<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
J.P. MORGAN & CO. INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-5885 13-2625764
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
60 Wall Street, New York, NY 10260-0060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 483-2323
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes..X.. No.....
Number of shares outstanding of each of the registrant's classes of common
stock at July 31, 1998:
Common Stock, $2.50 Par Value 176,560,120 Shares
1
<PAGE> 2
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following financial statement information as of and for the three and six
months ended June 30, 1998, is set forth within this document on the pages
indicated:
<TABLE>
<CAPTION>
Page(s)
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 9-22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Business sector analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-28
Financial review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-33
Risk management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-36
Asset-quality analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-40
Consolidated average balances and net interest earnings. . . . . . . . . . . . . . . . . . . . . 41-44
PART II -- OTHER INFORMATION
Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
In millions, except share data Three months ended
----------------------------------------------------------
June 30 June 30 Increase/
1998 1997 (Decrease)
----------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $3,106 $3,029 $ 77
Interest expense 2,816 2,534 282
- --------------------------------------------------------------------------------------------------------------------
Net interest revenue 290 495 (205)
NONINTEREST REVENUES
Trading revenue 877 477 400
Investment banking revenue 362 294 68
Investment management revenue 226 199 27
Fees and commissions 197 156 41
Investment securities revenue 68 114 (46)
Other revenue 133 56 77
- --------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 1,863 1,296 567
Total revenues, net of interest expense 2,153 1,791 362
OPERATING EXPENSES
Employee compensation and benefits 862 734 128
Net occupancy 78 104 (26)
Technology and communications 293 240 53
Other expenses 183 163 20
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,416 1,241 175
Income before income taxes 737 550 187
Income taxes 256 176 80
- --------------------------------------------------------------------------------------------------------------------
Net income 481 374 107
PER COMMON SHARE
Net income
Basic $2.57 $1.98 $0.59
Diluted 2.36 1.85 0.51
Dividends declared 0.95 0.88 0.07
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
In millions, except share data Six months ended
----------------------------------------------------------
June 30 June 30 Increase/
1998 1997 (Decrease)
----------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $6,368 $5,921 $447
Interest expense 5,742 4,976 766
- ---------------------------------------------------------------------------------------------------------------------
Net interest revenue 626 945 (319)
NONINTEREST REVENUES
Trading revenue 1,773 1,174 599
Investment banking revenue 708 520 188
Investment management revenue 437 383 54
Fees and commissions 387 304 83
Investment securities revenue 111 175 (64)
Other revenue 108 123 (15)
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 3,524 2,679 845
Total revenues, net of interest expense 4,150 3,624 526
OPERATING EXPENSES
Employee compensation and benefits 1,865 1,500 365
Net occupancy 229 177 52
Technology and communications 594 443 151
Other expenses 360 312 48
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,048 2,432 616
Income before income taxes 1,102 1,192 (90)
Income taxes 384 394 (10)
- ----------------------------------------------------------------------------------------------------------------------
Net income 718 798 (80)
PER COMMON SHARE
Net income
Basic $3.82 $4.17 $(0.35)
Diluted 3.51 3.89 (0.38)
Dividends declared 1.90 1.76 0.14
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
June 30 December 31
In millions, except share data 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,522 $ 1,758
Interest-earning deposits with banks 2,804 2,132
Debt investment securities available-for-sale carried at fair value 23,698 22,768
Equity investment securities 1,012 1,085
Trading account assets, net of allowance for credit losses of $327 at June 1998 and $350
at December 1997 123,475 111,854
Securities purchased under agreements to resell 36,537 39,002
Securities borrowed 40,215 38,375
Loans, net of allowance for credit losses of $392 at June 1998 and $546 at December 1997 31,029 31,032
Accrued interest and accounts receivable 7,536 4,962
Premises and equipment, net of accumulated depreciation of $1,389 at June 1998 and $1,379
at December 1997 1,855 1,838
Other assets 11,094 7,353
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 280,777 262,159
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 982 1,482
In offices outside the U.S. 1,254 744
Interest-bearing deposits:
In offices in the U.S. 6,316 9,232
In offices outside the U.S. 48,474 47,421
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 57,026 58,879
Trading account liabilities 74,997 71,141
Securities sold under agreements to repurchase ($67,319 at June 1998 and $53,202
at December 1997) and federal funds purchased 69,891 57,804
Commercial paper 12,738 6,622
Other liabilities for borrowed money 16,788 17,176
Accounts payable and accrued expenses 8,268 10,865
Long-term debt not qualifying as risk-based capital 21,301 18,246
Other liabilities, including allowance for credit losses of $185 2,223 4,129
- ------------------------------------------------------------------------------------------------------------------------------
263,232 244,862
Liabilities qualifying as risk-based capital:
Long-term debt 4,679 4,743
Company-obligated mandatorily redeemable preferred securities of subsidiaries 1,150 1,150
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 269,061 250,755
STOCKHOLDERS' EQUITY
Preferred stock (authorized shares: 10,000,000)
Adjustable rate cumulative preferred stock, $100 par value (issued and outstanding: 2,444,300) 244 244
Variable cumulative preferred stock, $1,000 par value (issued and outstanding: 250,000) 250 250
Fixed cumulative preferred stock, $500 par value (issued and outstanding: 400,000) 200 200
Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,807,317
at June 1998 and 200,692,673 at December 1997) 502 502
Capital surplus 1,306 1,360
Common stock issuable under stock award plans 1,342 1,185
Retained earnings 9,743 9,398
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 376 432
Foreign currency translation, net of taxes (44) (22)
- ------------------------------------------------------------------------------------------------------------------------------
13,919 13,549
Less: treasury stock (24,148,710 shares at June 1998 and 24,374,944 shares
at December 1997) at cost 2,203 2,145
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,716 11,404
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 280,777 262,159
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
1998 1997
------------------------ -----------------------
Compre- Compre-
Stockholders' hensive Stockholders' hensive
In millions: Six months ended June 30 Equity Income Equity Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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, January 1 and June 30 200 200
- -----------------------------------------------------------------------------------------------------------------------------------
Total preferred stock, June 30 694 694
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1 and June 30 502 502
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance, January 1 1,360 1,446
Shares issued or distributed under dividend reinvestment plan,
various employee benefit plans, and conversion of debentures
and income tax benefits associated with stock options (54) (44)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 1,306 1,402
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 1,185 838
Deferred stock awards, net 157 144
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 1,342 982
- -----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, January 1 9,398 8,635
Net income 718 $ 718 798 $798
Dividends declared on preferred stock (18) (18)
Dividends declared on common stock (337) (318)
Dividend equivalents on common stock issuable (18) (12)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 9,743 9,085
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized gains on investment securities:
Balance, net of taxes, January 1 432 464
-------------- ------------
Net unrealized holding gains arising during the period,
before taxes ($14 in 1998 and $115 in 1997, net of taxes) 19 184
Reclassification adjustment for net gains included in net income,
before taxes ($64 in 1998 and $56 in 1997, net of taxes) (100) (88)
-------------- -------------
Change in net unrealized gains on investment securities, before taxes (81) 96
Deferred income tax benefit/(expense) 25 (42)
-------------- -------------
Change in net unrealized gains on investment securities, net of taxes (56) (56) 54 54
Balance, net of taxes, June 30 376 518
-------------- -------------
Foreign currency translation:
Balance, net of taxes, January 1 (22) (12)
-------------- ------------
Translation adjustment arising during the period, before taxes (34) (3)
Income tax benefit 12 1
-------------- ------------
Translation adjustment arising during the period, net of taxes (22) (22) (2) (2)
-------------- ------------
Balance, net of taxes, June 30 (44) (14)
- -----------------------------------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income,
net of taxes, June 30 332 504
- -----------------------------------------------------------------------------------------------------------------------------------
LESS: TREASURY STOCK
Balance, January 1 2,145 1,135
Purchases 446 1,016
Shares issued/distributed, primarily related to various employee
benefit plans (388) (330)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30 2,203 1,821
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 11,716 11,348
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME 640 850
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
J.P. Morgan & Co. Incorporated
- -----------------------------------------------------------------------------------------------------------
In millions Six months ended
- -----------------------------------------------------------------------------------------------------------
June 30 June 30
1998 1997
-------- --------
<S> <C> <C>
NET INCOME $ 718 $ 798
Adjustments to reconcile to cash provided by (used in) operating activities:
Noncash items: depreciation, amortization, deferred income taxes,
stock award plans, and write-downs on investment securities 473 381
Gain on sale of global trust and agency services business (79) --
Net (increase) decrease in assets:
Trading account assets (11,567) (14,891)
Securities purchased under agreements to resell 2,493 (3,980)
Securities borrowed (1,840) (9,906)
Accrued interest and accounts receivable (2,568) 1,378
Net increase (decrease) in liabilities:
Trading account liabilities 3,932 8,485
Securities sold under agreements to repurchase 14,141 8,197
Accounts payable and accrued expenses (2,514) 1,067
Other changes in operating assets and liabilities, net (2,417) 2,305
Net investment securities gains included in cash flows from investing
activities (127) (192)
- -----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 645 (6,358)
- -----------------------------------------------------------------------------------------------------------
Net (increase) in interest-earning deposits with banks (669) (147)
Debt investment securities:
Proceeds from sales 7,077 13,229
Proceeds from maturities, calls, and mandatory redemptions 4,197 1,918
Purchases (12,513) (15,389)
Net decrease in federal funds sold -- 50
Net decrease (increase) in loans 69 (1,208)
Payments for premises and equipment (113) (72)
Investment in American Century Companies, Inc. (965) --
Other changes, net (2,159) 642
- -----------------------------------------------------------------------------------------------------------
CASH (USED IN) INVESTING ACTIVITIES (5,076) (977)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in noninterest-bearing deposits 11 (333)
Net (decrease) increase in interest-bearing deposits (1,805) 4,568
Net (decrease) in federal funds purchased (2,030) (2,170)
Net increase in commercial paper 6,117 157
Other liabilities for borrowed money proceeds 6,912 11,915
Other liabilities for borrowed money payments (6,748) (13,615)
Long-term debt proceeds 7,289 7,552
Long-term debt payments (4,199) (1,433)
Proceeds from issuance of Company-obligated mandatorily redeemable preferred
securities of subsidiaries -- 400
Capital stock issued or distributed 219 181
Capital stock purchased (446) (1,016)
Dividends paid (355) (340)
Other changes, net (759) 1,337
- -----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 4,206 7,203
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks (11) (22)
- -----------------------------------------------------------------------------------------------------------
(DECREASE) IN CASH AND DUE FROM BANKS (236) (154)
Cash and due from banks at December 31, 1997 and 1996 1,758 906
- -----------------------------------------------------------------------------------------------------------
Cash and due from banks at June 30, 1998 and 1997 1,522 752
- -----------------------------------------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 5,658 $ 4,745
Income taxes 370 479
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
June 30 December 31
In millions, except share data 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,491 $ 1,663
Interest-earning deposits with banks 2,736 2,195
Debt investment securities available-for-sale carried at fair value (see note 8) 3,891 20,539
Trading account assets, net of allowance for credit losses of $327 at June 1998
and $350 at December 1997 96,070 88,995
Securities purchased under agreements to resell 24,183 28,045
Securities borrowed 13,802 13,831
Loans, net of allowance for credit losses of $390 at June 1998 and $545 at December 1997 30,847 30,851
Accrued interest and accounts receivable 6,934 4,534
Premises and equipment, net of accumulated depreciation of $1,209 at June 1998 and
$1,208 at December 1997 1,685 1,669
Other assets 6,298 4,096
- -------------------------------------------------------------------------------------------------------------------------
Total assets 187,937 196,418
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 991 1,492
In offices outside the U.S. 1,262 752
Interest-bearing deposits:
In offices in the U.S. 6,328 10,156
In offices outside the U.S. 50,112 48,343
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 58,693 60,743
Trading account liabilities 64,903 61,562
Securities sold under agreements to repurchase and federal funds purchased 21,413 26,017
Other liabilities for borrowed money 10,453 10,433
Accounts payable and accrued expenses 6,413 7,160
Long-term debt not qualifying as risk-based capital (includes $820 at June 1998 and
$1,267 at December 1997 of notes payable to J.P. Morgan) 11,164 14,320
Other liabilities, including allowance for credit losses of $185 780 2,713
- -------------------------------------------------------------------------------------------------------------------------
173,819 182,948
Long-term debt qualifying as risk-based capital (includes $3,152 at June 1998 and
$2,878 at December 1997 of notes payable to J.P. Morgan) 3,287 3,037
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 177,106 185,985
STOCKHOLDER'S EQUITY
Preferred stock, $100 par value (authorized shares: 2,500,000) - -
Common stock, $25 par value (authorized shares: 11,000,000; issued and
outstanding 10,599,027) 265 265
Surplus 3,305 3,155
Undivided profits 7,178 6,927
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 127 108
Foreign currency translation, net of taxes (44) (22)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 10,831 10,433
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity 187,937 196,418
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Member of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
See notes to consolidated financial statements.
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan & Co. Incorporated (J.P. Morgan), a global financial services firm,
is the holding company for a group of subsidiaries that provide a range of
financial services, including:
- - advisory
- - underwriting
- - financing
- - market making
- - asset management
- - brokerage
We serve a broad client base that includes corporations, governments,
institutions, and individuals. We also use our expertise and resources to enter
into proprietary transactions for our own account.
J.P. Morgan and our subsidiaries, including Morgan Guaranty Trust Company of New
York (Morgan Guaranty), use accounting and reporting policies and practices that
conform with U.S. generally accepted accounting principles.
Basis of presentation
The consolidated financial statements include the accounts of J.P. Morgan and
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation. The financial information as of and for the periods
ended June 30, 1998 and 1997 is unaudited. All adjustments which, in the opinion
of management, are necessary for a fair presentation have been made and were of
a normal, recurring nature. These unaudited financial statements should be read
in conjunction with the audited financial statements included in J.P. Morgan's
Annual report on Form 10-K for the year ended December 31, 1997, as well as
with information included in J.P. Morgan's unaudited quarterly report on Form
10-Q for the three months ended March 31, 1998. The nature of J.P. Morgan's
business is such that the results of any interim period are not necessarily
indicative of results for a full year. Certain prior year amounts have been
reclassified to conform with the current presentation.
The following provides certain supplemental information regarding our Accounting
policies.
Aggregate allowance for credit losses
We maintain an aggregate allowance for credit losses to absorb losses inherent
in our extensions of credit that we believe are probable of occurring and that
can be reasonably estimated. Such extensions include:
- - loans and unused loan commitments
- - payments made on behalf of clients (e.g., standby letters of credit and
guarantees)
- - all other credit exposures, including derivatives
The size and adequacy of our Aggregate allowance for credit losses is based on
an assessment by the firm's Asset Quality Review (AQR) Committee at each
reporting period of the following components:
- - Specific counterparty allocations - an estimate of probable losses
related to specific counterparties.
- - Specific industry allocations - an estimate of probable losses related
to exposures to counterparties in industries undergoing financial and
structural distress. Industry allocations exclude exposures addressed
in specific counterparty allocations.
- - Specific country allocations - an estimate of probable losses resulting
from exposures to counterparties in countries experiencing political
and transfer risk, country-wide economic distress, or issues regarding
the legal enforceability of contracts. Included in this allocation are
reserve requirements, if any, that are mandated by the Federal Reserve
Board. Specific country allocations exclude exposures addressed in
specific counterparty allocations.
- - Expected loss allocations - an estimate based on statistical modeling
of the amount that is probable we will lose over the life of our
existing performing portfolio of traditional credit products, net of
recoveries. Our traditional credit product portfolio includes loans,
standby letters of credit, guarantees and other commitments to extend
credit. The expected loss allocation excludes exposures covered by the
specific allocations discussed above, and is intended to recognize
probable losses on a portfolio basis that have not yet been
specifically identified. The expected loss allocation is based on our
Annual Expected Loss calculation which represents the amount of
probable losses to the firm in each year, on average, over the life of
our existing portfolio.
9
<PAGE> 10
- - General allocations - a judgmental assessment of probable losses not
adequately captured by specific allocations or by the expected loss
allocation with regards to our existing portfolio of credit
extensions. Probable losses not specifically identified include those
related to our derivative and settlement activities (including
situations where the counterparty is unwilling to meet its
obligations). In addition, the allocation attempts to compensate for
the inherent imperfections in our expected loss models, including the
fact that default and recovery statistics are based almost exclusively
on U.S. corporate experience which does not completely match our global
book of risk, our view of future economic trends versus the historical
determination of the models, and the impact of using averages versus
actual occurrences.
The firm's AQR process forms the basis for determining the above components
comprising the allowance. The AQR Committee determines, using their judgment and
experience, the appropriate actions (placement on nonperforming status, specific
allocation or charge-off) that should be taken with regards to specific
counterparties, industries and countries. The senior members of the AQR
Committee then consider appropriate actions to be taken in addition to the
specific risk decisions, including a review of the following: expected loss
calculations of the existing performing portfolio; the level and history of
charge-offs and nonperforming assets; the estimated sale prices of certain
exposures; the level of counterparties on the special review list; business and
economic conditions; regulatory requirements; our historical experience;
concentrations of risk by country, industry, product and client; and the
relative size of many of our credit exposures given our wholesale orientation.
Based on this review, each quarter, the senior members of the AQR Committee
recommend the provision, if any, needed to adjust the aggregate allowance, so
that the combination of the general allocation together with the specific and
expected loss allocations remains at an appropriate level.
In accordance with the American Institute of Certified Public Accountants Banks
and Savings Institutions Audit and Accounting Guide, we allocate for financial
reporting purposes our aggregate allowance across balance sheet captions based
upon the nature of the underlying exposure and management's judgment.
Accordingly, we display our aggregate allowance as a reduction of Loans, a
reduction of Trading account assets (relating to derivatives), and as Other
liabilities (relating to off-balance sheet items such as standby letters of
credit, guarantees, and commitments). We expect that portions of the aggregate
allowance may be reclassified from time to time among Loans, Trading account
assets, and Other liabilities due to the global and diverse nature of our
business; expected shifts in the relative level of credit risk among
instruments; and necessary changes in estimates and assumptions needed to
calculate the allocated amounts. Such allowance reclassifications across balance
sheet captions, starting June 30, 1998, will be reflected as provisions or
reversals of provisions in the Consolidated statement of income.
Company-obligated mandatorily redeemable preferred securities of subsidiaries
Dividends (or distributions) on company-obligated mandatorily redeemable
preferred securities of subsidiaries (trust preferred securities) are treated as
interest and expensed on an accrual basis. Interest related to the trust
preferred securities is included in the interest expense caption in our
consolidated statement of income.
2. ACCOUNTING CHANGES AND DEVELOPMENTS
Accounting for transfers of assets and servicing of financial assets and
extinguishments of liabilities
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers of
Assets and Servicing of Financial Assets and Extinguishments of Liabilities,
which provides new accounting and reporting standards for sales,
securitizations, and servicing of receivables and other financial assets, and
extinguishments of liabilities. In December 1996, the FASB issued SFAS No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125.
This statement deferred the provisions of SFAS No. 125 for transfers involving
repurchase agreements, securities borrowing/lending transactions, and financial
assets provided as collateral until January 1, 1998. Effective January 1, 1998,
we adopted the provisions of SFAS No. 127. The adoption of this standard did not
have a material impact on our consolidated financial statements.
Reporting comprehensive income
Effective January 1, 1998, we adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes the concept of comprehensive income and provides
standards for reporting it. Comprehensive income is defined as the change in
equity of an entity excluding such transactions with stockholders as the
issuance of common stock or preferred stock, payment of dividends, and purchase
of treasury shares. Comprehensive income has two major components: net income,
as reported in the consolidated statement of income, and other comprehensive
income. Other comprehensive income includes such items
10
<PAGE> 11
as unrealized gains and losses on available-for-sale securities and foreign
currency translation. This standard is limited to issues of reporting and
presentation, and does not address recognition or measurement. Its adoption,
therefore, did not affect our earnings, liquidity, or capital resources.
Disclosures about segments of an enterprise and related information
In 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This standard establishes the criteria for
determining an operating segment and the required financial information to be
disclosed. SFAS No. 131 also establishes standards for disclosing related
information regarding products and services, geographic areas and major
customers. This standard supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise. We are required to adopt this standard
starting with our consolidated financial statements for the year ended December
31, 1998. This standard is limited to issues of reporting and presentation and
does not address recognition or measurement. Its adoption, therefore, will not
affect our earnings, liquidity, or capital resources. We are currently in the
process of evaluating SFAS No. 131 and have not yet determined what impact the
adoption of this standard will have on our existing segments which are
currently included in the Business sector analysis section of Management's
discussion and analysis of financial condition and results of operations
(MD&A).
Employer's disclosures about pensions and other postretirement benefits
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures about
Pensions and Other Postretirement Benefits, which revises employer's disclosures
about pensions and other postretirement benefits. This standard supersedes the
disclosure requirements for pension and other benefits of SFAS No. 87,
Employer's Accounting for Pensions; SFAS No.88, Employer's Accounting for
Settlements and Curtailments of Defined Benefit Plans and for Termination
Benefits; and SFAS No. 106, Employer's Accounting for Postretirement Benefits
Other than Pensions. The standard requires additional information on the changes
in the benefit obligations and plan assets and eliminates certain disclosures to
facilitate the financial analysis of these plans. We are required to adopt this
standard starting with our financial statements for the year ended December 31,
1998. This standard is limited to issues of reporting and presentation and does
not address recognition or measurement. Therefore, its adoption will not affect
our earnings, liquidity or capital resources.
Accounting for the costs of computer software developed or obtained for
internal use
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use (SOP 98-1). SOP 98-1 provides guidance on accounting for the costs
of computer software developed or obtained for internal use and for determining
when specific costs should be capitalized and when they should be expensed. We
are required to adopt SOP 98-1 starting in the first quarter of 1999.
Restatement of previously issued financial statements is not allowed. We are
currently in the process of evaluating SOP 98-1 and have not yet determined
what the impact of its adoption will have on our earnings or financial
position.
Accounting for derivative instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted starting
with our financial statements for the quarter ended March 31, 2000. The
standard permits early adoption as of the beginning of any fiscal quarter
after its issuance. The standard will require us to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. If the
change in fair value of a derivative designated as a hedge is not effectively
offset, as defined, by the change in value of the item it is hedging, this
difference will be immediately recognized in earnings. We are currently in
the process of evaluating SFAS No. 133 and have not yet determined what impact
the adoption of the standard will have on our earnings and financial position.
3. RESTRUCTURING OF BUSINESS ACTIVITIES
The six months ended June 30, 1998 includes a first quarter 1998 pretax charge
of $215 million ($129 million after tax) incurred in connection with the
restructuring of certain sales and trading functions in Europe, the refocus of
our investment banking and equities business in Asia, and the rationalization of
resources throughout the firm. The charge reflected severance-related costs of
$140 million recorded in Employee compensation and benefits associated with
staff reductions of approximately 900; $70 million in Net occupancy related to
real estate write-offs; and $5 million in Technology and communications, related
to equipment write-offs. As of June 30, 1998, approximately $130 million of the
first quarter charge was accrued in Other liabilities, of which $80 million
related to severance and the remainder primarily related to real estate. The
majority of this remaining reserve is expected to be utilized by year-end.
4. INVESTMENT IN AMERICAN CENTURY COMPANIES, INC.
In January 1998, we completed the purchase of a 45% economic interest in
American Century Companies, Inc. (American Century) for $965 million. American
Century is a no-load U.S. mutual fund company selling directly to individuals.
The investment is accounted for under the equity method of accounting and
recorded in Other assets. The excess of our investment over our share of equity
(i.e., goodwill) in American Century is approximately $795 million. This amount
11
<PAGE> 12
is being amortized on a straight-line basis over a period of 25 years. Our share
of equity income or loss in American Century and the amortization of goodwill
related to this investment is recorded in Other revenue.
5. SALE OF GLOBAL TRUST AND AGENCY SERVICES BUSINESS
In June 1998, we completed the sale of our global trust and agency services
business to Citibank, resulting in a net gain of $131 million ($79 million after
tax) recorded in Other revenue. The sale will not have a material effect on our
ongoing earnings.
6. INTEREST REVENUE AND EXPENSE
The following table presents an analysis of interest revenue and expense
obtained from on- and off-balance sheet financial instruments. Interest revenue
and expense associated with derivative financial instruments is included with
related balance sheet instruments. These derivative financial instruments are
used as hedges or to modify the interest rate characteristics of assets and
liabilities and include swaps, forwards, futures, options, and debt securities
forwards.
<TABLE>
<CAPTION>
Second quarter Six months
----------------------------- ---------------------------
In millions 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE
Deposits with banks $ 65 $ 46 $ 129 $ 73
Debt investment securities (a) 328 387 706 799
Trading account assets 1,126 1,014 2,310 2,085
Securities purchased under agreements
to resell and federal funds sold 455 504 960 959
Securities borrowed 514 444 1,010 827
Loans 544 494 1,090 959
Other sources, primarily risk adjusting swaps in 1997 74 140 163 219
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest revenue 3,106 3,029 6,368 5,921
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 703 670 1,493 1,333
Trading account liabilities 377 398 832 755
Securities sold under agreements to
repurchase and federal funds purchased 937 853 1,869 1,729
Other borrowed money 408 357 803 708
Long-term debt 391 256 745 451
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,816 2,534 5,742 4,976
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 290 495 626 945
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Interest revenue from debt investment securities included taxable revenue
of $298 million and $654 million and revenue exempt from U.S. income taxes of
$30 million and $52 million for the three months and six months ended June 30,
1998, respectively. Interest revenue from debt investment securities included
taxable revenue of $364 million and $749 million and revenue exempt from U.S.
income taxes of $23 million and $50 million for the three months and six months
ended June 30, 1997.
Net interest revenue associated with derivatives used for purposes
other-than-trading was approximately $39 million and $71 million for the
three and six months ended June 30, 1998, respectively, compared with
approximately $75 million and $110 million for the three months and six months
ended June 30, 1997, respectively. At June 30, 1998, approximately $282 million
of net deferred losses on closed derivative contracts used for purposes
other-than-trading were recorded on the Consolidated balance sheet. These
amounts are primarily net deferred losses on closed hedge contracts, which are
included in the amortized cost of the debt investment portfolio as of June 30,
1998. The amount of net deferred gains or losses on closed derivative contracts
changes from period to period, primarily due to the amortization of such amounts
to Net interest revenue. These changes are also influenced by the execution of
our investing strategies, which may result in the sale of the underlying hedged
instruments and/or termination of hedge contracts. Net deferred losses (gains)
on closed derivative contracts as of June 30, 1998 of $282 million, are expected
to amortize into Net interest revenue as follows: $50 million - remainder of
1998; $98 million in 1999; $91 million in 2000; $47 million in 2001; $2 million
in 2002; ($2) million in 2003; and approximately ($4) million thereafter.
7. TRADING REVENUE
We disaggregate trading revenue by principal product grouping across all of our
business sector activities within the following groupings:
- - fixed income
- - equities
- - foreign exchange
- - commodities
- - proprietary trading
12
<PAGE> 13
Our Fixed income trading revenue includes the results of making markets in both
developed and emerging countries in government securities, U.S. government
agency securities, corporate debt securities, money market instruments, interest
rate and currency swaps, and options and other derivatives.
Our Equities trading revenue includes the results of making markets in global
equity securities and equity derivatives such as swaps, options, futures, and
forward contracts.
Our Foreign exchange trading revenue includes the results of making markets in
spot, options, and short-term interest rate products in order to help clients
manage their foreign currency exposure.
Our Commodities trading revenue includes the results from transactions in spot,
forwards, options and swaps.
Our Proprietary trading revenue reflects results from transactions we enter into
for our own account across all markets. Instruments utilized in our Proprietary
trading activities include fixed income securities, foreign exchange, equity
securities, and related derivatives.
The following table presents trading revenue for the three and six months ended
June 30, 1998 and 1997. This revenue reflects only a portion of the total
revenues generated by our activities and excludes other important sources of
revenues, including fees and commissions. As a result, this table does not
reflect the integrated nature of our business. Refer to the Business sector
analysis in MD&A for more information.
<TABLE>
<CAPTION>
Second quarter Six months
----------------- ----------------
In millions 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income $532 $250 $1,173 $ 596
Equities 109 170 166 281
Foreign exchange 170 72 235 192
Commodities 40 2 50 15
Proprietary trading 26 (17) 149 90
- ---------------------------------------------------------------------------------------------------------------
Total trading revenue 877 477 1,773 1,174
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
8. INVESTMENT SECURITIES
DEBT INVESTMENT SECURITIES
Our debt investment securities portfolio is classified as available-for-sale.
Available-for-sale securities are measured at fair value and unrealized gains or
losses are reported as a net amount within the stockholders' equity account, Net
unrealized gains on investment securities, net of taxes.
The following table presents the gross unrealized gains and losses and a
comparison of the cost, and the fair and carrying value of our
available-for-sale debt investment securities at June 30, 1998. The gross
unrealized gains or losses on each debt investment security include the effects
of any related hedge. See Note 10, Off-balance sheet financial instruments, for
additional detail of gross unrealized gains and losses associated with open
derivative contracts used to hedge debt investment securities.
<TABLE>
<CAPTION>
Gross Gross Fair and
unrealized unrealized carrying
In millions: June 30, 1998 Cost gains losses value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 1,140 $ 126 $ 1 $ 1,265
U.S. government agency, principally mortgage-backed 19,438 93 68 19,463
U.S. state and political subdivision 1,382 167 11 1,538
U.S. corporate and bank debt 235 1 2 234
Foreign government (a) 344 4 8 340
Foreign corporate and bank debt 803 - 64 739
Other 119 - - 119
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt investment securities 23,461 391 154 23,698
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Primarily includes debt of countries that are members of the Organization
for Economic Cooperation and Development
13
<PAGE> 14
The table below presents gains, losses, and write-downs of debt investment
securities during the three and six months ended June 30, 1998 and 1997. These
amounts are recorded in Investment securities revenue.
<TABLE>
<CAPTION>
Second quarter Six months
------------------------- -------------------------
In millions 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross realized gains from sales of securities $ 11 $ 8 $ 58 $ 46
Gross realized losses from sales of securities (52) (7) (84) (33)
Write-downs for other-than-temporary impairments in value (2) (15) (2) (15)
- --------------------------------------------------------------------------------------------------------------------------------
Net debt investment securities losses (43) (14) (28) (2)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Morgan Guaranty
In the Morgan Guaranty consolidated statement of condition on page 8, the
balance for Debt investment securities available-for-sale carried at fair value
decreased from $20.5 billion at December 31, 1997 to $3.9 billion at June 30,
1998, reflecting Morgan Guaranty's sale of approximately $18 billion of debt
investment securities to an affiliated J.P. Morgan entity during the first six
months of 1998.
EQUITY INVESTMENT SECURITIES
Equity investment securities include both marketable and nonmarketable
securities.
Marketable available-for-sale equity investment securities
Marketable equity investment securities, which are classified as
available-for-sale, are recorded at fair value. Unrealized gains and losses are
reported as a net amount within the stockholders' equity account, Net unrealized
gains on investment securities, net of taxes. Gross unrealized gains and losses,
as well as a comparison of the cost, and fair and carrying value of marketable
available-for-sale equity investment securities as of June 30, 1998 are shown in
the following table.
<TABLE>
<CAPTION>
In millions: June 30, 1998
- --------------------------------------------------------------------------
<S> <C>
Cost $ 122
- --------------------------------------------------------------------------
Gross unrealized gains 377
Gross unrealized losses (7)
- --------------------------------------------------------------------------
Net unrealized gains(a) 370
- --------------------------------------------------------------------------
Fair and carrying value 492
- --------------------------------------------------------------------------
</TABLE>
(a) Primarily relates to investments in the insurance industry.
Nonmarketable and other equity securities
Nonmarketable equity investment securities are carried at cost on the balance
sheet. Securities held in subsidiaries registered as Small Business Investment
Companies (SBICs) are carried at fair value on the balance sheet, with changes
in fair value recorded currently in Investment securities revenue. The following
table presents the carrying and fair value, as well as the net unrealized gains,
on nonmarketable and other equity securities.
<TABLE>
<CAPTION>
In millions: June 30, 1998
- ----------------------------------------------------------------------
<S> <C>
Carrying value $ 520
Net unrealized gains on nonmarketable securities(a) 97
- ----------------------------------------------------------------------
Fair value 617
- ----------------------------------------------------------------------
</TABLE>
(a) Primarily relates to investments in the telecommunications and financial
services industries.
Realized gains and write-downs
The following table presents gross realized gains and write-downs for
other-than-temporary impairments in value related to our equity investments
portfolio, excluding securities in SBICs, for the three and six months ended
June 30, 1998 and 1997. These amounts are recorded in Investment securities
revenue.
<TABLE>
<CAPTION>
Second quarter Six months
----------------------- ------------------------
In millions 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross realized gains from marketable available-for-sale securities $ 117 $ 66 $ 142 $ 92
Gross realized gains from nonmarketable and other equity securities 4 61 11 87
Write-downs for other-than-temporary impairments in value (20) (3) (34) (12)
- --------------------------------------------------------------------------------------------------------------------------------
Net equity investment securities realized gains 101 124 119 167
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
9. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and liabilities, including derivative instruments used
for trading purposes, are carried at fair value. The following table presents
the carrying value of trading account assets - before taking into consideration
the allowance for credit losses - and trading account liabilities at June 30,
1998. It also includes the average balance for the three and six months ended
June 30, 1998.
<TABLE>
<CAPTION>
Carrying Average
value balance
------------------------ -----------------------------------------------
June 30 Second quarter Six months
In millions: 1998 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRADING ACCOUNT ASSETS
U.S. Treasury $ 6,061 $ 8,635 $ 10,765
U.S. government agency 11,800 10,320 10,256
Foreign government 30,627 34,023 32,908
Corporate debt and equity 24,949 23,763 21,954
Other securities 8,447 9,993 9,560
Interest rate and currency swaps 18,365 20,944 20,387
Foreign exchange contracts 4,348 3,565 4,634
Interest rate futures and forwards 251 159 215
Commodity and equity contracts 2,803 1,922 1,808
Purchased option contracts 16,151 13,941 12,909
- -------------------------------------------------------------------------------------------------------------------------------
Total trading account assets 123,802 127,265 125,396
- -------------------------------------------------------------------------------------------------------------------------------
TRADING ACCOUNT LIABILITIES
U.S. Treasury 9,487 9,301 9,888
Foreign government 12,768 15,994 15,485
Corporate debt and equity 12,431 11,337 9,772
Other securities 1,470 3,454 3,290
Interest rate and currency swaps 14,126 17,537 16,962
Foreign exchange contracts 4,573 3,819 5,213
Interest rate futures and forwards 803 824 917
Commodity and equity contracts 2,862 2,342 2,133
Written option contracts 16,477 11,850 11,892
- -------------------------------------------------------------------------------------------------------------------------------
Total trading account liabilities 74,997 76,458 75,552
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Derivatives
In general, derivatives are contracts or agreements whose values are derived
from changes in interest rates, foreign exchange rates, prices of securities, or
financial or commodity indices. The timing of cash receipts and payments for
derivatives is generally determined by contractual agreement. Derivatives may be
used for trading or other-than-trading purposes. Other-than-trading purposes
are primarily related to our investing activities.
Derivatives used for trading purposes include:
- - interest rate and currency swap contracts
- - interest rate futures, forward rate agreements, and interest rate option
contracts
- - foreign exchange spot, forward, futures and option contracts
- - equity swap, futures and option contracts
- - commodity swap, forward and option contracts
In our investing activities we use derivative instruments including:
- - interest rate and currency swap contracts
- - foreign exchange forward contracts
- - interest rate futures and debt securities forward contracts
- - option contracts
Interest rate swaps are contractual agreements to exchange periodic interest
payments at specified intervals. The notional amounts of interest rate swaps are
not exchanged; they are used solely to calculate the periodic interest payments.
Currency swaps generally involve exchanging principal (the notional amount) and
periodic interest payments in one currency for principal and periodic interest
payments in another currency.
Foreign exchange contracts involve an agreement to exchange one country's
currency for another at an agreed upon price and settlement date. The contracts
reported in the following table primarily include forward contracts.
15
<PAGE> 16
Interest rate futures are standardized exchange-traded agreements to receive or
deliver a specific financial instrument at a specific future date and price.
Forward rate agreements provide for the payment or receipt of the difference
between a specified interest rate and a reference rate at a future settlement
date. Debt security forwards include to-be-announced and when-issued securities
contracts.
Commodity and equity swaps, forward, and futures contracts include swaps and
futures in the commodity and equity markets and commodity forward agreements.
Equity swaps are contractual agreements to receive the appreciation or
depreciation in value based on a specific strike price on an equity instrument
in return for paying another rate, which is usually based upon equity index
movements or interest rates. Commodity swaps are contractual commitments to
exchange the fixed price of a commodity for a floating price. Equity and
commodity futures are exchange-traded agreements to receive or deliver a
financial instrument or commodity at a specific future date and price. Equity
and commodity forwards are over-the-counter agreements to purchase or sell a
specific amount of a financial instrument or commodity at an agreed upon price
and settlement date.
An option provides the option purchaser, for a fee, the right - but not the
obligation - to buy or sell a security at a fixed price on or before a specified
date. The option writer is obligated to buy or sell the security if the
purchaser chooses to exercise the option. These options include contracts in the
interest rate, foreign exchange, equity and commodity markets. Interest rate
options include caps and floors.
A summary of the on-balance sheet credit exposure, which is represented by the
positive fair value associated with derivatives, is included in the following
table. Our on-balance sheet exposure takes into consideration $71.1 billion of
master netting agreements in effect at June 30, 1998.
<TABLE>
<CAPTION>
In billions: June 30, 1998 Notional amounts Credit exposure
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate and currency swaps
Trading $2,891.3
Other-than-trading(a)(b) 77.9
- -----------------------------------------------------------------------------------------------
Total interest rate and currency swaps 2,969.2 $18.3
- -----------------------------------------------------------------------------------------------
Foreign exchange spot, forward, and futures contracts
Trading 643.4
Other-than-trading(a)(b) 33.6
- -----------------------------------------------------------------------------------------------
Total foreign exchange spot, forward, and futures
contracts 677.0 4.3
- -----------------------------------------------------------------------------------------------
Interest rate futures, forward rate agreements,
and debt securities forwards
Trading 1,416.5
Other-than-trading 2.4
- -----------------------------------------------------------------------------------------------
Total interest rate futures, forward rate agreements,
and debt securities forwards 1,418.9 0.3
- -----------------------------------------------------------------------------------------------
Commodity and equity swaps, forward,
and futures contracts, all trading 102.0 2.8
- -----------------------------------------------------------------------------------------------
Purchased options(c)
Trading 1,043.0
Other-than-trading(a) 0.5
- -----------------------------------------------------------------------------------------------
Total purchased options 1,043.5 16.2
- -----------------------------------------------------------------------------------------------
Written options, all trading(d) 1,257.4
- -----------------------------------------------------------------------------------------------
Total on-balance sheet credit exposure 41.9
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) The majority of J.P. Morgan's derivatives used for purposes
other-than-trading are transacted with independently managed J.P. Morgan
derivatives dealers who function as intermediaries for credit and administrative
purposes.
(b) The notional amounts of derivative contracts used for purposes
other-than-trading, conducted in the foreign exchange markets, primarily
forward contracts, amounted to $38.2 billion at June 30, 1998, and were
primarily denominated in the following currencies: Japanese yen $4.5 billion,
Swiss franc $3.9 billion, Italian lira $3.8 billion, French franc $3.6 billion,
Spanish peseta $2.4 billion, and Belgian franc $2.3 billion.
(c) At June 30, 1998, purchased options used for trading purposes included
$720.5 billion of interest rate options, $248.9 billion of foreign exchange
options, and $73.6 billion of commodity and equity options. Only interest rate
options are used for purposes other-than-trading. Purchased options executed on
an exchange amounted to $143.1 billion and those negotiated over-the-counter
amounted to $900.4 billion at June 30, 1998.
(d) At June 30, 1998, written options included $929.9 billion of interest rate
options, $253.7 billion of foreign exchange options, and $73.8 billion of
commodity and equity options. Written option contracts executed on an exchange
amounted to $344.8 billion and those negotiated over-the-counter amounted to
$912.6 billion at June 30, 1998.
As part of our other-than-trading activities, we use derivatives to hedge our
exposure to interest rate and currency fluctuations, primarily on or related to
debt investment securities. We also use them to modify the characteristics of
interest rate-related balance sheet instruments such as loans, short-term
borrowings, and long-term debt.
16
<PAGE> 17
Net unrealized gains associated with open derivative contracts used to hedge or
modify the interest rate characteristics of related balance sheet instruments
amounted to $805 million at June 30, 1998. Such amounts primarily relate to
interest rate and currency swaps used to hedge or modify the interest rate
characteristics of long-term debt and deposits. Gross unrealized gains and gross
unrealized losses associated with open derivative contracts at June 30, 1998,
are as follows:
<TABLE>
<CAPTION>
Gross Gross Net
unrealized unrealized unrealized
In millions: June 30, 1998 gains (losses) gains (losses)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt $577 ($113) $464
Debt investment securities 12 (17) (5)
Deposits 263 (13) 250
Other financial instruments 194 (98) 96
- -------------------------------------------------------------------------------------
Total 1,046 (241) 805
- -------------------------------------------------------------------------------------
</TABLE>
Credit-related financial instruments
Credit-related financial instruments include commitments to extend credit,
standby letters of credit and guarantees, and indemnifications related to
securities lending activities. The contractual amounts of these instruments
represent the amount at risk should the contract be fully drawn upon, the client
default, and the value of their collateral become worthless.
The total contractual amount of credit-related financial instruments does not
represent the future liquidity requirements since we expect a significant amount
of commitments to expire or mature without being drawn. The credit risk
associated with these instruments varies depending on the client's
creditworthiness and the value of any collateral held. Commitments to extend
credit generally require clients to meet certain credit-related terms and
conditions before drawdown. We require collateral in connection with securities
lending indemnifications. Market risk for commitments to extend credit and
standby letters of credit and guarantees, while not significant, may exist as
availability of and access to credit markets change.
The following table summarizes the contractual amount of credit-related
financial instruments as of June 30, 1998.
<TABLE>
<CAPTION>
In billions: June 30, 1998
- -------------------------------------------------------------------
<S> <C>
Commitments to extend credit $78.2
Standby letters of credit and guarantees 16.1
Securities lending indemnifications (a) 9.2
- -------------------------------------------------------------------
</TABLE>
(a) At June 30, 1998, J.P. Morgan held cash and other collateral in support of
securities lending indemnifications.
Included in Fees and Commissions are credit-related fees of $39 million and
$79 million for the three and six months ended June 30, 1998, respectively, and
$40 million and $77 million for the three and six months ended June 30, 1997,
respectively. They are primarily earned from commitments to extend credit,
standby letters of credit and guarantees, and securities lending
indemnifications.
Other
Amounts receivable and payable for securities that have not reached their
contractual settlement dates are recorded net in the Consolidated balance sheet.
This is consistent with industry practice. Amounts receivable for securities
sold of $34.4 billion was netted against amounts payable for securities
purchased of $33.5 billion. This produced a net trade date receivable of
$0.9 billion, recorded in Accrued interest and accounts receivable as of
June 30, 1998.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, we estimate the fair value of all on-balance sheet and off-balance
sheet financial instruments. At June 30, 1998, we estimate that the SFAS No. 107
aggregate net fair value of all financial instruments exceeded associated net
carrying values on our consolidated balance sheet by $0.8 billion, compared with
an excess of $1.0 billion at December 31, 1997. The decrease from December 31,
1997 primarily related to net loans.
The SFAS No. 107 fair value of a financial instrument is the current amount that
would be exchanged between willing parties (other than in a forced sale or
liquidation), and is best evidenced by a quoted market price, if one exists.
17
<PAGE> 18
Where quoted market prices are not available for financial instruments, fair
values are estimated using internal valuation techniques including pricing
models and discounted cash flows which may not be indicative of net realizable
value. Derivative contracts classified as nonperforming are included at their
recorded carrying value in these disclosures. The use of other valuation
techniques may produce results that are different than those obtained under
current fair value methodologies. For example, using credit derivative prices to
estimate the fair value of loans rather than discounting loans using current
market rates may result in fair values that are lower.
12. NONPERFORMING ASSETS
Total nonperforming assets - net of charge-offs - at June 30, 1998 are presented
in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
In millions: June 30, 1998
- ---------------------------------------------------------------------
<S> <C>
Nonperforming loans:
Commercial and industrial $ 25
Banks and other financial institutions 2
Other, primarily individuals 28
- ---------------------------------------------------------------------
Total nonperforming loans 55
- ---------------------------------------------------------------------
Other nonperforming assets,
primarily swaps with certain Asian financial institutions 533
- ---------------------------------------------------------------------
Total nonperforming assets 588
- ---------------------------------------------------------------------
</TABLE>
13. AGGREGATE ALLOWANCE FOR CREDIT LOSSES
We maintain an aggregate allowance for credit losses to absorb losses inherent
in our extensions of credit. Such extensions include loans and unused loan
commitments, payments made on behalf of clients (e.g., standby letters of credit
and guarantees), and all other credit exposures, including derivatives. Refer to
the Credit risk section of Risk management in the 1997 Annual report and Note 1,
Summary of significant accounting policies, in this quarterly report for further
details.
The following tables summarize the activity of the aggregate allowance for
credit losses.
<TABLE>
<CAPTION>
Second quarter
In millions 1998
- -------------------------------------------------------------------
BALANCE, APRIL 1 $987
- -------------------------------------------------------------------
<S> <C>
Recoveries -
Charge-offs:
Commercial and industrial (15)
Banks and other financial institutions (16)
Losses on sale of loans, primarily banks
and other financial institutions (52)
- -------------------------------------------------------------------
Net charge-offs (83)
- -------------------------------------------------------------------
BALANCE, JUNE 30 904
- -------------------------------------------------------------------
</TABLE>
For the three months ended June 30, 1998, charge-offs of $60 million related to
loans and $23 million related to trading account assets.
<TABLE>
<CAPTION>
Six months
In millions 1998
- ---------------------------------------------------------------------
BALANCE, JANUARY 1 $1,081
- ---------------------------------------------------------------------
<S> <C>
Recoveries 15
Charge-offs:
Commercial and industrial (58)
Banks and other financial institutions (56)
Losses on sale of loans, primarily banks
and other financial institutions (78)
- ---------------------------------------------------------------------
Net charge-offs (177)
- ---------------------------------------------------------------------
BALANCE, JUNE 30 904
- ---------------------------------------------------------------------
</TABLE>
For the six months ended June 30, 1998, charge-offs of $113 million related to
loans and $79 million related to trading account assets. Recoveries for the six
months ended June 30, 1998 of $9 million related to loans and $6 million related
to trading account assets.
14. INVESTMENT BANKING REVENUE
In the second quarter of 1998 and 1997, investment banking revenue of
$362 million and $294 million includes $164 million and $140 million,
respectively, of underwriting revenue. For the six months ended June 30, 1998
and 1997, investment banking revenue of $708 million and $520 million includes
$319 million and $237 million, respectively, of underwriting revenue.
18
<PAGE> 19
15. OTHER REVENUE AND OTHER EXPENSES
In the 1998 second quarter, Other revenue includes the $131 million net gain on
the sale of the firm's global trust and agency services business. See Note 5,
Sale of global trust and agency services business, for additional information.
Other expenses
The following table presents the major components of Other expenses.
<TABLE>
<CAPTION>
Second quarter Six months
-------------- -------------
In millions 1998 1997 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Professional services $ 31 $ 32 $ 59 $ 58
Marketing and business development 43 49 89 93
Other 109 82 212 161
-----------------------------------------------------------------------------------------
Total other expenses 183 163 360 312
-----------------------------------------------------------------------------------------
</TABLE>
16. INCOME TAXES
The effective tax rate for the three months ended June 30, 1998 and 1997 was 35%
and 32%, respectively. For the six months ended June 30, 1998 and 1997, the
effective tax rate was 35% and 33%, respectively. Income tax expense related to
net realized gains and write-downs for other-than-temporary impairments in value
on debt and equity investment securities, excluding securities in SBICs, was
approximately $19 million and $31 million for the three and six months ended
June 30, 1998, respectively, and $41 million and $61 million for the three and
six months ended June 30, 1997, respectively. The applicable tax rate used to
compute the income tax expense related to net gains on debt and equity
investment securities was approximately 33% and 34%, respectively, for the three
and six months ended June 30, 1998. The applicable tax rate used to compute the
income tax expense related to net gains on debt and equity investment securities
for the three and six months ended June 30, 1997, was approximately 37%.
17. COMMITMENTS AND CONTINGENT LIABILITIES
Excluding mortgaged properties, assets on the consolidated balance sheet of
approximately $92.4 billion at June 30, 1998, were pledged as collateral for
borrowings, to qualify for fiduciary powers, to secure public monies as required
by law, and for other purposes.
19
<PAGE> 20
18. EARNINGS PER SHARE
Effective December 31, 1997, we adopted SFAS No. 128, Earnings per Share, which
established new standards for computing and presenting earnings per share (EPS).
All EPS amounts have been restated to conform to the new requirements.
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding, which includes
contingently issuable shares where all necessary conditions for issuance have
been satisfied. Diluted EPS includes the determinants of basic EPS and, in
addition, gives effect to dilutive potential common shares that were outstanding
during the period.
The computation of basic and diluted EPS for the three and six months ended
June 30, 1998 and 1997 is presented in the following table.
<TABLE>
<CAPTION>
Second quarter Six months
----------------------------------- --------------------------------
Dollars in millions, except share data 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $481 $374 $718 $798
Preferred stock dividends and other (9) (8) (18) (17)
- --------------------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings
per share - income available to
common stockholders $472 $366 $700 $781
- --------------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings per share -
weighted-average shares 183,469,787 184,992,888 183,138,853 187,159,288
Effect of dilutive securities:
Options (a) 7,260,936 6,134,413(b)(c) 6,974,253 6,473,272(b)
Other stock awards (d) 9,264,175 6,946,457 9,449,139 6,922,627
4.75% convertible debentures 69,309 75,165 70,565 75,496
- --------------------------------------------------------------------------------------------------------------------------------
16,594,420 13,156,035 16,493,957 13,471,395
- --------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
weighted-average number of common
shares and dilutive potential common
shares 200,064,207 198,148,923 199,632,810 200,630,683
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $2.57 $1.98 $3.82 $4.17
Diluted earnings per share 2.36 1.85 3.51 3.89
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The dilutive effect of stock options was computed using the treasury stock
method. This method computes the number of incremental shares by assuming the
issuance of outstanding stock options, reduced by the number of shares assumed
to be repurchased from the issuance proceeds, using the average market price of
our common stock for the period. The related tax benefits are also considered.
(b) Options to purchase 500,000 shares of our common stock at $104.92 per share
were outstanding at June 30, 1997, but were not included in the computation of
diluted EPS for the three and six months ended June 30, 1997. The inclusion of
such options using the treasury stock method would have an antidilutive effect
on the diluted EPS calculation because the options' exercise price was greater
than the average market price of our common shares for the three and six months
ended June 30, 1997. These options expire on October 13, 2006.
(c) Options to purchase 142,000 shares of our common stock at $103.44 per share
were outstanding at June 30, 1997, but were not included in the computation of
diluted EPS for the three months ended June 30, 1997. The inclusion of such
options using the treasury stock method would have an antidilutive effect on the
diluted EPS calculation because the options' exercise price was greater than the
average market price of our common shares for the three months ended June 30,
1997. These options expire on January 15, 2010.
(d) Weighted-average incremental shares for other stock awards include
restricted stock and stock bonus awards.
Consistent with our normal annual grant schedule, we granted stock option awards
in July 1998. The total number of stock options granted was 5,135,000 with an
average exercise price of $130.94.
20
<PAGE> 21
19. CAPITAL REQUIREMENTS
J.P. Morgan, our subsidiaries, and certain foreign branches of our bank
subsidiary, Morgan Guaranty Trust Company of New York, are subject to regulatory
capital requirements of U.S. and foreign regulators. Our primary federal banking
regulator, the Board of Governors of the Federal Reserve System (Federal Reserve
Board), establishes minimum capital requirements for J.P. Morgan, the
consolidated bank holding company, and some of our subsidiaries, including
Morgan Guaranty. These requirements ensure banks and bank holding companies meet
specific guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
principles. Failure to meet these requirements can result in actions by
regulators that could have a direct material impact on our financial statements.
The capital of J.P. Morgan and our principal subsidiaries, Morgan Guaranty and
J.P. Morgan Securities Inc. (JPMSI), exceeded the minimum requirements set by
each regulator at June 30, 1998.
Capital ratios and amounts
The following table indicates the risk-based capital and leverage ratios and
amounts as of June 30, 1998 for J.P. Morgan and Morgan Guaranty under the
Federal Reserve Board's market risk capital guidelines. These guidelines
incorporate a measure of market risk for trading positions. Under the market
risk capital guidelines, the published capital ratios of J.P. Morgan are
calculated including the equity, assets, and off-balance sheet exposures of
JPMSI. In accordance with Federal Reserve Board guidelines, the risk-based
capital and leverage amounts and ratios exclude the effect of SFAS No. 115.
<TABLE>
<CAPTION>
Dollars in millions Amounts Ratios(b)
- ---------------------------- -----------------------------------------------
<S> <C> <C>
Tier 1 capital(a)
J.P. Morgan $11,424 7.7%
Morgan Guaranty 10,684 8.2
- -------------------------------- -------------------------------------------
Total risk-based capital(a)
J.P. Morgan $16,820 11.3%
Morgan Guaranty 14,697 11.3
- ---------------------------- -----------------------------------------------
Leverage
J.P. Morgan 4.1%
Morgan Guaranty 5.6%
- ---------------------------- -----------------------------------------------
</TABLE>
(a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required
minimum tier 1 capital of $6.0 billion and $5.2 billion, respectively. For
capital adequacy purposes, J.P. Morgan and Morgan Guaranty required minimum
total risk-based capital of $11.9 billion and $10.4 billion, respectively.
(b) Pursuant to Federal Reserve Board guidelines, the minimum tier 1 capital,
total risk-based capital, and leverage ratios are 4%, 8%, and 3%, respectively,
for bank holding companies and banks.
Capital categories
Bank regulators use five capital category definitions for regulatory supervision
purposes. The categories range from well capitalized to critically
undercapitalized. A bank is considered well capitalized if it has minimum tier 1
capital, total capital, and leverage ratios of 6%, 10%, and 5%, respectively,
under standards provided by the regulatory framework for prompt corrective
action and the Federal Reserve Board.
Bank holding companies also have guidelines which determine the capital levels
at which it shall be considered well capitalized. Pursuant to these guidelines,
the Federal Reserve Board considers a bank holding company who has adopted the
market risk rules to be well capitalized if it has minimum tier 1 capital,
total capital, and leverage ratios of 6%, 10%, and 3%, respectively.
At June 30, 1998, the ratios of J.P. Morgan and Morgan Guaranty exceeded the
minimum standards required for a well capitalized bank holding company and bank.
Management is aware of no conditions or events that have occurred since June 30,
1998, that would change J.P. Morgan's and Morgan Guaranty's well capitalized
status.
21
<PAGE> 22
20. INTERNATIONAL OPERATIONS
For financial reporting purposes, our operations are divided into domestic and
international components. We believe that the method we have chosen to allocate
our results among domestic and international sources, while inexact, is
appropriate.
Because our operations are highly integrated, we need to make estimates and
assumptions to identify revenues and expenses by geographic region. The
following is a summary of these assumptions:
- - Client-focused revenues are assigned to the region managing the client
relationship for a particular product. For finance and advisory products,
this is the client's head office; for most other products, it is the
location where the activity is transacted.
- - Market making revenues that cannot be specifically attributed to individual
clients (e.g., gains or losses from positions taken to facilitate client
transactions) are generally allocated based on the proportion of regional
revenues.
- - Revenues from proprietary investing and trading activities are based on the
location of the risk-taker.
- - Expenses are allocated based on the estimated cost associated with
servicing the regions' client base.
- - Earnings on stockholders' equity are mainly allocated based on each
region's proportion of regional revenue, and adjustments are made for
differences between domestic and international tax rates.
The results for the three and six months ended June 30, 1998 and 1997 were
distributed among domestic and international operations, as presented in the
following table.
<TABLE>
<CAPTION>
Client- Income
focused Total Total Pretax tax Net
In millions revenues revenues(a) expenses income expense income
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER 1998
Europe(b) $ 728 $ 744(f) $ 476 $ 268 $107 $161
Asia Pacific 182 180 128 52 21 31
Latin America(c) 131 98 48 50 20 30
- ------------------------------------------------------------------------------------------------------------------------
Total international operations 1,041 1,022 652 370 148 222
Domestic operations(d) 912 1,131 764 367 108 259
- ------------------------------------------------------------------------------------------------------------------------
Total 1,953 2,153 1,416 737 256 481
- ------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1997
Europe(b) 472 535 376 159 63 96
Asia Pacific 130 88 127 (39) (15) (24)
Latin America(c) 172 227 60 167 67 100
- ------------------------------------------------------------------------------------------------------------------------
Total international operations 774 850 563 287 115 172
Domestic operations(d) 747 941 678 263 61 202
- ------------------------------------------------------------------------------------------------------------------------
Total 1,521 1,791 1,241 550 176 374
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1998
Europe(b) 1,303 1,391(f) 1,043(e) 348 139 209
Asia Pacific 442 369 292(e) 77 31 46
Latin America(c) 266 299 123 176 70 106
- ------------------------------------------------------------------------------------------------------------------------
Total international operations 2,011 2,059 1,458 601 240 361
Domestic operations(d) 1,827 2,091 1,590(e) 501 144 357
- ------------------------------------------------------------------------------------------------------------------------
Total 3,838 4,150 3,048 1,102 384 718
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1997
Europe(b) 949 1,137 734 403 161 242
Asia Pacific 341 376 254 122 49 73
Latin America(c) 308 381 119 262 105 157
- ------------------------------------------------------------------------------------------------------------------------
Total international operations 1,598 1,894 1,107 787 315 472
Domestic operations(d) 1,482 1,730 1,325 405 79 326
- ------------------------------------------------------------------------------------------------------------------------
Total 3,080 3,624 2,432 1,192 394 798
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes net interest revenue and noninterest revenues.
(b) Includes the Middle East and Africa.
(c) Includes Mexico, Central America, and South America.
(d) Includes the United States, Canada, and the Caribbean. Results relate
substantially to United States operations for both years.
(e) Total expenses include a first quarter 1998 $215 million pretax charge
related to the restructuring of business activities which was recorded as
follows: $116 million in Europe, $15 million in Asia Pacific, and $84 million
in Domestic operations.
(f) Includes 1998 second quarter net gain of $131 million related to the sale
of our global trust and agency services business. See note 5, Sale of global
trust and agency services business.
22
<PAGE> 23
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
J.P. Morgan reported net income of $481 million, up 29% from the second quarter
of 1997. The 1998 result includes a gain of $131 million ($79 million after tax)
related to the previously announced sale of the firm's global trust and agency
services business. Excluding the gain, net income was $402 million, 7% higher
than in last year's quarter. Earnings per share in the 1998 quarter were $2.36,
or $1.96 per share excluding the gain.
Net income for the first half of 1998, excluding the second quarter gain and a
$129 million after tax restructuring charge taken in the first quarter, was $768
million, compared with $798 million in the first half of 1997.
OTHER HIGHLIGHTS OF THE QUARTER:
- - Revenues from our client-focused activities rose 28% from the year-ago
quarter, benefiting from strong client demand globally and a robust market
environment in the U.S. and Europe; proprietary revenues were lower.
- - Operating expenses were flat compared with the first quarter as we funded
strategic investment with savings realized from the restructuring actions
announced in March.
- - Exposures to counterparties in Indonesia, Malaysia, the Philippines, South
Korea, and Thailand totaled $3.4 billion, down 26% from the first quarter
and 44% from year-end 1997.
SECOND QUARTER RESULTS AT A GLANCE
<TABLE>
<CAPTION>
First
Second quarter quarter
---------------------------------------------------------------------------------------------
In millions of dollars, except per share data 1998 1997 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 2,153 $ 1,791 $ 1,997
Operating expenses (1,416) (1,241) (1,632)*
Income taxes (256) (176) (128)
---------------------------------------------------------------------------------------------
Net income 481 374 237
Net income per share $ 2.36 $ 1.85 $ 1.15
Dividends declared per share $ 0.95 $ 0.88 $ 0.95
---------------------------------------------------------------------------------------------
</TABLE>
* Includes a pretax charge of $215 million related to the restructuring of
business activities.
23
<PAGE> 24
BUSINESS SECTOR ANALYSIS
For the purposes of reporting our results, we divide our business activities
into five sectors: Finance and Advisory, Market Making, Asset Management and
Servicing, Equity Investments, and Proprietary Investing and Trading.
The first three sectors - Finance and Advisory, Market Making, and Asset
Management and Servicing - comprise the services we provide to clients. Equity
Investments and Proprietary Investing and Trading represent the activities we
undertake exclusively for our own account. For a complete description of our
business sectors, refer to the J.P. Morgan & Co. Incorporated 1997 Annual
report. Presented below are the summary results for each sector for the three
and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Asset TOTAL
Finance Management CLIENT- Equity Proprietary TOTAL
and Market and FOCUSED Invest- Investing PROPRIETARY Corporate
In millions Advisory Making Servicing ACTIVITIES ments and Trading ACTIVITIES Items CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECOND QUARTER 1998
Total revenues $ 588 $ 920 $ 445 $1,953 $ 108 $ 58 $ 166 $34 (a) $ 2,153
Total expenses 366 565 362 1,293 11 48 59 64 1,416
- --------------------------------------------------------------------------------------------------------------------------------
Pretax income 222 355 83 660 97 10 107 (30) 737
- --------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1997
Total revenues 481 648 392 1,521 124 116 240 30 1,791
Total expenses 351 455 320 1,126 11 45 56 59 1,241
- --------------------------------------------------------------------------------------------------------------------------------
Pretax income 130 193 72 395 113 71 184 (29) 550
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE),
SECOND QUARTER 1998 VS
SECOND QUARTER 1997
Total revenues 107 272 53 432 (16) (58) (74) 4 362
Total expenses 15 110 42 167 -- 3 3 5 175
- -------------------------------------------------------------------------------------------------------------------------------
Pretax income 92 162 11 265 (16) (61) (77) (1) 187
- -------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1998
Total revenues 1,152 1,839 847 3,838 133 296 429 (117)(a) 4,150
Total expenses 721 1,173 705 2,599 18 97 115 334 (b) 3,048
- -------------------------------------------------------------------------------------------------------------------------------
Pretax income 431 666 142 1,239 115 199 314 (451) 1,102
- -------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 1997
Total revenues 932 1,381 767 3,080 173 392 565 (21) 3,624
Total expenses 653 929 620 2,202 18 91 109 121 2,432
- -------------------------------------------------------------------------------------------------------------------------------
Pretax income 279 452 147 878 155 301 456 (142) 1,192
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE),
SIX MONTHS 1998 VS
SIX MONTHS 1997
Total revenues 220 458 80 758 (40) (96) (136) (96) 526
Total expenses 68 244 85 397 -- 6 6 213 616
- -------------------------------------------------------------------------------------------------------------------------------
Pretax income 152 214 (5) 361 (40) (102) (142) (309) (90)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a second quarter 1998 pretax gain of $131 million related to the
sale of the firm's global trust and agency services business.
(b) Includes a first quarter 1998 pretax charge of $215 million related to the
restructuring of business activities.
METHODOLOGY:
The firm's management reporting system and policies were used to determine the
revenues and expenses directly attributable to each business sector. Earnings on
stockholders' equity were allocated based on management's assessment of the
inherent risk of the components of each sector. In addition, certain overhead
expenses not allocated for management reporting purposes were allocated to each
business sector. Overhead expenses were allocated based primarily on staff
levels and represent costs associated with various support functions that exist
for the benefit of the firm as a whole.
24
<PAGE> 25
The following table summarizes revenues by major activity included within each
of our business sectors for the three and six months ended June 30, 1998 and
1997.
<TABLE>
<CAPTION>
Second Second Six Six
quarter quarter Increase/ months months Increase/
In millions 1998 1997 (Decrease) 1998 1997 (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Advisory & Underwriting $334 $255 $79 $674 $476 $198
Credit 254 226 28 478 456 22
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCE AND ADVISORY 588 481 107 1,152 932 220
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Income 377 267 110 837 531 306
Emerging Markets 149 123 26 386 309 77
Equities 205 158 47 321 310 11
Foreign Exchange 147 84 63 239 203 36
Commodities 42 16 26 56 28 28
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET MAKING 920 648 272 1,839 1,381 458
- ---------------------------------------------------------------------------------------------------------------------------------
Asset Management Services 277 256 21 528 499 29
Securities and Futures Services 168 136 32 319 268 51
- ---------------------------------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT AND SERVICING 445 392 53 847 767 80
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL CLIENT-FOCUSED
REVENUES 1,953 1,521 432 3,838 3,080 758
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY INVESTMENTS 108 124 (16) 133 173 (40)
- ---------------------------------------------------------------------------------------------------------------------------------
PROPRIETARY INVESTING AND
TRADING 58 116 (58) 296 392 (96)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL PROPRIETARY REVENUES 166 240 (74) 429 565 (136)
- ---------------------------------------------------------------------------------------------------------------------------------
CORPORATE ITEMS 34(a) 30 4 (117)(a) (21) (96)
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES 2,153 1,791 362 4,150 3,624 526
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The activities of our Fixed Income, Emerging Markets, and Equities businesses
are reflected across several sectors. Aggregate revenues for these businesses
for the six months ended June 30 follows: Fixed Income - $1,114 million (1998)
and $762 million (1997); Emerging Markets - $395 million (1998) and $371 million
(1997); and, Equities - $519 million (1998) and $446 million (1997).
(a) Includes a second quarter 1998 pretax gain of $131 million related to the
sale of the firm's global trust and agency services business.
25
<PAGE> 26
REVENUES in the second quarter of 1998 rose 20% from the prior year to
$2.153 billion.
Revenues from client-focused activities, which are reported in the Finance and
Advisory, Market Making, and Asset Management and Servicing sectors, rose 28% to
$1.953 billion in the second quarter of 1998 from $1.521 billion in the year-ago
quarter. Revenues from Equity Investments and Proprietary Investing and Trading
activities were $166 million versus $240 million in the 1997 second quarter.
FINANCE AND ADVISORY
The Finance and Advisory sector includes results of our advisory, debt and
equity underwriting, and credit activities. Revenues were $588 million in the
second quarter of 1998, up 22% from the 1997 second quarter.
Revenues from advisory services and debt and equity underwriting rose 31% to
$334 million in the quarter, reflecting robust demand for investment banking
services, particularly in the Americas and Europe. For the first half of 1998,
Securities Data Co. ranked J.P. Morgan fifth in completed mergers and
acquisitions worldwide, up from seventh in the year-ago first half; market share
advanced to 15.0% from 9.4%. Morgan ranked ninth in U.S. equity lead
underwriting with a market share of 4.3%, compared with 11th and a market share
of 2.7% in the 1997 first half. Revenues from credit activities in the quarter
rose $28 million to $254 million.
Finance and Advisory expenses in the second quarter of 1998 were $366 million
compared with $351 million in the second quarter of 1997. This sector includes
all the costs associated with our global network of client relationship managers
who market the full spectrum of our capabilities and provide the link between
our clients' needs and our capital raising, advisory, asset management, market
making, and risk management products and services.
The Finance and Advisory sector recorded pretax income of $222 million in the
second quarter of 1998 compared with $130 million a year ago.
Revenues for the first six months of 1998 increased to $1.152 billion from
$932 million in 1997. Expenses for the same period increased to $721 million
from $653 million in the six months ended June 30, 1997. Year-to-date pretax
income was $431 million in 1998, as compared to $279 million for the first six
months of 1997.
MARKET MAKING
The Market Making sector includes results of our fixed income, emerging markets,
equities, foreign exchange, and commodities activities. Revenues totaled
$920 million in the second quarter, up 42% from a year earlier.
Fixed income revenues rose 41% to $377 million in the second quarter of 1998.
Revenues from swaps and other derivative transactions with clients were sharply
higher.
In emerging markets, market-making revenues were $149 million in the second
quarter, up 21%. Increased client flows in Asian local markets and derivatives
contributed to the increase.
Market-making revenues in equities were $205 million in the second quarter of
1998, up 30% from $158 million a year ago. Equity derivatives posted strong
increases on higher client demand. Cash secondary revenues were also sharply
higher, reflecting growing market share and volumes.
Foreign exchange revenues were $147 million, 75% higher than in the year-ago
quarter. Strong client demand and volatile markets, both in G-7 and emerging
market currencies, contributed to the increase.
Commodities revenues of $42 million more than doubled from a year ago,
reflecting increased client activity in both metals and energy.
Market making expenses were $565 million, a 24% increase from the second quarter
of 1997.
The Market Making sector recorded pretax income of $355 million in the second
quarter of 1998, compared with $193 million in the second quarter of 1997.
Revenues for the six month period were $1.839 billion compared with
$1.381 billion a year earlier. Expenses for the same period were $1.173 billion
compared to $929 million in the six months ended June 30, 1997. Year-to-date
pretax income was $666 million in 1998, as compared to $452 million for the six
months of 1997.
26
<PAGE> 27
ASSET MANAGEMENT AND SERVICING
The Asset Management and Servicing sector includes results of institutional
investment management and mutual funds, services for private clients, and
securities and futures services activities. Revenues were up 14% to $445 million
in the second quarter from a year ago.
Revenues generated from asset management increased 8% to $277 million,
reflecting a 14% increase in investment management fees partially offset by the
costs associated with our investment in American Century. Assets under
management were $302 billion at June 30, 1998, compared with $234 billion a
year ago.
Private clients accounted for revenues of approximately $175 million, an
increase of 21%. Of this amount, approximately $45 million is recorded in the
Finance and Advisory and Market Making sectors.
Revenues from securities and futures services were broadly higher. The 24% gain
in the quarter included strong Euroclear revenues and record results in futures
and options brokerage.
Asset Management and Servicing expenses were $362 million in the second quarter
of 1998, compared with $320 million in the second quarter of 1997.
The Asset Management and Servicing sector recorded pretax income of $83 million
in the second quarter of 1998, compared with $72 million in the year-earlier
period.
Revenues for the six month period increased to $847 million from $767 million a
year earlier. Expenses for the same period were $705 million versus $620 million
for the six months ended June 30, 1997. Year-to-date pretax income was
$142 million, as compared to $147 million for the first six months of 1997.
EQUITY INVESTMENTS
The Equity Investments sector includes results from our proprietary equity
investments portfolio management activities. Reported revenues were $108 million
in the second quarter, compared with $124 million a year ago. Net gains of
$101 million this quarter primarily related to the sale of an investment in the
insurance industry. Equity investments recorded pretax income of $97 million in
the second quarter of 1998, compared with $113 million in the second quarter of
1997.
Revenues for the six month period were $133 million, as compared with
$173 million a year earlier. Year-to-date pretax income was $115 million in
1998, as compared to $155 million for the first six months of 1997.
Total return - reported revenues plus the change in net unrealized appreciation
- - was negative $48 million for the second quarter of 1998, compared with
$212 million in the 1997 period, which saw exceptional appreciation in insurance
industry investments. Total return for the six months ended June 30, 1998 was
$37 million compared with $187 million for the six months ended June 30, 1997.
PROPRIETARY INVESTING AND TRADING
The Proprietary Investing and Trading sector includes results from our market
and credit risk positioning and capital and liquidity management activities.
Revenues declined to $58 million in the 1998 second quarter from $116 million a
year ago. The decline includes approximately $50 million in losses on the sale
of investment securities related to reducing our Asian credit exposures. The
Proprietary Investing and Trading sector recorded pretax income of $10 million
in the second quarter of 1998, compared with $71 million in the same period a
year ago.
Revenues for the six months of 1998 were $296 million as compared to
$392 million a year earlier. Year-to-date pretax income was $199 million in
1998, as compared to $301 million for the first six months of 1997.
Total return - reported revenues plus the change in net unrealized appreciation
- - for the 1998 second quarter was $69 million compared with $59 million last
year. Total return for the six month period ended June 30, 1998 was
$249 million, as compared to $424 million for the six months ended June 30,
1997.
27
<PAGE> 28
CORPORATE ITEMS
Corporate Items includes revenues and expenses not allocated to business
sectors, intercompany eliminations, equity in earnings of certain affiliates,
taxable-equivalent adjustments, and results of sold or discontinued businesses.
For the second quarter of 1998, Corporate Items includes the $131 million pretax
net gain on the sale of our global trust and agency services business. In
addition to the $131 million gain, Corporate Items, for the first six months of
1998, includes the first quarter pretax charge of $215 million related to the
restructuring of business activities.
28
<PAGE> 29
FINANCIAL REVIEW
REVENUES
Revenues were $2.153 billion in the second quarter of 1998, compared with
$1.791 billion in the year ago quarter. For the six months ended June 30, 1998,
revenues were $4.150 billion versus $3.624 billion in the same period a year
ago.
Net interest revenue, the aggregate of interest revenue and expense generated
from the firm's client-focused and proprietary activities using a variety of
asset, liability, and off-balance sheet instruments, decreased 41% to
$290 million from the second quarter of 1997. This decrease resulted from lower
net interest revenue from our market-making activities and proprietary investing
positions. For the first six months of 1998, net interest revenue decreased 34%
to $626 million from the corresponding 1997 period.
Trading revenue, excluding trading-related net interest revenue, increased to
$877 million in the second quarter of 1998 from $477 million a year ago.
Year-to-date trading revenue increased to $1.773 billion from $1.174 billion for
the first six months of 1997. The following table presents trading revenue,
disaggregated by principal product groupings across all of our business sector
activities, and total trading-related net interest revenue. This revenue
reflects only a portion of the total revenues generated by our activities, and
excludes other important sources of revenue, including fees and commissions. As
a result, this table does not reflect the integrated nature of our business as
described in Business Sector Analysis (see pages 24-28).
<TABLE>
<CAPTION>
Total Net
Fixed Foreign Commod- Proprietary Trading Interest Combined
In millions Income Equities Exchange ities Trading Revenue Revenue Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Second quarter 1998 $532 $ 109 $ 170 $40 $26 $877 $74 $951
Second quarter 1997 250 170 72 2 (17) 477 159 636
Six months 1998 1,173 166 235 50 149 1,773 183 1,956
Six months 1997 596 281 192 15 90 1,174 281 1,455
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed income trading revenue increased to $532 million from $250 million in the
year-earlier quarter on sharply higher revenues from swaps and other derivative
transactions. Trading revenue from equities declined to $109 million, primarily
reflecting lower positioning gains. Foreign exchange trading revenue increased
to $170 million from $72 million a year ago. Strong client demand and volatile
markets, both in G-7 and emerging market currencies, contributed to the
increase. Trading revenue from commodities grew to $40 million from $2 million
in the year-earlier quarter, reflecting increased client activity in both metals
and energy. Proprietary trading revenue was $26 million, compared with a loss of
$17 million in the 1997 second quarter.
Investment banking revenue rose 23% to $362 million in the second quarter of
1998, reflecting robust demand for investment banking services, particularly in
the Americas and Europe. Underwriting revenue grew to $164 million from
$140 million in the year-earlier quarter. Advisory and syndication fees rose to
$198 million from $154 million a year ago. Investment banking revenue for the
first six months of 1998 was $708 million, compared with $520 million for the
first six months of 1997. Underwriting revenue for the first half of 1998 was
$319 million, versus $237 million for the same 1997 period. Advisory and
syndication fees for the first half of 1998 were $389 million, compared to
$283 million for the same period of 1997.
Investment management revenue increased 14% to $226 million in the 1998 second
quarter from a year ago. Assets under management were $302 billion at June 30,
1998, compared with $234 billion a year ago. Investment management revenue for
the first six months of 1997 increased 14% to $437 million, over the same 1997
period.
Fees and commissions were $197 million, up 26% from $156 million in the year-ago
quarter. The increase primarily reflects higher equity commissions resulting
from growing market share and volumes, and very strong results in futures and
options brokerage. For the first six months of 1998, fees and commissions
revenue was $387 million, compared to $304 million in the same 1997 period.
29
<PAGE> 30
Investment securities revenue was $68 million in the second quarter of 1998 and
$114 million in the prior year quarter. Net gains from positions associated
with our Equity Investment activities were $101 million in the current quarter
and primarily related to the sale of an investment in the insurance industry. A
year ago, such net gains were $118 million and primarily related to the sale of
investments in the telecommunications and insurance industries. Also included
in investment securities revenue in the current quarter were net realized
losses on sales of debt investment securities of $43 million, primarily related
to reducing our Asian credit exposures. This compares with net realized losses
of $14 million in the year-ago quarter. For the current six month period,
investment securities revenue was $111 million, versus $175 million for the
first six months of 1997.
Other revenue was $133 million in the second quarter, compared with $56 million
a year earlier. For the second quarter of 1998, Other revenue included the
$131 million net pretax gain on the sale of the firm's global trust and agency
services business. Other revenue for the first half of 1998 was $108 million,
compared with $123 million for the first six months of 1997.
OPERATING EXPENSES
Operating expenses were $1.416 billion in the second quarter, flat compared with
the first quarter (excluding a $215 million restructuring charge), reflecting
progress on our productivity initiatives. Incremental investments in strategic
growth areas were substantially funded by savings realized from the
restructuring initiatives announced last quarter. In addition, the firm
continued to make progress on the stated objective to achieve $300 million to
$500 million a year in efficiency savings to fund future investments. During
the second quarter, an additional $60 million in annual savings was identified
as a result of the sale of the firm's global trust and agency services
business, announced transactions in asset management, and other
initiatives. This, combined with $250 million of annual savings identified in
the first quarter, will result in $310 million in annual savings to be
reinvested in areas of strategic priority.
Compared with the prior year, operating expenses in the second quarter increased
14%, reflecting higher incentive compensation accruals and other expenses
related to increased business activity. Costs to prepare for the Year 2000
($42 million) and European Economic and Monetary Union ($13 million) totaled
$55 million in the quarter, up from $14 million a year ago (see page 35). For
the six months ended June 30, 1998, operating expenses were $3.048 billion,
including the first quarter 1998 pretax charge of $215 million related to the
restructuring of business activities. This compares to $2.432 billion of
operating expenses for the first six months of 1997.
At June 30, 1998, staff totaled 16,045 employees, compared with 15,776 employees
at June 30, 1997, and 16,943 employees at December 31, 1997.
Income-tax expense in the second quarter totaled $256 million, based on an
effective tax rate of 35%, compared with an effective rate of 32% in the
year-earlier quarter.
ASSETS
Total assets were $281 billion at June 30, 1998, compared with $262 billion at
December 31, 1997.
CREDIT-RELATED ITEMS
We continued to reduce exposures to counterparties in Indonesia, Malaysia, the
Philippines, South Korea, and Thailand through principal repayments, loan and
investment securities sales, the purchase of credit protection through
derivatives, and charge-offs. Exposures to these countries at June 30, 1998,
were down 26% to $3.4 billion from March 31, 1998, and down 44% since
December 31, 1997. Exposures primarily consist of loans, derivatives, trading
account securities, and debt investment securities.
30
<PAGE> 31
Exposures of $3.4 billion at June 30, 1998 are based upon management's view of
total exposures to counterparties in Indonesia, Malaysia, the Philippines, South
Korea, and Thailand. By country, our exposures were as follows:
By financial instrument
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
June 30, 1998
- -------------------------------------------------------------------------------------------
Credit March 31, December 31,
Deriva- Other out- deriva- Commit- 1998 1997
In billions Loans tives standings tives, net ments Total Total Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Indonesia $0.1 - - - $0.1 $0.2 $0.5 $0.8
Malaysia - $0.1 $0.1 - - 0.2 0.3 0.4
Philippines 0.1 0.1 0.1 - - 0.3 0.4 0.3
South Korea 0.5 1.4 0.6 $(0.3) 0.1 2.3 2.9 3.5
Thailand 0.1 0.2 0.1 - - 0.4 0.5 1.1
- -------------------------------------------------------------------------------------------------------------------------------
Total 0.8 1.8 0.9 (0.3) 0.2 3.4 4.6 6.1
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
By counterparty
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
In billions Govern- Commit-
June 30, 1998 Banks ments Other ments Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Indonesia - - $0.1 $0.1 $0.2
Malaysia $0.1 - 0.1 - 0.2
Philippines 0.1 $0.1 0.1 - 0.3
South Korea 1.3 0.4 0.5 0.1 2.3
Thailand 0.3 - 0.1 - 0.4
- -------------------------------------------------------------------------------------------------------------------------------
Total exposure June 30, 1998 1.8 0.5 0.9 0.2 3.4
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total, March 31, 1998 2.2 0.8 1.3 0.3 4.6
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total, December 31, 1997 3.2 0.8 1.7 0.4 6.1
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming assets at June 30, 1998, were $588 million, down from $650 million
at March 31, 1998 and $659 million at December 31, 1997. Assets newly classified
as nonperforming were offset by a combination of charge-offs and repayments
during the quarter. Nonperforming assets consist primarily of swaps with certain
Asian counterparties. Net charge-offs were $83 million in the quarter and
related primarily to counterparties in South Korea and Indonesia.
At June 30, 1998, the aggregate allowance for credit losses was $904 million,
compared with $987 million at March 31, 1998 and $1,081 million at December 31,
1997. Of exposures to Indonesia, Malaysia, the Philippines, South Korea, and
Thailand, approximately $2.5 billion at June 30, 1998, were eligible for
coverage by the aggregate allowance for credit losses. Credit losses relating to
the remaining exposures, primarily trading account securities (issuer positions)
and investment securities, will be recognized in the Consolidated statement of
income. We consider approximately 47% of the aggregate allowance for credit
losses to relate to these countries as of June 30, 1998. The aggregate
allowance, however, remains available to absorb losses inherent in J.P. Morgan's
existing portfolio of loans, as well as other undertakings to extend credit or
make payments, and all other credit exposures, including derivatives. In
management's judgment, the aggregate allowance for credit losses remains at an
adequate level at June 30, 1998.
31
<PAGE> 32
CAPITAL
STOCKHOLDERS' EQUITY
Total stockholders' equity was approximately $11.7 billion at June 30, 1998.
Stockholders' equity included approximately $376 million of net unrealized
appreciation on debt investment securities and marketable equity investment
securities, net the related deferred tax liability of $231 million. The net
unrealized appreciation on debt investment securities was $237 million at
June 30, 1998. The net unrealized appreciation on marketable equity investment
securities was $370 million at June 30, 1998. Included in the table below are
selected ratios based upon stockholders' equity.
<TABLE>
<CAPTION>
June 30 December 31 June 30
Dollars in billions, except share data 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total stockholders' equity $11.7 $11.4 $11.3
Annualized rate of return on average common
stockholders' equity (a)(b) 17.3%(c) 9.7% 14.1%
As percent of period-end total assets:
Common equity 3.9% 4.1% 4.3%
Total equity 4.2% 4.4% 4.5%
Book value per common share (d) $57.26 $55.99 $55.37
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the annualized rate of return on average common stockholders'
equity for the three months ended June 30, 1998, December 31, 1997, and June 30,
1997. Excluding the impact of SFAS No. 115, the annualized rate of return on
average common stockholders' equity would have been 18.0%, 10.2%, and 14.7% for
the three months ended June 30, 1998, December 31, 1997, and June 30, 1997,
respectively.
(b) The annualized rate of return on average common stockholders' equity for the
six months ended June 30, 1998 and 1997 was 13.0% and 14.9% (including the
impact of SFAS No. 115), respectively, and 13.5% and 15.6% (excluding the impact
of SFAS No. 115), respectively. Excluding the 1998 second quarter after tax gain
of $79 million ($131 million before tax) related to the sale of the firm's
global trust and agency services business and excluding the 1998 first quarter
after tax charge of $129 million ($215 million before tax) related to the
restructuring of business activities, the annualized rate of return on average
common stockholders' equity was 13.9% (including the impact of SFAS No. 115) and
14.5% (excluding the impact of SFAS No. 115) for the six months ended June 30,
1998.
(c) Excluding the 1998 second quarter after tax gain of $79 million
($131 million before tax) related to the sale of the firm's global trust and
agency services business, the annualized rate of return on average common
stockholders' equity was 14.4% (including the impact of SFAS No. 115) and 15.0%
(excluding the impact of SFAS No. 115) for the three months ended June 30, 1998.
(d) Excluding the impact of SFAS No. 115, the book value per common share would
have been $55.31, $53.74, and $52.68 at June 30, 1998, December 31, 1997, and
June 30, 1997, respectively.
During the second quarter, the firm purchased approximately 2.5 million shares
of its common stock for a total of 3.7 million shares in the year to date. These
purchases are pursuant to the Board of Directors' December 1997 authorization to
purchase up to 7 million shares of J.P. Morgan common stock, to lessen the
dilutive impact on earnings per share of the firm's employee benefit plans.
These purchases may be made in 1998 or beyond in the open market or through
privately negotiated transactions.
REGULATORY CAPITAL REQUIREMENTS
The capital of J.P. Morgan and Morgan Guaranty Trust Company of New York (Morgan
Guaranty) remained well above the minimum standards set by regulators at
June 30, 1998. Further, the capital ratios of J.P. Morgan and Morgan Guaranty
exceeded the minimum standards for a well capitalized bank holding company and
bank, respectively, at June 30, 1998.
At June 30, 1998, under the Federal Reserve Board market risk capital guidelines
for calculation of risk-based capital ratios, J.P. Morgan's tier 1 and total
risk-based capital ratios were 7.7% and 11.3%, respectively; the leverage
ratio was 4.1 %. At December 31, 1997, J.P. Morgan's tier 1 and total
risk-based capital ratios were 8.0% and 11.9%, respectively, and the leverage
ratio was 4.4%. Refer to note 19, Capital Requirements, for further information.
Risk-adjusted assets represent the total of all on- and off- balance sheet
exposures adjusted for risk-based factors as prescribed by the Federal Reserve
Board. J.P. Morgan's risk-adjusted assets as of June 30, 1998 were $148.9
billion, compared with $150.6 billion at March 31, 1998. The net decrease
includes a reduction of approximately $6 billion achieved through actions taken
as part of our strategy to reduce capital employed in our credit portfolio. At
December 31, 1997, risk-adjusted assets were $148.5 billion.
32
<PAGE> 33
FORWARD-LOOKING STATEMENTS
Certain sections of our Form 10-Q contain forward-looking statements. We use
words such as "expects," "believe," and "estimates" or similar expressions to
identify forward-looking statements. Our statements are subject to certain risks
and uncertainties, as discussed in the Business environment and other
information and Risk management sections of the 1997 Annual report. These risks
and uncertainties could cause actual results to differ materially from our
statements.
33
<PAGE> 34
RISK MANAGEMENT
The major risks associated with our business are:
- - Market risk - the risk of loss due to movements in market prices and rates
- - Liquidity risk - the risk of being unable to fund our portfolio of assets
at reasonable rates and to appropriate maturities
- - Credit risk - represents the probability that corporations, non-bank
financial institutions, governments, banks, and individuals (collectively
referred to as counterparties) will default on their obligations to us
- - Operating risk - the potential for loss arising from breakdowns in our
policies and controls for ensuring the proper functioning of our people,
systems, and facilities.
We have developed comprehensive risk management processes to facilitate,
control, and monitor risk taking. These processes are built on a foundation of
early identification and measurement. They continually evolve as our business
activities change in response to market, credit, product, and other
developments. We constantly seek to strengthen our risk monitoring process.
Periodic reviews by internal auditors, regulators, and independent accountants
subject our practices to additional scrutiny and further strengthen our process.
Please refer to our 1997 Annual report for a detailed discussion of how we
manage risk.
MARKET RISK
Market risk profiles
Market risk arises from trading and investing activities undertaken by both
client-related and proprietary businesses. Our primary tool for measuring and
monitoring market risk is referred to as Daily Earnings at Risk (DEaR). DEaR is
an estimate, at a 95% confidence level, of the worst expected loss in the value
of our portfolios over a one-day time horizon. The DEaR measure takes into
account numerous variables that may cause a change in the value of our
portfolios, including interest rates, foreign exchange rates, securities and
commodities prices, and their volatilities, as well as correlations among these
variables (a variance/covariance methodology).
The following presents the market risk profiles for the firm as of and for the
twelve month periods ended June 30, 1998 and December 31, 1997. The level of
market risk, which is measured on a diversified basis, will vary with market
factors, the level of client activity, and price and market movements.
Aggregate DEaR
Aggregate DEaR, which presents the market risk profile for firmwide trading and
investing activities combined, averaged $35 million for the twelve months ended
June 30, 1998 and ranged from $22 million to $49 million. For the twelve months
ended December 31, 1997, average aggregate DEaR was $29 million and ranged from
$22 million to $37 million. At June 30, 1998, aggregate DEaR was $35 million
versus $31 million at December 31, 1997. The increase in aggregate DEaR
primarily reflects an increase in proprietary trading activities.
DEaR for trading activities
Average DEaR for trading activities was $31 million and ranged from $17 million
to $45 million for the twelve months ended June 30, 1998. For the twelve months
ended December 31, 1997, average DEaR for trading activities was $23 million and
ranged from $15 million to $35 million. This increase reflects higher levels of
trading activity across the spectrum of our business activities offset by
decreases in market volatilities. The twelve month average and period-end DEaR
for June 30, 1998 and December 31, 1997, segregated by type of market risk
exposure associated with our trading activities, is presented in the table
below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Twelve months ended Period-end
-------------------------- ---------------------------------
June 30 December 31
1998 1997 June 30 December 31
In millions Average Average 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk $25 $20 $24 $26
Foreign exchange risk 14 7 18 12
Equity price risk 11 8 13 13
Commodity price risk 3 3 3 4
Diversification effects (22) (15) (24) (27)
- ----------------------------------------------------------------------------------------------------------------------
Total 31 23 34 28
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
Our primary market risk exposures related to the above risks are as follows:
Interest rate risk
Interest rate risk is the risk that changes in interest rates will affect the
value of financial instruments. Our primary risk exposures to interest rates
from trading activities originates in sovereign and corporate bond markets
across North America, Europe, Asia and Latin America; mortgage-backed security
markets in the U.S.; and interest rate derivatives. They also include yield
curve, vega, and basis risk primarily concentrated in our European and American
trading activities. Instruments such as interest rate swaps, options, U.S.
Government securities, future and forward contracts are used, in connection with
diversification management strategies, to manage our exposure to interest rate
risk.
Foreign exchange rate risk
Foreign exchange rate risk represents the possibility that fluctuations in
foreign exchange rates will impact the value of our financial instruments. Our
primary risk exposures to foreign exchange rate risk arises from transactions
and activities denominated in currencies other than the U.S. Dollar, in
particular the currencies of G7 countries. We execute transactions in foreign
currencies in all major countries and most minor currencies throughout North
America, Europe, Latin America and Asia. We manage the risk arising from foreign
currency transactions primarily through the use of currency swaps, options,
forwards and futures contracts.
Equity price risk
Equity price risk arises from the possibility that equity security prices will
fluctuate, affecting the value of equity securities and other instruments that
derive their value from a particular stock, a defined basket of stocks, or a
stock index. Our primary risk exposure to equity price risk arises from our
activities in our European equity derivative portfolios. We manage risk of loss,
due to unexpected price fluctuations, primarily through the use of equity option
contracts.
Given the nature of our business, we expect frequent changes to our primary risk
exposures over the course of a year. Our approach to managing market risk
considers this expectation.
We evaluate the reasonableness of DEaR for our trading activities by comparing
DEaR to actual trading results. The number of occurrences where actual daily
revenue fell short of average daily revenue by amounts greater than related DEaR
estimates were consistent with statistical expectations.
DEaR for proprietary investing activities
Average DEaR for our proprietary investing activities for the twelve months
ended June 30, 1998 was $17 million, and ranged from $10 to $28 million. This
compares with average DEaR of $16 million and a range from $10 to $25 million
for the twelve months ended December 31, 1997. At June 30, 1998 and December 31,
1997, DEaR for our proprietary investing activities was $13 million and $15
million, respectively.
The primary sources of market risk associated with our proprietary investing
activities relate to interest rate risk associated with fixed income securities
and spread risk, which is the possibility that changes in credit spreads will
affect the value of our financial instruments, associated with our
mortgage-backed securities portfolio.
Due to the longer-term nature of our investing activities, we use a weekly time
horizon to evaluate our risk estimates relative to total return. For the twelve
month period ended June 30, 1998, the number of times weekly total return fell
short of expected weekly results by amounts greater than related weekly risk
estimates was consistent with statistical expectations.
OPERATING RISK
The year 2000 initiative
With the new millennium approaching, organizations are examining their computer
systems to ensure they are year 2000 compliant. The issue, in simple terms, is
that many existing computer systems use only two numbers to identify a year in
the date field with the assumption that the first two digits are always 19. As
the century is implied in the date, on January 1, 2000, computers that are not
year 2000 compliant will assume the year is 1900. Systems that calculate,
compare, or sort using the incorrect date will cause erroneous results, ranging
from system malfunctions to
35
<PAGE> 36
incorrect or incomplete transaction processing. If not remedied, potential risks
include business interruption or shutdown, financial loss, reputation loss,
and/or legal liability.
J.P. Morgan has undertaken a firmwide initiative to address the year 2000 issue
and has developed a comprehensive plan to prepare, as appropriate, our computer
systems. Each business line has taken responsibility for identifying and fixing
the problem within its own area of operation and for addressing all
interdependencies. A multidisciplinary team of internal and external experts
supports the business teams by providing direction and firmwide coordination.
Working together, the business and multidisciplinary teams have completed a
thorough education and awareness initiative and a global inventory and
assessment of our technology and application portfolio to understand the scope
of the year 2000 impact at Morgan. We presently are renovating and testing
these technologies and applications in partnership with external consulting and
software development organizations, as well as with year 2000 tool providers.
We are on target with our plan to substantially complete renovation, testing,
and validation of our key systems by year-end 1998 and have already begun
participating in industry-wide testing (or streetwide testing).
Our efforts also focus on developing appropriate policies or risk mitigation
actions to address year 2000 related failures prior to the millennium due to
reliance on internal or external dependencies. We are working with key
external parties, including clients, counterparties, vendors, exchanges,
depositories, utilities, suppliers, agents, and regulatory agencies, to stem
the potential risks the year 2000 problem poses to us and to the global
financial community. The failure of external parties to resolve their own year
2000 issues in a timely manner could result in a material financial risk to the
firm. For potential failure scenarios where the risk to the firm is deemed
significant and where such risk is considered to have a higher probability of
occurrence, we will develop business recovery/contingency plans. These plans,
which will be developed in 1999, will define the infrastructure that should be
put in place for managing a failure during the millennium event itself.
Costs to prepare our systems for the year 2000 are estimated at $250 million,
for internal systems renovation and testing, testing equipment, and both
internal and external resources working on the project. Through June 30, 1998,
costs incurred approximated $180 million ($95 million in 1997; $85 million in
the six months ended June 30, 1998). Remaining costs will be incurred primarily
by year-end.
ECONOMIC AND MONETARY UNION IN EUROPE (EMU)
EMU refers to the movement toward economic and monetary union in Europe with
the ultimate goal of introducing a single currency called the euro. Monetary
union will have profound financial and political implications. It removes the
existence of different currencies, monetary policies, and, to some degree,
fiscal policies from Europe's financial markets. It effectively brings about a
merger of the capital markets of the EMU participants. In the second quarter,
finance ministers of the European Union certified 11 states to launch the
single currency. The countries joining EMU in the first wave are: Austria,
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, and Spain. The remaining four EU members are Britain, Greece, Sweden
and Denmark. While the convergence to the euro has reduced client demand for
certain transactions, which has impacted our foreign exchange and fixed income
activities in Europe, we anticipate that new opportunities in Europe will be
created through an expansion of activities in both the investment grade and
high yield debt capital markets. Overall, management anticipates that the
formation of EMU will not materially affect the trend of earnings of the firm.
J.P. Morgan has been actively involved in preparing for EMU and has developed a
firmwide plan to enable a successful transition to the euro. Many areas of the
firm will be affected by the introduction of the single currency. As with the
year 2000 issue, EMU poses various operating risks. EMU will require many
changes to our operations and technology, including currency conversions,
modifications of payment and settlement systems, and the redenomination of
securities, to name a few.
J.P. Morgan is committed to having all areas of the firm prepared for EMU
before the scheduled start date of January 1, 1999. A full time "core team" has
been assigned to assess the impact on the firm's global infrastructure and to
drive the implementation of the changeover across the firm. We have completed
the analysis, design and build phases of the changeover plan and will focus on
testing throughout the next several months. In addition, we will be directing
our efforts toward planning the conversion weekend (January 1-3, 1999). As
part of our conversion process, we are establishing detailed contingency
plans. The contingency plans will provide mechanisms to assess and communicate
the impact of any delays, and to resolve as quickly as possible any deviation
from the conversion plan using an established chain-of-command. Costs to
prepare for EMU in 1998 are expected to be approximately $65 million, of which
$25 million have been incurred in the first half of 1998.
36
<PAGE> 37
ASSET-QUALITY ANALYSIS
NONPERFORMING ASSETS
The following table presents nonperforming assets - net of charge-offs -
organized by the location of the counterparty. Approximately $526 million in
banks and other financial institutions at June 30, 1998 relate primarily to
swaps with certain Asian counterparties; the remainder of the amounts included
in the table primarily represent nonperforming loans.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
In millions: June 30 1998
- ------------------------------------------------------------------
<S> <C>
COUNTERPARTIES IN THE U.S.
Commercial and industrial $ 10
Other 17
- ------------------------------------------------------------------
27
- ------------------------------------------------------------------
COUNTERPARTIES OUTSIDE THE U.S.
Commercial and industrial 22
Banks and other financial institutions 527
Other 12
- ------------------------------------------------------------------
561
- ------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS 588
- ------------------------------------------------------------------
</TABLE>
The following table presents an analysis of the changes in nonperforming assets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Second quarter Six months
In millions 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NONPERFORMING ASSETS, BEGINNING BALANCE $ 650 $ 659
- -------------------------------------------------------------------------------------------------------------------------------
Additions to nonperforming assets 61 224
Less:
Repayments of principal, net of
additional advances (24) (34)
Nonperforming assets returning to
accrual status - (50)
Charge-offs:
Commercial and industrial (15) (58)
Banks and other financial institutions (16) (56)
Losses on sales of loans, primarily banks and other financial institutions (52) (78)
Interest and other credits (16) (19)
- -------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS, JUNE 30 588 588
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATE ALLOWANCE FOR CREDIT LOSSES
We maintain an aggregate allowance for credit losses to absorb losses inherent
in our extensions of credit. Such extensions include loans and unused loan
commitments, payments made on behalf of clients (e.g., standby letters of credit
and guarantees), and all other credit exposures, including derivatives.
37
<PAGE> 38
The following table summarizes the activity of the aggregate allowance for
credit losses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Second quarter Six months
In millions 1998 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BEGINNING BALANCE $987 $1,081
- --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Counterparties in the U.S., primarily
commercial and industrial - 10
Counterparties outside the U.S. - 5
- --------------------------------------------------------------------------------------------------------------------------
- 15
- --------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Counterparties in the U.S., primarily
commercial and industrial - (2)
Counterparties outside the U.S.:
Commercial and industrial (15) (56)
Banks and other financial
institutions (16) (56)
Losses on sale of loans, primarily banks and
other financial institutions (52) (78)
- --------------------------------------------------------------------------------------------------------------------------
(83) (192)
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs (83) (177)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30 904 904
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPONENTS OF THE AGGREGATE ALLOWANCE FOR CREDIT LOSSES
Our aggregate allowance for credit losses is based on an assessment at each
reporting period of the following components: specific counterparty allocations,
specific industry allocations, specific country allocations, expected loss
allocations, and general allocations. Refer to Note 1, Summary of significant
accounting policies, for additional information regarding the allocation of the
aggregate allowance for credit losses.
The following table displays how the aggregate allowance for credit losses is
allocated between the specific, expected loss, and general allocation components
as of June 30, 1998, March 31, 1998, December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
June 30, March 31, December 31, December 31, December 31,
In millions 1998 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Specific counterparty allocations in the U.S. $ 25 $ 24 $ 58 $ 116 $ 142
Specific counterparty allocations outside the U.S. 238 284 228 68 59
- -----------------------------------------------------------------------------------------------------------------------------------
Total specific counterparty allocations 263 308 286 184 201
- -----------------------------------------------------------------------------------------------------------------------------------
Specific industry/country allocations 193 248 428 355 692
Expected loss allocations 252 246 224 143 112
General allocations 196 185 143 434 125
- -----------------------------------------------------------------------------------------------------------------------------------
Total aggregate allowance 904 987 1,081 1,116 1,130
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
CROSS-BORDER AND LOCAL OUTSTANDINGS
For financial reporting purposes only, the following table presents our
cross-border and local outstandings under the regulatory basis established by
the Federal Financial Institutions Examination Council (FFIEC). The FFIEC
approach excludes certain items which management believes should be considered
in determining exposure, including trading account securities sold short of
issuers and credit derivatives with highly rated counterparties. Refer to page
40 for the management view of total exposure to certain Asian countries.
In accordance with FFIEC, cross-border outstandings include, regardless of
currency:
- - all claims of our U.S. offices against foreign residents
- - all claims of our foreign offices against residents of other foreign countries
Local outstandings include all claims of our foreign offices with residents of
the same foreign country, net of local funding.
All outstandings are based on the location of the ultimate counterparty, that
is, if collateral or a formal guarantee exists, the country presented is
determined by the location where the collateral is held and realizable, or the
location of the guarantor. Cross-border and local outstandings include the
following: interest-earning deposits with banks; investment securities; trading
account assets including derivatives; securities purchased under agreements to
resell; loans; accrued interest; investments in affiliates; and other monetary
assets. Commitments include all cross-border commitments to extend credit,
standby letters of credit, guarantees, and securities lending indemnifications.
The following table shows each country where cross-border and local
outstandings, net of funding, exceed 0.75% of total assets, as of June 30, 1998,
under the regulatory basis established by the FFIEC.
<TABLE>
<CAPTION>
Total out-
Local out- standings
standings, Total % of and
In millions Govern- net of out- Total Commit- commit-
June 30, 1998 Banks ments Other(a) funding standings assets ments ments
- ------------- ------ ------- -------- ---------- --------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Germany $7,670 $2,378 $1,321 $11,369 4.05% $1,859 $13,228
Japan (b) 3,796 3,681 2,509 9,986 3.56 1,486 11,472
Italy 2,581 5,345 492 $ 783 9,201 3.28 348 9,549
France 5,194 2,293 1,547 9,034 3.22 2,075 11,109
Netherlands 5,578 818 2,526 8,922 3.18 751 9,673
United Kingdom 3,905 16 4,720 8,641 3.08 982 9,623
Spain 1,843 3,028 833 268 5,972 2.13 403 6,375
Belgium 1,331 1,872 2,347 5,550 1.98 6,227 11,777
Cayman Islands 65 - 4,921 4,986 1.78 300 5,286
Switzerland 2,560 269 1,618 4,447 1.58 1,368 5,815
Brazil 167 851 829 2,128 3,975 1.42 1 3,976
Canada 1,187 784 797 2,768 0.99 1,781 4,549
South Korea 1,470 513 612 2,595 0.92 56 2,651
Luxembourg 368 14 1,852 2,234 0.80 321 2,555
South Africa 962 1,189 36 2,187 0.78 139 2,326
</TABLE>
(a) Includes nonbank financial institutions and commercial and industrial
entities.
(b) Total exposures to Japan, under the management view, were $8,306 million at
June 30, 1998. The difference between the regulatory rules and the
management view primarily relates to trading account securities sold short.
39
<PAGE> 40
Exposures to certain Asian countries
The following tables present exposures to certain Asian countries based upon
management's view of total exposure. As noted on page 39, the management view
differs from the FFIEC rules for disclosures of cross-border and local
outstandings.
<TABLE>
<CAPTION>
Total out-
standings
By type of financial instrument Credit and
In billions Deriva- Other out- deriva- Commit- commit-
June 30, 1998 Loans tives standings tives, net ments ments
- ------------------------------- ----- -------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
China $0.1 $0.2 - -- -- $0.3
Hong Kong 0.8 -- $0.2 $(0.1) $0.2 1.1
Indonesia 0.1 -- -- -- 0.1 0.2
Malaysia -- 0.1 0.1 -- -- 0.2
Philippines 0.1 0.1 0.1 -- -- 0.3
Singapore -- 0.4 0.1 -- -- 0.5
South Korea 0.5 1.4 0.6 (0.3) 0.1 2.3
Taiwan -- -- -- -- 0.1 0.1
Thailand 0.1 0.2 0.1 -- -- 0.4
</TABLE>
<TABLE>
<CAPTION>
Total out-
standings
By type of counterparty and
In billions Govern- Commit- commit-
June 30, 1998 Banks ments Other ments ments
- ----------------------- ----- ------- ----- ------- -----------
<S> <C> <C> <C> <C> <C>
China $0.1 $0.1 $0.1 -- $0.3
Hong Kong -- 0.1 0.8 $0.2 1.1
Indonesia -- -- 0.1 0.1 0.2
Malaysia 0.1 -- 0.1 -- 0.2
Philippines 0.1 0.1 0.1 -- 0.3
Singapore 0.1 0.2 0.2 -- 0.5
South Korea 1.3 0.4 0.5 0.1 2.3
Taiwan -- -- -- 0.1 0.1
Thailand 0.3 -- 0.1 -- 0.4
</TABLE>
40
<PAGE> 41
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Three months ended
on a taxable-equivalent basis ------------------------------------------------------------------------------
June 30, 1998 June 30, 1997
------------------------------------------------------------------------------
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. $ 2,218 $ 65 11.75% $ 2,019 $ 46 9.14%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 748 15 8.04 1,277 24 7.54
U.S. state and political
subdivision 1,305 39 11.99 1,234 37 12.03
Other 19,661 259 5.28 17,036 273 6.43
Debt investment securities in offices
outside the U.S. (a) 1,471 30 8.18 3,399 66 7.79
Trading account assets:
In offices in the U.S. 28,834 428 5.95 23,320 363 6.24
In offices outside the U.S. 41,332 698 6.77 39,937 652 6.55
Securities purchased under agreements
to resell,
In offices in the U.S. 13,051 181 5.56 16,728 227 5.44
In offices outside the U.S. 22,961 274 4.79 23,666 277 4.69
Securities borrowed,
mainly in offices in the U.S. 40,916 514 5.04 35,334 444 5.04
Loans:
In offices in the U.S. 6,869 115 6.72 4,840 94 7.79
In offices outside the U.S. 25,687 430 6.71 24,594 404 6.59
Other interest-earning assets (b):
In offices in the U.S. 2,425 41 * 657 42 *
In offices outside the U.S. 981 33 * 791 98 *
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 208,459 3,122 6.01 194,832 3,047 6.27
Allowance for credit losses (786) (912)
Cash and due from banks 1,402 765
Other noninterest-earning assets 72,789 48,540
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 281,864 243,225
- -----------------------------------------------------------------------------------------------------------------------------------
</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 1998 and 1997.
(a) For the three months ended June 30, 1998 and 1997, 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
41
<PAGE> 42
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Three months ended
on a taxable-equivalent basis ------------------------------------------------------------------------------
June 30, 1998 June 30, 1997
------------------------------------------------------------------------------
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. $ 7,251 $ 99 5.48% $ 10,145 $ 141 5.57%
In offices outside the U.S. 50,753 604 4.77 44,592 529 4.76
Trading account liabilities:
In offices in the U.S. 9,939 165 6.66 11,196 186 6.66
In offices outside the U.S. 15,804 212 5.38 14,325 212 5.94
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 70,305 937 5.35 65,330 853 5.24
Commercial paper, mainly in offices
in the U.S. 8,930 126 5.66 3,562 49 5.52
Other interest-bearing liabilities:
In offices in the U.S. 11,529 202 7.03 16,367 249 6.10
In offices outside the U.S. 4,869 80 6.59 3,803 59 6.22
Long-term debt,
mainly in offices in the U.S. 26,488 391 5.92 16,145 256 6.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 205,868 2,816 5.49 185,465 2,534 5.48
Noninterest-bearing deposits:
In offices in the U.S. 931 966
In offices outside the U.S. 915 490
Other noninterest-bearing
liabilities 62,504 45,197
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 270,218 232,118
Stockholders' equity 11,646 11,107
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 281,864 243,225
Net yield on interest-earning assets 0.59 1.06
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest earnings 306 513
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 43
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Six months ended
on a taxable-equivalent basis ---------------------------------------------------------------------------------
June 30, 1998 June 30, 1997
---------------------------------------------------------------------------------
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. $ 2,131 $ 129 12.21% $ 1,968 $ 73 7.48%
Debt investment securities in
offices in the U.S. (a):
U.S. Treasury 778 30 7.78 1,353 50 7.45
U.S. state and political
subdivision 1,260 74 11.84 1,350 79 11.80
Other 19,643 556 5.71 17,406 558 6.46
Debt investment securities in offices
outside the U.S. (a) 1,930 73 7.63 4,083 141 6.96
Trading account assets:
In offices in the U.S. 29,641 945 6.43 22,619 714 6.37
In offices outside the U.S. 39,928 1,366 6.90 40,528 1,373 6.83
Securities purchased under agreements
to resell and federal funds sold,
In offices in the U.S. 14,924 391 5.28 15,649 423 5.45
In offices outside the U.S. 23,071 569 4.97 23,466 536 4.61
Securities borrowed,
mainly in offices in the U.S. 40,562 1,010 5.02 33,118 827 5.04
Loans:
In offices in the U.S. 6,695 233 7.02 4,909 191 7.85
In offices outside the U.S. 25,853 860 6.71 24,161 775 6.47
Other interest-earning assets (b):
In offices in the U.S. 1,736 75 * 710 62 *
In offices outside the U.S. 935 88 * 869 157 *
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 209,087 6,399 6.17 192,189 5,959 6.25
Allowance for credit losses (824) (913)
Cash and due from banks 1,288 983
Other noninterest-earning assets 71,216 47,413
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 280,767 239,672
- -----------------------------------------------------------------------------------------------------------------------------------
</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 1998 and 1997.
(a) For the six months ended June 30, 1998 and 1997, 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
43
<PAGE> 44
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in millions,
Interest and average rates Six months ended
on a taxable-equivalent basis ----------------------------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------------------------------------------------------
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. $ 8,790 $ 239 5.48% $ 9,489 $ 261 5.55%
In offices outside the U.S. 50,997 1,254 4.96 45,304 1,072 4.77
Trading account liabilities:
In offices in the U.S. 10,363 394 7.67 10,285 350 6.86
In offices outside the U.S. 15,296 438 5.77 13,072 405 6.25
Securities sold under agreements to
repurchase and federal funds
purchased, mainly in offices in
the U.S. 68,877 1,869 5.47 66,586 1,729 5.24
Commercial paper, mainly in offices
in the U.S. 8,927 250 5.65 3,927 107 5.49
Other interest-bearing liabilities:
In offices in the U.S. 13,950 421 6.09 16,400 491 6.04
In offices outside the U.S. 3,625 132 7.34 3,730 110 5.95
Long-term debt,
mainly in offices in the U.S. 25,042 745 6.00 14,979 451 6.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 205,867 5,742 5.62 183,772 4,976 5.46
Noninterest-bearing deposits:
In offices in the U.S. 963 1,091
In offices outside the U.S. 892 309
Other noninterest-bearing
liabilities 61,477 43,249
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 269,199 228,421
Stockholders' equity 11,568 11,251
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 280,767 239,672
Net yield on interest-earning assets 0.63 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest earnings 657 983
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 45
ITEM 5. OTHER INFORMATION
As indicated in our 1998 proxy statement, if a stockholder wants to submit a
proposal for possible inclusion in our proxy statement for the 1999 annual
meeting of stockholders, we must receive the proposal on or before November 11,
1998. Pursuant to the recent amendments to Rule 14a-4 of the Securities
Exchange Act of 1934, as amended, if a stockholder intends to present a
proposal at the 1999 annual meeting, and has not requested timely inclusion of
the proposal in our proxy statement pursuant to Rule 14a-8, we must receive
notice of such proposal no later than January 26, 1999. If we do not receive
notice by that date, no discussion of the proposal is required to be included
in our 1999 proxy statement and we may use our discretionary authority to vote
on the proposal if it is presented at the annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. Statement re computation of ratios (incorporated by reference
to exhibit 12 to J.P. Morgan's report on Form 8-K, dated
July 14, 1998)
27. Financial data schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended June 30, 1998:
April 14, 1998 (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, 1998.
May 5, 1998 (Items 5 and 7)
Reported the issuance by J.P. Morgan of a press release announcing
that they had a briefing on such date in New York for
institutional investors and securities analysts. At such
meeting, executives of J.P. Morgan and Co. Incorporated
discussed the firm's strategy and several key business
initiatives.
45
<PAGE> 46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J.P. MORGAN & CO. INCORPORATED
------------------------------
(Registrant)
/s/ DAVID H. SIDWELL
-----------------------------------
NAME: DAVID H. SIDWELL
TITLE: MANAGING DIRECTOR AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
DATE: August 14, 1998
46
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CURRENT REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
ACCOMPANYING DISCLOSURES.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,522
<INT-BEARING-DEPOSITS> 2,804
<FED-FUNDS-SOLD> 36,537<F1>
<TRADING-ASSETS> 123,475
<INVESTMENTS-HELD-FOR-SALE> 24,190
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 31,029
<ALLOWANCE> 392
<TOTAL-ASSETS> 280,777
<DEPOSITS> 57,026
<SHORT-TERM> 99,417<F2>
<LIABILITIES-OTHER> 86,638<F3>
<LONG-TERM> 25,980
0
694
<COMMON> 502
<OTHER-SE> 10,520
<TOTAL-LIABILITIES-AND-EQUITY> 280,777
<INTEREST-LOAN> 1,090
<INTEREST-INVEST> 706
<INTEREST-OTHER> 4,572
<INTEREST-TOTAL> 6,368
<INTEREST-DEPOSIT> 1,493
<INTEREST-EXPENSE> 5,742
<INTEREST-INCOME-NET> 626
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 111<F4>
<EXPENSE-OTHER> 3,048<F5>
<INCOME-PRETAX> 1,102
<INCOME-PRE-EXTRAORDINARY> 718
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 718
<EPS-PRIMARY> 3.82<F6>
<EPS-DILUTED> 3.51<F6>
<YIELD-ACTUAL> .63
<LOANS-NON> 588<F7>
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,081<F8>
<CHARGE-OFFS> 192<F8>
<RECOVERIES> 15<F8>
<ALLOWANCE-CLOSE> 904<F8>
<ALLOWANCE-DOMESTIC> 25<F8>
<ALLOWANCE-FOREIGN> 238<F8>
<ALLOWANCE-UNALLOCATED> 641<F8>
<FN>
<F1>INCLUDES SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
<F2>INCLUDES SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS
PURCHASED, COMMERCIAL PAPER, AND OTHER LIABILITIES FOR BORROWED MONEY.
<F3>INCLUDES TRADING ACCOUNT LIABILITIES, ACCOUNTS PAYABLE AND ACCURED EXPENSES,
OTHER LIABILITIES, AND COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARIES.
<F4>INCLUDES GAINS AND LOSSES ON DEBT AND EQUITY INVESTMENT SECURITIES,
OTHER-THAN-TEMPORARY IMPAIRMENTS OR WRITE-DOWNS IN VALUE, AND RELATED DIVIDEND
INCOME.
<F5>INCLUDES EMPLOYEE COMPENSATION AND BENEFITS, NET OCCUPANCY, TECHNOLOGY AND
COMMUNICATIONS, AND OTHER EXPENSES.
<F6>PRIMARY EPS REPRESENTS BASIC EPS UNDER STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 128, EARNINGS PER SHARE.
<F7>INCLUDES NONPERFORMING LOANS AND OTHER NONPERFORMING ASSETS.
<F8>AMOUNTS RELATE TO THE FIRM'S AGGREGATE ALLOWANCE FOR CREDIT LOSSES.
</FN>
</TABLE>
