1
PAGE 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 April 30, 1997:
Common Stock, $2.50 Par Value 179,818,346 Shares
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PAGE 2
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following financial statement information for the quarterly period ended
March 31, 1997, is set forth within this document on the pages indicated:
Page
Three-month Consolidated statement of income
J.P. Morgan & Co. Incorporated 3
Consolidated balance sheet
J.P. Morgan & Co. Incorporated 4
Consolidated statement of changes in stockholders' equity
J.P. Morgan & Co. Incorporated 5
Consolidated statement of cash flows
J.P. Morgan & Co. Incorporated 6
Consolidated statement of condition
Morgan Guaranty Trust Company of New York 7
Notes to Consolidated financial statements
J.P. Morgan & Co. Incorporated 8-16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial highlights 17
Business sector analysis 18-22
Risk management 23
Financial review 24-27
Consolidated average balances and net interest earnings 28-29
Derivatives used for purposes other-than-trading 30
Other financial information 31
PART II -- OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 33
SIGNATURES 34
3
PAGE 3
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
- ------------------------------------------------------------------------------------------------
In millions,
except per share data Three months ended
---------------------------------------------------------------
March 31 March 31 Increase/ December 31 Increase/
1997 1996 (Decrease) 1996 (Decrease)
---------------------------------------------------------------
NET INTEREST REVENUE
Interest revenue $ 2,892 $ 2,554 $ 338 $ 2,925 ($ 33)
Interest expense 2,442 2,158 284 2,441 1
- ------------------------------------------------------------------------------------------------
Net interest revenue 450 396 54 484 (34)
NONINTEREST REVENUE
Trading revenue 697 758 (61) 512 185
Investment banking revenue 226 201 25 277 (51)
Investment management revenue 184 157 27 182 2
Fees and commissions 148 151 (3) 152 (4)
Investment securities revenue 61 78 (17) 84 (23)
Other revenue 67 (1) 68 114 (47)
- ------------------------------------------------------------------------------------------------
Total noninterest revenue 1,383 1,344 39 1,321 62
Total revenue 1,833 1,740 93 1,805 28
OPERATING EXPENSES
Employee compensation and
benefits 766 730 36 732 34
Net occupancy 73 73 -- 73 --
Technology and communications 203 158 45 221 (18)
Other expenses 149 124 25 171 (22)
- ------------------------------------------------------------------------------------------------
Total operating expenses 1,191 1,085 106 1,197 (6)
Income before income taxes 642 655 (13) 608 34
Income taxes 218 216 2 189 29
- ------------------------------------------------------------------------------------------------
Net income 424 439 (15) 419 5
PER COMMON SHARE
Net income (a) $ 2.04 $ 2.13 ($ 0.09) $ 2.04 --
Dividends declared 0.88 0.81 0.07 0.88 --
- ------------------------------------------------------------------------------------------------
(a) Earnings per share amounts represent both primary and fully diluted earnings
per share, except for the three months ended December 31, 1996. Fully diluted
earnings per share for the three months ended December 31, 1996, were $2.03.
See notes to consolidated financial statements.
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PAGE 4
CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated
- -------------------------------------------------------------------------------------------------------
In millions, except per share data March 31 December 31
1997 1996
----------------------
ASSETS
Cash and due from banks $ 1,174 $ 906
Interest-earning deposits with banks 1,955 1,908
Debt investment securities available-for-
sale carried at fair value (Cost: $23,416
at March 1997 and $24,610 at December 1996) 23,659 24,865
Trading account assets, net of allowance for credit losses of $350 89,417 90,980
Securities purchased under agreements to
resell ($35,034 at March 1997 and $32,455 at
December 1996) and federal funds sold 35,108 32,505
Securities borrowed 31,981 27,931
Loans, net of allowance for credit losses of $563 at March 1997 and $566
at December 1996 28,890 27,554
Customers' acceptance liability 257 212
Accrued interest and accounts receivable 5,569 3,789
Premises and equipment 3,160 3,137
Less: accumulated depreciation 1,313 1,272
- -------------------------------------------------------------------------------------------------------
Premises and equipment, net 1,847 1,865
Other assets 6,525 9,511
- -------------------------------------------------------------------------------------------------------
Total assets 226,382 222,026
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 1,219 1,501
In offices outside the U.S. 806 708
Interest-bearing deposits:
In offices in the U.S. 10,293 7,103
In offices outside the U.S. 41,253 43,412
- -------------------------------------------------------------------------------------------------------
Total deposits 53,571 52,724
Trading account liabilities 55,338 50,919
Securities sold under agreements to
repurchase ($55,448 at March 1997 and $56,117
at December 1996) and federal funds purchased 60,155 61,429
Commercial paper 4,023 4,132
Other liabilities for borrowed money 19,948 19,948
Accounts payable and accrued expenses 4,825 5,935
Liability on acceptances 257 212
Long-term debt not qualifying as risk-based capital 10,855 9,411
Other liabilities, including allowance for credit losses of $200 986 1,442
- -------------------------------------------------------------------------------------------------------
209,958 206,152
Long-term debt qualifying as risk-based capital 4,118 3,692
Company-obligated mandatorily redeemable preferred securities
of subsidiaries 1,150 750
- -------------------------------------------------------------------------------------------------------
Total liabilities 215,226 210,594
STOCKHOLDERS' EQUITY
Preferred stock (authorized shares: 10,400,000)
Adjustable rate cumulative preferred
stock, $100 par value (issued and
outstanding: 2,444,300) 244 244
Variable cumulative preferred stock,
$1,000 par value (issued and outstanding:
250,000) 250 250
Fixed cumulative preferred stock, $500 par value (issued and outstanding:
400,000) 200 200
Common stock, $2.50 par value (authorized
shares: 500,000,000; issued: 200,689,373 at
March 1997 and 200,688,123 at December 1996) 502 502
Capital surplus 1,413 1,446
Retained earnings 8,883 8,635
Net unrealized gains on investment securities, net of taxes 402 464
Other 864 826
- -------------------------------------------------------------------------------------------------------
12,758 12,567
Less: treasury stock (19,562,782 shares at March 1997 and 15,765,455
shares at December 1996) at cost 1,602 1,135
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,156 11,432
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 226,382 222,026
- -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
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PAGE 5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
J.P. Morgan & Co. Incorporated
- ---------------------------------------------------------------------------------------------------
Dollars in millions Three months ended
-----------------------
March 31 March 31
1997 1996
-----------------------
PREFERRED STOCK
Adjustable rate cumulative preferred stock
Balance, January 1 and March 31 $ 244 $ 244
- ---------------------------------------------------------------------------------------------------
Variable cumulative preferred stock
Balance, January 1 and March 31 250 250
- ---------------------------------------------------------------------------------------------------
Fixed cumulative preferred stock
Balance, January 1 200 --
Shares issued -- 200
- ---------------------------------------------------------------------------------------------------
Balance, March 31 200 200
- ---------------------------------------------------------------------------------------------------
Total preferred stock, March 31 694 694
- ---------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, January 1 and March 31 502 502
- ---------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance, January 1 1,446 1,430
Shares issued or distributed under dividend reinvestment plan, various
employee benefit plans, and conversion of debentures, and income tax
benefits associated with stock options (33) 2
- ---------------------------------------------------------------------------------------------------
Balance, March 31 1,413 1,432
- ---------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, January 1 8,635 7,731
Net income 424 439
Dividends declared on preferred stock (9) (8)
Dividends declared on common stock (160) (152)
Dividend equivalents on common stock issuable (7) (4)
- ---------------------------------------------------------------------------------------------------
Balance, March 31 8,883 8,006
- ---------------------------------------------------------------------------------------------------
NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES
Balance, January 1 464 566
Net change in net unrealized gains, net of taxes (62) (96)
- ---------------------------------------------------------------------------------------------------
Balance, March 31 402 470
- ---------------------------------------------------------------------------------------------------
OTHER
COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 838 556
Deferred stock awards, net 42 39
- ---------------------------------------------------------------------------------------------------
Balance, March 31 880 595
- ---------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
Balance, January 1 (12) (4)
Translation adjustments (6) 3
Income tax benefit (expense) 2 (1)
- ---------------------------------------------------------------------------------------------------
Balance, March 31 (16) (2)
- ---------------------------------------------------------------------------------------------------
Total other, March 31 864 593
- ---------------------------------------------------------------------------------------------------
LESS: TREASURY STOCK
Balance, January 1 1,135 824
Purchases 734 142
Shares distributed under various employee benefit plans (267) (116)
- ---------------------------------------------------------------------------------------------------
Balance, March 31 1,602 850
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity, March 31 11,156 10,847
- ---------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
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PAGE 6
CONSOLIDATED STATEMENT OF CASH FLOWS
J.P. Morgan & Co. Incorporated
- -------------------------------------------------------------------------------------------------------
Dollars in millions Three months ended
-----------------------
March 31 March 31
1997 1996
-----------------------
NET INCOME $ 424 $ 439
Adjustments to reconcile to cash (used in) provided by operating
activities:
Noncash items: depreciation, amortization, deferred income taxes,
stock award plans, and write-downs of investment securities 155 277
(Increase) decrease in assets:
Trading account assets 1,537 (422)
Securities purchased under agreements to resell (2,584) (7,523)
Securities borrowed (4,050) (3,071)
Accrued interest and accounts receivable (1,780) (1,227)
Increase (decrease) in liabilities:
Trading account liabilities 4,401 1,488
Securities sold under agreements to repurchase (673) 15,151
Accounts payable and accrued expenses (1,073) 1,586
Other changes in operating assets and liabilities, net 2,733 (5,607)
Net investment securities gains included in
cash flows from investing activities (77) (85)
- -------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (987) 1,006
- -------------------------------------------------------------------------------------------------------
(Increase) decrease in interest-earning deposits with banks (48) 803
Debt investment securities:
Proceeds from sales 10,367 15,201
Proceeds from maturities, calls, and mandatory redemptions 1,095 747
Purchases (10,362) (18,907)
Increase in federal funds sold (24) (9)
Increase in loans (1,349) (5,205)
Payments for premises and equipment (29) (42)
Other changes, net 217 211
- -------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (133) (7,201)
- -------------------------------------------------------------------------------------------------------
Decrease in noninterest-bearing deposits (184) (570)
Increase in interest-bearing deposits 1,020 4,345
Decrease in federal funds purchased (605) (1,483)
Increase (decrease) in commercial paper (109) 1,428
Other liabilities for borrowed money:
Proceeds 5,581 6,250
Payments (5,294) (6,390)
Long-term debt:
Proceeds 3,256 657
Payments (1,204) (517)
Proceeds from issuance of Company-obligated mandatorily
redeemable preferred securities of subsidiary 400 --
Capital stock:
Issued or distributed 132 200
Purchased (734) (143)
Dividends paid (171) (162)
Other changes, net (670) 1,780
- -------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,418 5,395
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks (30) (3)
- -------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 268 (803)
Cash and due from banks at December 31, 1996 and 1995 906 1,535
- -------------------------------------------------------------------------------------------------------
Cash and due from banks at March 31, 1997 and 1996 1,174 732
- -------------------------------------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 2,414 $ 2,279
Income taxes 300 252
- -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
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PAGE 7
CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York
- -----------------------------------------------------------------------------------------------
In millions, except per share data March 31 December 31
1997 1996
-------------------------
ASSETS
Cash and due from banks $ 1,113 $ 920
Interest-earning deposits with banks 1,958 1,910
Debt investment securities available-for-sale
carried at fair value 22,416 23,510
Trading account assets, net of allowance for credit 72,600 72,549
losses of $350
Securities purchased under agreements to resell
and federal funds sold 34,613 27,762
Loans, net of allowance for credit losses of $561 at March 1997
and $565 at December 1996 28,711 27,378
Customers' acceptance liability 257 212
Accrued interest and accounts receivable 6,385 3,470
Premises and equipment 2,830 2,812
Less: accumulated depreciation 1,152 1,116
- -----------------------------------------------------------------------------------------------
Premises and equipment, net 1,678 1,696
Other assets 3,207 5,406
- -----------------------------------------------------------------------------------------------
Total assets 172,938 164,813
- -----------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 1,253 1,495
In offices outside the U.S. 845 749
Interest-bearing deposits:
In offices in the U.S. 10,304 7,114
In offices outside the U.S. 41,288 43,716
- -----------------------------------------------------------------------------------------------
Total deposits 53,690 53,074
Trading account liabilities 46,825 44,039
Securities sold under agreements to repurchase
and federal funds purchased 31,361 30,787
Other liabilities for borrowed money 12,941 13,215
Accounts payable and accrued expenses 2,833 4,203
Liability on acceptances 257 212
Long-term debt not qualifying as risk-based capital
(includes $993 at March 1997 and $942 at December 1996 of
notes payable to J.P. Morgan) 7,800 5,436
Other liabilities, including allowance for credit losses of $200 4,254 977
- -----------------------------------------------------------------------------------------------
159,961 151,943
Long-term debt qualifying as risk-based capital
(includes $2,731 at March 1997 and $2,780 at December 1996 of
notes payable to J.P. Morgan) 2,891 2,979
- -----------------------------------------------------------------------------------------------
Total liabilities 162,852 154,922
STOCKHOLDER'S EQUITY
Preferred stock, $100 par value (authorized shares: 2,500,000) -- --
Common stock, $25 par value (authorized shares: 11,000,000;
outstanding: 10,599,027) 265 265
Surplus 3,155 3,155
Undivided profits 6,521 6,334
Net unrealized gains on investment securities, net of taxes 161 149
Foreign currency translation (16) (12)
- -----------------------------------------------------------------------------------------------
Total stockholder's equity 10,086 9,891
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity 172,938 164,813
- -----------------------------------------------------------------------------------------------
Member of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
See notes to consolidated financial statements.
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PAGE 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF J.P. MORGAN & CO. INCORPORATED
Supplementary to notes in the 1996 Annual report to stockholders
1. BASIS OF PRESENTATION
The interim financial information in this report has not been audited. In the
opinion of management, all adjustments necessary for a fair presentation of the
consolidated financial position and the consolidated results of operations for
the interim periods have been made. All adjustments made were of a normal
recurring nature. Management consults with its independent accountants on
significant accounting and reporting matters that arise during the year.
2. ACCOUNTING DEVELOPMENTS
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15 and related
pronouncements, and replaces the computations of primary and fully diluted
earnings per share (EPS) with basic and diluted EPS, respectively. Basic EPS is
computed by dividing income available to common stockholders by the period's
weighted-average number of common shares outstanding, which includes
contingently issuable shares where all necessary conditions for issuance have
been satisfied. Diluted EPS includes the determinants of basic EPS and, in
addition, gives effect to dilutive potential common shares that were
outstanding during the period. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997. Earlier
application is not permitted. Basic EPS and diluted EPS, computed using SFAS No.
128, for the three months ended March 31, 1997, were approximately $2.19 and
$2.04, respectively.
3. INTEREST REVENUE AND EXPENSE
An analysis of interest revenue and expense derived from on-and
off-balance-sheet financial instruments is presented in the table below.
Interest revenue and expense associated with derivative financial instruments,
such as swaps, forwards, spot, futures, options, and debt securities forwards,
used as hedges or to modify the interest rate characteristics of assets and
liabilities, is attributed to and included with the related balance sheet
instrument. Net interest revenue associated with risk-adjusting swaps that are
used to meet longer-term investment objectives, including the maximization of
net interest revenue, is not attributed to a specific balance sheet instrument,
but is included in the Other sources caption in the table below.
First quarter
In millions 1997 1996
- --------------------------------------------------------------
INTEREST REVENUE
Deposits with banks $ 27 $ 27
Debt investment securities (a) 412 394
Trading account assets 1,071 755
Securities purchased under agreements
to resell and federal funds sold 455 577
Securities borrowed 383 263
Loans 465 440
Other sources, primarily risk-adjusting swaps 79 98
- --------------------------------------------------------------
Total interest revenue 2,892 2,554
- --------------------------------------------------------------
INTEREST EXPENSE
Deposits 663 650
Trading account liabilities 357 293
Securities sold under agreements to
repurchase and federal funds purchased 876 787
Other borrowed money 332 289
Long-term debt 195 139
Trust preferred securities 19 -
- --------------------------------------------------------------
Total interest expense 2,442 2,158
- --------------------------------------------------------------
Net interest revenue 450 396
- --------------------------------------------------------------
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PAGE 9
(a) Interest revenue from debt investment securities included taxable revenue of
$385 million and revenue exempt from U.S. income taxes of $27 million for the
three months ended March 31, 1997. Interest revenue from debt investment
securities included taxable revenue of $360 million and revenue exempt from U.S.
income taxes of $34 million for the three months ended March 31, 1996.
For the three months ended March 31, 1997, net interest revenue associated with
derivatives used for purposes other-than-trading was approximately $35 million,
compared with approximately $40 million for the three months ended March 31,
1996. At March 31, 1997, approximately $230 million of net deferred losses on
closed derivative contracts used for purposes other-than-trading were recorded
on the consolidated balance sheet. Such amount is primarily composed of net
deferred losses on closed hedge contracts included in the amortized cost of the
debt investment portfolio. As discussed in Note 5 to the consolidated financial
statements, Investment securities, the net unrealized appreciation associated
with the debt investment portfolio was $243 million at March 31, 1997. The
amount of net deferred gains or losses on closed derivative contracts will
change from period to period, primarily due to amortization of such amounts to
net interest revenue and the execution of our investing strategies, which may
result in the sale of the underlying hedged instruments and/or termination of
hedge contracts. Net deferred losses on closed derivative contracts at March 31,
1997, are expected to amortize into Net interest revenue as follows: $60 million
- - remainder of 1997; $75 million in 1998; $35 million in 1999; $30 million in
2000; $15 million in 2001; $10 million in 2002; and approximately $5 million
thereafter.
4. TRADING REVENUE
Trading revenue disaggregated by principal product groupings for the three
months ended March 31, 1997 and 1996, is presented in the following table. For
additional information refer to the Trading revenue discussion in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
First quarter
In millions 1997 1996
- -----------------------------------------------------------
Fixed Income $346 $533
Equities 111 94
Foreign Exchange 120 68
Commodities 13 34
Proprietary Trading 107 29
- -----------------------------------------------------------
Trading revenue 697 758
- -----------------------------------------------------------
5. INVESTMENT SECURITIES
Debt investment securities
A comparison of the cost and carrying values of debt investment securities
available-for-sale and carried at fair value at March 31, 1997, follows.
Gross Gross Fair and
unrealized unrealized carrying
In millions Cost gains losses value
- -----------------------------------------------------------------------------------------
U.S. Treasury $ 1,282 46 (22) $ 1,306
U.S. government agency,
principally mortgage-backed 16,912 132 (71) 16,973
U.S. state and political subdivision 1,408 143 (18) 1,533
U.S. corporate and bank debt 296 1 - 297
Foreign government* 1,025 25 (4) 1,046
Foreign corporate and bank debt 2,383 13 (3) 2,393
Other 110 1 - 111
- -----------------------------------------------------------------------------------------
Total debt investment securities 23,416 361 (118) 23,659
- -----------------------------------------------------------------------------------------
* Approximately half of these foreign governments are members of the
Organization for Economic Cooperation and Development.
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PAGE 10
The gross unrealized gains and losses shown in the table above include the
effects of any related hedge. For additional detail of gross unrealized gains
and losses associated with open derivative contracts used to hedge debt
investment securities, see Note 7 to the consolidated financial statements,
Off-balance-sheet financial instruments.
The following table presents the components of Investment Securities Revenue
realized related to the debt investment securities portfolio during the first
quarter of 1997 and 1996.
First quarter
In millions 1997 1996
- --------------------------------------------------------------
Gross realized gains from sales $38 $101
Gross realized losses from sales (26) (89)
- --------------------------------------------------------------
Net debt investment securities gains 12 12
Equity investment securities
Net realized gains on the sale of equity investment securities during the
quarters ended March 31, 1997 and 1996 of $55 million and $64 million,
respectively, are reflected in Investment securities revenue. For the 1997
period, this represents gross realized gains of $65 million and write-downs of
$10 million. For the 1996 period, this represents gross realized gains of $73
million and write-downs of $9 million.
Gross unrealized gains and losses as well as a comparison of the cost,
fair value, and carrying value of marketable equity investment securities
available-for-sale at March 31, 1997, follows.
Gross Gross Fair and
unrealized unrealized carrying
In millions Cost gains losses value
- -----------------------------------------------------------------------------
March 31, 1997 $343 $388 $ (2) $729
- -----------------------------------------------------------------------------
Nonmarketable equity investment securities and securities held in Small Business
Investment Companies, with a carrying value of $537 million, had an estimated
fair value of $670 million at March 31, 1997.
6. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and liabilities, including derivative instruments used
for trading purposes, are carried at fair value. The following table presents
the carrying value of trading account assets, before taking into consideration
the allowance for credit losses, and trading account liabilities at March 31,
1997, and the average balance for the three-month period ended March 31, 1997.
Carrying Average
value balance
In millions
- -----------------------------------------------------------------
TRADING ACCOUNT ASSETS (a)
U.S. Treasury $14,547 $16,440
U.S. government agency 4,948 6,226
Foreign government 21,307 24,949
Corporate debt and equity 18,127 17,599
Other securities 4,212 6,626
Interest rate and currency swaps 15,247 14,412
Foreign exchange contracts 2,332 2,592
Interest rate futures and forwards 326 400
Commodity and equity contracts 578 1,887
Purchased option contracts 8,143 7,721
- -----------------------------------------------------------------
Total trading account assets 89,767 98,852
- -----------------------------------------------------------------
TRADING ACCOUNT LIABILITIES
U.S. Treasury 9,621 8,991
Foreign government 8,922 10,172
Corporate debt and equity 7,099 5,975
Other securities 1,914 3,151
Interest rate and currency swaps 12,229 12,591
Foreign exchange contracts 3,511 4,910
Interest rate futures and forwards 784 734
Commodity and equity contracts 2,495 2,405
Written option contracts 8,763 7,898
- -----------------------------------------------------------------
Total trading account liabilities 55,338 56,827
- -----------------------------------------------------------------
(a) Refer to Note 10 to these consolidated financial statements for a discussion
of the aggregate allowance for credit losses.
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PAGE 11
7. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Derivatives
Derivatives may be used either for trading or other-than-trading purposes.
Other-than-trading purposes are primarily related to our investing activities.
Accordingly, the notional amounts presented in the table below have been
identified as relating to either trading or other-than-trading purposes based on
management's intent and ongoing usage. A summary of the credit exposure, which
is represented by the positive market value associated with derivatives, after
considering the benefit of approximately $39.8 billion of master netting
agreements in effect at March 31, 1997, is also presented.
Notional amounts Credit exposure
In billions
- ---------------------------------------------------------------------------------
Interest rate and currency swaps
Trading $1,988.1
Other-than-trading(a)(b)(c) 233.1
- ---------------------------------------------------------------------------------
Total interest rate and currency swaps 2,221.2 $15.3
- ---------------------------------------------------------------------------------
Foreign exchange spot, forward, and
futures contracts
Trading 675.1
Other-than-trading(a)(b) 34.2
- ---------------------------------------------------------------------------------
Total foreign exchange spot, forward,
and futures contracts 709.3 2.3
- ---------------------------------------------------------------------------------
Interest rate futures, forward rate
agreements, and debt securities forwards
Trading 642.6
Other-than-trading 15.9
- ---------------------------------------------------------------------------------
Total interest rate futures, forward
rate agreements, and debt securities
forwards 658.5 0.3
- ---------------------------------------------------------------------------------
Commodity and equity swaps, forward, and
futures contracts, all trading 70.0 0.6
- ---------------------------------------------------------------------------------
Purchased options(d)
Trading 723.9
Other-than-trading(a) 1.6
- ---------------------------------------------------------------------------------
Total purchased options 725.5 8.1
- ---------------------------------------------------------------------------------
Written options, all trading(e) 874.8
- ---------------------------------------------------------------------------------
Total credit exposure recorded as
assets on the consolidated balance sheet 26.6
- ---------------------------------------------------------------------------------
12
PAGE 12
(a) The majority of J.P. Morgan's derivatives used for purposes
other-than-trading are transacted with independently managed J.P. Morgan
derivatives dealers who function as intermediaries for credit and administrative
purposes.
(b) The notional amounts of derivative contracts used for purposes
other-than-trading conducted in the foreign exchange markets, primarily forward
contracts, amounted to $37.4 billion at March 31, 1997, and were primarily
denominated in the following currencies: deutsche mark $7.2 billion, Japanese
yen $5.4 billion, French franc $4.9 billion, Italian lira $3.8 billion, Swiss
franc $2.0 billion, British pound $1.9 billion, Belgian franc $1.9 billion,
European currency unit $1.4 billion, and Spanish peseta $1.3 billion.
(c) The notional amount of risk-adjusting swaps was $189.0 billion at March 31,
1997.
(d) At March 31, 1997, purchased options used for trading purposes included
$543.4 billion of interest rate options, $140.8 billion of foreign exchange
options, and $39.7 billion of commodity and equity options. Only interest rate
options are used for purposes other-than-trading. Purchased options executed on
an exchange amounted to $192.9 billion and those negotiated over-the-counter
amounted to $532.6 billion at March 31, 1997.
(e) At March 31, 1997, written options included $676.4 billion of interest rate
options, $154.5 billion of foreign exchange options, and $43.9 billion of
commodity and equity options. Written option contracts executed on an exchange
amounted to $285.3 billion and those negotiated over-the-counter amounted to
$589.5 billion at March 31, 1997.
Derivatives used for purposes other-than-trading
As an end user, J.P. Morgan utilizes derivative instruments in the execution of
its investing strategies. Such derivatives primarily include interest rate
swaps, foreign exchange forward contracts, interest rate futures, and debt
securities forwards. Derivatives are used to hedge or modify the interest rate
characteristics of debt investment securities, loans, deposits, other
liabilities for borrowed money, long-term debt, and other financial assets and
liabilities. In addition, we utilize derivatives to adjust our overall interest
rate risk profile through the use of risk-adjusting swaps.
Net unrealized gains associated with open derivative contracts used to
hedge or modify the interest rate characteristics of related balance sheet
instruments amounted to $146 million at March 31, 1997. Gross unrealized gains
and gross unrealized losses associated with open derivative contracts used for
these purposes at March 31, 1997, 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 8 to the
consolidated financial statements, Fair value of financial instruments.
Gross Gross
unrealized unrealized Net unrealized
In millions gains (losses) gains (losses)
- -------------------------------------------------------------------------------
Long-term debt $ 200 $ (159) $ 41
Debt investment securities 176 (51) 125
Deposits 48 (55) (7)
Other financial instruments 61 (74) (13)
- -------------------------------------------------------------------------------
Total 485 (339) 146
- -------------------------------------------------------------------------------
Net unrealized gains associated with risk-adjusting swaps that are entered into
to meet longer-term investment objectives and their related hedges approximated
$0.1 billion at March 31, 1997. The net amount is composed of $2.7 billion of
gross unrealized gains and $2.6 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 March 31, 1997.
There were no material terminations of risk-adjusting swaps during the three
months ended March 31, 1997.
13
PAGE 13
Credit-related financial instruments
Credit-related financial instruments include commitments to extend credit,
standby letters of credit and guarantees, and indemnifications in connection
with securities lending activities. The contractual amounts of these instruments
represent the amounts at risk should the contract be fully drawn upon, the
client default, and the value of any existing collateral become worthless. The
total contractual amount of credit-related financial instruments does not
represent the expected future liquidity requirements, since a significant amount
of commitments to extend credit and standby letters of credit and guarantees are
expected to expire or mature without being drawn. The credit risk associated
with these instruments varies depending on the creditworthiness of the client
and the value of any collateral held. Commitments to extend credit generally
require the client to meet certain credit-related terms and conditions before
drawdown. Collateral is required in connection with securities lending
indemnifications. Market risk for commitments to extend credit and standby
letters of credit and guarantees, while not significant, may exist as
availability of and access to credit markets changes.
A summary of the contractual amount of credit-related financial instruments
at March 31, 1997, is presented in the following table.
March 31
In billions 1997
- ----------------------------------------------------------------------
Commitments to extend credit $ 69.5
Standby letters of credit and guarantees 16.6
Securities lending indemnifications (a) 4.5
- ----------------------------------------------------------------------
(a) At March 31, 1997, J.P. Morgan held cash and other collateral in support of
securities lending indemnifications.
Included in Fees and Commissions are credit-related fees of $37 million and $38
million for the three months ended March 31, 1997 and 1996, respectively, which
are primarily earned from commitments to extend credit, standby letters of
credit and guarantees, and securities lending indemnifications.
Other
Consistent with industry practice, amounts receivable and payable for securities
that have not reached the contractual settlement dates are recorded net on the
consolidated balance sheet. Amounts receivable for securities sold of $39.0
billion were netted against amounts payable for securities purchased of $39.1
billion to arrive at a net trade date payable of $0.1 billion, which was
classified as Other liabilities on the consolidated balance sheet at March 31,
1997.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, J.P. Morgan estimates that the aggregate net fair value of all
balance sheet and off-balance-sheet financial instruments exceeded associated
net carrying values. At March 31, 1997, such excess was essentially unchanged
from December 31, 1996.
14
PAGE 14
9. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS
Total impaired loans and other nonperforming assets, net of charge-offs, at
March 31, 1997, are presented in the following table. At March 31, 1997,
approximately 50% 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, approximately 40% is based on the fair value of the
collateral, and the remainder is measured by an observable market price.
March 31
In millions 1997
- ----------------------------------------------------------------------------
Impaired loans:
Commercial and industrial $ 55
Other 34
- ----------------------------------------------------------------------------
89
Restructuring countries 2
- ----------------------------------------------------------------------------
Total impaired loans 91 (a)
- ----------------------------------------------------------------------------
Other nonperforming assets 19
- ----------------------------------------------------------------------------
Total nonperforming assets 110
- ----------------------------------------------------------------------------
(a) As of March 31, 1997, no reserve is required under SFAS No. 114, Accounting
by Creditors for Impairment of a Loan, for the $91 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 ended March 31, 1997, the average
recorded investment in impaired loans was $113 million.
An analysis of the effect of impaired loans, net of charge-offs, on interest
revenue for the three months ended March 31, 1997 and 1996, is presented in the
following table.
First quarter
In millions 1997 1996
- -----------------------------------------------------------------------------
Interest revenue that would have been recorded if accruing $ 2 $ 4
Less interest revenue recorded 1 1
- -----------------------------------------------------------------------------
(Negative) impact of impaired loans on interest revenue (1) (3)
10. AGGREGATE ALLOWANCE FOR CREDIT LOSSES
An analysis of the aggregate allowance for credit losses at March 31, 1997, is
presented in the following table.
First quarter
In millions 1997
- -------------------------------------------------------------------
Beginning of period balance $1,116
- -------------------------------------------------------------------
Recoveries 10
Charge-offs:
Commercial and industrial (13)
Other --
- -------------------------------------------------------------------
Net charge-offs (3)
- -------------------------------------------------------------------
Balance, March 31, 1997 (a)(b)(c) 1,113
- -------------------------------------------------------------------
(a) In accordance with SFAS No. 5, Accounting for Contingencies, and SFAS No.
114, as amended by SFAS No. 118, an aggregate allowance is maintained that is
considered adequate to absorb losses inherent in the existing portfolios of
loans and other undertakings to extend credit, such as irrevocable unused loan
commitments, or to make payments to others for which a client is ultimately
liable, such as standby letters of credit and guarantees, commercial letters of
credit and acceptances, and all other credit exposures, including derivatives. A
judgment as to the adequacy of the aggregate allowance is made at the end of
each quarterly reporting period.
(b) At March 31, 1997, the allocation of the aggregate allowance for credit
losses was as follows: Specific allocation - borrowers in the U.S. $163 million,
Specific allocation - borrowers outside the U.S. $56 million, Allocation to
general risk $894 million.
(c) At March 31, 1997, the aggregate allowance was apportioned and displayed as
follows: $563 million as a reduction of loans, $350 million as reduction of
trading account assets related to derivatives, and $200 million included in
other liabilities related to undertakings to extend credit that are not
currently reflected on the consolidated balance sheet.
15
PAGE 15
11. INVESTMENT BANKING AND OTHER REVENUE
In the first quarter of 1997 and 1996, investment banking revenue of $226
million and $201 million includes $97 million and $65 million, respectively, of
underwriting revenue.
Other revenue in the 1997 first quarter includes $64 million ($59 million
in Corporate Items) of gains on hedges of anticipated foreign currency revenues
and expenses. These gains were partially offset by the impact of exchange rate
movements on reported revenues and expenses in the quarter.
12. INCOME TAXES
Income tax expense in the 1997 first quarter reflects a 34% effective tax rate,
compared to a 33% effective tax rate in the 1996 first quarter. Income tax
expense related to net realized gains on debt and equity investment securities
was approximately $25 million for the three months ended March 31, 1997. Income
tax expense related to net realized gains on debt and equity investment
securities was approximately $29 million for the three months ended March 31,
1996. The applicable tax rate used to compute the income tax expense related to
net gains on debt and equity investment securities was approximately 37% for the
three months ended March 31, 1997 and 1996.
The valuation allowance to reduce deferred tax assets to the amount
expected to be realized totaled approximately $120 million at March 31, 1997 and
December 31, 1996. The valuation allowance is primarily related to the ability
to recognize tax benefits associated with foreign operations.
13. COMMITMENTS AND CONTINGENT LIABILITIES
Excluding mortgaged properties, assets carried at approximately $70.1 billion in
the consolidated balance sheet at March 31, 1997, were pledged as collateral for
borrowings, to qualify for fiduciary powers, to secure public monies as required
by law, and for other purposes.
16
PAGE 16
14. EARNINGS PER COMMON SHARE
In the calculation of primary and fully diluted earnings per common share, net
income is adjusted by adding back to net income the interest expense on
convertible debentures and the expense related to dividend equivalents on
certain deferred incentive compensation awards, net of the related income tax
effects, and subtracting from net income the preferred stock dividends to arrive
at net income applicable to common stock. Primary and fully diluted earnings per
common share are computed by dividing net income applicable to common stock by
the weighted-average number of common and common equivalent shares outstanding
during the year.
For primary and fully diluted earnings per share, the weighted-average
number of common and common equivalent shares outstanding was the sum of the
average number of shares of common stock outstanding, the average number of
shares issuable upon conversion of convertible debentures, and the average
number of shares issuable under employee benefit plans that have a dilutive
effect, as computed under the treasury stock method. Under this method, the
number of incremental shares is determined by assuming the issuance of the
outstanding stock options and certain deferred incentive compensation awards,
reduced by the number of shares assumed to be repurchased from the issuance
proceeds, using the market price of the company's common stock. For primary
earnings per share, this market price is the average market price for the
period, while for fully diluted earnings per share, it is the period-end market
price, if it is higher than the average price.
First quarter
Dollars in millions 1997 1996
- --------------------------------------------------------------------
Adjusted net income $415 $431
Primary earnings per share:
Weighted-average number of common
and common equivalent shares
outstanding during the period 203,137,598 202,133,593
Fully diluted earnings per share:
Weighted-average number of common
and common equivalent shares
outstanding during the period 203,152,515 202,539,222
- --------------------------------------------------------------------
Refer to Note 2, Accounting Developments, for information regarding the recently
issued SFAS No. 128, Earnings per Share.
17
PAGE 17
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
J.P. Morgan & Co. Incorporated reported net income of $424 million in the first
quarter of 1997, compared with $439 million in the first quarter of 1996.
Earnings per share for the quarter were $2.04 compared with $2.13 a year ago.
FIRST QUARTER 1997 RESULTS AT A GLANCE
In millions of dollars, Fourth
except per share data First quarter quarter
1997 1996 1996
- ------------------------------------------------------------------------------
Revenues $ 1,833 $ 1,740 $ 1,805
Operating expenses (1,191) (1,085) (1,197)
Income taxes (218) (216) (189)
- ------------------------------------------------------------------------------
Net income 424 439 419
Net income per share $2.04 $2.13 $2.04
- ------------------------------------------------------------------------------
Dividends declared per share $0.88 $0.81 $0.88
REVENUES rose 5% in the first quarter from a year ago.
- Finance and Advisory revenues increased 8% to $451 million, mainly as a
result of higher debt and equity underwriting revenues.
- Market Making revenues totaled $733 million, a decline of $38 million.
Revenues in emerging markets, equities, and foreign exchange were up
strongly; fixed income revenues in developed markets were down from the
high levels of 1996.
- Asset Management and Servicing revenues increased 9% to $375 million,
primarily reflecting gains in investment management and private client
activities.
- Proprietary Investing and Trading revenues, well diversified, rose 28%
to $276 million.
- Equity Investments revenues declined to $49 million from $66 million.
OPERATING EXPENSES rose 10% in the 1997 first quarter from a year ago.
18
PAGE 18
BUSINESS SECTOR ANALYSIS
We describe the activities of J.P. Morgan using five business sectors. Three of
these sectors - Finance and Advisory, Market Making, and Asset Management and
Servicing - focus on services we provide for clients. Two sectors comprise
proprietary activities that we conduct exclusively for our own account: Equity
Investments and Proprietary Investing and Trading. For a complete description of
our business sectors, refer to the J.P. Morgan & Co. Incorporated 1996 Annual
Report. Presented below are the summary results for each sector for the three
months ended March 31, 1997 and 1996.
Asset
Manage Total Propriet- Total
Finance -ment Client- Equity ary Propriet-
and Market and Focused Invest- Investing ary Corporate Consol-
In millions Advisory Making Servicing Activities ments and Trading Activities Items idated
- ---------------------------------------------------------------------------------------------------------------------------------
First quarter 1997
Total revenues $ 451 $ 733 $ 375 $1,559 $ 49 $ 276 $ 325 $ (51) $1,833
Total expenses 302 474 300 1,076 7 46 53 62 1,191
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income 149 259 75 483 42 230 272 (113) 642
- ---------------------------------------------------------------------------------------------------------------------------------
First quarter 1996
Total revenues 416 771 345 1,532 66 215 281 (73) 1,740
Total expenses 259 410 271 940 8 36 44 101 1,085
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income 157 361 74 592 58 179 237 (174) 655
- ---------------------------------------------------------------------------------------------------------------------------------
Methodology
The firm's management reporting system and policies were used to determine the
revenues and expenses directly attributable to each business sector. Earnings on
stockholders' equity were allocated based on management's assessment of the
inherent risk of the components of each sector. In addition, certain overhead
expenses not allocated for management reporting purposes were allocated to each
business sector. Overhead expenses were allocated based primarily on staff
levels and represent costs associated with various support functions that exist
for the benefit of the firm as a whole. Effective January 1, 1997, as
compensation for managing the firm's credit risk, Global Credit receives fees
from other Morgan businesses. Such fees are included as revenues in the Finance
and Advisory sector and as a reduction in revenues reported by businesses on
whose behalf such credit risk is managed. Certain prior year amounts have been
reclassified to conform with the current presentation.
FINANCE AND ADVISORY
The Finance and Advisory sector includes results of our Advisory, Debt and
Equity Underwriting, and Global Credit activities. Total revenues increased 8%
to $451 million. Revenues from Debt and Equity underwriting in both developed
and emerging markets were up sharply, growing 61%, as issuers took advantage of
favorable market conditions. Advisory revenues declined 26% from the first
quarter of 1996, when fees from several large transactions were recorded.
Revenues from Global Credit activities rose 9% to $230 million, primarily
attributable to higher loan syndication revenues.
For the first quarter of 1997, Securities Data Co. ranked J.P. Morgan
fourth in U.S. debt and equity underwriting, up from eighth a year ago. Morgan
ranked fifth in completed mergers and acquisitions transactions worldwide,
compared with fourth in the first quarter of 1996. As an arranger of syndicated
loans, J.P. Morgan ranked third globally, according to Loan Pricing
Corporation, for the first quarter of 1997, unchanged from a year earlier.
Expenses in the first quarter of 1997 increased 17% to $302 million
compared with $259 million in the first quarter of 1996. The Finance and
Advisory sector includes all of the costs associated with our global network of
senior client relationship managers who market the full spectrum of our
capabilities and provide the link between our clients' needs and J.P. Morgan's
financial, advisory, asset management, market-making, and risk management
products and services.
The Finance and Advisory sector recorded pretax income of $149 million in
the first quarter of 1997 compared with $157 million a year ago.
19
PAGE 19
MARKET MAKING
The Market Making sector includes results of our Fixed Income, Equities, Foreign
Exchange, and Commodities activities. Total revenues were $733 million, down
from $771 million. While most markets showed strength early in the quarter,
activity slowed in mid-March as a result of the directional shift in U.S.
monetary policy.
Fixed income revenues of $264 million in developed markets declined from
the very strong first-quarter 1996 level of $456 million. Revenues in the first
quarter of last year benefited from gains on positions arising from
client-related swap transactions. Overall, the volume of client transactions
grew, but the number of higher-yielding, customized transactions declined.
In emerging markets, revenues rose nearly 50% to $186 million, as a result
of short-term positioning gains and greater client demand.
Market Making revenues from equities were up 63% to $152 million, as a
result of strong demand in both the cash and derivative markets. Equity
derivative revenues grew 64%, and equity commissions were up 47%, reflecting
higher volumes and growing market share, primarily on U.S. and European
exchanges.
Foreign exchange revenues rose 78%, with strong client demand in active
markets. Commodities revenues were $12 million, down from $31 million a year
ago.
Total expenses of $474 million increased 16% from the first quarter of
1996.
The Market Making sector recorded pretax income of $259 million in the
first quarter of 1997, compared with $361 million in the first quarter of 1996.
ASSET MANAGEMENT AND SERVICING
The Asset Management and Servicing sector includes results of our Investment
Management, Private Client Services, Futures and Options Brokerage, and
Euroclear System activities. Total revenues rose 9% to $375 million in the first
quarter. Revenues generated from institutional investment management activities
and services for private clients increased 13% to $243 million. Assets under
management grew 15% from a year ago to $214 billion at March 31, 1997, due to
net new business and, to a lesser extent, market appreciation.
While most of the revenues from our private client businesses are reported
in this sector, approximately $40 million are included in our Finance and
Advisory and Market Making sectors, reflecting transactions undertaken for
private clients in other business areas. Private clients accounted for
approximately $133 million of our revenues from all client-focused activities in
the first quarter of 1997, up approximately 20% from the first quarter of 1996.
Expenses associated with the Asset Management and Servicing sector were up
11%, to $300 million in the first quarter of 1997, compared with $271 million in
the first quarter of 1996.
The Asset Management and Servicing sector recorded pretax income of $75
million in the first quarter of 1997 compared with $74 million in the
year-earlier period.
EQUITY INVESTMENTS
The Equity Investments sector includes results from our proprietary equity
investment portfolio management activities. Total reported revenues were $49
million in the first quarter, compared with $66 million a year ago. Included in
reported revenues are net gains on equity investments of $33 million in 1997,
compared with $64 million in the 1996 first quarter, when gains were recognized
from the sale of a large investment. Equity Investments recorded pretax income
of $42 million in the first quarter of 1997 compared with $58 million in the
first quarter of 1996.
On a total return basis, combining reported revenues with the change in
net unrealized appreciation, there was a loss of $25 million in the 1997 first
quarter, reflecting a decline in the market value of the firm's investment
portfolio, primarily related to insurance industry investments. This compares
with a gain of $54 million a year ago. As our investment strategy covers a
longer-term horizon, total return viewed over short periods will reflect the
impact of short-term market movements, including industry specific events.
PROPRIETARY INVESTING AND TRADING
The Proprietary Investing and Trading sector includes results from our market
risk positioning and capital and liquidity management activities. Total revenues
were $276 million for the 1997 first quarter compared with $215 million a year
earlier and were broadly diversified across markets. The 28% increase in
reported revenues reflects higher trading revenues, partially offset by lower
net interest revenue from investing activities as higher-yielding investments,
principally interest rate swaps, continue to mature. The Proprietary Investing
and Trading sector recorded pretax income of $230 million in the first quarter
of 1997 compared with $179 million in the same period a year ago.
Total return - reported revenues plus the change in net unrealized
appreciation - for the 1997 first quarter increased to $365 million from $106
million, as most trading and investing strategies produced higher returns.
20
PAGE 20
CORPORATE ITEMS
Corporate Items includes revenues and expenses that have not been allocated to
the five business sectors, intercompany eliminations, the taxable-equivalent
adjustment and the results of sold or discontinued businesses.
Corporate Items includes $59 million of gains on hedges of anticipated
foreign currency revenues and expenses. These gains were partially offset by the
impact of exchange rate movements on reported revenues and expenses in the
quarter. Corporate Items also includes revenues and expenses of $37 million and
$47 million, respectively, in the first quarter of 1996, from custody and cash
processing activities, previously exited by Morgan.
21
PAGE 21
Client-focused activities by region
J.P. Morgan's clients are an increasingly global and diverse group of growing
and established companies, governments and their agencies, and privately held
firms, entrepreneurs, families, and individuals. We continue to broaden and
deepen client relationships in North America; Latin America; Europe, Middle
East, and Africa; and Asia Pacific. Regional results can be analyzed in a number
of ways. In the table below, combined results for our client-focused business
sectors are broken down by region responsible for managing the client
relationship.
Europe, Total
North Latin Middle East Asia Client-
In millions America America and Africa Pacific Focused
- ---------------------------------------------------------------------------------
First Quarter 1997
Revenues $735 $136 $477 $211 $1,559
Expenses 563 50 344 119 1,076
- ---------------------------------------------------------------------------------
Pretax Income 172 86 133 92 483
- ---------------------------------------------------------------------------------
First Quarter 1996
Revenues 680 135 552 165 1,532
Expenses 493 46 298 103 940
- ---------------------------------------------------------------------------------
Pretax Income 187 89 254 62 592
- ---------------------------------------------------------------------------------
The firm's management reporting system was used to determine the revenues and
expenses attributable to each region. For finance and advisory products, this is
the location of the client's head office; for most other products, it is based
on the location where activity is transacted. Market-making revenues that cannot
be specifically attributable to individual clients (i.e., gains/losses arising
from client-related positions) and earnings on stockholders' equity are
generally allocated based on the proportion of other regional revenues. Expenses
are allocated based on the estimated cost associated with servicing the client
base in the region.
North American client revenues for the first quarter increased 8% across all
client-focused sectors, compared with the first quarter of 1996. Increases in
market-making revenues in emerging markets and in equities and foreign exchange
were partially offset by declines in fixed income revenues. Finance and
advisory revenues were up on higher underwriting and loan syndication revenues.
Asset management and servicing revenues were higher versus a year ago.
Client revenues in Latin America were essentially unchanged in the first
quarter of 1997, compared with the prior year first quarter, as higher finance
and advisory revenues were offset by declines in market-making revenues.
Client revenues in Europe declined 14% in the first quarter of 1997 from
the first quarter of 1996. Market-making revenues in fixed income were lower
with declines more than offsetting increases in other market-making activities.
Asset management and servicing revenues increased, while finance and advisory
revenues were down.
Asia Pacific client revenues rose 28% over the same period in 1996, as
each of the three client-focused sectors posted strong increases in revenues.
22
PAGE 22
The following table summarizes business sector results for the full year and
each of the four quarters of 1996. These amounts have been reclassified
subsequent to the issuance of the 1996 Annual report to conform with the current
presentation. Refer to Business Sector methodology on page 18.
Asset Total
Finance Manage- Client- Equity Proprietary Total
and Market ment and Focused Invest- Investing Proprietary Corporate Consol-
In millions Advisory Making Servicing Activities ments and Trading Activities Items idated
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter 1996
Total revenues $ 416 $ 771 $ 345 $1,532 $ 66 $ 215 $ 281 $ (73) $1,740
Total expenses 259 410 271 940 8 36 44 101 1,085
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 157 361 74 592 58 179 237 (174) 655
Second Quarter 1996
Total revenues 426 639 351 1,416 126 216 342 3 1,761
Total expenses 268 441 274 983 8 40 48 73 1,104
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 158 198 77 433 118 176 294 (70) 657
Third Quarter 1996
Total revenues 429 545 330 1,304 59 203 262 (17) 1,549
Total expenses 261 420 282 963 7 33 40 134 1,137
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 168 125 48 341 52 170 222 (151) 412
Fourth Quarter 1996
Total revenues 471 595 364 1,430 45 264 309 66 1,805
Total expenses 320 468 313 1,101 11 44 55 41 1,197
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 151 127 51 329 34 220 254 25 608
Full Year 1996
Total revenues 1,742 2,550 1,390 5,682 296 898 1,194 (21) 6,855
Total expenses 1,108 1,739 1,140 3,987 34 153 187 349 4,523
- ------------------------------------------------------------------------------------------------------------------------------------
Pretax income 634 811 250 1,695 262 745 1,007 (370) 2,332
23
PAGE 23
RISK MANAGEMENT
The major risks inherent in J.P. Morgan's businesses are market, liquidity,
credit, and operating risk. Comprehensive risk management processes have been
established to facilitate, control, and monitor risk-taking. These processes are
built on a foundation of early identification and analytically rigorous
measurement of risks by each of our businesses. Refer to the 1996 Annual
report for further information.
Market Risk Profiles
The firm's primary measure of value at risk is referred to as "Daily Earnings at
Risk" (DEaR). This measure takes into account numerous variables that may cause
a change in the value of our portfolios, including interest rates, foreign
exchange rates, securities and commodities prices, and their volatilities, as
well as correlations among these variables. DEaR measures potential losses that
are expected to occur within a 95% confidence level, implying that a loss might
exceed DEaR approximately 5% of the time.
The following presents the market risk profiles for the firm for the twelve
months ended March 31, 1997. The level of market risk, which is measured on a
diversified basis, will vary with market factors, the level of client activity,
and our expectations of price and market movements.
Aggregate Market Risk Activities
For the twelve months ended March 31, 1997, average DEaR for our aggregate
trading and investing activities across all market risks was approximately $31
million and ranged from $24 million to $44 million, essentially unchanged from
the twelve months ended December 31, 1996.
Trading Market Risk Activities
For the twelve months ended March 31, 1997, average DEaR for our trading
activities was approximately $21 million and ranged from $12 million to
$30 million. Such DEaR represented the combination of interest rate risk of
approximately $15 million, foreign exchange rate risk of approximately $6
million, equities risk of approximately $5 million, commodity risk of
approximately $4 million and all other market risks of approximately $7
million, offset by approximately ($16) million reflecting additional
diversification among these risks. For the twelve months ended December 31,
1996, average DEaR for our trading activities was approximately $21 million
and ranged from $13 million to $28 million.
We evaluate the reasonableness of DEaR by comparing DEaR to actual trading
results. The number of occurrences where daily revenue fell short of expected
daily results by amounts greater than related DEaR estimates was consistent with
statistical expectations.
Proprietary Investing Activities
The primary sources of market risk associated with our proprietary investing
activities relate to interest rate risk associated with fixed income securities
and interest rate swaps and spread risk associated with our mortgage-backed
securities portfolio. For the twelve month period ended March 31, 1997, average
DEaR for proprietary investing activities was approximately $23 million and
ranged from $16 million to $37 million. For the twelve months ended December
31, 1996, average DEaR for proprietary investing activities was approximately
$22 million and ranged from $10 million to $37 million.
Due to the longer-term nature of our investing activities, we use a weekly time
horizon to evaluate our risk estimates relative to total return. For the twelve
month period ended March 31, 1997, the number of occurrences where total return
fell short of expected weekly results by amounts greater than related weekly
risk estimates was consistent with statistical expectations.
24
PAGE 24
FINANCIAL REVIEW
REVENUES
Revenues totaled $1.833 billion in the first quarter of 1997, up 5% from $1.740
billion a year earlier.
Net interest revenue, the aggregate of interest revenue and expense
generated from the firm's client-focused and proprietary activities using a
variety of asset, liability, and off-balance-sheet instruments, increased 14% to
$450 million from the first quarter of 1996. This increase resulted from higher
trading-related net interest revenue from our market-making activities,
partially offset by a decline in net interest revenue from proprietary investing
and trading positions as a result of the continuing maturity of higher-yielding
investments, principally interest rate swaps.
Trading revenue declined 8% to $697 million in the first quarter of 1997
from $758 million in the year-earlier quarter. The following table presents
trading revenue, disaggregated by principal product groupings. Such revenue
represents only a portion of the total revenues generated by the business
activities discussed in the Business Sector Analysis, and does not include
related Net interest revenue.
Fixed Foreign Commod- Proprietary
In millions Income Equities Exchange ities Trading Total
- ---------------------------------------------------------------------------------------
First Quarter 1997 $346 $111 $120 $13 $107 $697
First Quarter 1996 533 94 68 34 29 758
Fourth Quarter 1996 273 69 84 10 76 512
- ---------------------------------------------------------------------------------------
Fixed income trading revenue declined to $346 million from $533 million in the
year-earlier quarter, when revenues benefited from gains on positions arising
from client-related swap transactions. Overall, the volume of client
transactions grew in the first quarter of 1997, but the number of
higher-yielding, customized transactions declined. Trading revenue from equities
increased 18% to $111 million, as a result of strong demand in both the cash and
derivative markets. Foreign exchange trading revenue increased to $120 million
from $68 million a year ago, on strong client demand in active markets. Trading
revenue from commodities was $13 million, down from $34 million in the first
quarter of 1996. Proprietary trading revenue increased sharply to $107 million
from a year ago, as most trading strategies produced higher returns.
Investment banking revenue advanced 12% to $226 million in the first quarter
of 1997, compared to a year ago. Underwriting revenue grew to $97 million from
$65 million in the year-earlier quarter, as issuers took advantage of favorable
market conditions. Advisory and syndication fees in the first quarter declined
to $129 million from $136 million a year earlier. Lower advisory fees in the
first quarter of 1997, compared to the first quarter of 1996, when fees from
several large transactions were recorded, were partially offset by higher loan
syndication revenues.
Investment management revenue increased 17% to $184 million from a year
ago, as assets under management rose due to net new business and, to a lesser
extent, market appreciation. Assets under management at March 31, 1997 and March
31, 1996 were $214 billion and $186 billion, respectively.
Fees and commissions of $148 million in the first quarter were essentially
flat compared with the year earlier quarter, as increased equity commissions
were offset by declines in futures and options brokerage revenue and fees from
other operational services.
Investment securities revenue declined $17 million to $61 million from $78
million in the 1996 first quarter, when gains were recognized from the sale of a
large investment.
Other revenue was $67 million in the first quarter, compared with $(1)
million a year earlier. The 1997 first quarter includes $64 million ($59 million
in Corporate Items) of gains on hedges of anticipated foreign currency revenues
and expenses. These gains were partially offset by the impact of exchange rate
movements on reported revenues and expenses in the quarter.
25
PAGE 25
OPERATING EXPENSES
Operating expenses were $1.191 billion in the first quarter, up 10% from a
year ago. The increase reflects ongoing investments in areas targeted for
growth, including investment banking, equities, investment management, and
private client services, as well as higher levels of business activity.
Management has initiated a firm-wide effort to respond to the
technological challenges presented by the year 2000, and has begun to incur
related costs, which include internal staffing and consulting services.
These costs will be incurred over the next three years, and are not expected to
materially impact results of operations in any one given period.
At March 31, 1997, staff totaled 15,483 employees compared with 15,431
employees at March 31, 1996.
Income tax expense in the first quarter totaled $218 million, based on an
effective tax rate of 34%, compared with 33% in the first quarter of 1996.
ASSETS
Total assets were $226 billion at March 31, 1997, compared with $222 billion at
December 31, 1996.
At March 31, 1997, the aggregate allowance for credit losses was $1.113
billion versus $1.116 billion at December 31, 1996. Nonperforming assets
decreased to $110 million at March 31, 1997, from $120 million at December 31,
1996, as assets newly classified as nonperforming were more than offset by
assets returned to performing status, repayments, and charge-offs. No provision
for credit losses was deemed necessary in the 1997 first quarter.
26
PAGE 26
FOREIGN-COUNTRY-RELATED OUTSTANDINGS
Foreign-country-related outstandings represent outstandings to foreign
borrowers that are denominated in U.S. dollars or currencies other than the
borrower's local currency or, in the case of a guarantee, other than the
guarantor's local currency. Outstandings include loans, interest-earning
deposits with banks, investment securities, customers' acceptance liability,
securities purchased under agreements to resell, trading account securities,
accrued interest, and other monetary assets. Outstandings generally are
distributed according to the location and category of the borrower. In the case
of guaranteed outstandings or when tangible, liquid collateral is held and
realizable outside the obligor's country, distribution is generally made
according to the location and category of the guarantor or the location where
the collateral is held and realizable. Countries in which J.P. Morgan's
outstandings exceeded 1.0% of total assets at March 31, 1997, are listed in the
following table.
In millions Cross-border outstandings
--------------------------------------------------------------------------
France $4,899
United Kingdom 3,087
--------------------------------------------------------------------------
At March 31, 1997, cross-border outstandings in Switzerland and Mexico
were $2,118 and $2,090 (a), respectively, between 0.75% and 1.0% of total
assets.
(a) Not included in the Mexican cross-border outstandings above are United
Mexican States (UMS) bonds, which are collateralized by U.S. Treasury
Securities. If the book value of these bonds in excess of underlying collateral,
which is discussed below, had been included, total Mexican cross-border
outstandings would not have exceeded 1% of total assets at March 31, 1997.
The UMS bonds are collateralized as to principal by zero-coupon U.S. Treasury
securities with a face value equal to the face value of the underlying bonds.
The collateral, which will become available when the UMS bonds mature, is
pledged to the holders of the bonds and is held by the Federal Reserve Bank of
New York.
In millions U.S. Treasury
UMS Bonds Collateral
---------------------------------------------------
Book Face Market Fair
Value Value Value Value
- --------------------------------------------------------------------
March 31, 1997
Due in 2008 $22 $22 $22 $11
Due in 2019 162 190 162 38
- --------------------------------------------------------------------
27
PAGE 27
CAPITAL
March 31 December 31 March 31
Dollars in billions 1997 1996 1996
- ----------------------------------------------------------------------------
Total stockholders' equity $ 11.2 $ 11.4 $ 10.8
Annualized rate of return on
average common stockholders'
equity (a) 15.7% 15.3% 17.2%
As percent of period-end total
assets:
Common equity 4.6 4.8 5.0
Total equity 4.9 5.2 5.3
Book value per common share $54.05 $54.43 $51.57
Risk-based capital (b)
J.P. Morgan
Tier 1 risk-based capital $ 11.0 $ 10.9 $ 9.5
Total risk-based capital 15.7 15.1 13.9
Risk adjusted assets 127.1 123.9 113.8
Capital ratios (b)
J.P. Morgan
Tier 1 ratio 8.7% 8.8% 8.3%
Total ratio 12.4 12.2 12.2
Leverage ratio 5.9 5.9 6.2
Morgan Guaranty (c)
Tier 1 ratio 8.2% 8.2% 8.3%
Total ratio 11.4 11.5 11.6
Leverage ratio 5.5 5.3 5.8
- ----------------------------------------------------------------------------
(a) Represents the annualized rate of return on average common stockholders'
equity for the three months ended March 31, 1997, December 31, 1996, and March
31, 1996.
(b) In accordance with Federal Reserve Board guidelines, the risk-based capital
and leverage amounts and ratios exclude the equity, assets and off-balance sheet
exposures of J.P. Morgan Securities Inc. and the effect of SFAS No. 115.
(c) In accordance with Federal Reserve Board guidelines, the ratios exclude the
effect of SFAS No. 115. The March 31, 1996 ratios were restated to reflect the
merger of J.P. Morgan Delaware with Morgan Guaranty Trust Company of New York,
effective June 1996.
The capital of J.P. Morgan and Morgan Guaranty Trust Company of New York (Morgan
Guaranty) remained well above the minimum standards set by regulators at March
31, 1997. Further, the capital ratios of J.P. Morgan and Morgan Guaranty
exceeded the minimum standards for a "well capitalized" bank holding company and
bank, respectively, at March 31, 1997.
At March 31, 1997, stockholders' equity included approximately $402 million of
net unrealized appreciation on debt investment and marketable equity investment
securities, net the related deferred tax liability of $227 million. This
compares with $464 million of net unrealized appreciation at December 31, 1996,
net the related deferred tax liability of $268 million. The net unrealized
appreciation on debt investment securities was $243 million and $255 million at
March 31, 1997 and December 31, 1996, respectively. The net unrealized
appreciation on marketable equity investment securities was $386 million at
March 31, 1997, and $477 million at December 31, 1996.
In January 1997, JPM Capital Trust II, a wholly owned subsidiary of J.P. Morgan,
issued $400 million qualifying as tier 1 capital under Federal Reserve Board
guidelines through an issue of 7.95% trust preferred securities due 2027.
The firm purchased $555 million of J.P. Morgan common stock in the open market
during the first quarter of 1997, following the Board of Directors' December
1996 authorization of the purchase of up to $750 million of shares. The firm
also continued its program of purchasing J.P. Morgan shares to lessen the
dilutive impact on earnings per share of the firm's employee benefit plans.
28
PAGE 28
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- -----------------------------------------------------------------------------------------------------------------------
In millions, Three months ended
Interest and average rates --------------------------------------------------------------------------
on a taxable-equivalent basis March 31, 1997 March 31, 1996
--------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
--------------------------------------------------------------------------
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 1,916 $ 27 5.72% $ 1,795 $ 27 6.05%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 1,429 26 7.38 1,017 19 7.51
U.S. state and political
subdivision 1,466 42 11.62 1,694 49 11.63
Other 17,781 285 6.50 16,680 270 6.51
Debt investment securities in offices
outside the U.S. (a) 4,776 75 6.37 4,907 74 6.07
Trading account assets:
In offices in the U.S. 21,910 351 6.50 17,307 250 5.81
In offices outside the U.S. 41,125 721 7.11 26,913 506 7.56
Securities purchased under agreements
to resell and federal funds sold,
mainly in offices in the U.S. 37,822 455 4.88 41,760 577 5.56
Securities borrowed in offices in
the U.S. 30,878 383 5.03 20,773 263 5.09
Loans:
In offices in the U.S. 4,978 97 7.90 6,678 112 6.75
In offices outside the U.S. 23,724 371 6.34 20,648 332 6.47
Other interest-earning assets (b):
In offices in the U.S. 764 20 * 1,140 33 *
In offices outside the U.S. 947 59 * 1,294 65 *
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 189,516 2,912 6.23 162,606 2,577 6.37
Allowance for credit losses (c) (915) (1,130)
Cash and due from banks 1,203 1,253
Other noninterest-earning assets 46,275 42,107
- -----------------------------------------------------------------------------------------------------------------------
Total assets 236,079 204,836
- -----------------------------------------------------------------------------------------------------------------------
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 March 31, 1997 and 1996.
(a) For the three months ended March 31, 1997 and 1996, average debt investment
securities are computed based on historical amortized cost, excluding the
effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance-sheet
transactions.
(c) Average amount at March 31, 1997 is based on the portions of the aggregate
allowance for credit losses related only to loans and trading account assets.
See Note 10, Aggregate Allowance for Credit Losses, on page 14. Average amount
at March 31, 1996 is based on the aggregate allowance for credit losses.
* Not meaningful
29
PAGE 29
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- -----------------------------------------------------------------------------------------------------------------------
In millions, Three months ended
Interest and average rates --------------------------------------------------------------------------
on a taxable-equivalent basis March 31, 1997 March 31, 1996
--------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
--------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. $ 8,825 $ 120 5.51% $ 1,930 $ 23 4.79%
In offices outside the U.S. 46,025 543 4.78 45,551 627 5.54
Trading account liabilities:
In offices in the U.S. 9,365 164 7.10 7,925 117 5.94
In offices outside the U.S. 11,804 193 6.63 11,644 176 6.08
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 67,857 876 5.24 59,322 787 5.34
Commercial paper, mainly in offices
in the U.S. 4,297 58 5.47 3,685 51 5.57
Other interest-bearing liabilities:
In offices in the U.S. 15,428 223 5.86 13,385 192 5.77
In offices outside the U.S. 3,656 51 5.66 1,932 46 9.58
Long-term debt,
mainly in offices in the U.S. 13,799 195 5.73 9,430 139 5.93
Company obligated mandatorily
redeemable preferred securities of
subsidiaries 1,003 19 7.68
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 182,059 2,442 5.44 154,804 2,158 5.61
Noninterest-bearing deposits:
In offices in the U.S. 1,217 3,019
In offices outside the U.S. 126 1,098
Other noninterest-bearing
liabilities 41,282 35,239
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 224,684 194,160
Stockholders' equity 11,395 10,676
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 236,079 204,836
Net yield on interest-earning assets 1.01 1.03
- -----------------------------------------------------------------------------------------------------------------------
Net interest earnings 470 419
- -----------------------------------------------------------------------------------------------------------------------
30
PAGE 30
DERIVATIVES USED FOR PURPOSES OTHER-THAN-TRADING
The objective of J.P. Morgan's investing activities is to create
longer-term value through the management of interest rate risk related to J.P.
Morgan's nontrading assets, liabilities, and off-balance-sheet activities. J.P.
Morgan utilizes a variety of financial instruments, including derivatives, in an
integrated manner to achieve these objectives. Additional information on
derivatives used for purposes other-than-trading, primarily interest rate swaps,
is provided below. For more information about investing activities, see Note 7
to the consolidated financial statements, Off-balance-sheet financial
instruments.
The table below summarizes maturities and weighted-average interest rates
to be received and paid on U.S. dollar and non-U.S. dollar interest rate swaps
used for purposes other-than-trading at March 31, 1997. The majority of
nontrading interest rate swaps, as presented below, are risk-adjusting swaps.
Also included in the table are swaps designated as hedges or used to modify the
interest rate characteristics of assets and liabilities. Variable rates
presented are generally based on the London Interbank Offered Rate (LIBOR) in
effect on the swaps at March 31, 1997, 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 purposes
other-than-trading, such as currency swaps, basis swaps, foreign exchange
contracts, interest rate futures, forward rate agreements, debt securities
forwards, and purchased options, totaling $61.2 billion at March 31, 1997. The
contractual maturities of these derivative contracts are primarily less than one
year.
By expected maturities
- --------------------------------------------------------------------------------------------
After After After After
one two three four
year years years years
Within but but but but After
one within within within within five
Dollars in billions year two three four five years Total
- --------------------------------------------------------------------------------------------
INTEREST RATE SWAPS -
U.S. DOLLAR
Receive fixed
swaps
Notional amount $25.0 $6.8 $4.4 $3.1 $1.5 $12.4 $53.2
Weighted average:
Receive rate 5.7% 6.9% 7.0% 6.2% 7.1% 6.3% 6.2%
Pay rate 5.6 5.5 5.8 5.6 5.6 5.6 5.6
Pay fixed swaps
Notional amount $22.8 $8.8 $3.8 $8.4 $4.3 $10.0 $58.1
Weighted average:
Receive rate 5.6% 5.5% 5.6 5.6% 5.6% 5.6% 5.6%
Pay rate 5.0 5.9 6.9 6.0 6.8 6.8 5.8
INTEREST RATE SWAPS -
NON-U.S. DOLLAR
Receive fixed
swaps
Notional amount $28.7 $9.9 $7.9 $6.1 $3.3 $5.4 $61.3
Weighted average:
Receive rate 5.3% 5.8% 6.6% 6.0% 6.7% 6.9% 5.8%
Pay rate 3.1 3.2 3.9 3.4 3.5 3.6 3.3
Pay fixed swaps
Notional amount $20.7 $9.9 $7.9 $5.8 $2.3 $4.4 $51.0
Weighted average:
Receive rate 3.4% 3.1% 3.9% 3.6% 3.4% 3.4% 3.4%
Pay rate 6.0 5.5 6.4 6.4 7.1 7.2 6.2
- ----------------------------------------------------------------------------------------------
Total notional amount $97.2 $35.4 $24.0 $23.4 $11.4 $32.2 $223.6
- ----------------------------------------------------------------------------------------------
Not included in the table above are $3.2 billion and $6.3 billion of notional
amounts related to currency swaps and basis swaps, respectively.
31
Page 31
QUARTERLY CONSOLIDATED STATEMENT OF INCOME RECLASSIFICATIONS
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
Below are revenues for each of the four quarters of 1996, prepared in conformity
with the presentation adopted in the J.P. Morgan & Co. Incorporated 1996 Annual
Report.
In millions Three months ended
-------------------------------------------------
March 31 June 30 September 30 December 31
1996 1996 1996 1996
-------------------------------------------------
NET INTEREST REVENUE
Interest revenue $2,554 $2,559 $2,675 $2,925
Interest expense 2,158 2,162 2,250 2,441
- ----------------------------------------------------------------------------------------
Net interest revenue 396 397 425 484
NONINTEREST REVENUE
Trading revenue 758 697 510 512
Investment banking revenue 201 210 233 277
Investment management revenue 157 172 164 182
Fees and commissions 151 142 137 152
Investment securities revenue 78 72 68 84
Other revenue (1) 71 12 114
- ----------------------------------------------------------------------------------------
Total noninterest revenue 1,344 1,364 1,124 1,321
Total revenue 1,740 1,761 1,549 1,805
32
PAGE 32
Part II
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SUMMARY OF J.P. MORGAN'S ANNUAL MEETING
The 1997 annual meeting of stockholders of J.P. Morgan & Co. Incorporated was
held on Wednesday, May 14, 1997 at the company's 60 Wall Street headquarters;
87.06% of the 181,998,937 shares of common stock outstanding and eligible to be
voted was represented either in person or by proxy, constituting a quorum.
Douglas A. Warner III, Chairman of the Board, presided.
The stockholders took the following actions:
1. Elected all 14 nominees to one-year terms as members of the Board of
Directors. The directors are:
Percent
of
Percent of Shares shares
Director Shares in favor shares voting Withheld voting
- --------------------------------------------------------------------------------------
Douglas A. Warner III * 157,422,326 99.36% 1,018,565 0.64%
Riley P. Bechtel 157,435,315 99.37% 1,005,576 0.63%
Martin Feldstein 157,436,739 99.37% 1,004,152 0.63%
Hanna H. Gray 157,441,173 99.37% 999,718 0.63%
James R. Houghton 157,422,968 99.36% 1,017,923 0.64%
James L. Ketelsen 157,428,245 99.36% 1,012,646 0.64%
John A. Krol 157,440,055 99.37% 1,000,836 0.63%
Roberto G. Mendoza ** 157,416,423 99.35% 1,024,468 0.65%
Michael E. Patterson ** 157,483,228 99.40% 957,663 0.60%
Lee R. Raymond 157,405,451 99.35% 1,035,440 0.65%
Richard D. Simmons 157,433,783 99.36% 1,007,108 0.64%
Kurt F. Viermetz ** 157,444,799 99.37% 996,092 0.63%
Dennis Weatherstone 157,429,503 99.36% 1,011,388 0.64%
Douglas C. Yearley 157,477,753 99.39% 963,138 0.61%
* Chairman of the Board
** Vice Chairman of the Board
2. Approved the appointment of Price Waterhouse LLP as independent accountants
to perform auditing functions during 1997. There were 157,722,726 shares in
favor, or 99.55% of shares voting; 276,352 shares against, or 0.17% of shares
voting; 441,813 shares abstained; and no shares reflecting broker nonvotes.
3. Defeated the stockholder proposal relating to cumulative voting. There were
104,863,326 shares against, or 77.19% of shares voting; 28,138,404 shares for,
or 20.71% of shares voting; 2,849,858 shares abstained; and 22,589,303 shares
reflecting broker nonvotes.
4. Defeated the stockholder proposal relating to director term limits. There
were 129,855,239 shares against, or 95.59% of shares voting; 3,589,785 shares
for, or 2.64% of shares voting; 2,404,930 shares abstained; and 22,590,937
shares reflecting broker nonvotes.
33
PAGE 33
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. Statement re computation of ratios
27. Financial data schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended March 31, 1997:
January 13, 1997 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing
its earnings for the three-month and twelve-month periods ended
December 31, 1996.
January 30, 1997 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a series of 5.00%
Exchangeable Notes due January 22, 1999,(the "Autozone MEDS"),the
principal amounts of which at maturity are mandatorily exchangeable
into the common stock of Autozone Inc.
34
PAGE 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(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: May 15, 1997
35
PAGE 1
LIST OF EXHIBITS
EXHIBIT
12. Statement re computation of ratios
27. Financial data schedule