-----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, J7e2NzY7A1m/7BpR7a3vkzqIpwaSMarOCkh5cf4ARwibSwv5p4SsaTPUzbMyI+KH LXv2+eQwO1gqdgxhfuvRuQ== 0000950123-97-009650.txt : 19971117 0000950123-97-009650.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950123-97-009650 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 001-05885 FILM NUMBER: 97721003 BUSINESS ADDRESS: STREET 1: 60 WALL ST CITY: NEW YORK STATE: NY ZIP: 10260 BUSINESS PHONE: 2124832323 MAIL ADDRESS: STREET 1: P O BOX 271 STREET 2: C/O WILLIAM D HALL CITY: WILMINGTON STATE: DE ZIP: 19899 10-Q 1 FORM 10-Q 1 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 September 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 October 31, 1997: Common Stock, $2.50 Par Value 177,645,188 Shares 2 PART I -- FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS The following financial statement information for the three and nine months ended September 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 Nine-month Consolidated statement of income J.P. Morgan & Co. Incorporated ................................... 4 Consolidated balance sheet J.P. Morgan & Co. Incorporated ................................... 5 Consolidated statement of changes in stockholders' equity J.P. Morgan & Co. Incorporated ................................... 6 Consolidated statement of cash flows J.P. Morgan & Co. Incorporated ................................... 7 Consolidated statement of condition Morgan Guaranty Trust Company of New York ........................ 8 Notes to Consolidated financial statements J.P. Morgan & Co. Incorporated ................................... 9-17 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial highlights ............................................. 18 Business sector analysis ......................................... 19-23 Risk management .................................................. 24 Financial review ................................................. 25-28 Consolidated average balances and net interest earnings .......... 29-32 Derivatives used for purposes other-than-trading ................. 33 PART II -- OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K .............................. 34 SIGNATURES ............................................................ 35
3 PART I ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated
- ----------------------------------------------------------------------------------- In millions, except share data Three months ended ------------------------------------------------ September 30 September 30 Increase/ 1997 1996 (Decrease) ------------------------------------------------ NET INTEREST REVENUE Interest revenue $3,161 $2,675 $ 486 Interest expense 2,689 2,250 439 - ----------------------------------------------------------------------------------- Net interest revenue 472 425 47 NONINTEREST REVENUE Trading revenue 657 510 147 Investment banking revenue 320 233 87 Investment management revenue 201 164 37 Fees and commissions 164 137 27 Investment securities revenue 67 68 (1) Other revenue 35 12 23 - ----------------------------------------------------------------------------------- Total noninterest revenue 1,444 1,124 320 Total revenue 1,916 1,549 367 OPERATING EXPENSES Employee compensation and benefits 798 685 113 Net occupancy 77 74 3 Technology and communications 277 248 29 Other expenses 174 130 44 - ----------------------------------------------------------------------------------- Total operating expenses 1,326 1,137 189 Income before income taxes 590 412 178 Income taxes 194 136 58 - ----------------------------------------------------------------------------------- Net income 396 276 120 PER COMMON SHARE Net income (a) $ 1.96 $ 1.32 $0.64 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 September 30, 1997. Fully diluted earnings per share were $1.95 for the three months ended September 30, 1997. See notes to consolidated financial statements. 4 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated
- ------------------------------------------------------------------------------------- In millions, except share data Nine months ended -------------------------------------------------- September 30 September 30 Increase/ 1997 1996 (Decrease) -------------------------------------------------- NET INTEREST REVENUE Interest revenue $9,082 $7,788 $ 1,294 Interest expense 7,665 6,570 1,095 - ------------------------------------------------------------------------------------- Net interest revenue 1,417 1,218 199 NONINTEREST REVENUE Trading revenue 1,831 1,965 (134) Investment banking revenue 840 644 196 Investment management revenue 584 493 91 Fees and commissions 468 430 38 Investment securities revenue 242 218 24 Other revenue 158 82 76 - ------------------------------------------------------------------------------------- Total noninterest revenue 4,123 3,832 291 Total revenue 5,540 5,050 490 OPERATING EXPENSES Employee compensation and benefits 2,298 2,152 146 Net occupancy 254 223 31 Technology and communications 720 564 156 Other expenses 486 387 99 - ------------------------------------------------------------------------------------- Total operating expenses 3,758 3,326 432 Income before income taxes 1,782 1,724 58 Income taxes 588 569 19 - ------------------------------------------------------------------------------------- Net income 1,194 1,155 39 PER COMMON SHARE Net income (a) $ 5.84 $ 5.60 $ 0.24 Dividends declared 2.64 2.43 0.21 - -------------------------------------------------------------------------------------
(a) Fully diluted earnings per share were $5.82 and $5.57 for the nine months ended September 30, 1997 and 1996, respectively. See notes to consolidated financial statements. 5 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated
- ---------------------------------------------------------------------------------------------------------------------- September 30 December 31 In millions, except share data 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 813 $ 906 Interest-earning deposits with banks 1,813 1,908 Debt investment securities available-for-sale carried at fair value (cost: $21,915 at September 1997 and $24,610 at December 1996) 22,258 24,865 Trading account assets, net of allowance for credit losses of $350 115,144 90,980 Securities purchased under agreements to resell ($44,040 at September 1997 and $32,455 at December 1996) and federal funds sold 44,058 32,505 Securities borrowed 38,824 27,931 Loans, net of allowance for credit losses of $546 at September 1997 and $566 at December 1996 31,449 27,554 Customers' acceptance liability 270 212 Accrued interest and accounts receivable 5,859 3,789 Premises and equipment 3,160 3,137 Less: accumulated depreciation 1,345 1,272 - ---------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 1,815 1,865 Other assets 7,292 9,511 - ---------------------------------------------------------------------------------------------------------------------- Total assets 269,595 222,026 - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 1,022 1,501 In offices outside the U.S. 749 708 Interest-bearing deposits: In offices in the U.S. 8,970 7,103 In offices outside the U.S. 44,785 43,412 - ---------------------------------------------------------------------------------------------------------------------- Total deposits 55,526 52,724 Trading account liabilities 69,799 50,919 Securities sold under agreements to repurchase ($69,009 at September 1997 and $56,117 at December 1996) and federal funds purchased 74,473 61,429 Commercial paper 5,267 4,132 Other liabilities for borrowed money 17,477 19,948 Accounts payable and accrued expenses 8,512 5,935 Liability on acceptances 270 212 Long-term debt not qualifying as risk-based capital 17,229 9,411 Other liabilities, including allowance for credit losses of $200 4,097 1,442 - ---------------------------------------------------------------------------------------------------------------------- 252,650 206,152 Long-term debt qualifying as risk-based capital 4,163 3,692 Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 750 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities 257,963 210,594 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: 200,691,873 at September 1997 and 200,688,123 at December 1996) 502 502 Capital surplus 1,380 1,446 Retained earnings 9,308 8,635 Net unrealized gains on investment securities, net of taxes 598 464 Other 1,070 826 - ---------------------------------------------------------------------------------------------------------------------- 13,552 12,567 Less: treasury stock (22,487,572 shares at September 1997 and 15,765,455 shares at December 1996) at cost 1,920 1,135 - ---------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 11,632 11,432 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 269,595 222,026 - ----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY J.P. Morgan & Co. Incorporated
- ----------------------------------------------------------------------------------------------------------------------- In millions Nine months ended - ----------------------------------------------------------------------------------------------------------------------- September 30 September 30 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Adjustable rate cumulative preferred stock balance, January 1 and September 30 $ 244 $ 244 Variable cumulative preferred stock balance, January 1 and September 30 250 250 Fixed cumulative preferred stock: Balance, January 1 200 -- Shares issued -- 200 - ----------------------------------------------------------------------------------------------------------------------- Total preferred stock, September 30 694 694 - ----------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, January 1 and September 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 (66) 12 - ----------------------------------------------------------------------------------------------------------------------- Balance, September 30 1,380 1,442 - ----------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, January 1 8,635 7,731 Net income 1,194 1,155 Dividends declared on preferred stock (27) (24) Dividends declared on common stock (475) (454) Dividend equivalents on common stock issuable (19) (16) - ----------------------------------------------------------------------------------------------------------------------- Balance, September 30 9,308 8,392 - ----------------------------------------------------------------------------------------------------------------------- NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES Balance, January 1 464 566 Net change in unrealized gains, net of taxes 134 (249) - ----------------------------------------------------------------------------------------------------------------------- Balance, September 30 598 317 - ----------------------------------------------------------------------------------------------------------------------- OTHER COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS Balance, January 1 838 556 Deferred stock awards, net 249 207 - ----------------------------------------------------------------------------------------------------------------------- Balance, September 30 1,087 763 - ----------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION Balance, January 1 (12) (4) Translation adjustments (8) (7) Income tax benefit 3 2 - ----------------------------------------------------------------------------------------------------------------------- Balance, September 30 (17) (9) - ----------------------------------------------------------------------------------------------------------------------- Total Other, September 30 1,070 754 - ----------------------------------------------------------------------------------------------------------------------- LESS: TREASURY STOCK Balance, January 1 1,135 824 Purchases 1,191 445 Shares distributed under various employee benefit plans (406) (246) - ----------------------------------------------------------------------------------------------------------------------- Balance, September 30 1,920 1,023 - ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity, September 30 11,632 11,078 - -----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 7 CONSOLIDATED STATEMENT OF CASH FLOWS J.P. Morgan & Co. Incorporated
- ----------------------------------------------------------------------------------------------------------- In millions Nine months ended - ----------------------------------------------------------------------------------------------------------- September 30 September 30 1997 1996 - ----------------------------------------------------------------------------------------------------------- NET INCOME $ 1,194 $ 1,155 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 701 622 Increase in assets: Trading account assets (24,231) (11,372) Securities purchased under agreements to resell (11,599) (2,500) Securities borrowed (10,893) (5,600) Accrued interest and accounts receivable (2,072) (46) Increase in liabilities: Trading account liabilities 18,828 314 Securities sold under agreements to repurchase 12,880 17,515 Accounts payable and accrued expenses 2,397 765 Other changes in operating assets and liabilities, net 5,253 (3,433) Net investment securities gains included in cash flows from investing activities (266) (235) - ----------------------------------------------------------------------------------------------------------- CASH USED IN OPERATING ACTIVITIES (7,808) (2,815) - ----------------------------------------------------------------------------------------------------------- (Increase) decrease in interest-earning deposits with banks 94 (207) Debt investment securities: Proceeds from sales 18,672 20,299 Proceeds from maturities, calls, and mandatory redemptions 2,948 5,813 Purchases (19,189) (28,561) (Increase) decrease in federal funds sold 32 (28) Increase in loans (3,944) (6,560) Payments for premises and equipment (113) (83) Other changes, net (307) 1,489 - ----------------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (1,807) (7,838) - ----------------------------------------------------------------------------------------------------------- Decrease in noninterest-bearing deposits (438) (999) Increase in interest-bearing deposits 3,217 4,471 Increase (Decrease) in federal funds purchased 152 (1,520) Increase in commercial paper 1,135 1,647 Other liabilities for borrowed money: Proceeds 15,623 18,445 Payments (18,620) (16,342) Long-term debt: Proceeds 10,242 3,840 Payments (1,680) (1,102) Proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary 400 -- Capital stock: Issued or distributed 210 200 Purchased (1,191) (446) Dividends paid (507) (481) Other changes, net 1,016 2,500 - ----------------------------------------------------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES 9,559 10,213 - ----------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and due from banks (37) (7) - ----------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS (93) (447) Cash and due from banks at December 31, 1996 and 1995 906 1,535 - ----------------------------------------------------------------------------------------------------------- Cash and due from banks at September 30, 1997 and 1996 813 1,088 - ----------------------------------------------------------------------------------------------------------- Cash disbursements made for: Interest $ 7,270 $ 6,549 Income taxes 806 536 - -----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 8 PAGE 8 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York
- ------------------------------------------------------------------------------------------------------------------------------ September 30 December 31 In millions, except share data 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 771 $ 920 Interest-earning deposits with banks 1,776 1,910 Debt investment securities available-for-sale carried at fair value 21,093 23,510 Trading account assets, net of allowance for credit losses of $350 92,353 72,549 Securities purchased under agreements to resell and federal funds sold 30,546 21,081 Securities borrowed 12,180 6,681 Loans, net of allowance for credit losses of $545 at September 1997 and $565 at December 1996 31,288 27,378 Customers' acceptance liability 270 212 Accrued interest and accounts receivable 4,748 3,470 Premises and equipment 2,822 2,812 Less: accumulated depreciation 1,174 1,116 - ------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 1,648 1,696 Other assets 4,121 5,406 - ------------------------------------------------------------------------------------------------------------------------------ Total assets 200,794 164,813 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 1,027 1,495 In offices outside the U.S. 775 749 Interest-bearing deposits: In offices in the U.S. 8,983 7,114 In offices outside the U.S. 45,817 43,716 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 56,602 53,074 Trading account liabilities 58,307 44,039 Securities sold under agreements to repurchase and federal funds purchased 40,076 30,787 Other liabilities for borrowed money 9,989 13,215 Accounts payable and accrued expenses 6,335 4,203 Liability on acceptances 270 212 Long-term debt not qualifying as risk-based capital (includes $1,144 at September 1997 and $942 at December 1996 of notes payable to J.P. Morgan) 13,563 5,436 Other liabilities, including allowance for credit losses of $200 2,531 977 - ------------------------------------------------------------------------------------------------------------------------------ 187,673 151,943 Long-term debt qualifying as risk-based capital (includes $2,598 at September 1997 and $2,780 at December 1996 of notes payable to J.P. Morgan) 2,758 2,979 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 190,431 154,922 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 6,793 6,334 Net unrealized gains on investment securities, net of taxes 169 149 Foreign currency translation (19) (12) - ------------------------------------------------------------------------------------------------------------------------------ Total stockholder's equity 10,363 9,891 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholder's equity 200,794 164,813 - ------------------------------------------------------------------------------------------------------------------------------
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 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of J.P. Morgan & Co. Incorporated and subsidiaries (collectively, "JP Morgan"). All material intercompany accounts and transactions have been eliminated in consolidation. The financial information as of and for the periods ended September 30, 1997 and 1996 is unaudited. All adjustments which, in the opinion of management, are necessary for a fair presentation have been made and were of a normal, recurring nature. These unaudited financial statements should be read in conjunction with the audited financial statements included in J.P. Morgan's Annual report on Form 10-K for the year ended December 31, 1996, as well as information included in J.P. Morgan's unaudited quarterly reports on Form 10-Q for the periods ended March 31, 1997 and June 30, 1997. The nature of J.P. Morgan's business is such that the results of any interim period are not necessarily indicative of results for a full year. Certain prior-year amounts have been reclassified to conform with the current year presentation. 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 September 30, 1997, were approximately $2.10 and $1.96, respectively. For the nine months ended September 30, 1997, basic EPS and diluted EPS were approximately $6.27 and $5.84, respectively. Refer to Note 14, Earnings per Common Share, for EPS calculations under current rules. 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.
Third quarter Nine months In millions 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------- INTEREST REVENUE Deposits with banks $ 51 $ 30 $ 124 $ 81 Debt investment securities (a) 410 393 1,209 1,183 Trading account assets 1,032 819 3,117 2,256 Securities purchased under agreements to resell and federal funds sold 543 569 1,502 1,739 Securities borrowed 457 338 1,284 919 Loans 518 435 1,477 1,315 Other sources 150 91 369 295 - ---------------------------------------------------------------------------------------- Total interest revenue 3,161 2,675 9,082 7,788 - ---------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 710 626 2,043 1,895 Trading account liabilities 423 358 1,178 957 Securities sold under agreements to repurchase and federal funds purchased 888 799 2,617 2,384 Other borrowed money 344 310 1,012 902 Long-term debt 303 157 754 432 Trust preferred securities 21 -- 61 -- - ---------------------------------------------------------------------------------------- Total interest expense 2,689 2,250 7,665 6,570 - ---------------------------------------------------------------------------------------- Net interest revenue 472 425 1,417 1,218 - ----------------------------------------------------------------------------------------
(a) Interest revenue from debt investment securities included taxable revenue of $387 million and $1,136 million and revenue exempt from U.S. income taxes of $23 million and $73 million for the three months and nine months ended September 30, 1997, respectively. Interest revenue from debt investment securities included taxable revenue of $362 million and $1,094 million and revenue exempt from U.S. income taxes of $31 million and $89 million for the three months and nine months ended September 30, 1996. 10 Page 10 For the three months and nine months ended September 30, 1997, net interest revenue associated with derivatives used for purposes other-than-trading was approximately $50 million and $160 million respectively, compared with approximately $25 million and $90 million for the three months and nine months ended September 30, 1996. At September 30, 1997, approximately $265 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 $343 million at September 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 September 30, 1997, are expected to amortize into Net interest revenue as follows: $20 million - remainder of 1997; $80 million in 1998; $60 million in 1999; $55 million in 2000; $35 million in 2001; $10 million in 2002; and approximately $5 million thereafter. 4. TRADING REVENUE Trading revenue disaggregated by principal product groupings for the three months and nine months ended September 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.
Third Quarter Nine months In millions 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Fixed Income $416 $ 403 $1,012 $1,267 Equities 51 43 332 261 Foreign Exchange 78 59 270 236 Commodities 17 (15) 32 24 Proprietary Trading 95 20 185 177 - -------------------------------------------------------------------------------- Total Trading Revenue 657 510 1,831 1,965 - --------------------------------------------------------------------------------
11 PAGE 11 5. INVESTMENT SECURITIES Debt investment securities A comparison of the cost, and fair and carrying values of debt investment securities available-for-sale at September 30, 1997, follows.
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value - ------------------------------------------------------------------------------------------- U.S. Treasury $ 1,704 $ 113 $ (1) $ 1,816 U.S. government agency, principally mortgage-backed 15,281 114 (73) 15,322 U.S. state and political subdivision 1,223 180 (11) 1,392 U.S. corporate and bank debt 451 1 -- 452 Foreign government 990 34 (7) 1,017 Foreign corporate and bank debt 2,154 4 (12) 2,146 Other 112 1 -- 113 - ------------------------------------------------------------------------------------------- Total debt investment securities 21,915 447 (104) 22,258 - -------------------------------------------------------------------------------------------
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. The following table presents the realized components from sales of debt investment securities included in Investment securities revenue during the three and nine months ended September 30, 1997 and 1996.
Third quarter Nine months In millions 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------- Gross realized gains from sales $ 38 $ 23 $ 84 $ 140 Gross realized losses from sales (31) (12) (64) (168) Net gains on maturities, calls and mandatory redemptions 3 -- 3 -- - ----------------------------------------------------------------------------------------------------- Net debt investment securities gains (losses) 10 11 23 (28) - -----------------------------------------------------------------------------------------------------
Equity investment securities Included in investment securities revenue for the quarters ended September 30, 1997 and 1996 are gross realized gains on the sale of equity investment securities of $51 million and $60 million, respectively, and write-downs of $12 million and $4 million, respectively. Gross realized gains on the sale of equity investment securities during the nine months ended September 30, 1997 and 1996 were $243 million and $263 million, respectively. Also included in investment securities revenue for the nine months ended September 30, 1997 and 1996 are write-downs of $25 million in each period. 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 September 30, 1997, follows.
Gross Gross Fair and unrealized unrealized carrying In millions Cost gains losses value - ------------------------------------------------------------------------------------------ September 30, 1997 $303 $612 $(4) $911 - ------------------------------------------------------------------------------------------
Nonmarketable equity investment securities and securities held in Small Business Investment Companies, with a carrying value of $592 million, had an estimated fair value of $700 million at September 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 September 30, 1997, and the average balance for the three and nine-months ended September 30, 1997. 12 PAGE 12
Carrying Average Value balance ------------------------------------------- September 30 Third Quarter Nine months In millions 1997 1997 1997 - ----------------------------------------------------------------------------------- TRADING ACCOUNT ASSETS (a) U.S. Treasury $ 17,567 $ 13,420 $ 14,740 U.S. government agency 8,009 8,252 7,035 Foreign government 27,006 26,448 26,174 Corporate debt and equity 20,399 19,232 18,814 Other securities 4,843 8,201 6,641 Interest rate and currency swaps 19,843 18,229 15,836 Foreign exchange contracts 4,972 4,930 4,966 Interest rate futures and forwards 476 379 368 Commodity and equity contracts 2,438 2,166 2,539 Purchased option contracts 9,941 8,471 7,347 - ----------------------------------------------------------------------------------- Total trading account assets 115,494 109,728 104,460 - ----------------------------------------------------------------------------------- TRADING ACCOUNT LIABILITIES U.S. Treasury 11,759 11,199 10,608 Foreign government 13,133 13,138 11,644 Corporate debt and equity 7,941 7,497 7,352 Other securities 893 2,084 2,554 Interest rate and currency swaps 15,075 13,587 12,494 Foreign exchange contracts 5,464 6,513 6,666 Interest rate futures and forwards 1,025 952 820 Commodity and equity contracts 3,388 2,258 2,498 Written option contracts 11,121 9,698 8,255 - ----------------------------------------------------------------------------------- Total trading account liabilities 69,799 66,926 62,891 - -----------------------------------------------------------------------------------
(a) Refer to Note 10, Aggregate allowance for credit losses. 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 $52.7 billion of master netting agreements in effect at September 30, 1997, is also presented.
Notional amounts Credit exposure In billions - ---------------------------------------------------------------------------------------- Interest rate and currency swaps Trading $ 2,596.5 Other-than-trading(a)(b)(c) 205.0 - ---------------------------------------------------------------------------------------- Total interest rate and currency swaps 2,801.5 $ 19.8 - ---------------------------------------------------------------------------------------- Foreign exchange spot, forward, and futures contracts Trading 687.7 Other-than-trading(a)(b) 36.2 - ---------------------------------------------------------------------------------------- Total foreign exchange spot, forward, and futures contracts 723.9 5.0 - ---------------------------------------------------------------------------------------- Interest rate futures, forward rate agreements, and debt securities forwards Trading 840.0 Other-than-trading 10.4 - ---------------------------------------------------------------------------------------- Total interest rate futures, forward rate agreements, and debt securities forwards 850.4 0.5 - ---------------------------------------------------------------------------------------- Commodity and equity swaps, forward, and futures contracts, all trading 74.9 2.4 - ---------------------------------------------------------------------------------------- Purchased options(d) Trading 804.3 Other-than-trading(a) 1.6 - ---------------------------------------------------------------------------------------- Total purchased options 805.9 9.9 - ---------------------------------------------------------------------------------------- Written options, all trading(e) 942.5 - ---------------------------------------------------------------------------------------- Total credit exposure recorded as assets on the consolidated balance sheet 37.6 - ----------------------------------------------------------------------------------------
13 PAGE 13 (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 $40.2 billion at September 30, 1997, and were primarily denominated in the following currencies: German deutsche mark $11.1 billion, French franc $4.9 billion, Italian lira $4.4 billion, Japanese yen $4.1 billion, and Spanish peseta $2.8 billion. (c) The notional amount of risk-adjusting swaps was $155.8 billion at September 30, 1997. (d) At September 30, 1997, purchased options used for trading purposes included $581.6 billion of interest rate options, $177.2 billion of foreign exchange options, and $45.5 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 $120.3 billion and those negotiated over-the-counter amounted to $685.6 billion at September 30, 1997. (e) At September 30, 1997, written options included $686.2 billion of interest rate options, $202.3 billion of foreign exchange options, and $54.0 billion of commodity and equity options. Written option contracts executed on an exchange amounted to $182.5 billion and those negotiated over-the-counter amounted to $760.0 billion at September 30, 1997. 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 $305 million at September 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. Gross unrealized gains and gross unrealized losses associated with open derivative contracts at September 30, 1997, are as follows:
Gross Gross Net unrealized unrealized unrealized In millions gains (losses) gains (losses) - -------------------------------------------------------------------------------- Long-term debt $352 ($77) $ 275 Debt investment securities 39 (78) (39) Deposits 125 (15) 110 Other financial instruments 26 (67) (41) - -------------------------------------------------------------------------------- Total 542 (237) 305 - --------------------------------------------------------------------------------
Net unrealized gains associated with risk-adjusting swaps that are entered into to meet longer-term investment objectives and their related hedges approximated $56 million at September 30, 1997. The net amount is composed of $1,656 million of gross unrealized gains and $1,600 million of gross unrealized losses. The unrealized gains and losses related to the derivative contracts used to hedge these risk-adjusting swaps, included above, were not material at September 30, 1997. There were no material terminations of risk-adjusting swaps during the three months and nine months ended September 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 September 30, 1997, is presented in the following table. 14 PAGE 14
September 30 In billions 1997 - -------------------------------------------------------------------------------- Commitments to extend credit $ 77.2 Standby letters of credit and guarantees 15.0 Securities lending indemnifications (a) 8.3 - --------------------------------------------------------------------------------
(a) At September 30, 1997, J.P. Morgan held cash and other collateral in support of securities lending indemnifications. Included in Fees and Commissions are credit-related fees of $44 million and $121 million for the three months and nine months ended September 30, 1997, respectively, and $39 million and $115 million for the three and nine months ended September 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 $39.9 billion were netted against amounts payable for securities purchased of $40.7 billion to arrive at a net trade date payable of $ 0.8 billion, which was classified as Other liabilities on the consolidated balance sheet at September 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 the aggregate net fair value of all balance sheet and off-balance-sheet financial instruments. The aggregate fair value of such financial instruments exceeds associated net carrying values at September 30, 1997. Such excess did not significantly change during the quarter. 9. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS Total impaired loans and other nonperforming assets, net of charge-offs, at September 30, 1997, are presented in the following table. At September 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.
September 30 In millions 1997 - -------------------------------------------------------------------------------- Impaired loans: Commercial and industrial $46 Other 33 - -------------------------------------------------------------------------------- 79 Restructuring countries 1 - -------------------------------------------------------------------------------- Total impaired loans 80 (a) Other nonperforming assets 4 - -------------------------------------------------------------------------------- Total nonperforming assets 84 - --------------------------------------------------------------------------------
(a) As of September 30, 1997, no reserve is required under SFAS No. 114, Accounting by Creditors for Impairment of a Loan, for the $80 million recorded investment in impaired loans. Charge-offs and interest applied to principal have reduced the recorded investment values to amounts that are less than the SFAS No. 114 calculated values. For the three months and nine months ended September 30, 1997, the average recorded investment in impaired loans was $97 million and $102 million, respectively. An analysis of the effect of impaired loans, net of charge-offs, on interest revenue for the three months and nine months ended September 30, 1997 and 1996, is presented in the following table.
Third quarter Nine months In millions 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Interest revenue that would have been recorded if accruing $ 2 $2 $ 6 $ 9 Less interest revenue recorded 1 3 4 4 - ----------------------------------------------------------------------------------------------------------------------------- (Negative) positive impact of impaired loans on interest revenue (1) 1 (2) (5) - -----------------------------------------------------------------------------------------------------------------------------
15 PAGE 15 10. AGGREGATE ALLOWANCE FOR CREDIT LOSSES An analysis of the aggregate allowance for credit losses at September 30, 1997, is presented in the following table.
Third quarter Nine months In millions 1997 1997 - -------------------------------------------------------------------------------- BEGINNING OF PERIOD BALANCE $ 1,110 $ 1,116 - -------------------------------------------------------------------------------- Recoveries 14 36 Charge-offs: Commercial and industrial (17) (38) Other (10) (17) - -------------------------------------------------------------------------------- Net charge-offs (13) (19) - -------------------------------------------------------------------------------- Translation adjustment (1) (1) - -------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1997 (a)(b) $ 1,096 $ 1,096 - --------------------------------------------------------------------------------
(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 September 30, 1997, the allocation of the aggregate allowance for credit losses was as follows: Specific allocation - borrowers in the U.S. $135 million, Specific allocation - borrowers outside the U.S. $37 million, Allocation to general risk $924 million. 11. INVESTMENT BANKING REVENUE AND OTHER REVENUE In the third quarter of 1997 and 1996, investment banking revenue of $320 million and $233 million includes $132 million and $83 million, respectively, of underwriting revenue. For the nine months ended September 30, 1997 and 1996, investment banking revenue of $840 million and $644 million includes underwriting revenue of $369 million and $259 million, respectively. Other revenue includes $12 million and $85 million for the three and nine months ended September 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. 12. INCOME TAXES Income tax expense for the three and nine months ended September 30, 1997 and 1996 reflects a 33% effective tax rate. Income tax expense related to net realized gains on debt and equity investment securities was approximately $14 million and $80 million for the three and nine months ended September 30, 1997, respectively. Income tax expense related to net realized gains on debt and equity investment securities was approximately $26 million and $77 million for the three and nine months ended September 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 nine months ended September 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 nine month periods ended September 30, 1996, was approximately 39% and 36%, respectively. 13. COMMITMENTS AND CONTINGENT LIABILITIES Excluding mortgaged properties, assets carried at approximately $85.9 billion in the consolidated balance sheet at September 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.
Third quarter Nine months Dollars in millions 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------- Adjusted net income $386 $267 $1,167 $1,130 Primary earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 197,776,475 201,755,770 199,821,082 202,029,375 Fully diluted earnings per share: Weighted-average number of common and common equivalent shares outstanding during the period 198,229,576 201,968,519 200,675,727 202,792,562 - -------------------------------------------------------------------------------------------------------
Refer to Note 2, Accounting developments, for information regarding the recently issued SFAS No. 128, Earnings per Share. 15. CAPITAL REQUIREMENTS As of September 30, 1997, J.P. Morgan and Morgan Guaranty Trust Company of New York (Morgan Guaranty) adopted the Federal Reserve Board's new market risk capital guidelines for calculation of risk-based capital ratios, in advance of the mandatory implementation date of January 1, 1998. The new framework amends the existing guidelines by incorporating a measure of market risk for trading positions. In addition, the capital and assets of the Section 20 subsidiary, J.P. Morgan Securities Inc., are now included in the calculations related to J.P. Morgan, the bank holding company. Prior period ratios have not been restated. Refer to page 28 for further information. For certain regulatory supervision purposes, bank regulators use five capital category definitions applicable to banks ranging from "well capitalized" to "critically undercapitalized." A bank is considered "well capitalized" if it has minimum tier 1 capital, total capital and leverage ratios of 6%, 10% and 5%, respectively. A bank holding company that has adopted the new framework is considered "well capitalized" if it has minimum tier 1 capital, total capital, and leverage ratios of 6%, 10% and 3%, respectively. At September 30, 1997, the ratios of J.P. Morgan and Morgan Guaranty exceeded the minimum standards required for a "well capitalized" bank holding company and bank, respectively. Management is aware of no conditions or events that have occurred since September 30, 1997 that would change J.P. Morgan's or Morgan Guaranty's "well capitalized" status. 17 Page 17 Set forth in the table below are the risk-based capital and leverage ratios and amounts for J.P. Morgan and Morgan Guaranty as of September 30, 1997. All amounts and ratios exclude the impact of SFAS No. 115.
Dollars in millions Amounts Ratios(c) - -------------------------------------------------------------------------------- Tier 1 capital(a) J.P.Morgan $11,916 8.1% Morgan Guaranty 10,174 7.7 - -------------------------------------------------------------------------------- Total risk-based capital(b) J.P.Morgan $17,173 11.6% Morgan Guaranty 13,812 10.4 - -------------------------------------------------------------------------------- Leverage J.P.Morgan 4.5% Morgan Guaranty 5.2 - --------------------------------------------------------------------------------
(a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum tier 1 capital of $5.9 billion and $5.3 billion, respectively. (b) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum total risk-based capital of $11.8 billion and $10.6 billion, respectively. (c) Pursuant to Federal Reserve Board guidelines, the minimum tier 1 capital, total risk-based capital, and leverage ratios are 4%, 8%, and 3%, respectively for bank holding companies and banks. 16. PENDING INVESTMENT IN AMERICAN CENTURY COMPANIES, INC. 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 in early 1998, pending approval by 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. The investment will be accounted for under the equity method of accounting. 18 Page 18 PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS J.P. Morgan & Co. Incorporated reported net income of $396 million in the third quarter of 1997, up 43% from $276 million in the third quarter of 1996. Earnings per share for the quarter were $1.96, compared with $1.32 a year ago. In 1996, third quarter earnings included a special charge of $71 million ($42 million after tax, or $0.21 per share) related to the formation of a strategic alliance to manage parts of the firm's global technology infrastructure. Net income for the first nine months of 1997 totaled $1.194 billion, an increase from $1.155 billion a year ago. Earnings per share in the first nine months were $5.84 versus $5.60. THIRD QUARTER 1997 RESULTS AT A GLANCE
Third quarter Second quarter - ---------------------------------------------------------------------------------------- In millions of dollars, except per share data 1997 1996 1997 - ---------------------------------------------------------------------------------------- Revenues $ 1,916 $ 1,549 $ 1,791 Operating expenses (1,326) (1,137) (1,241) Income taxes (194) (136) (176) - ---------------------------------------------------------------------------------------- Net income 396 276 374 Net income per share $ 1.96 $ 1.32 $ 1.85 - ---------------------------------------------------------------------------------------- Dividends declared per share $ 0.88 $ 0.81 $ 0.88
REVENUES in the third quarter rose 24% from the same period a year ago. - Finance and Advisory revenues rose 28% to $548 million, reflecting continued growth in advisory services and debt and equity underwriting. - Market Making revenues, up 23% to $669 million, were strong and diversified. - Asset Management and Servicing revenues increased 23% to $407 million, reflecting growth in both institutional investment management and private client services. - Equity Investments revenues rose to $66 million from $59 million. - Proprietary Investing and Trading revenues were $241 million, up from $203 million. OPERATING EXPENSES, excluding the 1996 third quarter special charge of $71 million, rose 24% in the 1997 third quarter from the same period a year ago. 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, Morgan will purchase a 45% economic interest in American Century for approximately $900 million; Morgan will have an option to increase that interest to 50% at the end of three years. The transaction is expected to close in early 1998, pending approval by 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. 19 PAGE 19 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, including positions taken to facilitate client transactions. Two sectors comprise proprietary activities that we conduct exclusively for our own account: Equity Investments and Proprietary Investing and Trading. 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 nine months ended September 30, 1997 and 1996.
Asset TOTAL Finance Management CLIENT- Proprietary TOTAL and Market and FOCUSED Equity Investing PROPRIETARY Corporate CONSOL- In millions Advisory Making Servicing ACTIVITIES Investments and Trading ACTIVITIES Items IDATED - ------------------------------------------------------------------------------------------------------------------------------------ THIRD QUARTER 1997 Total revenues $548 $669 $407 $1,624 $66 $241 $307 ($15) $1,916 Total expenses 343 528 339 1,210 10 49 59 57 1,326 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax income 205 141 68 414 56 192 248 (72) 590 - ------------------------------------------------------------------------------------------------------------------------------------ THIRD QUARTER 1996 Total revenues 429 545 330 1,304 59 203 262 (17) 1,549 Total expenses 261 420 282 963 7 33 40 134 1,137 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax income 168 125 48 341 52 170 222 (151) 412 - ------------------------------------------------------------------------------------------------------------------------------------ INCREASE/(DECREASE), THIRD QUARTER 1997 VS. THIRD QUARTER 1996 Total revenues 119 124 77 320 7 38 45 2 367 Total expenses 82 108 57 247 3 16 19 (77) 189 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax income 37 16 20 73 4 22 26 79 178 - ------------------------------------------------------------------------------------------------------------------------------------ NINE MONTHS 1997 Total revenues 1,480 2,050 1,174 4,704 239 633 872 (36) 5,540 Total expenses 996 1,457 959 3,412 28 140 168 178 3,758 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax income 484 593 215 1,292 211 493 704 (214) 1,782 - ------------------------------------------------------------------------------------------------------------------------------------ NINE MONTHS 1996 Total revenues 1,271 1,955 1,026 4,252 251 634 885 (87) 5,050 Total expenses 788 1,271 827 2,886 23 109 132 308 3,326 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax income 483 684 199 1,366 228 525 753 (395) 1,724 - ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE), NINE MONTHS 1997 VS. NINE MONTHS 1996 Total revenues 209 95 148 452 (12) (1) (13) 51 490 Total expenses 208 186 132 526 5 31 36 (130) 432 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax income 1 (91) 16 (74) (17) (32) (49) 181 58 - ------------------------------------------------------------------------------------------------------------------------------------
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. 20 PAGE 20 FINANCE AND ADVISORY The Finance and Advisory sector includes results of our Advisory, Debt and Equity Underwriting, and Credit activities. Revenues in the third quarter increased 28% to $548 million from a year ago. Revenues from advisory services and debt and equity underwriting in both developed and emerging markets increased 74% to $328 million, reflecting record levels of investment banking activity. Revenues from the global credit business declined to $220 million from $240 million a year ago, primarily because of lower syndication revenues. Market share increased in both debt and equity underwriting and mergers and acquisitions activity. According to Securities Data Co., J.P. Morgan ranked sixth in U.S. debt and equity underwriting for the first nine months of 1997, and market share grew to 8.7% from 6.9% a year ago. In completed mergers and acquisitions transactions worldwide, Morgan also ranked sixth on a year-to-date basis; market share rose to 10.7%, compared with 8.9% in the prior year. As arranger of syndicated loans, J.P. Morgan ranked second globally, according to Loan Pricing Corporation, for the first nine months of 1997, unchanged from a year earlier. Expenses in the third quarter of 1997 increased 31% to $343 million compared with $261 million in the third 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 $205 million in the third quarter of 1997 compared with $168 million a year ago. Revenues for the first nine months of 1997 increased to $1.480 billion from $1.271 billion in 1996. Expenses for the same period increased to $996 million from $788 million in the nine months ended September 30, 1996. Year-to-date pretax income was $484 million in 1997, as compared to $483 million for the first nine months of 1996. MARKET MAKING The Market Making sector includes results of our Fixed Income, Equities, Foreign Exchange, and Commodities activities. Total revenues were $669 million in the 1997 third quarter, compared with $545 million a year ago. Fixed income revenues in developed markets increased 16% to $333 million, with especially strong results in Europe. In emerging markets, market-making revenues were $111 million, down from $153 million a year ago. In equities, market making revenues were up 83% to $106 million. Equity commissions increased sharply, reflecting growing volumes and market share on U.S. and European exchanges; equity derivative revenues also grew. Foreign exchange revenues rose more than 70% to $99 million on strong client demand in active markets. Commodities revenues were $20 million in the current period versus a loss of $10 million a year ago. Total expenses of $528 million increased 26% from the third quarter of 1996. The Market Making sector recorded pretax income of $141 million in the third quarter of 1997, compared with $125 million in the third quarter of 1996. Revenues for the nine month period were $2.050 billion compared with $1.955 billion a year earlier. Expenses for the same period were $1.457 billion compared to $1.271 billion in the nine months ended September 30, 1996. Year-to-date pretax income was $593 million in 1997, as compared to $684 million for the first nine 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 23% to $407 million in the 1997 third quarter from a year ago. Revenues generated from institutional investment management activities and services for private clients increased 23% to $259 million. Assets under management were $244 billion at September 30, 1997, compared with $197 billion at September 30, 1996. Futures and Options Brokerage as well as Euroclear-related revenues also increased. Private clients accounted for approximately $160 million of revenues from the firm's client-focused activities in the third quarter, up 31% from 1996. Of this amount, $51 million is recorded in the Finance and Advisory and Market Making sectors. Expenses associated with the Asset Management and Servicing sector were up 20%, to $339 million in the third quarter of 1997, compared with $282 million in the third quarter of 1996. 21 Page 21 The Asset Management and Servicing sector recorded pretax income of $68 million in the third quarter of 1997 compared with $48 million in the year-earlier period. Revenues for the nine month period increased to $1.174 billion from $1.026 billion a year-earlier. Expenses for the same period were $959 million versus $827 million for the nine months ended September 30, 1996. Year-to-date pretax income was $215 million, as compared to $199 million for the first nine months of 1996. EQUITY INVESTMENTS The Equity Investments sector includes results from our proprietary equity investment portfolio management activities. Total reported revenues were $66 million in the third quarter, compared with $59 million a year ago. Included in reported revenues were net gains of $54 million in the current quarter versus $56 million a year ago. Equity Investments recorded pretax income of $56 million in the third quarter of 1997 compared with $52 million in the third quarter of 1996. Revenues for the nine month period were $239 million compared with $251 million a year earlier. Year-to-date pretax income was $211 million in 1997, as compared to $228 million for the first nine months of 1996. On a total return basis, combining reported revenues with the change in net unrealized appreciation, Equity Investments earned $176 million in the 1997 third quarter, primarily related to investments in the insurance and financial services industries. A year ago, total return was a loss of $48 million. Total return for the nine months ended September 30, 1997, was $363 million compared with $109 million for the nine months ended September 30, 1996. As our investment strategy covers a longer-term horizon, total return viewed over shorter periods will reflect the impact of short-term market movements, including industry specific events. PROPRIETARY INVESTING AND TRADING The Proprietary Investing and Trading sector includes results from our market risk positioning and capital and liquidity management activities. Total reported revenues were $241 million for the 1997 third quarter, compared with $203 million a year ago. The Proprietary Investing and Trading sector recorded pretax income of $192 million in the third quarter of 1997, compared with $170 million in the same period a year ago. Revenues for the nine months of 1997 were $633 million, essentially unchanged from $634 million in the prior year. Year-to-date pretax income was $493 million in 1997, as compared to $525 million for the first nine months of 1996. Total return - reported revenues plus the change in net unrealized appreciation - for the 1997 third quarter was $173 million, compared with $165 million in 1996. Total return for the nine month period ended September 30, 1997 was $597 million compared with $360 million for the nine months ended September 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 in the third quarter of 1996 included a $71 million special charge related to the formation of a strategic alliance to manage parts of the firm's global technology infrastructure. Corporate Items also includes revenues and expenses of $30 million, in the third quarter of 1996, from custody and cash processing activities, previously exited by Morgan. Corporate items for the nine months of 1997 includes $80 million 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 year-to-date period. Corporate items in 1997 also includes a charge of $28 million incurred in connection with the renovation of office space in New York. In addition to the $71 million special charge discussed above, Corporate Items for the nine months of 1996 included revenues and expenses of $106 million and $120 million respectively, related to custody and cash processing activities, previously exited by Morgan. 22 PAGE 22 The following table summarizes revenues by major activity included within each of our business sectors for the three and nine months ended September 30, 1997 and 1996.
Third Third Nine Nine Quarter Quarter Increase/ Months Months Increase/ In millions 1997 1996 (Decrease) 1997 1996 (Decrease) - ------------------------------------------------------------------------------------------------------------------------------------ REVENUES Advisory & Underwriting $ 328 $ 189 $ 139 $ 804 $ 589 $ 215 Global Credit 220 240 (20) 676 682 (6) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCE AND ADVISORY 548 429 119 1,480 1,271 209 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Income 333 286 47 864 1,019 (155) Emerging Markets 111 153 (42) 420 428 (8) Equities 106 58 48 416 283 133 Foreign Exchange 99 58 41 302 206 96 Commodities 20 (10) 30 48 19 29 - ------------------------------------------------------------------------------------------------------------------------------------ MARKET MAKING 669 545 124 2,050 1,955 95 - ------------------------------------------------------------------------------------------------------------------------------------ Asset Management Services * 259 211 48 758 660 98 Securities and Futures Services 148 119 29 416 366 50 - ------------------------------------------------------------------------------------------------------------------------------------ ASSET MANAGEMENT AND SERVICING 407 330 77 1,174 1,026 148 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CLIENT-FOCUSED REVENUES 1,624 1,304 320 4,704 4,252 452 - ------------------------------------------------------------------------------------------------------------------------------------ EQUITY INVESTMENTS 66 59 7 239 251 (12) - ------------------------------------------------------------------------------------------------------------------------------------ PROPRIETARY INVESTING AND TRADING 241 203 38 633 634 (1) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL PROPRIETARY REVENUES 307 262 45 872 885 (13) - ------------------------------------------------------------------------------------------------------------------------------------ Corporate Items (15) (17) 2 (36) (87) 51 - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED REVENUES 1,916 1,549 367 5,540 5,050 490 - ------------------------------------------------------------------------------------------------------------------------------------
* Includes Investment Management and Private Client Services 23 PAGE 23 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 - ------------------------------------------------------------------------------- ------------ THIRD QUARTER 1997 Revenues $ 809 $ 142 $ 493 $ 180 $ 1,624 Expenses 633 57 387 133 1,210 - ------------------------------------------------------------------------------- ------------ Pretax Income 176 85 106 47 414 - ------------------------------------------------------------------------------- ------------ THIRD QUARTER 1996 Revenues 665 140 362 137 1,304 Expenses 501 45 310 107 963 - ------------------------------------------------------------------------------- ------------ Pretax Income 164 95 52 30 341 - ------------------------------------------------------------------------------- ------------ NINE MONTHS 1997 Revenues 2,291 450 1,442 521 4,704 Expenses 1,791 162 1,087 372 3,412 - ------------------------------------------------------------------------------- ------------ Pretax Income 500 288 355 149 1,292 - ------------------------------------------------------------------------------- ------------ NINE MONTHS 1996 Revenues 2,026 435 1,349 442 4,252 Expenses 1,501 139 929 317 2,886 - ------------------------------------------------------------------------------- ------------ Pretax Income 525 296 420 125 1,366 - ------------------------------------------------------------------------------- ------------
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 13% in the nine months ended September 30, 1997, compared with the corresponding period of the prior year. Finance and advisory revenues rose on higher advisory services and debt and equity underwriting revenues. Market making revenues increased on strong results from equities and foreign exchange; asset management and servicing revenues also grew. Client revenues in Latin America rose 3% for the nine months ended September 30, 1997 versus a year ago, as strong increases in the finance and advisory and asset management and servicing sectors were offset by declines in the market making sector. Client revenues in Europe were 7% higher for the year-to-date period ended September 30, 1997, compared with the same 1996 period. Finance and advisory revenues increased on strong advisory and underwriting revenues; asset management and servicing also produced strong results. Offsetting such increases were lower market making revenues as lower fixed income revenues more than offset increases in other market making activities. Asia Pacific client revenues grew 18% in the nine months ended September 30, 1997 versus a year ago, driven by increases in the market making and asset management and servicing sectors. The finance and advisory sector's revenues were essentially unchanged. 24 PAGE 24 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 September 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 September 30, 1997, average DEaR for our aggregate trading and investing activities across all market risks was approximately $29 million and ranged from $22 million to $39 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 September 30, 1997, average DEaR for our trading activities was approximately $21 million and ranged from $15 million to $28 million. Such DEaR represented the combination of interest rate risk of approximately $16 million, foreign exchange rate risk of approximately $6 million, equities risk of approximately $7 million, commodity risk of approximately $3 million and all other market risks of approximately $7 million, offset by approximately ($18) 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 instruments and spread risk associated with our mortgage-backed securities portfolio. For the twelve month period ended September 30, 1997, average DEaR for proprietary investing activities was approximately $20 million and ranged from $12 million to $28 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 September 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. 25 PAGE 25 FINANCIAL REVIEW REVENUES Revenues were $1.916 billion in the third quarter of 1997, compared with $1.549 billion in the year ago quarter. For the nine months ended September 30, 1997, revenues were $5.540 billion versus $5.050 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 11% to $472 million from the third quarter of 1996. This increase resulted primarily from higher net interest revenue from our market-making and asset management and servicing 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 nine months of 1997, net interest revenue increased 16% to $1.417 billion from the corresponding 1996 period. Trading revenue was $657 million in the third quarter of 1997 compared with $510 million a year ago. Year-to-date trading revenue decreased to $1.831 billion from $1.965 billion for the first nine months of 1996, down 7%. The following table presents trading revenue, disaggregated by principal product groupings, and total trading-related net interest revenue. It does not represent total revenues generated by our activities, and accordingly, does not reflect the integrated nature of our business as described in Business Sector Analysis (see page 19).
Total Net Fixed Foreign Commod- Proprietary Trading Interest Combined In millions Income Equities Exchange ities Trading Revenue Revenue Totals ----------------------------------------------------------------------------------------------------------------------- Third Quarter 1997 $ 416 $ 51 $ 78 $17 $95 $657 $118 $775 Third Quarter 1996 403 43 59 (15) 20 510 65 575 Nine Months 1997 1,012 332 270 32 185 1,831 399 2,230 Nine Months 1996 1,267 261 236 24 177 1,965 137 2,102 -----------------------------------------------------------------------------------------------------------------------
Fixed income trading revenue increased to $416 million from $403 million in the year-earlier quarter. Trading revenue from equities grew 19% to $51 million. Foreign exchange trading revenue increased 32% to $78 million from a year ago, on strong client demand in active markets. Trading revenue from commodities was $17 million, compared with a loss of $15 million in the 1996 third quarter. Proprietary trading revenue grew to $95 million from $20 million in the year earlier quarter. Investment banking revenue rose 37% to $320 million in the third quarter of 1997, reflecting record levels of investment banking activity. Underwriting revenue grew to $132 million from $83 million in the year earlier quarter. Advisory and syndication fees rose to $188 million from $150 million a year ago. Investment banking revenue for the first nine months of 1997 was $840 million, compared with $644 million for the first nine months of 1996. Underwriting revenue for the first nine months of 1997 was $369 million, versus $259 million for the same 1996 period. Advisory and syndication fees for the first nine months were $471 million, compared to $385 million for the same period of 1996. Investment management revenue increased 23% to $201 million in the 1997 third quarter from a year ago. Assets under management were $244 billion at September 30, 1997, versus $197 billion at September 30, 1996. Investment management revenue for the first nine months of 1997 increased 18% to $584 million, over the same 1996 period. 26 PAGE 26 Fees and commissions were $164 million, up 20% from $137 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 nine months of 1997, fees and commissions revenue was $468 million, compared to $430 million in the same 1996 period. Investment securities revenue was $67 million in the third quarter of 1997 and $68 million in the prior year quarter. Net gains from positions associated with our Equity Investment activities were $54 million in the current quarter compared to $56 million a year ago. Also included in investment securities revenue were net realized gains of $10 million and $11 million on sales of debt investment securities in the current and year ago quarters, respectively. For the current nine month period, investment securities revenue was $242 million, versus $218 million for the first nine months of 1996. Other revenue was $35 million in the third quarter, compared with $12 million a year earlier. Other revenue for the first nine months of 1997 was $158 million, compared with $82 million for the first nine months of 1996. Other revenue includes $12 million and $85 million for the three and nine months ended September 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. OPERATING EXPENSES Operating expenses were $1.326 billion in the 1997 third quarter, compared with $1.137 billion in the third quarter of 1996. Excluding the technology-related special charge of $71 million in last year's third quarter, 1997 third quarter expenses grew 24% from a year earlier. The increase reflects continued spending on investment banking, equities, and asset management capabilities and higher levels of client-related business activity. Also contributing to the rise were expenditures related to initiatives to prepare for the year 2000 and the anticipated conversion to a single European currency. For the nine months ended September 30, 1997, operating expenses were $3.758 billion, versus $3.326 billion a year ago. At September 30, 1997, staff totaled 16,525 employees, compared with 15,188 employees at September 30, 1996. Income tax expense in the third quarter totaled $194 million, based on an effective tax rate of 33%, the same rate used in the year earlier quarter. For the nine months ended September 30, 1997 and 1996, the effective tax rate was 33%. 27 Page 27 ASSET QUALITY Total assets were $270 billion at September 30, 1997, compared with $250 billion at June 30, 1997. At September 30, 1997 the aggregate allowance for credit losses was $1.096 billion versus $1.110 billion at June 30, 1997. Nonperforming assets decreased to $84 million at September 30, 1997, from $108 million at June 30, 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 third quarter. 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 September 30, 1997, are listed in the following table.
Cross-border In millions outstandings - -------------------------------------------------------------------------------- France $4,919 United Kingdom 3,810 - --------------------------------------------------------------------------------
At September 30, 1997, Cross-border outstandings in Switzerland were $2,424 million, between 0.75% and 1.0% of total assets. STOCKHOLDERS' EQUITY Total stockholders' equity was approximately $11.6 billion at September 30, 1997. Stockholders' equity included approximately $598 million of net unrealized appreciation on debt investment securities and marketable equity investment securities, net the related deferred tax liability of $353 million. The net unrealized appreciation on debt investment securities was $343 million at September 30, 1997. The net unrealized appreciation on marketable equity investment securities was $608 million at September 30, 1997. Included in the table below are selected ratios based upon stockholders' equity.
September 30 December 31 September 30 Dollars in billions, except share data 1997 1996 1996 - ------------------------------------------------------------------------------------- Total stockholders' equity $ 11.6 $ 11.4 $ 11.1 Annualized rate of return on average common stockholders' equity (a) (b) 14.3% 15.3% 10.3% As percent of period-end total assets: Common equity 4.1 4.8 4.9 Total equity 4.3 5.2 5.2 Book value per common share (c) $56.83 $54.43 $52.62 - -------------------------------------------------------------------------------------
(a) Represents the annualized rate of return on average common stockholders' equity for the three months ended September 30, 1997, December 31, 1996, and September 30, 1996. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 15.0%, 15.9%, and 10.6% for the three months ended September 30, 1997, December 31, 1996, and September 30, 1996, respectively. (b) The annualized rate of return on average common stockholders' equity for the nine months ended September 30, 1997 and 1996 was 14.7% and 14.8%, respectively. Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 15.4% and 15.5% for the nine months ended September 30, 1997 and 1996, respectively. (c) Excluding the impact of SFAS No. 115, the book value per common share would have been $53.73, $52.08, and $51.01 for the three months ended September 30, 1997, December 31, 1996, and September 30, 1996, respectively. 28 PAGE 28 REGULATORY CAPITAL REQUIREMENTS 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 September 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 September 30, 1997. As of September 30, 1997, J.P. Morgan and Morgan Guaranty adopted the Federal Reserve Board's new market risk capital guidelines for calculation of risk-based capital ratios, in advance of the mandatory implementation date of January 1, 1998. The new framework amends the existing guidelines by incorporating a measure of market risk for trading positions. In addition, the capital and assets of the Section 20 subsidiary, J.P. Morgan Securities Inc., are no longer excluded from the calculations for J.P. Morgan, the bank holding company. The effect of SFAS No. 115 continues to be excluded. Prior period ratios have not been restated.
September 30 December 31 September 30 Dollars in billions 1997 1996 1996 - -------------------------------------------------------------------------------- Risk-based capital J.P. Morgan Tier 1 risk-based capital $ 11.9 (a) (a) Total risk-based capital 17.2 (a) (a) Risk adjusted assets 147.7 (a) (a) Capital ratios J.P. Morgan Tier 1 ratio 8.1% (a) (a) Total ratio 11.6 (a) (a) Leverage ratio 4.5 (a) (a) Morgan Guaranty Tier 1 ratio 7.7% (b) (b) Total ratio 10.4 (b) (b) Leverage ratio 5.2 (b) (b) - --------------------------------------------------------------------------------
(a)In accordance with Federal Reserve Board guidelines followed prior to September 30, 1997, the prior period 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. For J.P. Morgan, the tier 1, total, and leverage ratios, computed under former guidelines, were 8.8%, 12.2%, and 5.9%, respectively, at December 31, 1996, and 8.1%, 11.7%, and 6.2%, respectively, at September 30, 1996. The tier 1 capital, total capital and risk adjusted assets amounts, computed under former guidelines, were $10.9 billion, $15.1 billion and $123.9 billion, respectively at December 31, 1996, and $9.9 billion, $14.2 billion and $122.1 billion, respectively at September 30, 1996. (b)In accordance with Federal Reserve Board guidelines followed prior to September 30, 1997, the tier 1 , total, and leverage ratios, for Morgan Guaranty, were 8.2%, 11.5%, and 5.3%, respectively, at December 31, 1996, and 7.7%, 10.5%, and 5.9%, respectively, at September 30, 1996. 29 Page 29 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ------------------------------------------------------------------------------------------------------------------------------- Dollars in millions, Interest and average rates on a taxable-equivalent basis Three months ended ------------------------------------------------------------------------------------- September 30, 1997 September 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. $ 1,896 $ 51 10.67% $ 2,406 $ 30 4.96% Debt investment securities in offices in the U.S. (a): U.S. Treasury 1,259 23 7.25 1,367 25 7.28 U.S. state and political subdivision 1,187 35 11.70 1,523 44 11.49 Other 18,274 290 6.30 16,541 273 6.57 Debt investment securities in offices outside the U.S. (a) 3,753 75 7.93 3,740 66 7.02 Trading account assets: In offices in the U.S. 25,364 389 6.08 15,596 240 6.12 In offices outside the U.S. 38,516 644 6.63 30,369 579 7.58 Securities purchased under agreements to resell and federal funds sold, In offices in the U.S. 15,970 225 5.59 25,382 333 5.22 In offices outside the U.S. 25,457 318 4.96 19,267 236 4.87 Securities borrowed, mainly in offices in the U.S. 37,589 457 4.82 26,485 338 5.08 Loans: In offices in the U.S. 5,046 90 7.08 5,633 100 7.06 In offices outside the U.S. 26,155 431 6.54 21,343 340 6.34 Other interest-earning assets (b): In offices in the U.S. 732 69 * 824 29 * In offices outside the U.S. 525 81 * 933 62 * - ------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 201,723 3,178 6.25 171,409 2,695 6.25 Allowance for credit losses (c) (918) (1,114) Cash and due from banks 453 622 Other noninterest-earning assets 60,856 40,535 - ------------------------------------------------------------------------------------------------------------------------------- Total assets 262,114 211,452 - -------------------------------------------------------------------------------------------------------------------------------
Interest and average rates applying to the following asset categories have been adjusted to a taxable-equivalent basis: Debt investment securities in offices in the U.S.; Trading account assets in offices in the U.S.; and Loans in offices in the U.S. The applicable tax rate used to determine these adjustments was approximately 41% for the three months ended September 30, 1997 and 1996. (a) For the three months ended September 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 September 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 September 30, 1996 is based on the aggregate allowance for credit losses. * Not meaningful 30 PAGE 30 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ------------------------------------------------------------------------------------------------------------------------------------ Dollars in millions, Interest and average rates on a taxable-equivalent basis Three months ended ------------------------------------------------------------------ September 30, 1997 September 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. $ 9,818 $ 140 5.66% $ 3,754 $ 48 5.09% In offices outside the U.S. 46,755 570 4.84 44,029 578 5.22 Trading account liabilities: In offices in the U.S. 11,813 199 6.68 9,199 154 6.66 In offices outside the U.S. 14,834 224 5.99 11,094 204 7.32 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. 66,932 888 5.26 62,522 799 5.08 Commercial paper, mainly in offices in the U.S. 5,461 71 5.16 4,489 61 5.41 Other interest-bearing liabilities: In offices in the U.S. 14,034 212 5.99 13,900 196 5.61 In offices outside the U.S. 5,515 61 4.39 2,322 53 9.08 Long-term debt, mainly in offices in the U.S. 19,959 303 6.02 10,866 157 5.75 Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 21 7.68 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 196,271 2,689 5.44 162,175 2,250 5.52 Noninterest-bearing deposits: In offices in the U.S. 926 1,981 In offices outside the U.S. 589 437 Other noninterest-bearing liabilities 52,888 35,838 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 250,674 200,431 Stockholders' equity 11,440 11,021 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity 262,114 211,452 Net yield on interest-earning assets 0.96 1.03 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest earnings 489 445 - ------------------------------------------------------------------------------------------------------------------------------------
31 PAGE 31 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ------------------------------------------------------------------------------------------------------------------------------------ Dollars in millions, Interest and average rates on a taxable-equivalent basis Nine months ended ------------------------------------------------------------------------------------------ September 30, 1997 September 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. $ 1,944 $ 124 8.53% $ 2,006 $ 81 5.39% Debt investment securities in offices in the U.S. (a): U.S. Treasury 1,321 73 7.39 1,103 62 7.51 U.S. state and political subdivision 1,295 114 11.77 1,622 140 11.53 Other 17,699 848 6.41 17,632 834 6.32 Debt investment securities in offices outside the U.S. (a) 3,972 216 7.27 4,093 197 6.43 Trading account assets: In offices in the U.S. 23,544 1,103 6.26 15,748 714 6.06 In offices outside the U.S. 39,850 2,017 6.77 26,745 1,545 7.72 Securities purchased under agreements to resell and federal funds sold, In offices in the U.S. 15,757 648 5.50 26,837 1,019 5.07 In offices outside the U.S. 24,137 854 4.73 17,100 720 5.62 Securities borrowed, mainly in offices in the U.S. 34,625 1,284 4.96 24,441 919 5.02 Loans: In offices in the U.S. 4,955 281 7.58 6,441 326 6.76 In offices outside the U.S. 24,833 1,206 6.49 21,162 1,000 6.31 Other interest-earning assets (b): In offices in the U.S. 717 131 * 1,030 88 * In offices outside the U.S. 753 238 * 1,095 207 * - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 195,402 9,137 6.25 167,055 7,852 6.28 Allowance for credit losses (c) (915) (1,122) Cash and due from banks 804 886 Other noninterest-earning assets 51,943 41,864 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets 247,234 208,683 - ------------------------------------------------------------------------------------------------------------------------------------
Interest and average rates applying to the following asset categories have been adjusted to a taxable-equivalent basis: Debt investment securities in offices in the U.S., Trading account assets in offices in the U.S., and Loans in offices in the U.S. The applicable tax rate used to determine these adjustments was approximately 41% for the nine months ended September 30, 1997 and 1996. (a) For the nine months ended September 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 September 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 September 30, 1996 is based on the aggregate allowance for credit losses. * Not meaningful 32 PAGE 32 CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS J.P. Morgan & Co. Incorporated
- ---------------------------------------------------------------------------------------------------------------------------- Dollars in millions, Interest and average rates on a taxable-equivalent basis Nine months ended ------------------------------------------------------------------------------- September 30, 1997 September 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. $ 9,600 $ 401 5.58% $ 2,625 $ 95 4.83% In offices outside the U.S. 45,793 1,642 4.79 45,181 1,800 5.32 Trading account liabilities: In offices in the U.S. 10,800 549 6.80 8,351 395 6.32 In offices outside the U.S. 13,665 629 6.15 10,802 562 6.95 Securities sold under agreements to repurchase and federal funds purchased, mainly in offices in the U.S. 66,703 2,617 5.25 61,381 2,384 5.19 Commercial paper, mainly in offices in the U.S. 4,444 178 5.36 4,151 169 5.44 Other interest-bearing liabilities: In offices in the U.S. 14,889 663 5.95 13,847 588 5.67 In offices outside the U.S. 4,332 171 5.28 2,057 145 9.42 Long-term debt, mainly in offices in the U.S. 16,657 754 6.05 9,976 432 5.78 Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,101 61 7.68 - - - - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 187,984 7,665 5.45 158,371 6,570 5.54 Noninterest-bearing deposits: In offices in the U.S. 1,035 2,441 In offices outside the U.S. 403 823 Other noninterest-bearing liabilities 46,498 36,187 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 235,920 197,822 Stockholders' equity 11,314 10,861 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity 247,234 208,683 Net yield on interest-earning assets 1.01 1.03 - ------------------------------------------------------------------------------------------------------------------------- Net interest earnings 1,472 1,282 - -------------------------------------------------------------------------------------------------------------------------
33 PAGE 33 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 September 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 September 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 $58.4 billion at September 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 $ 22.6 $ 6.1 $ 4.2 $ 2.2 $ 1.2 $ 12.7 $ 49.0 Weighted average: Receive rate 5.9% 6.6% 6.5% 6.3% 6.8% 6.1% 6.2% Pay rate 5.7 5.7 6.0 5.8 5.8 5.8 5.8 Pay fixed swaps Notional amount $ 21.0 $ 4.0 $ 9.0 $ 5.5 $ 0.6 $ 9.7 $ 49.8 Weighted average: Receive rate 5.7% 5.7% 5.8% 5.8% 5.8% 5.8% 5.7% Pay rate 5.7 6.2 6.3 6.5 6.9 6.8 6.2 INTEREST RATE SWAPS - NON-U.S. DOLLAR Receive fixed swaps Notional amount $ 25.4 $ 9.1 $ 7.7 $ 2.7 $ 2.3 $ 4.5 $ 51.7 Weighted average: Receive rate 4.6% 4.7% 4.8% 4.6% 5.4% 5.8% 4.8% Pay rate 3.0 3.3 4.2 3.5 3.9 3.6 3.4 Pay fixed swaps Notional amount $ 19.5 $ 9.3 $ 7.2 $ 2.7 $ 1.8 $ 3.7 $ 44.2 Weighted average: Receive rate 3.4% 3.3% 4.3% 3.6% 3.9% 3.3% 3.6% Pay rate 5.5 4.6 5.0 5.1 5.3 5.9 5.2 - ---------------------------------------------------------------------------------------------------------------------------------- Total notional amount $ 88.5 $ 28.5 $ 28.1 $ 13.1 $ 5.9 $ 30.6 $194.7 - ----------------------------------------------------------------------------------------------------------------------------------
Not included in the table above are $4.2 billion and $6.1 billion of notional amounts related to currency swaps and basis swaps, respectively. 34 PAGE 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12. Statement re computation of ratios (incorporated by reference to Exhibit 12 to J.P. Morgan's report on Form 8-K, dated October 13, 1997) 27. Financial data schedule (b) Reports on Form 8-K The following reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended September 30, 1997: July 10, 1997 (Items 5 and 7) Reported the issuance by J.P. Morgan of a press release announcing its earnings for the three-month and six-month periods ended June 30, 1997. July 10, 1997 (Item 5) Reported the issuance by J.P. Morgan of a press release announcing that Paul A. Allaire and Ellen V. Futter have been elected directors of J.P. Morgan & Co. Incorporated, effective September 1, 1997. July 30, 1997 (Item 5) Reported the issuance by J.P. Morgan of a press release announcing that it agreed to form a business partnership with American Centuries, Inc. to pursue growth opportunities in asset management and personal financial services. September 11, 1997 (Item 5 and 7) Amended certain exhibits to a commodity-indexed preferred securities registration statement, previously filed with the Securities and Exchange Commission during 1996. 35 PAGE 35 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: November 14, 1997 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, INCLUDED IN THE FORM 10-Q. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 813 1,813 44,058 115,144 22,258 0 0 31,995 546 269,595 55,526 97,217 83,828 21,392 0 694 502 10,436 269,595 1,477 1,209 6,396 9,082 2,043 7,665 1,417 0 228 3,758 1,782 1,194 0 0 1,194 5.84 5.82 1.01 80 0 0 0 1,116 55 36 1,096 135 37 924
-----END PRIVACY-ENHANCED MESSAGE-----