts during 1995 reflects increased activity in equity contracts in line with our strategy to expand our market-making capabilities. 22 25 Option contracts
After one After five Within year but years but After one within within ten Total In billions: December 31 year five ten years 1996 1995 1994 ---------------------------------------------------------------------------------------------------------------------- Notional amount: Purchased option contracts ............. $ 366.7 $ 215.6 $ 32.5 $ 2.1 $ 616.9 $ 464.8 $ 280.6 Written option contracts ............... 394.6 254.8 60.3 3.3 713.0 524.0 348.9 ----------------------------------------------------------------------------------------------------------------------
An option contract provides the option purchaser with the right but not the obligation to buy or sell the underlying item at a set price during a period or at a specified date. The option writer is obligated to buy or sell the underlying item if the option purchaser chooses to exercise. The options reported above include contracts in the interest rate, foreign exchange, equity, and commodity markets. Interest rate options also include caps and floors. For caps and floors, the notional amounts are used to calculate periodic cash flows. The notional amount of options, particularly interest rate options, grew in 1996 and 1995, primarily due to increased market-making activities. Option contracts are either negotiated over-the-counter or standardized contracts executed on an exchange. The notional amount of purchased options executed on an exchange amounted to $165.5 billion and those negotiated over-the-counter amounted to $451.4 billion at December 31, 1996. Written options executed on an exchange amounted to $181.8 billion and those negotiated over-the-counter amounted to $531.2 billion at December 31, 1996. Credit exposure exists for purchased options and is measured as the positive market value of the option contract. At December 31, 1996, the credit exposure of purchased option contracts was $8.5 billion compared with $5.2 billion at December 31, 1995, and $3.7 billion at December 31, 1994. The increase in purchased option credit exposure reflects an increase in market-making activity, primarily in interest rate options. There is no credit exposure associated with written option contracts, as these contracts represent obligations, rather than assets, of J.P. Morgan. INVESTMENT BANKING REVENUE Investment banking revenue is earned globally by providing strategic and financial advice and by arranging financing for clients and includes advisory, loan syndication, and underwriting revenue. Substantially all of this revenue is reported in the Finance and Advisory sector. Investment banking revenue in both developed and emerging markets increased 58% to the record level of $921 million in 1996, as the continued strategic development of our ability to deliver a broader array of financial services enabled the firm to benefit from increased global investment banking activity. Advisory and syndication fees rose 44% to $568 million in 1996, primarily from higher advisory fees reflecting increased merger and acquisition activity from a growing and diverse client base worldwide. Revenues from the arrangement of syndicated lending facilities also rose in 1996 due to advances in the U.S. and Latin American markets. Underwriting revenue increased 87% to $353 million in 1996, as we continued to raise more debt and equity for a broad range of clients in the global marketplace. Investment banking revenue increased 35% to $584 million in 1995 from 1994 on higher levels of activity. Advisory and syndication fees rose 27% in 1995 to $395 million. Underwriting revenue increased 52% in 1995 to $189 million, as debt and equity securities underwriting activities grew. INVESTMENT MANAGEMENT REVENUE Investment management revenue is derived from providing investment management services to institutional and private clients and includes fees from the administration of trusts and estates. These activities are primarily reported in the Asset Management and Servicing sector. 23 26 Investment management revenue increased 18% to $675 million in 1996 compared with 1995. The increase was primarily due to net new business from both institutional and private clients, and to a lesser extent, market appreciation, that resulted in higher assets under management. Investment management revenue increased 11% to $574 million in 1995 compared with 1994, reflecting an increase in assets under management primarily from institutional net new business. Assets under management increased 16% to $208 billion in 1996 compared with 1995, and 19% to $179 billion in 1995 compared with 1994. FEES AND COMMISSIONS Fees and commissions include revenue previously classified as operational service fees and credit-related fees. Fees and commissions are earned from providing brokerage of futures and options and equity securities, as well as securities custody and clearing, trust and agency and cash management services. In addition, fees are earned from commitments to extend credit, standby letters of credit and guarantees, and securities lending activities. This revenue is included primarily in the Finance and Advisory and Asset Management and Servicing sectors, while certain commissions are included in the Market Making sector. Fees and commissions were $582 million, $708 million, and $750 million in 1996, 1995, and 1994 respectively. Included in fees and commissions is $45 million, $205 million, and $250 million in 1996, 1995, and 1994 respectively of revenue related to the exited custody and cash processing businesses. Excluding revenue from the exited custody and cash processing businesses, fees and commissions increased 7% from the prior year due to higher transaction volumes. Particularly strong growth in equity and other brokerage commissions accounted for the majority of the increase. Futures and options brokerage also rose as increased transaction levels more than offset lower commission rates. Fees and commissions were essentially flat in 1995 as compared with 1994 after excluding revenue generated from the exited custody and cash processing businesses. Increased revenue from equity commissions due to increased market penetration and volumes was offset by lower fees generated on securities lending transactions, commitments to extend credit, and standby letters of credit. CREDIT-RELATED FINANCIAL INSTRUMENTS Credit-related financial instruments include loans, commitments to extend credit, standby letters of credit and guarantees, and indemnifications in connection with securities lending activities. These instruments primarily result from the activities engaged in by our Finance and Advisory sector. The maximum credit risk associated with credit-related financial instruments is measured by the contractual amounts of these instruments. For off-balance-sheet credit-related financial instruments this balance represents the amount at risk should the contract be fully drawn upon, the client default, and any existing collateral become worthless. A significant amount of these commitments expire without being drawn upon. In addition, in the event of client default, commitment obligations of the firm are protected by financial covenants and/or material adverse clauses in contracts of credit-related financial instruments. The following table presents the percentages of credit exposure associated with credit-related financial instruments by counterparty credit quality, based on J.P. Morgan's internal credit ratings, as discussed on page 21. At December 31, 1996 and 1995, over 85% of the total credit exposure was with counterparties considered to be of investment grade quality. Total credit exposure by counterparty credit quality Percentage at December 31 1996 1995 ------------------------------------------------------------- AAA, AA ...................... 24% 23% A ............................ 41 41 BBB .......................... 22 22 BB and below ................. 13 14 ------------------------------------------------------------- Total ........................ 100 100 ------------------------------------------------------------- 24 27 Loans The extension of credit, including loans, remains one of the many ways we provide our clients with the broad array of financial services that they require. Our portfolio of loans is diversified by borrower, industry, and geographic area. At December 31 for each of the past three years, the loan portfolio consisted mainly of shorter-term outstandings, with over 45% of total loans maturing within one year and over 85% maturing within five years. Commitments to extend credit Commitments to extend credit are conditional contracts to lend money to a client in the future under specific terms. A majority of, and increases in, J.P. Morgan's commitments during the past three years relate to those issued to support clients' commercial paper programs. Standby letters of credit and guarantees Standbys are unconditional contracts issued to support clients' obligations to third parties, the beneficiaries. In the event a client fails to perform a contractual obligation, payment is made to the beneficiary upon demand. The client is required to reimburse J.P. Morgan for any payment made in connection with the standbys. The following table provides the contractual amount of commitments to extend credit and standby letters of credit and guarantees and a maturity profile of such instruments by contractual maturity for 1996.
After one Within year but More one within than five Total In billions: December 31 year five years 1996 1995 1994 ------------------------------------------------------------------------------------------------------------ Contractual amount: Commitments to extend credit ........ $ 18.4 $ 38.1 $ 8.2 $ 64.7 $ 55.1 $ 44.6 Standby letters of credit and guarantees ....... 7.4 5.0 1.5 13.9 11.7 9.9 ------------------------------------------------------------------------------------------------------------
For financial reporting purposes, beginning December 31, 1996, a portion of the aggregate allowance for credit losses amounting to $200 million has been reclassified to Other liabilities, related to undertakings to extend credit that are not currently reflected on the balance sheet. This amount had previously been reported as a reduction of loans in the consolidated balance sheet. Refer to page 28 for a detailed discussion of the aggregate allowance for credit losses. Securities lending indemnifications Securities lending indemnifications are contractual obligations under which J.P. Morgan guarantees that a third party lender of securities will be protected against a borrower's failure to return such securities. J.P. Morgan, acting as agent, receives from the borrower collateral, in the form of cash, securities, or letters of credit, that generally equals the market value of the securities borrowed plus some specified margin. The borrowers of these securities are mainly nonbank financial institutions. Generally, securities are lent for an average period of less than 30 days. The contractual amount of securities lending indemnifications declined from the levels in 1994 as a result of the sale of the firm's custody businesses in 1995.
In billions: December 31 1996 1995 1994 ----------------------------------------------------------------------- Contractual amount ..... $ 5.5 $ 5.4 $19.5 -----------------------------------------------------------------------
At December 31, 1996, 1995, and 1994, J.P. Morgan held cash and other collateral in support of securities lending indemnifications. 25 28 INVESTMENT SECURITIES REVENUE Investment securities revenue includes gains and losses on debt and equity investment securities, other-than-temporary impairments in value, and related dividend income. In 1996, 1995, and 1994, investment securities revenue was $303 million, $517 million, and $751 million respectively. Net gains from positions associated with our Equity Investments activities were $269 million, $485 million, and $606 million in 1996, 1995, and 1994 respectively. These gains are primarily related to the recognition of the firm's equity investment in Columbia/HCA Healthcare Corporation. Investment securities revenue also includes net realized gains of $17 million in 1996, $21 million in 1995, and $122 million in 1994, primarily related to the sale of foreign and U.S. government agency securities acquired in connection with our Proprietary Investing and Trading activities and held in the debt investment securities available-for-sale portfolio. OTHER REVENUE Other revenue includes hedge gains and losses from the management of nontrading foreign currency exposures, earnings from equity in affiliates, and the results of certain other transactions. Other revenue of $195 million in 1996 included a gain of $77 million from a partial sale of a minority investment and $52 million of foreign currency hedging gains. Other revenue of $142 million in 1995 included a net gain of $40 million on the sales of the firm's global and local custody and U.S. commercial paper issuing and paying agency businesses. Other revenue of $65 million in 1994 included $54 million related to a gain on the sale of our domestic corporate trust business and $56 million of foreign currency hedging losses. OPERATING EXPENSES
In millions 1996 1995 1994 ----------------------------------------------------------------------- Employee compensation and benefits..... $2 884 $2 498 $2 217 Net occupancy ......................... 296 322 275 Technology and communications ......... 785 671 645 Other expenses ........................ 558 507 555 ----------------------------------------------------------------------- Total operating expenses .............. 4 523 3 998 3 692 -----------------------------------------------------------------------
J.P. Morgan's strategy for expense management is critical to the firm's goal of maximizing long-term profitability. This strategy focuses on making disciplined investments and ensuring maximum efficiency in, as well as accountability for, existing activities. As part of this strategy, we review our business activities regularly to ensure that they are valued by clients and are areas where we can achieve competitive distinction. As part of J.P. Morgan's expense management focus, we entered into an agreement in July 1996 with a consortium of firms to form the Pinnacle Alliance (Alliance) to manage parts of the firm's global technology infrastructure, representing approximately one-third of our $1.0 billion total technology and communications expenditures. The Alliance expands our access to world-class technological resources and provides flexibility in meeting changing business needs. Other ongoing expense initiatives include redesigning our European branch network and processing operations, optimizing the firm's process for procuring and managing required resources, and responding to the technological challenges presented by the year 2000 and the anticipated formation of the European Monetary Union. Total operating expenses increased 13% to $4,523 million in 1996, as we continued to allocate resources to areas of strategic importance, including investment banking, equities, asset management, and private client activities, which more than offset the reduction in expenses resulting from the exit from the custody and cash processing businesses. In 1995, total operating expenses increased 8% to $3,998 million as compared with 1994. Employee compensation and benefits Employee compensation and benefits, which represented 64% of total operating expenses in 1996, is composed of salaries, incentive compensation, and benefits. An essential component of our success is the ability to hire and retain the most competent and highly skilled professionals. In this regard, we compensate 26 29 employees in accordance with their performance and that of the firm. A significant component and an increasing proportion of the firm's senior officers' compensation is tied to the firm's results, with a portion paid in restricted stock in order to align compensation with longer-term shareholder returns. Employee compensation and benefits expense increased 15% in 1996 compared with 1995. Excluding the 1995 severance-related charge of $55 million and expenses associated with the exited custody and cash processing businesses, employee compensation and benefits expense increased 21%. The increase was a result of higher incentive compensation - attributable to higher earnings, the increasing proportion of revenue earned in client business areas, and more competitive market conditions. At December 31, 1996, the total number of staff was 15,527, as compared with 15,613 employees at December 31, 1995, and 17,055 employees at December 31, 1994. The decline in 1996 was primarily the result of the transfer of employees to Alliance firms as discussed below, offset by new hires in areas of strategic importance. Employee compensation and benefits expense in 1995, excluding the $55 million severance-related charge, increased 10% compared with 1994. The increase was primarily due to higher incentive compensation linked to improved earnings over 1994, and higher salary expense reflecting the full-year impact of the 1994 growth in staff levels. Net occupancy Net occupancy decreased 8% to $296 million in 1996 compared with 1995, reflecting the rationalization of the firm's space requirements concurrent with the sale of our custody and cash processing businesses. In 1995, net occupancy increased 17% to $322 million compared with 1994, reflecting the full-year impact of expansions in prior years. Technology and communications Reported technology and communications expense includes all costs associated with operating and enhancing the firm's global technology capabilities, such as consulting, equipment, software, market information costs, and fees paid to the Alliance. J.P. Morgan completed the Alliance agreement with the goal of achieving an aggregate savings over the seven-year life of the agreement of approximately 15% on projected technology costs associated with activities now managed by the Alliance - approximately one-third of total technology and communications spending - including a $71 million technology-related special charge incurred in 1996. The special charge recorded in the third quarter 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. Approximately 700 employees in areas covered by the agreement were transferred to Alliance firms. Such employee costs, previously reflected in employee compensation and benefits, are now reflected in payments to the Alliance and are included in technology and communications expense. Reported technology and communications expense increased 17% during 1996 to $785 million. Excluding the 1996 technology-related special charge and expenses associated with the custody and cash processing businesses, technology and communications expense increased 12%. The increase is due to higher levels of business activity and the firm's expansion of its investment banking, equities, asset management, and private client activities, as well as the inclusion of costs associated with employees transferred to the Alliance beginning in July. In 1995, reported technology and communications expense increased 4% from 1994, as a result of higher depreciation and increased use of external resources and market information services. Excluding the special charge, total technology and communications spending, which includes other technology-related costs, primarily employee compensation and benefits, was $1,045 million in 1996, $1,040 million in 1995, and $984 million in 1994. Spending on total technology and communications was essentially flat in 1996 as compared to 1995, due to an increase in business activity which was offset by the reduction in spending related to the exited custody and cash processing businesses. Other expenses Other expenses include professional fees, costs for outside services, travel, brokerage fees, taxes other than income taxes, and training costs. 27 30 Other expenses increased 10% in 1996 on a reported basis, or 22% excluding expenses associated with the custody and cash processing businesses. The increase reflects higher professional fees, travel-related expenses, and costs incurred for outside services, including advertising fees and employment agency fees, reflecting increased business activity. The 9% decrease in other expenses in 1995 compared with 1994 was primarily due to a reduction in travel-related expenses and in costs incurred for outside services, including advertising and promotion fees and employment agency fees. INCOME TAXES Income tax expense of $758 million in 1996 increased $148 million from 1995, reflecting an increase in pretax income and a higher effective tax rate. Income tax expense was unchanged at $610 million in 1995 compared with 1994, reflecting an increase in pretax income, offset by a lower effective tax rate. The effective tax rates for 1996, 1995, and 1994 were 32.5%, 32.0%, and 33.4% respectively. AGGREGATE ALLOWANCE FOR CREDIT LOSSES Credit risk arises from the possibility that counterparties may default on their obligations to the firm. Given the global and diversified nature of our activities, these obligations may arise from our lending activities, from the extension of credit in our trading and investment activities, and from our participation in payment and securities transactions on our own behalf and as agent for our clients. J.P. Morgan maintains an aggregate allowance for credit losses to absorb losses inherent in the existing portfolios of loans and other undertakings to extend credit, such as 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. Prior to December 31, 1996, the aggregate allowance for credit losses was displayed in the consolidated balance sheet as a reduction of the carrying value of loans. For financial statement reporting purposes, beginning December 31, 1996, in accordance with the American Institute of Certified Public Accountants Banks and Savings Institutions Audit Guide, while we consider it in the aggregate, the total allowance of $1,116 million has been apportioned and displayed as follows: $566 million as a reduction of loans, $350 million as a reduction of trading account assets relating to derivatives, and $200 million as other liabilities related to undertakings to extend credit that are not currently reflected on the balance sheet, such as standby letters of credit, guarantees, and commitments. Given the global and diversified nature of our business, expected shifts in the relative level of credit risk among financial instruments, and the numerous estimates and assumptions necessary to derive such allocated amounts, it is expected that portions of the aggregate allowance may be reclassified from time to time. Prior period amounts have not been reclassified. An analysis of the aggregate allowance for credit losses is presented in the following table.
In millions 1996 1995 1994 ------------------------------------------------------------------- Balance, January 1 .............. $1 130 $1 131 $1 157 Recoveries ...................... 25 54 45 Charge-offs: Commercial and industrial..... (30) (39) (37) Restructuring countries ...... -- -- (18) Other ........................ (9) (16) (17) ------------------------------------------------------------------- Net charge-offs ................. (14) (1) (27) Translation adjustment .......... -- -- 1 ------------------------------------------------------------------- Balance, December 31 ............ 1 116 1 130 1 131 -------------------------------------------------------------------
28 31 No provision for credit losses was deemed necessary in 1996, 1995, or 1994. In assessing the probability of losses that have not yet been identified and the adequacy of the aggregate allowance, we have taken into consideration economic conditions; regulatory requirements; our historical experience; concentrations of risk by country, industry, product, and client; and the relatively large size of many of our credit exposures given our wholesale banking orientation. Charge-offs in 1996, 1995, and 1994 were $39 million, $55 million, and $72 million respectively, related to relatively few borrowers primarily in the U.S., and were diversified by industry. NONPERFORMING ASSETS Total nonperforming assets, net of charge-offs, are presented in the following table:
In millions: December 31 1996 1995 1994 ---------------------------------------------------------------- Impaired loans: Commercial and industrial $ 89 $ 67 $136 Other ................... 29 48 81 ---------------------------------------------------------------- 118 115 217 Restructuring countries .... 2 2 2 ---------------------------------------------------------------- Total impaired loans ....... 120 117 219 Other nonperforming assets . -- 1 1 ---------------------------------------------------------------- Total nonperforming assets . 120 118 220 ----------------------------------------------------------------
Impaired loans remained essentially flat in 1996, as commercial and industrial new classifications were offset by repayments and charge-offs. Impaired loans declined $102 million during 1995 as new classifications were more than offset by loan repayments, loan sales, and charge-offs. SOURCES OF FUNDS J.P. Morgan's strong capital base and international presence have allowed us to develop a global funding base consisting of a variety of sources. As a result, J.P. Morgan is able to limit its dependence on any individual source and choose the funding instruments that best meet management's strategies. Our sources include interest-bearing and noninterest-bearing deposits, commercial paper, bank notes, federal funds purchased, long-term debt, capital securities, and stockholders' equity. Other important sources of funding are trading account liabilities and repurchase agreements, which are presented in the Trading-related assets and liabilities section of the Financial review. In determining the most appropriate funding source at a particular point in time, management considers market conditions, prevailing interest rates, liquidity needs, and our desired maturity profile.
In billions: Average balances 1996 1995 1994 --------------------------------------------------------------------------------- Interest-bearing deposits .......... $ 49.1 $ 43.8 $ 39.9 Noninterest-bearing deposits ....... 3.0 4.7 5.2 Commercial paper ................... 4.1 2.8 4.2 Other liabilities for borrowed money 16.4 12.1 10.3 ---------------------------------------------------------------------------------
Interest-bearing deposits are short-term in nature and central to our operations. Noninterest-bearing deposits are mainly composed of items in the process of collection and clients' compensating balances placed with us in lieu of fees for certain services. Other liabilities for borrowed money primarily include bank notes, term federal funds purchased, and other short-term borrowings. 29 32 Long-term debt
In billions: December 31 1996 1995 1994 ------------------------------------------------------------------------------------------------ Long-term debt qualifying as risk-based capital ... $ 3.7 $ 3.6 $ 3.2 Long-term debt not qualifying as risk-based capital 9.4 5.7 3.6 ------------------------------------------------------------------------------------------------ Total long-term debt .............................. 13.1 9.3 6.8 ------------------------------------------------------------------------------------------------
In 1996, favorable market conditions allowed us to increase our activity in the term markets, particularly in non-U.S. dollar markets and the domestic medium-term note market, resulting in the issuance of $5.3 billion of long-term debt, of which approximately $260 million qualified as risk-based capital. Offsetting the additions to long-term debt were approximately $1.2 billion of maturities during 1996 and early redemptions at par of $264 million of debt. In 1995, we issued $3.8 billion of long-term debt, of which approximately $695 million qualified as risk-based capital. Offsetting the additions to long-term debt were approximately $511 million of maturities during 1995 and early redemptions at par of $800 million of debt. Other capital securities In November 1996, JPM Capital Trust I, a wholly owned subsidiary of J.P. Morgan, issued $750 million of 7.54% Trust Preferred Securities qualifying as tier 1 risk-based capital under the Board of Governors of the Federal Reserve System (Federal Reserve Board) guidelines. In January 1997, JPM Capital Trust II, a wholly owned subsidiary of J.P. Morgan, issued $400 million of 7.95% Trust Preferred Securities qualifying as tier 1 risk-based capital. STOCKHOLDERS' EQUITY
In billions: December 31 1996 1995 1994 -------------------------------------------------------------------------------------------- Common stockholders' equity ................. $ 10.7 $ 10.0 $ 9.1 Total stockholders' equity .................. 11.4 10.5 9.6 -------------------------------------------------------------------------------------------- Total stockholders' equity to year-end assets 5.2% 5.7% 6.2% --------------------------------------------------------------------------------------------
Common and total stockholders' equity increased in 1996 due to the retention of earnings in excess of common and preferred dividends. In addition, total stockholders' equity was increased by the issuance of preferred stock. These increases were offset in part by lower unrealized gains on investment securities, net of taxes. Common and total stockholders' equity increased in 1995 due primarily to the retention of earnings in excess of common and preferred dividends and higher unrealized gains on investment securities, net of taxes. The ratio of total stockholders' equity to year-end assets decreased in 1996 and 1995 primarily as a result of the growth of $37 billion and $30 billion in year-end assets respectively. In February 1996, J.P. Morgan issued $200 million of perpetual 6 5/8% cumulative preferred stock, series H, with a stated value of $500 per share. These shares are represented by 4 million depositary shares with a stated value of $50 per share, each representing one-tenth of a preferred share. During 1996, 1995, and 1994, the firm purchased approximately 7 million, 4 million, and 7 million shares respectively of common stock to reduce the dilutive impact on earnings per share of the firm's employee benefit plans. In December 1996, the Board of Directors approved the purchase of up to 7 million additional shares of J.P. Morgan common stock for the same purpose. These shares may be purchased periodically in 1997 or beyond in the open market or through privately negotiated transactions. Additionally, in December 1996, the Board of Directors approved the purchase of up to $750 million of J.P. Morgan common stock in the open market or through privately negotiated transactions. This stock repurchase, which is expected to be completed in 1997, will be funded principally with proceeds from the issuance of $750 million of 7.54% Trust Preferred Securities as discussed above in the Sources of funds section. 30 33 CAPITAL STRENGTH J.P. Morgan and its subsidiaries, as well as certain foreign branches of its bank subsidiary, Morgan Guaranty Trust Company of New York (Morgan Guaranty), are subject to the capital adequacy rules of several U.S. and foreign regulators. The Federal Reserve Board, J.P. Morgan's primary regulator, establishes minimum capital requirements for the consolidated bank holding company as well as for certain of its subsidiaries, including Morgan Guaranty. The Federal Reserve Board has risk-based capital guidelines for evaluating the capital adequacy of bank holding companies and banks. In addition, guidelines for a leverage ratio designed to complement the risk-based capital ratios have been established. A bank holding company and bank are considered "well capitalized" if certain minimum risk-based capital and leverage ratios are maintained. The capital of J.P. Morgan and its principal subsidiaries exceeded the minimum standards set by each regulator at December 31, 1996. Further, the capital ratios of J.P. Morgan and Morgan Guaranty exceeded the minimum standards for a "well capitalized" bank holding company and bank respectively at December 31, 1996. Capital strength of J.P. Morgan and Morgan Guaranty J.P. Morgan's risk-based capital and leverage ratios at December 31 were as follows.
1996 1995 -------------------------------------------------------------- Tier 1 capital ............. 8.8% 8.8% Total risk-based capital ... 12.2 13.0 -------------------------------------------------------------- Leverage ................... 5.9 6.1 --------------------------------------------------------------
In accordance with Federal Reserve Board guidelines, the risk-based capital and leverage ratios provided exclude the equity, assets, and off-balance sheet exposures of J.P. Morgan Securities Inc., and the effect of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Morgan Guaranty's risk-based capital and leverage ratios at December 31, calculated in accordance with bank regulatory accounting principles, were as follows.
1996 1995 ------------------------------------------------------------- Tier 1 capital ......... 8.2% 8.6% Total risk-based capital 11.5 11.2 ------------------------------------------------------------- Leverage ............... 5.3 5.7 -------------------------------------------------------------
In accordance with Federal Reserve Board guidelines, the risk-based capital and leverage ratios provided exclude the effect of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Prior period ratios were restated to reflect the merger of J.P. Morgan Delaware with Morgan Guaranty Trust Company of New York effective June 1996. Risk-based capital The following table presents the components of J.P. Morgan's risk-based capital at December 31.
In millions 1996 1995 1994 ------------------------------------------------------------------------------------------------------------------ Common stockholders' equity .............................. $10 276 $9 393 $8 620 Adjustable and fixed rate cumulative preferred stock ..... 444 244 244 Company-obligated mandatorily redeemable preferred securities of subsidiary .................... 750 -- -- Less: investments in certain subsidiaries and goodwill (a) 597 604 599 ------------------------------------------------------------------------------------------------------------------ Tier 1 capital ........................................... 10 873 9 033 8 265 ------------------------------------------------------------------------------------------------------------------ Variable cumulative preferred stock ...................... 248 248 248 Long-term debt qualifying as risk-based capital .......... 3 692 3 590 3 227 Qualifying aggregate allowance for credit losses ......... 1 097 1 130 1 079 Less: investments in certain subsidiaries (a) ............ 765 603 598 ------------------------------------------------------------------------------------------------------------------ Tier 2 capital ........................................... 4 272 4 365 3 956 ------------------------------------------------------------------------------------------------------------------ Total risk-based capital ................................. 15 145 13 398 12 221 ------------------------------------------------------------------------------------------------------------------
(a) In accordance with Federal Reserve Board guidelines, certain portions of our investments in certain subsidiaries (principally J.P. Morgan Securities Inc.) are deducted from both tier 1 and tier 2 capital. 31 34 Risk-adjusted assets J.P. Morgan's risk-adjusted assets, excluding the assets and off-balance-sheet exposures of JPMSI, were $123.9 billion, $103.1 billion and $86.2 billion as of December 31, 1996, 1995, and 1994, respectively. Additional information is provided in the Risk-adjusted assets section of Capital and funding analysis. New risk-based capital market risk measure The current risk-based capital guidelines require that capital be maintained for both balance sheet assets and off-balance-sheet exposures in accordance with their level of credit risk as defined by the Federal Reserve Board; however, currently they do not explicitly consider other risks, including liquidity, interest rate, and other market risks. In August 1996, the Federal Reserve Board issued a final rule, which amends the risk-based capital guidelines by incorporating a measure of market risk into the existing risk-based capital framework. The new rule is based on an amendment to the Basle Capital Accord that requires banking institutions with significant trading activity to measure and hold capital in support of their exposure to market risk. Under the new standard, risk-based capital ratios will take into account both the general market risk and specific risk of their debt and equity trading portfolios, and the general market risk associated with all trading and nontrading foreign exchange and commodity positions. A firm will be required to measure its exposure to market risk using internal models used to measure its daily value at risk, subject to regulatory approval that the internal models and risk management processes of the firm satisfy the rule's requirements. Internal model assumptions must be modified to conform with confidence levels and other assumptions specified by regulations. Upon adoption of the risk-based capital market risk measure, risk-based capital ratio requirements will be applied to J.P. Morgan, including J.P. Morgan Securities Inc. and Morgan Guaranty. In addition, the minimum leverage ratio for a bank holding company that is required to retain a "well capitalized" status will be reduced from 4% to 3%. Firms are required to adopt the risk-based capital market risk measure beginning no later than January 1, 1998, with earlier adoption permitted throughout 1997. Management believes that both J.P. Morgan and Morgan Guaranty will continue to exceed the minimum standards for a "well capitalized" bank holding company and bank respectively after adoption of the risk-based capital market risk measure. ACCOUNTING DEVELOPMENTS Accounting for Transfers of Assets and Servicing of Financial Assets and Extinguishments of Liabilities In 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers of Assets and Servicing of Financial Assets and Extinguishments of Liabilities, which provides new accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, and extinguishments of liabilities. The provisions of the Statement are to be applied to transfers of assets, servicing rights, and extinguishments of liabilities occurring after December 31, 1996, except for transfers involving repurchase agreements, securities borrowing/lending transactions, and financial assets provided as collateral. For these transactions, the Statement will be applied to transfers occurring after December 31, 1997. The adoption of this standard is expected to have no material impact on J.P. Morgan's consolidated financial statements for the year ending December 31, 1997. The firm is currently evaluating the impact of the new standard for the year ending December 31, 1998. 32 35 RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements in this Annual report were prepared by the management of J.P. Morgan. In doing so, management applied generally accepted accounting principles and also exercised its judgment and made estimates in those instances where they were deemed appropriate. Other financial information that is included in the Annual report is consistent with that of the consolidated financial statements. In discharging its responsibility both for the integrity and fairness of these statements and information, and for the examination of the accounting systems from which they are derived, management maintains a system of internal control designed to provide reasonable assurance, weighing the costs with the benefits sought, that transactions are executed in accordance with management's authorization, assets are safeguarded, and proper records are maintained. An important element in management's effort to establish a reliable control environment is the careful selection, training, and development of professional personnel, including internal auditors. Management believes that the system of internal control, which is subject to close scrutiny by management and by internal auditors and is revised as considered necessary, supports the integrity and reliability of the consolidated financial statements. Further, the independent accountants perform a study and evaluation of the system of internal accounting control for the purpose of expressing an opinion on the consolidated financial statements of J.P. Morgan. The Board of Directors of J.P. Morgan appoints an Audit Committee responsible for monitoring the accounting practices and internal controls of the company. The Committee, whose membership consists of directors who are not officers or employees of J.P. Morgan, meets periodically with members of the internal auditing staff to discuss the nature and scope of their work and to review such reports and other matters as the Committee deems necessary. The Committee also recommends to the Board of Directors the engagement of an independent accounting firm and meets with representatives of that firm to discuss the examination of the consolidated financial statements as well as other auditing and financial reporting matters. Both the internal auditors and the independent accountants are given access to the Audit Committee at any time to discuss privately matters they believe may be of significance. In addition, J.P. Morgan is examined periodically by examiners from the Federal Reserve System, State of New York Banking Department, and other regulatory agencies. The Board of Directors and management consider reports that arise from such examinations. Douglas A. Warner III John A. Mayer Jr. Chairman of the Board Chief Financial Officer 33 36 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of J.P. Morgan & Co. Incorporated We have audited the accompanying consolidated balance sheet of J.P. Morgan & Co. Incorporated ("J.P. Morgan") and its subsidiaries as of December 31, 1996 and 1995, the related consolidated statements of income, of changes in stockholders' equity, and of cash flows for each of the three years in the period ended December 31, 1996, and the consolidated statement of condition of Morgan Guaranty Trust Company of New York and its subsidiaries as of December 31, 1996 and 1995. These financial statements are the responsibility of J.P. Morgan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the financial position of J.P. Morgan and its subsidiaries at December 31, 1996 and 1995, the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, and the financial position of Morgan Guaranty Trust Company of New York and its subsidiaries at December 31, 1996 and 1995, in conformity with generally accepted accounting principles. PRICE WATERHOUSE LLP New York, New York January 8, 1997 34 37 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated
In millions, except per share data 1996 1995 1994 - ----------------------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue............................. $10 713 $9 937 $8 379 Interest expense............................. 9 011 7 934 6 398 - ----------------------------------------------------------------------------------------------- Net interest revenue......................... 1 702 2 003 1 981 NONINTEREST REVENUES Trading revenue.............................. 2 477 1 376 1 019 Investment banking revenue................... 921 584 434 Investment management revenue................ 675 574 517 Fees and commissions......................... 582 708 750 Investment securities revenue................ 303 517 751 Other revenue................................ 195 142 65 - ----------------------------------------------------------------------------------------------- Total noninterest revenues................... 5 153 3 901 3 536 OPERATING EXPENSES Employee compensation and benefits........... 2 884 2 498 2 217 Net occupancy................................ 296 322 275 Technology and communications................ 785 671 645 Other expenses............................... 558 507 555 - ----------------------------------------------------------------------------------------------- Total operating expenses..................... 4 523 3 998 3 692 - ----------------------------------------------------------------------------------------------- Income before income taxes................... 2 332 1 906 1 825 Income taxes................................. 758 610 610 - ----------------------------------------------------------------------------------------------- Net income................................... 1 574 1 296 1 215 - ----------------------------------------------------------------------------------------------- PER COMMON SHARE Net income (a)............................... $ 7.63 $ 6.42 $ 6.02 Dividends declared........................... 3.31 3.06 2.79 - -----------------------------------------------------------------------------------------------
(a) Earnings per share amounts for 1996 and 1995 represent primary earnings per share. For 1996 and 1995, fully diluted earnings per share were $7.56 and $6.36 respectively. Earnings per share for 1994 represent both primary and fully diluted earnings per share. The accompanying notes are an integral part of these consolidated financial statements. 35 38 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated
December 31 ---------------------- Dollars in millions 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks ........................................................................... $ 906 $ 1 535 Interest-earning deposits with banks .............................................................. 1 908 1 986 Debt investment securities available-for-sale carried at fair value (Cost: $24 610 at 1996 and $24 154 at 1995) ........................................................................... 24 865 24 638 Trading account assets, net of allowance for credit losses of $350 at 1996 ........................ 90 980 69 408 Securities purchased under agreements to resell ($32 455 at 1996 and $32 157 at 1995) and federal funds sold .................................................... 32 505 32 157 Securities borrowed ............................................................................... 27 931 19 830 Loans, net of allowance for credit losses of $566 at 1996 and $1 130 at 1995 ...................... 27 554 22 323 Customers' acceptance liability ................................................................... 212 237 Accrued interest and accounts receivable .......................................................... 3 789 3 539 Premises and equipment, net ....................................................................... 1 865 1 927 Other assets ...................................................................................... 9 511 7 299 - ----------------------------------------------------------------------------------------------------------------------------- Total assets ...................................................................................... 222 026 184 879 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits: In offices in the U.S. ......................................................................... 1 501 3 287 In offices outside the U.S. .................................................................... 708 744 Interest-bearing deposits: In offices in the U.S. ......................................................................... 7 103 2 003 In offices outside the U.S. .................................................................... 43 412 40 404 - ----------------------------------------------------------------------------------------------------------------------------- Total deposits .................................................................................... 52 724 46 438 Trading account liabilities ....................................................................... 50 919 45 289 Securities sold under agreements to repurchase ($56 117 at 1996 and $40 803 at 1995) and federal funds purchased ................................................... 61 429 45 099 Commercial paper .................................................................................. 4 132 2 801 Other liabilities for borrowed money .............................................................. 19 948 15 129 Accounts payable and accrued expenses ............................................................. 5 935 5 643 Liability on acceptances .......................................................................... 212 237 Long-term debt not qualifying as risk-based capital ............................................... 9 411 5 737 Other liabilities, including allowance for credit losses of $200 at 1996 .......................... 1 442 4 465 - ----------------------------------------------------------------------------------------------------------------------------- 206 152 170 838 Long-term debt qualifying as risk-based capital ................................................... 3 692 3 590 Company-obligated mandatorily redeemable preferred securities of subsidiary ....................... 750 -- - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities ................................................................................. 210 594 174 428 Commitments and contingencies (Notes 9, 18, 19, 20, and 23) STOCKHOLDERS' EQUITY Preferred stock ................................................................................... 694 494 Common stock, $2.50 par value (authorized shares: 500 000 000; issued: 200 688 123 at 1996 and 200 678 373 at 1995) ........................................... 502 502 Capital surplus ................................................................................... 1 446 1 430 Retained earnings ................................................................................. 8 635 7 731 Net unrealized gains on investment securities, net of taxes ....................................... 464 566 Other ............................................................................................. 826 552 - ----------------------------------------------------------------------------------------------------------------------------- 12 567 11 275 Less: treasury stock (15 765 455 shares at 1996 and 13 562 755 shares at 1995) at cost ............ 1 135 824 - ----------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity ........................................................................ 11 432 10 451 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity ........................................................ 222 026 184 879 - -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 36 39 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated
In millions 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ PREFERRED STOCK Adjustable rate cumulative preferred stock balance, January 1 and December 31 .... $ 244 $ 244 $ 244 Variable cumulative preferred stock balance, January 1 and December 31 ........... 250 250 250 Fixed cumulative preferred stock: Balance, January 1 ............................................................ -- -- -- Shares issued ................................................................. 200 -- -- - ------------------------------------------------------------------------------------------------------------------------ Total preferred stock, December 31 ............................................... 694 494 494 - ------------------------------------------------------------------------------------------------------------------------ COMMON STOCK Balance, January 1 ............................................................... 502 502 499 Shares issued or distributed under dividend reinvestment plan, various employee benefit plans, and conversion of debentures .................. -- -- 3 - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31 ............................................................. 502 502 502 - ------------------------------------------------------------------------------------------------------------------------ CAPITAL SURPLUS Balance, January 1 ............................................................... 1 430 1 452 1 393 Shares issued under dividend reinvestment plan, various employee benefit plans, and conversion of debentures and income tax benefits associated with stock options ........................................ 16 (22) 59 - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31 ............................................................. 1 446 1 430 1 452 - ------------------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance, January 1 ............................................................... 7 731 7 044 6 386 Net income ....................................................................... 1 574 1 296 1 215 Dividends declared on adjustable rate cumulative preferred stock ................. (12) (12) (12) Dividends declared on variable cumulative preferred stock ........................ (9) (12) (8) Dividends declared on fixed cumulative preferred stock ........................... (12) -- -- Dividends declared on common stock ............................................... (617) (574) (530) Dividend equivalents on common stock issuable .................................... (20) (11) (7) - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31 ............................................................. 8 635 7 731 7 044 - ------------------------------------------------------------------------------------------------------------------------ NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES Balance, January 1 ............................................................... 566 456 1 165 Net change in unrealized gains, net of taxes ..................................... (102) 110 (709) - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31 ............................................................. 464 566 456 - ------------------------------------------------------------------------------------------------------------------------ OTHER COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS Balance, January 1 ............................................................... 556 369 253 Deferred stock awards, net ....................................................... 282 187 116 - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31 ............................................................. 838 556 369 - ------------------------------------------------------------------------------------------------------------------------ FOREIGN CURRENCY TRANSLATION Balance, January 1 ............................................................... (4) (2) (3) Translation adjustments .......................................................... (14) (3) 2 Income tax benefit (expense) ..................................................... 6 1 (1) - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31 ............................................................. (12) (4) (2) - ------------------------------------------------------------------------------------------------------------------------ Total other, December 31 ......................................................... 826 552 367 - ------------------------------------------------------------------------------------------------------------------------ LESS: TREASURY STOCK Balance, January 1 ............................................................... 824 747 328 Purchases ........................................................................ 604 293 444 Shares distributed under various employee benefit plans .......................... (293) (216) (25) - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31 ............................................................. 1 135 824 747 - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity, December 31 .......................................... 11 432 10 451 9 568 - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 37 40 CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated
In millions 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME ................................................................. $ 1 574 $ 1 296 $ 1 215 Adjustments to reconcile to cash provided by (used in) operating activities: Noncash items: depreciation, amortization, deferred income taxes, stock award plans, and write-downs on investment securities .......... 1 055 598 390 (Increase) decrease in assets: Trading account assets ............................................... (21 919) (12 271) (15 772) Securities purchased under agreements to resell ...................... (297) (10 974) 1 461 Securities borrowed .................................................. (8 101) (7 703) (1 309) Accrued interest and accounts receivable ............................. (250) 1 489 (92) Increase (decrease) in liabilities: Trading account liabilities .......................................... 5 632 8 937 18 151 Securities sold under agreements to repurchase ....................... 15 314 10 637 (6 140) Accounts payable and accrued expenses ................................ 17 (788) 342 Other changes in operating assets and liabilities, net .................. (6 360) 6 655 (1 881) Net investment securities gains included in cash flows from investing activities ................................................. (294) (539) (747) - ----------------------------------------------------------------------------------------------------------------------- CASH USED IN OPERATING ACTIVITIES .......................................... (13 629) (2 663) (4 382) - ----------------------------------------------------------------------------------------------------------------------- (Increase) decrease in interest-earning deposits with banks ................ 78 (622) (142) Debt investment securities: Proceeds from sales ..................................................... 29 754 42 262 51 091 Proceeds from maturities, calls, and mandatory redemptions .............. 6 831 3 916 3 705 Purchases ............................................................... (36 923) (46 419) (59 062) (Increase) decrease in federal funds sold .................................. (50) 180 (119) (Increase) decrease in loans ............................................... (4 666) (1 375) 2 209 Payments for premises and equipment ........................................ (183) (237) (341) Other changes, net ......................................................... 180 (1 064) (493) - ----------------------------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES .......................................... (4 979) (3 359) (3 152) - ----------------------------------------------------------------------------------------------------------------------- (Decrease) in noninterest-bearing deposits ................................. (1 822) (428) (1 061) Increase in interest-bearing deposits ...................................... 8 109 3 820 3 703 Increase (decrease) in federal funds purchased ............................. 1 016 (1 293) 2 483 Increase (decrease) in commercial paper .................................... 1 331 (706) 934 Other liabilities for borrowed money proceeds .............................. 29 455 23 864 7 946 Other liabilities for borrowed money payments .............................. (26 222) (18 240) (8 128) Long-term debt proceeds .................................................... 5 288 3 808 2 342 Long-term debt payments .................................................... (1 426) (1 399) (879) Proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary .......................... 750 -- -- Capital stock issued or distributed ........................................ 424 143 61 Capital stock purchased .................................................... (604) (293) (445) Dividends paid ............................................................. (643) (583) (541) Other changes, net ......................................................... 2 319 (3 351) 2 297 - ----------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES ...................................... 17 975 5 342 8 712 - ----------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and due from banks ................. 4 5 24 - ----------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and due from banks ............................. (629) (675) 1 202 Cash and due from banks, beginning of year ................................. 1 535 2 210 1 008 - ----------------------------------------------------------------------------------------------------------------------- Cash and due from banks, end of year ....................................... 906 1 535 2 210 - ----------------------------------------------------------------------------------------------------------------------- Cash disbursements made for: Interest ................................................................ $ 8 898 $ 7 568 $ 6 178 Income taxes ............................................................ 748 560 1 223 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 38 41 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York
December 31 ---------------------- Dollars in millions 1996 1995 - ----------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks ........................................................ $ 920 $ 1 429 Interest-earning deposits with banks ........................................... 1 910 1 995 Debt investment securities available-for-sale carried at fair value ............ 23 510 23 767 Trading account assets, net of allowance for credit losses of $350 at 1996 ..... 72 549 55 373 Securities purchased under agreements to resell and federal funds sold ......... 27 762 20 996 Loans, net of allowance for credit losses of $565 at 1996 and $1 129 at 1995 ... 27 378 22 190 Customers' acceptance liability ................................................ 212 237 Accrued interest and accounts receivable ....................................... 3 470 3 420 Premises and equipment, net of accumulated depreciation of $1 116 at 1996 and $1 232 at 1995 ........................................... 1 696 1 735 Other assets ................................................................... 5 406 4 571 - ----------------------------------------------------------------------------------------------------------- Total assets ................................................................... 164 813 135 713 - ----------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits: In offices in the U.S. ...................................................... 1 495 3 275 In offices outside the U.S. ................................................. 749 839 Interest-bearing deposits: In offices in the U.S. ...................................................... 7 114 1 975 In offices outside the U.S. ................................................. 43 716 40 985 - ----------------------------------------------------------------------------------------------------------- Total deposits ................................................................. 53 074 47 074 Trading account liabilities .................................................... 44 039 39 197 Securities sold under agreements to repurchase and federal funds purchased ..... 30 787 20 274 Other liabilities for borrowed money ........................................... 13 215 8 509 Accounts payable and accrued expenses .......................................... 4 203 4 187 Liability on acceptances ....................................................... 212 237 Long-term debt not qualifying as risk-based capital (includes $942 at 1996 and $478 at 1995 of notes payable to J.P. Morgan) ............................... 5 436 2 846 Other liabilities, includes allowance for credit losses of $200 at 1996 ........ 977 2 805 - ----------------------------------------------------------------------------------------------------------- 151 943 125 129 Long-term debt qualifying as risk-based capital (includes $2 780 at 1996 and $1 400 at 1995 of notes payable to J.P. Morgan) ......................... 2 979 1 599 - ----------------------------------------------------------------------------------------------------------- Total liabilities .............................................................. 154 922 126 728 Commitments and contingencies STOCKHOLDER'S EQUITY Preferred stock, $100 par value (authorized shares: 2 500 000) ................. -- -- Common stock, $25 par value (authorized shares: 11 000 000 at 1996 and 1995; outstanding: 10 599 027 at 1996 and 1995) ................................... 265 265 Surplus ........................................................................ 3 155 3 155 Undivided profits .............................................................. 6 334 5 286 Net unrealized gains on investment securities, net of taxes .................... 149 283 Foreign currency translation ................................................... (12) (4) - ----------------------------------------------------------------------------------------------------------- Total stockholder's equity ..................................................... 9 891 8 985 - ----------------------------------------------------------------------------------------------------------- Total liabilities and stockholder's equity ..................................... 164 813 135 713 - -----------------------------------------------------------------------------------------------------------
Prior period balances were restated to reflect the merger of J.P. Morgan Delaware with Morgan Guaranty Trust Company of New York effective June 1996. Member of the Federal Reserve System and Federal Deposit Insurance Corporation. The accompanying notes are an integral part of this consolidated financial statement. 39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES J.P. Morgan, a global financial services firm, is the holding company for subsidiaries engaged in providing a wide range of financial services including advisory, underwriting, financing, trading, asset management, brokerage, and related capabilities. J.P. Morgan provides these capabilities to a broad global client base including corporations, governments, institutions, and individuals. The accounting and reporting policies and practices of J.P. Morgan and subsidiaries, including Morgan Guaranty Trust Company of New York and subsidiaries (Morgan Guaranty), conform with generally accepted accounting principles. The following is a description of significant accounting policies and practices. Consolidation The consolidated financial statements include the accounts of J.P. Morgan and subsidiaries in which its percentage of ownership exceeds 50%. All material intercompany accounts and transactions have been eliminated in consolidation. The equity method of accounting is used in determining the carrying values of investments in companies in which the percentage of investment in voting stock is 20% or more but not more than 50%; these investments are included in Other assets. Investment Securities Debt investment securities: Debt investment securities are held to maximize total return over the longer term. Debt investment securities that may be sold in response to or in anticipation of changes in interest rates and prepayment risk, liquidity considerations, and other factors are considered available-for-sale. Such securities are carried at fair value with unrealized gains and losses, including the effect of hedges, reported as a net amount within the stockholders' equity account, Net unrealized gains on investment securities, net of taxes, until realized. Realized gains and losses on debt investment securities, which are generally computed by the specific identification method, and other-than-temporary impairments in value are included in Investment securities revenue. Debt investment securities transactions are recorded on their trade dates. Carrying values of individual debt investment securities are reduced, if necessary, through write-downs to reflect other-than-temporary impairments in value. In instances where J.P. Morgan has the positive intent and ability to hold to maturity, investment securities will be carried at cost, adjusted for amortization of premiums and accretion of discounts. Equity investment securities: Equity investment securities of companies are held for long-term appreciation and are included in Other assets. Marketable equity investment securities are carried at fair value with unrealized gains and losses reported as a net amount within the stockholders' equity account, Net unrealized gains on investment securities, net of taxes, until realized. Nonmarketable equity investment securities are carried at cost. In the case of securities held in subsidiaries registered as Small Business Investment Companies (SBICs), equity investment securities are carried at fair value with changes in value recognized currently in earnings. Carrying values of individual equity investment securities are reduced through write-downs to reflect other-than-temporary impairments in value. Realized gains and losses on equity investment securities, which are generally computed by the average cost method for a security, changes in the fair value of securities held in SBICs, other-than- temporary impairments in value, and related dividend income are included in Investment securities revenue. 40 43 Trading account assets and liabilities Trading account assets and liabilities are carried at market value and are recorded as of their trade dates. Short trading positions are classified as liabilities. Gains and losses on trading positions are recognized currently as Trading revenue. Securities financing arrangements Securities purchased under agreements to resell (resale agreements) and Securities sold under agreements to repurchase (repurchase agreements) are generally treated as collateralized borrowing and lending transactions and are carried at the amounts at which the securities were initially acquired or sold. Securities borrowed for cash collateral are included on the balance sheet at the amount of cash advanced in connection with the transaction. Interest income and Interest expense are accrued ratably over the life of each agreement. J.P. Morgan takes possession of securities purchased under resale agreements. J.P. Morgan monitors the market value of the underlying securities, the majority of which are U.S. government and agency securities, as compared to the related receivable plus accrued interest, and, as necessary, requests additional collateral. Premiums and discounts Amortization of premiums and accretion of discounts are generally recognized as interest expense or interest revenue over the life of the instrument. Impaired loans J.P. Morgan defines an impaired loan as any loan on which the accrual of interest is discontinued because the contractual payment of principal or interest has become 90 days past due or management has serious doubts about future collectibility of principal or interest, even though the loans are currently performing (i.e., nonaccrual loans). Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions. When a loan is recognized as impaired, any accrued but unpaid interest previously recorded on such loan is reversed against interest revenue of the current period. Interest received on impaired loans is generally either applied against the principal or reported as revenue, according to management's judgment as to the collectibility of principal. Generally, a loan may be restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where interest has been interrupted for a substantial period, a regular payment performance is established. J.P. Morgan measures each loan impairment based upon the present value of expected future cash flows discounted at an individual loan's effective interest rate, except where there is an observable market value or, if the loan is collateral dependent, at the fair value of the collateral. Management recommends those credits or portions of credits judged to be uncollectible and that should be charged off. Aggregate allowance for credit losses An aggregate 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 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. Prior to December 31, 1996, the aggregate allowance for credit losses was displayed in the consolidated balance sheet as a reduction of the carrying value of loans. For financial statement reporting purposes, beginning December 31, 1996, in accordance with the American Institute of Certified Public Accountants Banks and Savings Institutions Audit Guide, while we consider it in the aggregate, the total allowance has been apportioned and displayed as a reduction of Loans, a reduction of Trading account assets relating to derivatives, and as Other liabilities relating to undertakings to extend credit that are not currently reflected on the consolidated balance sheet, such as standby letters of credit, guarantees, and commitments. Prior period amounts have not been reclassified. 41 44 Given the global and diversified nature of our business, expected shifts in the relative level of credit risk among financial instruments, and the numerous estimates and assumptions necessary to derive such allocated amounts, it is expected that portions of the aggregate allowance may be reclassified from time to time among Loans, Trading account assets, and Other liabilities. A judgment as to the adequacy of the aggregate allowance is made at the end of each quarterly reporting period. Should the aggregate allowance require adjustment either because of reductions due to charge-offs or because of changes in the size or risk characteristics of the portfolios, it is adjusted through a Provision for credit losses in the quarterly reporting period. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets. Derivatives used for trading purposes Derivatives entered into for trading purposes or used as hedges of trading instruments are carried at market value. Instruments used for trading purposes include swaps, futures, forwards, spot, and options contracts in the interest rate, foreign exchange, equity, and commodity markets. Gains and losses associated with such derivatives are recognized currently in Trading revenue. The portion of the market value associated with derivatives that reflects credit considerations, ongoing servicing, and transaction hedging costs is recognized over the life of the agreement in Trading revenue. Unrealized gains and losses are reported on a gross basis in Trading account assets or Trading account liabilities, after taking into consideration the offsetting permitted under Financial Accounting Standards Board Interpretation No. 39 (FIN No. 39), Offsetting of Amounts Related to Certain Contracts. The market values of options purchased and written are recorded on a gross basis in Trading account assets and Trading account liabilities respectively. Derivatives used for purposes other-than-trading Derivatives used for purposes other-than-trading are utilized to hedge exposures, to modify the interest rate characteristics of related balance sheet instruments, or to meet longer-term investment objectives, including maximization of net interest revenue. The specific criteria required for derivatives used for such purposes are described below. Derivatives that do not meet these criteria are carried at market value with changes in value recognized currently in earnings. Derivatives used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. Accordingly, changes in the market value of the derivative must be highly correlated with changes in the market value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. Derivatives used for hedging purposes include swaps, forwards, futures, and purchased options in the interest rate and foreign exchange markets. Interest rate swaps are also used to modify the interest rate characteristics of related balance sheet instruments. Swaps used to modify the interest rate characteristics of nontrading-related balance sheet instruments must be linked to the related asset or liability, whereby the terms of the swap generally equal the terms of the related asset or liability, at the inception and throughout the term of the derivative contract. Unrealized gains and losses on all of these derivative contracts are generally deferred. Derivatives used as hedges or to modify the interest rate characteristics of debt investment securities are carried at fair value with the related unrealized gains and losses deferred in a separate component of stockholders' equity. Margin requirements associated with futures contracts and option premiums for contracts used as hedges are recorded in Other assets or Other liabilities. The interest component associated with derivatives used as hedges or to modify the interest rate characteristics of assets and liabilities is recognized over the life of the contract in Net interest revenue. Upon contract settlement or termination, the cumulative change in the market value of such derivatives is recorded as an adjustment to the carrying value of the underlying asset or liability and recognized in Net interest revenue over the expected remaining life of the related asset or liability. In instances where the underlying instrument is sold, the cumulative change in the value of the associated derivative is recognized immediately in the component of earnings relating to the underlying instrument. 42 45 Risk-adjusting swaps are used in a manner similar to debt investment securities to achieve a desired overall interest rate profile by increasing or decreasing the firm's overall exposure to interest rate risk. Risk-adjusting swaps include only interest rate swaps that replicate the cash flows of nonamortizing cash instruments and do not contain leverage or embedded option features. Interest revenue or expense associated with these swaps is accrued over the life of the swap agreement in Net interest revenue. Risk-adjusting swaps are carried at the lower of aggregate cost or market value with aggregate unrealized net valuation adjustments, if any, recorded in Other revenue. Risk-adjusting swaps are generally not terminated. In instances where a risk-adjusting swap is terminated, losses are recognized immediately and gains are deferred and amortized over the original remaining life of the terminated swap in Other revenue. Fee revenue Investment banking revenue includes fees earned from providing advisory services and arranging financing for clients. All such fees are recognized as revenue when the related services are performed. In addition, credit arrangement and syndication fees are recognized after certain retention, timing, and yield criteria are satisfied. Investment management revenue and revenue from Fees and commissions are recognized as revenue when the related service is performed. Commitment fees are recognized as revenue in the period the unused commitment is available. Stock options and awards J.P. Morgan accounts for its stock-based compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. In accordance with APB No. 25, no compensation cost is recorded in conjunction with stock options granted under such stock-based compensation plans because such options are granted at an exercise price that is not less than the market price of the underlying stock on the date of grant. Compensation expense related to restricted stock awards, stock bonus awards, stock unit awards, redeemable preferred stock, and deferred stock payable in stock granted under the stock-based compensation plans of J.P. Morgan is recorded over the period in which the employees who receive such awards perform services. Effective January 1, 1996, J.P. Morgan adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits either the recognition of compensation cost for the estimated fair value of employee stock-based compensation arrangements on the date of grant, or the disclosure in the notes to the consolidated financial statements of the pro forma effects on net income and earnings per share, determined as if the fair value-based method had been applied in measuring compensation cost. J.P. Morgan has adopted the disclosure option and continues to apply APB Opinion No. 25 in accounting for its stock-based compensation plans. Income taxes Deferred tax assets and liabilities are established for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is established to reduce deferred tax assets to the amounts expected to be realized. Investment tax credits continue to be amortized over the estimated useful lives of the related assets. Statement of cash flows Cash flows from trading account assets and liabilities, trading-related derivative transactions, resale and repurchase agreements, and securities borrowed are classified as operating activities. Cash flows from investment securities, including securities available-for-sale, are classified as investing activities. Cash flows from sales of investment securities that had remaining lives of greater than one year when purchased and less than 90 days when sold, mandatory redemptions, and calls are classified as proceeds from maturities. Cash flows from derivative transactions used as hedges are classified consistent with the items being hedged. 43 46 Other The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform with the 1996 presentation. 2. ACCOUNTING CHANGES AND DEVELOPMENTS Accounting for impairment of a loan Effective January 1, 1995, J.P. Morgan adopted SFAS No. 114 and subsequent amendment SFAS No. 118, both entitled Accounting by Creditors for Impairment of a Loan, which prescribe criteria for recognition of loan impairment as well as methods to measure impairment of certain loans, including loans whose terms were modified in troubled debt restructurings. The standards require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. The adoption of these standards did not have a material impact on J.P. Morgan's consolidated financial statements and did not affect its charge-off policy. Accounting for transfers of assets and servicing of financial assets and extinguishments of liabilities In 1996, the Financial Accounting Standards Board issued SFAS No. 125, entitled Accounting for Transfers of Assets and Servicing of Financial Assets and Extinguishments of Liabilities, which provides new accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, and extinguishments of liabilities. The provisions of the Statement are to be applied to transfers of assets, servicing rights, and extinguishments of liabilities occurring after December 31, 1996, except for transfers involving repurchase agreements, securities borrowing/lending transactions, and financial assets provided as collateral. For these transactions, the Statement will be applied to transfers occurring after December 31, 1997. The adoption of this standard is expected to have no material impact on J.P. Morgan's consolidated financial statements for the year ending December 31, 1997. The firm is currently evaluating the impact of the new standard for the year ending December 31, 1998. 3. DISPOSITION OF CUSTODY AND CASH PROCESSING BUSINESSES In 1996, J.P. Morgan completed the sale of its institutional U.S. cash processing business. The sale did not have a material effect on earnings. In 1995, J.P. Morgan sold its global and local custody businesses and its U.S. commercial paper issuing and paying agency business and discontinued certain cash services businesses. Gross proceeds of $260 million from the sales were recorded in Other revenue. The firm recorded $220 million of nonrecurring costs, net against proceeds, associated with the exit of these businesses. The costs included severance and other personnel-related costs of $35 million, unreimbursed transition costs of $35 million, and other costs of approximately $40 million. In addition, a real estate charge of $110 million was recorded as a result of the rationalization of the firm's space requirements coincident with the disposition of these businesses and the corresponding reduction in personnel. The total number of personnel affected by these actions approximated 1,200. As of December 31, 1996, no material changes occurred with respect to nonrecurring costs related to the exit of these businesses, exclusive of planned expenditures. The transition of client accounts to the buyers of the sold businesses is expected to be completed over the next 12 months. The firm is contractually obligated to provide certain services to these clients for the benefit of the buyers until the transitions are complete. Total revenues for the above exited businesses were approximately 2% and 6% of consolidated total revenues in 1996 and 1995 respectively. 44 47 4. 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, is 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 investment 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.
In millions 1996 1995 1994 --------------------------------------------------------------------------------- INTEREST REVENUE Deposits with banks ............................... $ 110 $ 168 $ 197 Debt investment securities (a) .................... 1 601 1 552 1 206 Trading account assets ............................ 3 275 3 036 2 784 Securities purchased under agreements to resell and federal funds sold ......................... 2 254 1 942 1 593 Securities borrowed ............................... 1 284 876 624 Loans ............................................. 1 776 1 699 1 409 Other sources, primarily risk-adjusting swaps ..... 413 664 566 --------------------------------------------------------------------------------- Total interest revenue ............................ 10 713 9 937 8 379 --------------------------------------------------------------------------------- INTEREST EXPENSE Deposits .......................................... 2 541 2 520 1 946 Trading account liabilities ....................... 1 302 1 361 1 288 Securities sold under agreements to repurchase and federal funds purchased .................... 3 295 2 568 2 196 Other borrowed money .............................. 1 248 935 679 Long-term debt .................................... 625 550 289 --------------------------------------------------------------------------------- Total interest expense ............................ 9 011 7 934 6 398 --------------------------------------------------------------------------------- Net interest revenue .............................. 1 702 2 003 1 981 ---------------------------------------------------------------------------------
(a) Interest revenue from debt investment securities included taxable revenue of $1,484 million, $1,392 million, and $1,035 million and revenue exempt from U.S. income taxes of $117 million, $160 million, and $171 million in 1996, 1995, and 1994 respectively. For the 12 months ended December 31, 1996, 1995, and 1994, net interest revenue associated with derivatives used for purposes other-than-trading was approximately $125 million, $370 million, and $150 million respectively. At December 31, 1996 and 1995, approximately $225 million and $250 million respectively of net deferred losses on closed derivative contracts used for purposes other-than-trading were recorded on the consolidated balance sheet. Such amounts are primarily composed of net deferred losses on closed hedge contracts included in the amortized cost of the debt investment portfolio at December 31, 1996 and 1995. As discussed in Note 7 to the consolidated financial statements, Investment securities, the net unrealized appreciation associated with the debt investment portfolio was $255 million and $484 million at December 31, 1996 and 1995, respectively. 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 investing strategies, which may result in the sale of the underlying hedged instruments and/or termination of hedge contracts. Net deferred losses on closed derivative contracts at December 31, 1996, are expected to amortize into Net interest revenue as follows: $95 million in 1997; $75 million in 1998; $35 million in 1999; $10 million in 2000; $7 million in 2001; and approximately $3 million thereafter. 45 48 5. TRADING REVENUE Trading revenue disaggregated by principal product groupings is presented below. For additional information refer to the Trading revenue discussion in the Financial review.
In millions 1996 1995 1994 ---------------------------------------------------------------------- Fixed Income................. $1 540 $ 668 $ 766 Equities..................... 330 249 115 Foreign Exchange............. 320 253 168 Commodities.................. 34 42 82 Proprietary Trading.......... 253 164 (112) ---------------------------------------------------------------------- Trading revenue.............. 2 477 1 376 1 019 ----------------------------------------------------------------------
6. CASH AND DUE FROM BANKS J.P. Morgan is required to maintain noninterest-earning reserve balances with U.S. Federal Reserve banks and various foreign central banks. Such balances, which are based principally on deposits outstanding, are included in Cash and due from banks. At December 31, 1996 and 1995, required reserves were $259 million and $385 million respectively, compared with average required reserves during the year of $306 million in 1996 and $378 million in 1995. 7. INVESTMENT SECURITIES Debt investment securities The debt investment securities portfolio is classified as available-for-sale and measured at fair value with unrealized gains and losses excluded from earnings and reported as a net amount within the stockholders' equity account, Net unrealized gains on investment securities, net of taxes, until realized. Gross unrealized gains and losses, as well as a comparison of the cost and carrying value of debt investment securities available-for-sale and carried at fair value at December 31, 1996, 1995, and 1994, are presented in the table on the following page. Net unrealized appreciation associated with debt investment securities at December 31, 1996, was $255 million, consisting of gross unrealized appreciation of $405 million and gross unrealized depreciation of $150 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 10 to the consolidated financial statements, Estimated fair value of financial instruments. 46 49
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value ------------------------------------------------------------------------------------------------ 1996 U.S. Treasury .......................... $ 1 773 $ 80 $ 13 $ 1 840 U.S. government agency, principally mortgage-backed ..................... 16 848 109 114 16 843 U.S. state and political subdivision ... 1 575 164 15 1 724 U.S. corporate and bank debt ........... 304 1 -- 305 Foreign government (a) ................. 1 501 39 6 1 534 Foreign corporate and bank debt ........ 2 499 11 2 2 508 Other .................................. 110 1 -- 111 ------------------------------------------------------------------------------------------------ Total debt investment securities ....... 24 610 405 150 24 865 ------------------------------------------------------------------------------------------------
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value ------------------------------------------------------------------------------------------------ 1995 U.S. Treasury .......................... $ 1 892 $ 136 $ 2 $ 2 026 U.S. government agency, principally mortgage-backed ..................... 15 392 200 69 15 523 U.S. state and political subdivision ... 1 875 214 16 2 073 U.S. corporate and bank debt ........... 188 5 -- 193 Foreign government (a) ................. 3 413 33 21 3 425 Foreign corporate and bank debt ........ 1 295 6 3 1 298 Other .................................. 99 1 -- 100 ------------------------------------------------------------------------------------------------ Total debt investment securities ....... 24 154 595 111 24 638 ------------------------------------------------------------------------------------------------
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value ------------------------------------------------------------------------------------------------ 1994 U.S. Treasury .......................... $ 1 651 $ 14 $ 42 $ 1 623 U.S. government agency, principally mortgage-backed ..................... 13 531 210 88 13 653 U.S. state and political subdivision ... 2 396 157 58 2 495 U.S. corporate and bank debt ........... 265 17 -- 282 Foreign government (a) ................. 3 758 20 65 3 713 Foreign corporate and bank debt ........ 802 7 19 790 Other .................................. 100 1 -- 101 ------------------------------------------------------------------------------------------------ Total debt investment securities ....... 22 503 426 272 22 657 ------------------------------------------------------------------------------------------------
(a) Primarily includes debt of countries that are members of the Organization for Economic Cooperation and Development. At December 31, 1996, there were no securities of a single issuer, excluding the U.S. Treasury and U.S. government agencies, whose fair value exceeded 10% of stockholders' equity. 47 50 The following table presents the components of Investment securities revenue realized related to the debt investment securities portfolio during 1996, 1995, and 1994.
In millions 1996 1995 1994 ------------------------------------------------------------------------------------------ Gross realized gains from sales of securities ............... $ 231 $ 371 $ 411 Gross realized losses from sales of securities .............. (214) (363) (307) Net gains on maturities, calls, and mandatory redemptions ... -- 13 18 ------------------------------------------------------------------------------------------ Net debt investment securities gains ........................ 17 21 122 ------------------------------------------------------------------------------------------
A profile of the maturities of available-for-sale debt investment securities as of December 31, 1996, and the related weighted-average rates on such securities is presented in the following table. Mortgage-backed securities are included based on their weighted-average lives, reflecting anticipated future prepayments based on a consensus of dealers in the market.
After one After five Within year but years but one within within After ten In millions year five ten years Total ------------------------------------------------------------------------------------------------------------------ U.S. Treasury .......................... $ 86 $ 735 $ 127 $ 825 $ 1 773 U.S. government agency, principally mortgage-backed ......... 234 9 328 7 243 43 16 848 U.S. state and political subdivision ... 68 410 271 826 1 575 U.S. corporate and bank debt ........... 39 166 51 48 304 Foreign government ..................... 368 902 69 162 1 501 Foreign corporate and bank debt ........ 705 1 136 596 62 2 499 Other .................................. -- -- -- 110 110 ------------------------------------------------------------------------------------------------------------------ Total debt investment securities, at cost ............................. 1 500 12 677 8 357 2 076 24 610 Fair value ............................. 1 504 12 746 8 415 2 200 24 865 ------------------------------------------------------------------------------------------------------------------ Net unrealized gains ................... 4 69 58 124 255 ------------------------------------------------------------------------------------------------------------------ Average rates on debt investment securities, at cost ...... 6.11% 7.02% 7.85% 8.37% 7.36% ------------------------------------------------------------------------------------------------------------------
Average rates represent the weighted average at December 31, 1996, and include the effects of various hedging transactions. Average rates do not give effect to unrealized gains and losses that are reflected as a component of stockholders' equity. U.S. state and political subdivision securities have been adjusted to a taxable-equivalent basis. Equity investment securities Equity investment securities are held for long-term appreciation and are included in Other assets. These securities, which are acquired primarily through private placements, management buyouts, privatizations, and recapitalizations and consist of both marketable and nonmarketable securities, are generally owned by J.P. Morgan Capital Corporation, a wholly owned nonbank subsidiary of J.P. Morgan. Quoted or estimated values of equity investment securities do not necessarily represent net realizable amounts, as the timing or size of transactions and the liquidity of the markets may not support realization of these values. Fair values for equity investment securities for which the publicly quoted market prices do not represent the net realizable amounts or for which there are no publicly quoted market prices are determined by management based on financial and other available information. Most of our equity investment securities are subject to legal, regulatory, and contractual restrictions that limit our ability to dispose of them freely. At December 31, 1996, 1995, and 1994, marketable equity investment securities were carried at fair value and largely classified as available-for-sale. Net unrealized appreciation of $477 million, $440 million, and $576 million associated with available-for-sale equity investment securities at December 31, 1996, 1995, and 1994 respectively primarily related to investments in insurance-industry-related securities at December 31, 1996, and investments in insurance and health-care-industry-related securities at December 31, 1995 and 1994. Such net unrealized appreciation is included within the stockholders' equity account Net unrealized gains on investment securities, net of taxes. Net realized gains on equity investment securities during 1996 of $247 million are reflected in Investment securities revenue. This amount represents $277 million of gross realized gains and $30 million of write-downs of equity 48 51 investment securities. In 1995 and 1994 net realized gains from equity investment securities were $485 million and $606 million after write-downs of $33 million and $19 million respectively. Gross unrealized gains and losses as well as a comparison of the cost, fair value, and carrying value of marketable available-for-sale equity investment securities at December 31, 1996, 1995, and 1994 follows.
In millions: December 31 1996 1995 1994 ---------------------------------------------------------------------- Cost....................... $365 $237 $183 Gross unrealized gains..... 479 441 579 Gross unrealized losses.... (2) (1) (3) ---------------------------------------------------------------------- Fair and carrying value.... 842 677 759 ----------------------------------------------------------------------
Nonmarketable equity investment securities and securities held in SBICs are outside the scope of SFAS No. 115, and are carried at cost and fair value respectively. The carrying value of such investments is $499 million at December 31, 1996, $424 million at December 31, 1995, and $432 million at December 31, 1994. The estimated fair value of these securities was $614 million, $509 million, and $528 million at December 31, 1996, 1995, and 1994, respectively. Net unrealized appreciation was primarily related to investments in the communications and insurance industries at December 31, 1996, and an investment in the communication industry at December 31, 1995 and 1994. 8. 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, before taking into consideration the allowance for credit losses, and trading account liabilities at December 31, 1996 and 1995, and the average balance for the years then ended.
1996 1995 ---------------------- ----------------------- Carrying Average Carrying Average In millions value balance value balance --------------------------------------------------------------------------------------------------------------- TRADING ACCOUNT ASSETS (a) U.S. Treasury................................... $13 677 $10 214 $ 8 396 $ 6 900 U.S. government agency.......................... 6 163 3 527 2 549 2 410 Foreign government.............................. 24 348 20 784 20 111 20 139 Corporate debt and equity....................... 17 376 14 589 12 406 10 008 Other securities................................ 3 905 6 315 3 147 4 834 Interest rate and currency swaps................ 11 663 10 653 12 444 13 032 Foreign exchange contracts...................... 2 507 2 701 3 286 4 920 Interest rate futures and forwards.............. 405 341 444 309 Commodity and equity contracts.................. 2 811 3 035 1 377 1 372 Purchased option contracts...................... 8 475 6 061 5 248 4 095 --------------------------------------------------------------------------------------------------------------- 91 330 78 220 69 408 68 019 --------------------------------------------------------------------------------------------------------------- TRADING ACCOUNT LIABILITIES U.S. Treasury................................... 7 758 8 804 9 282 7 070 Foreign government.............................. 9 343 9 115 8 953 10 334 Corporate debt and equity....................... 5 372 4 393 2 847 3 384 Other securities................................ 801 2 498 668 1 552 Interest rate and currency swaps................ 12 037 10 252 11 208 12 016 Foreign exchange contracts...................... 4 173 4 323 4 126 4 501 Interest rate futures and forwards.............. 705 570 549 373 Commodity and equity contracts.................. 2 400 2 982 2 595 1 633 Written option contracts........................ 8 330 6 165 5 061 4 320 --------------------------------------------------------------------------------------------------------------- 50 919 49 102 45 289 45 183 ---------------------------------------------------------------------------------------------------------------
(a) Refer to Note 12 to the consolidated financial statements for a discussion of the aggregate allowance for credit losses. 49 52 9. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Derivatives Derivatives may be used either for trading or other-than-trading purposes. Other-than-trading purposes are primarily related to our investing activities. Accordingly, the notional amounts presented in the table below have been identified as relating to either trading or other-than-trading purposes 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 $36.5 billion and $27.7 billion of master netting agreements in effect at December 31, 1996 and 1995, respectively is also presented.
Notional amounts Credit exposure ------------------- ------------------ In billions: December 31 1996 1995 1996 1995 ----------------------------------------------------------------------------------------------------- Interest rate and currency swaps Trading .............................................. $1 867.9 $1 233.3 Other-than-trading (a) (b) (c) ....................... 253.0 282.3 ----------------------------------------------------------------------------------------------------- Total interest rate and currency swaps ............... 2 120.9 1 515.6 $ 11.7 $ 12.4 ----------------------------------------------------------------------------------------------------- Foreign exchange spot, forward, and futures contracts Trading .............................................. 583.3 443.7 Other-than-trading (a) (b) ........................... 36.8 18.1 ----------------------------------------------------------------------------------------------------- Total foreign exchange spot, forward, and futures contracts ............................. 620.1 461.8 2.5 3.3 ----------------------------------------------------------------------------------------------------- Interest rate futures, forward rate agreements, and debt securities forwards Trading .............................................. 524.8 412.7 Other-than-trading ................................... 43.4 2.7 ----------------------------------------------------------------------------------------------------- Total interest rate futures, forward rate agreements, and debt securities forwards .......... 568.2 415.4 0.4 0.5 ----------------------------------------------------------------------------------------------------- Commodity and equity swaps, forward, and futures contracts, all trading ................... 77.2 65.1 2.8 1.4 ----------------------------------------------------------------------------------------------------- Purchased options (d) Trading .............................................. 614.8 462.2 Other-than-trading (a) ............................... 2.1 2.6 ----------------------------------------------------------------------------------------------------- Total purchased options .............................. 616.9 464.8 8.5 5.2 ----------------------------------------------------------------------------------------------------- Written options, all trading (e) (f) .................... 713.0 524.0 -- -- ----------------------------------------------------------------------------------------------------- Total credit exposure recorded as assets on the consolidated balance sheet .................... 25.9 22.8 -----------------------------------------------------------------------------------------------------
(a) The majority of J.P. Morgan's derivatives used for purposes other-than-trading are transacted with independently managed J.P. Morgan derivatives dealers who function as intermediaries for credit and administrative purposes. (b) At December 31, 1996 and 1995, the notional amounts of derivative contracts used for purposes other-than-trading conducted in the foreign exchange markets, primarily forward contracts, amounted to $40.6 billion and $20.8 billion respectively. At December 31, 1996, these contracts were primarily denominated in the following currencies: German deutsche mark $5.9 billion, Italian lira $5.9 billion, Japanese yen $5.2 billion, French franc $4.1 billion, Swiss franc $3.4 billion, Spanish peseta $3.1 billion, Belgian franc $3.1 billion, British pound $1.9 billion, Australian dollar $1.4 billion, and European Currency Unit $1.1 billion. At December 31, 1995, these contracts were primarily denominated in the following currencies: German deutsche mark $4.6 billion, Italian lira $2.5 billion, Japanese yen $2.3 billion, French franc $1.8 billion, British pound $1.7 billion, Spanish peseta $1.7 billion, Belgian franc $1.5 billion, and Swiss franc $1.5 billion. (c) The notional amounts of risk-adjusting swaps were $214.3 billion and $259.4 billion at December 31, 1996 and 1995, respectively. (d) At December 31, 1996 and 1995, purchased options used for trading purposes included $477.5 billion and $356.7 billion respectively of interest rate options, $106.3 billion and $72.5 billion respectively of foreign exchange options, and $31.0 billion and $33.0 billion respectively of commodity and equity options. Only interest rate options are used for purposes other-than-trading. Purchased options executed on an exchange amounted to $165.5 billion and $137.4 billion and those negotiated over-the-counter amounted to $451.4 billion and $327.4 billion at December 31, 1996 and 1995 respectively. (e) At December 31, 1996 and 1995, written options included $557.7 billion and $414.6 billion respectively of interest rate options, $118.2 billion and $72.8 billion respectively of foreign exchange options, and $37.1 billion and $36.6 billion respectively of commodity and equity options. Written options executed on an exchange amounted to $181.8 billion and $162.4 billion and those negotiated over-the-counter amounted to $531.2 billion and $361.6 billion at December 31, 1996 and 1995 respectively. (f) The total notional amount of written put options includes $8.4 billion and $6.7 billion of written put option contracts on debt securities at December 31, 1996 and 1995, respectively. 50 53 The following presents the credit exposure associated with derivatives at December 31, 1996 and 1995, segregated by type of counterparty.
Nonbank financial Govern- In billions: December 31 institutions ments Banks All other Total ------------------------------------------------------------------------------------------------------------- 1996 Credit exposure.................... $8.8 $2.4 $9.4 $5.3 $25.9 ------------------------------------------------------------------------------------------------------------- 1995 Credit exposure.................... 5.8 2.8 8.9 5.3 22.8 -------------------------------------------------------------------------------------------------------------
Credit-related financial instruments Credit-related financial instruments include commitments to extend credit, standby letters of credit and guarantees, and indemnifications in connection with securities lending activities. The contractual amounts of these instruments represent the amounts at risk should the contract be fully drawn upon, the client default, and the value of any existing collateral become worthless. The total contractual amount of credit-related financial instruments does not represent the expected future liquidity requirements, since a significant amount of commitments to extend credit and standby letters of credit and guarantees are expected to expire or mature without being drawn. The credit risk associated with these instruments varies depending on the creditworthiness of the client and the value of any collateral held. Commitments to extend credit generally require the client to meet certain credit-related terms and conditions before drawdown. Collateral is required in connection with securities lending indemnifications. Market risk for commitments to extend credit and standby letters of credit and guarantees, while not significant, may exist as availability of and access to credit markets changes. A summary of the contractual amount of credit-related instruments at December 31 is presented in the following table.
In billions 1996 1995 ----------------------------------------------------------------------------- Commitments to extend credit..................... $64.7 $55.1 Standby letters of credit and guarantees......... 13.9 11.7 Securities lending indemnifications (a).......... 5.5 5.4 -----------------------------------------------------------------------------
(a) At December 31, 1996 and 1995, J.P. Morgan held cash and other collateral in support of securities lending indemnifications. The following presents the contractual amount of commitments to extend credit and standby letters of credit and guarantees at December 31, 1996 and 1995, segregated by type of counterparty.
Nonbank financial Govern- In billions: December 31 institutions ments Banks All other Total ------------------------------------------------------------------------------------------------------------- 1996 Commitments to extend credit....... $11.1 $3.4 $3.9 $46.3 $64.7 Standby letters of credit and guarantees...................... 4.8 2.4 0.3 6.4(a) 13.9 ------------------------------------------------------------------------------------------------------------- 1995 Commitments to extend credit....... 9.4 3.7 4.4 37.6(b) 55.1 Standby letters of credit and guarantees...................... 3.8 2.0 0.5 5.4(a) 11.7 -------------------------------------------------------------------------------------------------------------
(a) The utilities and health care industries at December 31, 1996 and 1995, each exceeded 10% of this amount. (b) At December 31, 1995, the utilities industry exceeded 10% of this amount. Included in Fees and commissions are credit-related fees of $156 million, $162 million, and $204 million for the years ended December 31, 1996, 1995, and 1994, respectively, which are primarily earned from commitments to extend credit, standby letters of credit and guarantees, and securities lending indemnifications. 51 54 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 $20.1 billion and $27.5 billion were netted against amounts payable for securities purchased of $17.1 billion and $31.6 billion to arrive at a net trade date receivable of $3.0 billion, recorded in Other assets, and a net trade date payable of $4.1 billion, recorded in Other liabilities, at December 31, 1996 and 1995, respectively. 10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments, J.P. Morgan estimates that the aggregate net fair value of all balance sheet and off-balance-sheet financial instruments exceeded associated net carrying values by $1.7 billion and $1.4 billion at December 31, 1996 and 1995, respectively before considering income taxes. In accordance with generally accepted accounting principles, J.P. Morgan's financial instruments are recorded using several methods, including historical cost and fair or market value. Under the historical cost method, the carrying value generally represents the amount received when a liability is incurred or the amount paid to acquire an asset less subsequent amortization and allowances that reflect management's estimate of uncollectible amounts. This method differs from the basis of disclosure under SFAS No. 107, which states that the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Therefore, differences between carrying values under the historical cost accounting method and fair value estimates can be significant. For example, such differences arise in the case of the loan portfolio, where the net carrying value represents management's estimate of ultimately recoverable principal amounts versus fair value estimates that represent a theoretical exchange value based on current market conditions that take into account both principal and interest and the timing of cash flows. 52 55 The following table presents the carrying value and fair value of J.P. Morgan's financial instruments at December 31, 1996 and 1995.
1996 1995 ----------------------------------------------------------------------- Appre- Appre- ciation/ ciation/ Carrying Fair (depre- Carrying Fair (depre- In billions value value ciation) value value ciation) -------------------------------------------------------------------------------------------------------------------- FINANCIAL INSTRUMENTS USED FOR TRADING PURPOSES: FINANCIAL ASSETS: Trading account assets, net (a) ......... $91.0 $91.3 $ 0.3 (b) $69.4 $69.4 $ -- Securities purchased under agreements to resell and federal funds sold (c) ............... 32.5 32.5 -- 32.2 32.2 -- Securities borrowed (d) ................. 27.9 27.9 -- 19.8 19.8 -- FINANCIAL LIABILITIES: Trading account liabilities (a) ......... 50.9 50.9 -- 45.3 45.3 -- Securities sold under agreements to repurchase and federal funds purchased (c) ........................ 61.4 61.5 (0.1) 45.1 45.3 (0.2) FINANCIAL INSTRUMENTS USED FOR PURPOSES OTHER THAN TRADING: FINANCIAL ASSETS: (e) Debt investment securities .............. 24.9 24.9 -- 24.6 24.6 -- Loans, net .............................. 27.6 28.2 0.6 (b) 22.3 23.5 1.2 (b) Other financial assets (f) .............. 15.8 16.0 0.2 14.2 14.2 -- FINANCIAL LIABILITIES: (e) Deposits ................................ 52.7 52.8 (0.1) 46.4 46.5 (0.1) Related derivatives .................. -- (0.1) 0.1 -- (0.1) 0.1 Other liabilities for borrowed money ................................ 19.9 19.8 0.1 15.1 15.1 -- Long-term debt (g) ...................... 12.4 12.5 (0.1) 8.6 8.9 (0.3) Related derivatives .................. -- (0.1) 0.1 -- (0.3) 0.3 Company-obligated mandatorily redeemable preferred securities of subsidiary ........................... 0.8 0.7 0.1 Other financial liabilities (h) ......... 11.7 11.3 0.4 (b) 12.9 12.9 -- OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: Risk-adjusting swaps (i) ................ -- 0.1 0.1 -- 0.4 0.4 Commitments to extend credit and standby letters of credit and guarantees ........................... -- -- -- -- -- -- -------------------------------------------------------------------------------------------------------------------- Excess of net fair values over net carrying values before considering income taxes ............. 1.7 1.4 --------------------------------------------------------------------------------------------------------------------
(a) Refer to Note 8 to the consolidated financial statements, Trading account assets and liabilities, for the carrying value and fair value of financial instruments, including derivatives, used for trading purposes. (b) Relates substantially to the allowance for credit losses. Refer to Note 12 to the consolidated financial statements, Aggregate allowance for credit losses. (c) These trading-related financial instruments are generally treated as collateralized lending and borrowing transactions and are carried at the amounts at which the securities were initially acquired or sold. Securities sold under agreements to repurchase are also used as one source of financing for the debt investment securities portfolio. (d) These trading-related financial instruments, which are collateralized by cash, are carried at amounts equal to the cash advanced. (e) 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. Net unrealized gains and losses associated with such derivatives contracts amounted to $90 million and $195 million at December 31, 1996 and 1995, respectively. Gross unrealized gains and gross unrealized losses associated with open derivative contracts used for these purposes at December 31, 1996 and 1995, are presented below. Such amounts primarily relate to interest rate and currency swaps used to hedge or modify the interest rate characteristics of long-term debt; deposits; debt investment securities, principally mortgage-backed securities; and other financial instruments. 53 56
Gross Gross Net unrealized In millions: December 31 unrealized gains unrealized losses gains/(losses) ----------------------------------------------------------------------------------------- 1996 Long-term debt.................. $239 $153 $ 86 Debt investment securities...... 49 126 (77) Deposits........................ 75 25 50 Other financial instruments..... 76 45 31 ----------------------------------------------------------------------------------------- Total........................... 439 349 90 ----------------------------------------------------------------------------------------- 1995 Long-term debt.................. 275 19 256 Debt investment securities...... 1 111 (110) Deposits........................ 57 1 56 Other financial instruments..... 38 45 (7) ----------------------------------------------------------------------------------------- Total........................... 371 176 195 -----------------------------------------------------------------------------------------
(f) Includes cash and due from banks, interest-earning deposits with banks, customers' acceptance liability, accrued interest and accounts receivable, and other financial assets. (g) Estimating the fair value for J.P. Morgan's convertible mortgage loan and British pound financing obligation is not practicable due to the complex terms and conditions associated with the transactions. For additional information regarding these financing obligations, see Note 14 to the consolidated financial statements, Long-term debt. (h) Includes commercial paper, liability on acceptances, accounts payable and accrued expenses, and other financial liabilities. (i) Represents the net unrealized gain associated with risk-adjusting swaps and their related hedges that are entered into to meet longer-term investment objectives. The net amount is composed of gross unrealized gains and gross unrealized losses of $2.8 billion and $2.7 billion respectively at December 31, 1996, and $4.4 billion and $4.0 billion respectively at December 31, 1995. The unrealized gains and losses related to the derivative contracts used to hedge these risk-adjusting swaps, included above, were not material at December 31, 1996 and 1995. There were no material terminations of risk-adjusting swaps during 1996 or 1995. The following table summarizes the fair values of all on- and off-balance-sheet financial instruments according to the valuation methods used to determine fair value estimates.
Off-balance- sheet Financial assets Financial liabilities instruments ------------------------------------------------------------------- Carrying Carrying In billions: December 31 value Fair value value Fair value Fair value ------------------------------------------------------------------------------------------------------------- 1996 Carried at fair or market value.... $116.9 $117.2 $ 50.9 $ 50.9 $ -- Carried at cost: Carrying value approximates fair value due to short-term nature............ 76.0 76.0 72.4 72.4 -- Fair value based on available quoted market prices......... 3.0 3.0 4.1 3.8 -- Fair value derived using estimation techniques........ 23.8 24.6 82.4 82.2 0.1 ------------------------------------------------------------------------------------------------------------- 219.7 220.8 209.8 209.3 0.1 ------------------------------------------------------------------------------------------------------------- 1995 Carried at fair or market value.... 94.7 94.7 45.3 45.3 -- Carried at cost: Carrying value approximates fair value due to short-term nature............ 65.1 65.1 58.1 58.3 -- Fair value based on available quoted market prices......... 2.8 2.8 5.4 5.4 -- Fair value derived using estimation techniques........ 19.9 21.1 64.6 64.6 0.4 ------------------------------------------------------------------------------------------------------------- 182.5 183.7 173.4 173.6 0.4 -------------------------------------------------------------------------------------------------------------
54 57 Carried at fair or market value Trading account assets and liabilities, including derivatives used for trading purposes, are carried at market value. For financial statement reporting purposes, a portion of the aggregate allowance for credit losses related to derivatives is classified as a reduction of the carrying value of trading account assets. Debt and marketable equity investment securities are carried at fair value. Carried at cost: Carrying value approximates fair value due to short-term nature For short-term balance sheet instruments without publicly quoted market prices, the carrying value approximates fair value. These balance sheet instruments include cash and due from banks, certain securities purchased under agreements to resell and federal funds sold, securities borrowed, certain loans, customers' acceptance liability, accrued interest and accounts receivable, certain other financial assets, certain securities sold under agreements to repurchase and federal funds purchased, liability on acceptances, accounts payable and accrued expenses, and certain other financial liabilities. Instruments with a maturity or repricing profile of one year or less are generally classified as short term. Carried at cost: Fair value based on available quoted market prices The fair values of certain loans and other financial assets and certain other financial liabilities were determined based on quoted market prices for the instruments or similar issues in their most active market. Carried at cost: Fair value derived using estimation techniques The fair values of most financial instruments without quoted market prices are derived using discount rates that management believes are appropriate. Interest rates derived from prevailing market yield curves, which closely reflect J.P. Morgan's interest-earning deposit and borrowing rates, are used to discount interest-earning deposits, other interest-earning assets, interest-bearing deposits, other borrowings, long-term repurchase agreements, and risk-adjusting swaps. In order to estimate fair values for commercial paper, J.P. Morgan's current commercial paper rates are used; for most long-term debt, J.P. Morgan's current cost of funds for debt with similar terms and remaining maturities is used. Loans are discounted at current market rates that are applicable to loans of similar type, maturity, and credit standing. The fair value of impaired loans is derived using expected cash flows on a discounted basis (or by taking the fair value of any collateral on the loan or by using available market prices). For financial statement reporting purposes, a portion of the aggregate allowance for credit losses is classified as a reduction of the carrying value of loans whose fair value is derived using estimation techniques. Fair values for equity investment securities for which there are no publicly quoted market prices are determined by management based on financial and other available information. The fair value related to commitments to extend credit and standby letters of credit and guarantees is derived by comparing the contractual future stream of fees with such fee streams adjusted to reflect current market rates that would be applicable to instruments of similar type, maturity, and credit standing. The fair value of securities lending indemnifications is determined similarly based on fee streams, which are at market rates since most agreements mature in less than 30 days. For financial statement reporting purposes, a portion of the aggregate allowance for credit losses related to undertakings to extend credit that are not currently reflected on the balance sheet is included in the carrying value of other liabilities. 55 58 11. LOANS Loans, before taking into consideration the allowance for credit losses, at December 31 are summarized in the following table.
In millions 1996 1995 --------------------------------------------------------------------------------------- LOANS IN OFFICES IN THE U.S. Commercial and industrial................................. $ 1 878 $ 1 990 Financial institution: Banks.................................................. 641 729 Other financial institutions........................... 902 527 Collateralized by real estate............................. 324 365 Other, including U.S. state and political subdivision..... 1 488 1 666 --------------------------------------------------------------------------------------- 5 233 5 277 --------------------------------------------------------------------------------------- LOANS IN OFFICES OUTSIDE THE U.S. Commercial and industrial................................. 12 026 10 045 Financial institution: Banks.................................................. 2 853 1 447 Other financial institutions........................... 4 522 3 013 Collateralized by real estate............................. 364 281 Foreign governments and official institutions ............ 811 1 042 Other..................................................... 2 311 2 348 --------------------------------------------------------------------------------------- 22 887 18 176 --------------------------------------------------------------------------------------- 28 120 23 453 ---------------------------------------------------------------------------------------
The distribution of total loans at December 31 on the basis of the location of the borrower is presented in the following table.
In millions 1996 1995 ----------------------------------------------------------------------- LOANS TO BORROWERS IN THE U.S. In offices in the U.S....................... $ 4 354 $ 3 769 In offices outside the U.S.................. 8 275 6 702 ----------------------------------------------------------------------- 12 629 10 471 ----------------------------------------------------------------------- LOANS TO BORROWERS OUTSIDE THE U.S. In offices in the U.S....................... 879 1 508 In offices outside the U.S.................. 14 612 11 474 ----------------------------------------------------------------------- 15 491 12 982 ----------------------------------------------------------------------- 28 120 23 453 -----------------------------------------------------------------------
Total impaired loans, net of charge-offs, at December 31 are presented in the following table. At December 31, 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 primarily based on the fair value of the collateral. Consistent with prior periods, all of J.P. Morgan's impaired loans at December 31, 1996, were on nonaccrual status.
In millions 1996 1995 1994 ----------------------------------------------------------------------- Commercial and industrial....... $ 89 $ 67 $136 Other........................... 29 48 81 ----------------------------------------------------------------------- 118 115 217 Restructuring countries......... 2 2 2 ----------------------------------------------------------------------- 120 117 219 -----------------------------------------------------------------------
56 59 As of December 31, 1996, no SFAS No. 114 reserve was required for the $120 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 12 months ended December 31, 1996, the average recorded investment in impaired loans was $141 million. An analysis of the effect of impaired loans, net of charge-offs, on interest revenue is presented in the following table.
In millions 1996 1995 1994 ------------------------------------------------------------------------------------------- Interest revenue that would have been recorded if accruing (a) ..... $ 14 $17 $18 Less interest revenue recorded: (b) Related to the current period ................................... 3 1 5 Related to prior periods ........................................ 1 38 39 ------------------------------------------------------------------------------------------- Positive (negative) impact of impaired loans on interest revenue ... (10) 22 26 -------------------------------------------------------------------------------------------
(a) Represents $12 million, $13 million, and $13 million from borrowers in the U.S. and $2 million, $4 million, and $5 million from borrowers outside the U.S. in 1996, 1995, and 1994 respectively. (b) Represents $3 million, $30 million, and $4 million from borrowers in the U.S. and $1 million, $9 million, and $40 million from borrowers outside the U.S. in 1996, 1995, and 1994 respectively. 12. AGGREGATE ALLOWANCE FOR CREDIT LOSSES An analysis of the aggregate allowance for credit losses is presented in the following table.
In millions 1996 1995 1994 ---------------------------------------------------------------------- BALANCE, JANUARY 1 ................... $1 130 $1 131 $1 157 ---------------------------------------------------------------------- Recoveries ........................... 25 54 45 Charge-offs: Commercial and industrial ......... (30) (39) (37) Restructuring countries ........... -- -- (18) Other ............................. (9) (16) (17) ---------------------------------------------------------------------- Net charge-offs ...................... (14) (1) (27) Translation adjustment ............... -- -- 1 ---------------------------------------------------------------------- BALANCE, DECEMBER 31 ................. 1 116 (a) 1 130 1 131 ----------------------------------------------------------------------
(a) At December 31, 1996, the aggregate allowance was apportioned and displayed as follows: $566 million as a reduction of loans, $350 million as a reduction of trading account assets relating to derivatives, and $200 million included in other liabilities related to undertakings to extend credit that are not currently reflected on the consolidated balance sheet. 13. PREMISES AND EQUIPMENT The components of premises and equipment at December 31 are presented in the following table.
In millions 1996 1995 ----------------------------------------------------------------------- Land...................................... $ 112 $ 112 Buildings................................. 1 047 958 Equipment and furniture................... 1 107 1 435 Leasehold improvements.................... 342 347 Property under financing obligation: Land and building...................... 500 455 Construction-in-progress.................. 29 32 ----------------------------------------------------------------------- 3 137 3 339 Less: accumulated depreciation............ 1 272 1 412 ----------------------------------------------------------------------- 1 865 1 927 -----------------------------------------------------------------------
Depreciation expense was $212 million in 1996, $247 million in 1995, and $231 million in 1994. No interest was capitalized in connection with various construction projects in 1996 or 1995. 57 60 14. LONG-TERM DEBT The net proceeds of J.P. Morgan's long-term debt may be used for general corporate purposes, including investment in equity and debt securities and advances to subsidiaries. J.P. Morgan has the option to redeem certain debt prior to maturity at specified prices. Long-term debt qualifying as risk-based capital generally must be unsecured and subordinated with an original weighted-average maturity of at least five years. LONG-TERM DEBT QUALIFYING AS RISK-BASED CAPITAL Long-term debt qualifying as risk-based capital and representing all of J.P. Morgan's subordinated issues at December 31 is presented in the following table.
J.P. Morgan (parent) Morgan Guaranty Total debt ------------------------ ---------------- outstanding Fixed Floating Fixed Floating ------------------ In millions rate rate rate rate 1996 1995 ------------------------------------------------------------------------------------------------------------------ CONTRACTUAL MATURITY DATE 1996................................. $ -- $ -- $ -- $ -- $ -- $ 100 1998................................. 611 (a)(b) -- -- -- 611 582 (a)(b) 2000................................. -- 200 -- -- 200 200 2002-2006............................ 1 602 740 199 -- 2 541 2 548 Thereafter........................... 899 10 -- -- 909 649 ------------------------------------------------------------------------------------------------------------------ 4 261 4 079 Less: amortization for risk-based capital purposes (c).............. (569) (489) ------------------------------------------------------------------------------------------------------------------ Total long-term debt qualifying as risk-based capital................ 3 692 3 590 ------------------------------------------------------------------------------------------------------------------
(a) Amounts include $2 million of outstanding convertible debentures at December 31, 1996 and 1995, respectively. At December 31, 1996, these debentures were convertible into 76,650 shares of J.P. Morgan common stock at $20 per share. (b) Amounts include $360 million and $331 million of outstanding zero-coupon notes at December 31, 1996 and 1995, respectively. The principal amount of these notes is $400 million. The yield to maturity on the notes, which do not bear interest, is 8.66%. The carrying value increases as the discount on the notes is accreted to interest expense. (c) The balance of debt qualifying as risk-based capital is reduced 20% per year during each of the last five years prior to maturity. 58 61 LONG-TERM DEBT NOT QUALIFYING AS RISK-BASED CAPITAL Long-term debt not qualifying as risk-based capital and representing all of J.P. Morgan's senior issues at December 31 is presented in the following table.
J.P. Morgan (parent) Morgan Guaranty Total debt ------------------------ ---------------- outstanding Fixed Floating Fixed Floating ------------------ In millions rate rate rate rate 1996 1995 ------------------------------------------------------------------------------------------------------------------- CONTRACTUAL MATURITY DATE 1996..................................... $ -- $ -- $ -- $ -- $ -- $1 062 1997..................................... 854 650 125 6 1 635 1 500 1998..................................... 208 194 414 1 543 2 359 399 1999..................................... 138 -- 530 200 868 332 2000..................................... 458 -- 43 10 511 537 2001..................................... 192 -- 738 95 1 025 65 2002-2006................................ 391 160 374 65 990 227 Thereafter............................... 1 103 (a)(b) -- 16 25 1 144 832 (a)(b) British pound financing obligation (c)... 310 310 294 ------------------------------------------------------------------------------------------------------------------- 8 842 5 248 Add: amortization for risk-based capital purposes (d).................. 569 489 ------------------------------------------------------------------------------------------------------------------- Total long-term debt not qualifying as risk-based capital................. 9 411 5 737 -------------------------------------------------------------------------------------------------------------------
(a) Amounts include a convertible mortgage loan with a carrying value of $406 million and $407 million at December 31, 1996 and 1995, respectively. The interest rate on the loan increases 1/2% every four years from 7%, as set in 1988, to 9% in 2004. After 2008 the rate will be fixed based upon the interest rate for 10-year U.S. Treasury securities at that time. Beginning in 2008 the loan may be converted, at the option of the lender, into a 49% interest in the J.P. Morgan building at 60 Wall Street. If the loan is converted, J.P. Morgan will have the option to lease the property for seven 10-year terms. J.P. Morgan has the right to prepay the debt if the lender does not exercise the conversion option. The loan is collateralized by the 60 Wall Street building owned by Morgan Guaranty. (b) Includes notes maturing in 2008 - 2009 for which the interest rates will be reset during 1998 for the following 10-year term at a rate based on the interest rate for 10-year U.S. Treasury securities at that time. The carrying amount of these notes was $425 million at December 31, 1996 and 1995, respectively. (c) Represents the sale of a 52.5% interest in J.P. Morgan's office building complex in London. The transaction is treated as a financing obligation, which is being amortized over a 25-year period, corresponding with J.P. Morgan's initial lease term for the entire complex. J.P. Morgan has renewal options to lease this space for an additional 50 years. The lease contains escalation clauses under which rental payments will be redetermined every five years, beginning after year 15. Interest on the financing obligation is imputed annually at an effective rate that varies depending on then-current rental rates in the London real estate market. The aggregate amounts of minimum cash payments (at the December 31, 1996 exchange rate) to be applied to the financing obligation for each of the five years subsequent to December 31, 1996, and thereafter are presented in the following table.
In millions -------------------------------------------------------------------- 1997..................................................... $ 26 1998..................................................... 26 1999..................................................... 26 2000..................................................... 26 2001..................................................... 28 Thereafter............................................... 283 -------------------------------------------------------------------- Total cash payments...................................... 415 Less: interest........................................... 105 -------------------------------------------------------------------- Balance outstanding at December 31, 1996................. 310 --------------------------------------------------------------------
(d) The balance of debt qualifying as risk-based capital is reduced 20% per year during each of the last five years prior to maturity. 59 62 Included in the long-term debt tables above are non-U.S. dollar denominated fixed rate instruments totaling $2,790 million and $1,319 million at December 31, 1996 and 1995, respectively. Non-U.S. dollar denominated floating rate instruments totaled $350 million and $124 million at December 31, 1996 and 1995, respectively. Also included in the long-term debt tables above are medium-term notes totaling $745 million at December 31, 1996. Based solely on contractual terms, the weighted-average interest rate of these issues was 6.09% at December 31, 1996. Maturities of these issues ranged from 1997 to 2026. There were no medium-term notes outstanding at December 31, 1995. Based on the yield to maturity for zero-coupon notes and contractual terms for all other issues, the ranges of interest rates associated with long-term debt at December 31 are summarized in the following table.
1996 1995 ----------------------------------------------------------------------------- U.S. dollar fixed rate issues............... 4.50-10.00% 4.46-8.66% U.S. dollar floating rate issues (a)........ 5.18-14.00 4.92-6.86 Non-U.S. dollar fixed rate issues........... 2.52-14.50 4.63-14.50 Non-U.S. dollar floating rate issues (a).... 3.39-8.00 4.13-9.69 -----------------------------------------------------------------------------
(a) Floating rates are determined by formulas and may be subject to certain minimum or maximum rates. The weighted-average interest rate for total long-term debt was 6.67% and 6.94% at December 31, 1996 and 1995, respectively. In order to modify exposure to interest rate and currency exchange rate movements, J.P. Morgan utilizes derivative instruments, primarily interest rate and currency swaps, in conjunction with some of its debt issues. The effect of these derivative instruments is included in the calculation of the interest expense on the associated debt. The weighted-average interest rate for total long-term debt, including the effects of the related derivative instruments, was 5.75% and 6.01% at December 31, 1996 and 1995, respectively. 15. INCOME TAXES J.P. Morgan and eligible subsidiaries file a consolidated U.S. federal income tax return. The current and deferred portions of income tax expense included in the consolidated statement of income are presented in the following table.
In millions 1996 1995 1994 ---------------------------------------------------- -------------------------- --------------------------- INCOME TAX EXPENSE (BENEFIT) Current Deferred Total Current Deferred Total Current Deferred Total -------------------------------------------------------------------------------------- U.S................... $285 $(123) $162 $ 43 $ (3) $ 40 $161 $ 91 $252 Foreign............... 586 (74) 512 505 (4) 501 243 16 259 State and local....... 120 (36) 84 114 (45) 69 115 (16) 99 --------------------------------------------------------------------------------------------------------------- 991 (233) 758 662 (52) 610 519 91 610 ---------------------------------------------------------------------------------------------------------------
60 63 The income tax expense related to net gains on debt and equity investment securities, included in Income taxes, was $98 million in 1996, $187 million in 1995, and $274 million in 1994. Deferred tax assets and liabilities at December 31, 1996, 1995, and 1994, resulted from the items listed in the following table.
In millions 1996 1995 1994 ------------------------------------------------------------------------------------------------ DEFERRED TAX ASSETS Compensation and benefits............................... $ 887 $ 646 $ 454 Aggregate allowance for credit losses................... 443 444 444 Foreign operations...................................... 68 82 88 Write-down of equity investment securities.............. 44 54 52 Other................................................... 168 199 129 ------------------------------------------------------------------------------------------------ Total deferred tax assets before valuation allowance.... 1 610 1 425 1 167 Less: valuation allowance (a)........................... 120 140 140 ------------------------------------------------------------------------------------------------ Total deferred tax assets............................... 1 490 1 285 1 027 ------------------------------------------------------------------------------------------------ DEFERRED TAX LIABILITIES Gains on debt and equity investment securities.......... 549 564 342 Lease financing transactions............................ 142 135 120 Unremitted earnings..................................... 101 86 67 Depreciation............................................ 36 43 44 Interest rate and currency swaps........................ 14 68 99 Other................................................... 147 241 219 ------------------------------------------------------------------------------------------------ Total deferred tax liabilities.......................... 989 1 137 891 ------------------------------------------------------------------------------------------------
(a) The valuation allowance is primarily related to the ability to recognize tax benefits associated with foreign operations. J.P. Morgan recorded a deferred income tax liability of $268 million, $358 million, and $274 million at December 31, 1996, 1995, and 1994, respectively related to the net unrealized gains on investment securities classified as available-for-sale. A reconciliation of the difference between the expected U.S. statutory income tax rate and J.P. Morgan's effective income tax rate is shown in the following table.
Percentage of pretax income 1996 1995 1994 ----------------------------------------------------------------------------------------------------------- U.S. statutory tax rate........................................ 35.0% 35.0% 35.0% Increase (decrease) due to: State and local taxes, net of U.S. income tax effects....... 2.3 2.4 3.5 Tax-exempt income........................................... (2.7) (6.7) (3.7) Other....................................................... (2.1) 1.3 (1.4) ----------------------------------------------------------------------------------------------------------- Effective tax rate............................................. 32.5 32.0 33.4 -----------------------------------------------------------------------------------------------------------
Pretax income The following table presents Income before income taxes reported by location of office. This presentation differs from the basis of disclosure of U.S., foreign, and state and local tax expense above and from the basis of disclosure of domestic-related and international-related income in Note 25 to the consolidated financial statements, International operations.
In millions 1996 1995 1994 --------------------------------------------------------------------- Offices in the U.S............. $ 155 $ 455 $ 908 Offices outside the U.S........ 2 177 1 451 917 --------------------------------------------------------------------- 2 332 1 906 1 825 ---------------------------------------------------------------------
61 64 16. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY In November 1996, the JPM Capital Trust I (Trust), a wholly owned subsidiary of J.P. Morgan, issued $750 million of 7.54% Cumulative Capital Securities (Trust Preferred Securities) with a stated value and liquidation preference of $1,000 per share. The Trust Preferred Securities qualify as tier 1 capital under Federal Reserve guidelines, and have no voting rights. The obligations of J.P. Morgan under the Trust Agreement, as defined, constitute a full and unconditional guarantee by J.P. Morgan of the Trust's obligations under the Trust Preferred Securities issued. The proceeds from the sale of the Trust Preferred Securities and the sale of the Trust's common stock to J.P. Morgan were utilized by the Trust to purchase $773.2 million of 7.54% Junior Subordinated Debentures (Intercompany Debentures) of J.P. Morgan. The Intercompany Debentures are unsecured and rank subordinate and junior in right of payment to all other indebtedness, liabilities, and obligations of J.P. Morgan. The Intercompany Debentures represent the sole assets of the Trust. Interest on the Trust Preferred Securities is cumulative, payable semiannually, but only if, and to the extent that, the semiannual interest payments are made on the Intercompany Debentures by J.P. Morgan. Upon approval from the Federal Reserve, J.P. Morgan has the right to optionally redeem the Intercompany Debentures, prior to the maturity date of January 15, 2027, on or after January 15, 2007, at 103.77% of the stated liquidation preference amount; such price declining 0.377% per year until January 15, 2017, at which time the price on and thereafter shall equal 100%. Proceeds from any redemption or maturity of the Intercompany Debentures would cause a mandatory redemption of Trust Preferred Securities having an aggregate liquidation amount equal to the principal amount of Intercompany Debentures redeemed. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 53, J.P. Morgan is not required to disclose separate financial statements because the Trust is wholly owned, has no independent operations, and is issuing securities that contain a full and unconditional guarantee of its parent, J.P. Morgan. In December 1996, the Board of Directors approved the purchase of up to $750 million of J.P. Morgan common stock in the open market or through privately negotiated transactions with the proceeds raised from the issuance of the Trust Preferred Securities. The repurchase is expected to be completed in 1997. 62 65 17. PREFERRED STOCK Total authorized shares of preferred stock are 10,400,000 and 10,000,000 at December 31, 1996 and 1995, respectively. J.P. Morgan may redeem the outstanding preferred stock, in whole or in part, at its option, for the stated value plus accrued and unpaid dividends except for the Fixed Cumulative Preferred Stock, Series H shares, which may not be redeemed before March 31, 2006. All preferred stock has a dividend preference as well as a liquidation preference and is generally nonvoting. Preferred stock outstanding at December 31 is presented in the following table.
Authorized, issued, and outstanding shares Dividend rate (a) --------------------------- ------------------------ 1996 1995 1996 1995 ------------------------------------------------------------------------------------------------------------------- Adjustable Rate Cumulative Preferred Stock, Series A (stated value: $100 per share)........ 2 444 300 2 444 300 5.00% 5.00% Variable Cumulative Preferred Stock, Series B, C, D, E, and F (authorized, issued, and outstanding: 50 000 shares each series; stated value: $1 000 per share)................ 250 000 250 000 3.88-4.08 4.28-4.56 Fixed Cumulative Preferred Stock, Series H (stated value: $500 per share)........ 400 000 -- 6.63 -- -------------------------------------------------------------------------------------------------------------------
(a) Series A: The quarterly dividend rate is determined by a formula based on the interest rates of certain actively traded U.S. Treasury obligations. The quarterly rate in no event will be less than 5.00% or greater than 11.50% per annum. The Series A preferred stock qualifies as tier 1 capital. Series B, C, D, E, and F: Dividend rates for each series are determined periodically either by auction or remarketing. The dividend rates may not exceed certain maximums that are 110% to 200% of various market interest rates, depending on the prevailing credit rating of the instrument at the dividend determination dates and the duration of the then-current dividend periods. The dividend periods may vary from one day to 30 years, depending on the dividend determination method used. During 1996 and 1995, J.P. Morgan reset the dividend rates approximately every 49 days. The dividend rates stated above represent the range of those in effect at year-end. These series of preferred stock qualify as tier 2 capital. Series H: The quarterly dividend rate is paid at the fixed rate of 6.625% per annum. The Series H preferred stock qualifies as tier 1 capital. 18. PENSION BENEFITS Pension plans are in effect for substantially all regular employees of J.P. Morgan. J.P. Morgan's pension plans are generally noncontributory defined benefit plans. The plans' pension benefits are generally based on age and years of credited service and a percentage of qualifying compensation during the final years of employment. J.P. Morgan's policy generally has been to contribute currently the accrued costs of its funded pension plans. The principal U.S. plan continues to meet legal funding requirements. Contributions to that plan were $20 million in 1996, $26 million in 1995, and $63 million in 1994. The accrued costs of certain other pension plans are not contributed currently, since contributions to these unfunded plans are not tax deductible. 63 66 For J.P. Morgan's domestic and foreign funded plans, the value of plan assets exceeded accumulated benefits at September 30, 1996 and 1995 (the dates of the actuarial valuations). The following table presents information related to these plans, including the amounts recorded on the consolidated balance sheet.
In millions 1996 1995 ------------------------------------------------------------------------------------------------------ Plan assets (a)............................................................... $1 309 $1 175 Less: accumulated benefits earned prior to valuation date (b) Vested..................................................................... 787 763 Nonvested.................................................................. 132 112 ------------------------------------------------------------------------------------------------------ Accumulated benefit obligation (b)......................................... 919 875 ------------------------------------------------------------------------------------------------------ Funded status of accumulated benefit obligation............................... 390 300 Less: additional benefits based on estimated future salary levels (b)......... 171 209 ------------------------------------------------------------------------------------------------------ Funded status of projected benefit obligation (c)............................. 219 91 Amounts available to increase (reduce) future pension expense: Unamortized balance of the initial transition amount (d)................... (34) (42) Cumulative net actuarial gain, including deferred investment results (e)... (114) (27) Costs of retroactive benefits granted by plan amendments................... 32 38 ------------------------------------------------------------------------------------------------------ Net amounts available to decrease expense in future periods................ (116) (31) ------------------------------------------------------------------------------------------------------ Net prepaid pension cost recorded on the consolidated balance sheet........... 103 60 ------------------------------------------------------------------------------------------------------
(a) Plan assets, which are at fair value, are managed by a trustee and are generally invested in fixed income securities, listed stocks, and commingled pension trust funds. (b) Expressed as the actuarial present value. (c) The projected benefit obligation, which equals the sum of the accumulated benefit obligation and additional benefits based on estimated future salary levels, was $1,090 million and $1,084 million at September 30, 1996 and 1995, respectively. (d) To be recognized ratably as a reduction of pension expense through 1999. (e) Actuarial gains result from experience that differs from that assumed or from a change in an actuarial assumption. Obligations related to unfunded pension plans are recorded as a liability on the consolidated balance sheet. At December 31, 1996 and 1995, such obligations were $116 million and $112 million respectively. The following table presents the components of 1996, 1995, and 1994 pension expense for all defined benefit pension plans. The pension expense related to defined contribution pension plans continues to be immaterial.
In millions 1996 1995 1994 ---------------------------------------------------------------------------------------------- Cost of benefits earned during the period ......................... $ 60 $ 60 $ 67 Interest cost on the projected benefit obligation ................. 88 87 81 Assumed return on all pension plan assets (a) ..................... (109) (98) (89) Amortization, primarily of the initial transition amount .......... (7) (6) (3) ---------------------------------------------------------------------------------------------- Pension expense reflected in Employee compensation and benefits ... 32 43 56 ----------------------------------------------------------------------------------------------
(a) For the 12 month periods ended September 30, 1996, 1995, and 1994, the actual returns on plan assets were $163 million, $141 million, and $33 million respectively. The differences between the actual and assumed amounts have been deferred. The following table presents weighted-average actuarial assumptions used to calculate the projected benefit obligation and pension expense. Assumptions at September 30 are used to calculate the projected benefit obligation as of that date and determine the pension expense for the following fiscal year.
1996 1995 1994 ------------------------------------------------------------------------------------- Assumptions at September 30: Assumed rate of return ......................... 9.3% 9.3% 9.5% Future annual compensation increases ........... 4.9 5.1 6.0 Discount rate .................................. 7.6 7.4 8.3 ------------------------------------------------------------------------------------- Pension expense for the year ended December 31: Assumed rate of return ......................... 9.3 9.5 9.5 Future annual compensation increases ........... 5.1 6.0 5.0 Discount rate .................................. 7.4 8.3 7.0 -------------------------------------------------------------------------------------
64 67 19. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS U.S. employees retiring with J.P. Morgan who were hired before February 1, 1989, and who have completed 10 years of continuous service with J.P. Morgan may be eligible for pensioner health care and pensioner life insurance coverage, although J.P. Morgan has no contractual obligation to provide this coverage. Eligible employees retiring after July 1, 1992, will absorb a greater proportion of the cost of health care than those who retired on or before July 1, 1992. U.S. employees hired on or after February 1, 1989, are not eligible for pensioner health care coverage but may be eligible for limited pensioner life insurance coverage when they retire. Substantially all of the postretirement benefit costs relate to U.S. employees. Eligibility requirements for each plan vary from country to country. Effective November 21, 1994, J.P. Morgan began to fund its postretirement benefit obligations through the purchase of corporate-owned life insurance (COLI) on the lives of eligible employees and retirees. Assets attributable to the COLI policy are held in a separate account at the insurance company, and the cash value of the policy is invested by the insurance company in equity securities and/or bonds or other debt instruments. The COLI policy is owned by J.P. Morgan; however, the COLI proceeds (i.e., death benefits, withdrawals, and other distributions) are segregated and restricted to reimbursing J.P. Morgan for its net postretirement benefit claim payments and related administrative expenses. The following table reconciles the actuarial present value of J.P. Morgan's accumulated postretirement benefit obligation (APBO) relating to health care and life insurance at September 30, the date of the actuarial valuation, to the amount recorded on the consolidated balance sheet at December 31.
In millions 1996 1995 ----------------------------------------------------------------------------------------------- Actuarial present value of APBO: Retirees ................................................................ $ 104 $ 97 Fully eligible active participants ...................................... 19 22 Other active participants ............................................... 69 83 ----------------------------------------------------------------------------------------------- Total APBO at September 30 ................................................. 192 202 Cumulative net actuarial gain, including deferred investment results (a) ... 91 73 Fair value of COLI policy at December 31 ................................... (140) (91) ----------------------------------------------------------------------------------------------- Net accrued postretirement benefit liability recorded on the consolidated balance sheet .............................................. 143 184 -----------------------------------------------------------------------------------------------
(a) Actuarial gains and losses result from experience that differs from that assumed or from a change in an actuarial assumption. The following table presents the components of 1996, 1995, and 1994 postretirement benefit expense.
In millions 1996 1995 1994 ----------------------------------------------------------------------- Cost of benefits earned during the period .... $ 5 $ 6 $ 9 Interest cost on APBO ........................ 15 17 18 Assumed return on COLI policy (a) ............ (7) (3) -- Amortization of unrecognized net gains ....... (4) (2) -- ----------------------------------------------------------------------- Postretirement benefit expense reflected in Employee compensation and benefits ........ 9 18 27 -----------------------------------------------------------------------
(a) For the 12 month periods ended September 30, 1996 and 1995, the actual return was $10 million and $9 million respectively. The differences between the actual and assumed amounts have been deferred. 65 68 The following table presents actuarial assumptions used to calculate the APBO and postretirement benefit expense. Assumptions at September 30 are used to calculate the APBO as of that date and determine postretirement benefit expense for the following fiscal year.
1996 1995 1994 --------------------------------------------------------------------------------------------------- Assumptions at September 30: Assumed rate of return ......................................... 9.0% 9.0% 9.0% Future annual compensation increases, affecting the APBO for pensioner life insurance only ............................... 4.8 4.8 5.5 Health care cost trend rate: First year .................................................. 11.5 12.0 15.0 Ultimate rate after gradual decreases until the year 2009 ... 5.5 5.5 5.5 Discount rate .................................................. 7.8 7.5 8.5 ---------------------------------------------------------------------------------------------------
If the assumed health care cost trend rate were increased one percentage point in each future year, annual postretirement benefit expense would have increased by $2.0 million in 1996, $2.0 million in 1995, and $3.0 million in 1994. In addition, the APBO as of September 30 would have increased by $13.0 million, $16.0 million, and $20.0 million for 1996, 1995, and 1994 respectively. 20. STOCK OPTIONS AND AWARDS J.P. Morgan's stock option and award plans provide for the issuance of stock-related awards to key employees, such as stock options, stock appreciation rights, restricted stock awards, stock bonus awards, stock unit awards, deferred stock payable in stock, and redeemable preferred stock. To satisfy awards granted under the stock option and award plans, common stock may be made available from J.P. Morgan's authorized but unissued shares. Shares may also be purchased on the open market at various times during the year. Shares available for future grant under the Stock Incentive plans totaled 21,204,623 at December 31, 1996, certain of which may be made available from treasury shares. Shares authorized for future grant under the Stock Bonus plan are 2% of outstanding shares. All shares authorized under the Stock Bonus plan are required to be settled in treasury shares. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock option and award plans. Compensation cost recognized in the consolidated income statement for J.P. Morgan's stock award plans for 1996, 1995, and 1994 was $272 million, $227 million, and $157 million respectively. Had compensation cost for J.P. Morgan's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, net income and earnings per share for 1996 and 1995 would approximate the pro forma amounts indicated below.
In millions, except per share data 1996 1995 ----------------------------------------------------------------------- Net income (a) As reported..... $1 574 $1 296 Pro forma....... 1 522 1 231 ----------------------------------------------------------------------- Primary earnings per share As reported..... $ 7.63 $6.42 Pro forma....... 7.37 6.09 ----------------------------------------------------------------------- Fully diluted earnings per share As reported..... 7.56 6.36 Pro forma....... 7.31 6.03 -----------------------------------------------------------------------
(a) For pro forma purposes, the fair value of stock option awards is amortized over the relative vesting periods; the fair value of other stock awards is generally expensed entirely in the year of performance to which it relates. As of December 31, 1996 and 1995, the unamortized expense of nonvested options for pro forma purposes was $28 million and $23 million respectively. 66 69 Stock options Stock options under the Stock Incentive plans are issued at exercise prices not less than the fair market value on the date of grant, and in accordance with APB Opinion No. 25 and related Interpretations, no compensation cost has been recognized for fixed stock option plans. Stock options are generally exercisable commencing one to three years following the date of grant and in no event later than 10 years from the date of grant. Options generally vest ratably over the vesting period. Since employee stock options have characteristics significantly different from those of traded options and because changes in the subjective assumptions can materially affect the fair value estimate, J.P. Morgan used a modified Black-Scholes option-pricing model to estimate the fair value of each option grant. The modified Black-Scholes model takes into account the estimated lives of the options and an expected dividend yield based on historical dividend rate increases. The following weighted-average assumptions were used for grants in 1996 and 1995 respectively: dividend yield of 4.24% and 4.83%; five year monthly historical volatility of 18.5% and 21.3%; risk-free interest rate of 5.98% and 7.61%; and expected life of 7 years. A summary of Morgan's stock option activity and related information follows.
1996 1995 1994 ------------------------ ------------------------ ------------------------ Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price ----------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year ..... 24 325 921 $59.75 20 725 020 $56.28 17 532 954 $51.95 Granted .............................. 5 208 808 78.44 7 166 952 64.61 4 541 600 71.00 Exercised ............................ (4 189 674) 54.33 (3 128 485) 47.17 (946 955) 42.87 Forfeited ............................ (271 958) 68.18 (437 566) 65.07 (402 579) 65.41 Expired .............................. (982) 41.94 -- -- -- -- ----------------------------------------------------------------------------------------------------------------------- Outstanding at year-end, ............. 25 072 115 64.45 24 325 921 59.75 20 725 020 56.28 ----------------------------------------------------------------------------------------------------------------------- Exercisable at year-end .............. 15 991 664 $59.13 15 179 860 $55.89 14 229 295 $51.06 ----------------------------------------------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year ... $ 13.47 $78.44 $ 13.41 $64.61 $ 16.18 $71.00 -----------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1996.
Options outstanding Options exercisable --------------------------------------- -------------------------- Weighted- average Weighted- Weighted- remaining average average Number contractual exercise Number exercise Range of exercise prices outstanding life (years) price exercisable price ----------------------------------------------------------------------------------------------------------- $31-$46............................ 4 101 242 3.05 $41.43 4 101 242 $41.43 $60-$76............................ 19 265 873 7.32 67.01 11 890 422 65.23 $78-$105........................... 1 705 000 8.55 90.82 -- -- -----------------------------------------------------------------------------------------------------------
Prior to 1997, stock options were generally granted in January. Beginning in 1997, stock options will generally be granted in midyear. 67 70 Restricted stock awards Restricted stock awards under the Stock Incentive and Stock Bonus plans are awarded in the form of share credits, each of which is equivalent to one share of J.P. Morgan common stock. Restricted stock awards generally become fully vested on the fifth anniversary of the date of the award. Payment of the award generally may be made to the participant as soon as practicable after the award has become vested, but may be deferred at the discretion of a committee of the Board of Directors administering the plans. At December 31, 1996, 1995, and 1994, total share credits representing previously granted restricted stock awards, including share credits attributable to dividend equivalents, were 3,395,355 credits, 2,968,840 credits, and 2,146,629 credits respectively. For the 1996 and 1995 award years, 485,507 and 612,530 share credits respectively were granted at weighted-average grant date fair values of $95.34 and $73.37 per share respectively. Stock bonus awards Stock bonus awards under the Stock Incentive and Stock Bonus plans are substantially similar to restricted stock awards, except that stock bonus awards generally become vested on the third anniversary of the date of the award. Payment of stock bonus awards may be made to the participant as soon as practicable after the award has become vested, but may be deferred at the discretion of a committee of the Board of Directors administering the plans. At December 31, 1996, 1995, and 1994, total share credits representing previously granted stock bonus awards, including share credits attributable to dividend equivalents, were 4,030,763 credits, 2,603,378 credits, and 1,573,006 credits respectively. For the 1996 and 1995 award years, 2,126,067 and 1,588,477 share credits respectively were granted at weighted average grant date fair values of $103.14 and $75.53 per share respectively. Stock unit awards Stock unit awards under the Stock Bonus plan are substantially similar to restricted stock and stock bonus awards, except that the value of a stock unit award will never exceed (but may be less than) the dollar value of the initial award, except for the value of dividend equivalents accrued on such awards. Stock unit awards generally become fully vested on the third anniversary of the date of the award. At December 31, 1996 and 1995, total share credits representing previously granted stock unit awards, including share credits attributable to dividend equivalents, were 176,481 credits and 52,533 credits respectively. At December 31, 1994, no stock unit awards had been granted. For the 1996 and 1995 award years, 145,594 and 123,364 share credits respectively were granted at weighted-average grant date fair values of $103.44 and $75.63 per share respectively. Deferred stock payable in stock Morgan's Incentive Compensation plans permit eligible employees to elect to defer all or a portion of their current annual incentive compensation awards into several types of accounts, including a Morgan common stock account. Deferral amounts are not subject to forfeiture. Amounts deferred into the Morgan common stock account are converted into share credits and earn dividend equivalents during the deferral period. In general, upon termination of employment or retirement, a participant's balance in the Morgan common stock account is distributed in the form of Morgan common stock. At December 31, 1996, total share credits payable in stock (including share credits attributable to dividend equivalents) were 2,100,985 credits. For the 1996 and 1995 award years, 306,284 and 186,155 share credits respectively were granted at weighted-average grant date fair values of $97.63 and $80.25 per share respectively. 68 71 Redeemable preferred stock J.P. Morgan may award redeemable preferred stock to certain employees. The redeemable preferred stock is redeemable at any time by the stockholder. J.P. Morgan may also call the outstanding redeemable preferred stock, in whole, upon 30 days' notice after 60 days from issuance. At December 31, 1996, 1995, and 1994, approximately 2.5 million, 1.7 million, and 1.0 million shares respectively of the redeemable preferred stock had been authorized, and there were no shares issued or outstanding. In 1996 and 1995, shares of redeemable preferred stock were awarded to employees, and all shares were redeemed by those employees. Stock awards other than options are generally granted in the January following the award year. In January 1997, 2,818,693 share credits representing stock awards other than options were granted. 21. 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 subtracting from net income the preferred stock dividends to arrive at net income applicable to common stock. Primary and fully diluted earnings per common share are computed by dividing net income applicable to common stock by the weighted-average number of common and common equivalent shares outstanding during the year. For primary and fully diluted earnings per share, the weighted-average number of common and common equivalent shares outstanding was the sum of 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, as computed under the treasury stock method. Under this method, the number of incremental shares is determined by assuming the issuance of the outstanding stock options and certain deferred incentive compensation awards, reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the market price of the company's common stock. For primary earnings per share, this market price is the average market price for the period, while for fully diluted earnings per share, it is the period-end market price, if it is higher than the average price.
Dollars in millions 1996 1995 1994 ---------------------------------------------------------------------------------------------- Net income applicable to common stock............. $ 1 541 $ 1 275 $ 1 198 Weighted-average number of common and common equivalent shares outstanding: Primary earnings per share..................... 202 010 237 198 654 973 199 056 561 Fully diluted earnings per share............... 203 754 564 200 613 199 199 056 809 ----------------------------------------------------------------------------------------------
69 72 22. CAPITAL REQUIREMENTS J.P. Morgan and its subsidiaries, as well as certain foreign branches of its bank subsidiary, Morgan Guaranty, are subject to various regulatory capital requirements administered by U.S. and foreign regulators. The Board of Governors of the Federal Reserve System (Federal Reserve Board), J.P. Morgan's primary regulator, establishes the minimum capital requirements for the consolidated bank holding company as well as for certain of its subsidiaries, including Morgan Guaranty. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on J.P. Morgan's financial statements. The capital of J.P. Morgan and its principal subsidiaries, Morgan Guaranty and J.P. Morgan Securities Inc. (JPMSI), exceeded the minimum requirements set by each regulator at December 31, 1996. Under risk-based capital adequacy guidelines set by the Federal Reserve Board, banks and bank holding companies must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Set forth in the table below are the risk-based capital and leverage ratios and amounts for J.P. Morgan and Morgan Guaranty. Under the capital guidelines established by the Federal Reserve Board, the published capital ratios of J.P. Morgan are calculated excluding the equity, assets, and off-balance-sheet exposures of JPMSI. JPMSI is subject to the SEC Uniform Net Capital Rule, which requires the maintenance of minimum net capital. In accordance with Federal Reserve Board guidelines, the risk-based capital and leverage amounts and ratios exclude the effect of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Amounts Ratios (c) --------------------- ---------------- In millions 1996 1995 1996 1995 ----------------------------------------------------------------------------------- Tier 1 capital (a) J.P. Morgan ............. $10 873 $ 9 033 8.8% 8.8% Morgan Guaranty (d) ..... 9 665 8 510 8.2 8.6 ----------------------------------------------------------------------------------- Total risk-based capital (b) J.P. Morgan ............. 15 145 13 398 12.2 13.0 Morgan Guaranty (d) ..... 13 551 11 143 11.5 11.2 ----------------------------------------------------------------------------------- Leverage J.P. Morgan ............. 5.9 6.1 Morgan Guaranty (d) ..... 5.3 5.7 -----------------------------------------------------------------------------------
(a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum tier 1 capital of $5.0 billion and $4.7 billion respectively as of December 31, 1996. At December 31, 1995, J.P. Morgan and Morgan Guaranty required minimum tier 1 capital of $4.1 billion and $4.0 billion respectively. (b) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum total risk-based capital of $9.9 billion and $9.4 billion respectively as of December 31, 1996. At December 31, 1995, J.P. Morgan and Morgan Guaranty required minimum total capital of $8.3 billion and $7.9 billion respectively. (c) Pursuant to Federal Reserve Board guidelines, the minimum tier 1 capital, total risk-based capital, and leverage ratios are 4%, 8%, and 3% respectively for bank holding companies and banks. (d) The December 31, 1995 amounts and ratios have been restated to reflect the merger of J.P. Morgan Delaware with Morgan Guaranty Trust Company of New York effective June 1996. Furthermore, for certain regulatory supervision purposes, bank regulators use five capital category definitions applicable to banks ranging from "well capitalized" to "critically undercapitalized." A bank is considered "well capitalized" if it has minimum tier 1 capital, total capital, and leverage ratios of 6%, 10%, and 5% respectively. At December 31, 1996 and 1995, Morgan Guaranty's ratios exceeded the minimum standards for a "well capitalized" bank, under standards provided by the regulatory framework for prompt corrective action and the Federal Reserve Board. Management is aware of no conditions or events that have occurred since December 31, 1996, that would change Morgan Guaranty's "well capitalized" status. 70 73 Effective October 1996, the Federal Reserve Board issued a rule implementing provisions of Regulation Y, which determines the capital levels at which a bank holding company shall be considered "well capitalized." Pursuant to these guidelines, the Federal Reserve Board considers a bank holding company "well capitalized" if it has a minimum tier 1 capital, total capital, and leverage ratios of 6%, 10%, and 4% respectively. At December 31, 1996, J.P. Morgan's ratios exceeded the minimum standards for a "well capitalized" bank holding company. Management is aware of no conditions or events that have occurred since December 31, 1996, that would change J.P. Morgan's "well capitalized" status. 23. COMMITMENTS AND CONTINGENT LIABILITIES Excluding mortgaged properties, assets carried at approximately $67.0 billion and approximately $53.1 billion in the consolidated balance sheet at December 31, 1996 and 1995, respectively were pledged as collateral for borrowings, to qualify for fiduciary powers, to secure public monies as required by law, and for other purposes. In compliance with rules and regulations established by various domestic and foreign regulators, cash of $112 million and $96 million and securities with a market value of $2,158 million and $1,786 million were segregated in special bank accounts for the benefit of securities and futures brokerage customers at December 31, 1996 and 1995, respectively. Operating expenses include net rentals of $96 million in 1996, $115 million in 1995, and $94 million in 1994. Minimum rental commitments on noncancelable leases for premises and equipment are $746 million in the aggregate, and for each of the five years subsequent to December 31, 1996, are $93 million (1997), $86 million (1998), $57 million (1999), $54 million (2000), and $50 million (2001). Certain leases contain renewal options and escalation clauses. In the ordinary course of business, J.P. Morgan guarantees the performance of certain obligations of certain subsidiaries and affiliates. It is not anticipated that these agreements will have a material effect on the results of operations of J.P. Morgan. Various legal actions and proceedings are pending against or involve J.P. Morgan and its subsidiaries. Management, after reviewing with counsel all actions and proceedings pending against or involving J.P. Morgan and its subsidiaries, considers that the aggregate liability or loss, if any, resulting from them will not be material. 71 74 24. CONCENTRATIONS OF FINANCIAL INSTRUMENTS J.P. Morgan's clients and other counterparties to the company's on- and off-balance-sheet financial instruments operate in diverse industries of the world economy, most significantly in the United States and Europe, and include nonbank financial institutions, governments, and banks. Summarized in the following tables are the amounts of credit exposure associated with the company's on- and off-balance-sheet financial instruments allocated to the industries and geographic areas of the ultimate obligors at December 31, 1996 and 1995. The amounts below do not consider $97.0 billion and $95.5 billion of cash and marketable security collateral at December 31, 1996 and 1995, respectively related mainly to loans, resale agreements, securities lending indemnifications, and amounts receivable for securities sold not yet settled, that are available to J.P. Morgan to limit these credit exposures.
Nonbank financial Govern- In billions institutions (a) ments Banks All other Total ------------------------------------------------------------------------------------------------------------ 1996 On-balance-sheet: North America (b) ..................... $ 30.6 $ 39.5 $ 23.8 $ 18.6 $112.5 Europe (c) ............................ 22.2 25.0 18.7 9.4 75.3 Asia Pacific .......................... 4.0 8.2 6.6 3.7 22.5 Latin America (d) ..................... 0.1 4.0 1.5 5.2 10.8 ------------------------------------------------------------------------------------------------------------ Total on-balance-sheet credit exposure 56.9 76.7 50.6 36.9 221.1 (e) ------------------------------------------------------------------------------------------------------------ Off-balance-sheet: North America (b) ..................... 20.3 5.7 5.1 42.0 73.1 Europe (c) ............................ 9.8 1.6 10.0 10.0 31.4 Asia Pacific .......................... 1.1 2.7 0.9 2.9 7.6 Latin America (d) ..................... 0.2 -- 0.3 0.6 1.1 ------------------------------------------------------------------------------------------------------------ Total off-balance-sheet credit exposure 31.4 10.0 16.3 55.5 113.2 ------------------------------------------------------------------------------------------------------------ Total credit exposure ................. 88.3 86.7 66.9 92.4(f) 334.3 ------------------------------------------------------------------------------------------------------------ Cash and marketable security collateral ......................... 51.8 1.6 33.1 10.5 97.0 ------------------------------------------------------------------------------------------------------------ 1995 On-balance-sheet: North America (b) ..................... 32.2 33.6 20.8 17.3 103.9 Europe (c) ............................ 13.5 20.3 13.4 9.5 56.7 Asia Pacific .......................... 1.7 7.1 3.4 2.4 14.6 Latin America (d) ..................... 0.1 4.6 1.6 2.6 8.9 ------------------------------------------------------------------------------------------------------------ Total on-balance-sheet credit exposure 47.5 65.6 39.2 31.8 184.1(e) ------------------------------------------------------------------------------------------------------------ Off-balance-sheet: North America (b) ..................... 25.7 6.6 3.7 34.2 70.2 Europe (c) ............................ 8.9 5.8 6.0 8.4 29.1 Asia Pacific .......................... 0.4 1.0 2.4 2.3 6.1 Latin America (d) ..................... 0.7 0.7 0.3 0.2 1.9 ------------------------------------------------------------------------------------------------------------ Total off-balance-sheet credit exposure 35.7 14.1 12.4 45.1 107.3 ------------------------------------------------------------------------------------------------------------ Total credit exposure ................. 83.2 79.7 51.6 76.9 291.4 ------------------------------------------------------------------------------------------------------------ Cash and marketable security collateral ......................... 57.2 1.7 27.0 9.6 95.5 ------------------------------------------------------------------------------------------------------------
(a) Nonbank financial institutions include securities firms, insurance companies, and investment companies. (b) Includes the United States, Canada, and the Carribean. (c) Includes Middle East and Africa. (d) Includes Mexico, Central America, and South America. (e) On-balance-sheet items without credit exposure totaled $0.9 billion and $0.8 billion in 1996 and 1995 respectively. (f) The utilities industry exceeded 10% of this amount at December 31, 1996. 72 75 25. INTERNATIONAL OPERATIONS For financial reporting purposes, the operations of J.P. Morgan are divided into domestic and international components. Management believes that the methodology used to allocate J.P. Morgan's results between domestic and international sources, while inexact, is an appropriate one. Assets are distributed on the basis of the location of the borrower or obligor, with the exception of interest-earning deposits with banks, which are distributed based on the location of the institution receiving the deposit, and trading account assets, premises and equipment, accrued interest and accounts receivable, and other assets, which are distributed based on the location of the office recording the asset. Because the operations of J.P. Morgan are highly integrated, identification of revenues and expenses by geographic region involves estimates and assumptions. Client-focused revenues are assigned to the region managing the client relationship for the particular product. For finance and advisory products, this is the location of the client's head office; for most other products, it is based on the location where activity is transacted. Market-making revenues that cannot be specifically attributed to individual clients (for example, gains/losses arising from positions taken to facilitate client transactions) are generally allocated based on the proportion of regional revenues. Revenues from proprietary investing and trading activities are based upon the location of the risk-taker. Expenses are allocated based on the estimated cost associated with servicing the client base in the region. Earnings on stockholders' equity are generally allocated based on the proportion of regional revenue, and adjustments are made for differences between domestic and international income tax rates. On the basis described above, assets at December 31 and results for the years ended December 31, 1996, 1995, and 1994 were distributed among domestic and international operations as presented in the following table.
Income before Income Total Total Total income tax Net In millions assets revenues (a) expenses taxes expense income ------------------------------------------------------------------------------------------------------------ 1996 Europe (b) ................... $ 95 854 $2 060 $1 367 $ 693 $ 277 $ 416 Asia Pacific ................. 11 365 845 458 387 155 232 Latin America (c) ............ 5 839 528 227 301 120 181 ------------------------------------------------------------------------------------------------------------ Total international operations 113 058 3 433 2 052 1 381 552 829 Domestic operations (d) (e) .. 108 968 3 422 2 471 951 206 745 ------------------------------------------------------------------------------------------------------------ Total ........................ 222 026 6 855 4 523 2 332 758 1 574 ------------------------------------------------------------------------------------------------------------ 1995 Europe (b) ................... 73 040 1 684 1 236 448 179 269 Asia Pacific ................. 7 753 786 430 356 143 213 Latin America (c) ............ 4 537 441 189 252 101 151 ------------------------------------------------------------------------------------------------------------ Total international operations 85 330 2 911 1 855 1 056 423 633 Domestic operations (d) (e) .. 99 549 2 993 2 143 850 187 663 ------------------------------------------------------------------------------------------------------------ Total ........................ 184 879 5 904 3 998 1 906 610 1 296 ------------------------------------------------------------------------------------------------------------ 1994 Europe (b) ................... 63 939 1 481 1 135 346 138 208 Asia Pacific ................. 5 840 578 363 215 86 129 Latin America (c) ............ 2 851 389 158 231 92 139 ------------------------------------------------------------------------------------------------------------ Total international operations 72 630 2 448 1 656 792 316 476 Domestic operations (d) (e) .. 82 287 3 069 2 036 1 033 294 739 ------------------------------------------------------------------------------------------------------------ Total ........................ 154 917 5 517 3 692 1 825 610 1 215 ------------------------------------------------------------------------------------------------------------
(a) Includes net interest revenue and noninterest revenues. (b) Includes Middle East and Africa. (c) Includes Mexico, Central America, and South America. (d) Includes the United States, Canada, and the Caribbean. Total assets include $99.5 billion, $90.5 billion, and $78.2 billion at December 31, 1996, 1995, and 1994, respectively related to United States operations. Total revenue and expenses relate substantially to United States operations for all years. (e) Expenses for domestic operations include a technology-related charge of $71 million in 1996, a severance-related charge of $55 million in 1995, and other unallocated corporate expenses. 73 76 26. CONDENSED FINANCIAL STATEMENTS OF J.P. MORGAN (PARENT) Presented below are the condensed statement of income, balance sheet, and statement of cash flows for J.P. Morgan & Co. Incorporated, the parent company. STATEMENT OF INCOME J.P. Morgan (parent)
In millions 1996 1995 1994 -------------------------------------------------------------------------------------------------- REVENUES Equity in undistributed earnings of subsidiaries .......... $1 093 $ 588 $ (82) Dividends from subsidiaries: Bank ................................................... 150 285 725 Other .................................................. 360 420 593 -------------------------------------------------------------------------------------------------- Total equity in earnings of subsidiaries .................. 1 603 1 293 1 236 Interest from subsidiaries ................................ 637 616 423 Other interest revenue .................................... 37 46 27 Investment banking revenue allocations from subsidiaries .. 103 71 59 Service fees from subsidiaries ............................ 186 134 87 Investment securities revenue ............................. (7) (28) (29) Other revenue ............................................. (9) 3 17 -------------------------------------------------------------------------------------------------- Total revenues ............................................ 2 550 2 135 1 820 -------------------------------------------------------------------------------------------------- EXPENSES Interest (includes $9 in 1996, $24 in 1995, and $16 in 1994 to subsidiaries) ....................................... 714 665 446 Employee compensation and benefits ........................ 203 159 103 Other expenses ............................................ 103 75 56 -------------------------------------------------------------------------------------------------- Total expenses ............................................ 1 020 899 605 -------------------------------------------------------------------------------------------------- Income before income taxes ................................ 1 530 1 236 1 215 Income tax benefit ........................................ (44) (60) -- -------------------------------------------------------------------------------------------------- Net income ................................................ 1 574 1 296 1 215 --------------------------------------------------------------------------------------------------
74 77 BALANCE SHEET J.P. Morgan (parent)
December 31 --------------------- In millions 1996 1995 ------------------------------------------------------------------------------------------------------------ ASSETS Interest-earning deposits with subsidiary bank ................................ $ 202 $ 377 Debt investment securities available-for-sale carried at fair value ........... 1 098 688 Investments in subsidiaries: Bank ....................................................................... 9 891 8 985 U.S. broker-dealer ......................................................... 494 407 Other nonbanks ............................................................. 919 947 Advances to subsidiaries: Bank ....................................................................... 3 545 1 878 U.S. broker-dealer ......................................................... 1 333 2 148 Other nonbanks, primarily securities-related ............................... 6 047 5 154 Accrued interest and accounts receivable, primarily from subsidiary bank ...... 296 265 Other assets (includes $1 577 in 1996 and $908 in 1995 related to corporate-owned life insurance contracts, $669 in 1996 and $544 in 1995 related to deferred tax assets, and $50 in 1995 from dividends receivable from subsidiary bank) ........................................... 2 343 1 660 ------------------------------------------------------------------------------------------------------------ Total assets .................................................................. 26 168 22 509 ------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Securities sold under agreements to repurchase (includes $87 in 1996 and $102 in 1995 with subsidiary bank) ......................................... 505 102 Commercial paper .............................................................. 3 438 2 729 Other liabilities for borrowed money .......................................... -- 1 140 Accounts payable and accrued expenses ......................................... 1 434 1 255 Long-term debt not qualifying as risk-based capital ........................... 4 931 3 369 Other liabilities ............................................................. 161 71 ------------------------------------------------------------------------------------------------------------ 10 469 8 666 Long-term debt qualifying as risk-based capital ............................... 3 494 3 392 Intercompany debentures ....................................................... 773 (a) -- ------------------------------------------------------------------------------------------------------------ Total liabilities ............................................................. 14 736 12 058 ------------------------------------------------------------------------------------------------------------ Total stockholders' equity .................................................... 11 432 10 451 ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity .................................... 26 168 22 509 ------------------------------------------------------------------------------------------------------------
(a) Consists solely of $773.2 million of 7.54% Junior Subordinated Debentures issued to JPM Capital Trust I. Refer to Note 16 to the consolidated financial statements, Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary. 75 78 STATEMENT OF CASH FLOWS J.P. Morgan (parent)
In millions 1996 1995 1994 ---------------------------------------------------------------------------------------------------------------- NET INCOME ............................................................. $ 1 574 $ 1 296 $ 1 215 Adjustments to reconcile to cash provided by operating activities: Equity in undistributed (earnings) losses of subsidiaries ........... (1 093) (588) 82 Increase (decrease) due to changes in other balance sheet amounts ............................................ 116 (223) 359 Net investment securities losses included in cash flows from investing activities ........................................ 7 28 29 ---------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES .................................. 604 513 1 685 ---------------------------------------------------------------------------------------------------------------- (Increase) decrease in interest-earning deposits with subsidiary bank ................................................ 227 1 263 (1 452) Debt investment securities: Proceeds from sales ................................................. 1 173 5 720 535 Purchases ........................................................... (1 605) (5 230) (1 064) Increase in advances to subsidiaries ................................... (1 712) (2 479) (695) Capital to subsidiaries ................................................ (23) (250) (270) Payments for insurance contracts ....................................... (717) (367) (367) Other changes, net ..................................................... (8) (14) 36 ---------------------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES ...................................... (2 665) (1 357) (3 277) ---------------------------------------------------------------------------------------------------------------- Increase (decrease) in securities sold under agreements to repurchase ....................................................... 403 (490) 281 Increase (decrease) in commercial paper ................................ 706 (698) 991 Increase (decrease) in other liabilities for borrowed money ............ (1 140) 1 140 - Long-term debt: Proceeds ............................................................ 1 792 2 230 1 575 Payments ............................................................ - (833) (464) Intercompany debentures: Proceeds ............................................................ 773 - - Capital stock: Issued or distributed ............................................... 424 143 61 Purchased ........................................................... (604) (293) (445) Dividends paid ......................................................... (643) (583) (541) Cash receipts from subsidiary bank for common stock issuable ........... 307 171 108 Other changes, net ..................................................... 41 57 26 ---------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES .................................. 2 059 844 1 592 ---------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS .................................... (2) - - Cash and due from banks, beginning of year ............................. 2 2 2 ---------------------------------------------------------------------------------------------------------------- Cash and due from banks, end of year ................................... - 2 2 ---------------------------------------------------------------------------------------------------------------- Cash disbursements for interest and taxes .............................. $ 692 $ 617 $ 445 ----------------------------------------------------------------------------------------------------------------
76 79 27. CERTAIN RESTRICTIONS: SUBSIDIARIES Under the Federal Reserve Act and New York State law, there are legal restrictions limiting the amount of dividends that Morgan Guaranty, a state member bank, can declare. The most restrictive test requires approval of the Federal Reserve Board if dividends declared exceed the net profits for that year combined with the net profits for the preceding two years. The calculation of the amount available for payment of dividends is based on net profits determined in accordance with bank regulatory accounting principles, reduced by the amount of dividends declared. At December 31, 1996, the cumulative retained net profits for the years 1996 and 1995 available for distribution as dividends in 1997 without approval of the Federal Reserve Board amounted to approximately $1,859 million. The Federal Reserve Board may prohibit the payment of dividends if it determines that circumstances relating to the financial condition of a bank are such that the payment of dividends would be an unsafe and unsound practice. U.S. federal law also places certain restrictions on certain types of transactions engaged in by insured banks and their subsidiaries with certain affiliates, including, in the case of Morgan Guaranty, J.P. Morgan and its nonbanking subsidiaries. "Covered transactions" are limited to 20% of capital and surplus, as defined, and "covered transactions" with any one such affiliate are limited to 10% of capital and surplus. "Covered transactions" are defined to include, among other things, loans and extensions of credit to such an affiliate, purchases of assets from such an affiliate, and any guarantees, acceptances, and letters of credit issued on behalf of such an affiliate. Such loans, extensions of credit, guarantees, acceptances, and letters of credit must be collateralized. In addition, a wide variety of transactions engaged in by insured banks and their subsidiaries with such affiliates are required to be made on terms and under circumstances that are at least as favorable to the bank or subsidiary concerned as those prevailing at the time for comparable transactions with nonaffiliated companies. Certain other subsidiaries are subject to various restrictions, mainly regulatory requirements, that may limit cash dividends and advances to J.P. Morgan and that establish minimum capital requirements. 77 80 ADDITIONAL SELECTED DATA J.P. Morgan & Co. Incorporated
Dollars in millions, except per share data 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA Total interest revenue ............................ $ 10 713 $ 9 937 $ 8 379 $ 7 442 $ 7 281 Total noninterest revenues ........................ 5 153 3 901 3 536 4 499 2 950 Total revenues .................................... 15 866 13 838 11 915 11 941 10 231 Net interest revenue .............................. 1 702 2 003 1 981 1 772 1 708 Provision for credit losses ....................... -- -- -- -- 55 Total operating expenses .......................... 4 523 3 998 3 692 3 580 2 854 Net income ........................................ 1 574 1 296 1 215 1 586(a) 1 582(b) At year-end: Total assets .................................... 222 026 184 879 154 917 133 888 103 197 Long-term debt and other capital securities (c).. 13 853 9 327 6 802 5 276 5 443 Stockholders' equity ............................ 11 432 10 451 9 568 9 859 7 308 Common stockholders' equity ..................... 10 738 9 957 9 074 9 365 6 814 Tier 1 risk-based capital (k) ................... 10 873 9 033 8 265 7 773 6 625 Total risk-based capital (k) .................... 15 145 13 398 12 221 10 850 9 672 Per common share: Net income (d) .................................. $ 7.63 $ 6.42 $ 6.02 $ 7.80(a) $ 7.95(b) Book value ...................................... 54.43(e) 50.71(f) 46.73(g) 47.25(h) 35.56 Dividends declared .............................. 3.31 3.06 2.79 2.48 2.23 1/2 EARNINGS RATIOS Net income as % of: Average total assets ............................ 0.73%(e) 0.73%(f) 0.70%(g) 1.08%(h) (i) 1.32%(j) Average stockholders' equity .................... 14.3(e) 13.2(f) 12.5(g) 19.8(h) (i) 22.5 (j) Average common stockholders' equity ............. 14.9(e) 13.6(f) 12.9(g) 20.9(h) (i) 23.9(j) DIVIDEND PAYOUT RATIO Dividends declared per common share as % of net income per common share ..................... 43.4% 47.7% 46.3% 31.8%(i) 28.1%(j) CAPITAL RATIOS Average stockholders' equity as % of average total assets .................................... 5.1%(e) 5.5%(f) 5.7%(g) 5.5%(h) 5.8% Common stockholders' equity as % of: Average total assets ............................ 5.0(e) 5.6(f) 5.3(g) 6.4(h) 5.7 Total year-end assets ........................... 4.8(e) 5.4(f) 5.9(g) 7.0(h) 6.6 Total stockholders' equity as % of: Average total assets ............................ 5.3(e) 5.9(f) 5.5(g) 6.7(h) 6.1 Total year-end assets ........................... 5.2(e) 5.7(f) 6.2(g) 7.4(h) 7.1 Tier 1 risk-based capital ratio (k) ............... 8.8 8.8 9.6 9.3 8.9 Total risk-based capital ratio (k) ................ 12.2 13.0 14.2 13.0 13.0 Leverage ratio (k) ................................ 5.9 6.1 6.5 7.3 7.1 OTHER SELECTED DATA Registered holders of record of common stock at year-end ........................................ 29 607 29 391 29 596 28 919 28 061 Common shares outstanding at year-end (in thousands) .................................. 184 923 187 116 187 701 193 087 191 610 Employees at year-end: In the U.S. ..................................... 8 579 8 855 9 607 8 983 8 567 Outside the U.S. ................................ 6 948 6 758 7 448 6 210 5 801 - ---------------------------------------------------------------------------------------------------------------------------------- Total employees ................................... 15 527 15 613 17 055 15 193 14 368 - ----------------------------------------------------------------------------------------------------------------------------------
78 81 (a) Net income in 1993 includes a $137 million ($0.68 per share) charge related to the cumulative effect of a change in accounting for postretirement benefits adopted January 1, 1993. (b) Net income in 1992 includes $452 million ($2.29 per share) related to the cumulative effect of a change in accounting for income taxes adopted retroactive to January 1, 1992. As a result of applying the new method of accounting for income taxes, income before the cumulative effect of the change for 1992 was reduced by $252 million, or $1.26 per share ($1.27 per share assuming full dilution); net income was increased by $200 million, or $1.03 per share ($1.02 per share assuming full dilution). (c) Includes $3,692 million, $3,590 million, $3,197 million, $2,459 million, and $2,300 million of long-term debt qualifying as risk-based capital in 1996, 1995, 1994, 1993, and 1992 respectively and $750 million of Company-obligated mandatorily redeemable preferred securities of subsidiary in 1996. (d) Earnings per share amounts for 1994 and 1993 represent both primary and fully diluted earnings per share; earnings per share amounts for 1996, 1995, and 1992 represent primary earnings per share. For 1996 fully diluted earnings per share were $7.56. For 1995 fully diluted earnings per share were $6.36. For 1992 fully diluted earnings per share before and after the cumulative effect of the change in accounting were $5.63 and $7.92 respectively. (e) Excluding the effect of SFAS No. 115, the book value per common share would have been $52.08 for the 12 months ended December 31, 1996; net income would have been 0.73% of average total assets, 14.89% of average stockholders' equity, and 15.6% of average common stockholders' equity; average stockholders' equity would have been 4.9% of average total assets; common stockholders' equity would have been 4.79% of average total assets and 4.64% of total year-end assets; and total stockholders' equity would have been 5.12% of average total assets and 4.96% of total year-end assets. (f) Excluding the effect of SFAS No. 115, the book value per common share would have been $47.83 for the 12 months ended December 31, 1995; net income would have been 0.73% of average total assets, 13.78% of average stockholders' equity, and 14.3% of average common stockholders' equity; average stockholders' equity would have been 5.3% of average total assets; common stockholders' equity would have been 5.29% of average total assets and 5.11% of total year-end assets; and total stockholders' equity would have been 5.57% of average total assets and 5.37% of total year-end assets. (g) Excluding the effect of SFAS No. 115, the book value per common share would have been $44.39 for the 12 months ended December 31, 1994; net income would have been 0.71% of average total assets, 13.6% of average stockholders' equity, and 14.2% of average common stockholders' equity; average stockholders' equity would have been 5.2% of average total assets; common stockholders' equity would have been 5.0% of average total assets and 5.6% of total year-end assets; and total stockholders' equity would have been 5.3% of average total assets and 5.9% of total year-end assets. (h) Excluding the effect of adopting SFAS No. 115 at December 31, 1993, the book value per common share would have been $41.37; net income would have been 1.09% of average total assets, 19.8% of average stockholders' equity, and 20.9% of average common stockholders' equity; average stockholders' equity would have been 5.5% of average total assets; common stockholders' equity would have been 5.6% of average total assets and 6.2% of total year-end assets; and total stockholders' equity would have been 6.0% of average total assets and 6.6% of total year-end assets. (i) Excluding the cumulative effect of the accounting change for postretirement benefits, 1993 net income would have been 1.18% of average total assets, 21.1% of average stockholders' equity, and 22.3% of average common stockholders' equity; dividends declared per common share would have been 29.3% of income per common share before the accounting change. (j) Excluding the cumulative effect of the accounting change for income taxes, 1992 net income would have been 0.94% of average total assets, 17.2% of average stockholders' equity, and 18.3% of average common stockholders' equity; dividends declared per common share would have been 39.5% of income per common share before the accounting change. (k) In accordance with Federal Reserve Board guidelines, the effect of SFAS No. 115 and the equity, assets, and off-balance-sheet exposures of J.P. Morgan Securities Inc. are excluded. 79 82 CONSOLIDATED AVERAGE BALANCES AND TAXABLE-EQUIVALENT NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
In millions 1996 1995 - ---------------------------------------------------------------------------- ------------------------ Interest and average rates on Average Average Average Average a taxable-equivalent basis balance Interest rate balance Interest rate - ------------------------------------------------------------------------------------------------------------ ASSETS Interest-earning deposits with banks, mainly in offices outside the U.S. ....... $ 2 022 $ 110 5.44% $ 1 796 $168 9.35% Debt investment securities in offices in the U.S.:(a) U.S. Treasury ............................ 1 581 106 6.70 1 983 130 6.56 U.S. state and political subdivision ..... 1 591 183 11.50 1 964 236 12.02 Other .................................... 17 399 1 109 6.37 13 619 962 7.06 Debt investment securities in offices outside the U.S.(a) .............................. 4 452 271 6.09 4 433 309 6.97 Trading account assets: In offices in the U.S. ................... 16 591 994 5.99 12 802 836 6.53 In offices outside the U.S. .............. 29 656 2 285 7.71 25 560 2 205 8.63 Securities purchased under agreements to resell and federal funds sold, mainly in offices in the U.S. ...................... 43 064 2 254 5.23 31 769 1 942 6.11 Securities borrowed in offices in the U.S. .. 25 310 1 284 5.07 15 222 876 5.75 Loans: In offices in the U.S. ................... 6 227 418 6.71 6 586 479 7.27 In offices outside the U.S. .............. 21 794 1 371 6.29 17 561 1 236 7.04 Other interest-earning assets:(b) In offices in the U.S. ................... 940 139 * 1 185 252 * In offices outside the U.S. .............. 1 027 274 * 1 635 412 * - ----------------------------------------------------------------------------------------------------------- Total interest-earning assets ............... 171 654 10 798 6.29 136 115 10 043 7.38 Allowance for credit losses ................. (1 119) (1 130) Cash and due from banks ..................... 935 1 796 Other noninterest-earning assets ............ 43 573 41 729 - ----------------------------------------------------------------------------------------------------------- Total assets ................................ 215 043 178 510 - -----------------------------------------------------------------------------------------------------------
In millions 1994 - ------------------------------------------------------------------------------- Interest and average rates on Average Average a taxable-equivalent basis balance Interest rate - -------------------------------------------------------------------------------- ASSETS Interest-earning deposits with banks, mainly in offices outside the U.S. ....... $ 2 252 $ 197 8.75% Debt investment securities in offices in the U.S.:(a) U.S. Treasury ............................ 1 282 79 6.16 U.S. state and political subdivision ..... 2 215 267 12.05 Other .................................... 10 569 547 5.18 Debt investment securities in offices outside the U.S.(a) .............................. 6 010 409 6.81 Trading account assets: In offices in the U.S. ................... 14 632 952 6.51 In offices outside the U.S. .............. 24 033 1 838 7.65 Securities purchased under agreements to resell and federal funds sold, mainly in offices in the U.S. ...................... 32 247 1 593 4.94 Securities borrowed in offices in the U.S. .. 15 615 624 4.00 Loans: In offices in the U.S. ................... 7 754 438 5.65 In offices outside the U.S. .............. 16 201 991 6.12 Other interest-earning assets:(b) In offices in the U.S. ................... 913 269 * In offices outside the U.S. .............. 646 295 * - -------------------------------------------------------------------------------- Total interest-earning assets ............... 134 369 8 499 6.33 Allowance for credit losses ................. (1 143) Cash and due from banks ..................... 1 790 Other noninterest-earning assets ............ 37 565 - -------------------------------------------------------------------------------- Total assets ................................ 172 581 - --------------------------------------------------------------------------------
The percentage of average interest-earning assets attributable to offices outside the U.S. was 47% in 1996, 50% in 1995, and 48% in 1994. Average balances are derived from daily balances except in the case of some subsidiaries, for which they are derived from month-end balances. 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 adjust tax-exempt interest to a taxable-equivalent basis was approximately 41% in 1996, 1995, and 1994. Impaired loans are included in the determination of average total loans. (a) 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 80 83
In millions 1996 1995 - ------------------------------------------------------------------------------------------ ------------------------------------ Interest and average rates on Average Average Average Average a taxable-equivalent basis balance Interest rate balance Interest rate - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: In offices in the U.S......................... $ 3 962 $ 204 5.15% $ 2 048 $ 98 4.79% In offices outside the U.S.................... 45 148 2 337 5.18 41 762 2 422 5.80 Trading account liabilities: In offices in the U.S......................... 8 295 522 6.29 6 596 438 6.64 In offices outside the U.S.................... 11 056 780 7.05 12 222 923 7.55 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S.................. 63 424 3 295 5.20 43 658 2 568 5.88 Commercial paper, mainly in offices in the U.S....................................... 4 133 225 5.44 2 809 169 6.02 Other interest-bearing liabilities: In offices in the U.S......................... 14 274 815 5.71 10 414 639 6.14 In offices outside the U.S.................... 2 258 204 9.03 1 869 127 6.80 Long-term debt, mainly in offices in the U.S..... 10 643 625 5.87 8 761 550 6.28 Company-obligated mandatorily redeemable preferred securities of subsidiary............ 57 4 7.54 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities............... 163 250 9 011 5.52 130 139 7 934 6.10 Noninterest-bearing deposits: In offices in the U.S......................... 2 298 3 336 In offices outside the U.S.................... 737 1 354 Other noninterest-bearing liabilities............ 37 767 33 822 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities................................ 204 052 168 651 Stockholders' equity............................. 10 991 9 859 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity....... 215 043 178 510 Net yield on interest-earning assets:............ 1.04 1.55 Attributable to offices in the U.S.(a) 0.76 1.29 Attributable to offices outside the U.S.(a) 1.36 1.85 Taxable-equivalent net interest earnings: 1 787 2 109 Attributable to offices in the U.S.(a) 699 883 Attributable to offices outside the U.S.(a) 1 088 1 226 - ----------------------------------------------------------------------------------------------------------------------------------
In millions 1994 - ------------------------------------------------------------------------------------- Interest and average rates on Average Average a taxable-equivalent basis balance Interest rate - ------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: In offices in the U.S..................... $ 2 175 $ 101 4.64% In offices outside the U.S................ 37 768 1 845 4.89 Trading account liabilities: In offices in the U.S..................... 8 028 510 6.35 In offices outside the U.S................ 11 109 778 7.00 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S.............. 48 372 2 196 4.54 Commercial paper, mainly in offices in the U.S................................... 4 174 182 4.36 Other interest-bearing liabilities: In offices in the U.S..................... 8 085 365 4.51 In offices outside the U.S................ 2 315 132 5.70 Long-term debt, mainly in offices in the U.S. 5 901 289 4.90 Company-obligated mandatorily redeemable preferred securities of subsidiary........ -- -- -- - ------------------------------------------------------------------------------------- Total interest-bearing liabilities........... 127 927 6 398 5.00 Noninterest-bearing deposits: In offices in the U.S..................... 3 818 In offices outside the U.S................ 1 395 Other noninterest-bearing liabilities........ 29 684 - ------------------------------------------------------------------------------------- Total liabilities............................ 162 824 Stockholders' equity......................... 9 757 - ------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 172 581 Net yield on interest-earning assets:........ 1.56 Attributable to offices in the U.S.(a) 1.41 Attributable to offices outside the U.S.(a) 1.73 Taxable-equivalent net interest earnings: 2 101 Attributable to offices in the U.S.(a) 994 Attributable to offices outside the U.S.(a) 1 107 - -------------------------------------------------------------------------------------
The percentage of average interest-bearing liabilities attributable to offices outside the U.S. was 47% in 1996, 53% in 1995, and 51% in 1994. (a) Funding costs are allocated based on the location of the office recording the asset. No allocation is made for capital. 81 84 ANALYSIS OF YEAR-TO-YEAR CHANGES IN TAXABLE-EQUIVALENT NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
1996/95 1995/94 --------------------------------- --------------------------------- Increase (decrease) Increase (decrease) due to change in: due to change in: -------------------- -------------------- Average Average Increase Average Average Increase In millions balance rate (decrease) balance rate (decrease) - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Interest-earning deposits with banks, mainly in offices outside the U.S. ................................... $ 19 $ (77) $ (58) $ (42) $ 13 $ (29) Debt investment securities in offices in the U.S.: U.S. Treasury ...................................... (27) 3 (24) 46 5 51 U.S. state and political subdivision ............... (43) (10) (53) (30) (1) (31) Other .............................................. 248 (101) 147 184 231 415 Debt investment securities in offices outside the U.S. 1 (39) (38) (109) 9 (100) Trading account assets: In offices in the U.S. ............................. 231 (73) 158 (119) 3 (116) In offices outside the U.S. ........................ 330 (250) 80 122 245 367 Securities purchased under agreements to resell and federal funds sold, mainly in offices in the U.S. .. 620 (308) 312 (24) 373 349 Securities borrowed in offices in the U.S. ............ 522 (114) 408 (16) 268 252 Loans: In offices in the U.S. ............................. (25) (36) (61) (72) 113 41 In offices outside the U.S. ........................ 277 (142) 135 88 157 245 Other interest-earning assets: In offices in the U.S. ............................. (46) (67) (113) 69 (86) (17) In offices outside the U.S. ........................ (161) 23 (138) 295 (178) 117 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets ......................... 1 946 (1 191) 755 392 1 152 1 544 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-bearing deposits: In offices in the U.S. ............................. 99 7 106 (6) 3 (3) In offices outside the U.S. ........................ 187 (272) (85) 209 368 577 Trading account liabilities: In offices in the U.S. ............................. 108 (24) 84 (94) 22 (72) In offices outside the U.S. ........................ (84) (59) (143) 81 64 145 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. ........................................... 1 052 (325) 727 (229) 601 372 Commercial paper, mainly in offices in the U.S. ....... 73 (17) 56 (70) 57 (13) Other interest-bearing liabilities: In offices in the U.S. ............................. 224 (48) 176 121 153 274 In offices outside the U.S. ........................ 29 48 77 (28) 23 (5) Long-term debt, mainly in offices in the U.S. ......... 108 (33) 75 175 86 261 Company-obligated mandatorily redeemable preferred securities of subsidiary ........................... 4 -- 4 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities .................... 1 800 (723) 1 077 159 1 377 1 536 - ---------------------------------------------------------------------------------------------------------------------------------- CHANGE IN TAXABLE-EQUIVALENT NET INTEREST EARNINGS .... 146 (468) (322) 233 (225) 8 - ----------------------------------------------------------------------------------------------------------------------------------
Changes in the average balance/rate are allocated based on the percentage relationship of the change in average balance or average rate to the total increase (decrease). Included in the above analysis is approximately $1 million, $38 million, and $39 million of interest revenue recorded in 1996, 1995, and 1994 respectively that related to prior years. TAXABLE-EQUIVALENT NET INTEREST EARNINGS AND THE CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated
In millions 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Taxable interest revenue............................................. $10 551 $ 9 728 $8 154 Tax-exempt interest revenue, adjusted to a taxable-equivalent basis.. 247 315 345 - ------------------------------------------------------------------------------------------------------ Total interest revenue, adjusted to a taxable-equivalent basis....... 10 798 10 043 8 499 Less: interest expense............................................... 9 011 7 934 6 398 - ------------------------------------------------------------------------------------------------------ Taxable-equivalent net interest earnings............................. 1 787 2 109 2 101 Less: adjustment of tax-exempt interest revenue...................... 85 106 120 - ------------------------------------------------------------------------------------------------------ Net interest revenue, as in the consolidated statement of income..... 1 702 2 003 1 981 - ------------------------------------------------------------------------------------------------------
82 85 ASSET-QUALITY ANALYSIS LOANS J.P. Morgan's portfolio of loans is diversified by borrower, industry, and geographic area. On the basis of the location of the borrower or, in the case of guaranteed loans, the location of the guarantor, at December 31, 1996 and 1995, 45% of loans were in the United States. No more than 9% and 12% of loans were in any single foreign country at year-end 1996 and 1995 respectively. At December 31, 1996 and 1995, 14% and 12% respectively of loans were collateralized by marketable securities or cash. At December 31, 1996, after exclusion of these collateralized amounts, the only category of borrower or guarantor that accounted for 10% or more of total loans was banks, which accounted for 13%, while at December 31, 1995, no category accounted for 10% or more of total loans. The following table shows loan diversity based upon maturity and interest rate structure, by category and location of the booking office.
Maturing ---------------------------------------------------------------------- After one After five Within year but years but After In millions: December 31, 1996 one year within five within ten ten years Total - --------------------------------------------------------------------------------------------------------------- LOANS IN OFFICES IN THE U.S. Commercial and industrial.......... $ 484 $ 560 $ 623 $211 $ 1 878 Financial institution: Banks........................... 441 200 -- -- 641 Other financial institutions.... 404 380 72 46 902 Collateralized by real estate...... 26 91 61 146 324 Other, including U.S. state and political subdivision........... 1 059 153 210 66 1 488 - --------------------------------------------------------------------------------------------------------------- 2 414 1 384 966 469 5 233 - --------------------------------------------------------------------------------------------------------------- LOANS IN OFFICES OUTSIDE THE U.S. Commercial and industrial.......... 4 192 6 413 1 388 33 12 026 Financial institution: Banks........................... 1 755 1 009 89 -- 2 853 Other financial institutions.... 2 775 1 427 256 64 4 522 Collateralized by real estate...... 207 121 9 27 364 Foreign governments and official institutions.................... 337 349 118 7 811 Other.............................. 1 326 712 272 1 2 311 - --------------------------------------------------------------------------------------------------------------- 10 592 10 031 2 132 132 22 887 - --------------------------------------------------------------------------------------------------------------- 13 006 11 415 3 098 601 28 120 - --------------------------------------------------------------------------------------------------------------- LOANS AT FIXED RATES OF INTEREST Offices in the U.S................. 691 865 582 198 2 336 Offices outside the U.S............ 2 291 770 144 30 3 235 - --------------------------------------------------------------------------------------------------------------- 2 982 1 635 726 228 5 571 - --------------------------------------------------------------------------------------------------------------- LOANS AT FLOATING RATES OF INTEREST Offices in the U.S................. 1 723 519 384 271 2 897 Offices outside the U.S............ 8 301 9 261 1 988 102 19 652 - --------------------------------------------------------------------------------------------------------------- 10 024 9 780 2 372 373 22 549 - --------------------------------------------------------------------------------------------------------------- 13 006 11 415 3 098 601 28 120 - ---------------------------------------------------------------------------------------------------------------
83 86 Additional detail on loans by category and location at December 31 is presented in the following table.
In millions 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- LOANS IN OFFICES IN THE U.S. Commercial and industrial.......... $ 1 878 $ 1 990 $ 3 047 $ 3 507 $ 3 643 Financial institution: Banks........................... 641 729 458 730 258 Other financial institutions.... 902 527 738 1 457 1 089 Collateralized by real estate...... 324 365 365 411 457 Other, including U.S. state and political subdivision........... 1 488 1 666 1 483 1 928 2 802 - ----------------------------------------------------------------------------------------------------------- 5 233 5 277 6 091 8 033 8 249 - ----------------------------------------------------------------------------------------------------------- LOANS IN OFFICES OUTSIDE THE U.S. Commercial and industrial.......... 12 026 10 045 8 451 7 809 8 777 Financial institution: Banks........................... 2 853 1 447 1 940 1 076 956 Other financial institutions.... 4 522 3 013 2 460 3 917 4 107 Collateralized by real estate...... 364 281 329 313 691 Foreign governments and official institutions.................... 811 1 042 846 1 149 1 840 Other.............................. 2 311 2 348 1 963 2 083 1 818 - ----------------------------------------------------------------------------------------------------------- 22 887 18 176 15 989 16 347 18 189 - ----------------------------------------------------------------------------------------------------------- 28 120 23 453 22 080 24 380 26 438 - -----------------------------------------------------------------------------------------------------------
Impaired loans Impaired loans, net of charge-offs, at December 31, distributed according to the location of the borrower, are presented in the following table. At December 31, 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 primarily based on the fair value of the collateral.
In millions 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------- BORROWERS IN THE U.S. Commercial and industrial....... $ 83 $ 59 $106 $129 $168 Other........................... 17 31 60 68 114 - ---------------------------------------------------------------------------- 100 90 166 197 282 - ---------------------------------------------------------------------------- BORROWERS OUTSIDE THE U.S. Commercial and industrial....... 6 8 30 53 33 Other........................... 12 17 21 24 38 - ---------------------------------------------------------------------------- 18 25 51 77 71 Restructuring countries......... 2 2 2 8 183 - ---------------------------------------------------------------------------- 20 27 53 85 254 - ---------------------------------------------------------------------------- 120 117 219 282 536 - ----------------------------------------------------------------------------
84 87 An analysis of changes in impaired loans is presented in the following table.
In millions 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------- IMPAIRED LOANS, JANUARY 1.......... $117 $219 $282 $536 $642 Additions to impaired loans........ 98 89 96 113 201 Less: Repayments of principal net of additional advances.......... 56 113 53 86 86 Loans returning to accrual status -- -- 42 26 78 Charge-offs: Commercial and industrial.... 8 13 20 24 62 Restructuring countries...... -- -- 1 1 6 Other........................ 7 7 8 30 33 Interest and other credits...... 11 12 11 19 20 Sales and swaps of loans........ 13 46 24 181 22 - ------------------------------------------------------------------------------- IMPAIRED LOANS, DECEMBER 31........ 120 117 219 282 536 - -------------------------------------------------------------------------------
Loans that are 90 days or more past due may still accrue interest if they are in the process of collection and are either well collateralized or guaranteed. The composition of such loans at December 31 is presented in the following table.
In millions 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------- Borrowers in the U.S............... $ 1 $ 2 $1 $2 $ 1 Borrowers outside the U.S.......... -- -- 1(a) 3(a) -- - ------------------------------------------------------------------------------------- 1 2 2 5 1 - -------------------------------------------------------------------------------------
(a) Guaranteed by the French and Swiss governments. Aggregate allowance and provision for credit losses A provision for credit losses is recorded in each accounting period as necessary, based on senior management's judgment as to the amount needed to maintain the aggregate allowance for credit losses at an adequate level 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. Size and risk characteristics of the portfolios are considered in determining the appropriate level for the aggregate allowance, and therefore the amount of the provision. Because J.P. Morgan deals with a relatively small number of borrowers, management believes that it is generally able to identify borrowers with financial problems reasonably early and to monitor carefully its credits to such borrowers. The Asset Quality Review Committee recommends those credits or portions of credits that are judged to be uncollectible and should therefore be charged off. It also recommends the size of the aggregate allowance considered adequate after taking such charge-offs into account. Specific allocations In reaching its judgment as to an adequate aggregate allowance, the Asset Quality Review Committee estimates the amounts necessary to provide for possible losses relating to specific credits. Although these credits are presently judged to be collectible, there is a greater-than-normal risk that some portion of them will become uncollectible if the factors that have adversely affected those borrowers continue. 85 88 Allocation to general risk The allocation to general risk considers the probability that there are inherent losses in the existing portfolios that cannot yet be identified. The allocation to general risk also includes the portion of the aggregate allowance that can be considered to be related to outstandings to restructuring countries. The portion of the aggregate allowance related to restructuring countries is based on overall concerns about the willingness and ability of certain countries to make timely payments on their outstanding debt and does not result in allocations of the allowance being made against specific counterparties. The following table summarizes the activity in the consolidated aggregate allowance for credit losses for the last five years.
In millions 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1................. $1 130 $1 131 $1 157 $1 258 $1 419 - ----------------------------------------------------------------------------------------------------------- Recoveries: Borrowers in the U.S., primarily commercial and industrial.... 20 37 14 7 7 Borrowers outside the U.S....... 5 17 31 53 26 - ----------------------------------------------------------------------------------------------------------- 25 54 45 60 33 - ----------------------------------------------------------------------------------------------------------- CHARGE-OFFS: Borrowers in the U.S., primarily commercial and industrial.... (36) (45) (51) (78) (117) Borrowers outside the U.S.: Restructuring countries...... -- - (18) (37) (48) Other, primarily commercial and industrial............ (3) (10) (3) (45) (82) - ----------------------------------------------------------------------------------------------------------- (39) (55) (72) (160) (247) - ----------------------------------------------------------------------------------------------------------- Net charge-offs.................... (14) (1) (27) (100) (214) Provision for credit losses........ -- -- -- -- 55 Translation adjustment............. -- -- 1 (1) (2) - ----------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31............... 1 116 (a) 1 130 1 131 1 157 1 258 - ----------------------------------------------------------------------------------------------------------- Specific allocations, primarily commercial and industrial (b)... 249 283 186 283 326 Allocation to general risk (c)..... 867 847 945 874 932 - ----------------------------------------------------------------------------------------------------------- Net charge-offs as % of average loans (d)....................... 0.05% 0.01% 0.11% 0.38% 0.74% - -----------------------------------------------------------------------------------------------------------
(a) At December 31, 1996, the aggregate allowance has been apportioned and displayed as follows: $566 million as a reduction of loans, $350 million as a reduction of trading account assets relating to derivatives, and $200 million included in other liabilities related to undertakings to extend credit that are not currently reflected on the consolidated balance sheet. (b) At December 31, 1996, 1995, 1994, 1993, and 1992, the specific allocation of the aggregate allowance for credit losses was as follows: borrowers in the U.S., $169 million, $224 million, $116 million, $164 million, and $198 million respectively; borrowers outside the U.S., $80 million, $59 million, $70 million, $119 million, and $128 million respectively. (c) Includes the portion of the aggregate allowance that could be considered to be related to outstandings to restructuring countries, which totaled approximately $129 million, $310 million, $239 million, $310 million, and $426 million at December 31, 1996, 1995, 1994, 1993, and 1992, respectively. (d) Excluding restructuring-country net charge-offs and loans, the ratios for 1996, 1995, 1994, 1993, and 1992 would have been 0.05%, 0.05%, 0.13%, 0.37%, and 0.68% respectively. Foreign-country-related assets The composition of foreign-country-related assets is presented in the following table. Assets are distributed on the basis of the location of the borrower or obligor, with the exception of interest-earning deposits with banks, which are distributed based on the location of the office receiving the deposit, and trading account assets, premises and equipment, accrued interest and accounts receivable, and other assets, which are distributed based on the location of the office recording the asset. 86 89
In millions: December 31 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Interest-earning deposits with banks: At overseas branches or subsidiaries of U.S. banks..... $ 305 $ 70 $ 94 Other.................................................. 1 539 1 906 1 258 Loans..................................................... 15 491 12 982 11 270 Less: allowance for credit losses......................... 356 716 647 - ---------------------------------------------------------------------------------------------------- Net loans................................................. 15 135 12 266 10 623 Investment securities..................................... 4 087 4 557 4 442 Trading account assets, net............................... 66 704 50 588 40 070 Customers' acceptance liability........................... 212 193 342 Other assets.............................................. 34 546 24 756 19 864 - ---------------------------------------------------------------------------------------------------- Total foreign-country-related assets...................... 122 528 94 336 76 693 - ----------------------------------------------------------------------------------------------------
For financial statement reporting purposes, beginning December 31, 1996, in accordance with the American Institute of Certified Public Accountants Banks and Savings Institutions Audit Guide, while we consider it in the aggregate, the total allowance has been apportioned and displayed as a reduction of Loans, a reduction of Trading account assets relating to derivatives, and as Other liabilities relating to undertakings to extend credit that are not currently reflected on the consolidated balance sheet. Prior period amounts have not been reclassified. Foreign-country-related aggregate allowance for credit losses In response to regulatory requirements, the following table presents the foreign-country-related portion of the aggregate allowance for credit losses. In cases where a specific allocation of the aggregate allowance was made for a borrower, the foreign-country-related component is determined on the basis of the borrower's location. The foreign-country-related portion of the aggregate allowance also includes the amount of the allowance that could be considered to relate to outstandings to restructuring countries. The remaining portion of the aggregate allowance allocated to general risk is apportioned to U.S.-related and foreign-country-related components in the same proportion as average total loans.
In millions 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------- BALANCE, JANUARY 1................. $ 716 $647 $708 $748 $ 807 - ------------------------------------------------------------------------------------- Recoveries......................... 5 17 31 53 26 Charge-offs: Commercial and industrial....... (1) (6) (2) (34) (69) Restructuring countries......... -- -- (18) (37) (48) Other........................... (2) (4) (1) (11) (13) - ------------------------------------------------------------------------------------- Net charge-offs.................... 2 7 10 (29) (104) Provision for credit losses........ -- -- (1) 9 17 Net transfer from (to) U.S.-related allowance....................... (187) 62 (71) (19) 30 Translation adjustment............. -- -- 1 (1) (2) - ------------------------------------------------------------------------------------- BALANCE, DECEMBER 31............... 531 716 647 708 748 - -------------------------------------------------------------------------------------
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% of total assets at December 31, 1996, 1995, and 1994, are listed in the following table. Outstandings, which are shown by category of borrower, 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 and category 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 and category of the guarantor or the location where the collateral is held and realizable. 87 90
Public sector Private sector --------------------------------------- ------------------- Governments, government agencies, central banks, and Commit- Con- official and Government-owned Other, ments tingent international ---------------- mainly to extend out- In millions: December 31 institutions Banks Other Banks businesses Total credit standings(a) - -------------------------------------------------------------------------------------------------------------------------------- 1996 United Kingdom............ $522 $ 3 $ 22 $1 221 $3 002 $4 770 $5 992 $1 504 France.................... 352 1 077 467 1 289 465 3 650 1 888 473 Switzerland............... -- 4 86 1 847 327 2 264 501 470 - -------------------------------------------------------------------------------------------------------------------------------- 1995 (b) United Kingdom............ 403 8 12 1 007 5 674 7 104 6 293 960 France.................... 208 1 343 533 1 329 342 3 755 1 289 350 - -------------------------------------------------------------------------------------------------------------------------------- 1994 (b) United Kingdom............ 40 263 4 669 3 018 3 994 4 263 2 876 Switzerland............... 1 17 49 961 613 1 641 397 749 - --------------------------------------------------------------------------------------------------------------------------------
The amounts reported for each country exclude those outstandings that are denominated in the local currency of that country except in cases of net unfunded or unhedged positions in the local currency. (a) Contingent outstandings include standby letters of credit, guarantees, and securities lending indemnifications. (b) Mexican cross-border outstandings at December 31, 1995 and 1994, were $1,196 million and $1,086 million respectively, less than 0.75% of total assets; commitments to extend credit and contingent outstandings were $6 million and $1 million at December 31, 1995, and $30 million and $11 million at December 31, 1994. Not included in Mexican cross-border outstandings are United Mexican States (UMS) bonds, substantially all of which have been sold forward (and delivered in 1996), which are collateralized by U.S. Treasury securities. If the book value of these bonds, which is discussed below, had been included, total Mexican cross-border outstandings would have exceeded 1% of total assets at December 31, 1995 and 1994.
1995 1994 ------------- ---------------- Book Face Book Face In millions: December 31 value value value value - ---------------------------------------------------------------------------- UMS bonds collateralized by U.S. Treasury securities: Due in 2008....................... $855 $879 $1 112 $1 149 Due in 2019....................... 561 786 985 1 303 - ----------------------------------------------------------------------------
The UMS bonds were collateralized as to principal by zero-coupon U.S. Treasury securities with a face value equal to the face value of the underlying bonds. The collateral was pledged to the holders of the bonds and held by the Federal Reserve Bank of New York. The fair value of the U.S. Treasury securities was $635 million and $585 million at December 31, 1995 and 1994, respectively. The estimated market value of the UMS bonds at December 31, 1995 and 1994, was $1,298 million and $1,945 million respectively. At December 31, 1996 and 1995, the amount of impaired loans relating to the countries listed in the table was immaterial. At December 31, 1994, there were no impaired loans relating to the countries listed in the above table. Additionally, loans contractually past due 90 days or more as to principal or interest payments but with interest still being accrued were immaterial for each of the countries in the table at December 31, 1996, 1995, and 1994. Foreign countries in which J.P. Morgan's total foreign-country-related outstandings were between 0.75% and 1% of total assets are presented below.
Total cross-border In millions: December 31 outstandings - ---------------------------------------------------------- 1995 Switzerland.................... $1 761 - ----------------------------------------------------------
At December 31, 1996 and 1994, there were no foreign-country-related outstandings between 0.75% and 1% of total assets. 88 91 DERIVATIVES USED FOR PURPOSES OTHER-THAN-TRADING The objective of J.P. Morgan's investing activities 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 derivatives used for purposes other-than-trading, primarily interest rate swaps, is provided below. For more information about investing activities, see the Proprietary Investing and Trading section of the Business sector analysis, and Note 9 to the consolidated 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 interest rate swaps used for purposes other-than-trading at December 31, 1996. The majority of nontrading 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 December 31, 1996, and reset at predetermined dates. The table was prepared under the assumption that these variable interest rates will 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 purposes other-than-trading, such as currency swaps, basis swaps, foreign exchange contracts, interest rate futures, forward rate agreements, debt securities forwards, and purchased options, totaling $88.7 billion at December 31, 1996. The contractual maturities of these derivative contracts are primarily less than one year. By expected maturities
After In billions 1997 1998 1999 2000 2001 2001 Total - ------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS: U.S. DOLLAR Receive fixed swaps Notional amount.......... $18.5 $13.6 $ 4.1 $ 2.9 $ 1.8 $ 11.7 $ 52.6 Weighted average: Receive rate.......... 6.2% 6.1% 7.1% 6.5% 6.7% 6.5% 6.3% Pay rate.............. 5.6 5.5 5.3 5.5 5.5 5.5 5.5 Pay fixed swaps Notional amount.......... $21.6 $14.7 $ 3.5 $ 8.3 $ 5.1 $ 9.9 $ 63.1 Weighted average: Receive rate.......... 5.2% 5.5% 5.6% 5.6% 5.5% 5.6% 5.4% Pay rate.............. 5.9 5.7 6.8 6.2 6.6 7.0 6.2 INTEREST RATE SWAPS: NON-U.S. DOLLAR Receive fixed swaps Notional amount.......... $26.0 $15.8 $ 9.4 $ 8.2 $ 3.5 $ 6.0 $ 68.9 Weighted average: Receive rate.......... 6.2% 4.8% 6.1% 6.2% 6.8% 7.0% 6.0% Pay rate.............. 3.6 2.8 3.3 3.5 3.8 3.6 3.4 Pay fixed swaps Notional amount.......... $25.5 $12.4 $ 9.1 $ 6.9 $ 2.8 $ 5.3 $ 62.0 Weighted average: Receive rate.......... 3.5% 3.5% 3.4% 4.0% 3.8% 3.5% 3.6% Pay rate.............. 6.1 5.4 6.0 6.4 7.2 7.2 6.1 - ------------------------------------------------------------------------------------------------------------- Total notional amount.... $91.6 $56.5 $26.1 $26.3 $13.2 $32.9 $246.6 - -------------------------------------------------------------------------------------------------------------
Not included in the table above are $3.9 billion and $2.5 billion of notional amounts related to currency swaps and basis swaps respectively. 89 92 CAPITAL AND FUNDING ANALYSIS RISK-ADJUSTED ASSETS J.P. Morgan's consolidated risk-adjusted assets and the net adjustments to exclude the assets and off-balance-sheet exposures of J.P. Morgan Securities Inc. (JPMSI) at December 31 are set forth in the following table.
1996 1995 1994 ---------------------- ---------------------- --------------------- Balance Balance Balance sheet/ Risk- sheet/ Risk- sheet/ Risk- notional adjusted notional adjusted notional adjusted In billions amount balance amount balance amount balance - ----------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks and interest- earning deposits with banks........ $ 2.8 $ 0.7 $ 3.5 $ 0.9 $ 3.5 $ 0.7 Debt investment securities............ 24.9 4.0 24.6 3.6 22.7 2.9 Trading account assets, net........... 91.0 22.4 69.4 18.3 57.0 11.3 Resale agreements and federal funds sold......................... 32.5 5.7 32.2 3.1 21.4 4.4 Securities borrowed................... 27.9 7.4 19.8 4.0 12.1 2.4 Loans, net............................ 27.6 23.6 22.3 20.7 21.0 18.9 Customers' acceptance liability....... 0.2 0.2 0.2 0.2 0.6 0.6 Premises and equipment, net........... 1.9 1.9 1.9 1.9 2.0 2.0 Other assets.......................... 13.2 9.8 11.0 7.3 14.6 12.0 - ---------------------------------------------------------------------------------------------------------------------- Total assets.......................... 222.0 75.7 184.9 60.0 154.9 55.2 Net effect of excluding JPMSI assets (primarily trading account assets, resale agreements, and securities borrowed).......................... (43.8) (7.2) (37.3) (5.7) (25.8) (7.8) - ---------------------------------------------------------------------------------------------------------------------- Assets, excluding JPMSI............... 178.2 68.5 147.6 54.3 129.1 47.4 - ---------------------------------------------------------------------------------------------------------------------- OFF-BALANCE-SHEET EXPOSURES Commitments to extend credit.......... 64.7 22.5 55.1 21.3 44.6 16.7 Standby letters of credit and guarantees 13.9 7.9 11.7 8.6 9.9 7.8 Securities lending indemnifications... 5.5 1.4 5.4 0.7 19.5 1.8 Other credit facilities............... 0.6 0.6 1.3 0.9 0.6 0.2 Foreign exchange contracts, including foreign exchange options. 844.6 4.4 607.1 3.1 494.9 3.5 Currency swaps........................ 205.9 4.3 144.2 3.8 112.7 3.5 Interest rate swaps................... 1 915.0 7.3 1 371.4 6.1 862.2 3.6 Interest rate and other contracts..... 1 750.8 8.2 1 324.0 4.5 1 002.7 1.8 - ---------------------------------------------------------------------------------------------------------------------- Total off-balance-sheet exposures..... 4 801.0 56.6 3 520.2 49.0 2 547.1 38.9 Net effect of excluding JPMSI off-balance-sheet exposures........ (29.1) (1.2) (27.7) (0.2) (58.0) -- - ---------------------------------------------------------------------------------------------------------------------- Off-balance-sheet exposures, excluding JPMSI.................... 4 771.9 55.4 (a) 3 492.5 48.8 (a) 2 489.1 38.9 (a) - ---------------------------------------------------------------------------------------------------------------------- Gross risk-adjusted assets, excluding JPMSI.............................. 123.9 103.1 86.3 Less: allowance for credit losses not qualifying as risk-based capital... -- -- (0.1) - ---------------------------------------------------------------------------------------------------------------------- Risk-adjusted assets, excluding JPMSI.................... 123.9 103.1 86.2 - ----------------------------------------------------------------------------------------------------------------------
(a) Includes $9.9 billion, $6.8 billion, and $4.6 billion at December 31, 1996, 1995, and 1994, respectively related to potential future credit exposure as defined in the risk-based capital framework. 90 93 DEPOSITS Average deposits in offices outside the U.S. are presented in the following table.
1996 1995 1994 ------------------- ------------------ ------------------- Average Average Average Average Average Average In millions balance rate paid balance rate paid balance rate paid - --------------------------------------------------------------------------------------------------------------- INTEREST-BEARING DEPOSITS From banks in foreign countries....... $13 753 4.96% $11 703 6.44% $12 139 5.05% From foreign governments and official institutions.............. 11 020 4.97 10 374 5.55 8 932 4.24 Other time............................ 16 830 5.96 15 750 6.10 13 114 5.75 On demand............................. 3 545 2.96 3 935 3.30 3 583 2.76 - --------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits in offices outside the U.S............ 45 148 5.18 41 762 5.80 37 768 4.89 - --------------------------------------------------------------------------------------------------------------- NONINTEREST-BEARING DEPOSITS From banks in foreign countries....... 29 56 183 From foreign governments and official institutions.............. 5 6 43 Other demand.......................... 703 1 292 1 169 - --------------------------------------------------------------------------------------------------------------- Total noninterest-bearing deposits in offices outside the U.S............ 737 1 354 1 395 - ---------------------------------------------------------------------------------------------------------------
Foreign-country-related deposits in offices in the U.S. totaled $0.8 billion at December 31, 1996, $1.2 billion at December 31, 1995, and $0.9 billion at December 31, 1994. A profile of the maturities of time certificates of deposit and other time deposits in denominations of $100,000 or more at December 31, 1996, is presented in the following table.
After six Within After three months but After three months but within one In millions months within six one year year Total - ----------------------------------------------------------------------------------------------------------- Offices in the U.S.: Time certificates of deposit.... $ 1 714 $ 52 $3 190 $ 203 $ 5 159 Other time deposits............. 235 51 -- 25 311 - ----------------------------------------------------------------------------------------------------------- 1 949 103 3 190 228 5 470 - ----------------------------------------------------------------------------------------------------------- Offices outside the U.S.: Time certificates of deposit.... 3 756 219 232 9 4 216 Other time deposits............. 27 981 1 171 351 1 023 30 526 - ----------------------------------------------------------------------------------------------------------- 31 737 1 390 583 1 032 34 742 - -----------------------------------------------------------------------------------------------------------
91 94 PURCHASED FUNDS AND OTHER BORROWINGS Purchased funds and other borrowings are detailed in the following table.
In millions 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Balance at year-end............................................ $56 117 $40 803 $30 179 Average balance................................................ 59 812 40 245 45 470 Maximum month-end balance...................................... 69 548 51 162 51 387 Average interest rate: During year................................................. 5.19% 5.87% 4.55% At year-end................................................. 5.98 5.77 5.43 - ----------------------------------------------------------------------------------------------------------- FEDERAL FUNDS PURCHASED (DAY-TO-DAY) Balance at year-end............................................ $ 5 312 $ 4 296 $ 5 589 Average balance................................................ 3 612 3 414 2 902 Maximum month-end balance...................................... 5 312 6 199 5 589 Average interest rate: During year................................................. 5.30% 5.96% 4.35% At year-end................................................. 6.19 5.48 5.25 - ----------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER Balance at year-end............................................ $ 4 132 $ 2 801 $ 3 507 Average balance................................................ 4 133 2 809 4 174 Maximum month-end balance...................................... 5 102 3 250 4 882 Average interest rate: During year................................................. 5.44% 6.02% 4.36% At year-end................................................. 5.50 5.67 5.89 - ----------------------------------------------------------------------------------------------------------- OTHER LIABILITIES FOR BORROWED MONEY Federal funds purchased (term): Balance at year-end......................................... $ 386 $ 442 $ 465 Average balance............................................. 554 461 372 Maximum month-end balance................................... 800 640 516 Average interest rate: During year.............................................. 5.57% 6.27% 4.30% At year-end.............................................. 5.51 5.95 3.82 Other: Balance at year-end......................................... $19 562 $14 687 $10 435 Average balance............................................. 15 810 11 822 10 028 Maximum month-end balance................................... 20 142 13 762 10 823 Average interest rate: During year.............................................. 6.20% 6.23% 4.80% At year-end.............................................. 5.63 5.96 5.82 - -----------------------------------------------------------------------------------------------------------
Average interest rates during each year are computed by dividing total interest expense by the average amount borrowed. Average interest rates at year-end are average rates for a single day and as such may reflect one-day market distortions that may not be indicative of generally prevailing rates. Original maturities of securities sold under agreements to repurchase generally are not more than six months. Original maturities of commercial paper are generally not more than nine months. Other liabilities for borrowed money generally have original maturities of one year or less. 92 95 SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA J.P. Morgan & Co. Incorporated
In millions, except per share data 1996 - ----------------------------------------------------------------------------------------------------- Three months ended Dec. 31 Sept. 30 June 30 Mar. 31 - ----------------------------------------------------------------------------------------------------- Interest revenue............................... $2 925 $2 675 $2 559 $2 554 Interest expense............................... 2 441 2 250 2 162 2 158 - ----------------------------------------------------------------------------------------------------- Net interest revenue........................... 484 425 397 396 Total noninterest revenues..................... 1 321 1 124 1 364 1 344 Total operating expenses....................... 1 197 1 137 1 104 1 085 - ----------------------------------------------------------------------------------------------------- Income before income taxes .................... 608 412 657 655 Income taxes................................... 189 136 217 216 - ----------------------------------------------------------------------------------------------------- NET INCOME .................................... 419 276 440 439 - ----------------------------------------------------------------------------------------------------- PER COMMON SHARE Net income (a)................................. $2.04 $ 1.32 $ 2.14 $ 2.13 Dividends declared............................. 0.88 0.81 0.81 0.81 - ----------------------------------------------------------------------------------------------------- Price range per common share on the composite tape: High........................................ $ 100 1/8 $ 92 1/2 $89 1/4 $ 85 3/4 Low......................................... 82 1/4 80 1/4 75 1/2 73 1/2 Closing price per common share at quarter-end.. 97 5/8 88 7/8 84 5/8 83 - -----------------------------------------------------------------------------------------------------
In millions, except per share data 1995 - ----------------------------------------------------------------------------------------------------- Three months ended Dec. 31 Sept. 30 June 30 Mar. 31 - ----------------------------------------------------------------------------------------------------- Interest revenue............................... $2 609 $2 453 $2 405 $2 470 Interest expense............................... 2 121 1 946 1 897 1 970 - ----------------------------------------------------------------------------------------------------- Net interest revenue........................... 488 507 508 500 Total noninterest revenues..................... 1 030 1 042 941 888 Total operating expenses....................... 990 1 022 984 1 002 - ----------------------------------------------------------------------------------------------------- Income before income taxes .................... 528 527 465 386 Income taxes................................... 162 167 150 131 - ----------------------------------------------------------------------------------------------------- NET INCOME .................................... 366 360 315 255 - ----------------------------------------------------------------------------------------------------- PER COMMON SHARE Net income (a)................................. $ 1.80 $ 1.78 $ 1.56 $ 1.27 Dividends declared............................. 0.81 0.75 0.75 0.75 - ----------------------------------------------------------------------------------------------------- Price range per common share on the composite tape: High........................................ $ 82 1/2 $ 78 7/8 $ 74 1/2 $ 65 5/8 Low......................................... 74 5/8 68 7/8 60 1/2 56 1/8 Closing price per common share at quarter-end.. 80 1/4 77 3/8 70 1/8 61 - -----------------------------------------------------------------------------------------------------
The principal market on which the company's common stock is traded is the New York Stock Exchange. (a) Earnings per share amounts represent both primary and fully diluted earnings per share, except for the three months ended December 31, 1996. Fully diluted earnings per share were $2.03 for the three months ended December 31, 1996. The 1996 fourth quarter results are discussed in J.P. Morgan's earnings release dated January 13, 1997. 93 96 FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 J.P. MORGAN & CO. INCORPORATED (Incorporated in the State of Delaware) 60 Wall Street, New York, NY 10260-0060 (212) 483-2323 Filed with: Securities and Exchange Commission, Washington, D.C. 20549 Commission file number: 1-5885 I.R.S. Employer Identification Number: 13-2625764 The following securities are registered on the New York Stock Exchange pursuant to Section 12(b) of the Act: Common Stock, $2.50 Par Value Adjustable Rate Cumulative Preferred Stock, Series A No Par Value, Stated Value $100 Depositary shares representing a one-tenth interest in 6 5/8% Cumulative Preferred Stock, Series H, No Par Value, Stated Value $500 4 3/4% Convertible Debentures Due 1998 No securities are registered pursuant to Section 12(g) of the Act. The aggregate market value of the voting stock held by nonaffiliates of J.P. Morgan totaled $19,344,804,150 at February 28, 1997. The number of shares outstanding of J.P. Morgan's Common Stock, $2.50 Par Value, at February 28, 1997, totaled 184,236,230 shares. J.P. Morgan (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 and (2) has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein nor in any amendment to this Form 10-K, but is contained in J.P. Morgan's 1997 Proxy Statement incorporated by reference in Part III of this Form 10-K. J.P. Morgan's definitive Proxy Statement dated March 24, 1997, is incorporated by reference in response to Part III, Items 10, 11, 12, and 13 of Form 10-K. 94 97 FORM 10-K CROSS-REFERENCE INDEX Part I 1. BUSINESS Description of business, 2-10, 97-100 Number of employees, 78 Financial information about foreign and domestic operations, 73, 86-88 Distribution of assets, liabilities, and stockholders' equity; interest rates and interest differential, 80-82 Investment portfolio, 46-49 Loan portfolio, 41, 56-57, 83-88 Summary of loan loss experience, 85-87 Deposits, 80-82, 91 Return on equity and assets, 78-79 Short-term borrowings, 92 2. PROPERTIES, 100 3. LEGAL PROCEEDINGS(a) 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS(a) PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, 77-79, 93 6. SELECTED FINANCIAL DATA, 78-79 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 2-32 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of independent accountants, 34 J.P. Morgan & Co. Incorporated Consolidated statement of income, 35 Consolidated balance sheet, 36 Consolidated statement of changes in stockholders' equity, 37 Consolidated statement of cash flows, 38 Morgan Guaranty Trust Company of New York - Consolidated statement of condition, 39 Notes to consolidated financial statements, 40-77 Selected consolidated quarterly financial data,(b) 93 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE(a) PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(c) 11. EXECUTIVE COMPENSATION(c) 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(c) 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(c) PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 1. Financial statements have been included in Item 8. 2. Financial statement schedules Schedule III - Condensed financial information of J.P. Morgan & Co. Incorporated (parent), 74-76 EXHIBITS 3a. Restated certificate of incorporation, as amended (incorporated by reference to Exhibit 3a to J.P. Morgan's post-effective amendment No. 1 to Form S-3, Registration No. 33-55851) 3b. By-laws of J.P. Morgan as amended through April 10, 1996 (incorporated by reference to Exhibit 3b to J.P. Morgan's report on Form 8-K, dated April 11, 1996) 4. Instruments defining the rights of security holders, including indentures(d) 10a. 1992 stock incentive plan, as amended (incorporated by reference to Exhibit 10a to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10b. Director stock plan, as amended (incorporated by reference to Exhibit 10b to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10c. Deferred compensation plan for directors' fees, as amended (incorporated by reference to Exhibit 10c to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1992, File No. 1-5885) 10d. 1989 stock incentive plan, as amended (incorporated by reference to Exhibit 10d to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10e. 1987 stock incentive plan, as amended (incorporated by reference to Exhibit 10e to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10f. Stock option plan, as amended (incorporated by reference to Exhibit 10f to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10g. Incentive compensation plan, as amended (incorporated by reference to Exhibit 10g to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1994, File No. 1-5885) 10h. Stock option award (incorporated by reference to Exhibit 10h to J.P. Morgan's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-5885) 10i. 1995 stock incentive plan, as amended 10j. 1995 executive officer performance plan (incorporated by reference to Exhibit 10j to J.P. Morgan's annual report on Form 10-K for the year ended December 31, 1995, File No. 1-5885) 12. Statements re computation of ratios 13. Annual report to stockholders(e) 21. Subsidiaries of J.P. Morgan 23. Consent of independent accountants 24. Powers of attorney 27. Financial data schedule REPORTS ON FORM 8-K Report on Form 8-K dated October 10, 1996, was filed with the Securities and Exchange Commission during the quarter ended December 31, 1996, which reported the issuance by J.P. Morgan of a press release reporting its earnings for the three- and nine-month periods ended September 30, 1996. In addition, Form 8-K dated December 11, 1996, was filed announcing a dividend increase, a stock repurchase program, and that John A. Krol had been elected a director of both J.P. Morgan and Morgan Guaranty effective January 1, 1997. This report on Form 10-K has not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed upon the accuracy or adequacy of this report. Portions of the annual report to stockholders are not required for the Form 10-K report and are not filed as part of J.P. Morgan's Form 10-K. (a) Nothing to report. (b) Fourth quarter 1996 results are incorporated by reference to the report on Form 8-K dated January 13, 1997, filed with the Securities and Exchange Commission. (c) Incorporated by reference to the definitive Proxy Statement dated March 24, 1997. (d) J.P. Morgan hereby agrees to furnish to the Commission, upon request, a copy of any unfiled agreements defining the rights of holders of long-term debt of J.P. Morgan and of all subsidiaries of J.P. Morgan for which consolidated or unconsolidated financial statements are required to be filed. (e) Only those sections of the annual report to stockholders referenced in the cross-reference index above are incorporated in the report on Form 10-K. Other schedules and exhibits are omitted because the required information either is not applicable or is shown in the consolidated financial statements or the notes thereto. 95 98 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on March 24, 1997, on its behalf by the undersigned, thereunto duly authorized. J.P. Morgan & Co. Incorporated Registrant RACHEL F. ROBBINS - ------------------------------- Rachel F. Robbins Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 24, 1997, by the following persons on behalf of the registrant in the capacities indicated. JOHN A. MAYER JR. - ------------------------------- John A. Mayer Jr. Chief Financial Officer (Principal financial officer) DAVID H. SIDWELL - ------------------------------- David H. Sidwell Managing Director and Controller (Principal accounting officer) Douglas A. Warner III* Chairman of the Board and Director Riley P. Bechtel* Director Martin Feldstein* Director Hanna H. Gray* Director James R. Houghton* Director James L. Ketelsen* Director John A. Krol* Director Roberto G. Mendoza* Vice Chairman of the Board and Director Michael E. Patterson* Vice Chairman of the Board and Director Lee R. Raymond* Director Richard D. Simmons* Director Kurt F. Viermetz* Vice Chairman of the Board and Director Dennis Weatherstone* Director Douglas C. Yearley* Director *By: JAMES C.P. BERRY ------------------------------------------------------- James C.P. Berry Attorney-in-fact 96 99 DESCRIPTION OF BUSINESS J.P. Morgan & Co. Incorporated, whose origins date to a merchant banking firm founded in London in 1838, is the holding company for subsidiaries engaged globally in providing a wide range of financial services to institutions, corporations, governments, and individuals. A list of principal subsidiaries and associated companies appears on page 104. BUSINESS ENVIRONMENT J.P. Morgan conducts its business in a global environment that is inherently unpredictable. Numerous variables may have a material effect on the firm's results or operations. These variables include, but are not limited to: economic and market conditions, including the liquidity of secondary markets, the volatility of market prices, rates and indices, the timing and volume of market activity, the availability of capital, and inflation; political events, including legislative, regulatory, and other developments, such as the anticipated formation of the European Monetary Union; competitive forces, including the ability to attract and retain highly skilled individuals, and the ability to cost-effectively develop and support technology and information systems critical to its businesses; and investor sentiment. As a result, revenues and net income in any particular period may not be indicative of full-year results; may vary from year to year; and may impact the firm's ability to achieve its strategic objectives. BUSINESS SECTORS We describe the activities of J.P. Morgan using five business sectors, as discussed below. Three of these sectors - Finance and Advisory, Market Making, and Asset Management and Servicing - focus on services we provide for clients, including positions taken to facilitate client transactions. Two sectors comprise proprietary activities that we conduct exclusively for our own account: Equity Investments and Proprietary Investing and Trading. While presenting our results in sector format helps simplify the complexity of Morgan's business, it is also important to understand the shared benefits of our strategy: our focus on building long-term client relationships; the synergy we create by acting as one firm with singular dedication to clients, rather than as a collection of separate businesses; the global diversification of activities across a range of products and locations; and the integration of global capabilities to capitalize on opportunities. Effective with the 1996 Annual report, we have made some changes to the business sector analysis in order to more closely align our sector results with the manner in which we provide services to our clients and to distinguish our proprietary activities. As a result, certain activities have been reclassified as follows: the proprietary trading unit results have been included in Proprietary Investing and Trading as compared to Market Making in the 1995 Annual report; cash and derivative secondary trading results related to the equities business have been included in the Market Making sector as compared to the Finance and Advisory sector in the 1995 Annual report; and earnings on stockholders' equity have been restated to reflect current internal management models based on external benchmarks. Prior year results have been restated to conform with the 1996 presentation. Our activities, updated for these changes, are summarized below. Finance and Advisory Finance and Advisory encompasses the sophisticated advisory, capital raising, and financing work that we do for our broad base of clients around the world. These clients include financial institutions, corporations, governments, and municipalities. The expertise we offer them is based on in-depth knowledge of their needs and the industries and financial markets in which they operate. Our global network of senior client relationship managers markets the full spectrum of our capabilities and provides the link between a corporate client's need and J.P. Morgan's financing, advisory, asset management, and risk management products and services. In partnership with clients, our advisory professionals explore the risks and rewards of such strategic alternatives as mergers and acquisitions, divestitures, privatizations, and recapitalizations. We also advise clients on their capital structures, looking for ways to unlock value and capture opportunities. 97 100 Our debt and equities underwriting and credit businesses provide clients with the capabilities to raise the necessary capital and execute strategies. High-quality research is an integral part of this business. Our credit capabilities include meeting clients' financing needs by underwriting, arranging and syndicating loans and other credit facilities. Market Making Market Making provides clients with around-the-clock access to global markets. J.P. Morgan makes markets in fixed income, equity, foreign exchange, and commodity instruments in both developed and emerging markets; we serve as a counterparty to help clients manage risks; and we provide research to help clients assess opportunities and track performance. We take positions to facilitate client transactions, to enable us to function effectively, and to benefit from our role as a market maker. Our clients include corporations, central banks, governments and their agencies, financial institutions, pension funds, mutual funds, and leveraged funds. Our fixed income activities encompass acting as a primary dealer in U.S. and foreign government securities; making markets in money market instruments, U.S. government agency securities, corporate debt securities, and options; and helping clients manage their exposure to fluctuating interest and foreign exchange rates by structuring, executing, and making markets in risk management products. Our equities activities include providing clients with liquidity in the cash and derivatives secondary markets through our global sales and trading network. We utilize our expertise in the equities markets to structure equity derivatives for our clients. Our foreign exchange capabilities include making markets in spot, options, and short-term interest rate products, including forwards and forward rate agreements in multiple currencies, to help clients manage their foreign currency exposures. In commodities, we make markets in metals and energy products and we advise clients on developing hedging, investment, and commodity-linked financing strategies. We also provide physical commodity services such as settlement of physical trades in the various metal and oil markets and metal borrowing and lending services. Our emerging markets activities, while principally related to fixed income activities, cross all markets, and our worldwide network enables us to fulfill our role as a market maker and provide clients with a steady flow of market information. Asset Management and Servicing Asset Management and Servicing activities encompass designing and executing investment strategies and providing administrative and brokerage services. Our clients include corporations, financial and governmental institutions, and high-net-worth individuals. We tailor our asset management capabilities for both institutional and private clients. For institutional clients, we offer a range of investment strategies and products worldwide to service the investment management needs of private and public sector retirement plans, governments, corporations, endowments, foundations, and trusts. Our private client group helps high-net-worth individuals plan and execute their investment strategies with a broad range of capabilities, which include managed investment and trust portfolios, Morgan-advised mutual funds, and a full-service brokerage unit. Credit, deposit, trust, and estate services are also provided to private clients. Our futures and options brokerage group provides institutional clients with worldwide access to major exchanges by acting as futures and options brokers in executing and clearing contracts. We operate under contract the Euroclear System, the world's largest clearance and settlement system for internationally traded securities. We provide credit and deposit services to Euroclear participants. In addition, we provide such operational services as the administration of depositary receipt programs and global trust and agency services, primarily in Europe. Equity Investments J.P. Morgan invests globally in privately held growth companies, management buyouts, privatizations, and recapitalizations. These investments are made and managed with the objective of maximizing total return, which is a measure of both long-term appreciation and net recognized gains. In addition, a number of our Equity Investment companies become clients of the firm. Our broad global presence and expertise is an important advantage in sourcing, evaluating, and managing investments. These activities are managed by a small group of professionals. 98 101 Our equity investment portfolio is diversified by industry, geographic area, and stage of investment. Our goal is to maintain a diversified portfolio capable of generating significant returns over time. This is a high-risk, high-reward business, and we operate under a variety of legal and regulatory restrictions in managing the portfolio. Investments are generally held for three to seven years, depending on our view of when a sale will produce optimal returns. Typically, investments are harvested through a public offering of securities or the sale of the investment. The process of assessing and managing the risks and rewards of new opportunities and existing investments continues throughout market cycles. Proprietary Investing and Trading Morgan actively takes market risk positions for its own account. These activities are managed by a small group of experienced market professionals who employ directional and relative value risk-taking strategies diversified across markets and instruments. Directional strategies anticipate changes in absolute rate and price levels, while relative value strategies anticipate changes in relationships between markets and classes of instruments. These strategies are conducted across many currencies and types of instruments, both on- and off-balance-sheet, where we perceive opportunities exist to generate value for the firm. Instruments typically used in these positioning activities include fixed income securities, foreign exchange, equity securities, commodity products, and related derivative instruments. Positions may be held for short or long periods of time, depending on the strategy and actual market performance. Certain longer-term strategies are considered to be investment activities, and primarily utilize government and mortgage-backed fixed income securities and interest rate swaps. The securities and interest rate swaps used in these investment activities are classified as "available-for-sale" and "risk-adjusting" respectively. In addition to these risk-taking activities are the firm's capital and liquidity management activities. Liquidity management is the management of the firm's liquidity risk profile to ensure that we have access to funding at a reasonable cost, even under adverse circumstances, to support all the business activities of the firm. A strong capital position is therefore an integral part of our liquidity management because it enables us to raise funds as inexpensively as possible in a variety of international markets. REGULATION J.P. Morgan is subject to regulation under the Bank Holding Company Act of 1956 (the Act). Under the Act, J.P. Morgan is required to file certain reports with the Board of Governors of the Federal Reserve System (the Board) and is subject to examination by the Board. The Act generally precludes J.P. Morgan and its subsidiaries from engaging in nonbanking activities, or from acquiring more than 5% of any class of voting securities of any company engaging in such activities, unless the Board has determined, by order or regulation, that such proposed activities are closely related to banking. Federal law and Board interpretations limit the extent to which J.P. Morgan and its subsidiaries can engage in certain aspects of the securities business. The Glass-Steagall Act prohibits affiliates of banks that are members of the Federal Reserve System, including J.P. Morgan Securities Inc. (JPMSI), a Section 20 subsidiary, from being "engaged principally" in bank-ineligible underwriting and dealing activities (mainly corporate debt and equity securities). As interpreted by the Board, this prohibition has restricted JPMSI's gross revenues from such activities to a maximum of 10% of its total gross revenues. Effective March 6, 1997, the restriction was changed from 10% to 25% of total gross revenues. J.P. Morgan continues to seek ways to expand the limits on its securities activities, including the continued reform of the Glass-Steagall Act, necessary to achieve our strategic objectives. 99 102 Morgan Guaranty Trust Company of New York (Morgan Guaranty), J.P. Morgan's largest subsidiary, is a member of the Federal Reserve System and a member of the Federal Deposit Insurance Corporation (FDIC). Its business is subject to both U.S. federal and state law and to examination and regulation by U.S. federal and state banking authorities. J.P. Morgan and its nonbank subsidiaries are affiliates of Morgan Guaranty within the meaning of the applicable federal statutes. Morgan Guaranty is subject to restrictions on loans and extensions of credit to J.P. Morgan and certain other affiliates and on certain other types of transactions with them or involving their securities. Among other wholly owned subsidiaries: - - JPMSI is a broker-dealer registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, the New York Stock Exchange, and other exchanges. - - J.P. Morgan Futures Inc. is subject to regulation by the Commodity Futures Trading Commission, the National Futures Association, and the commodity exchanges and clearinghouses of which it is a member. - - J.P. Morgan Investment Management Inc. is registered with the Securities and Exchange Commission as an investment advisor under the Investment Advisers Act of 1940, as amended. J.P. Morgan subsidiaries conducting business in other countries are also subject to regulations and restrictions imposed by those jurisdictions, including capital requirements. COMPETITION In all areas of business, J.P. Morgan and its subsidiaries operate in an intensely competitive environment, especially with respect to services and pricing. In the United States, we face competition from investment banks, money center bank holding companies, many regional and foreign banks, and a wide range of nonbank financial institutions. Internationally, we face competition from investment banks, commercial banks, and universal banks in the money centers of Europe, Asia, and Latin America. PROPERTIES J.P. Morgan owns and occupies buildings in New York, including its headquarters at 60 Wall Street, as well as 23 Wall Street and 15 Broad Street. J.P. Morgan also owns property in Delaware, London, and Paris and leases office space in New York, Brussels, Delaware, Paris, and London. J.P. Morgan also owns and leases property in other locations in which it conducts business throughout the world. As more fully described in Note 14 to the consolidated financial statements, Long-term debt, J.P. Morgan's financing arrangement for an office building complex in London involved the sale of a 52.5% interest in the building complex to the lender, excluding the interior office finishing, furniture, and technology. In addition, the 60 Wall Street building is subject to a mortgage in the amount of $400 million at December 31, 1996. 100 103 MANAGEMENT Douglas A. Warner III Roberto G. Mendoza Chairman of the Board Michael E. Patterson Chief Executive Officer Kurt F. Viermetz Vice Chairmen CLIENTS Thomas B. Ketchum Walter A. Gubert Peter L. Woicke Americas Europe, Middle East, Asia Pacific Africa CAPABILITIES AND Ramon de Oliveira Nicolas S. Rohatyn Pilar Conde SERVICES Equities Emerging Markets Michael R. Corey Equity Investments Foreign Exchange Proprietary Positioning Finance and Advisory Commodities Market Making Peter D. Hancock Luc Bomans Asset Management and Servicing Fixed Income John T. Olds Euroclear System Equity Investments Futures and Options Private Client Services Proprietary Investing and Trading Joseph P. MacHale Keith M. Schappert Credit Investment Management CORPORATE RESOURCES Stephen G. Thieke John A. Mayer Jr. Rachel F. Robbins Corporate Risk Management Chief Financial Officer General Counsel Credit Policy Strategic Planning Research Ronald H. Menaker David H. Sidwell Corporate Services Michael Enthoven Controller Technology and Operations Laura W. Dillon Edward F. Murphy Corporate Communication Herbert J. Hefke Auditor Human Resources
101 104 SENIOR OFFICERS Joseph T. Donohue Robert H. Muller John E. Graham Catherine S. Bryan Winfield S. Downs Sarah E. Nash David S. Hickman Jolyne K. Caruso-Fitzgerald Douglas A. Warner III Nicholas A. Draper El Walid Nsouli Stephen F. Holcomb W. Montgomery Cerf Chairman of the Board Richard R. Duron Timothy J. O'Brien Maria G. Jordan Jenifer L. Condit Chief Executive Officer Terence C. Eccles Simon R. Paterno Kenneth A. Lang John C. Conti Robert C. Elliott Hugh Paton Robert Le Blanc Etienne Deshormes Roberto G. Mendoza Frederic A. Escherich Nicholas B. Paumgarten Carl F. Munana Ronald R. Dewhurst Michael E. Patterson Yuichi Ezawa James R. Peacock Philip W. Mc Neal Pierre Dupont Kurt F. Viermetz Jean O. Facon Barrett R. Petty Charles C. O'Brien S. Luke L. Ellis Vice Chairmen of the Kathleen M. Fisher Werner C. Pfaffenberger Sheila J. O'Connell James R. English Board John A. Forlines III Howard F. Powers Jr. John A. Payne Simon W.P. Flannery Allen R. Friedman P. Preben Prebensen Joseph A. Sabatini John B. Fullerton CLIENTS Ronald T. Gault Roberta J. Puschel Mary E. Watkins James J. Fuschetti INVESTMENT BANKING S. Lane Genatowski Pascal J. Ravery Michael F. Gambardella Walter A. Gubert Michael P. George Gail M. Rogers EMERGING MARKETS Peter H. Gleason Thomas B. Ketchum Jean-Marc Georgy James P. Rutherfurd COMMODITIES Robert S. Hanft Peter L. Woicke John B. Goodwin Jr. T. Timothy Ryan Jr. FOREIGN EXCHANGE Meryl D. Hartzband Jacques G. Aigrain James M. Grant Purna R. Saggurti Nicolas S. Rohatyn Carlos M. Hernandez Yasukazu Aiuchi Alfredo D. Gutierrez Jaime Salaverri Frank B. Arisman Mark A. Husson Eric Altman Gregory L. Guyett Stephen Schaible Anthony J. Best Sharon H. Jacquet Jan A. Amethier James L. Hamilton Jr. Weijian Shan John G. Caccavale Daniel R. Kunstler Victor M. Arbulu Henry Harnischfeger Dag J. Skattum Petros Christodoulou Edward F. Mc Cartin Martin R. Atkin Maureen A. Hendricks Stephen S. Sloan John J. Coulter Charles C. Mountain Peter E. Baccile Peter J. Hill Damon P. Smith III Jose Luiz Daza Brian T. Murphy Stefano Balsamo Herman Hintzen Robert Sroka Ian R. Dubugras Jr. Catherine L. Murray Lloyd Bankson Henry W. Howell Michael W. Szeto Patrick du Pre de Saint-Maur Nirmal P. Narvekar Christophe J. Bataillard Herve Huas Jackson P. Tai Goetz Eggelhoefer Martin L. O'Neil Thaddeus T. Beczak Yong-Hak Huh Francis J. Tellier Stephanie E. Ercegovic Bintoar Palar David A. Behnke Gabriella Z. Icaza Xavier Tintore Peter F. Frey Timothy Purcell Carl J. Bergendahl Christian Jacobs Shu Tomioka Miguel Gutierrez Thomas S. Quinn III Enrico M. Bombieri Rondy E. Jennings Hiromichi Tsubouchi Christopher L. Harvey William D. Rabin Willard S. Boothby III John B. Jetter Georges Van Erck Thorkild P. Juncker Thomas P. Reagan Jonathan R. Brown Gregg Johnston Joseph A. Walker Elizabeth L. Littlefield Clayton S. Rose Henry I. Bryant Eric D. Karp William F. Wallace Richard S. Luddington Declan K. Sheehan P. Nicolas Carlisle Toshihide Kawashima Tira Wannamethee Arthur S. Magnus Nicholas E. Snee Francis P. Carr Edward J. Kelly III Raymond N. Wareham Jorge A. Maortua Thomas M. Snell Octavio Castello Branco Stephen C. Kirmse David B. Weir Jose A. Mc Loughlin Charles P. Soderstrom Eduardo F. Cepeda John D. Langlois James A. Wethered Guido A. Mosca James E. Staley Rowena W. Chu W. David Lawson IV David L. White Kurt Muehlbauer Rene Vanguestaine Ian M. Clark Robin A. Lawther Deborah M. Winshel Klaus T. Said Nancy S. Voye Peter T. Clarke Jin-Yi Lee Jon H. Zehner Cara L. Schnaper Brian F. Watson Pierre Colin John W. Littlefield Jr. Stephen A. Sinacore Christian Zugel Cezar P. Consing Dianne F. Lob CREDIT Glenn J. Smith David H. Courtney Michael C. Lobdell Joseph P. MacHale Thomas H. Smith EUROCLEAR Clifford S. Cramer Benjamin B. Lopata Roger B. Arner Jakob T. Stott Luc Bomans William F. Cruger Claus Lowe Barbara J. Asch Maria A. Trigo de Rosetti Santina Bernardi Guillaume D'Angerville Charles F. Lowrey Jr. Santiago Assalini Joseph C. Willing Ignace Combes D'Auvrecher C.H. Randolph Lyon William R. Barrett Jr. Jeanette K. Wong Erwin De Keyzer Antoinette Daridan Russell A. Mannis Wesley R. Brooks Richard Evans Olivier J. de Grivel Michael C. Mc Call Bruce N. Carnegie-Brown EQUITIES Michael Fleming William R. de Jonge Ferrell P. Mc Clean Timothy R. Elliott EQUITY INVESTMENTS Pierre Francotte Susana M. de la Puente John K. Mc Colloch Martha J. Gallo Ramon de Oliveira Martine Patureau David H. Deming Kenneth S. Mc Cormick Michael J. Gibbons Joseph Anastasio Pierre Slechten Jim H. Derryberry Benjamin Meuli Elizabeth R. Gile Edward C. Archer Anne Swaelus Klaus Diederichs Terry R. Mills David W. Godfrey Molly F. Ashby Gilbert Swinkels Adrian W. Doherty Jr. Marco Morelli Albert C. Bashawaty Andrew Threadgold D. Leslie A. Morrison Carol Bell Yannic Weber Guy Moszkowski Stephen A. Berenson Seth P. Bernstein David Bradley
102 105 FIXED INCOME Robert D. Birnbaum Susan E. Ulick Giovanni Gorno Tempini Robert McGinn FUTURES AND OPTIONS Jean L. Brunel Gilbert Van Hassel Michael J. Henderson Rachel F. Robbins Peter D. Hancock Andrew J. Canning Hendrick Van Riel Maureen R. Lee David J. Schraa Thomas J. Aylward IV Henry D. Cavanna William D. Walker Pierre Lenders Hildy J. Simmons Terrence M. Belton John C. Chigounis William L. Warner Lazaros P. Mavrides Ernest Stern Richard D. Berliand William L. Cobb Jr. Kurt J. Wolfgruber Colin W.P. McKechnie Debra F. Stone Eric Bertrand Warren K. Corning Gerd Woort-Menker Constantin E. Megiris Cory N. Strupp Mark C. Brickell Richard S. Davis Paul L. Zemsky Hubert Penot Bart J. Broadman Douglas J. Dooley Philipp M. Zenz-Spitzweg Georges-Arnaud Saier ECONOMIC RESEARCH Margaret A. Brody Roger L. Du Bois Peter T. Schwicht William A. Brown Robert S. Butler Christopher J. Durbin PRIVATE CLIENTS Guy Van Pelt Philip J. Suttle Russell Church Douglas M. Fleming John T. Olds Alan R. Collins Pablo Forero Sean A. Amery SECURITIES SERVICES FINANCIAL Thomas C. Connor Gordon B. Fowler Jr. Carlos M. Arias Charlton H. Chatfield John A. Mayer Jr. Joseph P. Cook L. George Gardella Susan G. Bell Jean M. Pellegrini Deborah L. Cuny John R. Corrie Stephen R. Goldman Saumyendra Bhattacharya Michael P. D'Angelo Louis Dehler Michael R. Granito Thomas R. Boehlke AUDIT Richard Johnson William S. Demchak Evelyn E. Guernsey Ann D. Borowiec Edward F. Murphy Patricia A. Jones Amin H. Ezz Al-Arab Andrew Harmstone David D. Burrows Bonnie L. Howard Allan B. Lubarsky Jeanne V. Feldhusen Timothy J. Heise Didier Cherpitel Mark L. Kay Dean R. Miller Alain L. Grisay Paul Hicks Jr. Joel I. Cohen Edmond J. Sannini Louis Rauchenberger Thomas F. Hagerstrom Pieter Hoets Philippe Damas Joel Tancer David H. Sidwell Stephen D. Heard Martyn C. Hole Herve de Montlivault Stephen M. Skoczylas Paul J. Hearn Robert Holland Daniel W. Drake CORPORATE RISK MANAGEMENT Gareth G. Stephens Rachel Hines Alistair Jessiman John R. Duffy Stephen G. Thieke Edmund H. Sutton Adam H. Howard Arthur J. Kalita Benoit H. Dumont Marc E. Berman Robert J. Hugin Dennis M. Kass Walter L. Fabricius Kyung Hee A. Choi HUMAN RESOURCES Mary L. Hustings Ivan Kerno Daniel M. Fitzpatrick James R. Helvey III Herbert J. Hefke Philippe K. Khuong-Huu Adrian Lee John A. Gent Alastair I. Hunter- Thomas R. Bain Fawzi S. Kyriakos-Saad Rudolph Leuthold Martyn E. Goossen Henderson James P. Baughman Richard G. Leibovitch Gerard W. Lillis Stephanie S. Hanbury-Brown Charles R. Monet John F. Bradley Martin K. Matsui Geoffrey M. Lindey Owen H. Harper David L. Roscoe III Gerard G. Cameron II James W. McAleenan Thomas M. Luddy James H. Higgins III Stephen A. Tyler Barbara M. Hack Richard M. McVey Thomas P. Madsen David A. Kelso Nancy B. Harwood David L. Meyer Robert J. Miller Chase W. Landreth CORPORATE SERVICES C. Dixon Kunzelmann Stephen Miller Jorg A. Mitterer Javier Muguiro Ronald H. Menaker Christopher R. Lowney T. Kelley Millet Thruston B. Morton III R. Scott Nycum Jr. John G. Daniello Isabel H. Sloane Michael J. Moore Patrick J. Murphy J. Edward Odegaard Theodore V. Farace Cecilia Y. Tsim John P. Mullen Fredric A. Nelson III William L. Oullin Derek G. Hall Andrew O. Watson Satoshi Nagase Lisa J. Oram Elizabeth J. Patrick Brian S. Howells Kenichi Noguchi James B. Otness Bruce T. Prolow William J. Kelly STRATEGIC PLANNING David M. Pryde Marian U. Pardo Susan G. Restler William J. Schneider John A. Mayer Jr. Eunice T. Reich-Berman Wesley I. Paul David B. Robb Jr. David W. Singleton David H. Brigstocke Robert L. Rossman William B. Petersen George W. Rowe Richard Speciale John G. Stathis Connie J. Plaehn Nicholas P. Sargen John J. Vahey TECHNOLOGY & OPERATIONS David J. Theobald Judith J. Plows John W. Schmidlin Michael Enthoven Charles M. Trunz III William M. Riegel Jr. Robert G. Simon CORPORATE STAFF Michael A. Azarian Alice Wang Roger A. Sayler Debra B. Treyz Charles A. Alexander Malcolm J. Beane Mark B. Werner Mark A. Sheridan Alexander G. Zaharoff Donald R. Brunner John Carlisle William T. Winters Terry Shu Laura W. Dillon Charles P. Costa Alain Younes Guenther P. Skrzypek PROPRIETARY POSITIONING Travis F. Epes Penelope A. Flugger Peter P. Zuppinger Laurence R. Smith Pilar Conde John W. Field Jr. Kenneth C. Fuller M. Steven Soltis Michael R. Corey Diane M. Genova Christophe E. Hioco INVESTMENT MANAGEMENT Yukiko Sugimoto Christopher C. Belchamber Dominique George Pamela V. Huttenberg Keith M. Schappert Robert J. Teatom Douglas A. Dachille Dennis C. Hensley Thomas F. Hynd Kenneth W. Anderson John R. Thomas Kim E. Fox-Moertl Hugh T. Kemper James F. Krass Robert A. Anselmi Takeshi Fujimaki Stephen E. Kowitt Peter A. Miller Joseph K. Azelby Veronique Weill Keith T. Banks Olivia C. Wyer
103 106 J.P. MORGAN DIRECTORY Principal subsidiaries and offices - wholly owned except where noted NORTH AMERICA NEW YORK J.P. Morgan & Co. Incorporated Morgan Guaranty Trust Company of New York J.P. Morgan Securities Inc. J.P. Morgan Investment Management Inc. J.P. Morgan Futures Inc. J.P. Morgan Capital Corporation J.P. Morgan Community Development Corporation BOSTON J.P. Morgan Securities - Boston office CHICAGO J.P. Morgan & Co. - Chicago office J.P. Morgan Securities - Chicago office J.P. Morgan Futures - Chicago office J.P. Morgan Trust Company of Illinois Morgan Guaranty - representative office HOUSTON J.P. Morgan Securities - Houston office J.P. Morgan Investment Management - Houston office LOS ANGELES Morgan Guaranty - representative office J.P. Morgan - Los Angeles office J.P. Morgan California J.P. Morgan Investment Management - Los Angeles office NEWARK, DELAWARE Morgan Guaranty - banking office J.P. Morgan Services Inc. J.P. Morgan Overseas Capital Corporation Morgan Guaranty International Finance Corporation PALM BEACH J.P. Morgan Florida, FSB J.P. Morgan Securities - Palm Beach office PHILADELPHIA Morgan Guaranty - limited purpose banking office SAN FRANCISCO J.P. Morgan & Co. - San Francisco office Morgan Guaranty - representative office J.P. Morgan California - San Francisco office J.P. Morgan Capital - San Francisco office J.P. Morgan Futures - San Francisco office J.P. Morgan Securities - San Francisco office WASHINGTON, DC J.P. Morgan Securities - Washington office WILMINGTON Morgan Guaranty - banking office J.P. Morgan Trust Company of Delaware TORONTO J.P. Morgan Canada J.P. Morgan Securities Canada Inc. NASSAU Morgan Guaranty - banking office Morgan Trust Company of The Bahamas Limited CAYMAN ISLANDS Morgan Fonciere Cayman Islands Ltd. Morgan Trust Company of the Cayman Islands Ltd. EUROPE LONDON Morgan Guaranty - banking and private banking offices J.P. Morgan Securities Ltd. J.P. Morgan Sterling Securities Ltd. J.P. Morgan Investment Management - London office J.P. Morgan Whitefriars Inc. AMSTERDAM J.P. Morgan Nederland N.V. BRUSSELS Morgan Guaranty - banking office J.P. Morgan Benelux S.A./N.V. Euroclear Operations Centre+ FRANKFURT Morgan Guaranty - banking office J.P. Morgan GmbH J.P. Morgan Investment GmbH J.P. Morgan Investment Management Inc. J.P. Morgan Holding Deutschland GmbH GENEVA J.P. Morgan (Suisse) S.A. MADRID Morgan Guaranty - banking and private banking offices Morgan Gestion, S.A. J.P. Morgan Espana S.A. J.P. Morgan Iberica S.L. J.P. Morgan Sociedad de Valores y Bolsa, S.A. MILAN Morgan Guaranty - banking office J.P. Morgan S.p.A. J.P. Morgan Fondi Italia S.p.A. PARIS Morgan Guaranty - banking and private banking offices J.P. Morgan & Cie S.A. Societe de Bourse J.P. Morgan S.A. PRAGUE J.P. Morgan International Ltd. ROME Morgan Guaranty - representative office WARSAW J.P. Morgan Polska Sp. z o.o. ZURICH Morgan Guaranty - banking office AFRICA JOHANNESBURG J.P. Morgan Securities South Africa (Proprietary) Limited *50% owned **40% owned +operated by J.P. Morgan 104 107 J.P. MORGAN DIRECTORY (continued) Principal subsidiaries and offices - wholly owned except where noted ASIA PACIFIC TOKYO Morgan Guaranty - banking and private banking offices J.P. Morgan Investment Management - Tokyo office J.P. Morgan Trust Bank Ltd. J.P. Morgan Securities Asia* - Tokyo office BANGKOK J.P. Morgan Securities Asia* - representative office BEIJING J.P. Morgan & Co. - representative office BOMBAY ICICI Asset Management Company Limited** ICICI Securities and Finance Company Limited** HONG KONG Morgan Guaranty - banking and private banking offices J.P. Morgan Futures Hong Kong Ltd. J.P. Morgan Securities Hong Kong Ltd. J.P. Morgan International Capital - Hong Kong office J.P. Morgan Securities Asia* - Hong Kong office JAKARTA Morgan Guaranty - representative office MANILA Morgan Guaranty - representative office MELBOURNE Morgan Guaranty - banking office J.P. Morgan Australia Limited J.P. Morgan Investment Management Australia Limited J.P. Morgan Australia Securities Limited OSAKA J.P. Morgan Securities Asia* - Osaka office SEOUL Morgan Guaranty - representative office J.P. Morgan Securities Asia* - representative office SHANGHAI J.P. Morgan & Co. - representative office SINGAPORE Morgan Guaranty - banking and private banking offices J.P. Morgan Securities Asia Ltd.* J.P. Morgan Futures - Singapore office J.P. Morgan International Capital Corporation - Singapore office J.P. Morgan Investment Management - Singapore office SYDNEY Morgan Guaranty - banking office J.P. Morgan Australia - Sydney office J.P. Morgan Australia Securities - Sydney office TAIPEI Morgan Guaranty - representative office J.P. Morgan Securities Asia* - representative office LATIN AMERICA BUENOS AIRES Morgan Guaranty - banking office J.P. Morgan Argentina Sociedad de Bolsa S.A. CARACAS J.P. Morgan Venezuela, S.A. LIMA Morgan Guaranty - representative office MEXICO CITY Morgan Guaranty - representative office J.P. Morgan Grupo Financiero, S.A. de C.V. J.P. Morgan Casa de Bolsa, S.A. de C.V. Banco J.P. Morgan, S.A. RIO DE JANEIRO Morgan Guaranty - banking office Banco J.P. Morgan, S.A. - Rio de Janeiro office JPM Corretora de Cambio, Titulos e Valores Mobiliarios - Rio de Janeiro office J.P. Morgan Investimentos e Financas - Rio de Janeiro office SANTIAGO J.P. Morgan Chile Ltda. SAO PAULO Morgan Guaranty - banking office Banco J.P. Morgan, S.A. JPM Corretora de Cambio, Titulos e Valores Mobiliarios S.A. J.P. Morgan Investimentos e Financas Ltda. *50% owned **40% owned +operated by J.P. Morgan 105 108 BOARD OF DIRECTORS J.P. Morgan & Co. Incorporated DOUGLAS A. WARNER III Chairman of the Board Chief Executive Officer RILEY P. BECHTEL Chairman and Chief Executive Officer Bechtel Group, Inc. MARTIN FELDSTEIN President and Chief Executive Officer National Bureau of Economic Research, Inc. HANNA H. GRAY President Emeritus and Harry Pratt Judson Distinguished Service Professor of History The University of Chicago JAMES R. HOUGHTON Retired Chairman of the Board Corning Incorporated JAMES L. KETELSEN Retired Chairman and Chief Executive Officer Tenneco Inc. JOHN A. KROL President and Chief Executive Officer E.I. du Pont de Nemours and Company ROBERTO G. MENDOZA Vice Chairman of the Board MICHAEL E. PATTERSON Vice Chairman of the Board LEE R. RAYMOND Chairman of the Board and Chief Executive Officer Exxon Corporation RICHARD D. SIMMONS Retired President The Washington Post Company and International Herald Tribune KURT F. VIERMETZ Vice Chairman of the Board DENNIS WEATHERSTONE Retired Chairman of the Board DOUGLAS C. YEARLEY Chairman, President, and Chief Executive Officer Phelps Dodge Corporation COMMITTEES OF THE BOARD EXECUTIVE COMMITTEE J.P. MORGAN AND MORGAN GUARANTY Messrs. Warner (Chairman), Houghton, Mendoza, Patterson, Viermetz, Weatherstone AUDIT COMMITTEE J.P. MORGAN EXAMINING COMMITTEE MORGAN GUARANTY Messrs. Ketelsen (Chairman), Feldstein, Krol, Yearley COMMITTEE ON TRUST MATTERS J.P. MORGAN Dr. Gray (Chairman), Messrs. Ketelsen, Simmons COMMITTEE ON MANAGEMENT DEVELOPMENT AND EXECUTIVE COMPENSATION J.P. MORGAN Messrs. Houghton (Chairman), Bechtel, Raymond COMMITTEE ON DIRECTOR NOMINATIONS AND BOARD AFFAIRS J.P. MORGAN Mr. Raymond (Chairman), Dr. Gray, Mr. Yearley COMMITTEE ON EMPLOYMENT POLICIES AND BENEFITS MORGAN GUARANTY Messrs. Simmons (Chairman), Feldstein, Weatherstone 106 109 INTERNATIONAL COUNCIL J.P. Morgan & Co. Incorporated Formed in 1967 and composed of business leaders and prominent individuals from public life, the International Council advises the senior management of J.P.Morgan on matters relating to its global business. It meets approximately every eight months to discuss relevant issues of international concern and interest. The Hon. Bill Bradley was named Vice Chairman of the Council and Miguel Etchenique became a member early in 1997. HON. GEORGE P. SHULTZ Chairman of the Council Distinguished Fellow, Hoover Institution Stanford University Stanford, California HON. BILL BRADLEY Vice Chairman of the Council Former U.S. Senator Montclair, New Jersey MOHAMMED ABALKHAIL Former Minister of Finance and Economy Kingdom of Saudi Arabia Riyadh, Saudi Arabia ROBERT E. ALLEN Chairman and Chief Executive Officer AT&T Corporation Basking Ridge, New Jersey BO BERGGREN Chairman Stora Kopparbergs Bergslags AB Stockholm, Sweden JORGE BORN President Bomagra S.A. Buenos Aires, Argentina LAWRENCE A. BOSSIDY Chairman and Chief Executive Officer AlliedSignal Inc. Morristown, New Jersey ING. CARLO DE BENEDETTI Chairman CIR S.p.A. Milan, Italy H. MIGUEL ETCHENIQUE Chairman of the Board and President Brasmotor S.A. Sao Paulo, Brazil SIR CHRISTOPHER HOGG Chairman Reuters Holdings PLC London, England THE RT. HON. THE LORD HOWE OF Aberavon, PC, QC House of Lords London, England DURK I. JAGER President and Chief Operating Officer The Procter & Gamble Company Cincinnati, Ohio ALAIN A. JOLY Chairman and Chief Executive Officer L'Air Liquide S.A. Paris, France DEREK L. KEYS Executive Director Gencor Limited Johannesburg, South Africa YOTARO KOBAYASHI Chairman and Chief Executive Officer Fuji Xerox Co., Ltd. Tokyo, Japan HON. LEE KUAN YEW Senior Minister Singapore CARLOS MARCH Chairman The March Group Madrid, Spain HELMUT O. MAUCHER Chairman and Chief Executive Officer Nestle S.A. Vevey, Switzerland KARL OTTO POHL Partner Sal. Oppenheim Jr. & Cie. Frankfurt, Germany JOHN B. PRESCOTT Managing Director and Chief Executive Officer The Broken Hill Proprietary Company Ltd. Melbourne, Australia CONDOLEEZZA RICE Provost Stanford University Stanford, California JURGEN E. SCHREMPP Chairman of the Board of Management Daimler-Benz AG Stuttgart, Germany JESS SODERBERG Partner and Chief Executive Officer A.P. Moller Copenhagen, Denmark DENNIS WEATHERSTONE Retired Chairman J.P. Morgan & Co. Incorporated New York, New York L.R. WILSON Chairman and Chief Executive Officer BCE Inc. Montreal, Canada 107 110 DIRECTORS ADVISORY COUNCIL Morgan Guaranty Trust Company of New York The Directors Advisory Council of Morgan Guaranty Trust Company, whose members are retired directors of J.P. Morgan, provides counsel to management and the Board. ELLMORE C. PATTERSON Chairman Directors Advisory Council Retired Chairman J.P. Morgan & Co. Incorporated RALPH E. BAILEY Former Vice Chairman E.I. du Pont de Nemours and Company and Retired Chairman and Chief Executive Officer Conoco Inc. BORIS S. BERKOVITCH Retired Vice Chairman J.P. Morgan & Co. Incorporated JAMES O. BOISI Retired Vice Chairman J.P. Morgan & Co. Incorporated CARTER L. BURGESS FRANK T. CARY Retired Chairman of the Board International Business Machines Corporation CHARLES D. DICKEY JR. Retired Chairman of the Board Scott Paper Company WALTER A. FALLON Former Chairman of the Board Eastman Kodak Company LEWIS W. FOY Former Chairman Bethlehem Steel Corporation HOWARD GOLDFEDER Retired Chairman and Chief Executive Officer Federated Department Stores, Inc. JOHN J. HORAN Former Chairman and Chief Executive Officer Merck & Co., Inc. HOWARD W. JOHNSON President Emeritus and Former Chairman of the Corporation Massachusetts Institute of Technology EDWARD R. KANE Former President E.I. du Pont de Nemours and Company RALPH F. LEACH Retired Chairman of the Executive Committee J.P. Morgan & Co. Incorporated ROBERT V. LINDSAY Retired President J.P. Morgan & Co. Incorporated HOWARD J. MORGENS Chairman Emeritus The Procter & Gamble Company WALTER H. PAGE Retired Chairman J.P. Morgan & Co. Incorporated DEWITT PETERKIN JR. Retired Vice Chairman J.P. Morgan & Co. Incorporated DONALD E. PROCKNOW Former Vice Chairman and Chief Operating Officer AT&T Technologies, Inc. THOMAS RODD Retired Vice Chairman J.P. Morgan & Co. Incorporated JOHN P. SCHROEDER Retired Vice Chairman J.P. Morgan & Co. Incorporated WARREN M. SHAPLEIGH Retired Vice Chairman of the Board Ralston Purina Company JOHN G. SMALE Chairman of the Executive Committee of the Board General Motors Corporation and Retired Chairman of the Board and Chief Executive Officer The Procter & Gamble Company OLCOTT D. SMITH Retired Chairman Aetna Life and Casualty Company (C) 1997 J.P. Morgan & Co. Incorporated Printed in USA on recycled paper. 108 111 CORPORATE INFORMATION CORPORATE HEADQUARTERS J.P. Morgan & Co. Incorporated, 60 Wall Street, New York, NY 10260-0060, 1-212-483-2323 ANNUAL MEETING The annual meeting of stockholders of J.P. Morgan will be held on Wednesday, May 14, 1997, at 11:00 a.m. in Morgan Hall West, 46th floor, 60 Wall Street, New York. LISTING The common stock of J.P. Morgan is listed on the New York, Amsterdam, London, Paris, Swiss, and Tokyo stock exchanges. International Depositary Receipts for the stock are listed on the Brussels and London stock exchanges. NYSE symbol: JPM The Adjustable Rate Cumulative Preferred Stock, Series A of J.P. Morgan is listed on the New York Stock Exchange. NYSE symbol: JPM Pr A Depositary shares representing a one-tenth interest in 6-5/8% Cumulative Preferred Stock, Series H of J.P. Morgan are listed on the New York Stock Exchange. NYSE symbol: JPM Pr H TRANSFER AGENT AND REGISTRAR Common Stock, Adjustable Rate Cumulative Preferred Stock, Series A, Depositary shares on 6-5/8% Cumulative Preferred Stock, Series H: First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, NJ 07303-2500, 1-800-519-3111 Variable Cumulative Preferred Stock, Series B through F: Bankers Trust Company, 4 Albany Street, 7th floor, New York, NY 10006-1500, 1-212-250-6850 FORM 10-K J.P. Morgan's Annual report on Form 10-K as filed with the Securities and Exchange Commission is incorporated in this report. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Stockholders wishing to receive a prospectus for the dividend reinvestment and stock purchase plan are invited to write to First Chicago Trust Company of New York, J.P. Morgan Dividend Reinvestment Plan, P.O. Box 2500, Jersey City, NJ 07303-2500, or call 1-800-519-3111. 1996 ANNUAL REVIEW REPORT ON CONTRIBUTIONS For a copy of J.P. Morgan's 1996 Annual review, the companion publication to this Annual report, or for a report on J.P. Morgan's philanthropic activities in 1996, write to Corporate Communication - Publications, J.P. Morgan & Co. Incorporated, 60 Wall Street, New York, NY 10260-0060, or call (1-212) 648-9607. CONTACTS Investor Relations: 1-212-648-9446 Media Relations: 1-212-648-9553 Please visit us on the Internet: www.jpmorgan.com EQUAL OPPORTUNITY AT J.P. MORGAN J.P. Morgan is committed to providing equal opportunity in the workplace. The company, through this commitment, benefits from the full use and development of its employees. 109 112 J.P. Morgan & Co. Incorporated 60 Wall Street New York, NY 10260-0060 1-212-483-2323 113 GRAPHIC INDEX PAGE 13 (1) Depicted on page 13 is a timeline of Daily Earnings at Risk for our combined trading activities for each business day in 1995 and 1996, as well as the average quarterly DEaR, in millions of dollars, for each quarter of 1995 and 1996. For 1995, in millions of dollars, the high was $31, the low was $11, the average was $19, and the period end amount was $27. For 1996, in millions of dollars, the high was $28, the low was $13, the average was $21, and the period end amount was $27. PAGE 14 (1) Depicted on page 14 is a histogram showing the frequency distribution of 1996 daily combined trading-related revenue generated by our trading businesses, in millions of dollars. EX-21 5 SUBSIDIARIES OF J.P. MORGAN 1 EXHIBIT 21 Subsidiaries of J.P. Morgan & Co. Incorporated ---------------------------------------------- J.P. Morgan & Co. Incorporated Delaware Subsidiaries of J.P. Morgan & Co. Incorporated - ---------------------------------------------- (all wholly owned, except where noted) DMHL Delaware Fund 800 Inc. Delaware J.P. Morgan California California Morgan Fonciere Cayman Islands Ltd. Cayman Islands Morgan Trust Company of the Cayman Islands Ltd. Cayman Islands Morgan Trust Company of The Bahamas Limited Commonwealth of The Bahamas J.P. Morgan Acceptance Corporation I Delaware J.P. Morgan Capital Corporation Delaware JPM Capital Trust I Delaware J.P. Morgan Capital Emerging Markets K Corporation Delaware J.P. Morgan Florida Holdings Corp.(1) Delaware J.P. Morgan Funding Corp. United Kingdom J.P. Morgan Funds Management Inc. Delaware J.P. Morgan Futures Inc. Delaware J.P. Morgan Futures Hong Kong Limited Crown Colony of Hong Kong J.P. Morgan GT Corporation Delaware J.P. Morgan International Capital Corporation Delaware 2 J.P. Morgan International Holdings Corp. Delaware J.P. Morgan Investment Corporation Delaware J.P. Morgan Investment Management Inc. Delaware J.P. Morgan Leasefunding Corp. Delaware J.P. Morgan (1992-I) Foreign Sales Corporation Barbados J.P. Morgan Mortgage Funding Inc. Delaware J.P. Morgan Commercial Mortgage Finance Corp. Delaware J.P. Morgan Mortgage Pass-Through Corporation Delaware J.P. Morgan News Partnership Corporation Delaware J.P. Morgan Technology Partnership Corporation Delaware JPM Pork Partnership Corporation Delaware J.P. Morgan Pine Street Corporation Delaware J.P. Morgan Partnership Capital Corporation Delaware J.P. Morgan Real Estate Partnership Corporation Delaware J.P. Morgan Energy Partnership Corporation Delaware J.P. Morgan Ventures Energy Corporation Delaware J.P. Morgan Private Investment Inc. Delaware J.P. Morgan Securities Holdings Inc. Delaware J.P. Morgan Securities Inc. Delaware J.P. Morgan Services Inc. Delaware J.P. Morgan Structured Finance Corp. Delaware 2 3 J.P. Morgan Structured Obligations Corporation Delaware Trading and Finance Management Limited United Kingdom J.P. Morgan Trust Company of Delaware Delaware J.P. Morgan Trust Company of Illinois Illinois J.P. Morgan Ventures Corporation Delaware J.P. Morgan Venezuela S.A. Venezuela J.P. Morgan Community Development Corporation Delaware Corsair, Inc. Delaware Sixty Wall Street Corporation Delaware Sixty Wall Street SBIC Corporation Delaware J.P. Morgan Florida, FSB Florida J.P. Morgan Trading and Finance Limited United Kingdom J.P. Morgan & Co. Limited United Kingdom Morgan Guaranty Trust Company of New York New York 3 4 Subsidiaries of Morgan Guaranty Trust Company of New York - --------------------------------------------------------- Angel Court Limited United Kingdom Morgan Guaranty Nominees Bahamas Limited Commonwealth of The Bahamas J.P. Morgan Interfunding Corp. Delaware Morprop Incorporated Delaware MorWest, Inc. Delaware MGT North America Corp. Delaware J.P. Morgan V.E. 92 Ltd. New York Oil Tankers Leasing Corporation New York J.P. Morgan Energy Products Inc. Delaware Ship Holding Corp. New York Whitkath Inc. New York EC Nominees Limited United Kingdom Guaranty Nominees Limited United Kingdom JPM (Eagle Star) Nominees Limited United Kingdom JPM Nominees Limited United Kingdom MGTB Nominees Limited United Kingdom MGT-EOC Nominees Limited United Kingdom Morgan Guaranty Executor and Trustee Company Limited United Kingdom J.P. Morgan Trustees Ltd. United Kingdom Morgan Guaranty International Finance Corporation Section 25 (a) of the Federal Reserve Act of the United States 4 5 Subsidiaries of Morgan Guaranty International Finance Corporation - ----------------------------------------------------------------- J.P. Morgan Argentina Sociedad de Bolsa S.A.(4) Argentina J.P. Morgan Chile Limitada(4) Chile Morgan Guaranty Finance Limited Bermuda J.P. Morgan Funds Bahamas Ltd. Commonwealth of The Bahamas JPM Corretora de Cambio, Titulos e Valores Mobiliarios S.A. Brazil Banco J.P. Morgan, S.A.(5) Brazil J.P. Morgan Fonds (Luxembourg) S.A. Grand Duchy of Luxembourg ICICI Asset Management Company Limited (40% owned) Bombay, India ICICI Brokerage Services Limited Bombay, India J.P. Morgan Iberica, S.L. Spain J.P. Morgan Investimentos e Financas Ltda. Brazil J.P. Morgan GmbH (97% owned)(6) Federal Republic of Germany J.P. Morgan Holding Deutschland GmbH(2) Federal Republic of Germany J.P. Morgan Investment GmbH Federal Republic of Germany J.P. Morgan & Cie S.A. France Morgan Gestion S.A. France Societe de Bourse J.P. Morgan S.A. France Morgan Conseil S.A. France J.P. Morgan Fund Services S.A.(4) Grand Duchy of Luxembourg J.P. Morgan S.p.A.(4) Italy 5 6 J.P. Morgan Trust Bank Ltd.(3) Japan J.P. Morgan Japanese Fund Services S.A.(4) Grand Duchy of Luxembourg J.P. Morgan Jersey Limited Jersey, The Channel Islands J.P. Morgan Benelux S.A. Kingdom of Belgium J.P. Morgan Securities Asia Ltd. (50% owned) Republic of Singapore J.P. Morgan Securities South Africa (Proprietary) Limited South Africa J.P. Morgan Servicios S.A. de C.V., J.P. Morgan Morgan Grupo Financiero Mexico City, Mexico J.P. Morgan Financial Markets Ltd. Switzerland J.P. Morgan (Suisse) S.A. Switzerland J.P. Morgan Portfolio Ltd. United Kingdom Morgan Property Development Company Limited United Kingdom J.P. Morgan Polska Sp. z o.o. Warsaw, Poland J.P. Morgan International Ltd. Delaware J.P. Morgan Grupo Financiero, S.A. de C.V. Mexico City, Mexico Banco J.P. Morgan, S.A., Institucion de Banca Multiple, J.P. Morgan Grupo Financiero Mexico City, Mexico J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero Mexico City, Mexico J.P. Morgan Fondi Italia S.p.A. Italy J.P. Morgan Services Ltd. Singapore Financiere Franco-Neerlandaise (10% Owned) France FL21 SARL (10% Owned) France 6 7 ICICI Securities and Finance Company Limited (39.7% Owned) Bombay, India Epargne-Interessement (23% Owned) France Private Export Funding Corporation (7.5% Owned) New York J.P. Morgan Overseas Capital Corporation Delaware Subsidiaries of J.P. Morgan Overseas Capital Corporation - -------------------------------------------------------- J.P. Morgan Nederland N.V. Amsterdam, The Netherlands J.P. Morgan Securities Hong Kong Ltd. Crown Colony of Hong Kong J.P. Morgan Whitefriars Inc. Delaware J.P. Morgan Whitefriars (UK) United Kingdom J.P. Morgan Securities Ltd.(7) United Kingdom J.P. Morgan Securities Canada Inc. Ontario, Canada J.P. Morgan Canada Ontario, Canada Morgan Bank of Canada (Receivables Purchase Financing) Ltd. Ontario, Canada J.P. Morgan Espana S.A. Spain J.P. Morgan Sociedad de Valores y Bolsa S.A. Spain Morgan Gestion, S.A. Spain J.P. Morgan Sterling Securities Ltd. United Kingdom Kipps Nominees Ltd. United Kingdom J.P. Morgan Societa di Intermediazione Mobiliare S.p.A. Italy Morgan Guaranty Holdings Ltd.(8) United Kingdom Morgan Guaranty Trust Company Limited (U.K.) United Kingdom 7 8 Sociven S.A. Venezuela J.P. Morgan Australia Holdings Limited Victoria, Australia J.P. Morgan Australia Limited Victoria, Australia J.P. Morgan Australia Securities Limited Victoria, Australia J.P. Morgan Investment Management Australia Limited Victoria, Australia J.P. Morgan Nominees Pty. Limited Victoria, Australia Bank of the Philippine Islands (12.6% Owned) Philippines Saudi International Bank Al-Bank Al-Saudi Al-Alami Limited (20% Owned) London - ------------------------------------- (1) J.P. MORGAN INTERNATIONAL HOLDINGS CORP. HAS A 50% OWNERSHIP INTEREST. (2) J.P. MORGAN & CIE S.A. OWNS SHARES CARRYING 23% OF THE VOTING POWER. (3) J.P. MORGAN AND CIE S.A. OWNS PREFERRED SHARES CARRYING 31.74% OF THE VOTING POWER. (4) J.P. MORGAN OVERSEAS CAPITAL CORPORATION OWNS A MINORITY INTEREST IN THE COMPANY. (5) J.P. MORGAN INVESTIMENTOS E FINANCAS LTDA. HAS A 36% OWNERSHIP INTEREST. (6) MORGAN GUARANTY TRUST COMPANY OF NEW YORK HAS A 3% OWNERSHIP INTEREST. (7) MORGAN GUARANTY INTERNATIONAL FINANCE CORPORATION AND MORGAN GUARANTY INTERNATIONAL BANK EACH OWNS A MINORITY INTEREST IN THE COMPANY. (8) MORGAN GUARANTY INTERNATIONAL FINANCE CORPORATION HAS A 21% OWNERSHIP INTEREST. 8 EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-44312, 33-45651, 33-49775, 33-55851, 33-64193, 333-01723, 333-01121, 333-15079, 333-15079-1 through 4, 333-20427, and 333-20427-1 through 3) and in the Registration Statements on Form S-8, as amended, (Nos. 33-61167, 33-61181, 33-65065, 33-49267, 33-32659, 33-49419 and 33-63659) of our report dated January 8, 1997 appearing on page 34 of the J. P. Morgan & Co. Incorporated Annual Report, which is included as exhibit 13 to Form 10-K for the year ended December 31, 1996. /s/ PRICE WATERHOUSE LLP - ------------------------ Price Waterhouse LLP New York, New York March 24, 1997 EX-24 7 POWERS OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Douglas A. Warner III 2 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Riley P. Bechtel 3 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Martin Feldstein 4 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Hanna H. Gray 5 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ James R. Houghton 6 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ James L. Ketelsen 7 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ John A. Krol 8 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Roberto G. Mendoza 9 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Michael E. Patterson 10 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Lee R. Raymond 11 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Richard D. Simmons 12 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Kurt F. Viermetz 13 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Dennis Weatherstone 14 EXHIBIT 24 POWER OF ATTORNEY (Form 10-K) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Douglas A. Warner III, Roberto G. Mendoza, Kurt F. Viermetz, Michael E. Patterson, Rachel F. Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power to act without the others, as the undersigned's true and lawful attorney-in-fact and agent, with full and several power of substitution, for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign any and all Annual Reports of J.P. Morgan & Co. Incorporated on Form 10-K and any and all amendments thereto pursuant to the Securities Exchange Act of 1934, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the 24th day of March, 1997. /s/ Douglas C. Yearley EX-27 8 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF J.P. MORGAN & CO. INCORPORATED FOR THE YEAR ENDED 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH J.P. MORGAN & CO. INCORPORATED ANNUAL REPORT ON FORM 10-K AS OF AND FOR THE YEAR ENDED 12/31/96. 1,000,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 906 1,908 32,505 90,980 24,865 0 0 28,120 566 222,026 52,724 85,509 59,258 13,103 0 694 502 10,236 222,026 1,776 1,601 7,336 10,713 2,541 9,011 1,702 0 286 4,523 2,332 1,574 0 0 1,574 7.63 7.56 1.04 120 1 0 0 1,130 39 25 1,116 585 531 0 In prior Annual reports of J.P. Morgan and Co. Incorporated, the income statement caption Net Investment Securities Gains, which reported gains and losses from sales of securities from our debt investment securities portfolio, was reported in the Securities-gains caption in this financial data schedule. In the 1996 Annual report, net securities gains included in the new income statement caption, Investment Securities Revenue, which includes gains and losses on debt and equity investment securities, other-than-temporary impairments in value, and related dividend income, is reported in the Securities-gains caption in this financial data schedule. Net securities gains for purposes of this data schedule for the years ended December 31, 1996, 1995 and 1994 were $286 million, $506 million, and $728 million, respectively.
-----END PRIVACY-ENHANCED MESSAGE-----