-----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, UolZ2zNaMY95/QRaL1aMneaxJH+feF1w2eazVQm/EmosP4LmJLhOX/EWrUJgE2KX l8orkiUaeCWkoPVh2d4dIQ== 0000950123-97-006924.txt : 19970815 0000950123-97-006924.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950123-97-006924 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN J P & CO INC CENTRAL INDEX KEY: 0000068100 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132625764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05885 FILM NUMBER: 97662885 BUSINESS ADDRESS: STREET 1: 60 WALL ST CITY: NEW YORK STATE: NY ZIP: 10260 BUSINESS PHONE: 2124832323 MAIL ADDRESS: STREET 1: P O BOX 271 STREET 2: C/O WILLIAM D HALL CITY: WILMINGTON STATE: DE ZIP: 19899 10-Q 1 J.P. MORGAN & CO. INCORPORATED 1 PAGE 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 J.P. MORGAN & CO. INCORPORATED (Exact name of registrant as specified in its charter) Delaware 1-5885 13-2625764 (State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) Identification No.) 60 Wall Street, New York, NY 10260-0060 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 483-2323 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares outstanding of each of the registrant's classes of common stock at July 31, 1997: Common Stock, $2.50 Par Value 178,909,966 Shares ================================================================================ 2 PAGE 2 PART I -- FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS The following financial statement information for the three and six months ended June 30, 1997, is set forth within this document on the pages indicated: Page Three-month Consolidated statement of income J.P. Morgan & Co. Incorporated. . . . . . . . . . . . . 3 Six-month Consolidated statement of income J.P. Morgan & Co. Incorporated . . . . . . . . . . . . 4 Consolidated balance sheet J.P. Morgan & Co. Incorporated . . . . . . . . . . . . 5 Consolidated statement of changes in stockholders' equity J.P. Morgan & Co. Incorporated . . . . . . . . . . . . 6 Consolidated statement of cash flows J.P. Morgan & Co. Incorporated . . . . . . . . . . . . 7 Consolidated statement of condition Morgan Guaranty Trust Company of New York . . . . . . . . . 8 Notes to Consolidated financial statements J.P. Morgan & Co. Incorporated . . . . . . . . . . . . 9-16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial highlights . . . . . . . . . . . . . . . 17 Business sector analysis . . . . . . . . . . . . . . 18-22 Risk management . . . . . . . . . . . . . . . . 23 Financial review . . . . . . . . . . . . . . . . 24-27 Consolidated average balances and net interest earnings . . . 28-31 Derivatives used for purposes other-than-trading . . . . . . 32 PART II -- OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 33 SIGNATURES . . . . . . . . . . . . . . . . . . . . . 34 3 PAGE 3 PART I ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated - ---------------------------------------- -------------------------------------------------------------------------------------- In millions, except per share data Three months ended -------------------------------------------------------------------------------------- June 30 June 30 Increase/ 1997 1996 (Decrease) -------------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue $3,029 $2,559 $470 Interest expense 2,534 2,162 372 - ---------------------------------------- ---------------------------- ---------------------------- ---------------------------- Net interest revenue 495 397 98 NONINTEREST REVENUE Trading revenue 477 697 (220) Investment banking revenue 294 210 84 Investment management revenue 199 172 27 Fees and commissions 156 142 14 Investment securities revenue 114 72 42 Other revenue 56 71 (15) - ---------------------------------------- ---------------------------- ---------------------------- ---------------------------- Total noninterest revenue 1,296 1,364 (68) Total revenue 1,791 1,761 30 OPERATING EXPENSES Employee compensation and benefits 734 737 (3) Net occupancy 104 76 28 Technology and communications 240 158 82 Other expenses 163 133 30 - ---------------------------------------- ---------------------------- ---------------------------- ---------------------------- Total operating expenses 1,241 1,104 137 Income before income taxes 550 657 (107) Income taxes 176 217 (41) - ---------------------------------------- ---------------------------- ---------------------------- ---------------------------- Net income 374 440 (66) PER COMMON SHARE Net income (a) $1.85 $2.14 ($0.29) Dividends declared 0.88 0.81 0.07 - ---------------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) Earnings per share amounts represent both primary and fully diluted earnings per share, except for the three months ended June 30, 1997. Fully diluted earnings per share for the three months ended June 30, 1997 were $1.84. See notes to consolidated financial statements. 4 PAGE 4
CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated - ------------------------------------------------------------------------------------------------------------------------------ In millions, except per share data Six months ended ------------------------------------------------------------------------------------- June 30 June 30 Increase/ 1997 1996 (Decrease) ------------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue $5,921 $5,113 $808 Interest expense 4,976 4,320 656 - ------------------------------------------------------------------------------------------------------------------------------ Net interest revenue 945 793 152 NONINTEREST REVENUE Trading revenue 1,174 1,455 (281) Investment banking revenue 520 411 109 Investment management revenue 383 329 54 Fees and commissions 304 293 11 Investment securities revenue 175 150 25 Other revenue 123 70 53 - ---------------------------------------- ---------------------------- --------------------------- ---------------------------- Total noninterest revenue 2,679 2,708 (29) Total revenue 3,624 3,501 123 OPERATING EXPENSES Employee compensation and benefits 1,500 1,467 33 Net occupancy 177 149 28 Technology and communications 443 316 127 Other expenses 312 257 55 - ---------------------------------------- ---------------------------- --------------------------- ---------------------------- Total operating expenses 2,432 2,189 243 Income before income taxes 1,192 1,312 (120) Income taxes 394 433 (39) - ---------------------------------------- ---------------------------- --------------------------- ---------------------------- Net income 798 879 (81) PER COMMON SHARE Net income (a) $3.89 $4.28 ($0.39) Dividends declared 1.76 1.62 0.14 - ---------------------------------------- ---------------------------- --------------------------- ----------------------------
(a) Earnings per share amounts represent both primary and fully diluted earnings per share, except for the six months ended June 30, 1996. Fully diluted earnings per share were $4.27 for the six months ended June 30, 1996. See notes to consolidated financial statements. 5 PAGE 5
CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated - -------------------------------------------------------------------------------------------------------------------------- In millions, except per share data June 30 December 31 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 752 $ 906 Interest-earning deposits with banks 2,054 1,908 Debt investment securities available-for-sale carried at fair value (cost: $24,642 at June 1997 and $24,610 at December 1996) 24,936 24,865 Trading account assets, net of allowance for credit losses of $350 105,825 90,980 Securities purchased under agreements to resell ($36,425 at June 1997 and $32,455 at December 1996) and federal funds sold 36,425 32,505 Securities borrowed 37,837 27,931 Loans, net of allowance for credit losses of $560 at June 1997 and $566 at December 1996 28,734 27,554 Customers' acceptance liability 175 212 Accrued interest and accounts receivable 4,446 3,789 Premises and equipment 3,194 3,137 Less: accumulated depreciation 1,353 1,272 - -------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 1,841 1,865 Other assets 7,465 9,511 - -------------------------------------------------------------------------------------------------------------------------- Total assets 250,490 222,026 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 1,235 1,501 In offices outside the U.S. 641 708 Interest-bearing deposits: In offices in the U.S. 9,274 7,103 In offices outside the U.S. 45,827 43,412 - -------------------------------------------------------------------------------------------------------------------------- Total deposits 56,977 52,724 Trading account liabilities 59,436 50,919 Securities sold under agreements to repurchase ($64,322 at June 1997 and $56,117 at December 1996) and federal funds purchased 67,464 61,429 Commercial paper 4,289 4,132 Other liabilities for borrowed money 19,615 19,948 Accounts payable and accrued expenses 7,025 5,935 Liability on acceptances 175 212 Long-term debt not qualifying as risk-based capital 14,890 9,411 Other liabilities, including allowance for credit losses of $200 4,000 1,442 - -------------------------------------------------------------------------------------------------------------------------- 233,871 206,152 Long-term debt qualifying as risk-based capital 4,121 3,692 Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 750 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 239,142 210,594 STOCKHOLDERS' EQUITY Preferred stock (authorized shares: 10,400,000) Adjustable rate cumulative preferred stock, $100 par value (issued and outstanding: 2,444,300) 244 244 Variable cumulative preferred stock, $1,000 par value (issued and outstanding: 250,000) 250 250 Fixed cumulative preferred stock, $500 par value (issued and outstanding: 400,000) 200 200 Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,689,973 at June 1997 and 200,688,123 at December 1996) 502 502 Capital surplus 1,402 1,446 Retained earnings 9,085 8,635 Net unrealized gains on investment securities, net of taxes 518 464 Other 968 826 - -------------------------------------------------------------------------------------------------------------------------- 13,169 12,567 Less: treasury stock (21,633,098 shares at June 1997 and 15,765,455 shares at December 1996) at cost 1,821 1,135 - -------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 11,348 11,432 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 250,490 222,026 - --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 6 PAGE 6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated - -------------------------------------------------------------------------------------------------------------------------------- Dollars in millions Six months ended - -------------------------------------------------------------------------------------------------------------------------------- June 30 June 30 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Adjustable rate cumulative preferred stock balance, January 1 and June 30 $ 244 $ 244 Variable cumulative preferred stock balance, January 1 and June 30 250 250 Fixed cumulative preferred stock: Balance, January 1 200 - Shares issued - 200 - -------------------------------------------------------------------------------------------------------------------------------- Total preferred stock, June 30 694 694 - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, January 1 and June 30 502 502 - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SURPLUS Balance, January 1 1,446 1,430 Shares issued or distributed under dividend reinvestment plan, various employee benefit plans, and conversion of debentures and income tax benefits associated with stock options (44) 5 - -------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 1,402 1,435 - -------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, January 1 8,635 7,731 Net income 798 879 Dividends declared on preferred stock (18) (15) Dividends declared on common stock (318) (303) Dividend equivalents on common stock issuable (12) (11) - ------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 9,085 8,281 - ------------------------------------------------------------------------------------------------------------------------------- NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES Balance, January 1 464 566 Net change in unrealized gains, net of taxes 54 (199) - ------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 518 367 - ------------------------------------------------------------------------------------------------------------------------------- OTHER COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS Balance, January 1 838 556 Deferred stock awards, net 144 133 - ------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 982 689 - ------------------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION Balance, January 1 (12) (4) Translation adjustments (3) 2 Income tax benefit (expense) 1 (1) - ------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 (14) (3) - ------------------------------------------------------------------------------------------------------------------------------- Total Other, June 30 968 686 - ------------------------------------------------------------------------------------------------------------------------------- LESS: TREASURY STOCK Balance, January 1 1,135 824 Purchases 1,016 291 Shares distributed under various employee benefit plans (330) (181) - ------------------------------------------------------------------------------------------------------------------------------- Balance, June 30 1,821 934 - ------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity, June 30 11,348 11,031 - -------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 7 PAGE 7
CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated - ------------------------------------------------------------------------------------------------------------------------ Dollars in millions Six months ended - ------------------------------------------------------------------------------------------------------------------------ June 30 June 30 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 798 $ 879 Adjustments to reconcile to cash used in operating activities: Noncash items: depreciation, amortization, deferred income tax, stock award plans, and write-downs of investment securities 423 422 (Increase) decrease in assets: Trading account assets (14,891) 11 Securities purchased under agreements to resell (3,980) (4,336) Securities borrowed (9,906) (5,790) Accrued interest and accounts receivable (658) (200) Increase (decrease) in liabilities: Trading account liabilities 8,485 (1,038) Securities sold under agreements to repurchase 8,197 10,797 Accounts payable and accrued expenses 1,025 693 Other changes in operating assets and liabilities, net 2,189 (5,066) Net investment securities gains included in cash flows from investing activities (205) (164) - ------------------------------------------------------------------------------------------------------------------------- CASH USED IN OPERATING ACTIVITIES (8,523) (3,792) - ------------------------------------------------------------------------------------------------------------------------ (Increase) decrease in interest-earning deposits with banks (147) 559 Debt investment securities: Proceeds from sales 13,242 16,666 Proceeds from maturities, calls, and mandatory redemptions 1,918 4,802 Purchases (15,389) (21,025) (Increase) decrease in federal funds sold 50 (56) Increase in loans (1,208) (6,139) Payments for premises and equipment (72) (72) Other changes, net 642 1,174 - ------------------------------------------------------------------------------------------------------------------------ CASH USED IN INVESTING ACTIVITIES (964) (4,091) - ------------------------------------------------------------------------------------------------------------------------ Decrease in noninterest-bearing deposits (333) (1,375) Increase in interest-bearing deposits 4,568 3,380 Decrease in federal funds purchased (2,170) (786) Increase in commercial paper 157 2,301 Other liabilities for borrowed money: Proceeds 14,067 11,708 Payments (13,615) (11,043) Long-term debt: Proceeds 7,552 1,152 Payments (1,433) (391) Proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary 400 - Capital stock: Issued or distributed 181 200 Purchased (1,016) (291) Dividends paid (340) (317) Other changes, net 1,337 2,467 - ------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES 9,355 7,005 - ------------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and due from banks (22) (6) - ------------------------------------------------------------------------------------------------------------------------ DECREASE IN CASH AND DUE FROM BANKS (154) (884) Cash and due from banks at December 31, 1996 and 1995 906 1,535 - ------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at June 30, 1997 and 1996 752 651 - ------------------------------------------------------------------------------------------------------------------------ Cash disbursements made for: Interest $4,745 $4,180 Income taxes 479 413 - -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 8 PAGE 8
CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York - -------------------------------------------------------------------------------------------------------------------------------- June 30 December 31 In millions, except per share data 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 718 $ 920 Interest-earning deposits with banks 2,056 1,910 Debt investment securities available-for-sale carried at fair value 23,827 23,510 Trading account assets, net of allowance for credit losses of $350 84,442 72,549 Securities purchased under agreements to resell and federal funds sold 26,831 21,081 Securities borrowed 11,637 6,681 Loans, net of allowance for credit losses of $558 at June 1997 and $565 at December 1996 28,560 27,378 Customers' acceptance liability 175 212 Accrued interest and accounts receivable 3,429 3,470 Premises and equipment 2,858 2,812 Less: accumulated depreciation 1,185 1,116 - -------------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 1,673 1,696 Other assets 5,144 5,406 - -------------------------------------------------------------------------------------------------------------------------------- Total assets 188,492 164,813 - -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 1,235 1,495 In offices outside the U.S. 662 749 Interest-bearing deposits: In offices in the U.S. 9,285 7,114 In offices outside the U.S. 46,711 43,716 - -------------------------------------------------------------------------------------------------------------------------------- Total deposits 57,893 53,074 Trading account liabilities 49,908 44,039 Securities sold under agreements to repurchase and federal funds purchased 35,061 30,787 Other liabilities for borrowed money 12,678 13,215 Accounts payable and accrued expenses 5,063 4,203 Liability on acceptances 175 212 Long-term debt not qualifying as risk-based capital (includes $1,081 at June 1997 and $942 at December 1996 of notes payable to J.P. Morgan) 11,500 5,436 Other liabilities, including allowance for credit losses of $200 3,257 977 - -------------------------------------------------------------------------------------------------------------------------------- 175,535 151,943 Long-term debt qualifying as risk-based capital (includes $2,658 at June 1997 and $2,780 at December 1996 of notes payable to J.P. Morgan) 2,817 2,979 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 178,352 154,922 STOCKHOLDER'S EQUITY Preferred stock, $100 par value (authorized shares: 2,500,000) - - Common stock, $25 par value (authorized shares: 11,000,000; outstanding 10,599,027) 265 265 Surplus 3,155 3,155 Undivided profits 6,578 6,334 Net unrealized gains on investment securities, net of taxes 156 149 Foreign currency translation (14) (12) - -------------------------------------------------------------------------------------------------------------------------------- Total stockholder's equity 10,140 9,891 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholder's equity 188,492 164,813 - --------------------------------------------------------------------------------------------------------------------------------
Member of the Federal Reserve System and the Federal Deposit Insurance Corporation. See notes to consolidated financial statements. 9 PAGE 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Supplementary to notes in the 1996 Annual report to stockholders 1. BASIS OF PRESENTATION The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the consolidated results of operations for the interim periods have been made. All adjustments made were of a normal, recurring nature. Management consults with its independent accountants on significant accounting and reporting matters that arise during the year. 2. ACCOUNTING DEVELOPMENTS Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 and related pronouncements, and replaces the computations of primary and fully diluted earnings per share (EPS) with basic and diluted EPS, respectively. Basic EPS is computed by dividing income available to common stockholders by the period's weighted-average number of common shares outstanding, which includes contingently issuable shares where all necessary conditions for issuance have been satisfied. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares that were outstanding during the period. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997. Earlier application is not permitted. Basic EPS and diluted EPS, computed using SFAS No. 128, for the three months ended June 30, 1997, were approximately $1.98 and $1.85, respectively. For the six months ended June 30, 1997, basic EPS and diluted EPS were approximately $4.17 and $3.89, respectively. 3. INTEREST REVENUE AND EXPENSE An analysis of interest revenue and expense derived from on-and off-balance-sheet financial instruments is presented in the table below. Interest revenue and expense associated with derivative financial instruments, such as swaps, forwards, 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.
Second quarter Six months In millions 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- INTEREST REVENUE Deposits with banks $ 46 $ 24 $ 73 $ 51 Debt investment securities (a) 387 396 799 790 Trading account assets 1,014 682 2,085 1,437 Securities purchased under agreements to resell and federal funds sold 504 593 959 1,170 Securities borrowed 444 318 827 581 Loans 494 440 959 880 Other sources, primarily risk-adjusting swaps 140 106 219 204 - ---------------------------------------------------------------------------------------------------------------------- Total interest revenue 3,029 2,559 5,921 5,113 - ---------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 670 619 1,333 1,269 Trading account liabilities 398 306 755 599 Securities sold under agreements to repurchase and federal funds purchased 853 798 1,729 1,585 Other borrowed money 336 303 668 592 Long-term debt 256 136 451 275 Trust preferred securities 21 - 40 - - ---------------------------------------------------------------------------------------------------------------------- Total interest expense 2,534 2,162 4,976 4,320 - ---------------------------------------------------------------------------------------------------------------------- Net interest revenue 495 397 945 793 - ----------------------------------------------------------------------------------------------------------------------
(a) Interest revenue from debt investment securities included taxable revenue of $364 million and $749 million and revenue exempt from U.S. income taxes of $23 million and $50 million for the three months and six months ended June 30, 1997, respectively. Interest revenue from debt investment securities included taxable revenue of $370 million and $733 million and revenue exempt from U.S. income taxes of $26 million and $57 million for the three months and six months ended June 30, 1996. 10 PAGE 10 For the three months and six months ended June 30, 1997, net interest revenue associated with derivatives used for purposes other-than-trading was approximately $75 million and $110 million respectively, compared with approximately $25 million and $65 million for the three months and six months ended June 30, 1996. At June 30, 1997, approximately $215 million of net deferred losses on closed derivative contracts used for purposes other-than-trading were recorded on the consolidated balance sheet. Such amount is primarily composed of net deferred losses on closed hedge contracts included in the amortized cost of the debt investment portfolio. As discussed in Note 5 to the consolidated financial statements, Investment securities, the net unrealized appreciation associated with the debt investment portfolio was $294 million at June 30, 1997. 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 into 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 June 30, 1997, are expected to amortize into Net interest revenue as follows: $30 million - remainder of 1997; $60 million in 1998; $40 million in 1999; $40 million in 2000; $25 million in 2001; $10 million in 2002; and approximately $10 million thereafter. 4. TRADING REVENUE Trading revenue disaggregated by principal product groupings for the three months and six months ended June 30, 1997 and 1996, is presented in the following table. For additional information, which reflects the integrated nature of the firm's activities, refer to the Business Sector Analysis in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Second Quarter Six months In millions 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------- Fixed Income $250 $331 $ 596 $ 864 Equities 170 124 281 218 Foreign Exchange 72 109 192 177 Commodities 2 5 15 39 Proprietary Trading (17) 128 90 157 - ----------------------------------------------------------------------------------------- Trading revenue 477 697 1,174 1,455 - -----------------------------------------------------------------------------------------
5. INVESTMENT SECURITIES Debt investment securities A comparison of the cost and carrying values of debt investment securities available-for-sale and carried at fair value at June 30, 1997, follows.
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value - ------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 1,635 $ 70 $ (4) $ 1,701 U.S. government agency, principally mortgage-backed 17,459 117 (62) 17,514 U.S. state and political subdivision 1,266 168 (13) 1,421 U.S. corporate and bank debt 480 1 - 481 Foreign government 1,413 29 (9) 1,433 Foreign corporate and bank debt 2,278 14 (18) 2,274 Other 111 1 - 112 - ------------------------------------------------------------------------------------------------------------------------- Total debt investment securities 24,642 400 (106) 24,936 - -------------------------------------------------------------------------------------------------------------------------
The gross unrealized gains and losses shown in the table above include the effects of any related hedge. For additional detail of gross unrealized gains and losses associated with open derivative contracts used to hedge debt investment securities, see Note 7 to the consolidated financial statements, Off-balance-sheet financial instruments. 11 PAGE 11 The following table presents the realized components of Investment securities revenue related to the debt investment securities portfolio during the three and six months ended June 30, 1997 and 1996.
Second quarter Six months In millions 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------- Gross realized gains from sales $ 8 $ 16 $ 46 $ 117 Gross realized losses from sales (7) (67) (33) (156) - ------------------------------------------------------------------------------------------------------------- Net debt investment securities gains (losses) 1 (51) 13 (39) - -------------------------------------------------------------------------------------------------------------
Equity investment securities Net realized gains on the sale of equity investment securities during the quarters ended June 30, 1997 and 1996 of $124 million and $118 million, respectively, are reflected in Investment securities revenue. For the 1997 period, this represents gross realized gains of $127 million and write-downs of $3 million. For the 1996 period, this represents gross realized gains of $130 million and write-downs of $12 million. Net realized gains on the sale of equity investment securities during the six months ended June 30, 1997 and 1996 were $179 million and $182 million, respectively. For the 1997 period, this represents gross realized gains of $192 million and write-downs of $13 million. For the 1996 period, this represents gross realized gains of $203 million and write-downs of $21 million. Gross unrealized gains and losses as well as a comparison of the cost, fair value, and carrying value of marketable equity investment securities available-for-sale at June 30, 1997, follows.
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value - ---------------------------------------------------------------------------------------------------------------------------- June 30, 1997 $305 $536 $ (2) $839 - ----------------------------------------------------------------------------------------------------------------------------
Nonmarketable equity investment securities and securities held in Small Business Investment Companies, with a carrying value of $554 million, had an estimated fair value of $626 million at June 30, 1997. 6. TRADING ACCOUNT ASSETS AND LIABILITIES Trading account assets and liabilities, including derivative instruments used for trading purposes, are carried at fair value. The following table presents the carrying value of trading account assets, before taking into consideration the allowance for credit losses, and trading account liabilities at June 30, 1997, and the average balance for the three and six-months ended June 30, 1997.
Carrying Average Value Balance -------------------- --------------------------------------------- June 30 Second quarter Six months In millions 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------- TRADING ACCOUNT ASSETS (a) U.S. Treasury $ 14,609 $ 14,374 $ 15,412 U.S. government agency 8,935 6,604 6,416 Foreign government 24,932 27,323 26,175 Corporate debt and equity 19,664 19,570 18,601 Other securities 5,155 4,908 5,709 Interest rate and currency swaps 18,321 14,838 14,621 Foreign exchange contracts 3,381 2,969 2,781 Interest rate futures and forwards 478 324 362 Commodity and equity contracts 3,212 2,764 2,653 Purchased option contracts 7,488 6,490 6,782 - ------------------------------------------------------------------------------------------------------------- Total trading account assets 106,175 100,164 99,512 - ------------------------------------------------------------------------------------------------------------- TRADING ACCOUNT LIABILITIES U.S. Treasury 9,814 11,532 10,296 Foreign government 10,663 11,685 10,891 Corporate debt and equity 6,843 8,543 7,273 Other securities 987 2,444 2,803 Interest rate and currency swaps 13,311 11,307 11,941 Foreign exchange contracts 4,045 4,477 4,692 Interest rate futures and forwards 955 773 753 Commodity and equity contracts 3,942 2,186 2,620 Written option contracts 8,876 7,798 7,528 - ------------------------------------------------------------------------------------------------------------- Total trading account liabilities 59,436 60,745 58,797 - -------------------------------------------------------------------------------------------------------------
(a) Refer to Note 10, Aggregate allowance for credit losses. 12 PAGE 12 7. 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 $40.5 billion of master netting agreements in effect at June 30, 1997, is also presented.
Notional amounts Credit exposure In billions - ---------------------------------------------------------------------------------------------------------------- Interest rate and currency swaps Trading $ 2,340.1 Other-than-trading(a)(b)(c) 214.8 - ---------------------------------------------------------------------------------------------------------------- Total interest rate and currency swaps 2,554.9 $18.3 - ---------------------------------------------------------------------------------------------------------------- Foreign exchange spot, forward, and futures contracts Trading 700.8 Other-than-trading(a)(b) 38.3 - ---------------------------------------------------------------------------------------------------------------- Total foreign exchange spot, forward, and futures contracts 739.1 3.4 - ---------------------------------------------------------------------------------------------------------------- Interest rate futures, forward rate agreements, and debt securities forwards Trading 760.5 Other-than-trading 24.3 - ---------------------------------------------------------------------------------------------------------------- Total interest rate futures, forward rate agreements, and debt securities forwards 784.8 0.5 - ---------------------------------------------------------------------------------------------------------------- Commodity and equity swaps, forward, and futures contracts, all trading 69.3 3.2 - ---------------------------------------------------------------------------------------------------------------- Purchased options(d) Trading 793.2 Other-than-trading(a) 1.6 - ---------------------------------------------------------------------------------------------------------------- Total purchased options 794.8 7.5 - ---------------------------------------------------------------------------------------------------------------- Written options, all trading(e) 1,018.3 - ---------------------------------------------------------------------------------------------------------------- Total credit exposure recorded as assets on the consolidated balance sheet 32.9 - ----------------------------------------------------------------------------------------------------------------
(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) The notional amounts of derivative contracts used for purposes other-than-trading conducted in the foreign exchange markets, primarily forward contracts, amounted to $41.9 billion at June 30, 1997, and were primarily denominated in the following currencies: Italian lira $11.5 billion, German deutsche mark $5.5 billion, French franc $5.4 billion, Japanese yen $4.1 billion, and Swiss franc $2.4 billion. (c) The notional amount of risk-adjusting swaps was $161.6 billion at June 30, 1997. (d) At June 30, 1997, purchased options used for trading purposes included $585.9 billion of interest rate options, $166.1 billion of foreign exchange options, and $41.2 billion of commodity and equity options. Only interest rate options are used for purposes other-than-trading. Purchased options executed on an exchange amounted to $153.5 billion and those negotiated over-the-counter amounted to $641.3 billion at June 30, 1997. (e) At June 30, 1997, written options included $780.9 billion of interest rate options, $189.8 billion of foreign exchange options, and $47.6 billion of commodity and equity options. Written option contracts executed on an exchange amounted to $278.1 billion and those negotiated over-the-counter amounted to $740.2 billion at June 30, 1997. 13 PAGE 13 Derivatives used for purposes other-than-trading 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 or modify the interest rate characteristics of debt investment securities, loans, deposits, other liabilities for borrowed money, long-term debt, and other financial assets and liabilities. In addition, we utilize derivatives to adjust our overall interest rate risk profile through the use of risk-adjusting swaps. Net unrealized gains associated with open derivative contracts used to hedge or modify the interest rate characteristics of related balance sheet instruments amounted to $182 million at June 30, 1997. Such amounts primarily relate to interest rate and currency swaps used to hedge or modify the interest rate characteristics of long-term debt, deposits, and debt investment securities, principally mortgage-backed securities. See Note 8 to the consolidated financial statements, Fair value of financial instruments. Gross unrealized gains and gross unrealized losses associated with open derivative contracts at June 30, 1997, are as follows:
Gross Gross Net unrealized unrealized unrealized In millions gains (losses) gains (losses) - ------------------------------------------------------------------------------------------------------------ Long-term debt $318 ($113) $205 Debt investment securities 42 (96) (54) Deposits 58 (20) 38 Other financial instruments 34 (41) (7) - ------------------------------------------------------------------------------------------------------------ Total 452 (270) 182 - ------------------------------------------------------------------------------------------------------------
Net unrealized gains associated with risk-adjusting swaps that are entered into to meet longer-term investment objectives and their related hedges approximated $0.1 billion at June 30, 1997. The net amount is composed of $1.8 billion of gross unrealized gains and $1.7 billion of gross unrealized losses. The unrealized gains and losses related to the derivative contracts used to hedge these risk-adjusting swaps, included above, were not material at June 30, 1997. There were no material terminations of risk-adjusting swaps during the three months and six months ended June 30, 1997. 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 financial instruments at June 30, 1997, is presented in the following table.
June 30 In billions 1997 - ------------------------------------------------------------------------- Commitments to extend credit $78.3 Standby letters of credit and guarantees 15.9 Securities lending indemnifications (a) 8.1 - -------------------------------------------------------------------------
(a) At June 30, 1997, J.P. Morgan held cash and other collateral in support of securities lending indemnifications. 14 PAGE 14 Included in Fees and Commissions are credit-related fees of $40 million and $77 million for the three months and six months ended June 30, 1997, respectively, and $38 million and $76 million for the three and six months ended June 30, 1996, respectively. These fees are primarily earned from commitments to extend credit, standby letters of credit and guarantees, and securities lending indemnifications. Other Consistent with industry practice, amounts receivable and payable for securities that have not reached the contractual settlement dates are recorded net on the consolidated balance sheet. Amounts receivable for securities sold of $37.0 billion were netted against amounts payable for securities purchased of $36.1 billion to arrive at a net trade date receivable of $0.9 billion, which was classified as Other assets on the consolidated balance sheet at June 30, 1997. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments, J.P. Morgan estimates that the aggregate net fair value of all balance sheet and off-balance-sheet financial instruments exceeded associated net carrying values. At June 30, 1997, such excess was essentially unchanged from December 31, 1996. 9. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS Total impaired loans and other nonperforming assets, net of charge-offs, at June 30, 1997, are presented in the following table. At June 30, 1997, approximately two thirds 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 approximately one third is measured by the fair value of the collateral or by an observable market price.
June 30 In millions 1997 - -------------------------------------------------------------------------------- Impaired loans: Commercial and industrial $60 Other 44 - -------------------------------------------------------------------------------- 104 Restructuring countries 2 - -------------------------------------------------------------------------------- Total impaired loans 106(a) Other nonperforming assets 2 - -------------------------------------------------------------------------------- Total nonperforming assets 108 - --------------------------------------------------------------------------------
(a) As of June 30, 1997, no reserve is required under SFAS No. 114, Accounting by Creditors for Impairment of a Loan, for the $106 million recorded investment in impaired loans. Charge-offs and interest applied to principal have reduced the recorded investment values to amounts that are less than the SFAS No. 114 calculated values. For the three months and six months ended June 30, 1997, the average recorded investment in impaired loans was $93 million and $105 million, respectively. An analysis of the effect of impaired loans, net of charge-offs, on interest revenue for the three months and six months ended June 30, 1997 and 1996, is presented in the following table.
Second quarter Six months In millions 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Interest revenue that would have been recorded if accruing $2 $3 $4 $7 Less interest revenue recorded 2 - 3 1 - --------------------------------------------------------------------------------------------------------------------------- (Negative) impact of impaired loans on interest revenue - (3) (1) (6) - ---------------------------------------------------------------------------------------------------------------------------
15 PAGE 15 10. AGGREGATE ALLOWANCE FOR CREDIT LOSSES An analysis of the aggregate allowance for credit losses at June 30, 1997, is presented in the following table.
Second quarter Six months In millions 1997 1997 - --------------------------------------------------------------- BEGINNING OF PERIOD BALANCE $ 1,113 $ 1,116 - --------------------------------------------------------------- Recoveries 12 22 Charge-offs: Commercial and industrial (8) (21) Other (7) (7) - --------------------------------------------------------------- Net charge-offs (3) (6) - --------------------------------------------------------------- BALANCE, JUNE 30, 1997 (a)(b) 1,110 1,110 - ---------------------------------------------------------------
(a) In accordance with SFAS No. 5, Accounting for Contingencies, and SFAS No. 114, as amended by SFAS No. 118, 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 irrevocable unused loan commitments, or to make payments to others for which a client is ultimately liable, such as standby letters of credit and guarantees, commercial letters of credit and acceptances, and all other credit exposures, including derivatives. A judgment as to the adequacy of the aggregate allowance is made at the end of each quarterly reporting period. (b) At June 30, 1997, the allocation of the aggregate allowance for credit losses was as follows: Specific allocation - borrowers in the U.S. $137 million, Specific allocation - borrowers outside the U.S. $54 million, Allocation to general risk $919 million. 11. INVESTMENT BANKING REVENUE, OTHER REVENUE AND OTHER EXPENSES In the second quarter of 1997 and 1996, investment banking revenue of $294 million and $210 million includes $140 million and $111 million, respectively, of underwriting revenue. For the six months ended June 30, 1997 and 1996, investment banking revenue of $520 million and $411 million includes underwriting revenue of $237 million and $176 million, respectively. Other revenue includes $9 million and $73 million for the three and six months ended June 30, 1997, respectively, of gains on hedges of anticipated foreign currency revenues and expenses. These gains were partially offset by the impact of exchange rate movements on reported revenues and expenses in the respective periods. For the three and six month periods ended June 30, 1997, other expenses included approximately $46 million and $86 million, respectively of travel and entertainment expenses. 12. INCOME TAXES Income tax expense in the 1997 second quarter reflects a 32% effective tax rate, compared to a 33% effective tax rate in the 1996 second quarter. For the six months ended June 30, 1997 and 1996, the effective tax rate was 33%. Income tax expense related to net realized gains on debt and equity investment securities was approximately $41 million and $66 million for the three and six months ended June 30, 1997. Income tax expense related to net realized gains on debt and equity investment securities was approximately $22 million and $51 million for the three and six months ended June 30, 1996, respectively. The applicable tax rate used to compute the income tax expense related to net gains on debt and equity investment securities was approximately 37% for the three and six months ended June 30, 1997. The applicable tax rate used to compute the income tax expense related to net gains on debt and equity investment securities for the three and six month periods ended June 30, 1996, was approximately 33% and 35%, respectively. The valuation allowance to reduce deferred tax assets to the amount expected to be realized totaled approximately $120 million at June 30, 1997 and December 31, 1996. The valuation allowance is primarily related to the ability to recognize tax benefits associated with foreign operations. 13. COMMITMENTS AND CONTINGENT LIABILITIES Excluding mortgaged properties, assets carried at approximately $77.1 billion in the consolidated balance sheet at June 30, 1997, were pledged as collateral for borrowings, to qualify for fiduciary powers, to secure public moneys as required by law, and for other purposes. 16 PAGE 16 14. 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.
Second quarter Six months Dollars in millions 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Adjusted net income $366 $432 $781 $863 Primary earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 198,148,923 202,063,927 200,750,906 202,048,817 Fully diluted earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 198,383,856 202,075,297 200,832,331 202,395,067 - -----------------------------------------------------------------------------------------------------------------------------
Refer to Note 2, Accounting developments, for information regarding the recently issued SFAS No. 128, Earnings per Share. 15. SUBSEQUENT EVENT On July 30, 1997, J.P. Morgan agreed to purchase a 45% economic interest in American Century Companies, Inc. (American Century) for cash consideration of approximately $900 million. In addition, J.P. Morgan will have an option to increase its economic interest to 50% at the end of three years. The transaction is expected to close within four to six months pending approval by each firm's Board of Directors and by U.S. regulatory agencies. American Century, the fourth largest no-load U.S. mutual fund company selling directly to individuals, manages $60 billion of assets in about 70 mutual funds. The investment will be accounted for under the equity method of accounting. 17 PAGE 17 PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS J.P. Morgan & Co. Incorporated reported net income of $374 million in the second quarter of 1997, compared with $440 million in the second quarter of 1996. Earnings per share for the quarter were $1.85, compared with $2.14 a year ago. Net income for the first six months of 1997 totaled $798 million, down from $879 million in 1996. Earnings per share in the first six months were $3.89 versus $4.28 a year ago. SECOND QUARTER 1997 RESULTS AT A GLANCE
Second quarter First quarter In millions of dollars, except per share data 1997 1996 1997 - -------------------------------------------------------------------------------------------- Revenues $ 1,791 $ 1,761 $ 1,833 Operating expenses (1,241) (1,104) (1,191) Income taxes (176) (217) (218) - -------------------------------------------------------------------------------------------- Net income 374 440 424 Net income per share $ 1.85 $ 2.14 $ 2.04 - -------------------------------------------------------------------------------------------- Dividends declared per share $ 0.88 $ 0.81 $ 0.88 - --------------------------------------------------------------------------------------------
REVENUES were up slightly in the second quarter from a year ago. - Finance and Advisory revenues rose 13% to $481 million on strong results from advisory activities and debt and equity underwriting. - Market Making revenues were $648 million, up from $639 million a year ago, as increases in equities outpaced declines in global fixed income results. - Asset Management and Servicing revenues increased 12% to $392 million, reflecting growth in investment management and private client activities. - Equity Investments revenues were $124 million versus $126 million. - Proprietary Investing and Trading revenues declined to $116 million from $216 million. OPERATING EXPENSES rose 12% in the 1997 second quarter from a year ago. The increase reflected planned spending in areas targeted for growth and included a charge of $28 million incurred in connection with the renovation of office space in New York. IN OTHER DEVELOPMENTS, on July 30, 1997, J.P. Morgan and American Century Companies, Inc. agreed to form a business partnership to pursue growth opportunities in asset management and personal financial services. As part of the agreement, J.P. Morgan will purchase a 45% economic interest in American Century for cash consideration of approximately $900 million. In addition, J.P. Morgan will have an option to increase its economic interest to 50% at the end of three years. The transaction is expected to close within four to six months pending approval from each firm's Board of Directors and U.S. regulatory agencies. American Century, the fourth largest no-load U.S. mutual fund company selling directly to individuals, manages $60 billion of assets in about 70 mutual funds. 18 PAGE 18 BUSINESS SECTOR ANALYSIS We describe the activities of J.P. Morgan using five business sectors. Three of these sectors - Finance and Advisory, Market Making, and Asset Management and Servicing - focus on services we provide for clients. Two sectors comprise proprietary activities that we conduct exclusively for our own account: Equity Investments and Proprietary Investing and Trading. For a complete description of our business sectors, refer to the J.P. Morgan & Co. Incorporated 1996 Annual report. Presented below are the summary results for each sector for the three and six months ended June 30, 1997 and 1996.
Propriet- Asset Total ary Total Finance Management Client- Equity Investing Propriet- and Market and Focused Invest- and ary Corporate Consol- In millions Advisory Making Servicing Activities ments Trading Activities Items idated - -------------------------------------------------------------------------------------------------------------------- SECOND QUARTER 1997 Total revenues $ 481 $ 648 $ 392 $ 1,521 $ 124 $ 116 $ 240 $ 30 $1,791 Total expenses 351 455 320 1,126 11 45 56 59 1,241 - -------------------------------------------------------------------------------------------------------------------- Pretax income 130 193 72 395 113 71 184 (29) 550 - -------------------------------------------------------------------------------------------------------------------- SECOND QUARTER 1996 Total revenues 426 639 351 1,416 126 216 342 3 1,761 Total expenses 268 441 274 983 8 40 48 73 1,104 - ------------------------------------------------------------------------------------------------------------------- Pretax income 158 198 77 433 118 176 294 (70) 657 - ------------------------------------------------------------------------------------------------------------------- SIX MONTHS 1997 Total revenues 932 1,381 767 3,080 173 392 565 (21) 3,624 Total expenses 653 929 620 2,202 18 91 109 121 2,432 - ------------------------------------------------------------------------------------------------------------------- Pretax income 279 452 147 878 155 301 456 (142) 1,192 - ------------------------------------------------------------------------------------------------------------------- SIX MONTHS 1996 Total revenues 842 1,410 696 2,948 192 431 623 (70) 3,501 Total expenses 527 851 545 1,923 16 76 92 174 2,189 - ------------------------------------------------------------------------------------------------------------------- Pretax income 315 559 151 1,025 176 355 531 (244) 1,312 - ------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE), 2ND QUARTER 1997 VS. 2ND QUARTER 1996 Total revenues 55 9 41 105 (2) (100) (102) 27 30 Total expenses 83 14 46 143 3 5 8 (14) 137 - -------------------------------------------------------------------------------------------------------------------- Pretax income (28) (5) (5) (38) (5) (105) (110) 41 (107) - -------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE), 6 MONTHS 1997 VS. 6 MONTHS 1996 Total revenues 90 (29) 71 132 (19) (39) (58) 49 123 Total expenses 126 78 75 279 2 15 17 (53) 243 - -------------------------------------------------------------------------------------------------------------------- Pretax income (36) (107) (4) (147) (21) (54) (75) 102 (120) - --------------------------------------------------------------------------------------------------------------------
Methodology 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. Effective January 1, 1997, as compensation for managing the firm's credit risk, Global Credit receives fees from other Morgan businesses. Such fees are included as revenues in the Finance and Advisory sector and as a reduction in revenues reported by businesses on whose behalf such credit risk is managed. Certain prior year amounts have been reclassified to conform with the current presentation. 19 PAGE 19 FINANCE AND ADVISORY The Finance and Advisory sector includes results of our Advisory, Debt and Equity Underwriting, and Global Credit activities. Revenues increased 13% to $481 million, reflecting continued growth across investment banking activities. Revenues from advisory services and debt and equity underwriting in both developed and emerging markets increased 31% to $255 million. The market for advisory and underwriting activity remained strong, and Morgan assisted clients in a number of the quarter's notable transactions. Revenues from global credit activities were $226 million, essentially unchanged from a year ago. For the first half of 1997, Securities Data Co. ranked J.P. Morgan fifth in U.S. debt and equity underwriting, up from sixth a year ago. Morgan ranked seventh in completed mergers and acquisitions transactions worldwide, unchanged from the first six months of 1996. As an arranger of syndicated loans, J.P. Morgan ranked second globally, according to Loan Pricing Corporation, for the first six months of 1997, unchanged from a year earlier. Expenses in the second quarter of 1997 increased 31% to $351 million compared with $268 million in the second quarter of 1996. The Finance and Advisory 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 financial, advisory, asset management, market-making, and risk management products and services. The Finance and Advisory sector recorded pretax income of $130 million in the second quarter of 1997 compared with $158 million a year ago. Revenues for the six month period increased 11% to $932 million. Expenses for the same period increased 24% to $653 million from the six months ended June 30, 1996. Year-to-date pretax income was $279 million in 1997, as compared to $315 million for the first six months of 1996. MARKET MAKING The Market Making sector includes results of our Fixed Income, Equities, Foreign Exchange, and Commodities activities. Total revenues were $648 million, compared with $639 million a year ago. After a brief slowdown caused by the mid-March directional shift in U.S. monetary policy, financial markets worldwide generally gained strength in the second quarter. Fixed income revenues in developed markets were $267 million, compared with $277 million in the 1996 second quarter. In emerging markets, revenues were $123 million down from $151 million a year ago. Revenue increases in local market activities in Eastern Europe and Asia were more than offset by lower revenues from external debt trading. In equities, market making revenues were up 20% to $158 million. Equity derivative revenues grew and equity commissions increased sharply, primarily reflecting growing market share on U.S. and European exchanges. Foreign exchange revenues rose 4% to $84 million. Commodities revenues were $16 million versus a loss of $2 million a year ago. Total expenses of $455 million increased 3% from the second quarter of 1996. The Market Making sector recorded pretax income of $193 million in the second quarter of 1997, compared with $198 million in the second quarter of 1996. Revenues for the six month period were $1,381 million compared with $1,410 million a year earlier. Expenses for the same period increased 9% to $929 million from the six months ended June 30, 1996. Year-to-date pretax income was $452 million in 1997, as compared to $559 million for the first six months of 1996. ASSET MANAGEMENT AND SERVICING The Asset Management and Servicing sector includes results of our Investment Management, Private Client Services, Futures and Options Brokerage, and Euroclear System activities. Total revenues rose 12% to $392 million in the second quarter. Revenues generated from institutional investment management activities and services for private clients increased 10% to $256 million. Assets under management were approximately $234 billion at June 30, 1997. Futures and Options Brokerage as well as Euroclear-related revenues also increased. 20 PAGE 20 Private clients accounted for approximately $145 million of revenues from the firm's client-focused activities in the second quarter, up 15% from 1996, $45 million of which is recorded in the Finance and Advisory and Market Making sectors. Expenses associated with the Asset Management and Servicing sector were up 17%, to $320 million in the second quarter of 1997, compared with $274 million in the second quarter of 1996. The Asset Management and Servicing sector recorded pretax income of $72 million in the second quarter of 1997 compared with $77 million in the year-earlier period. Revenues for the six month period increased 10% to $767 million from $696 million a year-earlier. Expenses for the same period increased 14% to $620 million from the six months ended June 30, 1996. Year-to-date pretax income was $147 million, as compared to $151 million for the first six months of 1996. EQUITY INVESTMENTS The Equity Investments sector includes results from our proprietary equity investment portfolio management activities. Total reported revenues were $124 million in the second quarter, compared with $126 million a year ago. Included in reported revenues were net gains of $118 million, primarily related to the sale of equity investments in the communications and insurance industries. A year ago, net gains were also $118 million. Equity Investments recorded pretax income of $113 million in the second quarter of 1997 compared with $118 million in the second quarter of 1996. On a total return basis, combining reported revenues with the change in net unrealized appreciation, Equity Investments earned $212 million in the 1997 second quarter, primarily related to insurance industry investments. A year ago, total return was $103 million. Total return for the six months ended June 30, 1997, was $187 million compared with $157 million for the six months ended June 30, 1996. As our investment strategy covers a longer-term horizon, total return viewed over short periods will reflect the impact of short-term market movements, including industry specific events. PROPRIETARY INVESTING AND TRADING The Proprietary Investing and Trading sector includes results from our market risk positioning and capital and liquidity management activities. Total revenues were $116 million for the 1997 second quarter, compared with $216 million a year ago. Trading losses were $17 million, compared with gains of $128 million in the 1996 second quarter. The Proprietary Investing and Trading sector recorded pretax income of $71 million in the second quarter of 1997 compared with $176 million in the same period a year ago. Total return - reported revenues plus the change in net unrealized appreciation - for the 1997 second quarter was $59 million, compared with $89 million in 1996. Total return for the six month period ended June 30, 1997 was $424 million compared with $195 million for the six months ended June 30, 1996. CORPORATE ITEMS Corporate Items includes revenues and expenses that have not been allocated to the five business sectors, intercompany eliminations, the taxable-equivalent adjustment and the results of sold or discontinued businesses. Corporate Items expenses for the second quarter of 1997 includes a charge of $28 million incurred in connection with the renovation of office space in New York. Corporate Items also includes revenues and expenses of $39 million and $43 million, respectively, in the second quarter of 1996, from custody and cash processing activities, previously exited by Morgan. 21 PAGE 21 The following table summarizes revenues by major activity included within each of our business sectors beginning with the first quarter of 1996.
First Second Third Fourth Twelve First Second Quarter Quarter Quarter Quarter Months Quarter Quarter In millions 1996 1996 1996 1996 1996 1997 1997 - -------------------------------------------------------------------------------------------------------------- REVENUES Advisory & Underwriting $ 205 $ 195 $ 189 $ 225 $ 814 $ 221 $ 255 Global Credit 211 231 240 246 928 230 226 - -------------------------------------------------------------------------------------------------------------- FINANCE AND ADVISORY 416 426 429 471 1,742 451 481 - -------------------------------------------------------------------------------------------------------------- Fixed Income 456 277 286 286 1,305 264 267 Emerging Markets 124 151 153 119 547 186 123 Equities 93 132 58 83 366 152 158 Foreign Exchange 67 81 58 88 294 119 84 Commodities 31 (2) (10) 19 38 12 16 - -------------------------------------------------------------------------------------------------------------- MARKET MAKING 771 639 545 595 2,550 733 648 - -------------------------------------------------------------------------------------------------------------- Asset Management Services 216 233 211 242 902 243 256 Other 129 118 119 122 488 132 136 - -------------------------------------------------------------------------------------------------------------- ASSET MANAGEMENT AND SERVICING 345 351 330 364 1,390 375 392 - -------------------------------------------------------------------------------------------------------------- TOTAL CLIENT-FOCUSED REVENUES 1,532 1,416 1,304 1,430 5,682 1,559 1,521 - -------------------------------------------------------------------------------------------------------------- EQUITY INVESTMENTS 66 126 59 45 296 49 124 - -------------------------------------------------------------------------------------------------------------- PROPRIETARY INVESTING AND TRADING 215 216 203 264 898 276 116 - -------------------------------------------------------------------------------------------------------------- TOTAL PROPRIETARY REVENUES 281 342 262 309 1,194 325 240 - -------------------------------------------------------------------------------------------------------------- Corporate Items (73) 3 (17) 66 (21) (51) 30 - -------------------------------------------------------------------------------------------------------------- CONSOLIDATED REVENUES 1,740 1,761 1,549 1,805 6,855 1,833 1,791 - --------------------------------------------------------------------------------------------------------------
22 PAGE 22 CLIENT-FOCUSED ACTIVITIES BY REGION 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 - ---------------------------------------------------------------------------------- SECOND QUARTER 1997 Revenues $747 $172 $472 $130 $1,521 Expenses 595 55 356 120 1,126 - ---------------------------------------------------------------------------------- Pretax Income 152 117 116 10 395 - ---------------------------------------------------------------------------------- SECOND QUARTER 1996 Revenues 681 160 435 140 1,416 Expenses 507 48 321 107 983 - ---------------------------------------------------------------------------------- Pretax Income 174 112 114 33 433 - ---------------------------------------------------------------------------------- SIX MONTHS 1997 Revenues 1,482 308 949 341 3,080 Expenses 1,158 105 700 239 2,202 - ---------------------------------------------------------------------------------- Pretax Income 324 203 249 102 878 - ---------------------------------------------------------------------------------- SIX MONTHS 1996 Revenues 1,361 295 987 305 2,948 Expenses 1,000 94 619 210 1,923 - ---------------------------------------------------------------------------------- Pretax Income 361 201 368 95 1,025 - ----------------------------------------------------------------------------------
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 attributable 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. North American client revenues increased 9% in the six months ended June 30, 1997, compared with the corresponding period of the prior year. Increases in market making were driven by higher equities and foreign exchange revenues, partially offset by lower fixed income results. In addition, both finance and advisory and asset management servicing revenues grew. Client revenues in Latin America were 4% higher in the six months ended June 30, 1997 than a year ago, as increases in finance and advisory and asset management and servicing offset declines in the market making sector. Client revenues in Europe were 4% lower for the year-to-date period ended June 30, 1997, compared with the same 1996 period. Market making revenues decreased as lower fixed income revenues more than offset strong increases in equities. Finance and advisory revenues were flat; asset management and servicing revenues grew. Asia Pacific revenues grew 12% in the six months ended June 30, 1997, compared with the corresponding period of the prior year driven by increases in volumes and client demand in all three client sectors. 23 PAGE 23 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. Refer to the 1996 Annual report for further information. Market Risk Profiles 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. 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. The following presents the market risk profiles for the firm for the twelve months ended June 30, 1997. 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 For the twelve months ended June 30, 1997, average DEaR for our aggregate trading and investing activities across all market risks was approximately $29 million and ranged from $23 million to $40 million. For the twelve months ended December 31, 1996, average DEaR for our aggregate trading and investing activities across all market risks was approximately $31 million and ranged from $24 million to $44 million. Trading Market Risk Activities For the twelve months ended June 30, 1997, average DEaR for our trading activities was approximately $20 million and ranged from $13 million to $28 million. Such DEaR represented the combination of interest rate risk of approximately $16 million, foreign exchange rate risk of approximately $5 million, equities risk of approximately $6 million, commodity risk of approximately $2 million and all other market risks of approximately $7 million, offset by approximately ($16) million reflecting additional diversification among these risks. For the twelve months ended December 31, 1996, average DEaR for our trading activities was approximately $21 million and ranged from $13 million to $28 million. We evaluate the reasonableness of DEaR by comparing DEaR to actual trading results. 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. 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. For the twelve month period ended June 30, 1997, average DEaR for proprietary investing activities was approximately $20 million and ranged from $12 million to $33 million. For the twelve months ended December 31, 1996, average DEaR for proprietary investing activities was approximately $22 million and ranged from $10 million to $37 million. 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. For the twelve month period ended June 30, 1997, the number of occurrences where total return fell short of expected weekly results by amounts greater than related weekly risk estimates was consistent with statistical expectations. 24 PAGE 24 FINANCIAL REVIEW REVENUES Revenues were $1.791 billion in the second quarter of 1997, compared with $1.761 billion in the year ago quarter. For the six months ended June 30, 1997, revenues were $3.624 billion versus $3.501 billion in the same period a year ago. Net interest revenue, the aggregate of interest revenue and expense generated from the firm's client-focused and proprietary activities using a variety of asset, liability, and off-balance-sheet instruments, increased 25% to $495 million from the second quarter of 1996. This increase resulted primarily from higher trading-related net interest revenue from our market-making activities, partially offset by a decline in net interest revenue from proprietary investing and trading positions, as a result of the continuing maturity of higher-yielding investments, principally interest rate swaps. For the first six months of 1997, net interest revenue increased 19% to $945 million from the corresponding 1996 period. Trading revenue was $477 million in the second quarter of 1997 compared with $697 million a year ago. Year-to-date trading revenue decreased to $1,174 million from $1,455 million for the first six months of 1996, down 19%. The following table presents trading revenue only, disaggregated by principal product groupings, and does not reflect the integrated nature of our activities as described in Business Sector Analysis.
Fixed Foreign Commod- Proprietary In millions Income Equities Exchange ities Trading Total - ------------------------------------------------------------------------------------------- Second Quarter 1997 $250 $170 $ 72 $ 2 ($ 17) $ 477 Second Quarter 1996 331 124 109 5 128 697 Six Months 1997 596 281 192 15 90 1,174 Six Months 1996 864 218 177 39 157 1,455 - -------------------------------------------------------------------------------------------
Fixed income trading revenue declined to $250 million from $331 million in the year-earlier quarter, primarily due to lower debt trading revenues in emerging markets. Trading revenue from equities grew 37% to $170 million on higher revenues from equity derivatives and positioning gains. Foreign exchange trading revenue decreased 34% to $72 million from $109 million a year ago. Trading revenue from commodities was $2 million, down from $5 million in the second quarter of 1996. Proprietary trading losses were $17 million, compared with gains of $128 million in the 1996 second quarter. Investment banking revenue rose 40% to a record $294 million in the second quarter of 1997, compared to a year ago. The market for advisory and underwriting activity remained strong, and the firm assisted clients in a number of the quarter's notable transactions. Underwriting revenue grew to $140 million from $111 million in the year earlier quarter. Advisory and syndication fees rose to $154 million from $99 million a year ago. Investment banking revenue for the first six months of 1997 was $520 million, compared with $411 million for the first six months of 1996. Underwriting revenue for the first half of 1997 was $237 million, versus $176 million for the same 1996 period. Advisory and syndication fees for the first half were $283 million, compared to $235 million for the same period of 1996. Investment management revenue increased 16% to $199 million in the second quarter of 1997, as compared with the prior year. Assets under management were $234 billion at June 30, 1997, versus $190 billion at June 30, 1996. Investment management revenue for the first six months of 1997 increased 16% to $383 million, over the same 1996 period. Fees and commissions were $156 million, up 10% from $142 million in the year ago quarter, primarily due to higher equity commissions reflecting growing market share on U.S. and European exchanges. For the first six months of 1997, fees and commissions revenue was $304 million, compared to $293 million in the same 1996 period. 25 PAGE 25 Investment securities revenue was $114 million in the second quarter of 1997 and $72 million in the prior year. Net gains from positions associated with our Equity Investment activities were $118 million in the current quarter and primarily related to the sale of investments in the communications and insurance industries. A year ago, such net gains were also $118 million, but related to sales of investments in the biotechnology and health-care-related industries. Also included in investment securities revenue were net realized gains of $1 million and losses of $51 million in the current and year ago quarters, respectively. For the current six month period, investment securities revenue was $175 million, versus $150 million for the first six months of 1996. Other revenue was $56 million in the second quarter, compared with $71 million a year earlier. Other revenue for the first half of 1997 was $123 million, compared with $70 million for the first six months of 1996. OPERATING EXPENSES Operating expenses increased 12% to $1.241 billion in the 1997 second quarter and included a charge of $28 million incurred in connection with the renovation of office space in New York. Expense increases were concentrated in two business sectors - Finance and Advisory, and Asset Management and Servicing - where Morgan is investing to expand market share and business capacity. Higher levels of business activity also contributed to the overall rise in expenses, as did initiatives to prepare for the year 2000 and the anticipated conversion to a single European currency. For the six months ended June 30, 1997, operating expenses increased approximately 11% to $2.432 billion, as compared to the first six months of 1996. At June 30, 1997, staff totaled 15,776 employees, compared with 15,391 employees at June 30, 1996. Income tax expense in the second quarter totaled $176 million, based on an effective tax rate of 32%, compared with 33% in the year earlier quarter. ASSETS Total assets were $250 billion at June 30, 1997, compared with $226 billion at March 31, 1997. At June 30, 1997, the aggregate allowance for credit losses was $1.110 billion versus $1.113 billion at March 31, 1997. Nonperforming assets decreased to $108 million at June 30, 1997, from $110 million at March 31, 1997, as assets newly classified as nonperforming were more than offset by assets returned to performing status, repayments, and charge-offs. No provision for credit losses was deemed necessary in the 1997 second quarter. 26 PAGE 26 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. Outstandings include loans, interest-earning deposits with banks, investment securities, customers' acceptance liability, securities purchased under agreements to resell, trading account securities, accrued interest, and other monetary assets. Outstandings generally are distributed according to the location 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. Countries in which J.P. Morgan's outstandings exceeded 1.0% of total assets at June 30, 1997, are listed in the following table.
Cross-border In millions outstandings - ---------------------------------------------------------------------- France $4,409 United Kingdom 4,203 Switzerland 2,535 - ----------------------------------------------------------------------
27 PAGE 27 CAPITAL
June 30 March 31 December 31 June 30 Dollars in billions 1997 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 11.3 $ 11.2 $ 11.4 $ 11.0 Annualized rate of return on average common stockholders' equity(a)(b) 14.1% 15.7% 15.3% 17.1% As percent of period-end total assets: Common equity 4.3 4.6 4.8 5.2 Total equity 4.5 4.9 5.2 5.5 Book value per common share(c) $ 55.37 $ 54.05 $ 54.43 $ 52.40 Risk-based capital(d) J.P. Morgan Tier 1 risk-based capital $ 11.1 $ 11.0 $ 10.9 $ 9.7 Total risk-based capital 15.6 15.7 15.1 14.1 Risk adjusted assets 137.2 127.1 123.9 120.3 Capital ratios(d) J.P. Morgan Tier 1 ratio 8.1% 8.7% 8.8% 8.1% Total ratio 11.4 12.4 12.2 11.7 Leverage ratio 5.9 5.9 5.9 6.2 Morgan Guaranty(e) Tier 1 ratio 7.7% 8.2% 8.2% 7.7% Total ratio 10.5 11.4 11.5 10.7 Leverage ratio 5.5 5.5 5.3 5.7 - -------------------------------------------------------------------------------------------------------------------
(a) Represents the annualized rate of return on average common stockholders' equity for the three months ended June 30, 1997, March 31, 1997, December 31, 1996, and June 30, 1996. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 14.7%, 16.5%, 15.9%, and 17.8% for the three months ended June 30, 1997, March 31, 1997, December 31, 1996, and June 30, 1996, respectively. (b) The annualized rate of return on average common stockholders' equity for the six months ended June 30, 1997 and 1996 was 14.9% and 17.1%, respectively. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 15.6% and 18.0% for the six months ended June 30, 1997 and 1996, respectively. (c) Excluding the impact of SFAS No. 115, the book value per common share would have been $52.68, $51.98, $52.08, and $50.54 for the three months ended June 30, 1997, March 31, 1997, December 31, 1996, and June 30, 1996, respectively. (d) In accordance with Federal Reserve Board guidelines, the risk-based capital and leverage amounts and ratios exclude the equity, assets and off-balance-sheet exposures of J.P. Morgan Securities Inc. and the effect of SFAS No. 115. (e) In accordance with Federal Reserve Board guidelines, the ratios exclude the effect of SFAS No. 115. The capital of J.P. Morgan and Morgan Guaranty Trust Company of New York (Morgan Guaranty) remained well above the minimum standards set by regulators at June 30, 1997. 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 June 30, 1997. At June 30, 1997, stockholders' equity included approximately $518 million of net unrealized appreciation on debt investment and marketable equity investment securities, net the related deferred tax liability of $310 million. The net unrealized appreciation on debt investment securities was $294 million at June 30, 1997. The net unrealized appreciation on marketable equity investment securities was $534 million at June 30, 1997. During the second quarter of 1997, the firm completed the purchase of J.P. Morgan common stock in the open market pursuant to the Board of Directors' December 1996 authorization of the purchase of up to $750 million of shares. In addition, the firm continues its program of purchasing J.P. Morgan shares to lessen the dilutive impact on earnings per share of the firm's employee benefit plans. 28 PAGE 28 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ------------------------------------------------------------------------------------------------------------ Dollars in millions, Interest and average rates Three months ended on a taxable-equivalent basis ------------------------------------------------------------------ June 30, 1997 June 30, 1996 ------------------------------------------------------------------ Average Average Average Average balance Interest rate balance Interest rate ------------------------------------------------------------------ ASSETS Interest-earning deposits with banks, mainly in offices outside the U.S. $ 2,019 $ 46 9.14% $1,812 $ 24 5.33% Debt investment securities in offices in the U.S. (a): U.S. Treasury 1,277 24 7.54 922 18 7.85 U.S. state and political subdivision 1,234 37 12.03 1,651 47 11.45 Other 17,036 273 6.43 19,685 292 5.97 Debt investment securities in offices outside the U.S. (a) 3,399 66 7.79 3,622 57 6.33 Trading account assets: In offices in the U.S. 23,320 363 6.24 14,343 224 6.28 In offices outside the U.S. 39,937 652 6.55 22,911 460 8.08 Securities purchased under agreements to resell and federal funds sold: In offices in the U.S. 16,728 227 5.44 28,039 355 5.09 In offices outside the U.S. 23,666 277 4.69 17,355 238 5.52 Securities borrowed, mainly in offices in the U.S. 35,334 444 5.04 26,042 318 4.91 Loans: In offices in the U.S. 4,840 94 7.79 7,020 114 6.53 In offices outside the U.S. 24,594 404 6.59 21,494 328 6.14 Other interest-earning assets (b): In offices in the U.S. 657 42 * 1,126 26 * In offices outside the U.S. 791 98 * 1,065 80 * - ------------------------------------------------------------------------------------------------------------ Total interest-earning assets 194,832 3,047 6.27 167,087 2,581 6.21 Allowance for credit losses (c) (912) (1,122) Cash and due from banks 765 785 Other noninterest-earning assets 48,540 42,941 - ------------------------------------------------------------------------------------------------------------ Total assets 243,225 209,691 - ------------------------------------------------------------------------------------------------------------
Interest and average rates applying to the following asset categories have been adjusted to a taxable-equivalent basis: Debt investment securities in offices in the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in the U.S. The applicable tax rate used to determine these adjustments was approximately 41% for the three months ended June 30, 1997 and 1996. (a) For the three months ended June 30, 1997 and 1996, 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. (c) Average amount at June 30, 1997 is based on the portions of the aggregate allowance for credit losses related only to loans and trading account assets. See Note 10, Aggregate Allowance for Credit Losses. Average amount at June 30, 1996 is based on the aggregate allowance for credit losses. * Not meaningful 29 PAGE 29 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ---------------------------------------------------------------------------------------------------------------------------- Dollars in millions, Three months ended Interest and average rates ------------------------------------------------------------------------------- on a taxable-equivalent basis June 30, 1997 June 30, 1996 ------------------------------------------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: In offices in the U.S. $ 10,145 $ 141 5.57% $ 2,177 $ 24 4.43% In offices outside the U.S. 44,592 529 4.76 46,008 595 5.20 Trading account liabilities: In offices in the U.S. 11,196 186 6.66 7,921 124 6.30 In offices outside the U.S. 14,325 212 5.94 9,665 182 7.57 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. 65,330 853 5.24 62,286 798 5.15 Commercial paper, mainly in offices in the U.S. 3,562 49 5.52 4,274 57 5.36 Other interest-bearing liabilities: In offices in the U.S. 15,217 228 6.01 14,270 200 5.64 In offices outside the U.S. 3,803 59 6.22 1,899 46 9.74 Long-term debt, mainly in offices in the U.S. 16,145 256 6.36 9,623 136 5.69 Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 21 7.68 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 185,465 2,534 5.48 158,123 2,162 5.50 Noninterest-bearing deposits: In offices in the U.S. 966 2,329 In offices outside the U.S. 490 933 Other noninterest-bearing liabilities 45,197 37,422 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 232,118 198,807 Stockholders' equity 11,107 10,884 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 243,225 209,691 Net yield on interest-earning assets 1.06 1.01 - ---------------------------------------------------------------------------------------------------------------------------- Net interest earnings 513 419 - ----------------------------------------------------------------------------------------------------------------------------
30 PAGE 30 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ----------------------------------------------------------------------------------------------------------------------------------- Dollars in millions, Six months ended Interest and average rates --------------------------------------------------------------------------------------- on a taxable-equivalent basis June 30, 1997 June 30, 1996 --------------------------------------------------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate --------------------------------------------------------------------------------------- ASSETS Interest-earning deposits with banks, mainly in offices outside the U.S. $ 1,968 $ 73 7.48% $ 1,803 $ 51 5.69% Debt investment securities in offices in the U.S.(a): U.S. Treasury 1,353 50 7.45 970 37 7.67 U.S. state and political subdivision 1,350 79 11.80 1,672 96 11.55 Other 17,406 558 6.46 18,182 561 6.20 Debt investment securities in offices outside the U.S.(a) 4,083 141 6.96 4,272 131 6.17 Trading account assets: In offices in the U.S. 22,619 714 6.37 15,825 474 6.02 In offices outside the U.S. 40,528 1,373 6.83 24,913 966 7.80 Securities purchased under agreements to resell and federal funds sold: In offices in the U.S. 15,649 423 5.45 27,573 686 5.00 In offices outside the U.S. 23,466 536 4.61 16,004 484 6.08 Securities borrowed, mainly in offices in the U.S. 33,118 827 5.04 23,408 581 4.99 Loans: In offices in the U.S. 4,909 191 7.85 6,849 226 6.64 In offices outside the U.S. 24,161 775 6.47 21,071 660 6.30 Other interest-earning assets(b): In offices in the U.S. 710 62 * 1,132 59 * In offices outside the U.S. 869 157 * 1,180 145 * - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 192,189 5,959 6.25 164,854 5,157 6.29 Allowance for credit losses(c) (913) (1,126) Cash and due from banks 983 1,019 Other noninterest-earning assets 47,413 42,537 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets 239,672 207,284 - -----------------------------------------------------------------------------------------------------------------------------------
Interest and average rates applying to the following asset categories have been adjusted to a taxable-equivalent basis: Debt investment securities in offices in the U.S., Trading account assets in offices in the U.S., and Loans in offices in the U.S. The applicable tax rate used to determine these adjustments was approximately 41% for the six months ended June 30, 1997 and 1996. (a) For the six months ended June 30, 1997 and 1996, 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. (c) Average amount at June 30, 1997 is based on the portions of the aggregate allowance for credit losses related only to loans and trading account assets. See Note 10, Aggregate Allowance for Credit Losses. Average amount at June 30, 1996 is based on the aggregate allowance for credit losses. * Not meaningful 31 PAGE 31 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ---------------------------------------------------------------------------------------------------------------------------- Six months ended Dollars in millions, ------------------------------------------------------------------------------- Interest and average rates June 30, 1997 June 30,1996 on a taxable-equivalent basis - ---------------------------------------------------------------------------------------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: $ 9,489 $ 261 5.55% $ 2,054 $ 47 4.60% In offices in the U.S. 45,304 1,072 4.77 45,764 1,222 5.37 In offices outside the U.S. Trading account liabilities: 10,285 350 6.86 7,923 241 6.12 In offices in the U.S. 13,072 405 6.25 10,654 358 6.76 In offices outside the U.S. Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. 66,586 1,729 5.24 60,804 1,585 5.24 Commercial paper, mainly in offices in the U.S. 3,927 107 5.49 3,980 108 5.46 Other interest-bearing liabilities: In offices in the U.S. 15,323 451 5.94 13,827 392 5.70 In offices outside the U.S. 3,730 110 5.95 1,916 92 9.66 Long-term debt, mainly in offices in the U.S. 14,979 451 6.07 9,526 275 5.81 Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,077 40 7.68 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 183,772 4,976 5.46 156,448 4,320 5.55 Noninterest-bearing deposits: In offices in the U.S. 1,091 2,674 In offices outside the U.S. 309 1,015 Other noninterest-bearing liabilities 43,249 36,367 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 228,421 196,504 Stockholders' equity 11,251 10,780 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 239,672 207,284 Net yield on interest-earning assets 1.03 1.02 - ---------------------------------------------------------------------------------------------------------------------------- Net interest earnings 983 837 - ----------------------------------------------------------------------------------------------------------------------------
32 PAGE 32 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 Note 7 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 June 30, 1997. 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, which reset at predetermined dates, are generally presented based on the London Interbank Offered Rate (LIBOR) in effect on the swaps at June 30, 1997. The table was prepared under the assumption that these variable interest rates remain constant. The variable interest rates to be received or paid will change to the extent that rates fluctuate. Such changes may be substantial. Not included in the table below are other derivatives used for 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 $72.5 billion at June 30, 1997. The contractual maturities of these derivative contracts are primarily less than one year.
By expected maturities After one After two After three After four Within one year but years but years but years but After five Dollars in billions year within two within three within four within five years Total - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SWAPS - U. S. DOLLAR Receive fixed swaps Notional amount 24.8 6.4 4.2 2.5 1.8 12.6 52.3 Weighted average: Receive rate 5.8 6.8 6.9 6.2 6.8 6.1 6.2 Pay rate 5.8 5.8 6.0 5.9 5.8 5.8 5.8 Pay fixed swaps Notional amount 20.2 5.9 9.2 6.3 0.8 9.9 52.3 Weighted average: Receive rate 5.8 5.8 5.8 5.8 5.9 5.8 5.8 Pay rate 5.5 5.8 6.6 6.3 6.9 6.7 6.1 INTEREST RATE SWAPS - NON - U.S. DOLLAR Receive fixed swaps Notional amount 25.7 9.6 7.3 4.0 3.2 4.8 54.6 Weighted average: Receive rate 5.1 5.7 6.0 5.3 6.3 6.4 5.5 Pay rate 3.0 3.4 4.3 2.6 3.8 3.2 3.3 Pay fixed swaps Notional amount 20.2 9.6 7.1 3.8 2.3 4.3 47.3 Weighted average: Receive rate 3.5 3.3 4.3 2.8 3.8 3.0 3.5 Pay rate 5.7 5.2 6.1 6.0 6.4 6.6 5.8 - ------------------------------------------------------------------------------------------------------------------------------------ Total notional amount 90.9 31.5 27.8 16.6 8.1 31.6 206.5 - ------------------------------------------------------------------------------------------------------------------------------------
Not included in the table above are $3.7 billion and $4.6 billion of notional amounts related to currency swaps and basis swaps, respectively. 33 PAGE 33 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12. Statement re computation of ratios 27. Financial data schedule (b) Reports on Form 8-K The following reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended June 30, 1997: April 10, 1997 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing its earnings for the three-month period ended March 31, 1997. 34 PAGE 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J.P. MORGAN & CO. INCORPORATED (Registrant) /s/ DAVID H. SIDWELL ----------------------------------- NAME: DAVID H. SIDWELL TITLE: MANAGING DIRECTOR AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) DATE: August 14, 1997 35 PAGE 1 LIST OF EXHIBITS EXHIBIT 12. Statement re computation of ratios 27. Financial data schedule EX-12 2 STATEMENT RE COMPUTATION OF RATIOS 1 PAGE 2 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges J.P. Morgan & Co. Incorporated Consolidated
- -------------------------------------------------------------------------------- Six months Dollars in millions 1997 - -------------------------------------------------------------------------------- Earnings: Net income $ 798 Add: income taxes 394 Less: equity in undistributed income of all affiliates accounted for by the equity method 17 Add: fixed charges, excluding interest on deposits 3,657 - -------------------------------------------------------------------------------- Earnings available for fixed charges, excluding interest on deposits 4,832 Add: interest on deposits 1,333 - -------------------------------------------------------------------------------- Earnings available for fixed charges, including interest on deposits 6,165 - -------------------------------------------------------------------------------- Fixed charges: Interest expense, excluding interest on deposits 3,643 Interest factor in net rental expense 14 - -------------------------------------------------------------------------------- Total fixed charges, excluding interest on deposits 3,657 Add: interest on deposits 1,333 - -------------------------------------------------------------------------------- Total fixed charges, including interest on deposits 4,990 - -------------------------------------------------------------------------------- Ratio of earnings to fixed charges: Excluding interest on deposits 1.32 Including interest on deposits 1.24 - --------------------------------------------------------------------------------
2 PAGE 3 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends J.P. Morgan & Co. Incorporated Consolidated
- -------------------------------------------------------------------------------- Six months Dollars in millions 1997 - -------------------------------------------------------------------------------- Earnings: Net income $ 798 Add: income taxes 394 Less: equity in undistributed income of all affiliates accounted for by the equity method 17 Add: fixed charges, excluding interest on deposits and preferred stock dividends 3,657 - -------------------------------------------------------------------------------- Earnings available for fixed charges, excluding interest on deposits 4,832 Add: interest on deposits 1,333 - -------------------------------------------------------------------------------- Earnings available for fixed charges, including interest on deposits 6,165 - -------------------------------------------------------------------------------- Fixed charges: Interest expense, excluding interest on deposits 3,643 Interest factor in net rental expense 14 Preferred stock dividends 27 - -------------------------------------------------------------------------------- Total fixed charges, excluding interest on deposits 3,684 Add: interest on deposits 1,333 - -------------------------------------------------------------------------------- Total fixed charges, including interest on deposits 5,017 - -------------------------------------------------------------------------------- Ratio of earnings to fixed charges and preferred stock dividends: Excluding interest on deposits 1.31 Including interest on deposits 1.23 - --------------------------------------------------------------------------------
EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED JUNE 30, 1997 INCLUDED IN THE J.P. MORGAN & CO. INCORPORATED FORM 10-Q. 1,000,000 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 752 2,054 36,425 105,825 24,936 0 0 29,294 560 250,490 56,977 91,368 71,786 19,011 0 694 502 10,152 250,490 494 387 2,148 3,029 670 2,534 495 0 125 1,241 550 374 0 0 374 1.85 1.84 1.06 106 0 0 0 1,113 15 12 1,110 137 54 919
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