1 July 11, 1996 J.P. MORGAN REPORTS 1996 SECOND QUARTER RESULTS J.P. Morgan & Co. Incorporated reported net income of $440 million in the second quarter of 1996, 40% higher than in the second quarter of 1995. Earnings per share for the quarter were $2.14 versus $1.56 a year ago. Net income for the first six months of 1996 totaled $879 million, up 54% from $570 million a year earlier. Earnings per share in the first six months were $4.28 versus $2.83 a year ago. Six-month earnings in 1995 included a first quarter charge of $55 million ($33 million after tax), or $0.17 per share, related primarily to severance. "The global expansion of our business with clients generated strong, diversified earnings growth in the first half of the year," said Douglas A. Warner III, chairman. "We have made it a priority to earn an increasing share of our clients' business, and that drive is producing results across the range of J.P. Morgan's market-making, investment banking, and investment management activities." SECOND QUARTER RESULTS AT A GLANCE First Second quarter quarter In millions of dollars, except per share data 1996 1995 1996 ---------------------------------------------------------------------------------------------------- Revenues $ 1,761 $ 1,449 $ 1,740 Operating expenses (1,104) (984) (1,085) Income taxes (217) (150) (216) ---------------------------------------------------------------------------------------------------- Net income $ 440 $ 315 $ 439 Net income per share $2.14 $1.56 $2.13 ---------------------------------------------------------------------------------------------------- Dividends declared per share $0.81 $0.75 $0.81 REVENUES rose 22% in the second quarter from a year ago. - Trading revenue more than doubled to $697 million as client activity remained strong. Combined trading and related net interest revenue rose to $739 million from $333 million. - Investment banking revenue rose 79% to $210 million. - Investment management fees grew 25%. Operational service and credit-related fees were lower as a result of the sale of the firm's custody business in late 1995. - Net interest revenue declined 22% to $397 million. OPERATING EXPENSES were up 12% from a year ago, as incentive compensation accruals for the second quarter increased in line with higher earnings. IN OTHER DEVELOPMENTS, Morgan announced in May an agreement in principle to form a strategic alliance to manage activities that represent about a third of the firm's $1 billion of annual technology expenditures. Morgan expects to achieve aggregate savings of about 15% on projected technology costs over the seven-year life of the agreement. The remainder of this release contains information on specific areas of results, a financial summary, and the consolidated financial statements. - -------------------------------------------------------------------------------- Press contact: William McBride 212/648-9537 Investor contact: Ann B. Patton 212/648-9446 2 2 REVENUES Revenues totaled $1.761 billion in the second quarter of 1996, up 22% from $1.449 billion a year earlier. NET INTEREST REVENUE, the aggregate of interest revenue and expense generated by the firm's asset and liability management, credit-related, and trading activities, declined 22% to $397 million from the second quarter of 1995. Asset and liability management was the principal factor in the decline as higher-yielding positions continued to mature. TRADING REVENUE rose to $697 million in the second quarter from $305 million a year earlier. First-half trading revenue also more than doubled from the first six months of 1995. Revenues in both developed and emerging markets were strong and diversified across nearly all the firm's trading products. Reported trading revenue does not include net interest revenue associated with trading activities, which was $42 million in the second quarter of 1996 and $28 million a year ago. Combined trading and related net interest revenue rose to $739 million from $333 million a year earlier. (For details, see the table of combined trading and related net interest revenue by principal product groupings on page 10.) Combined revenue from fixed income rose to $385 million in the second quarter from $152 million in the year-earlier quarter, driven by continued client demand for swaps and for government and corporate securities. Combined revenue from equities more than doubled to $115 million from $56 million a year earlier, reflecting strong demand for equity derivative products. Foreign exchange combined revenue totaled $114 million versus $65 million in the second quarter of 1995. Commodities trading, which posted combined revenue of $11 million in the second quarter a year ago, broke even on a combined revenue basis in the period just ended. Combined revenue from the firm's proprietary trading unit more than doubled to $125 million from $49 million in the second quarter of 1995, due to favorable positioning, primarily in the United States and Europe. INVESTMENT BANKING REVENUE increased 79% to $210 million in the second quarter. Underwriting revenue grew to $111 million from $41 million a year ago, as Morgan raised more debt and equity capital for a broad range of clients. Advisory fees in the second quarter rose to $99 million from $76 million a year earlier. For the first half of 1996, J.P. Morgan ranked as the sixth largest underwriter of U.S. debt and equity issues, according to Securities Data Co. In advisory activities, Securities Data Co. ranked J.P. Morgan seventh in completed mergers and acquisitions worldwide and fourth in pending transactions in the first half. CREDIT-RELATED FEES were $38 million in the second quarter, 7% lower than in the second quarter of 1995 because of the sale of the custody business. INVESTMENT MANAGEMENT FEES advanced 25% to $172 million from a year ago, as assets under management rose, primarily from net new business. Assets under management at June 30, 1996, were approximately $190 billion. OPERATIONAL SERVICE FEES in the second quarter totaled $104 million, 26% lower than in the second quarter of 1995. Excluding revenues associated with the custody business, which was sold in 1995, operational service fees for the second quarter rose 5% on increased brokerage commissions. 3 3 NET INVESTMENT SECURITIES LOSSES were $51 million in the second quarter, versus net gains of $33 million in the second quarter of 1995. The losses in the second quarter of 1996 resulted primarily from the sale of government agency securities to realign the risk profile of the portfolio. OTHER REVENUE was $194 million in the second quarter, compared with $167 million in the 1995 second quarter. The 1996 second quarter reflected net equity investment securities gains of $118 million, compared with $132 million in the same quarter of 1995. OPERATING EXPENSES Operating expenses were $1.104 billion in the second quarter of 1996, up 12% from a year earlier, primarily reflecting higher incentive compensation accruals in line with higher earnings. Excluding the 1995 expenses associated with the custody business, operating expenses were up 18%. Expenses other than employee compensation and benefits increased due to higher levels of business activity. As previously reported, the firm has agreed in principle to form a strategic alliance to manage parts of the firm's global technology infrastructure. Morgan expects to achieve aggregate savings of approximately 15% on projected technology costs over the life of the agreement, after an estimated $100 million transition expense. The transition expense is expected to be recorded in the 1996 third quarter upon completion of a final agreement. With the establishment of the alliance, some costs previously included in employee compensation and benefits will be reflected in technology and communications expenses. At June 30, 1996, staff totaled 15,391 employees compared with 16,267 employees at June 30, 1995. Income tax expense of $217 million in the second quarter was based on an effective tax rate of 33% versus 32% in the second quarter of 1995. ASSETS Total assets were $199 billion at June 30, 1996, compared with $205 billion at March 31, 1996. Nonperforming assets decreased by $22 million to $134 million during the second quarter as assets newly classified as nonperforming were more than offset by repayments and loan sales. No provision for credit losses was deemed necessary in the 1996 second quarter. The allowance for credit losses was $1.125 billion at June 30, 1996. (For details, see asset quality tables on page 11.) CAPITAL At June 30, 1996, J.P. Morgan's estimated Tier 1 and total risk-based capital ratios were 8.0% and 11.7%, respectively, compared with Tier 1 and total risk- based capital ratios of 8.3% and 12.2%, respectively, at March 31, 1996. The June 30, 1996, leverage ratio was 6.2%, unchanged from March 31, 1996. At June 30, 1996, stockholders' equity included approximately $367 million of net unrealized appreciation on debt investment and marketable equity investment securities, net the related deferred tax liability of $202 million. Net unrealized appreciation was $470 million at March 31, 1996. The unrealized appreciation on debt investment securities was $226 million and $331 million at June 30, 1996, and March 31, 1996, respectively. The unrealized appreciation on marketable equity investment securities was $343 million and $429 million at June 30, 1996, and March 31, 1996, respectively. 4 4 # # # J.P. Morgan is a global banking firm that serves clients with complex financial needs through an integrated range of advisory, financing, trading, investment, and related capabilities. Attached are the financial summary, the financial statements, the combined trading and related net interest revenue table, and the asset quality tables. J.P. Morgan news releases, including quarterly financial results, are available on the Internet (http://www.jpmorgan.com). 5 5 FINANCIAL SUMMARY J.P. Morgan & Co. Incorporated Dollars in millions, except per share data Second Quarter First Six Months --------------------------- Quarter ---------------------------- 1996 1995 1996 1996 1995 ------------------------------------------------------------------------- Net income $440 $315 $439 $879 $570 PER COMMON SHARE Net income (a) $ 2.14 $ 1.56 $ 2.13 $4.28 $2.83 Dividends declared 0.81 0.75 0.81 1.62 1.50 Book value (b) 52.40 48.14 51.57 - -------------------------------------------------------------------------------------------------------------------- Weighted-average number of common and common equivalent shares outstanding 202,063,927 198,241,301 202,133,593 202,048,817 197,724,069 - -------------------------------------------------------------------------------------------------------------------- Dividends declared on common stock $151 $141 $152 $303 $282 Dividends declared on preferred stock 8 6 8 16 12 SELECTED RATIOS Annualized rate of return on average common stockholders' equity (c) 17.1 % 13.4 % 17.2 % 17.1 % 12.3 % As % of period-end total assets: Common equity 5.2 5.6 5.0 Total equity 5.5 5.9 5.3 Regulatory capital ratios (d) Tier 1 risk-based capital ratio 8.0 8.7 8.3 Total risk-based capital ratio 11.7 12.8 12.2 Leverage ratio 6.2 6.0 6.2 - ---------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Debt investment securities (e) $ 25,880 $ 20,659 $ 24,298 $ 25,096 $ 21,684 Loans 28,514 24,639 27,326 27,920 24,156 Total interest-earning assets 167,087 128,235 162,606 164,854 132,169 Total assets 209,691 174,502 204,836 207,284 175,095 Total interest-bearing liabilities 158,123 124,177 154,804 156,448 126,714 Total liabilities 198,807 164,753 194,160 196,504 165,437 Common stockholders' equity 10,190 9,255 10,065 10,127 9,164 Total stockholders' equity 10,884 9,749 10,676 10,780 9,658 Net interest earnings (fully taxable basis) 419 535 418 837 1,064 Net yield on interest-earning assets 1.01 % 1.67 % 1.03 % 1.02 % 1.62 % - ------------------------------------------------------------------------------------------------------------------ Employees at period-end 15,391 16,267 15,431 - ---------------------------------------------------------------------------------------------------------------- (a) Earnings per share amounts represent both primary and fully diluted earnings per share, except for the six months ended June 30, 1996 and 1995. Fully diluted earnings per share were $4.27 and $2.81 for the six months ended June 30, 1996 and 1995, respectively. (b) Excluding the impact of SFAS No. 115, book value per common share would have been $50.54, $45.78, and $49.18 for the three months ended June 30, 1996, June 30, 1995, and March 31, 1996, respectively. (c) Excluding the impact of SFAS No. 115, the annualized rate of return on average common stockholders' equity would have been 17.8%, 14.1%, and 18.1% for the three months ended June 30, 1996, June 30, 1995, and March 31, 1996, respectively, and 18.0% and 12.9% for the six months ended June 30, 1996 and 1995, respectively. (d) In accordance with Federal Reserve Board guidelines, these ratios exclude the equity, assets and off-balance-sheet exposures of J.P. Morgan Securities, Inc. and the effect of SFAS No. 115. Risk-based capital ratios for June 30, 1996, are estimates. (e) Average debt investment securities are computed based on historical amortized cost, excluding the effects of SFAS No. 115 adjustments. 6 6 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated In millions, except per share data Three months ended --------------------------------------------------------------------------------- June 30 June 30 Increase/ March 31 Increase/ 1996 1995 (Decrease) 1996 (Decrease) --------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue $2,559 $2,405 $154 $2,554 $ 5 Interest expense 2,162 1,897 265 2,158 4 - --------------------------------------------------------------------------------------------------------------------------------- Net interest revenue 397 508 (111) 396 1 NONINTEREST REVENUE Trading revenue 697 305 392 758 (61) Investment banking revenue 210 117 93 201 9 Credit-related fees 38 41 (3) 38 - Investment management fees 172 138 34 157 15 Operational service fees 104 140 (36) 113 (9) Net investment securities gains (losses) (51) 33 (84) 12 (63) Other revenue 194 167 27 65 129 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue 1,364 941 423 1,344 20 Total revenue 1,761 1,449 312 1,740 21 OPERATING EXPENSES Employee compensation and benefits 737 616 121 730 7 Net occupancy 76 79 (3) 73 3 Technology and communications 158 165 (7) 158 - Other expenses 133 124 9 124 9 - --------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 1,104 984 120 1,085 19 Income before income taxes 657 465 192 655 2 Income taxes 217 150 67 216 1 - --------------------------------------------------------------------------------------------------------------------------------- Net income 440 315 125 439 1 PER COMMON SHARE Net income (a) $2.14 $1.56 $0.58 $2.13 $0.01 Dividends declared 0.81 0.75 0.06 0.81 - - --------------------------------------------------------------------------------------------------------------------------------- (a) Earnings per share amounts represent both primary and fully diluted earnings per share. 7 7 CONSOLIDATED STATEMENT OF INCOME J.P. Morgan & Co. Incorporated In millions, except per share data Six months ended --------------------------------------------------- June 30 June 30 Increase/ 1996 1995 (Decrease) --------------------------------------------------- NET INTEREST REVENUE Interest revenue $5,113 $4,875 $238 Interest expense 4,320 3,867 453 - -------------------------------------------------------------------------------------------------------- Net interest revenue 793 1,008 (215) NONINTEREST REVENUE Trading revenue 1,455 608 847 Investment banking revenue 411 231 180 Credit-related fees 76 84 (8) Investment management fees 329 268 61 Operational service fees 217 280 (63) Net investment securities gains (losses) (39) 42 (81) Other revenue 259 316 (57) - -------------------------------------------------------------------------------------------------------- Total noninterest revenue 2,708 1,829 879 Total revenue 3,501 2,837 664 OPERATING EXPENSES Employee compensation and benefits 1,467 1,242 225 Net occupancy 149 159 (10) Technology and communications 316 337 (21) Other expenses 257 248 9 - -------------------------------------------------------------------------------------------------------- Total operating expenses 2,189 1,986 203 Income before income taxes 1,312 851 461 Income taxes 433 281 152 - -------------------------------------------------------------------------------------------------------- Net income 879 570 309 PER COMMON SHARE Net income (a) $4.28 $2.83 $1.45 Dividends declared 1.62 1.50 0.12 - -------------------------------------------------------------------------------------------------------- (a) See Financial summary for per common share data assuming full dilution. 8 8 CONSOLIDATED BALANCE SHEET J.P. Morgan & Co. Incorporated Dollars in millions June 30 March 31 December 31 1996 1996 1995 -------------------------------------------- ASSETS Cash and due from banks $ 651 $ 732 $ 1,535 Interest-earning deposits with banks 1,427 1,183 1,986 Debt investment securities available for sale carried at fair value (Cost: $22,486 at June 1996, $27,115 at March 1996, and $24,154 at December 1995) 22,712 27,446 24,638 Trading account assets 69,375 69,844 69,408 Securities purchased under agreements to resell ( $36,488 at June 1996, $39,683 at March 1996, and $32,157 at December 1995) and federal funds sold 36,544 39,692 32,157 Securities borrowed 25,620 22,901 19,830 Loans 29,588 28,645 23,453 Less: allowance for credit losses 1,125 1,117 1,130 - ------------------------------------------------------------------------------------------------------------------------ Net loans 28,463 27,528 22,323 Customers' acceptance liability 236 339 237 Accrued interest and accounts receivable 3,738 4,766 3,539 Premises and equipment 3,387 3,354 3,339 Less: accumulated depreciation 1,492 1,445 1,412 - ------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 1,895 1,909 1,927 Other assets 8,104 8,407 7,299 - ------------------------------------------------------------------------------------------------------------------------ Total assets 198,765 204,747 184,879 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 1,906 2,784 3,287 In offices outside the U.S. 750 677 744 Interest-bearing deposits: In offices in the U.S. 2,498 1,765 2,003 In offices outside the U.S. 43,303 44,978 40,404 - ------------------------------------------------------------------------------------------------------------------------ Total deposits 48,457 50,204 46,438 Trading account liabilities 44,267 46,766 45,289 Securities sold under agreements to repurchase ( $51,604 at June 1996, $55,952 at March 1996, and $40,803 at December 1995) and federal funds purchased 55,114 58,765 45,099 Commercial paper 5,102 4,229 2,801 Other liabilities for borrowed money 16,510 15,659 15,129 Accounts payable and accrued expenses 6,159 7,265 5,643 Liability on acceptances 236 339 237 Long-term debt not qualifying as risk-based capital 6,109 5,710 5,737 Other liabilities 2,047 1,272 4,465 - ------------------------------------------------------------------------------------------------------------------------ 184,001 190,209 170,838 Long-term debt qualifying as risk-based capital 3,733 3,691 3,590 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 187,734 193,900 174,428 STOCKHOLDERS' EQUITY Preferred stock (authorized shares: 10,400,000 at June 1996 and March 1996, and 10,000,000 at December 1995): Adjustable rate cumulative preferred stock, $100 par value (issued and outstanding: 2,444,300) 244 244 244 Variable cumulative preferred stock, $1,000 par value (issued and outstanding: 250,000) 250 250 250 Fixed cumulative preferred stock, $500 par value (issued and outstanding: 400,000) 200 200 -- Common stock, $2.50 par value (authorized shares: 500,000,000; issued: 200,683,373 at June 1996, 200,682,873 at March 1996, and 200,678,373 at December 1995) 502 502 502 Capital surplus 1,435 1,432 1,430 Retained earnings 8,281 8,006 7,731 Net unrealized gains on investment securities, net of taxes 367 470 566 Other 686 593 552 - ------------------------------------------------------------------------------------------------------------------------ 11,965 11,697 11,275 Less: treasury stock (14,083,799 shares at June 1996, 13,382,388 shares at March 1996 and 13,562,755 shares at December 1995) at cost 934 850 824 - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 11,031 10,847 10,451 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity 198,765 204,747 184,879 - ------------------------------------------------------------------------------------------------------------------------ 9 9 CONSOLIDATED STATEMENT OF CONDITION Morgan Guaranty Trust Company of New York Dollars in millions June 30 December 31 1996 1995 --------------------------------- ASSETS Cash and due from banks $ 659 $ 1,429 Interest-earning deposits with banks 1,428 1,995 Debt investment securities available for sale carried at fair value 17,824 23,767 Trading account assets 55,999 55,373 Securities purchased under agreements to resell and federal funds sold 23,613 20,996 Loans 29,437 23,319 Less: allowance for credit losses 1,125 1,129 - ------------------------------------------------------------------------------------------------------------------------ Net loans 28,312 22,190 Customers' acceptance liability 236 237 Accrued interest and accounts receivable 3,651 3,420 Premises and equipment 2,999 2,967 Less: accumulated depreciation 1,294 1,232 - ------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 1,705 1,735 Other assets 5,061 4,571 - ------------------------------------------------------------------------------------------------------------------------ Total assets 138,488 135,713 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES Noninterest-bearing deposits: In offices in the U.S. 1,908 3,275 In offices outside the U.S. 788 839 Interest-bearing deposits: In offices in the U.S. 2,510 1,975 In offices outside the U.S. 43,670 40,985 - ------------------------------------------------------------------------------------------------------------------------ Total deposits 48,876 47,074 Trading account liabilities 39,240 39,197 Securities sold under agreements to repurchase and federal funds purchased 18,456 20,274 Other liabilities for borrowed money 10,606 8,509 Accounts payable and accrued expenses 4,346 4,187 Liability on acceptances 236 237 Long-term debt not qualifying as risk-based capital 2,809 2,786 Other liabilities 1,974 3,324 - ------------------------------------------------------------------------------------------------------------------------ 126,543 125,588 Long-term debt qualifying as risk-based capital 2,596 1,659 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 129,139 127,247 STOCKHOLDER'S EQUITY Preferred stock, $100 par value (authorized shares: 2,500,000) - - Common stock, $25 par value (authorized shares: 11,000,000; outstanding: 10,599,027 at June 1996, and authorized and outstanding: 10,000,000 at December 1995) 265 250 Surplus 3,155 2,820 Undivided profits 5,797 5,136 Net unrealized gains on investment securities, net of taxes 135 264 Foreign currency translation (3) (4) - ------------------------------------------------------------------------------------------------------------------------ Total stockholder's equity 9,349 8,466 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholder's equity 138,488 135,713 - ------------------------------------------------------------------------------------------------------------------------ Prior period balances were restated to reflect the merger of J.P. Morgan Delaware with Morgan Guaranty Trust Company effective June 1996. Member of the Federal Reserve System and the Federal Deposit Insurance Corporation. 10 10 COMBINED TRADING AND RELATED NET INTEREST REVENUE J.P. Morgan & Co. Incorporated Dollars in millions Fixed Foreign Proprietary Income Equities Exchange Commodities Unit Total - -------------------------------------------------------------------------------------------------------------------------- Second Quarter 1996 Trading revenue $331 $124 $109 $5 $128 $697 Net interest revenue* 54 (9) 5 (5) (3) 42 - -------------------------------------------------------------------------------------------------------------------------- Combined total 385 115 114 - 125 739 - -------------------------------------------------------------------------------------------------------------------------- Second Quarter 1995 Trading revenue 96 96 62 12 39 305 Net interest revenue 56 (40) 3 (1) 10 28 - -------------------------------------------------------------------------------------------------------------------------- Combined total 152 56 65 11 49 333 - -------------------------------------------------------------------------------------------------------------------------- Six Months 1996 Trading revenue 864 218 177 39 157 1,455 Net interest revenue* 123 (52) 10 (7) (2) 72 - -------------------------------------------------------------------------------------------------------------------------- Combined total 987 166 187 32 155 1,527 - -------------------------------------------------------------------------------------------------------------------------- Six Months 1995 Trading revenue 153 138 164 31 122 608 Net interest revenue 122 (57) 7 2 15 89 - -------------------------------------------------------------------------------------------------------------------------- Combined total 275 81 171 33 137 697 * Estimated 11 11 ASSET QUALITY J.P. Morgan & Co. Incorporated NONPERFORMING ASSETS June 30 March 31 December 31 June 30 Dollars in millions 1996 1996 1995 1995 ---------- ---------- ----------- ---------- Impaired loans: Commercial and industrial $ 96 $110 $ 67 $127 Other 36 42 48 56 - -------------------------------------------------------------------------------------- 132 152 115 183 Restructuring countries 2 4 2 3 - -------------------------------------------------------------------------------------- Total impaired loans 134 156 117 186 Other nonperforming assets - - 1 1 - -------------------------------------------------------------------------------------- Total nonperforming assets 134 156 118 187 - -------------------------------------------------------------------------------------- ALLOWANCE FOR CREDIT LOSSES June 30 March 31 December 31 June 30 Dollars in millions 1996 1996 1995 1995 ---------- ---------- ----------- ---------- Allowance for credit losses $1,125 $1,117 $1,130 $1,132 - -------------------------------------------------------------------------------------- Second Quarter Six Months ----------------------- ----------------------- 1996 1995 1996 1995 ---------- ---------- ----------- ---------- Charge-offs: Commercial and industrial ($1) ($14) ($16) ($20) Other - (4) (3) (6) Recoveries 9 18 14 27 - --------------------------------------------------------------------------------------