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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-5885
J.P. MORGAN & CO. INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 13-2625764
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 Wall Street, New York, NY
(Address of principal executive offices)
10260-0060
(Zip Code)
(212) 483-2323
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes/ X / No/ /
Number of shares outstanding of each of the registrant's classes of common
stock at October 31, 1996:
Common Stock, $2.50 Par Value 185,205,628 Shares
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PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Financial statement information is set forth within this document on the pages
indicated:
Page
Three-month Consolidated statement of income
J.P. Morgan & Co. Incorporated 3
Nine-month Consolidated statement of income
J.P. Morgan & Co. Incorporated 4
Consolidated balance sheet
J.P. Morgan & Co. Incorporated 5
Consolidated statement of changes in stockholders' equity
J.P. Morgan & Co. Incorporated 6
Consolidated statement of cash flows
J.P. Morgan & Co. Incorporated 7
Consolidated statement of condition
Morgan Guaranty Trust Company of New York 8
Notes to Consolidated financial statements
J.P. Morgan & Co. Incorporated 9-17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of business sector results; Discussion of
the financial condition and results of operations;
Discussion of risk management; Statements of consolidated
average balances and net interest earnings of J.P. Morgan
& Co. Incorporated ("J.P. Morgan") for the three
months and nine months ended September 30, 1996; and
Table of asset and liability management derivatives. 18-35
PART II -- OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 36
SIGNATURES 37
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3
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
In millions,
except per share data Three months ended
--------------------------------------------------------------------
September 30 September 30 Increase/ June 30 Increase/
1996 1995 (Decrease) 1996 (Decrease)
------------ ------------ --------- ------- ----------
NET INTEREST REVENUE
Interest revenue $ 2,675 $ 2,453 $ 222 $ 2,559 $ 116
Interest expense 2,250 1,946 304 2,162 88
- --------------------------------------------------------------------------------------------------
Net interest revenue 425 507 (82) 397 28
NONINTEREST REVENUE
Trading revenue 510 399 111 697 (187)
Investment banking revenue 233 195 38 210 23
Credit-related fees 39 38 1 38 1
Investment management fees 164 150 14 172 (8)
Operational service fees 98 137 (39) 104 (6)
Net investment securities
gains (losses) 11 (22) 33 (51) 62
Other revenue 69 145 (76) 194 (125)
- --------------------------------------------------------------------------------------------------
Total noninterest revenue 1,124 1,042 82 1,364 (240)
Total revenue 1,549 1,549 -- 1,761 (212)
OPERATING EXPENSES
Employee compensation and
benefits 685 648 37 737 (52)
Net occupancy 74 87 (13) 76 (2)
Technology and communications 248 169 79 158 90
Other expenses 130 118 12 133 (3)
- --------------------------------------------------------------------------------------------------
Total operating expenses 1,137 1,022 115 1,104 33
Income before income taxes 412 527 (115) 657 (245)
Income taxes 136 167 (31) 217 (81)
- --------------------------------------------------------------------------------------------------
Net income 276 360 (84) 440 (164)
PER COMMON SHARE
Net income (a) $ 1.32 $ 1.78 ($ 0.46) $ 2.14 ($ 0.82)
Dividends declared 0.81 0.75 0.06 0.81 --
- --------------------------------------------------------------------------------------------------
(a) Earnings per share amounts represent both primary and fully diluted earnings
per share.
See notes to financial statements.
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CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
In millions,
except per share data Nine months ended
------------------------------------
September 30 September 30 Increase/
1996 1995 (Decrease)
------------ ------------ ----------
NET INTEREST REVENUE
Interest revenue $ 7,788 $ 7,328 $ 460
Interest expense 6,570 5,813 757
- -------------------------------------------------------------------------------
Net interest revenue 1,218 1,515 (297)
NONINTEREST REVENUE
Trading revenue 1,965 1,007 958
Investment banking revenue 644 426 218
Credit-related fees 115 122 (7)
Investment management fees 493 418 75
Operational service fees 315 417 (102)
Net investment securities
gains (losses) (28) 20 (48)
Other revenue 328 461 (133)
- -------------------------------------------------------------------------------
Total noninterest revenue 3,832 2,871 961
Total revenue 5,050 4,386 664
OPERATING EXPENSES
Employee compensation and
benefits 2,152 1,890 262
Net occupancy 223 246 (23)
Technology and communications 564 506 58
Other expenses 387 366 21
- -------------------------------------------------------------------------------
Total operating expenses 3,326 3,008 318
Income before income taxes 1,724 1,378 346
Income taxes 569 448 121
- -------------------------------------------------------------------------------
Net income 1,155 930 225
PER COMMON SHARE
Net income (a) $ 5.60 $ 4.62 $ 0.98
Dividends declared 2.43 2.25 0.18
- -------------------------------------------------------------------------------
(a) Earnings per share amounts represent primary earnings per share for the nine
months ended September 30, 1996 and 1995. Fully diluted earnings per share were
$5.57 and $4.57 for the nine months ended September 30, 1996 and 1995,
respectively.
See notes to financial statements.
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CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
Dollars in millions September 30 June 30 December 31
1996 1996 1995
------------ ------- -----------
ASSETS
Cash and due from banks $ 1,088 $ 651 $ 1,535
Interest-earning deposits with banks 2,193 1,427 1,986
Debt investment securities available for
sale carried at fair value (Cost: $26,341
at September 1996, $22,486 at June 1996,
and $24,154 at December 1995) 26,565 22,712 24,638
Trading account assets 80,784 69,375 69,408
Securities purchased under agreements to
resell ($34,658 at September 1996, $36,488 at
June 1996, and $32,157 at December
1995)and federal funds sold 34,686 36,544 32,157
Securities borrowed 25,430 25,620 19,830
Loans 30,002 29,588 23,453
Less: allowance for credit losses 1,113 1,125 1,130
- ----------------------------------------------------------------------------------------------------
Net loans 28,889 28,463 22,323
Customers' acceptance liability 287 236 237
Accrued interest and accounts receivable 3,585 3,738 3,539
Premises and equipment 3,068 3,387 3,339
Less: accumulated depreciation 1,236 1,492 1,412
- ----------------------------------------------------------------------------------------------------
Premises and equipment, net 1,832 1,895 1,927
Other assets 6,309 8,104 7,299
- ----------------------------------------------------------------------------------------------------
Total assets 211,648 198,765 184,879
- ----------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 2,115 1,906 3,287
In offices outside the U.S. 917 750 744
Interest-bearing deposits:
In offices in the U.S. 6,016 2,498 2,003
In offices outside the U.S. 40,860 43,303 40,404
- ----------------------------------------------------------------------------------------------------
Total deposits 49,908 48,457 46,438
Trading account liabilities 45,601 44,267 45,289
Securities sold under agreements to
repurchase ($58,318 at September 1996, $51,604
at June 1996, and $40,803 at December
1995) and federal funds purchased 61,094 55,114 45,099
Commercial paper 4,448 5,102 2,801
Other liabilities for borrowed money 19,966 16,510 15,129
Accounts payable and accrued expenses 6,255 6,159 5,643
Liability on acceptances 287 236 237
Long-term debt not qualifying as risk-based
capital 8,176 6,109 5,737
Other liabilities 1,095 2,047 4,465
- ----------------------------------------------------------------------------------------------------
196,830 184,001 170,838
Long-term debt qualifying as risk-based
capital 3,740 3,733 3,590
- ----------------------------------------------------------------------------------------------------
Total liabilities 200,570 187,734 174,428
STOCKHOLDERS' EQUITY
Preferred stock (authorized shares:
10,400,000 at September 1996 and June 1996,
and 10,000,000 at December 1995):
Adjustable rate cumulative preferred
stock, $100 par value (issued and
outstanding: 2,444,300) 244 244 244
Variable cumulative preferred stock,
$1,000 par value (issued and outstanding:
250,000) 250 250 250
Fixed cumulative preferred stock, $500
par value (issued and outstanding:
400,000 at September 1996 and June 1996) 200 200 --
Common stock, $2.50 par value (authorized
shares: 500,000,000; issued: 200,684,623 at
September 1996, 200,683,373 at June 1996, and
200,678,373 at December 1995) 502 502 502
Capital surplus 1,442 1,435 1,430
Retained earnings 8,392 8,281 7,731
Net unrealized gains on investment securities,
net of taxes 317 367 566
Other 754 686 552
- ----------------------------------------------------------------------------------------------------
12,101 11,965 11,275
Less: treasury stock (14,767,312 shares at September 1996,
14,083,799 shares at June 1996, and 13,562,755 shares at 1,023 934 824
December 1995) at cost
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 11,078 11,031 10,451
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 211,648 198,765 184,879
- ----------------------------------------------------------------------------------------------------
See notes to financial statements.
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
Dollars in millions Nine months ended
---------------------------
September 30 September 30
1996 1995
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PREFERRED STOCK
Adjustable rate cumulative preferred stock
Balance, January 1 and September 30 $ 244 $ 244
- --------------------------------------------------------------------------------------------------------------------
Variable cumulative preferred stock
Balance, January 1 and September 30 250 250
- --------------------------------------------------------------------------------------------------------------------
Fixed cumulative preferred stock
Balance, January 1 -- --
Shares issued 200 --
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30 200 --
- --------------------------------------------------------------------------------------------------------------------
Total preferred stock, September 30 694 494
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COMMON STOCK
Balance, January 1 and September 30 502 502
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance, January 1 1,430 1,452
Shares issued or distributed under dividend reinvestment plan, various employee benefit
plans, and conversion of debentures, and income tax benefits associated with stock
options 12 (19)
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30 1,442 1,433
- --------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, January 1 7,731 7,044
Net income 1,155 930
Dividends declared on adjustable rate cumulative preferred stock (9) (9)
Dividends declared on variable cumulative preferred stock (7) (9)
Dividends declared on fixed cumulative preferred stock (8) --
Dividends declared on common stock (454) (422)
Dividend equivalents on common stock issuable (16) (8)
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30 8,392 7,526
- --------------------------------------------------------------------------------------------------------------------
NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES
Balance, January 1 566 456
Net change in net unrealized gains, net of taxes (249) 39
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30 317 495
- --------------------------------------------------------------------------------------------------------------------
OTHER
COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 556 369
Deferred stock awards, net 207 75
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30 763 444
- --------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
Balance, January 1 (4) (2)
Translation adjustments (7) (4)
Income tax benefit 2 1
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30 (9) (5)
- --------------------------------------------------------------------------------------------------------------------
Total other, September 30 754 439
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LESS: TREASURY STOCK
Balance, January 1 824 747
Purchases 445 194
Shares distributed under various employee benefit plans (246) (165)
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30 1,023 776
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity, September 30 11,078 10,113
- --------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
Dollars in millions Nine months ended
------------------------------
September 30 September 30
1996 1995
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NET INCOME $1,155 $ 930
Adjustments to reconcile to cash provided by (used in)operating activities:
Noncash items: depreciation, amortization, deferred income taxes, and
stock award plans 597 290
(Increase) decrease in assets:
Trading account assets (11,372) (7,654)
Securities purchased under agreements to resell (2,500) (9,384)
Securities borrowed (5,600) (5,713)
Accrued interest and accounts receivable (46) 2,029
Increase (decrease) in liabilities:
Trading account liabilities 314 8,582
Securities sold under agreements to repurchase 17,515 8,165
Accounts payable and accrued expenses 765 (692)
Other changes in operating assets and liabilities, net (4,357) 711
Net investment securities (gains) losses included in
cash flows from investing activities 28 (20)
- -----------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (3,501) (2,756)
- -----------------------------------------------------------------------------------------------------------
Decrease in interest-earning deposits with banks (207) (142)
Debt investment securities:
Proceeds from sales 24,701 33,920
Proceeds from maturities, calls, and mandatory redemptions 5,813 1,988
Purchases (32,963) (33,669)
(Increase) decrease in federal funds sold (28) 42
Increase in loans (6,560) (3,201)
Payments for premises and equipment (83) (160)
Other changes, net 1,251 (2,254)
- -----------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (8,076) (3,476)
- -----------------------------------------------------------------------------------------------------------
Decrease in noninterest-bearing deposits (999) (41)
Increase in interest-bearing deposits 4,471 3,621
Decrease in federal funds purchased (1,520) (2,057)
Increase (decrease) in commercial paper 1,647 (553)
Other liabilities for borrowed money:
Proceeds 19,369 13,771
Payments (16,342) (10,022)
Long-term debt:
Proceeds 3,840 3,320
Payments (1,102) (798)
Capital stock:
Issued or distributed 200 --
Purchased (446) (194)
Dividends paid (481) (434)
Other changes, net 2,500 (1,095)
- -----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 11,137 5,518
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks (7) 23
- -----------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND DUE FROM BANKS (447) (691)
Cash and due from banks at December 31, 1995 and 1994 1,535 2,210
- -----------------------------------------------------------------------------------------------------------
Cash and due from banks at September 30, 1996 and 1995 1,088 1,519
- -----------------------------------------------------------------------------------------------------------
Cash disbursements made for:
Interest 6,549 $ 5,578
Income taxes 536 422
- -----------------------------------------------------------------------------------------------------------
See notes to financial statements.
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CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York
- --------------------------------------------------------------------------------
Dollars in millions September 30 December 31
1996 1995
----------------------------
ASSETS
Cash and due from banks $ 1,044 $ 1,429
Interest-earning deposits with banks 2,196 1,995
Debt investment securities available for sale
carried at fair value 21,899 23,767
Trading account assets 64,424 55,373
Securities purchased under agreements to resell
and federal funds sold 26,262 20,996
Loans 29,837 23,319
Less: allowance for credit losses 1,112 1,129
- ------------------------------------------------------------------------------------------------------------------
Net loans 28,725 22,190
Customers' acceptance liability 287 237
Accrued interest and accounts receivable 3,230 3,420
Premises and equipment 2,737 2,967
Less: accumulated depreciation 1,082 1,232
- ------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 1,655 1,735
Other assets 2,778 4,571
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Total assets 152,500 135,713
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LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 2,114 3,275
In offices outside the U.S. 961 839
Interest-bearing deposits:
In offices in the U.S. 6,029 1,975
In offices outside the U.S. 41,166 40,985
- ------------------------------------------------------------------------------------------------------------------
Total deposits 50,270 47,074
Trading account liabilities 38,650 39,197
Securities sold under agreements to repurchase
and federal funds purchased 27,795 20,274
Other liabilities for borrowed money 13,417 8,509
Accounts payable and accrued expenses 4,464 4,187
Liability on acceptances 287 237
Long-term debt not qualifying as risk-based capital
(includes $632 at 1996 and $418 at 1995 of notes
payable to J.P. Morgan) 4,275 2,786
Other liabilities 1,315 3,324
- ------------------------------------------------------------------------------------------------------------------
140,473 125,588
Long-term debt qualifying as risk-based capital
(includes $2,318 at 1996 and $1,310 at 1995 of
notes payable to J.P. Morgan) 2,517 1,659
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 142,990 127,247
STOCKHOLDER'S EQUITY
Preferred stock, $100 par value(authorized shares: 2,500,000) -- --
Common stock, $25 par value (authorized shares: 11,000,000 at September
1996, and 10,000,000 at December 1995; outstanding: 10,599,027 at September
1996 and 10,000,000 at December 1995) 265 250
Surplus 3,140 2,820
Undivided profits 5,971 5,136
Net unrealized gains on investment securities, net of taxes 143 264
Foreign currency translation (9) (4)
- ------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 9,510 8,466
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Total liabilities and stockholder's equity 152,500 135,713
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Prior period balances were restated to reflect the merger of J.P. Morgan
Delaware with Morgan Guaranty Trust Company effective June 1996.
Member of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
See notes to financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF J.P. MORGAN & CO. INCORPORATED
Supplementary to notes in the 1995 Annual report to stockholders
1. BASIS OF PRESENTATION
The interim financial information in this report has not been audited. In the
opinion of management, all adjustments necessary for a fair presentation of the
financial position and the results of operations for the interim periods have
been made. All adjustments made were of a normal recurring nature. Management
consults with its independent accountants on significant accounting and
reporting matters that arise during the year.
2. INTEREST REVENUE AND EXPENSE
An analysis of interest revenue and expense derived from on-and
off-balance-sheet financial instruments is presented in the table below.
Interest revenue and expense associated with derivative financial instruments,
such as swaps, forwards, spot, futures, options, and debt securities forwards,
used as hedges or to modify the interest rate characteristics of assets and
liabilities, are attributed to and included with the related balance sheet
instrument. Net interest revenue associated with risk-adjusting swaps that are
used to meet longer-term asset and liability management objectives, including
the maximization of net interest revenue, is not attributed to a specific
balance sheet instrument, but is included in the Other sources caption in the
table below.
Third quarter Nine months
In millions 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------
INTEREST REVENUE
Deposits with banks $ 30 $ 31 $ 81 $ 134
Debt investment securities (a) 393 377 1,183 1,148
Trading account assets 819 735 2,256 2,346
Securities purchased under agreements
to resell and federal funds sold 569 500 1,739 1,355
Securities borrowed 338 203 919 604
Loans 435 407 1,315 1,258
Other sources, primarily risk-adjusting swaps 91 200 295 483
- ---------------------------------------------------------------------------------------------
Total interest revenue 2,675 2,453 7,788 7,328
- ---------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 626 619 1,895 1,854
Trading account liabilities 358 305 957 1,066
Securities sold under agreements to
repurchase and federal funds purchased 799 633 2,384 1,833
Other borrowed money 310 238 902 653
Long-term debt 157 151 432 407
- ---------------------------------------------------------------------------------------------
Total interest expense 2,250 1,946 6,570 5,813
- ---------------------------------------------------------------------------------------------
Net interest revenue 425 507 1,218 1,515
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(a) Interest revenue from debt investment securities included taxable revenue of
$362 million and $1,094 million and revenue exempt from U.S. income taxes of $31
million and $89 million for the three months and nine months ended September 30,
1996, respectively. Interest revenue from debt investment securities included
taxable revenue of $342 million and $1,030 million and revenue exempt from U.S.
income taxes of $35 million and $118 million for the three months and nine
months ended September 30, 1995, respectively.
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For the three months and nine months ended September 30, 1996, net interest
revenue associated with asset and liability management derivatives was
approximately $25 million and $90 million respectively, compared with
approximately $90 million and $280 million for the respective 1995 periods. At
September 30, 1996, approximately ($170) million of net deferred losses on
closed derivative contracts used for asset and liability management purposes
were recorded on the balance sheet. Such amount is primarily composed of net
deferred losses on closed hedge contracts included in the amortized cost of the
debt investment portfolio. As discussed in Note 4 to the financial statements,
Investment securities, the net unrealized appreciation associated with the debt
investment portfolio was $224 million at September 30, 1996. Net deferred losses
on closed derivative contracts are expected to amortize into Net interest
revenue as follows: ($20) million - remainder of 1996; ($55) million in 1997;
($40) million in 1998; ($25) million in 1999; ($20) million in 2000; ($9)
million in 2001; and approximately ($1) million thereafter. The amount of net
deferred gains or losses on closed derivative contracts will change from period
to period, primarily due to amortization of such amounts to net interest revenue
and the execution of our asset and liability management strategies, which may
result in the sale of the underlying hedged instruments and/or termination of
hedge contracts.
3. TRADING REVENUE
Trading revenue disaggregated by principal product groupings for the three
months and nine months ended September 30, 1996 and 1995, is presented in the
following table. Trading-related net interest revenue should be considered when
evaluating trading results since the firm manages its trading activities based
on combined revenues. For additional information refer to the Trading revenue
discussion in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Third quarter Nine months
In millions 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Fixed Income $ 403 $ 267 $1,267 $ 420
Equities 43 75 261 213
Foreign Exchange 59 26 236 190
Commodities (15) 6 24 37
Proprietary Unit 20 25 177 147
- --------------------------------------------------------------------------------
Trading revenue 510 399 1,965 1,007
- --------------------------------------------------------------------------------
4. INVESTMENT SECURITIES
Debt investment securities
A comparison of the cost and carrying values of debt investment securities
available for sale and carried at fair value at September 30, 1996, follows.
Fair and
carrying
In millions Cost value
- --------------------------------------------------------------------------------
U.S. Treasury $ 4,379 $ 4,445
U.S. government agency, principally mortgage-backed 16,123 16,086
U.S. state and political subdivision 1,550 1,696
U.S. corporate and bank debt 249 251
Foreign government* 1,511 1,545
Foreign corporate and bank debt 2,431 2,443
Other 98 99
- --------------------------------------------------------------------------------
Total debt investment securities 26,341 26,565
- --------------------------------------------------------------------------------
* Primarily includes debt of countries that are members of the Organization for
Economic Cooperation and Development.
Net unrealized appreciation associated with debt investment securities available
for sale carried at fair value at September 30, 1996, was $224 million,
consisting of gross unrealized appreciation of $385 million and gross unrealized
depreciation of $161 million. Such amounts represent the gross unrealized
appreciation or depreciation on each debt security, including the effects of any
related hedge. For additional detail of gross unrealized gains and losses
associated with open derivative contracts used to hedge debt investment
securities, see Note 6 to the financial statements, Off-balance-sheet financial
instruments.
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11
The following table presents the components of Net realized debt investment
securities gains (losses).
Third quarter Nine months
In millions 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------
Gross realized gains from sales $ 23 $ 49 $ 140 $ 320
Gross realized losses from sales (12) (83) (168) (312)
Net gains on maturities, calls and
mandatory redemptions -- 12 -- 12
- --------------------------------------------------------------------------------------------
Net debt investment securities gains (losses) 11 (22) (28) 20
Equity investment securities
Net realized gains on the sale of equity investment securities of $56 million
and $238 million included in Other revenue for the three months and nine months
ended September 30, 1996, respectively, include $60 million and $263 million of
gross realized gains. Gross unrealized gains and losses as well as a comparison
of the cost, fair value, and carrying value of marketable equity investment
securities at September 30, 1996, follows.
Gross Gross Fair and
unrealized unrealized carrying
In millions Cost gains losses value
- --------------------------------------------------------------------------------------
September 30, 1996 $199 $271 -- $470
- --------------------------------------------------------------------------------------
Nonmarketable Securities:
Nonmarketable equity investment securities, carried at a cost of $709 million,
had an estimated fair value of $821 million at September 30, 1996.
5. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and liabilities, including derivative instruments used
for trading purposes, are carried at fair value. The following table presents
the carrying value of trading account assets and liabilities at September 30,
1996, and the average balance for the three-month and nine-month periods ended
September 30, 1996.
Carrying Average
value balance
-------------------------------------------
September 30, Third quarter Nine months
In millions 1996 1996 1996
- --------------------------------------------------------------------------------
TRADING ACCOUNT ASSETS
U.S. Treasury $ 9,300 $ 9,023 $ 9,405
U.S. government agency 5,022 3,139 2,994
Foreign government 23,928 21,755 19,413
Corporate debt and equity 15,464 14,227 13,890
Other securities 4,006 5,725 6,254
Interest rate and currency swaps 10,399 9,420 10,330
Foreign exchange contracts 2,336 2,503 2,902
Interest rate futures and forwards 341 280 322
Commodity and equity contracts 3,706 3,677 2,848
Purchased option contracts 6,282 5,641 5,430
- --------------------------------------------------------------------------------
Total trading account assets 80,784 75,390 73,788
- --------------------------------------------------------------------------------
TRADING ACCOUNT LIABILITIES
U.S. Treasury 6,245 9,643 8,672
Foreign government 9,571 9,399 9,130
Corporate debt and equity 3,642 3,975 4,462
Other securities 894 2,614 2,644
Interest rate and currency swaps 10,429 9,331 9,517
Foreign exchange contracts 3,941 5,464 4,483
Interest rate futures and forwards 616 540 540
Commodity and equity contracts 3,557 3,547 3,205
Written option contracts 6,706 5,495 5,560
- --------------------------------------------------------------------------------
Total trading account liabilities 45,601 50,008 48,213
- --------------------------------------------------------------------------------
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6. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Derivatives
Derivatives may be used either for trading or asset and liability management
purposes. Accordingly, the notional amounts presented in the table below have
been identified as relating to either trading or asset and liability management
activities based on management's intent and ongoing usage. A summary of the
credit exposure, which is represented by the positive market value associated
with derivatives, after considering the benefit of approximately $29.0 billion
and $27.7 billion of master netting agreements in effect at September 30, 1996
and December 31, 1995, respectively, is also presented.
Notional amounts Credit exposure
-----------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30 DECEMBER 31
In billions 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
Interest rate and currency swaps
Trading $1,737.5 $1,233.3
Asset and liability management(a)(b)(c) 267.9 282.3
- ---------------------------------------------------------------------------------------------------------
Total interest rate and currency swaps 2,005.4 1,515.6 $ 10.4 $ 12.4
- ---------------------------------------------------------------------------------------------------------
Foreign exchange spot, forward, and
futures contracts
Trading 584.8 443.7
Asset and liability management(a)(b) 37.8 18.1
- ---------------------------------------------------------------------------------------------------------
Total foreign exchange spot, forward,
and futures contracts 622.6 461.8 2.3 3.3
- ---------------------------------------------------------------------------------------------------------
Interest rate futures, forward rate
agreements, and debt securities forwards
Trading 485.2 412.7
Asset and liability management 17.8 2.7
- ---------------------------------------------------------------------------------------------------------
Total interest rate futures, forward
rate agreements, and debt securities
forwards 503.0 415.4 0.3 0.5
- ---------------------------------------------------------------------------------------------------------
Commodity and equity swaps, forward, and
futures contracts, all trading 89.7 65.1 3.7 1.4
- ---------------------------------------------------------------------------------------------------------
Purchased options(d)
Trading 551.1 462.2
Asset and liability management(a) 2.1 2.6
- ---------------------------------------------------------------------------------------------------------
Total purchased options 553.2 464.8 6.3 5.2
- ---------------------------------------------------------------------------------------------------------
Written options, all trading(e) 740.8 524.0 -- --
- ---------------------------------------------------------------------------------------------------------
Total credit exposure recorded as
assets on the balance sheet 23.0 22.8
- ---------------------------------------------------------------------------------------------------------
13
13
(a) The majority of J.P. Morgan's asset and liability management derivatives are
transacted with independently managed J.P. Morgan derivatives dealers that
function as intermediaries for credit and administrative purposes.
(b) The notional amounts of asset and liability management derivatives
contracts conducted in the foreign exchange markets, primarily forward
contracts, amounted to $41.6 billion at September 30, 1996, and were primarily
denominated in the following currencies: Italian lire $8.1 billion, French
franc $7.1 billion, deutsche mark $5.8 billion, Swiss franc $2.4 billion,
Japanese yen $2.4 billion, European currency unit $2.3 billion, Belgian franc
$1.7 billion, Spanish peseta $1.6 billion, Netherlands guilder $1.3 billion,
Australian dollar $1.3 billion, Swedish krona $1.2 billion, and British pound
$1.2 billion.
(c) The notional amount of risk-adjusting swaps was $236.2 billion at September
30, 1996.
(d) At September 30, 1996, purchased options used for trading purposes included
$432.8 billion of interest rate options, $88.5 billion of foreign exchange
options, and $29.8 billion of commodity and equity options. Only interest rate
options are used for asset and liability management purposes. Purchased options
executed on an exchange amounted to $114.8 billion and those negotiated
over-the-counter amounted to $438.4 billion at September 30, 1996.
(e) At September 30, 1996, written options used for trading purposes included
$607.2 billion of interest rate options, $99.3 billion of foreign exchange
options, and $34.3 billion of commodity and equity options. Written option
contracts executed on an exchange amounted to $268.3 billion and those
negotiated over-the-counter amounted to $472.5 billion at September 30, 1996.
Asset and liability management derivatives
As an end user, J.P. Morgan utilizes derivative instruments in the execution of
its asset and liability management strategies. Derivatives used for these
purposes primarily include interest rate swaps, foreign exchange forward
contracts, forward rate agreements, interest rate futures, and debt securities
forwards. Derivatives are used to hedge or modify the interest rate
characteristics of debt investment securities, loans, deposits, other
liabilities for borrowed money, long-term debt, and other financial assets and
liabilities. In addition, we utilize derivatives to adjust our overall interest
rate risk profile through the use of risk-adjusting swaps.
Net unrealized gains associated with open derivative contracts used to
hedge or modify the interest rate characteristics of related balance sheet
instruments amounted to $72 million at September 30, 1996. Gross unrealized
gains and gross unrealized losses associated with open derivative contracts used
for these purposes at September 30, 1996, are presented below. Such amounts
primarily relate to interest rate and currency swaps used to hedge or modify the
interest rate characteristics of long-term debt, deposits, and debt investment
securities, principally mortgage-backed securities. See Note 7 to the financial
statements, Fair value of financial instruments.
Gross Gross Net
unrealized unrealized unrealized
In millions gains (losses) gains (losses)
- --------------------------------------------------------------------------------
Long-term debt $ 181 ($102) $ 79
Debt investment securities 61 (113) (52)
Deposits 49 (19) 30
Other financial instruments 39 (24) 15
- --------------------------------------------------------------------------------
Total 330 (258) 72
- --------------------------------------------------------------------------------
Net unrealized gains associated with risk-adjusting swaps and their related
hedges that are entered into to meet longer-term asset and liability management
objectives approximated $0.2 billion at September 30, 1996. The net amount is
composed of $2.6 billion of gross unrealized gains and $2.4 billion of gross
unrealized losses. The unrealized gains and losses related to the derivative
contracts used to hedge these risk-adjusting swaps, included above, were not
material at September 30, 1996. There were no material terminations of
risk-adjusting swaps during the three months and nine months ended September 30,
1996.
14
14
Credit-related financial instruments
Credit-related financial instruments include commitments to extend credit and
standby letters of credit and guarantees. The contractual amounts of these
instruments represent the amounts at risk should the contract be fully drawn
upon, the client default, and the value of any existing collateral become
worthless. The credit risk associated with these instruments varies depending on
the creditworthiness of the client and the value of any collateral held. The
maximum credit risk associated with credit-related financial instruments is
measured by the contractual amounts of these instruments.
A summary of the contractual amount of credit-related financial instruments
at September 30, 1996, is presented in the following table.
September 30
In billions 1996
- --------------------------------------------------------------------------------
Commitments to extend credit $62.3
Standby letters of credit and guarantees 14.1
- --------------------------------------------------------------------------------
Other
Consistent with industry practice, amounts receivable and payable for securities
that have not reached the contractual settlement dates are recorded net on the
consolidated balance sheet. Amounts receivable for securities sold of $35.8
billion were netted against amounts payable for securities purchased of $35.2
billion to arrive at a net trade date receivable of $0.6 billion, which was
classified as Other assets on the consolidated balance sheet at September 30,
1996.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosures about Fair Value of Financial Instruments, J.P. Morgan estimates
that the aggregate net fair value of all balance sheet and off-balance-sheet
financial instruments exceeded associated net carrying values at September 30,
1996 and December 31,1995, by approximately $1.4 billion before considering
income taxes. Such amounts were primarily attributable to net appreciation on
net loans and risk-adjusting swaps of $1.2 billion and $0.2 billion,
respectively, at September 30, 1996 and $1.2 billion and $0.4 billion,
respectively, at December 31, 1995.
15
15
8. IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES
Total impaired loans, net of charge-offs, at September 30, 1996, are presented
in the following table. At September 30, 1996, more than half of the impaired
loan balance is measured based upon the present value of expected future cash
flows discounted at an individual loan's effective interest rate, and the
remainder is based on the fair value of the collateral.
September 30
In millions 1996
- --------------------------------------------------------------------------------
Impaired loans:
Commercial and industrial 125
Other 34
- --------------------------------------------------------------------------------
159
Restructuring countries 2
- --------------------------------------------------------------------------------
Total impaired loans 161 (a)
- --------------------------------------------------------------------------------
Other nonperforming assets --
- --------------------------------------------------------------------------------
Total nonperforming assets 161
- --------------------------------------------------------------------------------
An analysis of the effect of impaired loans, net of charge-offs, on
interest revenue for the three months and nine months ended September 30, 1996
and 1995, is presented in the following table.
Third quarter Nine months
In millions 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
Interest revenue that would have been recorded if accruing $ 2 $ 5 $ 9 $ 14
Less interest revenue recorded 3 4 4 23
- ------------------------------------------------------------------------------------------------------------
(Negative)/ positive impact of impaired loans on interest
revenue 1 (1) (5) 9
- ------------------------------------------------------------------------------------------------------------
An analysis of the allowance for credit losses at September 30, 1996, is
presented in the following table.
Third quarter Nine months
In millions 1996 1996
- -------------------------------------------------------------------------------
Beginning of period balance $ 1,125 $ 1,130
- -------------------------------------------------------------------------------
Recoveries 4 18
Charge-offs:
Commercial and industrial (12) (28)
Other (4) (7)
- -------------------------------------------------------------------------------
Net charge-offs (12) (17)
- -------------------------------------------------------------------------------
Balance, September 30, 1996 (b)(c) 1,113 1,113
- -------------------------------------------------------------------------------
(a) As of September 30, 1996, no reserve is required under SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, for the $161 million recorded
investment in impaired loans. Charge-offs and interest applied to principal have
reduced the recorded investment values to amounts that are less than the SFAS
No. 114 calculated values. For the three months and nine months ended September
30, 1996, the average recorded investment in impaired loans was $140.7 million
and $139.6 million, respectively.
(b) In accordance with SFAS No. 5, Accounting for Contingencies, and SFAS No.
114, as amended by SFAS No. 118, an allowance is maintained that is considered
adequate to absorb losses inherent in the existing portfolios of loans and other
undertakings to extend credit, such as irrevocable unused loan commitments, or
to make payments to others for which a client is ultimately liable, such as
standby letters of credit and guarantees, commercial letters of credit and
acceptances, and all other credit exposures, including derivatives. A judgment
as to the adequacy of the allowance is made at the end of each quarterly
reporting period.
(c) At September 30, 1996, the allocation of the allowance for credit losses was
as follows: Specific allocation-borrowers in the U.S. $116 million, Specific
allocation-borrowers outside the U.S. $73 million, Allocation to general risk
$924 million.
16
16
9. INVESTMENT BANKING AND OTHER REVENUE
In the third quarter of 1996 and 1995, investment banking revenue of $233
million and $195 million includes $83 million and $71 million, respectively, of
underwriting revenue. For the nine months ended September 30, 1996 and 1995,
underwriting revenue was $259 million and $134 million, respectively.
Other revenue of $69 million in the 1996 third quarter includes $56 million
of net equity investment securities gains. Other revenue of $145 million in the
1995 third quarter includes $91 million of net equity investment securities
gains and $35 million of revenue associated with hedging anticipated foreign
currency revenues and expenses. For the nine months ended September 30, 1996 and
1995, Other revenue of $328 million and $461 million, respectively, primarily
includes net equity investment securities gains of $238 million and $386
million, respectively.
10. OPERATING EXPENSES
In July 1996, JP Morgan entered into an agreement with a consortium of firms to
form a strategic alliance to manage parts of the firm's global technology
infrastructure (the "Alliance"). The formation of the Alliance resulted in a
technology-related special charge incurred in the third quarter of $71 million,
which is reflected in technology and communication expenses. The charge related
primarily to payments for training and other personnel costs incurred and to
the sale at a loss of certain technology equipment to the Alliance.
11. INCOME TAXES
Income tax expense in the 1996 third quarter reflects a 33% effective tax rate,
compared to a 32% effective tax rate in the 1995 third quarter. For the nine
months ended September 30, 1996, the effective tax rate remained unchanged at
33% from the comparable 1995 period. Income tax expense (benefit) related to net
investment securities gains (losses) was approximately $5 million and ($11)
million for the three months and nine months ended September 30, 1996,
respectively. Income tax expense (benefit) related to net investment securities
gains (losses) was approximately ($9) million and $8 million for the three
months and nine months ended September 30, 1995, respectively. The applicable
tax rate used to compute the income tax expense (benefit) related to net
investment securities gains (losses) was approximately 41% for the three months
and nine months ended September 30, 1996 and 1995.
The valuation allowance to reduce deferred tax assets to the amount
expected to be realized totaled approximately $125 million at September 30,
1996, compared with $140 million at December 31, 1995. The valuation allowance
is primarily related to the ability to recognize tax benefits associated with
foreign operations.
12. COMMITMENTS AND CONTINGENT LIABILITIES
Excluding mortgaged properties, assets carried at approximately $64.1 billion in
the consolidated balance sheet at September 30, 1996, were pledged as collateral
for borrowings, to qualify for fiduciary powers, to secure public monies as
required by law, and for other purposes.
17
17
13. EARNINGS PER COMMON SHARE
In the calculation of primary and fully diluted earnings per common share, net
income is adjusted by adding back to net income the interest expense on
convertible debentures and the expense related to dividend equivalents on
certain deferred incentive compensation awards, net of the related income tax
effects, and deducting the preferred stock dividends.
Primary and fully diluted earnings per common share are computed by
dividing income components by the weighted-average number of common and common
equivalent shares outstanding during the period.
For the primary earnings per share calculation, the weighted-average number
of common and common equivalent shares outstanding includes the average number
of shares of common stock outstanding, the average number of shares issuable
upon conversion of convertible debentures, and the average number of shares
issuable under employee benefit plans, that have a dilutive effect.
The weighted-average number of common and common equivalent shares
outstanding, assuming full dilution, includes the average number of shares of
common stock outstanding, the average number of shares issuable upon conversion
of convertible debentures, and the average number of shares issuable under
various employee benefit plans. The maximum dilutive effect is computed using
the period-end market price of J.P. Morgan common stock, if it is higher than
the average market price used in calculating primary earnings per share.
Third quarter Nine months
Dollars in millions 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 267 $ 356 $ 1,130 $ 915
Primary earnings per share:
Weighted-average number of common
and common equivalent shares
outstanding during the period 201,755,770 199,300,749 202,029,375 198,179,495
Fully diluted earnings per share:
Weighted-average number of common
and common equivalent shares
outstanding during the period 201,968,519 200,069,670 202,792,562 200,232,610
- -------------------------------------------------------------------------------------------------------------------
18
18
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
J.P. Morgan & Co. Incorporated reported net income of $276 million in the third
quarter of 1996, 23% lower than in the third quarter of 1995. Earnings per share
for the quarter were $1.32 compared with $1.78 a year ago. The 1996 third
quarter earnings reflected a special charge of $71 million ($42 million after
tax, or $0.21 per share),related to the previously announced formation of a
strategic alliance to manage parts of the firm's global technology
infrastructure. Excluding the charge, net income totaled $318 million in the
third quarter of 1996, 12% lower than in the third quarter of 1995. Net income
for the first nine months of 1996, including the third quarter special charge,
totaled $1.155 billion, up 24% from $930 million a year earlier. Earnings per
share in the first nine months were $5.60 compared with $4.62 a year ago.
Nine-month earnings in 1995 included a first quarter charge of $55 million ($33
million after tax, or $0.17 per share), related primarily to severance.
THIRD QUARTER RESULTS AT A GLANCE
In millions of dollars, Third quarter Second
except per share data quarter
1996 1995 1996
- --------------------------------------------------------------------------------
Revenues $ 1,549 $ 1,549 $ 1,761
Operating expenses (1,137) (1,022) (1,104)
Income taxes (136) (167) (217)
- --------------------------------------------------------------------------------
Net income $ 276 $ 360 $ 440
Net income per share $ 1.32 $ 1.78 $ 2.14
- --------------------------------------------------------------------------------
Dividends declared per share $ 0.81 $ 0.75 $ 0.81
REVENUES equaled the level in the third quarter of 1995:
- Trading revenue rose 28% to $510 million due to higher results in fixed
income and foreign exchange. Combined trading and related net interest
revenue was up 35% to $575 million.
- Investment banking revenue was up 19% to $233 million.
- Investment management fees grew 9%. Credit-related fees were flat, and
operational service fees were lower as a result of the sale of the
firm's custody business in late 1995.
- Net interest revenue declined 16% to $425 million.
- Other revenue decreased 52% to $69 million due to lower net equity
investment securities gains.
OPERATING EXPENSES, excluding the special charge, rose 4% from a year ago.
IN OTHER DEVELOPMENTS, Morgan announced in August an agreement to sell its
institutional U.S. cash-processing business. The sale is expected to close in
the fourth quarter, subject to regulatory approvals, and is not expected to have
any material effect on Morgan's ongoing financial results.
Morgan completed the agreement to form the Pinnacle Alliance in July. The firm
expects to achieve aggregate savings of approximately 15% on projected
technology costs over the seven-year life of the Alliance agreement after the
special charge.
19
19
BUSINESS SECTOR RESULTS
The firm reports financial results for five business sectors. Three are oriented
toward client services: Finance and Advisory, Sales and Trading, and Asset
Management and Servicing. The Equity Investments sector comprises management of
the firm's own portfolio of equity securities. The Asset and Liability
Management sector covers the management of the firm's overall interest rate
exposure. These five sectors generally reflect the way we operate but do not
correspond exactly with the firm's organizational structure. Presented below are
the summary results for each sector for the three months and nine months ended
September 30, 1996 and 1995.
Asset Asset
Manage- and
Finance Sales ment Equity Liability Cor-
and and and Invest- Manage- porate Consol-
In millions Advisory Trading Servicing ments ment Items idated
- -----------------------------------------------------------------------------------------------------------------
Third quarter
1996
Total revenue $ 425 $ 558 $ 336 $ 88 $ 176 $ (34) $1,549
Total expenses 354 332 282 7 28 134 1,137
- -----------------------------------------------------------------------------------------------------------------
Pretax income 71 226 54 81 148 (168) 412
- -----------------------------------------------------------------------------------------------------------------
Third quarter
1995
Total revenue 453 431 314 102 244 5 1,549
Total expenses 312 312 234 6 27 131 1,022
- -----------------------------------------------------------------------------------------------------------------
Pretax income 141 119 80 96 217 (126) 527
- -----------------------------------------------------------------------------------------------------------------
Nine months
1996
Total revenue 1,383 1,962 1,040 333 463 (131) 5,050
Total expenses 1,056 1,022 827 23 90 308 3,326
- -----------------------------------------------------------------------------------------------------------------
Pretax income 327 940 213 310 373 (439) 1,724
- -----------------------------------------------------------------------------------------------------------------
Nine months
1995
Total revenue 1,140 1,160 941 426 774 (55) 4,386
Total expenses 877 896 677 18 75 465 3,008
- -----------------------------------------------------------------------------------------------------------------
Pretax income 263 264 264 408 699 (520) 1,378
- -----------------------------------------------------------------------------------------------------------------
Notes:
(1) The firm's management reporting system and policies were used to determine
the revenues and expenses directly attributable to each sector on a
taxable-equivalent basis. In addition, earnings on stockholders' equity and
certain overhead expenses not allocated for management reporting purposes were
allocated to each business sector. Earnings on stockholders' equity were
allocated based on management's assessment of the inherent risk of each sector.
Overhead expenses were allocated based primarily on staff levels and represent
costs associated with various support functions that exist for the benefit of
the firm as a whole.
(2) In the three months ended September 30, 1996 and 1995, $136 million and $167
million, respectively, related to income taxes were not allocated to the
business sectors. In the nine months ended September 30, 1996 and 1995, $569
million and $448 million, respectively, related to income taxes were not
allocated to the business sectors.
20
20
FINANCE AND ADVISORY
The Finance and Advisory sector recorded pretax income of $71 million in the
third quarter of 1996 compared with $141 million a year ago. Total revenue in
the 1996 third quarter decreased 6% to $425 million in the third quarter of 1995
reflecting a decline in equities trading revenue. The decline was partially
offset by an increase in investment banking revenue principally due to higher
levels of advisory, syndication, and underwriting activities.
Expenses in the third quarter of 1996 were $354 million compared with
$312 million in the third quarter of 1995, an increase of 13%, primarily due to
higher employee compensation and benefits expenses.
Revenues for the nine month period increased 21% to $1,383 million from
the corresponding prior period. Expenses for the same period increased 20% to
$1,056 million from the nine months ended September 30, 1995.
For the third quarter of 1996, J.P. Morgan ranked as the fourth largest
underwriter of U.S. debt and equity issues, according to Securities Data Co. In
advisory activities, Securities Data Co. ranked J.P. Morgan sixth in completed
mergers and acquisitions worldwide and fourth in pending transactions in the
first nine months of 1996. As an arranger of bank credit facilities, J.P. Morgan
ranked second globally, according to Loan Pricing Corp., for the first nine
months of 1996.
SALES AND TRADING
The Sales and Trading sector recorded pretax income of $226 million in the third
quarter of 1996 compared with $119 million in the third quarter of 1995. Total
revenue in the third quarter of 1996 increased 29% to $558 million in the third
quarter of 1995 due primarily to higher results in fixed income markets driven
by continued strong client demand for swaps and for government and corporate
securities.
Total expenses of $332 million increased 6% from the third quarter of
1995 primarily due to higher employee compensation and benefits expense.
Total revenue of $1,962 million for the nine months ended September 30,
1996, increased 69% from 1995. Total expenses increased 14% to $1,022 million
when compared to the same period last year.
ASSET MANAGEMENT AND SERVICING
The Asset Management and Servicing sector recorded pretax income of $54 million
in the third quarter of 1996 compared with $80 million in the year-earlier
period. Total revenue increased 7% to $336 million in the third quarter of 1996
compared with the third quarter of 1995. This increase was primarily driven by
an increase in revenue from asset management, reflecting an increase in assets
under management, primarily from net new business. Assets under management at
September 30, 1996 were $197 billion.
Expenses associated with Asset Management and Servicing were $282
million in the third quarter of 1996 compared with $234 million in the third
quarter of 1995. The 21% increase in expenses primarily relates to higher
employee compensation and benefits, in part due to higher staff levels.
Revenues of $1,040 million for the nine month period ended September
30, 1996, increased 11% from 1995. Expenses of $827 million for the nine month
period ended September 30, 1996, increased 22% from 1995.
In strategic dispositions, J.P. Morgan sold its custody business and
discontinued certain of its cash services during 1995 and, as previously
mentioned, has agreed to sell its U.S. institutional cash processing business.
Revenues and expenses for 1996 and 1995 associated with these businesses are
included in the Corporate Items section.
These actions do not affect the cash management and processing services
Morgan offers for private clients or the firm's role as operator of the
Euroclear System, the world's largest clearance and settlement system for
internationally traded securities.
21
21
EQUITY INVESTMENTS
Equity Investments recorded pretax income of $81 million in the third quarter of
1996 compared with $96 million in the third quarter of 1995. Total revenue was
$88 million in the third quarter of 1996 compared with $102 million in the third
quarter of 1995. The 1996 third quarter reflected net equity investment
securities gains of $56 million versus $91 million in the year-earlier quarter.
Total revenue for the nine month period was $333 million compared with $426
million in 1995. Net unrealized appreciation on the combined portfolio of
marketable and nonmarketable equity investment securities was $383 million at
September 30, 1996, compared with $490 million at June 30, 1996.
The results of the Equity Investment portfolio are also evaluated on an
economic basis using total return, which combines revenue and the change in net
unrealized appreciation. Total return for the third quarter of 1996 was ($19)
million compared with $65 million in the third quarter of 1995. Total return for
the nine months ended September 30, 1996, was $191 million compared with $270
million for the nine months ended September 30, 1995. As our investment strategy
covers a longer-term horizon, total return viewed over shorter periods will
reflect the impact of short-term market movements, including industry specific
events.
ASSET AND LIABILITY MANAGEMENT
Asset and Liability Management recorded pretax income of $148 million in the
third quarter of 1996 compared with $217 million in the same period a year ago.
Total revenue, which primarily includes net interest revenue and net investment
securities gains (losses), was $176 million and $244 million for the third
quarter of 1996 and 1995, respectively. The decline in total revenue, primarily
due to the decrease in net interest revenue as a result of the maturity of
higher-yielding instruments, was partially offset by net investment securities
gains in the third quarter of 1996. Net investment securities gains in the third
quarter of 1996 were $11 million compared with net losses of $22 million in the
third quarter of 1995. Net unrealized appreciation on asset and liability
management financial instruments, which included appreciation associated with
risk-adjusting swaps and debt investment securities, was $279 million at
September 30, 1996 and $317 million at June 30, 1996.
Total revenue was $463 million for the nine months ended September 30,
1996 compared with $774 million for the year-earlier period.
As our objective in Asset and Liability Management is to create
longer-term value through the management of interest rate risk related to J.P.
Morgan's nontrading assets, liabilities, and off-balance-sheet activities, the
performance of the Asset and Liability Management sector, similar to that of the
Equity Investments sector, is evaluated on an economic basis using total return.
Total return, which combines reported revenue and the change in net unrealized
appreciation, decreased to $138 million in the third quarter of 1996 from $187
million in the third quarter of 1995. Total return for the nine month period
ended September 30, 1996 was $189 million compared with $346 million for the
nine months ended September 30, 1995.
CORPORATE ITEMS
Corporate Items includes revenues and expenses that have not been allocated to
the five business sectors, intercompany eliminations, and the taxable equivalent
adjustment, which is calculated to gross-up tax exempt interest to a taxable
basis.
Corporate Items for the third quarter and nine months of 1996 and 1995
also included the revenues and expenses of the custody and cash processing
businesses. As mentioned in the discussion of Asset Management and Servicing,
these businesses have been sold or discontinued during 1995 or are expected to
be sold by year end. Corporate Items for the third quarter and the nine months
of 1996 also included the previously announced special charge of $71 million
related to the formation of the Pinnacle Alliance; and the taxable equivalent
adjustment of $20 million and $27 million for the third quarter of 1996 and 1995
respectively. Corporate Items for the nine months of 1996 consisted primarily of
intercompany eliminations, the taxable equivalent adjustment of $64 million, and
other items not allocated to a sector.
22
22
RISK MANAGEMENT
The following presents the market risk profiles related to our trading
activities and asset and liability management activities for the three months
and twelve months ended September 30, 1996.
Trading activities
J.P. Morgan employs a value at risk methodology to estimate the potential losses
that could arise from adverse changes in market conditions within a 95%
confidence interval, referred to as "Daily Earnings at Risk" (DEaR). The DEaR
estimate for our combined trading activities for the third quarter of 1996
averaged approximately $19 million and ranged from $13 million to $25 million.
The DEaR estimate for our combined trading activities for the second quarter of
1996 averaged approximately $22 million and ranged from $17 million to $26
million.
For the twelve months ended September 30, 1996, the DEaR estimate for
our combined trading activities averaged approximately $21 million and ranged
from approximately $13 million to $28 million. Daily combined trading-related
revenue averaged $11.6 million during the twelve-month period ended September
30, 1996. Consistent with statistical expectations, daily revenue fell short of
expected results by amounts greater than related DEaR estimates within 5% of the
trading days during the twelve months ended September 30, 1996.
Asset and liability management activities
During the twelve months ended September 30, 1996, value at risk measured over a
weekly horizon averaged approximately $44 million and ranged from $21 million to
$82 million. These amounts approximate average DEaR of $20 million and a range
of $10 million to $37 million. Weekly total return related to asset and
liability management activities fell short of expected weekly results by amounts
greater than related weekly value at risk estimates within 5% of the time.
23
23
FINANCIAL STATEMENT ANALYSIS
REVENUES
Revenues totaled $1.549 billion in the third quarter of 1996, equal to the level
of the year earlier quarter. Revenues in the third quarter trailed the levels in
the first two quarters of 1996 primarily because of lower trading results and
lower net equity investment securities gains. For the first nine months of 1996,
revenues were up 15% to $5.050 billion from the corresponding 1995 period.
Net interest revenue, the aggregate of interest revenue and expense
generated by the firm's asset and liability management, credit-related, and
trading activities, declined 16% to $425 million from the third quarter of 1995.
The principal factor in the decline was the maturing of higher yielding asset
and liability management instruments. For the first nine months of 1996, net
interest revenue decreased 20% to $1,218 million from the corresponding 1995
period.
The following table provides J.P. Morgan's interest-rate-sensitivity
gap at September 30, 1996, including the asset and liability
interest-rate-sensitivity gap and the effect of derivatives on the gap. The
resulting interest-rate-sensitivity gap is presented by U.S. dollar and non-U.S.
dollar currency components and reflects J.P. Morgan's market outlook at
September 30, 1996. Significant variances in interest rate sensitivity may exist
at other dates not presented in the table. Amounts in parentheses reflect
liability sensitive positions.
By repricing or maturity dates
- ------------------------------------------------------------------------------------------------
After
After one
six year
Within months but After
six but within within five
In millions months one year five years
- ------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996
Asset and liability interest-
rate-sensitivity gap (410) (4,155) 2,795 10,661
Derivatives affecting interest
rate sensitivity 1,842 1,317 (5,885) 2,726
- ------------------------------------------------------------------------------------------------
Interest-rate-sensitivity gap (a) 1,432 (2,838) (3,090) 13,387
- ------------------------------------------------------------------------------------------------
(a) Components of interest-rate-
sensitivity gap:
U.S. dollar 12,911 (2,767) (7,450) 12,935
Non-U.S. dollar* (11,479) (71) 4,360 452
- ------------------------------------------------------------------------------------------------
Total 1,432 (2,838) (3,090) 13,387
- ------------------------------------------------------------------------------------------------
* Primarily Japanese yen, deutsche mark, French franc, Italian lira and British
pound positions.
24
24
Trading revenue rose 28% to $510 million in the third quarter from $399 million
a year earlier. Trading revenue for the first nine months of 1996 totaled $1.965
billion, up from $1.007 billion in the corresponding 1995 period. Year-to-date
trading revenues in both developed and emerging markets were strong and
diversified across the firm's products.
Reported trading revenue does not include net interest revenue associated with
trading activities, which was $65 million in the third quarter of 1996 and $26
million a year ago.
The following table presents trading revenue and net interest revenue associated
with the firm's trading activities, in both developed and emerging markets,
disaggregated by principal product groupings. The table does not represent total
revenues generated by business activities as discussed in Business sector
results. For example, underwriting revenues and equities commissions, which are
reported in Investment banking revenue and Operational service fees respectively
on the Consolidated Statement of Income, are not included below.
Fixed Foreign Commod- Proprietary
In millions Income Equities Exchange ities Unit Total
- -----------------------------------------------------------------------------------------------------------
Third Quarter 1996
Trading revenue $ 403 $ 43 $ 59 ($ 15) $ 20 $ 510
Net interest revenue 45 (4) 5 4 15 65
- -----------------------------------------------------------------------------------------------------------
Combined total 448 39 64 (11) 35 575
- -----------------------------------------------------------------------------------------------------------
Third Quarter 1995
Trading revenue 267 75 26 6 25 399
Net interest revenue 41 (23) 3 -- 5 26
- -----------------------------------------------------------------------------------------------------------
Combined total 308 52 29 6 30 425
- -----------------------------------------------------------------------------------------------------------
Second Quarter 1996
Trading revenue 331 124 109 5 128 697
Net interest revenue 54 (9) 5 (5) (3) 42
- -----------------------------------------------------------------------------------------------------------
Combined total 385 115 114 -- 125 739
- -----------------------------------------------------------------------------------------------------------
Nine Months 1996
Trading revenue 1,267 261 236 24 177 1,965
Net interest revenue 168 (56) 15 (3) 13 137
- -----------------------------------------------------------------------------------------------------------
Combined total 1,435 205 251 21 190 2,102
- -----------------------------------------------------------------------------------------------------------
Nine Months 1995
Trading revenue 420 213 190 37 147 1,007
Net interest revenue 163 (80) 10 2 20 115
- -----------------------------------------------------------------------------------------------------------
Combined total 583 133 200 39 167 1,122
25
25
Combined trading and related net interest revenue rose to $575 million in the
third quarter from $425 million a year earlier. Combined revenue from fixed
income rose to $448 million in the third quarter from $308 million in the
year-earlier quarter, driven by continued strong client demand for swaps and for
government and corporate securities. Combined revenue from equities was $39
million compared with $52 million a year earlier. Foreign exchange combined
revenue increased to $64 million from $29 million in the third quarter of 1995,
largely in emerging markets. Combined revenue for the first nine months of 1996
was $2,102, compared with $1,122 in the same 1995 period.
Investment banking revenue increased 19% to $233 million in the third quarter.
Underwriting revenue grew to $83 million from $71 million a year ago. Advisory
and syndication fees in the third quarter rose to $150 million from $124 million
a year earlier. Investment banking revenue for the first nine months of 1996 was
$644 million, compared with $426 million for the first nine months of 1995.
Underwriting revenue for the first nine months of 1996 was $259 million, versus
$134 million in the comparable 1995 period.
Credit-related fees of $39 million in the third quarter were flat compared
with the third quarter of 1995. Excluding revenues from the custody business,
which was sold in 1995, and from the discontinued cash-processing businesses,
credit related fees rose 13% from a year earlier. In the first nine months of
this year, credit-related fees excluding revenues from the custody and
cash-processing businesses, rose 7% from the same period of 1995.
Investment management fees advanced 9% to $164 million from a year ago, as
assets under management rose, primarily from net new business. Investment
management fees for the first nine months of 1996 were $493 million, versus $418
million in the same 1995 period. Assets under management at September 30, 1996,
were $197 billion.
Operational service fees in the third quarter totaled $98 million, 28%
lower than in the third quarter of 1995. Excluding revenues associated with the
custody and cash-processing businesses, operational service fees were unchanged.
For the first nine months of 1996, operational service fees excluding revenues
from the custody and cash-processing businesses, increased 6% from the
corresponding 1995 period.
Net investment securities gains were $11 million in the third quarter,
compared with net losses of $22 million in the third quarter of 1995. For the
nine-month period, net investment securities losses were $28 million, versus net
gains of $20 million in the first nine months of 1995.
Other revenue was $69 million in the third quarter, compared with $145
million a year earlier. The 1996 third quarter reflected net equity investment
securities gains of $56 million, compared with $91 million in the year-earlier
quarter. For the first nine months of 1996, other revenue was $328 million,
versus $461 million in the comparable 1995 period. Net equity investment
securities gains in the first nine months were $238 million, compared with $386
million for the first nine months of 1995.
26
26
OPERATING EXPENSES
Operating expenses were $1.137 billion in the third quarter, compared with
$1.022 billion in the third quarter of 1995. Excluding the technology-related
special charge and expenses associated with the custody and cash-processing
businesses, 1996 third quarter operating expenses grew 10% from a year earlier.
Employee compensation and benefits rose primarily due to higher incentive
compensation accruals, reflecting the increasing proportion of revenue from our
client-based businesses and more competitive market conditions. Other expenses
increased due to higher levels of business activity.
The firm incurred a $71 million special charge in the third quarter,
which is reflected in technology & communications expenses, in conjunction
with the formation of the Pinnacle Alliance. Approximately 700 employees in
areas covered by the agreement were transferred to Alliance firms. Costs
associated with the transferred employees, previously reflected in employee
compensation & benefits, are now reflected in payments to the Alliance and
included in technology & communications expenses.
At September 30, 1996, staff totaled 15,188 employees compared with
16,394 employees at September 30, 1995.
Operating expenses in the first nine months of 1996 increased 11% to
$3.326 billion. Excluding the 1995 first quarter charge related primarily to
severance, the 1996 technology-related special charge and expenses associated
with the custody and cash-processing businesses, operating expenses rose 16%.
Income tax expense of $136 million in the third quarter was based on an
effective tax rate of 33% versus 32% in the third quarter of 1995. For the nine
months ended September 30, 1996 and 1995, the effective tax rate was 33%.
ASSETS
Total assets were $212 billion at September 30, 1996, compared with $199 billion
at June 30, 1996. Nonperforming assets increased by $27 million to $161 million
during the third quarter as repayments and charge-offs were more than offset by
assets newly classified as nonperforming. No provision for credit losses was
deemed necessary in the 1996 third quarter. The allowance for credit losses was
$1.113 billion at September 30, 1996.
27
27
FOREIGN-COUNTRY-RELATED OUTSTANDINGS
Foreign-country-related outstandings represent outstandings to foreign borrowers
that are denominated in U.S. dollars or currencies other than the borrower's
local currency or, in the case of a guarantee, other than the guarantor's local
currency. Countries in which J.P. Morgan's outstandings exceeded 1.0% of total
assets at September 30, 1996, are listed in the following table. Outstandings
include loans, interest-earning deposits with banks, investment securities,
customers' acceptance liability, securities purchased under agreements to
resell, trading account securities, accrued interest, and other monetary assets.
Outstandings generally are distributed according to the location of the
borrower. In the case of guaranteed outstandings or when tangible, liquid
collateral is held and realizable outside the obligor's country, distribution is
generally made according to the location of the guarantor or the location where
the collateral is held and realizable.
In millions Cross-border outstandings
- --------------------------------------------------------------------------------
United Kingdom $4,404
France 4,924
Switzerland 3,082
- --------------------------------------------------------------------------------
28
28
CAPITAL
September 30 June 30 December 31 September 30
Dollars in billions 1996 1996 1995 1995
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 11.1 $ 11.0 $ 10.5 $ 10.1
Annualized rate of return on
average common stockholders'
equity (a) (b) 10.3% 17.1% 14.7% 14.9%
As percent of period-end total
assets:
Common equity 4.9 5.2 5.4 5.4
Total equity 5.2 5.5 5.7 5.7
Book value per common share (c) $ 52.62 $ 52.40 $ 50.71 $ 49.36
Risk-based capital:
Tier 1 risk-based capital $ 9.9 $ 9.8 $ 9.0 $ 8.8
Total risk-based capital 14.2 14.1 13.4 13.0
Risk adjusted assets 122.1 120.3 103.1 103.8
Capital ratios:
J.P. Morgan
Tier 1 ratio 8.1% 8.2% 8.8% 8.5%
Total ratio 11.7 11.7 13.0 12.5
Leverage ratio 6.2 6.3 6.1 6.3
Morgan Guaranty Trust Company of New York
Tier 1 ratio 7.7% 7.7% 8.5% 8.2%
Total ratio 10.5 10.7 11.0 10.6
Leverage ratio 5.9 5.7 5.5 5.7
- --------------------------------------------------------------------------------------------------------
(a) Represents the annualized rate of return on average common stockholders'
equity for the three months ended September 30, 1996, June 30, 1996, December
31, 1995, and September 30, 1995. Excluding the impact of SFAS No. 115, the
annualized rate of return on average common stockholders' equity would have been
10.6%, 17.8%, 15.5%, and 15.6% for the three months ended September 30, 1996,
June 30, 1996, December 31, 1995, and September 30, 1995, respectively.
(b) The annualized rate of return on average common stockholders' equity for the
nine months ended September 30, 1996 and 1995 was 14.8% and 13.2%, respectively.
Excluding the impact of SFAS No. 115, the annualized rate of return on average
common stockholders' equity would have been 15.5% and 13.8% for the nine months
ended September 30, 1996 and 1995, respectively.
(c) Excluding the impact of SFAS No. 115, the book value per common share would
have been $51.01, $50.54, $47.83, and $46.82 for the three months ended
September 30, 1996, June 30, 1996, December 31, 1995, and September 30, 1995,
respectively.
29
29
J.P. Morgan's risk-based capital and leverage ratios remain well above the
minimum standards set by the Federal Reserve Board. In accordance with the
Federal Reserve Board guidelines, the risk-based capital and leverage ratios
exclude the equity, assets and off-balance-sheet exposures of J.P. Morgan
Securities, Inc. and the effect of SFAS No. 115.
At September 30, 1996, stockholders' equity included approximately $317 million
of net unrealized appreciation on debt investment and marketable equity
investment securities, net the related deferred tax liability of $178 million.
Net unrealized appreciation was $367 million at June 30, 1996. The net
unrealized appreciation on debt investment securities was $224 million and $226
million at September 30, 1996 and June 30, 1996, respectively. The net
unrealized appreciation on marketable equity investment securities was $271
million and $343 million at September 30, 1996 and June 30, 1996, respectively.
30
30
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
Dollars in millions, Three months ended
interest and average rates ---------------------------------------------------------------------------------------
on a taxable-equivalent basis September 30, 1996 September 30, 1995
---------------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
---------------------------------------------------------------------------------------
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 2,406 $ 30 4.96% $ 1,316 $ 31 9.35%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 1,367 25 7.28 2,179 36 6.55
U.S. state and political
subdivision 1,523 44 11.49 1,916 56 11.60
Other 16,541 273 6.57 14,042 245 6.92
Debt investment securities in offices
outside the U.S. (a) 3,740 66 7.02 3,405 62 7.22
Trading account assets:
In offices in the U.S. 15,596 240 6.12 12,231 196 6.36
In offices outside the U.S. 30,369 579 7.58 24,779 540 8.65
Securities purchased under agreements
to resell and federal funds sold,
mainly in offices in the U.S. 44,649 569 5.07 31,721 500 6.25
Securities borrowed in offices in
the U.S. 26,485 338 5.08 14,350 203 5.61
Loans:
In offices in the U.S. 5,633 100 7.06 6,364 109 6.80
In offices outside the U.S. 21,343 340 6.34 17,413 302 6.88
Other interest-earning assets (b):
In offices in the U.S. 824 29 * 739 53 *
In offices outside the U.S. 933 62 * 1,968 147 *
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 171,409 2,695 6.25 132,423 2,480 7.43
Allowance for credit losses (1,114) (1,132)
Cash and due from banks 622 1,809
Other noninterest-earning assets 40,535 40,914
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 211,452 174,014
- ----------------------------------------------------------------------------------------------------------------------------------
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S., Trading account assets in offices in the U.S., and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the three months ended September 30, 1996 and 1995.
(a) For the three months ended September 30, 1996 and 1995, average debt
investment securities are computed based on historical amortized cost, excluding
the effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance-sheet
transactions.
* Not meaningful
31
31
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
Dollars in millions, Three months ended
interest and average rates ------------------------------------------------------------------------------
on a taxable-equivalent basis September 30, 1996 September 30, 1995
------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. $ 3,754 $ 48 5.09% $ 2,056 $ 24 4.63%
In offices outside the U.S. 44,029 578 5.22 38,763 595 6.09
Trading account liabilities:
In offices in the U.S. 9,199 154 6.66 5,329 90 6.70
In offices outside the U.S. 11,094 204 7.32 11,550 215 7.39
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 62,522 799 5.08 42,623 633 5.89
Commercial paper, mainly in offices
in the U.S. 4,489 61 5.41 2,583 40 6.14
Other interest-bearing liabilities:
In offices in the U.S. 13,900 196 5.61 10,193 158 6.15
In offices outside the U.S. 2,322 53 9.08 1,702 40 9.32
Long-term debt,
mainly in offices in the U.S. 10,866 157 5.75 9,643 151 6.18
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 162,175 2,250 5.52 124,442 1,946 6.20
Noninterest-bearing deposits:
In offices in the U.S. 1,981 3,355
In offices outside the U.S. 437 1,597
Other noninterest-bearing
liabilities 35,838 34,661
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 200,431 164,055
Stockholders' equity 11,021 9,959
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 211,452 174,014
Net yield on interest-earning assets 1.03 1.60
- ------------------------------------------------------------------------------------------------------------------------
Net interest earnings 445 534
- ------------------------------------------------------------------------------------------------------------------------
32
32
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
Dollars in millions, Nine months ended
interest and average rates ----------------------------------------------------------------------------------------
on a taxable-equivalent basis September 30, 1996 September 30, 1995
----------------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
----------------------------------------------------------------------------------------
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 2,006 $ 81 5.39% $ 1,743 $ 134 10.28%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 1,103 62 7.51 2,228 107 6.42
U.S. state and political
subdivision 1,622 140 11.53 2,043 185 12.11
Other 17,632 834 6.32 12,887 690 7.16
Debt investment securities in offices
outside the U.S. (a) 4,093 197 6.43 4,478 233 6.96
Trading account assets:
In offices in the U.S. 15,748 714 6.06 12,652 640 6.76
In offices outside the U.S. 26,745 1,545 7.72 25,425 1,710 8.99
Securities purchased under agreements
to resell and federal funds sold,
mainly in offices in the U.S. 43,937 1,739 5.29 30,069 1,355 6.02
Securities borrowed in offices in
the U.S. 24,441 919 5.02 14,186 604 5.69
Loans:
In offices in the U.S. 6,441 326 6.76 6,684 355 7.10
In offices outside the U.S. 21,162 1,000 6.31 17,345 915 7.05
Other interest-earning assets (b):
In offices in the U.S. 1,030 88 * 1,295 211 *
In offices outside the U.S. 1,095 207 * 1,220 272 *
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 167,055 7,852 6.28 132,255 7,411 7.49
Allowance for credit losses (1,122) (1,132)
Cash and due from banks 886 1,827
Other noninterest-earning assets 41,864 41,781
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 208,683 174,731
- ----------------------------------------------------------------------------------------------------------------------------------
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S., Trading account assets in offices in the U.S., and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the nine months ended September 30, 1996 and 1995.
(a) For the nine months ended September 30, 1996 and 1995, average debt
investment securities are computed based on historical amortized cost, excluding
the effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance-sheet
transactions.
* Not meaningful
33
33
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
Dollars in millions, Nine months ended
interest and average rates ------------------------------------------------------------------------------
on a taxable-equivalent basis September 30, 1996 September 30, 1995
------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. $ 2,625 $ 95 4.83% $ 2,104 $ 76 4.83%
In offices outside the U.S. 45,181 1,800 5.32 41,009 1,778 5.80
Trading account liabilities:
In offices in the U.S. 8,351 395 6.32 6,527 339 6.94
In offices outside the U.S. 10,802 562 6.95 11,691 727 8.31
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 61,381 2,384 5.19 41,836 1,833 5.86
Commercial paper, mainly in offices
in the U.S. 4,151 169 5.44 2,598 119 6.12
Other interest-bearing liabilities:
In offices in the U.S. 13,847 588 5.67 9,664 449 6.21
In offices outside the U.S. 2,057 145 9.42 1,974 85 5.76
Long-term debt,
mainly in offices in the U.S. 9,976 432 5.78 8,545 407 6.36
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 158,371 6,570 5.54 125,948 5,813 6.17
Noninterest-bearing deposits:
In offices in the U.S. 2,441 3,346
In offices outside the U.S. 823 1,366
Other noninterest-bearing
liabilities 36,187 34,312
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 197,822 164,972
Stockholders' equity 10,861 9,759
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 208,683 174,731
Net yield on interest-earning assets 1.03 1.62
- ------------------------------------------------------------------------------------------------------------------------
Net interest earnings 1,282 1,598
- ------------------------------------------------------------------------------------------------------------------------
34
34
ASSET AND LIABILITY MANAGEMENT DERIVATIVES
The objective of asset and liability management is to create longer-term
value through the management of interest rate risk related to J.P. Morgan's
nontrading assets, liabilities, and off-balance-sheet activities. J.P. Morgan
utilizes a variety of financial instruments, including derivatives, in an
integrated manner to achieve these objectives. Additional information on asset
and liability management derivatives, primarily interest rate swaps, is provided
below. For more information about asset and liability management activities, see
Note 6 to the financial statements, Off-balance-sheet financial instruments.
The table below summarizes maturities and weighted-average interest rates
to be received and paid on U.S. dollar and non-U.S. dollar asset and liability
management interest rate swaps at September 30, 1996. The majority of asset and
liability management interest rate swaps, as presented below, are risk-adjusting
swaps. Also included in the table are swaps designated as hedges or used to
modify the interest rate characteristics of assets and liabilities. Variable
rates presented are generally based on the London Interbank Offered Rate (LIBOR)
in effect on the swaps at September 30, 1996, and reset at predetermined dates.
The table was prepared under the assumption that these variable interest rates
remain constant. The variable interest rates to be received or paid will change
to the extent that rates fluctuate. Such changes may be substantial.
Not included in the table below are other derivatives used for asset
and liability management purposes, such as currency swaps, basis swaps, foreign
exchange contracts, interest rate futures, forward rate agreements, debt
securities forwards, and purchased options, totaling $64.2 billion at September
30, 1996. The contractual maturities of these derivative contracts are primarily
less than one year.
35
35
By expected maturities
- ---------------------------------------------------------------------------------------------------------------
After After two After After
one year years three four
but but years but but After
Within within within within within five
Dollars in billions one year two three four five years Total
- ---------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS -
U.S. DOLLAR
Receive fixed
swaps
Notional amount $ 18.6 $ 14.8 $ 4.0 $ 3.8 $ 1.7 $ 11.5 $ 54.4
Weighted average:
Receive rate 6.6% 6.0% 6.9% 6.8% 6.5% 6.6% 6.5%
Pay rate 5.4 5.6 5.6 5.6 5.6 5.6 5.5
Pay fixed swaps
Notional amount $ 20.3 $ 18.6 $ 2.9 $ 8.9 $ 5.3 $ 9.9 $ 65.9
Weighted average:
Receive rate 5.6% 5.6% 5.6% 5.4% 5.6% 5.6% 5.6%
Pay rate 6.3 5.7 6.4 6.3 5.5 7.1 6.2
INTEREST RATE SWAPS -
NON-U.S. DOLLAR
Receive fixed
swaps
Notional amount $ 30.5 $ 19.0 $ 8.8 $ 6.2 $ 3.8 $ 6.8 $ 75.1
Weighted average:
Receive rate 6.1% 5.1% 6.1% 6.5% 6.7% 7.1% 6.1%
Pay rate 3.5 3.4 3.3 4.0 4.3 3.5 3.5
Pay fixed swaps
Notional amount $ 26.3 $ 14.8 $ 9.3 $ 6.2 $ 3.3 $ 6.1 $ 66.0
Weighted average:
Receive rate 3.8% 2.8% 3.3% 3.9% 4.2% 3.4% 3.5%
Pay rate 6.1 5.5 5.8 6.5 7.4 7.2 6.3
- ---------------------------------------------------------------------------------------------------------------
Total notional amount $ 95.7 $ 67.2 $ 25.0 $ 25.1 $ 14.1 $ 34.3 $261.4
- ---------------------------------------------------------------------------------------------------------------
Not included in the table above are $3.8 billion and $2.7 billion of notional
amounts related to currency swaps and basis swaps, respectively.
36
36
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. Statement re computation of ratios
27. Financial data schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended September 30, 1996:
July 11, 1996 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing
its earnings for the three-month period ended June 30, 1996.
August 13, 1996 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing
an agreement to sell its institutional cash processing business to
HSBC Financial Institutions, a division of Marine Midland Bank.
37
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(REGISTRANT) J.P. MORGAN & CO. INCORPORATED
BY (SIGNATURE)
/s/ DAVID H. SIDWELL
---------------------------------------
(NAME AND TITLE) DAVID H. SIDWELL
MANAGING DIRECTOR AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
DATE: November 14, 1996
38
1
LIST OF EXHIBITS
EXHIBIT
12. Statement re computation of ratios
27. Financial data schedule