<PAGE> 1
1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------
Date of Report (Date of earliest event reported) October 19, 1998
J.P. MORGAN & CO. INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 1-5885 13-2625764
(State or other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification No.)
60 WALL STREET, NEW YORK, NEW YORK 10260-0060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 483-2323
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(Former name or former address, if changed since last report)
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<PAGE> 2
2
ITEM 5. OTHER EVENTS
On October 19, 1998, the Registrant issued a press release announcing
its earnings for the three-month and nine-month periods ended September
30, 1998. A copy of such press release is filed herein as Exhibit 99.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements
NONE. The financial statements included in this report are not
required to be filed as part of this report.
(b) Pro Forma Financial Information
NONE.
(c) Exhibits
12. Statement re computation of ratios.
99. Copy of press release of J.P. Morgan & Co. Incorporated
dated October 19, 1998.
<PAGE> 3
3
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 hereunto duly authorized.
J.P. MORGAN & CO. INCORPORATED
------------------------------
(REGISTRANT)
/s/ Grace B. Vogel
----------------------------
NAME: Grace B. Vogel
TITLE: Chief Accounting Officer
DATE: October 19, 1998
<PAGE> 4
EXHIBIT INDEX
12. Statement re computation of ratios.
99. Copy of press release of J.P. Morgan & Co. Incorporated
dated October 19, 1998.
<PAGE> 1
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
J.P. Morgan & Co. Incorporated
Consolidated
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Nine Months
Dollars in millions 1998
- ----------------------------------------------------------------------------------
Earnings:
<S> <C>
Net income $ 874
Add: income taxes 430
Less: equity in undistributed income
of all affiliates accounted for by
the equity method 15
Add: fixed charges, excluding interest
on deposits 7 167
- ----------------------------------------------------------------------------------
Earnings available for fixed charges,
excluding interest on deposits 8 456
Add: interest on deposits 2 138
- ----------------------------------------------------------------------------------
Earnings available for fixed charges,
including interest on deposits 10 594
- ----------------------------------------------------------------------------------
Fixed charges:
Interest expense, excluding interest on
deposits 6 521
Interest factor in net rental expense 34
- ----------------------------------------------------------------------------------
Total fixed charges, excluding interest
on deposits 6 555
Add: interest on deposits 2 138
- ----------------------------------------------------------------------------------
Total fixed charges, including interest
on deposits 8 693
- ----------------------------------------------------------------------------------
Ratio of earnings to fixed charges:
Excluding interest on deposits 1.29 (a)
Including interest on deposits 1.22 (a)
- ----------------------------------------------------------------------------------
</TABLE>
(a) For the nine months ended September 30, 1998, the ratio of earnings to fixed
charges, excluding the third quarter 1998 after tax gain of $34 million ($56
million before tax); excluding the second quarter 1998 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 first quarter 1998 after tax
charge of $129 million ($215 million before tax) related to restructuring of
business activities,was 1.29 excluding interest on deposits and 1.22 including
interest on deposits.
<PAGE> 2
EXHIBIT 12
Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
J.P. Morgan & Co. Incorporated
Consolidated
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Dollars in millions Nine Months
1998
- ---------------------------------------------------------------------------------
Earnings:
<S> <C>
Net income $ 874
Add: income taxes 430
Less: equity in undistributed income
of all affiliates accounted for by
the equity method 15
Add: fixed charges, excluding interest
on deposits and preferred stock
dividends 7 207
- ---------------------------------------------------------------------------------
Earnings available for fixed charges,
excluding interest on deposits 8 496
Add: interest on deposits 2 138
- ---------------------------------------------------------------------------------
Earnings available for fixed charges,
including interest on deposits 10 634
- ---------------------------------------------------------------------------------
Fixed charges:
Interest expense, excluding interest on
deposits 6 521
Interest factor in net rental expense 34
Preferred stock dividends 40
- ---------------------------------------------------------------------------------
Total fixed charges, excluding interest
on deposits 6 595
Add: interest on deposits 2 138
- ---------------------------------------------------------------------------------
Total fixed charges, including interest
on deposits 8 733
- ---------------------------------------------------------------------------------
Ratio of earnings to fixed charges and
preferred stock dividends:
Excluding interest on deposits 1.29 (a)
Including interest on deposits 1.22 (a)
- ---------------------------------------------------------------------------------
</TABLE>
(a) For the nine months ended September 30, 1998, the ratio of earnings to fixed
charges and preferred stock dividends, excluding the third quarter 1998 after
tax gain of $34 million ($56 million before tax); excluding the second quarter
1998 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 first
quarter 1998 after tax charge of $129 million ($215 million before tax) related
to restructuring of business activities, was 1.29 excluding interest on deposits
and 1.22 including interest on deposits.
<PAGE> 1
J.P. Morgan & Co. Incorporated JPMORGAN
60 Wall Street
New York, NY 10260-0060
NYSE: symbol: JPM
- --------------------------------------------------------------------------------
NEWS RELEASE: IMMEDIATE October 19, 1998
J.P. MORGAN REPORTS 1998 THIRD QUARTER RESULTS
J.P. Morgan today reported third quarter net income of $156 million, down from
$396 million in the third quarter of 1997 and $481 million in the 1998 second
quarter. The 1998 third quarter result includes a gain of $56 million ($34
million after tax) related to the sale of a business. Excluding the gain, net
income was $122 million. Earnings per share in the 1998 third quarter were
$0.75, or $0.58 excluding the gain.
Net income for the first nine months of 1998 was $890 million, excluding
after-tax gains of $113 million on business sales and a $129 million after tax
restructuring charge taken in the first quarter. This compares with $1.194
billion in the first nine months of 1997. Earnings per share for the 1998 year
to date, excluding special items, were $4.36, versus $5.85 in the same period a
year ago.
OTHER HIGHLIGHTS OF THE QUARTER:
- - Revenues declined 32% from a year ago as a result of market disruptions
characterized by extreme volatility, widening of credit spreads, lower
asset values, and withdrawal of investors from many markets.
- - Expenses fell 17% from a year ago reflecting lower compensation
accruals and continued progress on productivity initiatives.
- - A $75 million provision brought the allowance for credit losses to $914
million.
- - We continued to reduce emerging market credit exposures: emerging Asian
exposures are down more than 50% from their December 31, 1997, levels;
Latin American exposures are down nearly 40%.
- - We expect to exceed our previously announced savings target of
$300-$500 million, reducing core expenses in 1999 by $400 million and
reinvesting the balance of the savings.
"The quarter's results show the impact of market upheaval," said Douglas A.
Warner III, chairman. "We are aggressively adjusting to reduced capital markets
activity globally and the possibility of a broader business slowdown. While we
are not immune to the effects of continued turmoil, Morgan's strengths in a
tough environment are significant: consistent, superior client service and the
ability to execute transactions under difficult conditions."
<TABLE>
<CAPTION>
THIRD QUARTER RESULTS AT A GLANCE Third quarter Second quarter
- ---------------------------------------------------------------------------------------------
In millions of dollars, except per share data 1998 1997 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 1,301 $ 1,916 $ 2,153
Operating expenses (1,099) (1,326) (1,416)
Income taxes (46) (194) (256)
- ---------------------------------------------------------------------------------------------
Net income 156 396 481
Net income per share $ 0.75 $ 1.96 $ 2.36
Dividends declared per share $ 0.95 $ 0.88 $ 0.95
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Press contact: Joseph M. Evangelisti 212/648-9589
Investor contact: Ann B. Patton 212/648-9446
<PAGE> 2
J.P. Morgan & Co. Incorporated 2
REVENUES BY BUSINESS SECTOR
Lower revenues reflect turmoil in global capital markets
REVENUES in the third quarter of 1998 were $1.301 billion, down 32% from last
year and 40% from the 1998 second quarter, reflecting the global market
upheaval.
Revenues from client-focused activities, reported in the Finance and Advisory,
Market Making, and Asset Management and Servicing sectors, were $1.109 billion,
compared with $1.624 billion last year and $1.953 billion in the second quarter.
Revenues from Equity Investments and Proprietary Investing and Trading
activities were $278 million, versus $307 million in 1997 and $166 million in
the second quarter.
FINANCE AND ADVISORY (Advisory, Debt and Equity Underwriting, and Credit)
revenues were $413 million. This was down from $548 million in the third quarter
of last year and $588 million in the second quarter of 1998.
Advisory and underwriting revenues were $268 million, $60 million lower than in
the 1997 third quarter. Advisory fees increased but underwriting revenues fell
as issuance activity across markets worldwide slowed significantly in the latter
half of the quarter. For the first nine months of 1998, Securities Data Co.
ranked us sixth in announced mergers and acquisitions worldwide. In completed
transactions Morgan ranked eighth, and market share advanced to 12.7% from 10.7%
last year. Morgan ranked ninth in U.S. equity lead underwriting with a market
share of 4.4%, up from 2.9% last year.
Revenues from credit activities in the quarter were $145 million and included a
provision for credit losses of $75 million. Excluding the provision, credit
revenues were flat compared with last year's quarter.
MARKET MAKING (Fixed Income, Emerging Markets, Equities, Foreign Exchange, and
Commodities) revenues totaled $260 million in the third quarter, compared with
$669 million in the third quarter of 1997 and $920 million in the second quarter
of this year. Results across developed and emerging markets were affected by
widening credit spreads, illiquidity and price declines in many instruments,
increases in market volatility, and the breakdown of historical price
relationships across markets.
Fixed income revenues declined to $56 million from $333 million in the 1997
quarter. The results included losses in corporate securities activities and
lower derivatives revenues. Emerging markets recorded a loss of $56 million
compared with revenues of $111 million in the 1997 quarter. The decline
primarily related to losses of approximately $130 million on Russian trading
account positions. Equities market making revenues increased $13 million to $119
million on strong commission volumes. Foreign exchange revenues of $138 million
were $39 million higher than in the third quarter of 1997. Strong client demand
and related trading in emerging market and G-7 currencies contributed to this
improvement.
ASSET MANAGEMENT AND SERVICING (Institutional Investment Management and Mutual
Funds, Services for Private Clients, and Securities and Futures Services)
revenues were up 7% to $436 million in the third quarter from a year ago and
essentially unchanged from the 1998 second quarter.
Revenues from asset management increased $23 million or 9% from a year ago,
excluding the effect of our partnership with American Century, driven by growth
in investment management fees of 11%. Including American
<PAGE> 3
J.P. Morgan & Co. Incorporated 3
Century, asset management revenues were $270 million, up $11 million. Assets
under management approximated $277 billion at September 30, 1998, compared with
$244 billion at September 30, 1997, and $302 billion at June 30, 1998. The
decline from the previous quarter was principally caused by the worldwide
weakness in equity prices.
Revenues from private client services across our business sectors rose 9% to
$175 million from the 1997 quarter. Despite the turbulent market environment,
investment management and liquidity management revenues rose, while brokerage
commissions remained stable.
On October 1, 1998, J.P. Morgan and the Dai-Ichi Kangyo Bank, Limited agreed to
form an integrated joint venture to offer investment trusts (i.e., mutual funds)
to retail customers in Japan.
Revenues from securities and futures services rose nearly 20% to $166 million,
excluding prior year revenues of the global trust and agency business, which was
sold in June 1998. The increase included record results in futures and options
brokerage.
EQUITY INVESTMENTS (Equity Investment Portfolio Management) reported revenues of
$157 million in the third quarter, compared with $66 million a year ago and $108
million in the 1998 second quarter. Gains of $197 million this quarter primarily
related to an investment in the insurance industry. Offsetting these gains were
write-downs of $48 million mostly related to investments in Latin America. The
downturn in equity markets caused total return - reported revenues and the
change in net unrealized appreciation - to be negative $90 million, compared
with $176 million in the 1997 third quarter and negative $48 million last
quarter.
PROPRIETARY INVESTING AND TRADING (Risk Positioning, Credit Investment
Portfolio, and Capital and Liquidity Management) revenues were $121 million in
the 1998 third quarter, compared with $241 million a year ago and $58 million in
the 1998 second quarter. Total return - reported revenues and the change in net
unrealized appreciation - for the 1998 third quarter was $141 million, compared
with $173 million last year and $69 million for the 1998 second quarter.
CORPORATE ITEMS (Revenues not allocated to business sectors, intercompany
eliminations, equity in earnings of certain affiliates, taxable-equivalent
adjustment, and results of sold or discontinued businesses) include the $56
million gain on the sale of our investment management business in Australia.
OPERATING EXPENSES
Expenses down on lower revenues and ongoing productivity programs
Operating expenses were $1.099 billion in the third quarter, down 17% from a
year ago and 22% from the 1998 second quarter. Compensation costs declined
nearly 30% from the prior year and 34% from the second quarter, mostly because
of lower compensation accruals. Non-compensation costs were flat versus the
year-ago period and down 4% from the second quarter. Costs to prepare for the
Year 2000 and European Economic and Monetary Union were $45 million in the
quarter, up from $28 million a year ago.
<PAGE> 4
J.P. Morgan & Co. Incorporated 4
We have intensified the productivity initiative announced earlier this year. We
expect to exceed our previously disclosed target of $300 million to $500 million
in annualized savings, reducing core expenses in 1999 by $400 million and
reinvesting the balance of the savings.
CREDIT RISK DEVELOPMENTS
Market dislocations in the third quarter evidence a significant shift in the
global risk environment. We have responded by closely managing our credit
exposures and selectively reducing risk concentrations.
Exposures to key emerging markets reduced 45% year-to-date
We continued to manage down exposures to key emerging markets to reflect the
increased risk associated with these assets. Asian exposures (excluding Japan)
at September 30, 1998, were down more than 50% from December 31, 1997. Latin
American exposures declined nearly 40%. At quarter end, cross-border exposures
to Asia and Latin America were $4.5 billion and $5.0 billion respectively; local
exposures were $0.1 billion and $2.1 billion. These exposures consist of loans
and commitments to lend as well as the fair values of derivatives, securities in
trading accounts, and debt investment securities. In addition, we charged off
our Russian credit and settlement counterparty exposure of $50 million.
Remaining Russian government exposure as of September 30 consisted of
approximately $65 million of net trading assets.
Exposures to hedge funds substantially collateralized
The net amount owed J.P. Morgan by hedge funds under derivative and foreign
exchange contracts on a mark-to-market basis was approximately $0.9 billion as
of September 30, 1998. Substantially all of this amount is secured by cash and
U.S. Treasury and agency securities, under daily mark-to-market collateral
agreements. We also finance trading positions for hedge funds through reverse
repurchase agreements. The net amount of collateral owed the firm under
derivative and foreign exchange contracts and short-term financing agreements
was approximately $100 million. In addition, we have unsecured loans and
commitments to lend of approximately $40 million.
J.P. Morgan also made a $300 million equity investment in Long-Term Capital
Management, L.P., as part of the consortium of firms recapitalizing that entity.
Provision for credit losses of $75 million
We recorded a provision for credit losses of $75 million in the quarter,
bringing the aggregate allowance for credit losses after net charge-offs to $914
million, compared with $904 million at June 30, 1998. Net charge-offs were $65
million and primarily related to exposures in Russia. The allowance reflects our
quantitative and qualitative assessment of expected credit losses. It includes
allocations to specific counterparties and countries, primarily in Asia. It also
includes allocations that reflect the risks inherent in our overall portfolio,
including increased risks in emerging markets outside Asia. However, the entire
allowance remains available to absorb any losses inherent in our extensions of
credit.
<PAGE> 5
J.P. Morgan & Co. Incorporated 5
Nonperforming assets at September 30, 1998, were $593 million, versus $588
million at June 30, 1998. Assets newly classified as nonperforming during the
quarter were offset by a combination of charge-offs and repayments.
Nonperforming assets consist primarily of swaps with certain Asian
counterparties.
MARKET RISK DEVELOPMENTS
Daily earnings at risk (DEaR) in our trading activities increased from $34
million at the end of June to $43 million at September 30 as increased
volatility more than offset reductions in the size of positions. Unprecedented
market volatilities caused actual results to exceed DEaR estimates predicted by
our models during the quarter. In addition, during the quarter we increased
holdings of U.S. government agency bonds in our investment securities portfolio.
As a result of these investments, DEaR for our investment portfolio at the end
of the third quarter was $39 million, up from $13 million on June 30. Aggregate
DEaR for the firm rose to $68 million at the end of the third quarter compared
with $35 million on June 30, 1998.
CAPITAL
At September 30, 1998, under the Federal Reserve Board market risk capital
guidelines for calculation of risk-based capital ratios, J.P. Morgan's estimated
tier 1 and total risk-based capital ratios were 7.4% and 10.9% respectively; the
estimated leverage ratio was 4.0%. At June 30, 1998, J.P. Morgan's tier 1 and
total risk-based capital ratios were 7.7% and 11.3%, respectively, and the
leverage ratio was 4.1%.
At September 30, 1998, stockholders' equity included $292 million of net
unrealized appreciation on debt investment and marketable equity investment
securities, net the related deferred tax liability of $202 million. This
compares with $376 million of net unrealized appreciation at June 30, 1998, net
the related deferred tax liability of $231 million. The net unrealized
appreciation on debt investment securities was $410 million and $237 million at
September 30, 1998, and June 30, 1998, respectively. The net unrealized
appreciation on marketable equity investment securities was $84 million at
September 30, 1998, and $370 million at June 30, 1998.
The firm bought back approximately 2.6 million shares of its common stock in the
third quarter, for a total of 6.3 million shares in the year to date. These
purchases are part of an authorization to repurchase 7 million shares to lessen
the dilutive impact of the firm's employee benefit plans on earnings per share.
# # #
J.P. Morgan is a leading global financial firm that meets critical financial
needs for business enterprises, governments, and individuals. The firm advises
on corporate strategy and structure, raises capital, makes markets in financial
instruments, and manages investment assets. Morgan also commits its own capital
to promising enterprises and invests and trades to capture market opportunities.
<PAGE> 6
J.P. Morgan & Co. Incorporated 6
This release may contain forward-looking statements. Our statements, which
reflect management's beliefs and expectations, are subject to risks and
uncertainties that may cause actual results to differ materially from these
statements. For a discussion of the risks and uncertainties, please refer to our
1997 Annual Report.
Attached are the financial summary; interim consolidated financial statements,
which are unaudited; summary of sector results; trading and investment banking
revenue tables; and asset quality tables. J.P. Morgan news releases, including
quarterly financial results, are available on the Internet at www.jpmorgan.com.
<PAGE> 7
J.P. Morgan & Co. Incorporated 7
FINANCIAL SUMMARY
J.P. Morgan & Co. Incorporated
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Dollars in millions, except share data
<TABLE>
<CAPTION>
Second
Third Quarter Quarter Nine Months
-------------------------------- ---------------------- ----------------------------
1998 1997 1998 1998 1997
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<S> <C> <C> <C> <C> <C>
Net Income (a) $156 $396 (b) $481 (c) $874 $1,194
Per common share
Net income (d)
Basic (a) $0.81 $2.10 (b) $2.57 (c) $4.65 $6.27
Diluted (a) 0.75 1.96 (b) 2.36 (c) 4.28 5.85
Dividends declared 0.95 0.88 0.95 2.85 2.64
Book value (e) $56.22 $56.83 $57.26
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Common shares issued and outstanding
at period-end 174,951,795 178,204,301 176,658,607
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common
and dilutive potential common shares
outstanding 196,395,485 197,776,475 200,064,207 198,216,384 199,687,666
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Dividends declared on common stock $167 $157 $168 $504 $475
Dividends declared on preferred stock 9 9 9 27 27
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Annualized rate of return on average
common stockholders' equity (f) (a) 5.3 % 14.3 % (b) 17.3 % (c) 10.3 % 14.7 %
As % of period-end total assets:
Common equity 3.6 % 4.1 % 3.9 %
Total equity 3.9 4.3 4.2
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Regulatory capital ratios
Tier 1 risk-based capital ratio 7.4 % 8.1 % 7.7 %
Total risk-based capital ratio 10.9 11.6 11.3
Leverage ratio 4.0 4.5 4.1
Risk adjusted assets $153,003 $147,696 $148,930
- ----------------------------------------------------------------------------------------------------------------------------------
Average balances
Debt investment securities (g) $ 22,225 $ 24,473 $ 23,185 $ 23,144 $ 24,287
Loans 30,162 31,201 32,556 31,744 29,788
Total interest-earning assets 204,724 201,723 208,459 207,616 195,402
Total assets 284,637 262,114 281,864 282,071 247,234
Total interest-bearing liabilities 201,553 196,271 205,868 204,413 187,984
Total liabilities 272,841 250,674 270,218 270,426 235,920
Common stockholders' equity 11,102 10,746 10,952 10,951 10,620
Total stockholders' equity 11,796 11,440 11,646 11,645 11,314
Net interest earnings (fully taxable basis) 352 489 306 1,009 1,472
Net yield on interest-earning assets 0.68 % 0.96 % 0.59 % 0.65 % 1.01 %
- ----------------------------------------------------------------------------------------------------------------------------------
Employees at period-end 16,155 16,525 16,045
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding the 1998 third quarter after tax gain of $34 million ($56 million
before tax) related to the sale of the firm's investment management business in
Australia: net income was $122 million; basic and diluted earnings per share
(EPS) were $0.62 and $0.58, respectively; and the annualized rate of return on
average common stockholders' equity was 4.0% (including the impact of Statement
of Financial Accounting Standards (SFAS) No. 115) and 4.2% (excluding the impact
of SFAS No. 115) for the three months ended September 30, 1998.
(b) 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: net income was $402 million; basic and diluted EPS were $2.14
and $1.96, respectively; and 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.
(c) Excluding 1998 after tax gains of $113 million on business sales (see notes
a and b) and excluding the 1998 first quarter after tax charge of $129 million
($215 million before tax) related to the restructuring of business activities:
net income was $890 million; basic and diluted EPS were $4.73 and $4.36,
respectively; and the annualized rate of return on average common stockholders'
equity was 10.5% (including the impact of SFAS No. 115) and 11.0% (excluding the
impact of SFAS No. 115) for the nine months ended September 30, 1998.
(d) Effective December 31, 1997, J.P. Morgan adopted SFAS No. 128, Earnings per
Share. SFAS No. 128 supersedes Accounting Principles Board Opinion (APB) No. 15
and related interpretations and replaces the computations of primary and fully
diluted EPS with basic and diluted EPS, respectively. Prior period amounts have
been restated.
(e) Excluding the impact of SFAS No. 115, the book value per common share was
$54.70, $53.73, and $55.31, at September 30, 1998, September 30, 1997, and June
30, 1998, respectively.
(f) Excluding the impact of SFAS No. 115, the annualized rate of return on
average common stockholders' equity was 5.4%, 15.0%, and 18.0% for the three
months ended September 30, 1998, September 30, 1997, and June 30, 1998,
respectively, and 10.8% and 15.4% for the nine months ended September 30, 1998
and 1997, respectively.
(g) Average debt investment securities are computed on historical amortized
cost, excluding the effects of SFAS No. 115 adjustments.
<PAGE> 8
J.P. Morgan & Co. Incorporated 8
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
In millions, except share data
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------
September 30 September 30 Increase/ June 30 Increase/
1998 1997 (Decrease) 1998 (Decrease)
----------------------------------------------------------------------
NET INTEREST REVENUE
<S> <C> <C> <C> <C> <C>
Interest revenue $ 3,249 $ 3,161 $ 88 $ 3,106 $ 143
Interest expense 2,917 2,689 228 2,816 101
- -----------------------------------------------------------------------------------------------------------------------------
Net interest revenue 332 472 (140) 290 42
NONINTEREST REVENUES
Trading revenue 119 657 (538) 877 (758)
Investment banking revenue 312 320 (8) 362 (50)
Investment management revenue 224 201 23 226 (2)
Fees and commissions 182 164 18 197 (15)
Investment securities revenue 136 67 69 68 68
Other revenue 71 (a) 35 36 133 (b) (62)
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest revenues 1,044 1,444 (400) 1,863 (819)
PROVISION FOR CREDIT LOSSES ($50 related to trading
account assets and $25 related to loans) (75) -- (75) -- (75)
Total revenues, net of interest expense
and provision for credit losses 1,301 1,916 (615) 2,153 (852)
OPERATING EXPENSES
Employee compensation and benefits 567 798 (231) 862 (295)
Net occupancy 84 77 7 78 6
Technology and communications 293 277 16 293 --
Other expenses 155 174 (19) 183 (28)
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,099 1,326 (227) 1,416 (317)
Income before income taxes 202 590 (388) 737 (535)
Income taxes 46 194 (148) 256 (210)
- -----------------------------------------------------------------------------------------------------------------------------
Net income 156 396 (240) 481 (325)
PER COMMON SHARE
Net income
Basic $ 0.81 $ 2.10 ($ 1.29) $ 2.57 ($ 1.76)
Diluted 0.75 1.96 (1.21) 2.36 (1.61)
Dividends declared 0.95 0.88 0.07 0.95 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Third quarter 1998 includes a pretax gain of $56 million ($34 million after
tax) related to the sale of the firm's investment management business in
Australia.
(b) Second quarter 1998 includes a pretax gain of $131 million ($79 million
after tax) related to the sale of the firm's global trust and agency services
business.
<PAGE> 9
J.P. Morgan & Co. Incorporated
9
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In millions, except share data
Nine months ended
---------------------------------------------
September 30 September 30 Increase/
1998 1997 (Decrease)
---------------------------------------------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $9,617 $9,082 $535
Interest expense 8,659 7,665 994
- -----------------------------------------------------------------------------------------------------
Net interest revenue 958 1,417 (459)
NONINTEREST REVENUES
Trading revenue 1,892 1,831 61
Investment banking revenue 1,020 840 180
Investment management revenue 661 584 77
Fees and commissions 569 468 101
Investment securities revenue 247 242 5
Other revenue 179 (a) 158 21
- -----------------------------------------------------------------------------------------------------
Total noninterest revenues 4,568 4,123 445
PROVISION FOR CREDIT LOSSES ($50 related to trading
account assets and $25 related to loans) (75) - (75)
Total revenues, net of interest expense
and provision for credit losses 5,451 5,540 (89)
OPERATING EXPENSES
Employee compensation and benefits 2,432 2,298 134
Net occupancy 313 254 59
Technology and communications 887 720 167
Other expenses 515 486 29
- -----------------------------------------------------------------------------------------------------
Total operating expenses 4,147 (b) 3,758 389
Income before income taxes 1,304 1,782 (478)
Income taxes 430 588 (158)
- -----------------------------------------------------------------------------------------------------
Net income 874 1,194 (320)
PER COMMON SHARE
Net income
Basic $ 4.65 $ 6.27 ($1.62)
Diluted 4.28 5.85 (1.57)
Dividends declared 2.85 2.64 0.21
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Nine months ended September 30, 1998 includes a third quarter pretax gain of
$56 million ($34 million after tax) related to the sale of the firm's investment
management business in Australia and a second quarter pretax gain of $131
million ($79 million after tax) related to the sale of the firm's global trust
and agency services business.
(b) Nine months ended September 30, 1998 includes a first quarter pretax charge
of $215 million ($129 million after tax) related to the restructuring of
business activities which was recorded as follows: $140 million in Employee
compensation and benefits, related to severance; $70 million in Net occupancy,
related to real estate write-offs; and $5 million in Technology and
communications, related to equipment write-offs.
<PAGE> 10
J.P. Morgan & Co. Incorporated
10
CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In millions, except share data September 30 June 30 December 31
1998 1998 1997
------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 3,405 $ 1,522 $ 1,758
Interest-earning deposits with banks 1,529 2,804 2,132
Debt investment securities available-for-sale carried at fair value
(cost: $25,231 at September 1998, $23,461 at June 1998, and $22,507
at December 1997) 25,641 23,698 22,768
Equity investment securities 951 1,012 1,085
Trading account assets, net of allowance for credit losses of $325
at September 1998, $327 at June 1998, and $350 at December 1997 128,746 123,475 111,854
Securities purchased under agreements to resell 42,985 36,537 39,002
Securities borrowed 47,744 40,215 38,375
Loans, net of allowance for credit losses of $404 at September 1998,
$392 at June 1998, and $546 at December 1997 30,291 31,029 31,032
Accrued interest and accounts receivable 6,888 7,536 4,962
Premises and equipment, net of accumulated depreciation of $1,339 at
September 1998, $1,389 at June 1998, and $1,379 at December 1997 1,888 1,855 1,838
Other assets 8,446 11,094 7,353
- ----------------------------------------------------------------------------------------------------------------------
Total assets 298,514 280,777 262,159
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 992 982 1,482
In offices outside the U.S. 776 1,254 744
Interest-bearing deposits:
In offices in the U.S. 3,699 6,316 9,232
In offices outside the U.S. 48,885 48,474 47,421
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 54,352 57,026 58,879
Trading account liabilities 78,552 74,997 71,141
Securities sold under agreements to repurchase ($82,740 at September
1998, $67,319 at June 1998, and $53,202 at December 1997) and
federal funds purchased 83,196 69,891 57,804
Commercial paper 12,324 12,738 6,622
Other liabilities for borrowed money 13,940 16,788 17,176
Accounts payable and accrued expenses 12,547 8,268 10,865
Long-term debt not qualifying as risk-based capital 23,284 21,301 18,246
Other liabilities, including allowance for credit losses of $185 3,035 2,223 4,129
- ----------------------------------------------------------------------------------------------------------------------
281,230 263,232 244,862
Liabilities qualifying as risk-based capital:
Long-term debt 4,615 4,679 4,743
Company-obligated mandatorily redeemable preferred securities of
subsidiaries 1,150 1,150 1,150
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 286,995 269,061 250,755
STOCKHOLDERS' EQUITY
Preferred stock (authorized shares: 10,000,000)
Adjustable rate cumulative preferred stock, $100 par value
(issued and outstanding: 2,444,300) 244 244 244
Variable cumulative preferred stock, $1,000 par value (issued
and outstanding: 250,000) 250 250 250
Fixed cumulative preferred stock, $500 par value (issued and
outstanding: 400,000) 200 200 200
Common stock, $2.50 par value (authorized shares: 500,000,000;
issued: 200,809,067 at September 1998, 200,807,317 at June 1998,
and 200,692,673 at December 1997) 502 502 502
Capital surplus 1,273 1,306 1,360
Common stock issuable under stock award plans 1,446 1,342 1,185
Retained earnings 9,716 9,743 9,398
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 292 376 432
Foreign currency translation, net of taxes (38) (44) (22)
- ----------------------------------------------------------------------------------------------------------------------
13,885 13,919 13,549
Less: treasury stock (25,857,272 shares at September 1998,
24,148,710 shares at June 1998, and 24,374,944 shares at
December 1997) at cost 2,366 2,203 2,145
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,519 11,716 11,404
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 298,514 280,777 262,159
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain prior period amounts have been reclassified to conform with the current
presentation.
<PAGE> 11
J.P. Morgan & Co. Incorporated
11
CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In millions, except share data September 30 December 31
1998 1997
-----------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,344 $ 1,663
Interest-earning deposits with banks 1,500 2,195
Debt investment securities available-for-sale carried at fair value 3,232 20,539
Trading account assets, net of allowance for credit losses of $325
at September 1998 and $350 at December 1997 99,264 88,995
Securities purchased under agreements to resell 37,473 28,045
Securities borrowed 11,923 13,831
Loans, net of allowance for credit losses of $402 at September 1998
and $545 at December 1997 30,123 30,851
Accrued interest and accounts receivable 5,676 4,534
Premises and equipment, net of accumulated depreciation of $1,153
at September 1998 and $1,208 at December 1997 1,714 1,669
Other assets 3,563 4,096
- -----------------------------------------------------------------------------------------------------------
Total assets 197,812 196,418
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
In offices in the U.S. 1,012 1,492
In offices outside the U.S. 783 752
Interest-bearing deposits:
In offices in the U.S. 3,721 10,156
In offices outside the U.S. 49,779 48,343
- -----------------------------------------------------------------------------------------------------------
Total deposits 55,295 60,743
Trading account liabilities 72,840 61,562
Securities sold under agreements to repurchase and federal funds purchased 28,180 26,017
Other liabilities for borrowed money 8,260 10,433
Accounts payable and accrued expenses 7,351 7,160
Long-term debt not qualifying as risk-based capital 10,681 14,320
Other liabilities, including allowance for credit losses of $185 1,315 2,713
- -----------------------------------------------------------------------------------------------------------
183,922 182,948
Long-term debt qualifying as risk-based capital 3,216 3,037
- -----------------------------------------------------------------------------------------------------------
Total liabilities 187,138 185,985
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 7,016 6,927
Accumulated other comprehensive income:
Net unrealized gains on investment securities, net of taxes 126 108
Foreign currency translation, net of taxes (38) (22)
- -----------------------------------------------------------------------------------------------------------
Total stockholder's equity 10,674 10,433
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity 197,812 196,418
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Member of the Federal Reserve System and the Federal Deposit Insurance
Corporation.
<PAGE> 12
12
SUMMARY OF SECTOR RESULTS
J.P. Morgan & Co. Incorporated
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Asset TOTAL
Finance Manage- CLIENT- Equity Proprietary TOTAL
and Market ment and FOCUSED Invest- Investing PROPRIETARY Corporate CONSOL-
In millions Advisory Making Servicing ACTIVITIES ments and Trading ACTIVITIES Items IDATED
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
THIRD QUARTER 1998
Total revenues $ 413(a) $ 260 $ 436 $ 1,109 $ 157 $ 121 $ 278 $ (86)(b) $ 1,301
Total expenses 281 387 335 1,003 10 40 50 46 1,099
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income 132 (127) 101 106 147 81 228 (132) 202
- ---------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER 1997
Total revenues 548 669 407 1,624 66 241 307 (15) 1,916
Total expenses 343 528 339 1,210 10 49 59 57 1,326
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income 205 141 68 414 56 192 248 (72) 590
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE),
THIRD QUARTER 1998 VS.
THIRD QUARTER 1997
Total revenues (135) (409) 29 (515) 91 (120) (29) (71) (615)
Total expenses (62) (141) (4) (207) -- (9) (9) (11) (227)
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income (73) (268) 33 (308) 91 (111) (20) (60) (388)
- ---------------------------------------------------------------------------------------------------------------------------------
=================================================================================================================================
SECOND QUARTER 1998
Total revenues 588 920 445 1,953 108 58 166 34(c) 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
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE),
THIRD QUARTER 1998 VS.
SECOND QUARTER 1998
Total revenues (175) (660) (9) (844) 49 63 112 (120) (852)
Total expenses (85) (178) (27) (290) (1) (8) (9) (18) (317)
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income (90) (482) 18 (554) 50 71 121 (102) (535)
- ---------------------------------------------------------------------------------------------------------------------------------
=================================================================================================================================
NINE MONTHS 1998
Total revenues 1,565(a) 2,099 1,283 4,947 290 417 707 (203)(d) 5,451
Total expenses 1,002 1,560 1,040 3,602 28 137 165 380 (e) 4,147
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income 563 539 243 1,345 262 280 542 (583) 1,304
- ---------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS 1997
Total revenues 1,480 2,050 1,174 4,704 239 633 872 (36) 5,540
Total expenses 996 1,457 959 3,412 28 140 168 178 3,758
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income 484 593 215 1,292 211 493 704 (214) 1,782
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE),
NINE MONTHS 1998 VS.
NINE MONTHS 1997
Total revenues 85 49 109 243 51 (216) (165) (167) (89)
Total expenses 6 103 81 190 -- (3) (3) 202 389
- ---------------------------------------------------------------------------------------------------------------------------------
Pretax income 79 (54) 28 53 51 (213) (162) (369) (478)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a third quarter 1998 provision for credit losses of $75 million.
(b) Includes a third quarter 1998 pretax gain of $56 million related to the sale
of the firm's investment management business in Australia.
(c) Includes a second quarter 1998 pretax gain of $131 million related to the
sale of the firm's global trust and agency services business.
(d) Includes 1998 pretax gains of $187 million related to business sales (see
notes b and c).
(e) Includes a first quarter 1998 pretax charge of $215 million related to the
restructuring of business activities.
We describe the activities of J.P. Morgan using five business sectors. Three of
these sectors - Finance and Advisory, Market Making, and Asset Management and
Servicing - focus on services we provide for clients, including positions taken
to facilitate client transactions. Two sectors comprise proprietary activities
that we conduct exclusively for our own account: Equity Investments and
Proprietary Investing and Trading. The Finance and Advisory sector includes
results of our advisory, debt and equity underwriting, and credit activities.
The Market Making sector includes results of our fixed income, emerging markets,
equities, foreign exchange, and commodities activities. The Asset Management and
Servicing sector includes results of our institutional investment management and
mutual funds, services for private clients, and securities and futures services.
Corporate Items includes revenues and expenses that have not been allocated to
business sectors, intercompany eliminations, equity in earnings of certain
affiliates, taxable-equivalent adjustment, and results of certain discontinued
businesses. For a complete description of our business sectors, please refer to
the J.P. Morgan & Co. Incorporated 1997 Annual report.
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.
<PAGE> 13
13
SUMMARY OF SECTOR RESULTS
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Third Third Second Nine Nine
Quarter Quarter Increase/ Quarter Increase/ Months Months Increase/
In millions 1998 1997 (Decrease) 1998 (Decrease) 1998 1997 (Decrease)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Advisory & Underwriting $ 268 $ 328 $ (60) $ 334 $ (66) $ 942 $ 804 $ 138
Global Credit 145(a) 220 (75) 254 (109) 623(a) 676 (53)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCE AND ADVISORY 413 548 (135) 588 (175) 1,565 1,480 85
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed Income 56 333 (277) 377 (321) 893 864 29
Emerging Markets (56) 111 (167) 149 (205) 330 420 (90)
Equities 119 106 13 205 (86) 440 416 24
Foreign Exchange 138 99 39 147 (9) 377 302 75
Commodities 3 20 (17) 42 (39) 59 48 11
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET MAKING 260 669 (409) 920 (660) 2,099 2,050 49
- ----------------------------------------------------------------------------------------------------------------------------------
Asset Management Services 270 259 11 277 (7) 798 758 40
Securities and Futures Services 166 148 18 168 (2) 485 416 69
- ----------------------------------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT AND
SERVICING 436 407 29 445 (9) 1,283 1,174 109
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CLIENT-FOCUSED
REVENUES 1,109 1,624 (515) 1,953 (844) 4,947 4,704 243
- ----------------------------------------------------------------------------------------------------------------------------------
EQUITY INVESTMENTS 157 66 91 108 49 290 239 51
- ----------------------------------------------------------------------------------------------------------------------------------
PROPRIETARY INVESTING AND
TRADING 121 241 (120) 58 63 417 633 (216)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL PROPRIETARY REVENUES 278 307 (29) 166 112 707 872 (165)
- ----------------------------------------------------------------------------------------------------------------------------------
CORPORATE ITEMS (86)(b) (15) (71) 34(c) (120) (203)(d) (36) (167)
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES 1,301 1,916 (615) 2,153 (852) 5,451 5,540 (89)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a third quarter 1998 provision for credit losses of $75 million.
(b) Includes a third quarter 1998 pretax gain of $56 million related to the sale
of the firm's investment management business in Australia.
(c) Includes a second quarter 1998 pretax gain of $131 million related to the
sale of the firm's global trust and agency services business.
(d) Includes 1998 pretax gains of $187 million related to business sales (see
notes b and c).
The activities of our Fixed Income, Emerging Markets, and Equities businesses
are reflected across several sectors.
Aggregate revenues for these businesses for the nine months ended September 30
follows:
Fixed Income - (1998) $1,284 million and (1997) $1,214 million; Emerging Markets
- - (1998) $301 million and (1997) $508 million; and, Equities - (1998) $700
million and (1997) $647 million.
Private clients accounted for revenues of approximately $175 million and $520
million for the three and nine months ended September 30, 1998, respectively. Of
this amount, $44 million and $144 million were recorded in the Finance and
Advisory and Market Making sectors for the three and nine months ended September
30, 1998, respectively.
- --------------------------------------------------------------------------------
TRADING REVENUE AND RELATED NET INTEREST REVENUE
J.P. Morgan & Co. Incorporated
The following table presents trading revenue, disaggregated by principal product
grouping 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 revenues,
including fees and commissions. As a result, this table does not reflect the
integrated nature of our business.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NET
FIXED FOREIGN PROPRIETARY TRADING INTEREST COMBINED
In millions INCOME EQUITIES EXCHANGE COMMODITIES TRADING REVENUE REVENUE TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Third Quarter 1998 ($95) ($6) $158 $ 5 $ 57 $ 119 $ 92 $ 211
Third Quarter 1997 416 51 78 17 95 657 118 775
- ----------------------------------------------------------------------------------------------------------------------
Second Quarter 1998 532 109 170 40 26 877 74 951
- ----------------------------------------------------------------------------------------------------------------------
Nine Months 1998 1,078 160 393 55 206 1,892 275 2,167
Nine Months 1997 1,012 332 270 32 185 1,831 399 2,230
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 14
J.P. Morgan & Co. Incorporated
14
INVESTMENT BANKING REVENUE
J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In millions
- ------------------------------------------------------------------------------
ADVISORY AND UNDERWRITING TOTAL INVESTMENT
SYNDICATION FEES REVENUE BANKING REVENUE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Third Quarter 1998 $229 $83 $312
Third Quarter 1997 188 132 320
- ------------------------------------------------------------------------------
Second Quarter 1998 198 164 362
- ------------------------------------------------------------------------------
Nine Months 1998 618 402 1,020
Nine Months 1997 471 369 840
- ------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
J.P. Morgan & Co. Incorporated
ASSET QUALITY
15
NONPERFORMING ASSETS
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
September 30 June 30 December 31 September 30
In millions 1998 1998 1997 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonperforming loans:
Commercial and industrial $ 12 $ 25 $ 55 $ 46
Banks and other financial institutions 2 2 30 5
Other 46 28 28 29
- ---------------------------------------------------------------------------------------------------
Total nonperforming loans 60 55 113 80
Other nonperforming assets,
primarily swaps with Asian banking
and other financial institutions 533 533 546 4
- ---------------------------------------------------------------------------------------------------
Total nonperforming assets 593 588 659 84
- ---------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATE ALLOWANCE FOR CREDIT LOSSES
J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Third quarter 1998 Third Nine Nine
- ------------------------------------------------------------------------------------------ quarter months months
Trading 1997 1998 1997
In millions account assets Loans Other Aggregate Aggregate Aggregate Aggregate
- ------------------------------------------------------------------------------------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $327 $392 $185 $904 $1,110 $1,081 $1,116
- ------------------------------------------------------------------------------------------- ------------ ---------- ----------
Provision for credit losses 50 25 - 75 - 75 -
- ------------------------------------------------------------------------------------------- ------------ ---------- ----------
Recoveries - 4 - 4 14 19 36
Charge-offs:
Commercial and industrial - (6) - (6) (17) (64) (38)
Banks and other financial institutions (31) - - (31) (10) (87) (16)
Other (21) - - (21) (1) (21) (2)
Losses on sale of loans, primarily
banks and other financial institutions - (11) - (11) - (89) -
- ------------------------------------------------------------------------------------------- ------------ ---------- ----------
Net charge-offs (52) (13) - (65) (14) (242) (20)
- ------------------------------------------------------------------------------------------- ------------ ---------- ----------
Ending balance, September 30 325 404 185 914 1,096 914 1,096
- ------------------------------------------------------------------------------------------- ------------ ---------- ----------
</TABLE>
COMPONENTS OF THE AGGREGATE ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
September 30 June 30 December 31
In millions 1998 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Specific counterparty allocations in the U.S. $ 38 $ 25 $ 58
Specific counterparty allocations outside the U.S. 229 238 228
- -------------------------------------------------------------------------------------------
Total specific counterparty allocations 267 263 286
- -------------------------------------------------------------------------------------------
Specific industry/country allocations 178 193 428
Expected loss allocations 304 252 224
General allocations 165 196 143
- -------------------------------------------------------------------------------------------
Total aggregate allowance 914 904 1,081
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
J.P. Morgan & Co. Incorporated
16
EMERGING MARKET CREDIT EXPOSURES
J.P. Morgan & Co. Incorporated
(preliminary)
The following tables present exposures to certain emerging markets based upon
management's view of total exposure as of September 30, 1998.
The management view includes the following cross-border and local exposures: the
notional or contract value of loans, commitments to extend credit, securities
purchased under agreements to resell, interest earning deposits with banks; the
fair values of trading account assets (cash securities and derivatives) and
investment securities; and other monetary assets. It also includes the impact of
credit derivatives, at their notional or contract value, where we have bought or
sold credit protection outside of the respective country. Trading assets reflect
the net of long and short positions of the same issuer. Management's view
differs from bank regulatory rules, which are established by the Federal
Financial Institutions Examination Council (FFIEC), because of its treatment of
credit derivatives, trading account short positions, and the use of fair value
versus cost of investment securities. In addition, management does not net local
funding or liabilities against any local exposures as allowed by the FFIEC.
<TABLE>
<CAPTION>
By type of financial instrument
- ---------------------------------------------------------------------------------------------------------------------------------
Credit
In billions Deriva- Other out- deriva- Commit- Local Total
September 30, 1998 Loans tives standings tives ments exposure exposure
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
China $ - $ 0.2 $ - $ - $ - $ - $ 0.2
Hong Kong 0.8 - 0.2 (0.1) 0.2 0.1 1.2
Indonesia 0.1 - - - 0.1 - 0.2
Malaysia - - 0.1 - - - 0.1
Philippines 0.1 0.1 - - - - 0.2
Singapore - - 0.2 - - - 0.2
South Korea 0.5 1.2 0.5 (0.5) - - 1.7
Taiwan - - - - 0.1 - 0.1
Thailand 0.1 0.2 0.1 - - - 0.4
Other - 0.1 0.2 - - - 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Asia, excluding Japan(a) 1.6 1.8 1.3 (0.6) 0.4 0.1 4.6
- ---------------------------------------------------------------------------------------------------------------------------------
Argentina 0.3 0.4 0.6 (0.5) - 0.3 1.1
Brazil 0.8 0.1 0.5 (0.3) - 1.1 2.2
Chile 0.6 0.1 0.1 (0.1) - - 0.7
Colombia 0.2 0.1 0.4 - - - 0.7
Mexico 0.5 0.3 0.4 (0.3) - 0.7 1.6
Other 0.4 - 0.3 - 0.1 - 0.8
- ---------------------------------------------------------------------------------------------------------------------------------
Total Latin America, excluding the Caribbean 2.8 1.0 2.3 (1.2) 0.1 2.1 7.1
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
By type of counterparty
- ----------------------------------------------------------------------------------------------
In billions Govern-
September 30, 1998 Banks ments Other Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
China $ 0.1 $ 0.1 $ - $ 0.2
Hong Kong 0.1 - 1.1 1.2
Indonesia - - 0.2 0.2
Malaysia 0.1 - - 0.1
Philippines 0.1 - 0.1 0.2
Singapore 0.1 - 0.1 0.2
South Korea 1.0 0.6 0.1 1.7
Taiwan 0.1 - - 0.1
Thailand 0.3 - 0.1 0.4
Other - - 0.3 0.3
- ----------------------------------------------------------------------------------------------
Total Asia, excluding Japan(a) 1.9 0.7 2.0 4.6
- ----------------------------------------------------------------------------------------------
Argentina - 0.4 0.7 1.1
Brazil 0.2 0.8 1.2 2.2
Chile - - 0.7 0.7
Colombia - 0.1 0.6 0.7
Mexico 0.1 0.4 1.1 1.6
Other 0.2 - 0.6 0.8
- ----------------------------------------------------------------------------------------------
Total Latin America, excluding the Caribbean 0.5 1.7 4.9 7.1
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Total exposures to Japan, based upon management's view, were $6.8 billion at
September 30, 1998.
Total exposures to South Africa, based upon management's view, were $1.6
billion at September 30, 1998.
