<PAGE> 1
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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-5885
J.P. MORGAN & CO. INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 13-2625764
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 Wall Street, New York, NY
(Address of principal executive offices)
10260-0060
(Zip Code)
(212) 483-2323
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes..X.. No.....
Number of shares outstanding of each of the registrant's classes of common
stock at July 31, 1996:
Common Stock, $2.50 Par Value 186,461,330 Shares
<PAGE> 2
2
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Financial statement information is set forth within this document on the pages
indicated:
Page
Three-month Consolidated statement of income
J.P. Morgan & Co. Incorporated 3
Six-month Consolidated statement of income
J.P. Morgan & Co. Incorporated 4
Consolidated balance sheet
J.P. Morgan & Co. Incorporated 5
Consolidated statement of changes in stockholders' equity
J.P. Morgan & Co. Incorporated 6
Consolidated statement of cash flows
J.P. Morgan & Co. Incorporated 7
Consolidated statement of condition
Morgan Guaranty Trust Company of New York 8
Notes to Consolidated financial statements
J.P. Morgan & Co. Incorporated 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Discussion of business sector results; Discussion of the financial condition
and results of operations; Statements of consolidated average balances and net
interest earnings of J.P. Morgan & Co. Incorporated ("J.P. Morgan") for the
three months and six months ended June 30, 1996; and Table of asset and
liability management derivatives are set forth on pages 18 through 35 herein.
PART II -- OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 36
SIGNATURES 37
<PAGE> 3
3
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In millions,
except per share data Three months ended
--------------------------------------------------------------------------------
June 30 June 30 Increase/ March 31 Increase/
1996 1995 (Decrease) 1996 (Decrease)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $2,559 $2,405 $ 154 $2,554 $ 5
Interest expense 2,162 1,897 265 2,158 4
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 397 508 (111) 396 1
NONINTEREST REVENUE
Trading revenue 697 305 392 758 (61)
Investment banking revenue 210 117 93 201 9
Credit-related fees 38 41 (3) 38 -
Investment management fees 172 138 34 157 15
Operational service fees 104 140 (36) 113 (9)
Net investment securities
gains (losses) (51) 33 (84) 12 (63)
Other revenue 194 167 27 65 129
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue 1,364 941 423 1,344 20
Total revenue 1,761 1,449 312 1,740 21
OPERATING EXPENSES
Employee compensation and
benefits 737 616 121 730 7
Net occupancy 76 79 (3) 73 3
Technology and communications 158 165 (7) 158 -
Other expenses 133 124 9 124 9
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,104 984 120 1,085 19
Income before income taxes 657 465 192 655 2
Income taxes 217 150 67 216 1
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 440 315 125 439 1
PER COMMON SHARE
Net income (a) $2.14 $1.56 $0.58 $2.13 $0.01
Dividends declared 0.81 0.75 0.06 0.81 -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Earnings per share amounts represent both primary and fully diluted earnings
per share.
See notes to financial statements.
<PAGE> 4
4
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
In millions,
except per share data Six months ended
--------------------------------------------------------------------------------------------------------
June 30 June 30 Increase/
1996 1995 (Decrease)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $5,113 $4,875 $238
Interest expense 4,320 3,867 453
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 793 1,008 (215)
NONINTEREST REVENUE
Trading revenue 1,455 608 847
Investment banking revenue 411 231 180
Credit-related fees 76 84 (8)
Investment management fees 329 268 61
Operational service fees 217 280 (63)
Net investment securities
gains (losses) (39) 42 (81)
Other revenue 259 316 (57)
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue 2,708 1,829 879
Total revenue 3,501 2,837 664
OPERATING EXPENSES
Employee compensation and
benefits 1,467 1,242 225
Net occupancy 149 159 (10)
Technology and communications 316 337 (21)
Other expenses 257 248 9
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,189 1,986 203
Income before income taxes 1,312 851 461
Income taxes 433 281 152
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 879 570 309
PER COMMON SHARE
Net income (a) $4.28 $2.83 $1.45
Dividends declared 1.62 1.50 0.12
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Earnings per share amounts represent primary earnings per share for the six
months ended June 30, 1996 and 1995. Fully diluted earnings per share were
$4.27 and $2.81 for the six months ended June 30, 1996 and 1995,
respectively.
See notes to financial statements.
<PAGE> 5
5
CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Dollars in millions June 30 March 31 December 31
1996 1996 1995
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 651 $ 732 $ 1,535
Interest-earning deposits with banks 1,427 1,183 1,986
Debt investment securities available for
sale carried at fair value (Cost: $22,486
at June 1996, $27,115 at March 1996, and
$24,154 at December 1995) 22,712 27,446 24,638
Trading account assets 69,375 69,844 69,408
Securities purchased under agreements to
resell ($36,488 at June 1996, $39,683 at
March 1996, and $32,157 at December
1995)and federal funds sold 36,544 39,692 32,157
Securities borrowed 25,620 22,901 19,830
Loans 29,588 28,645 23,453
Less: allowance for credit losses 1,125 1,117 1,130
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 28,463 27,528 22,323
Customers' acceptance liability 236 339 237
Accrued interest and accounts receivable 3,738 4,766 3,539
Premises and equipment 3,387 3,354 3,339
Less: accumulated depreciation 1,492 1,445 1,412
- ----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 1,895 1,909 1,927
Other assets 8,104 8,407 7,299
- ----------------------------------------------------------------------------------------------------------------------------
Total assets 198,765 204,747 184,879
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 1,906 2,784 3,287
In offices outside the U.S. 750 677 744
Interest-bearing deposits:
In offices in the U.S. 2,498 1,765 2,003
In offices outside the U.S. 43,303 44,978 40,404
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 48,457 50,204 46,438
Trading account liabilities 44,267 46,766 45,289
Securities sold under agreements to
repurchase ($51,604 at June 1996, $55,952
at March 1996, and $40,803 at December
1995) and federal funds purchased 55,114 58,765 45,099
Commercial paper 5,102 4,229 2,801
Other liabilities for borrowed money 16,510 15,659 15,129
Accounts payable and accrued expenses 6,159 7,265 5,643
Liability on acceptances 236 339 237
Long-term debt not qualifying as risk-based
capital 6,109 5,710 5,737
Other liabilities 2,047 1,272 4,465
- ---------------------------------------------------------------------------------------------------------------------------
184,001 190,209 170,838
Long-term debt qualifying as risk-based
capital 3,733 3,691 3,590
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 187,734 193,900 174,428
STOCKHOLDERS' EQUITY
Preferred stock (authorized shares:
10,400,000 at June 1996 and March 1996,
and 10,000,000 at December 1995):
Adjustable rate cumulative preferred
stock, $100 par value (issued and
outstanding: 2,444,300) 244 244 244
Variable cumulative preferred stock,
$1,000 par value (issued and outstanding:
250,000) 250 250 250
Fixed cumulative preferred stock, $500
par value (issued and outstanding:
400,000 at June 1996 and March 1996) 200 200 -
Common stock, $2.50 par value (authorized
shares: 500,000,000; issued: 200,683,373 at
June 1996, 200,682,873 at March 1996, and
200,678,373 at December 1995) 502 502 502
Capital surplus 1,435 1,432 1,430
Retained earnings 8,281 8,006 7,731
Net unrealized gains on investment securities,
net of taxes 367 470 566
Other 686 593 552
- ---------------------------------------------------------------------------------------------------------------------------
11,965 11,697 11,275
Less: treasury stock (14,083,799 shares at June 1996, 13,382,388
shares at March 1996, and 13,562,755 shares at December 1995) at
cost 934 850 824
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,031 10,847 10,451
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 198,765 204,747 184,879
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE> 6
6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions Six months ended
-------------------------------------------
June 30 June 30
1996 1995
-------------------------------------------
<S> <C> <C>
PREFERRED STOCK
Adjustable rate cumulative preferred stock
Balance, January 1 and June 30 $ 244 $ 244
- -----------------------------------------------------------------------------------------------------------------------------------
Variable cumulative preferred stock
Balance, January 1 and June 30 250 250
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed cumulative preferred stock
Balance, January 1 - -
Shares issued 200 -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 200 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total preferred stock, June 30 694 494
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, January 1 and June 30 502 502
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance, January 1 1,430 1,452
Shares issued or distributed under dividend reinvestment
plan, various employee benefit plans, and conversion of
debentures, and income tax benefits associated with stock
options 5 (11)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 1,435 1,441
- -----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, January 1 7,731 7,044
Net income 879 570
Dividends declared on adjustable rate cumulative preferred
stock (6) (6)
Dividends declared on variable cumulative preferred stock (4) (6)
Dividends declared on fixed cumulative preferred stock (5) -
Dividends declared on common stock (303) (282)
Dividend equivalents on common stock issuable (11) (5)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 8,281 7,315
- -----------------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES
Balance, January 1 566 456
Net change in net unrealized gains, net of taxes (199) 3
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 367 459
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER
COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 556 369
Deferred stock awards, net 133 41
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 689 410
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
Balance, January 1 (4) (2)
Translation adjustments 2 (1)
Income tax expense (1) -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 (3) (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Total other, June 30 686 407
- -----------------------------------------------------------------------------------------------------------------------------------
LESS: TREASURY STOCK
Balance, January 1 824 747
Purchases 291 103
Shares distributed under various employee benefit plans (181) (103)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 934 747
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity, June 30 11,031 9,871
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE> 7
7
CONSOLIDATED STATEMENT OF CASH FLOWS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Dollars in millions Six months ended
-----------------------------------------
June 30 June 30
1996 1995
-----------------------------------------
<S> <C> <C>
NET INCOME $ 879 $ 570
Adjustments to reconcile to cash provided by (used in) operating activities:
Noncash items: depreciation, amortization, deferred
income taxes, and stock award plans 401 166
(Increase) decrease in assets:
Trading account assets 11 (11,258)
Securities purchased under agreements to resell (4,336) (4,971)
Securities borrowed (5,790) 1,814
Accrued interest and accounts receivable (200) 1,812
Increase (decrease) in liabilities:
Trading account liabilities (1,038) 5,947
Securities sold under agreements to repurchase 10,797 2,675
Accounts payable and accrued expenses 693 (1,449)
Other changes in operating assets and liabilities, net (5,066) 1,110
Net investment securities (gains) losses included in
cash flows from investing activities 39 (42)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (3,610) (3,626)
- -----------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in interest-earning deposits with banks 559 (375)
Debt investment securities:
Proceeds from sales 31,434 24,147
Proceeds from maturities, calls, and mandatory redemptions 4,802 1,035
Purchases (35,793) (21,142)
(Increase) decrease in federal funds sold (56) 98
Increase in loans (6,139) (1,997)
Payments for premises and equipment (72) (105)
Other changes, net 992 (1,797)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (4,273) (136)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in noninterest-bearing deposits (1,375) 28
Increase in interest-bearing deposits 3,380 2,166
Increase (decrease) in federal funds purchased (786) 43
Increase (decrease) in commercial paper 2,301 (1,604)
Other liabilities for borrowed money:
Proceeds 11,708 7,952
Payments (11,043) (6,591)
Long-term debt:
Proceeds 1,152 2,421
Payments (391) (283)
Capital stock:
Issued or distributed 200 -
Purchased (291) (103)
Dividends paid (317) (279)
Other changes, net 2,467 (508)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 7,005 3,242
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks (6) 122
- -----------------------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND DUE FROM BANKS (884) (398)
Cash and due from banks at December 31, 1995 and 1994 1,535 2,210
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at June 30, 1996 and 1995 651 1,812
- -----------------------------------------------------------------------------------------------------------------------------------
Cash disbursements made for:
Interest $4,180 $3,717
Income taxes 413 257
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE> 8
8
CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Dollars in millions June 30 December 31
1996 1995
--------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 659 $ 1,429
Interest-earning deposits with banks 1,428 1,995
Debt investment securities available for sale
carried at fair value 17,824 23,767
Trading account assets 55,999 55,373
Securities purchased under agreements to resell
and federal funds sold 23,613 20,996
Loans 29,437 23,319
Less: allowance for credit losses 1,125 1,129
- --------------------------------------------------------------------------------------------------------------------------
Net loans 28,312 22,190
Customers' acceptance liability 236 237
Accrued interest and accounts receivable 3,651 3,420
Premises and equipment 2,999 2,967
Less: accumulated depreciation 1,294 1,232
- --------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 1,705 1,735
Other assets 5,061 4,571
- --------------------------------------------------------------------------------------------------------------------------
Total assets 138,488 135,713
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 1,908 3,275
In offices outside the U.S. 788 839
Interest-bearing deposits:
In offices in the U.S. 2,510 1,975
In offices outside the U.S. 43,670 40,985
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 48,876 47,074
Trading account liabilities 39,240 39,197
Securities sold under agreements to repurchase
and federal funds purchased 18,456 20,274
Other liabilities for borrowed money 10,606 8,509
Accounts payable and accrued expenses 4,346 4,187
Liability on acceptances 236 237
Long-term debt not qualifying as risk-based capital
(includes $546 at 1996 and $418 at 1995 of notes
payable to J.P. Morgan) 2,809 2,786
Other liabilities 1,974 3,324
- -------------------------------------------------------------------------------------------------------------------------
126,543 125,588
Long-term debt qualifying as risk-based capital
(includes $2,396 at 1996 and $1,310 at 1995 of
notes payable to J.P. Morgan) 2,596 1,659
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 129,139 127,247
STOCKHOLDER'S EQUITY
Preferred stock, $100 par value
(authorized shares: 2,500,000) - -
Common stock, $25 par value
(authorized shares: 11,000,000; outstanding:
10,599,027 at June 1996, and authorized and
outstanding: 10,000,000 at December 1995) 265 250
Surplus 3,155 2,820
Undivided profits 5,797 5,136
Net unrealized gains on investment securities, net of
taxes 135 264
Foreign currency translation (3) (4)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 9,349 8,466
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity 138,488 135,713
- -----------------------------------------------------------------------------------------------------------------------------------
Prior period balances were restated to reflect the merger of J.P. Morgan
Delaware with Morgan Guaranty Trust Company effective June 1996.
Member of the Federal Reserve System and the Federal Deposit Insurance Corporation.
</TABLE>
See notes to financial statements.
<PAGE> 9
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF J.P. MORGAN & CO. INCORPORATED
Supplementary to notes in the 1995 Annual report to stockholders
1. BASIS OF PRESENTATION
The interim financial information in this report has not been audited. In the
opinion of management, all adjustments necessary for a fair presentation of the
financial position and the results of operations for the interim periods have
been made. All adjustments made were of a normal recurring nature. Management
consults with its independent accountants on significant accounting and
reporting matters that arise during the year.
2. INTEREST REVENUE AND EXPENSE
An analysis of interest revenue and expense derived from on-and
off-balance-sheet financial instruments is presented in the table below.
Interest revenue and expense associated with derivative financial instruments,
such as swaps, forwards, spot, futures, options, and debt securities forwards,
used as hedges or to modify the interest rate characteristics of assets and
liabilities, are attributed to and included with the related balance sheet
instrument. Net interest revenue associated with risk-adjusting swaps that are
used to meet longer-term asset and liability management objectives, including
the maximization of net interest revenue, is not attributed to a specific
balance sheet instrument, but is included in the Other sources caption in the
table below.
<TABLE>
<CAPTION>
Second quarter Six months
In millions 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE
Deposits with banks $ 24 $ 44 $ 51 $ 103
Debt investment securities (a) 396 373 790 771
Trading account assets 682 782 1,437 1,611
Securities purchased under agreements
to resell and federal funds sold 593 443 1,170 855
Securities borrowed 318 187 581 401
Loans 440 436 880 851
Other sources, primarily risk-adjusting swaps 106 140 204 283
- -------------------------------------------------------------------------------------------------
Total interest revenue 2,559 2,405 5,113 4,875
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 619 616 1,269 1,235
Trading account liabilities 306 332 599 761
Securities sold under agreements to
repurchase and federal funds purchased 798 605 1,585 1,200
Other borrowed money 303 204 592 415
Long-term debt 136 140 275 256
- -------------------------------------------------------------------------------------------------
Total interest expense 2,162 1,897 4,320 3,867
- -------------------------------------------------------------------------------------------------
Net interest revenue 397 508 793 1,008
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Interest revenue from debt investment securities included taxable revenue
of $338 million and $698 million and revenue exempt from U.S. income taxes of
$58 million and $92 million for the three months and six months ended June 30,
1996, respectively. Interest revenue from debt investment securities included
taxable revenue of $332 million and $688 million and revenue exempt from U.S.
income taxes of $41 million and $83 million for the three months and six months
ended June 30, 1995, respectively.
<PAGE> 10
10
For the three months and six months ended June 30, 1996, net interest revenue
associated with asset and liability management derivatives was approximately $25
million and $65 million respectively, compared with approximately $110 million
and $190 million for the respective 1995 periods. At June 30, 1996,
approximately ($165) million of net deferred losses on closed derivative
contracts used for asset and liability management purposes were recorded on the
balance sheet. Such amount is primarily composed of net deferred losses on
closed hedge contracts included in the amortized cost of the debt investment
portfolio. As discussed in Note 4 to the financial statements, Investment
securities, the net unrealized appreciation associated with the debt investment
portfolio was $226 million at June 30, 1996. Net deferred losses on closed
derivative contracts are expected to amortize into Net interest revenue as
follows: ($30) million - remainder of 1996; ($50) million in 1997; ($35) million
in 1998; ($25) million in 1999; ($20) million in 2000; ($6) million in 2001; and
approximately $1 million thereafter. The amount of net deferred gains or losses
on closed derivative contracts will change from period to period, primarily due
to amortization of such amounts to net interest revenue and the execution of our
asset and liability management strategies, which may result in the sale of the
underlying hedged instruments and/or termination of hedge contracts.
3. TRADING REVENUE
Trading revenue disaggregated by principal product groupings for the three
months and six months ended June 30, 1996 and 1995, is presented in the
following table. Trading-related net interest revenue should be considered when
evaluating trading results since the firm manages its trading activities based
on combined revenues. For additional information refer to the Trading revenue
discussion in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<TABLE>
<CAPTION>
Second quarter Six months
In millions 1996 1995 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income $ 331 $ 96 $ 864 $ 153
Equities 124 96 218 138
Foreign Exchange 109 62 177 164
Commodities 5 12 39 31
Proprietary Unit 128 39 157 122
- ------------------------------------------------------------------------------
Trading revenue 697 305 1,455 608
- ------------------------------------------------------------------------------
</TABLE>
4. INVESTMENT SECURITIES
Debt investment securities
A comparison of the cost and carrying values of debt investment securities
available for sale and carried at fair value at June 30, 1996, follows.
<TABLE>
<CAPTION>
Fair and
carrying
In millions Cost value
- -------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury $ 936 $ 992
U.S. government agency, principally mortgage-backed 16,684 16,675
U.S. state and political subdivision 1,670 1,811
U.S. corporate and bank debt 142 143
Foreign government* 922 947
Foreign corporate and bank debt 2,029 2,040
Other 103 104
- -------------------------------------------------------------------------------
Total debt investment securities 22,486 22,712
- -------------------------------------------------------------------------------
</TABLE>
* Primarily includes debt of countries that are members of the Organization for
Economic Cooperation and Development.
Net unrealized appreciation associated with debt investment securities available
for sale carried at fair value at June 30, 1996, was $226 million, consisting of
gross unrealized appreciation of $496 million and gross unrealized depreciation
of $270 million. Such amounts represent the gross unrealized appreciation or
depreciation on each debt security, including the effects of any related hedge.
For additional detail of gross unrealized gains and losses associated with open
derivative contracts used to hedge debt investment securities, see Note 6 to the
financial statements, Off-balance-sheet financial instruments.
<PAGE> 11
11
The following table presents the components of Net realized investment
securities gains (losses).
<TABLE>
<CAPTION>
Second quarter Six months
In millions 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross realized gains from sales $ 16 $ 211 $ 117 $ 271
Gross realized losses from sales (67) (178) (156) (229)
- -------------------------------------------------------------------------------------------
Net investment securities gains (losses) (51) 33 (39) 42
- -------------------------------------------------------------------------------------------
</TABLE>
Equity investment securities
Net realized gains on the sale of equity investment securities of $118 million
and $182 million included in Other revenue for the three months and six months
ended June 30, 1996, respectively, include $130 million and $203 million of
gross realized gains. Gross unrealized gains and losses as well as a comparison
of the cost, fair value, and carrying value of marketable equity investment
securities at June 30, 1996, follows.
<TABLE>
<CAPTION>
Gross Gross Fair and
unrealized unrealized carrying
In millions Cost gains losses value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1996 $208 $344 $ 1 $551
- ----------------------------------------------------------------------------------
</TABLE>
Securities without available market quotations:
Nonmarketable equity investment securities, carried at a cost of $627 million,
had an estimated fair value of $774 million at June 30, 1996.
5. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and liabilities, including derivative instruments used
for trading purposes, are carried at fair value. The following table presents
the carrying value of trading account assets and liabilities at June 30, 1996,
and the average balance for the three-month and six-month periods ended June 30,
1996.
<TABLE>
<CAPTION>
Carrying Average
value balance
----------- -------------------------
June 30 Second Six months
In millions 1996 quarter 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
TRADING ACCOUNT ASSETS
U.S. Treasury $ 5,796 $ 7,271 $ 9,594
U.S. government agency 2,960 3,309 2,801
Foreign government 20,288 16,888 18,229
Corporate debt and equity 13,779 13,815 13,719
Other securities 3,724 6,336 6,642
Interest rate and currency swaps 10,218 10,263 10,782
Foreign exchange contracts 3,039 3,356 3,112
Interest rate futures and forwards 259 294 343
Commodity and equity contracts 2,972 3,164 2,434
Purchased option contracts 6,340 5,651 5,322
- -------------------------------------------------------------------------------
Total trading account assets 69,375 70,347 72,978
- -------------------------------------------------------------------------------
TRADING ACCOUNT LIABILITIES
U.S. Treasury 6,105 7,656 8,169
Foreign government 11,170 8,482 8,996
Corporate debt and equity 3,491 5,669 4,717
Other securities 1,079 2,841 2,659
Interest rate and currency swaps 8,258 8,929 9,614
Foreign exchange contracts 4,332 4,053 3,977
Interest rate futures and forwards 515 559 540
Commodity and equity contracts 3,070 3,506 3,036
Written option contracts 6,247 6,219 5,596
- -------------------------------------------------------------------------------
Total trading account liabilities 44,267 47,914 47,304
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
12
6. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Derivatives
Derivatives may be used either for trading or asset and liability management
purposes. Accordingly, the notional amounts presented in the table below have
been identified as relating to either trading or asset and liability management
activities based on management's intent and ongoing usage. A summary of the
credit exposure, which is represented by the positive market value associated
with derivatives, after considering the benefit of approximately $25.8 billion
and $27.7 billion of master netting agreements in effect at June 30, 1996 and
December 31, 1995, respectively, is also presented.
<TABLE>
<CAPTION>
Notional amounts Credit exposure
--------------------------- -----------------------
June 30 December 31 June 30 December 31
In billions 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps
Trading $ 1,481.7 $ 1,233.3
Asset and liability management(a)(b)(c) 268.5 282.3
- -----------------------------------------------------------------------------------------------------
Total interest rate and currency swaps 1,750.2 1,515.6 $ 10.2 $ 12.4
- -----------------------------------------------------------------------------------------------------
Foreign exchange spot, forward, and
futures contracts
Trading 495.5 443.7
Asset and liability management(a)(b) 27.3 18.1
- -----------------------------------------------------------------------------------------------------
Total foreign exchange spot, forward,
and futures contracts 522.8 461.8 3.0 3.3
- -----------------------------------------------------------------------------------------------------
Interest rate futures, forward rate
agreements, and debt securities forwards
Trading 479.5 412.7
Asset and liability management 11.0 2.7
- -----------------------------------------------------------------------------------------------------
Total interest rate futures, forward
rate agreements, and debt securities
forwards 490.5 415.4 0.3 0.5
- -----------------------------------------------------------------------------------------------------
Commodity and equity swaps, forward, and
futures contracts, all trading 83.8 65.1 3.0 1.4
- -----------------------------------------------------------------------------------------------------
Purchased options(d)
Trading 521.4 462.2
Asset and liability management(a) 2.1 2.6
- -----------------------------------------------------------------------------------------------------
Total purchased options 523.5 464.8 6.3 5.2
- -----------------------------------------------------------------------------------------------------
Written options, all trading(e) 692.5 524.0 -- --
- -----------------------------------------------------------------------------------------------------
Total credit exposure recorded as
assets on the balance sheet 22.8 22.8
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 13
13
(a) The majority of J.P. Morgan's asset and liability management derivatives
are transacted with independently managed J.P. Morgan derivatives dealers that
function as intermediaries for credit and administrative purposes.
(b) The notional amounts of asset and liability management derivatives
contracts conducted in the foreign exchange markets, primarily forward
contracts, amounted to $30.6 billion at June 30, 1996, and were primarily
denominated in the following currencies: deutsche mark $5.1 billion, French
franc $5.0 billion, Italian lira $3.4 billion, Swiss franc $3.3 billion, Spanish
peseta $2.6 billion, Japanese yen $1.9 billion, and Belgian franc $1.6 billion.
(c) The notional amount of risk-adjusting swaps was $240.8 billion at June 30,
1996.
(d) At June 30, 1996, purchased options used for trading purposes included
$400.2 billion of interest rate options, $92.0 billion of foreign exchange
options, and $29.2 billion of commodity and equity options. Only interest rate
options are used for asset and liability management purposes. Purchased options
executed on an exchange amounted to $125.9 billion and those negotiated
over-the-counter amounted to $397.6 billion at June 30, 1996.
(e) At June 30, 1996, written options used for trading purposes included $557.1
billion of interest rate options, $102.3 billion of foreign exchange options,
and $33.1 billion of commodity and equity options. Written option contracts
executed on an exchange amounted to $249.3 billion and those negotiated
over-the-counter amounted to $443.2 billion at June 30, 1996.
Asset and liability management derivatives
As an end user, J.P. Morgan utilizes derivative instruments in the execution of
its asset and liability management strategies. Derivatives used for these
purposes primarily include interest rate swaps, foreign exchange forward
contracts, forward rate agreements, interest rate futures, and debt securities
forwards. Derivatives are used to hedge or modify the interest rate
characteristics of debt investment securities, loans, deposits, other
liabilities for borrowed money, long-term debt, and other financial assets and
liabilities. In addition, we utilize derivatives to adjust our overall interest
rate risk profile through the use of risk-adjusting swaps.
Net unrealized gains associated with open derivative contracts used to
hedge or modify the interest rate characteristics of related balance sheet
instruments amounted to $70 million at June 30, 1996. Gross unrealized gains and
gross unrealized losses associated with open derivative contracts used for these
purposes at June 30, 1996, are presented below. Such amounts primarily relate to
interest rate and currency swaps used to hedge or modify the interest rate
characteristics of long-term debt, deposits, and debt investment securities,
principally mortgage-backed securities. See Note 7 to the financial statements,
Fair value of financial instruments.
<TABLE>
<CAPTION>
Gross Gross Net
unrealized unrealized unrealized
In millions gains (losses) gains/(losses)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt $ 146 ($121) $ 25
Debt investment securities 75 (56) 19
Deposits 32 (14) 18
Other financial instruments 56 (48) 8
- -------------------------------------------------------------------------------
Total 309 (239) 70
- -------------------------------------------------------------------------------
</TABLE>
Net unrealized gains associated with risk-adjusting swaps and their related
hedges that are entered into to meet longer-term asset and liability management
objectives approximated $0.2 billion at June 30, 1996. The net amount is
composed of $2.5 billion of gross unrealized gains and $2.3 billion of gross
unrealized losses. The unrealized gains and losses related to the derivative
contracts used to hedge these risk-adjusting swaps, included above, were not
material at June 30, 1996. There were no material terminations of risk-adjusting
swaps during the three months and six months ended June 30, 1996.
<PAGE> 14
14
Credit-related financial instruments
Credit-related financial instruments include commitments to extend credit and
standby letters of credit and guarantees. The contractual amounts of these
instruments represent the amounts at risk should the contract be fully drawn
upon, the client default, and the value of any existing collateral become
worthless. The credit risk associated with these instruments varies depending on
the creditworthiness of the client and the value of any collateral held. The
maximum credit risk associated with credit-related financial instruments is
measured by the contractual amounts of these instruments.
A summary of the contractual amount of credit-related financial instruments
at June 30, 1996, is presented in the following table.
<TABLE>
<CAPTION>
June 30
In billions 1996
- ----------------------------------------------------------------------------
<S> <C>
Commitments to extend credit $ 60.6
Standby letters of credit and guarantees 13.4
- ----------------------------------------------------------------------------
</TABLE>
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 $46.7
billion were netted against amounts payable for securities purchased of $45.8
billion to arrive at a net trade date receivable of $0.9 billion, which was
classified as Other assets on the consolidated balance sheet at June 30, 1996.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, J.P. Morgan estimates that the aggregate net fair value of all
balance sheet and off-balance-sheet financial instruments exceeded associated
net carrying values at June 30, 1996, by approximately $1.5 billion before
considering income taxes, compared with $1.4 billion at December 31, 1995. Such
amounts were primarily attributable to net appreciation on net loans and
risk-adjusting swaps of $1.2 billion and $0.2 billion, respectively, at June 30,
1996 and $1.2 billion and $0.4 billion, respectively, at December 31, 1995.
<PAGE> 15
15
8. IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES
Total impaired loans, net of charge-offs, at June 30, 1996, are presented in the
following table. At June 30, 1996, more than half of the impaired loan balance
is measured based upon the present value of expected future cash flows
discounted at an individual loan's effective interest rate, one third is based
on the fair value of the collateral, and the remainder is measured by an
observable market price.
<TABLE>
<CAPTION>
June 30
In millions 1996
- ----------------------------------------------------------------------
<S> <C>
Impaired loans:
Commercial and industrial $ 96
Other 36
- ----------------------------------------------------------------------
132
Restructuring countries 2
- ----------------------------------------------------------------------
Total impaired loans 134(a)
- ----------------------------------------------------------------------
Other nonperforming assets --
- ----------------------------------------------------------------------
Total nonperforming assets 134
- ----------------------------------------------------------------------
</TABLE>
An analysis of the effect of impaired loans, net of charge-offs, on
interest revenue in the three months and six months ended June 30, 1996 and
1995, is presented in the following table.
<TABLE>
<CAPTION>
Second quarter Six months
In millions 1996 1995 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest revenue that would have been
recorded if accruing $ 3 $ 4 $ 7 $ 9
Less interest revenue recorded -- 5 1 19
- -------------------------------------------------------------------------------------
(Negative)/ positive impact of impaired
loans on interest revenue (3) 1 (6) 10
- -------------------------------------------------------------------------------------
</TABLE>
An analysis of the allowance for credit losses at June 30, 1996, is presented in
the following table.
<TABLE>
<CAPTION>
Second quarter Six months
In millions 1996 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Beginning of period balance $ 1,117 $ 1,130
- ----------------------------------------------------------------------------
Recoveries 9 14
Charge-offs:
Commercial and industrial (1) (16)
Other -- (3)
- ----------------------------------------------------------------------------
Net charge-offs 8 (5)
- ----------------------------------------------------------------------------
Balance, June 30, 1996 (b) 1,125 1,125 (c)
- ----------------------------------------------------------------------------
</TABLE>
(a) As of June 30, 1996, no reserve is required under Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, for the $134 million recorded investment in impaired loans. Charge-offs
and interest applied to principal have reduced the recorded investment values to
amounts that are less than the SFAS No. 114 calculated values. For the three
months and six months ended June 30, 1996, the average recorded investment in
impaired loans was $149 million and $138 million, respectively.
(b) In accordance with SFAS No. 5, Accounting for Contingencies, and SFAS No.
114, as amended by SFAS No. 118, an allowance is maintained that is considered
adequate to absorb losses inherent in the existing portfolios of loans and other
undertakings to extend credit, such as irrevocable unused loan commitments, or
to make payments to others for which a client is ultimately liable, such as
standby letters of credit and guarantees, commercial letters of credit and
acceptances, and all other credit exposures, including derivatives. A judgment
as to the adequacy of the allowance is made at the end of each quarterly
reporting period.
(c) At June 30, 1996, the allocation of the allowance for credit losses was as
follows: Specific allocation - borrowers in the U.S. $120 million, Specific
allocation - borrowers outside the U.S. $63 million, Allocation to general risk
$942 million.
<PAGE> 16
16
9. INVESTMENT BANKING AND OTHER REVENUE
In the second quarter of 1996 and 1995, investment banking revenue of $210
million and $117 million includes $111 million and $41 million, respectively, of
underwriting revenue. For the six months ended June 30, 1996 and 1995,
underwriting revenue was $176 million and $63 million, respectively.
Other revenue of $194 million in the 1996 second quarter includes $118
million of net equity investment securities gains. Other revenue of $167 million
in the 1995 second quarter includes net equity investment securities gains of
$132 million. For the six months ended June 30, 1996 and 1995, Other revenue of
$259 million and $316 million, respectively, primarily includes net equity
investment securities gains of $182 million and $295 million respectively.
10. INCOME TAXES
Income tax expense in the 1996 second quarter reflects a 33% effective tax rate,
compared to a 32% effective tax rate in the 1995 second quarter. For the six
months ended June 30, 1996 and 1995, the effective tax rate was 33%. Income tax
benefit related to net investment securities losses was approximately $21
million and $16 million for the three months and six months ended June 30, 1996,
respectively. Income tax expense related to net investment securities gains was
approximately $13 million and $17 million for the three month and six months
ended June 30, 1995, respectively. The applicable tax rate used to compute the
income tax benefit and income tax expense related to net investment securities
gains (losses) was approximately 41% for the three months and six months ended
June 30, 1996 and 1995.
The valuation allowance to reduce deferred tax assets to the amount
expected to be realized totaled approximately $130 million at June 30, 1996,
compared with $140 million at December 31, 1995. The valuation allowance is
primarily related to the ability to recognize tax benefits associated with
foreign operations.
11. COMMITMENTS AND CONTINGENT LIABILITIES
Excluding mortgaged properties, assets carried at approximately $64.9 billion in
the consolidated balance sheet at June 30, 1996, were pledged as collateral for
borrowings, to qualify for fiduciary powers, to secure public monies as required
by law, and for other purposes.
<PAGE> 17
17
12. EARNINGS PER COMMON SHARE
In the calculation of primary and fully diluted earnings per common share, net
income is adjusted by adding back to net income the interest expense on
convertible debentures and the expense related to dividend equivalents on
certain deferred incentive compensation awards, net of the related income tax
effects, and deducting the preferred stock dividends.
Primary and fully diluted earnings per common share are computed by
dividing income components by the weighted-average number of common and common
equivalent shares outstanding during the period.
For the primary earnings per share calculation, the weighted-average number
of common and common equivalent shares outstanding includes the average number
of shares of common stock outstanding, the average number of shares issuable
upon conversion of convertible debentures, and the average number of shares
issuable under employee benefit plans that have a dilutive effect.
The weighted-average number of common and common equivalent shares
outstanding, assuming full dilution, includes the average number of shares of
common stock outstanding, the average number of shares issuable upon conversion
of convertible debentures, and the average number of shares issuable under
various employee benefit plans. The maximum dilutive effect is computed using
the period-end market price of J.P. Morgan common stock, if it is higher than
the average market price used in calculating primary earnings per share.
<TABLE>
<CAPTION>
First quarter Second quarter
Dollars in millions 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjusted net income $ 431 $ 249 $ 432 $ 310
Primary earnings per share:
Weighted-average number of common
and common equivalent shares
outstanding during the period 202,133,593 196,905,106 202,063,927 198,241,301
Fully diluted earnings per share:
Weighted-average number of common
and common equivalent shares
outstanding during the period 202,539,222 196,998,250 202,075,297 198,920,499
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six months
Dollars in millions 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Adjusted net income $ 863 $ 559
Primary earnings per share:
Weighted-average number of common
and common equivalent shares
outstanding during the period 202,048,817 197,724,069
Fully diluted earnings per share:
Weighted-average number of common
and common equivalent shares
outstanding during the period 202,395,067 199,082,095
- ------------------------------------------------------------------------------
</TABLE>
<PAGE> 18
18
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
J.P. Morgan & Co. Incorporated reported net income of $440 million in the second
quarter of 1996, 40% higher than in the second quarter of 1995. Earnings per
share for the quarter were $2.14 versus $1.56 a year ago.
Net income for the first six months of 1996 totaled $879 million, up 54% from
$570 million a year earlier. Earnings per share in the first six months were
$4.28 versus $2.83 a year ago. Six-month earnings in 1995 included a first
quarter charge of $55 million ($33 million after tax), or $0.17 per share,
related primarily to severance.
SECOND QUARTER RESULTS AT A GLANCE
<TABLE>
<CAPTION>
In millions of dollars, First
except per share data Second quarter quarter
1996 1995 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 1,761 $ 1,449 $ 1,740
Operating expenses (1,104) (984) (1,085)
Income taxes (217) (150) (216)
- -------------------------------------------------------------------------
Net income $ 440 $ 315 $ 439
Net income per share $ 2.14 $ 1.56 $ 2.13
- -------------------------------------------------------------------------
Dividends declared per share $ 0.81 $ 0.75 $ 0.81
</TABLE>
REVENUES rose 22% in the second quarter from a year ago.
- Trading revenue more than doubled to $697 million as client activity
remained strong. Combined trading and related net interest revenue
rose to $739 million from $333 million.
- Investment banking revenue rose 79% to $210 million.
- Investment management fees grew 25%. Operational service and
credit-related fees were lower as a result of the sale of the firm's
custody business in late 1995.
- Net interest revenue declined 22% to $397 million.
OPERATING EXPENSES were up 12% from a year ago, as incentive compensation
accruals for the second quarter increased in line with higher earnings.
IN OTHER DEVELOPMENTS, in July 1996, Morgan finalized an agreement to form a
strategic alliance to manage activities that represent about a third of the
firm's $1 billion of annual technology expenditures. Morgan expects to achieve
aggregate savings of about 15% on projected technology costs over the seven-year
life of the agreement.
In addition, on August 13, 1996, J.P. Morgan announced it has agreed to sell
its institutional U.S. cash processing business to HSBC Financial Institutions,
a division of Marine Midland Bank. The sale is expected to close by the end
of the year, subject to regulatory approvals, and is expected to have no
material effect on Morgan's ongoing consolidated results.
<PAGE> 19
19
BUSINESS SECTOR RESULTS
The firm reports financial results for five business sectors. Three are oriented
toward client services: Finance and Advisory, Sales and Trading, and Asset
Management and Servicing. The Equity Investments sector comprises management of
the firm's own portfolio of equity securities. The Asset and Liability
Management sector covers the management of the firm's overall interest rate
exposure. These five sectors generally reflect the way we operate but do not
correspond exactly with the firm's organizational structure. Presented below are
the summary results for each sector for the three months and six months ended
June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Asset Asset
Manage- and
Finance Sales ment Equity Liability Corp-
and and and Inves- Manage- orate Consol-
In millions Advisory Trading Servicing tments ment Items idated
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Second quarter
1996
Total revenue $ 507 $ 663 $ 355 $ 155 $ 96 $ (15) $1,761
Total expenses 365 351 274 8 33 73 1,104
- ----------------------------------------------------------------------------------------------------------
Pretax income 142 312 81 147 63 (88) 657
- ----------------------------------------------------------------------------------------------------------
Second quarter
1995
Total revenue 367 344 310 151 290 (13) 1,449
Total expenses 289 289 227 6 25 148 984
- ----------------------------------------------------------------------------------------------------------
Pretax income 78 55 83 145 265 (161) 465
- ----------------------------------------------------------------------------------------------------------
Six months
1996
Total revenue 958 1,404 704 245 287 (97) 3,501
Total expenses 702 690 545 16 62 174 2,189
- ----------------------------------------------------------------------------------------------------------
Pretax income 256 714 159 229 225 (271) 1,312
- ----------------------------------------------------------------------------------------------------------
Six months
1995
Total revenue 687 729 627 324 530 (60) 2,837
Total expenses 565 584 443 12 48 334 1,986
- ----------------------------------------------------------------------------------------------------------
Pretax income 122 145 184 312 482 (394) 851
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) The firm's management reporting system and policies were used to determine
the revenues and expenses directly attributable to each sector on a
taxable-equivalent basis. In addition, earnings on stockholders' equity and
certain overhead expenses not allocated for management reporting purposes were
allocated to each business sector. Earnings on stockholders' equity were
allocated based on management's assessment of the inherent risk of each sector.
Overhead expenses were allocated based primarily on staff levels and represent
costs associated with various support functions that exist for the benefit of
the firm as a whole.
(2) In the three months ended June 30, 1996 and 1995, $217 million and $150
million, respectively, related to income taxes were not allocated to the
business sectors. In the six months ended June 30, 1996 and 1995, $433 million
and $281 million, respectively, related to income taxes were not allocated to
the business sectors.
<PAGE> 20
20
FINANCE AND ADVISORY
The Finance and Advisory sector recorded pretax income of $142 million in the
second quarter of 1996 compared with $78 million a year ago. Total revenue in
the 1996 second quarter increased 38% to $507 million from $367 million in the
second quarter of 1995 reflecting an increase in investment banking revenue
principally due to higher levels of advisory and underwriting activities. Higher
revenues from equity derivatives also contributed to the increase.
Expenses in the second quarter of 1996 for the Finance and Advisory
sector were $365 million compared with $289 million in the second quarter of
1995, an increase of 26%, primarily due to higher employee compensation and
benefits expenses.
Revenues for the six month period increased 39% to $958 million.
Expenses for the same period increased 24% to $702 million from the six months
ended June 30, 1995.
For the first half of 1996, J.P. Morgan ranked as the sixth largest
underwriter of U.S. debt and equity issues, according to Securities Data Co. In
advisory activities, Securities Data Co. ranked J.P. Morgan seventh in completed
mergers and acquisitions worldwide and fourth in pending transactions in the
first half of the year.
SALES AND TRADING
The Sales and Trading sector recorded pretax income of $312 million in the
second quarter of 1996 compared with $55 million in the second quarter of 1995.
Total revenue in the second quarter of 1996 increased 93% to $663 million
compared with $344 million in the second quarter of 1995 as revenues in both
developed and emerging markets were strong. Total revenue increased due to
higher results in fixed income markets driven by continued client demand for
swaps, government, and corporate securities. Revenues from our proprietary
trading unit increased in the quarter due to favorable positioning, primarily in
the United States and Europe.
Total expenses for the Sales and Trading sector of $351 million
increased $62 million or 21% from the second quarter of 1995 primarily due to
higher employee compensation and benefits expense.
Total revenue of $1,404 million for the six months ended June 30, 1996,
increased 93% or $675 million from 1995. Total expenses increased 18% to $690
million when compared to the same period from last year.
ASSET MANAGEMENT AND SERVICING
The Asset Management and Servicing sector recorded pretax income of $81 million
in the second quarter of 1996 compared with $83 million in the year-earlier
period. Total revenue increased 15% to $355 million in the second quarter of
1996 compared with $310 million in the second quarter of 1995. This increase was
primarily driven by an increase in revenue from asset management, reflecting an
increase in assets under management primarily from net new business.
Expenses associated with Asset Management and Servicing were $274
million in the second quarter of 1996 compared with $227 million in the second
quarter of 1995. The 21% increase in expenses primarily relates to higher
employee compensation and benefits, in part due to higher staff levels.
Revenues of $704 million for the six month period ended June 30, 1996,
increased $77 million from 1995. Expenses of $545 million for the six month
period ended June 30, 1996, increased $102 million from 1995.
In strategic dispositions, we sold our securities custody and clearing
business and discontinued certain of our cash services during 1995 and, as
previously mentioned, have agreed to sell our U.S. institutional cash processing
business. Revenues and expenses for 1996 and 1995 associated with these
businesses are included in the Corporate Items section.
These actions do not affect the cash management and processing services
Morgan offers for private clients or our role as operator of the Euroclear
System, the world's largest clearance and settlement system for internationally
traded securities.
<PAGE> 21
21
EQUITY INVESTMENTS
Equity Investments recorded pretax income of $147 million in the second quarter
of 1996 compared with $145 million in the second quarter of 1995. Total revenue
was $155 million in the second quarter of 1996 compared with $151 million in the
second quarter of 1995. The 1996 second quarter reflected net equity investment
securities gains of $118 million versus net gains of $132 million in the
year-earlier quarter. Total revenue for the six months period was $245 million
compared with $324 million in 1995. Net unrealized appreciation on the combined
portfolio of marketable and nonmarketable equity investment securities was $490
million at June 30, 1996, compared with $513 million at March 31, 1996.
The results of the Equity Investment portfolio are also evaluated on an
economic basis using total return, which combines revenue and the change in net
unrealized appreciation. Total return for the second quarter of 1996 was $132
million compared with $108 million in the second quarter of 1995. Total return
for the six months ended June 30, 1996, was $210 million compared with $205
million for the six months ended June 30, 1995. As our investment strategy
covers a longer-term horizon, total return viewed over shorter periods will
reflect the impact of short-term market movements, including industry specific
events.
ASSET AND LIABILITY MANAGEMENT
Asset and Liability Management recorded pretax income of $63 million in the
second quarter of 1996 compared with $265 million in the same period a year ago.
Total revenue, which primarily includes net interest revenue and net investment
securities gains (losses), was $96 million and $290 million for the second
quarter of 1996 and 1995, respectively. The decline in total revenue was
primarily due to the decrease in net interest revenue as a result of the
maturity of higher-yielding instruments. In addition, net investment securities
losses were $51 million in the second quarter of 1996, versus net gains of $33
million in the second quarter of 1995. Net unrealized appreciation on asset and
liability management financial instruments, which included appreciation
associated with risk-adjusting swaps and debt investment securities, was $317
million at June 30, 1996 and $444 million at March 31, 1996. Total revenue
declined $243 million to $287 million for the six months ended June 30, 1996.
As our objective in Asset and Liability Management is to create
longer-term value through the management of interest rate risk related to J.P.
Morgan's nontrading assets, liabilities, and off-balance-sheet activities, the
performance of the Asset and Liability Management sector, similar to that of the
Equity Investments sector, is evaluated on an economic basis using total return.
Total return, which combines reported revenue and the change in net unrealized
appreciation, decreased to ($31) million in the second quarter of 1996 from $30
million in the second quarter of 1995. Total return for the six month period
ended June 30, 1996 was $51 million compared with $159 million for the six
months ended June 30, 1995.
CORPORATE ITEMS
Corporate Items includes revenues and expenses that have not been allocated to
the five business sectors, intercompany eliminations, and the taxable equivalent
adjustment, which is calculated to gross-up tax exempt interest to a taxable
basis.
Corporate Items for the second quarter and six months of 1996 and 1995
also included the revenues and expenses of the securities custody and clearing
and cash services businesses. As mentioned in the discussion of Asset Management
and Servicing, these businesses have been sold or discontinued during 1995 or
are expected to be sold by year end. Corporate Items in the second quarter of
1996 and 1995 also included the taxable equivalent adjustment of $22 million and
$27 million respectively. Corporate Items for the six months of 1996 consisted
primarily of intercompany eliminations, the taxable equivalent adjustment of $44
million, and other items not allocated to a sector.
<PAGE> 22
22
RISK MANAGEMENT
The following presents the market risk profiles related to our trading
activities and asset and liability management activities for the three months
and twelve months ended June 30, 1996.
Trading activities
J.P. Morgan employs a value at risk methodology to estimate the potential losses
that could arise from adverse changes in market conditions within a 95%
confidence interval, referred to as "Daily Earnings at Risk" (DEaR). The DEaR
estimate for our combined trading activities for the second quarter of 1996
averaged approximately $22 million, unchanged from the first quarter of 1996,
and ranged from $17 million to $26 million.
For the twelve months ended June 30, 1996, the DEaR estimate for our
combined trading activities averaged approximately $21 million and ranged from
approximately $16 million to $31 million. Daily combined trading-related revenue
averaged $11.3 million during the twelve-month period ended June 30, 1996.
Consistent with statistical expectations, daily revenue fell short of expected
results by amounts greater than related DEaR estimates within 5% of the trading
days during the twelve months ended June 30, 1996.
Asset and liability management activities
During the twelve months ended June 30, 1996, value at risk measured over a
weekly horizon averaged approximately $40 million and ranged from $21 million to
$82 million. These amounts approximate average DEaR of $18 million and a range
of $10 million to $37 million. Weekly total return related to asset and
liability management activities fell short of expected weekly results by amounts
greater than related weekly value at risk estimates within 5% of the time.
<PAGE> 23
23
FINANCIAL STATEMENT ANALYSIS
REVENUES
Revenues totaled $1.761 billion in the second quarter of 1996, up 22% from
$1.449 billion a year earlier.
Net interest revenue, the aggregate of interest revenue and expense
generated by the firm's asset and liability management, credit-related, and
trading activities, declined 22% to $397 million from the second quarter of
1995. Asset and liability management was the principal factor in the decline as
higher-yielding positions continued to mature.
The following table provides J.P. Morgan's interest-rate-sensitivity
gap at June 30, 1996, including the asset and liability interest-rate-
sensitivity gap and the effect of derivatives on the gap. The resulting
interest-rate-sensitivity gap is presented by U.S. dollar and non-U.S. dollar
currency components and reflects J.P. Morgan's market outlook at June 30, 1996.
Significant variances in interest rate sensitivity may exist at other dates not
presented in the table. Amounts in parentheses reflect liability sensitive
positions.
By repricing or maturity dates
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
After After
six one
months year
Within but but After
six within within five
In millions months one year five years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1996
Asset and liability interest-
rate-sensitivity gap ($ 2,842) ($ 2,614) $ 2,098 $ 9,653
Derivatives affecting interest
rate sensitivity 1,397 4,158 (8,266) 2,711
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-rate-sensitivity gap (a) (1,445) 1,544 (6,168) 12,364
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Components of interest-rate-
sensitivity gap:
U.S. dollar 7,004 1,580 (10,749) 12,131
Non-U.S. dollar* (8,449) (36) 4,581 233
- -----------------------------------------------------------------------------------------------------------------------------------
Total (1,445) 1,544 (6,168) 12,364
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
* Primarily yen, deutsche mark, French franc, and sterling positions.
<PAGE> 24
24
Trading revenue rose to $697 million in the second quarter from $305 million a
year earlier. First-half trading revenue also more than doubled from the first
six months of 1995. Revenues in both developed and emerging markets were strong
and diversified across nearly all the firm's trading products. Reported trading
revenue does not include net interest revenue associated with trading
activities, which was $42 million in the second quarter of 1996 and $28 million
a year ago. The following table presents trading revenue and net interest
revenue associated with the firm's trading activities, in both developed and
emerging markets, disaggregated by principal product groupings. The table does
not represent total revenues generated by business activities as discussed in
Business sector results. For example, underwriting revenues and equities
commissions, which are reported in Investment banking revenue and Operational
service fees respectively on the Consolidated Statement of Income, are not
included below.
<TABLE>
<CAPTION>
Fixed Foreign Commo- Proprietary
In millions Income Equities Exchange dities Unit Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Second Quarter 1996
Trading revenue $331 $124 $109 $ 5 $128 $ 697
Net interest revenue 54 (9) 5 (5) (3) 42
- -----------------------------------------------------------------------------------------------------------------------------------
Combined total 385 115 114 - 125 739
- -----------------------------------------------------------------------------------------------------------------------------------
Second Quarter 1995
Trading revenue 96 96 62 12 39 305
Net interest revenue 56 (40) 3 (1) 10 28
- -----------------------------------------------------------------------------------------------------------------------------------
Combined total 152 56 65 11 49 333
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months 1996
Trading revenue 864 218 177 39 157 1,455
Net interest revenue 123 (52) 10 (7) (2) 72
- -----------------------------------------------------------------------------------------------------------------------------------
Combined total 987 166 187 32 155 1,527
Six Months 1995
Trading revenue 153 138 164 31 122 608
Net interest revenue 122 (57) 7 2 15 89
- -----------------------------------------------------------------------------------------------------------------------------------
Combined total 275 81 171 33 137 697
</TABLE>
<PAGE> 25
25
Combined trading and related net interest revenue rose to $739 million from $333
million a year earlier. Combined revenue from fixed income rose to $385 million
in the second quarter from $152 million in the year-earlier quarter, driven by
continued client demand for swaps and for government and corporate securities.
Combined revenue from equities more than doubled to $115 million from $56
million a year earlier, reflecting strong demand for equity derivative products.
Foreign exchange combined revenue totaled $114 million versus $65 million in the
second quarter of 1995. Commodities trading, which posted combined revenue of
$11 million in the second quarter a year ago, broke even on a combined revenue
basis in the period just ended. Combined revenue from the firm's proprietary
trading unit more than doubled to $125 million from $49 million in the second
quarter of 1995, due to favorable positioning, primarily in the United States
and Europe. Combined revenue for the first six months of 1996 was $1,527
million, compared with $697 million in the same 1995 period.
Investment banking revenue increased 79% to $210 million in the second quarter.
Underwriting revenue grew to $111 million from $41 million a year ago, as Morgan
raised more debt and equity capital for a broad range of clients. Advisory fees
in the second quarter rose to $99 million from $76 million a year earlier.
Investment banking revenue for the first six months of 1996 was $411 million,
compared with $231 million for the first six months of 1995. Underwriting
revenue for the first six months of 1996 was $176 million, versus $63 million in
the comparable 1995 period.
Credit-related fees were $38 million in the second quarter, 7% lower than
in the second quarter of 1995 because of the sale of the custody business. In
the first six months of this year, credit-related fees were $76 million compared
with $84 million in the same period of 1995.
Investment management fees advanced 25% to $172 million from a year ago,
as assets under management rose, primarily from net new business. Assets under
management at June 30, 1996, were approximately $190 billion. Investment
management fees for the first six months of 1996 were $329 million, versus $268
million in the same 1995 period.
Operational service fees in the second quarter totaled $104 million,
26% lower than in the second quarter of 1995. Excluding revenues associated with
the custody business, which was sold in 1995, operational service fees for the
second quarter rose 5% on increased brokerage commissions. For the first six
months of 1996, operational service fees were $217 million, versus $280 million
in the 1995 period. Excluding revenues associated with the custody business,
operational service fees for the six months rose 5%.
Net investment securities losses were $51 million in the second
quarter, versus net gains of $33 million in the second quarter of 1995. The
losses in the second quarter of 1996 resulted primarily from the sale of
government agency securities to realign the risk profile of the portfolio. For
the six-month period, net investment securities losses were $39 million, versus
net gains of $42 million in the first six months of 1995.
Other revenue was $194 million in the second quarter, compared with
$167 million in the 1995 second quarter. The 1996 second quarter reflected net
equity investment securities gains of $118 million, compared with $132 million
in the same quarter of 1995. For the first six months of 1996, other revenue was
$259 million, versus $316 million in the comparable 1995 period. Net equity
investment securities gains in the first half were $182 million, compared with
$295 million for the first six months of 1995.
<PAGE> 26
26
OPERATING EXPENSES
Operating expenses were $1.104 billion in the second quarter of 1996, up 12%
from a year earlier, primarily reflecting higher incentive compensation accruals
in line with higher earnings. Excluding the 1995 expenses associated with the
custody business, operating expenses were up 18%. Expenses other than employee
compensation and benefits increased due to higher levels of business activity.
In July 1996, the firm formed a strategic alliance to manage parts of
the firm's global technology infrastructure. Morgan expects to achieve aggregate
savings of approximately 15% on projected technology costs over the life of the
agreement, after an estimated $100 million transition expense. The transition
expense is expected to be recorded in the 1996 third quarter. With the
establishment of the alliance, some costs previously included in employee
compensation and benefits will be reflected in technology and communications
expenses.
At June 30, 1996, staff totaled 15,391 employees compared with 16,267
employees at June 30, 1995.
Operating expenses in the first six months of 1996 increased 10% to
$2.189 billion. Excluding the 1995 first quarter charge and the 1995 expenses
associated with the custody business, operating expenses rose 20%.
Income tax expense of $217 million in the second quarter was based on
an effective tax rate of 33% versus 32% in the second quarter of 1995. For the
six months ended June 30, 1996 and 1995, the effective tax rate was 33%.
ASSETS
Total assets were $199 billion at June 30, 1996, compared with $205 billion at
March 31, 1996. Nonperforming assets decreased by $22 million to $134 million
during the second quarter as assets newly classified as nonperforming were more
than offset by repayments and loan sales. No provision for credit losses was
deemed necessary in the 1996 second quarter. The allowance for credit losses was
$1.125 billion at June 30, 1996.
<PAGE> 27
27
FOREIGN-COUNTRY-RELATED OUTSTANDINGS
Foreign-country-related outstandings represent outstandings to foreign borrowers
that are denominated in U.S. dollars or currencies other than the borrower's
local currency or, in the case of a guarantee, other than the guarantor's local
currency. Countries in which J.P. Morgan's outstandings exceeded 1.0% of total
assets at June 30, 1996, are listed in the following table. Outstandings include
loans, interest-earning deposits with banks, investment securities, customers'
acceptance liability, securities purchased under agreements to resell, trading
account securities, accrued interest, and other monetary assets. Outstandings
generally are distributed according to the location of the borrower. In the case
of guaranteed outstandings or when tangible, liquid collateral is held and
realizable outside the obligor's country, distribution is generally made
according to the location of the guarantor or the location where the collateral
is held and realizable.
<TABLE>
<CAPTION>
In millions Cross-border outstandings (a)
--------------------------------------------------------------------------
<S> <C>
United Kingdom $4,765
France 5,363
Switzerland 2,230
--------------------------------------------------------------------------
</TABLE>
(a) Mexican cross-border outstandings at June 30, 1996, were $1,214 million,
less than 0.75% of total assets. Not included in Mexican cross-border
outstandings are United Mexican States (UMS) bonds, substantially all of which
have been sold forward, which are collateralized by U.S. Treasury securities. If
the book value of these bonds, which is discussed below, had been included,
total Mexican cross-border outstandings would have exceeded 0.75% of total
assets at June 30, 1996.
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.
<TABLE>
<CAPTION>
U.S.
Treasury
In millions UMS bonds collateral
- ---------------------------------------------------------------------------------
Book Face Market Fair
value value value value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1996
Due in 2008 $ 28 $ 29 $ 28 $ 13
Due in 2019 523 637 501 116
- ---------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
28
CAPITAL
<TABLE>
<CAPTION>
June 30 March 31 December 31 June 30
Dollars in billions 1996 1996 1995 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total stockholders' equity $ 11.0 $ 10.8 $ 10.5 $ 9.9
Annualized rate of return on
average common stockholders'
equity (a) (b) 17.1% 17.2% 14.7% 13.4%
As percent of period-end total
assets:
Common equity 5.2 5.0 5.4 5.6
Total equity 5.5 5.3 5.7 5.9
Book value per common share (c) $ 52.40 $ 51.57 $ 50.71 $ 48.14
Risk-based capital:
Tier 1 risk-based capital $ 9.7 $ 9.5 $ 9.0 $ 8.6
Total risk-based capital 14.1 13.9 13.4 12.7
Risk adjusted assets 120.3 113.8 103.1 99.0
Capital ratios:
J.P. Morgan
Tier 1 ratio 8.1% 8.3% 8.8% 8.7%
Total ratio 11.7 12.2 13.0 12.8
Leverage ratio 6.2 6.2 6.1 6.0
Morgan Guaranty Trust Company of New York
Tier 1 ratio 7.7% 8.1% 8.5% 8.3%
Total ratio 10.7 11.4 11.0 10.7
Leverage ratio 5.7 5.6 5.5 5.2
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the annualized rate of return on average common stockholders'
equity for the three months ended June 30, 1996, March 31, 1996, December 31,
1995, and June 30, 1995. Excluding the impact of SFAS No. 115, the annualized
rate of return on average common stockholders' equity would have been 17.8%,
18.1%, 15.5%, and 14.1% for the three months ended June 30, 1996, March 31,
1996, December 31, 1995, and June 30, 1995, respectively.
(b) The annualized rate of return on average common stockholders' equity for the
six months ended June 30, 1996 and 1995 was 17.1% and 12.3%, respectively.
Excluding the impact of SFAS No. 115, the annualized rate of return on average
common stockholders' equity would have been 18.0% and 12.9% for the six months
ended June 30, 1996 and 1995, respectively.
(c) Excluding the impact of SFAS No. 115, the book value per common share would
have been $50.54, $49.18, $47.83, and $45.78 for the three months ended June 30,
1996, March 31, 1996, December 31, 1995, and June 30, 1995, respectively.
<PAGE> 29
29
J.P. Morgan's risk-based capital and leverage ratios remain well above the
minimum standards set by the Federal Reserve Board. In accordance with the
Federal Reserve Board guidelines, the risk-based capital and leverage ratios
exclude the equity, assets and off-balance-sheet exposures of J.P. Morgan
Securities, Inc. and the effect of SFAS No. 115.
At June 30, 1996, stockholders' equity included approximately $367
million of net unrealized appreciation on debt investment and marketable equity
investment securities, net the related deferred tax liability of $202 million.
Net unrealized appreciation was $470 million at March 31, 1996. The unrealized
appreciation on debt investment securities was $226 million and $331 million at
June 30, 1996 and March 31, 1996, respectively. The net unrealized appreciation
on marketable equity investment securities was $343 million and $429 million at
June 30, 1996 and March 31, 1996, respectively.
<PAGE> 30
30
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, Three months ended
interest and average rates ----------------------------------------------------------------------------------------
on a taxable-equivalent basis June 30, 1996 June 30, 1995
----------------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 1,812 $ 24 5.33% $ 1,652 $ 44 10.68%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 922 18 7.85 2,785 43 6.19
U.S. state and political
subdivision 1,651 47 11.45 2,066 64 12.43
Other 19,685 292 5.97 11,490 215 7.51
Debt investment securities in offices
outside the U.S. (a) 3,622 57 6.33 4,318 73 6.78
Trading account assets:
In offices in the U.S. 14,343 224 6.28 12,397 203 6.57
In offices outside the U.S. 22,911 460 8.08 23,585 580 9.86
Securities purchased under agreements
to resell and federal funds sold,
mainly in offices in the U.S. 45,394 593 5.25 30,246 443 5.87
Securities borrowed in offices in
the U.S. 26,042 318 4.91 12,899 187 5.81
Loans:
In offices in the U.S. 7,020 114 6.53 6,602 115 6.99
In offices outside the U.S. 21,494 328 6.14 18,037 325 7.23
Other interest-earning assets (b):
In offices in the U.S. 1,126 26 * 1,128 72 *
In offices outside the U.S. 1,065 80 * 1,030 68 *
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 167,087 2,581 6.21 128,235 2,432 7.61
Allowance for credit losses (1,122) (1,132)
Cash and due from banks 785 1,829
Other noninterest-earning assets 42,941 45,570
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 209,691 174,502
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S., Trading account assets in offices in the U.S., and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the three months ended June 30, 1996 and 1995.
(a) For the three months ended June 30, 1996 and 1995, average debt investment
securities are computed based on historical amortized cost, excluding the
effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance-sheet
transactions.
* Not meaningful
<PAGE> 31
31
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, Three months ended
interest and average rates ----------------------------------------------------------------------------------------
on a taxable-equivalent basis June 30, 1996 June 30, 1995
----------------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. $ 2,177 $ 24 4.43 % $ 2,184 $ 28 5.14 %
In offices outside the U.S. 46,008 595 5.20 42,390 588 5.56
Trading account liabilities:
In offices in the U.S. 7,921 124 6.30 6,871 108 6.30
In offices outside the U.S. 9,665 182 7.57 10,963 224 8.20
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 62,286 798 5.15 39,458 605 6.15
Commercial paper, mainly in offices
in the U.S. 4,274 57 5.36 2,634 40 6.09
Other interest-bearing liabilities:
In offices in the U.S. 14,270 200 5.64 9,254 146 6.33
In offices outside the U.S. 1,899 46 9.74 1,731 18 4.17
Long-term debt,
mainly in offices in the U.S. 9,623 136 5.69 8,692 140 6.46
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 158,123 2,162 5.50 124,177 1,897 6.13
Noninterest-bearing deposits:
In offices in the U.S. 2,329 3,330
In offices outside the U.S. 933 1,363
Other noninterest-bearing
liabilities 37,422 35,883
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 198,807 164,753
Stockholders' equity 10,884 9,749
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 209,691 174,502
Net yield on interest-earning assets 1.01 1.67
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest earnings 419 535
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 32
32
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, Six months ended
interest and average rates ----------------------------------------------------------------------------------------
on a taxable-equivalent basis June 30, 1996 June 30, 1995
----------------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits with banks,
mainly in offices outside the U.S. $ 1,803 $ 51 5.69% $ 1,960 $ 103 10.60%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 970 37 7.67 2,253 71 6.35
U.S. state and political
subdivision 1,672 96 11.55 2,108 129 12.34
Other 18,182 561 6.20 12,299 445 7.30
Debt investment securities in offices
outside the U.S. (a) 4,272 131 6.17 5,024 171 6.86
Trading account assets:
In offices in the U.S. 15,825 474 6.02 12,866 444 6.96
In offices outside the U.S. 24,913 966 7.80 25,754 1,170 9.16
Securities purchased under agreements
to resell and federal funds sold,
mainly in offices in the U.S. 43,577 1,170 5.40 29,230 855 5.90
Securities borrowed in offices in
the U.S. 23,408 581 4.99 14,103 401 5.73
Loans:
In offices in the U.S. 6,849 226 6.64 6,846 246 7.25
In offices outside the U.S. 21,071 660 6.30 17,310 613 7.14
Other interest-earning assets (b):
In offices in the U.S. 1,132 59 * 1,577 158 *
In offices outside the U.S. 1,180 145 * 839 125 *
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 164,854 5,157 6.29 132,169 4,931 7.52
Allowance for credit losses (1,126) (1,132)
Cash and due from banks 1,019 1,835
Other noninterest-earning assets 42,537 42,223
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 207,284 175,095
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and average rates applying to the following asset categories have been
adjusted to a taxable-equivalent basis: Debt investment securities in offices in
the U.S., Trading account assets in offices in the U.S., and Loans in offices in
the U.S. The applicable tax rate used to determine these adjustments was
approximately 41% for the six months ended June 30, 1996 and 1995.
(a) For the six months ended June 30, 1996 and 1995, average debt investment
securities are computed based on historical amortized cost, excluding the
effects of SFAS No. 115 adjustments.
(b) Interest revenue includes the effect of certain off-balance-sheet
transactions.
* Not meaningful
<PAGE> 33
33
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions, Six months ended
interest and average rates ----------------------------------------------------------------------------------------
on a taxable-equivalent basis June 30, 1996 June 30, 1995
----------------------------------------------------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
In offices in the U.S. $ 2,054 $ 47 4.60 % $ 2,129 $ 52 4.93 %
In offices outside the U.S. 45,764 1,222 5.37 42,151 1,183 5.66
Trading account liabilities:
In offices in the U.S. 7,923 241 6.12 7,136 249 7.04
In offices outside the U.S. 10,654 358 6.76 11,762 512 8.78
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 60,804 1,585 5.24 41,435 1,200 5.84
Commercial paper, mainly in offices
in the U.S. 3,980 108 5.46 2,606 79 6.11
Other interest-bearing liabilities:
In offices in the U.S. 13,827 392 5.70 9,395 291 6.25
In offices outside the U.S. 1,916 92 9.66 2,113 45 4.29
Long-term debt,
mainly in offices in the U.S. 9,526 275 5.81 7,987 256 6.46
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 156,448 4,320 5.55 126,714 3,867 6.15
Noninterest-bearing deposits:
In offices in the U.S. 2,674 3,342
In offices outside the U.S. 1,015 1,249
Other noninterest-bearing
liabilities 36,367 34,132
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 196,504 165,437
Stockholders' equity 10,780 9,658
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 207,284 175,095
Net yield on interest-earning assets 1.02 1.62
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest earnings 837 1,064
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 34
34
ASSET AND LIABILITY MANAGEMENT DERIVATIVES
The objective of asset and liability management is to create longer-term
value through the management of interest rate risk related to J.P. Morgan's
nontrading assets, liabilities, and off-balance-sheet activities. J.P. Morgan
utilizes a variety of financial instruments, including derivatives, in an
integrated manner to achieve these objectives. Additional information on asset
and liability management derivatives, primarily interest rate swaps, is provided
below. For more information about asset and liability management activities, see
Note 6 to the financial statements, Off-balance-sheet financial instruments.
The table below summarizes maturities and weighted-average interest rates
to be received and paid on U.S. dollar and non-U.S. dollar asset and liability
management interest rate swaps at June 30, 1996. The majority of asset and
liability management interest rate swaps, as presented below, are risk-adjusting
swaps. Also included in the table are swaps designated as hedges or used to
modify the interest rate characteristics of assets and liabilities. Variable
rates presented are generally based on the London Interbank Offered Rate (LIBOR)
in effect on the swaps at June 30, 1996, and reset at predetermined dates. The
table was prepared under the assumption that these variable interest rates
remain constant. The variable interest rates to be received or paid will change
to the extent that rates fluctuate. Such changes may be substantial.
Not included in the table below are other derivatives used for asset
and liability management purposes, such as currency swaps, basis swaps, foreign
exchange contracts, interest rate futures, forward rate agreements, debt
securities forwards, and purchased options, totaling $44.8 billion at June 30,
1996. The contractual maturities of these derivative contracts are primarily
less than one year.
<PAGE> 35
35
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS -
U.S. DOLLAR
Receive fixed
swaps
Notional amount $17.6 $15.6 $4.3 $3.8 $2.0 $10.8 $54.1
Weighted average:
Receive rate 6.7 % 5.8 % 7.1 % 7.0 % 6.4 % 6.8 % 6.5 %
Pay rate 5.5 5.5 5.5 5.5 5.5 5.6 5.5
Pay fixed swaps
Notional amount $21.8 $20.0 $4.7 $9.0 $6.1 $9.4 $71.0
Weighted average:
Receive rate 5.5 % 5.5 % 5.5 5.5 % 5.5 % 5.5 % 5.5 %
Pay rate 6.4 5.7 5.7 6.4 6.2 7.1 6.2
INTEREST RATE SWAPS -
NON-U.S. DOLLAR
Receive fixed
swaps
Notional amount $26.7 $21.0 $8.4 $7.8 $3.1 $7.0 $74.0
Weighted average:
Receive rate 6.2 % 5.4 % 6.2 % 6.5 % 7.0 % 7.0 % 6.1 %
Pay rate 3.9 3.7 3.5 3.9 4.8 3.7 3.8
Pay fixed swaps
Notional amount $22.6 $16.3 $8.4 $7.8 $3.2 $6.7 $65.0
Weighted average:
Receive rate 3.9 % 3.2 % 3.5 % 3.9 % 4.8 % 3.6 % 3.7 %
Pay rate 6.2 5.8 5.8 6.4 7.4 7.2 6.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $88.7 $72.9 $25.8 $28.4 $14.4 $33.9 $264.1
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Not included in the table above are $3.3 billion and $1.1 billion of notional
amounts related to currency swaps and basis swaps respectively.
<PAGE> 36
36
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. Statement re computation of ratios
27. Financial data schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended March 31, 1996:
April 11, 1996 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing
its earnings for the three-month period ended March 31, 1996.
May 13, 1996 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing
its intent to join a Computer Sciences Corporation, Andersen
Consulting, AT&T Solutions, and Bell Atlantic Network Integration
in a global alliance to manage parts of J.P. Morgan's global
technology infrastructure.
<PAGE> 37
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(REGISTRANT) J.P. MORGAN & CO. INCORPORATED
BY (SIGNATURE)
/s/ DAVID H. SIDWELL
---------------------------------------
(NAME AND TITLE) DAVID H. SIDWELL
MANAGING DIRECTOR AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
DATE: August 14, 1996
<PAGE> 38
1
LIST OF EXHIBITS
EXHIBIT
12. Statement re computation of ratios
27. Financial data schedule
<PAGE> 1
2
<TABLE>
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
J.P. Morgan & Co. Incorporated
Consolidated
- --------------------------------------------------------------------------------
<CAPTION>
Dollars in millions Six months
1996
- --------------------------------------------------------------------------------
<S> <C>
Earnings:
Net income $ 879
Add: income taxes 433
Less: equity in undistributed income of all affiliates
accounted for by the equity method 12
Add: fixed charges, excluding interest on deposits 3,068
- --------------------------------------------------------------------------------
Earnings available for fixed charges, excluding
interest on deposits 4,368
Add: interest on deposits 1,269
- --------------------------------------------------------------------------------
Earnings available for fixed charges, including
interest on deposits 5,637
- --------------------------------------------------------------------------------
Fixed charges:
Interest expense, excluding interest on deposits 3,051
Interest factor in net rental expense 17
- --------------------------------------------------------------------------------
Total fixed charges, excluding interest on deposits 3,068
Add: interest on deposits 1,269
- --------------------------------------------------------------------------------
Total fixed charges, including interest on deposits 4,337
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges:
Excluding interest on deposits 1.42
Including interest on deposits 1.30
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
3
<TABLE>
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
J.P. Morgan & Co. Incorporated
Consolidated
- --------------------------------------------------------------------------------
<CAPTION>
Dollars in millions Six months
1996
- --------------------------------------------------------------------------------
<S> <C>
Earnings:
Net income $ 879
Add: income taxes 433
Less: equity in undistributed income of all affiliates
accounted for by the equity method 12
Add: fixed charges, excluding interest on deposits
and preferred stock dividends 3,068
- --------------------------------------------------------------------------------
Earnings available for fixed charges, excluding
interest on deposits 4,368
Add: interest on deposits 1,269
- --------------------------------------------------------------------------------
Earnings available for fixed charges, including
interest on deposits 5,637
- --------------------------------------------------------------------------------
Fixed charges:
Interest expense, excluding interest on deposits 3,051
Interest factor in net rental expense 17
Preferred stock dividends 24
- --------------------------------------------------------------------------------
Total fixed charges, excluding interest on deposits 3,092
Add: interest on deposits 1,269
- --------------------------------------------------------------------------------
Total fixed charges, including interest on deposits 4,361
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges:
Excluding interest on deposits 1.41
Including interest on deposits 1.29
- --------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED JULY 30,
1996 INCLUDED IN THE FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 651
<INT-BEARING-DEPOSITS> 1,427
<FED-FUNDS-SOLD> 36,544
<TRADING-ASSETS> 69,375
<INVESTMENTS-HELD-FOR-SALE> 22,712
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 29,588
<ALLOWANCE> 1,125
<TOTAL-ASSETS> 198,765
<DEPOSITS> 48,457
<SHORT-TERM> 76,726
<LIABILITIES-OTHER> 52,709
<LONG-TERM> 9,842
0
694
<COMMON> 502
<OTHER-SE> 9,835
<TOTAL-LIABILITIES-AND-EQUITY> 198,765
<INTEREST-LOAN> 880
<INTEREST-INVEST> 790
<INTEREST-OTHER> 3,443
<INTEREST-TOTAL> 5,113
<INTEREST-DEPOSIT> 1,269
<INTEREST-EXPENSE> 4,320
<INTEREST-INCOME-NET> 793
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (39)
<EXPENSE-OTHER> 2,189
<INCOME-PRETAX> 1,312
<INCOME-PRE-EXTRAORDINARY> 879
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 879
<EPS-PRIMARY> 4.28
<EPS-DILUTED> 4.27
<YIELD-ACTUAL> 1.02
<LOANS-NON> 134
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,130
<CHARGE-OFFS> 19
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 1,125
<ALLOWANCE-DOMESTIC> 120
<ALLOWANCE-FOREIGN> 63
<ALLOWANCE-UNALLOCATED> 942
</TABLE>
