-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AdYmQwoifMZcAsmuneeGzTkMLsIa7T8URyY1sJ63I3wU/pnAJOoKdP1ec3DPj04n IMSW6vu/yZrlr9rMfw9NEA== 0000950128-96-000224.txt : 19960320 0000950128-96-000224.hdr.sgml : 19960320 ACCESSION NUMBER: 0000950128-96-000224 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960319 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MELLON BANK CORP CENTRAL INDEX KEY: 0000064782 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251233834 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07410 FILM NUMBER: 96536200 BUSINESS ADDRESS: STREET 1: ONE MELLON BANK CENTER STREET 2: 500 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15258-0001 BUSINESS PHONE: 4122345000 FORMER COMPANY: FORMER CONFORMED NAME: MELLON NATIONAL CORP DATE OF NAME CHANGE: 19841014 10-K405 1 MELLON BANK 10-K405 1 THIS REPORT HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION VIA EDGAR - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------- FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 [Fee Required] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 or [ ] Transition Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 [No Fee Required] Commission File No. 1-7410 MELLON BANK CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 25-1233834 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Mellon Bank Center Pittsburgh, Pennsylvania 15258-0001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code - (412) 234-5000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $0.50 Par Value New York Stock Exchange Preferred Stock, Series I, $1.00 Par Value New York Stock Exchange Preferred Stock, Series J, $1.00 Par Value New York Stock Exchange Preferred Stock, Series K, $1.00 Par Value New York Stock Exchange 7-1/4% Convertible Subordinated Capital Notes Due 1999 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of February 29, 1996, there were 133,523,754 shares outstanding of the registrant's voting common stock, $0.50 par value per share, of which 131,016,721 common shares having a market value of $7,320,559,286 were held by nonaffiliates. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the following parts of this Annual Report. Mellon Bank Corporation 1996 Proxy Statement-Part III Mellon Bank Corporation 1995 Annual Report to Shareholders-Parts I, II and IV - ------------------------------------------------------------------------------- 2 The Form 10-K filed with the Securities and Exchange Commission contains the Exhibits listed on the Index to Exhibits beginning on page 22, including the Financial Review and Statements and Notes; Principal Locations and Operating Entities; Directors and Senior Management Committee; and Corporate Information Sections of the Registrant's 1995 Annual Report to Shareholders. Copies of the Registrant's 1995 Annual Report to Shareholders and the Proxy Statement for its 1996 Annual Meeting may be obtained free of charge by writing to: Secretary, Mellon Bank Corporation Room 1820 One Mellon Bank Center 500 Grant Street Pittsburgh, Pennsylvania 15258-0001 3 MELLON BANK CORPORATION Form 10-K Index - -------------------------------------------------------------------------------
PART I Page ---- Item 1. Business Description of Business 3 Supervision and Regulation 5 Competition 8 Employees 8 Statistical Disclosure by Bank Holding Companies 8 Item 2. Properties 14 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Executive Officers of the Registrant 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 18 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III Item 10. Directors and Executive Officers of the Registrant 19 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 19 Item 13. Certain Relationships and Related Transactions 19 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
2 4 PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS Mellon Bank Corporation (the "Corporation") is a multibank holding company incorporated under the laws of Pennsylvania in August 1971 and registered under the Federal Bank Holding Company Act of 1956, as amended. The Corporation provides a comprehensive range of financial products and services in domestic and selected international markets. The Corporation's banking subsidiaries are located in Pennsylvania, Massachusetts, Delaware, Maryland, and New Jersey. Other subsidiaries are located in key business centers throughout the United States and abroad. At December 31, 1995, the Corporation was the twenty-third largest bank holding company in the United States in terms of assets. The Corporation's principal direct subsidiaries are Mellon Bank, N.A. ("Mellon Bank"), The Boston Company, Inc. ("TBC"), Mellon Bank (DE) National Association, Mellon Bank (MD), Mellon PSFS (NJ) National Association and a number of companies known as Mellon Financial Services Corporation. The Corporation also owns a federal savings bank headquartered in New Jersey, Mellon Bank, F.S.B. The Dreyfus Corporation ("Dreyfus"), one of the nation's largest mutual fund companies, is a wholly owned subsidiary of Mellon Bank. The Corporation's banking subsidiaries engage in retail financial services, commercial banking, trust and investment management services, residential real estate loan financing, mortgage servicing, mutual fund activities and various securities-related activities. Mellon Bank, which has its executive offices in Pittsburgh, Pennsylvania, became a subsidiary of the Corporation in November 1972. With its predecessors, Mellon Bank has been in business since 1869. Mellon Bank is comprised of six operating regions throughout Pennsylvania. Dreyfus, headquartered in New York, New York, serves primarily as an investment adviser, manager and administrator of mutual funds. TBC, through Boston Safe Deposit and Trust Company ("BSDT") and other subsidiaries, engages in the business of institutional trust and custody, institutional asset management, private investment management and banking services. TBC is headquartered in Boston, Massachusetts. Mellon Bank (DE) National Association, headquartered in Wilmington, Delaware, serves consumer and small to midsize commercial markets throughout Delaware and provides nationwide cardholder processing services. Mellon Bank (MD) is headquartered in Rockville, Maryland, and serves consumer and small to midsize commercial markets throughout Maryland. Mellon Bank (MD) has a Maryland state charter and is a member of the Federal Reserve System. Mellon Bank, F.S.B., headquartered in Paramus, New Jersey, provides corporate trust and personal trust services and serves consumer and small to midsize commercial markets. Mellon PSFS (NJ) National Association serves consumer and small to midsize commercial markets in southern New Jersey. The Corporation's banking subsidiaries operate 1,129 domestic retail banking locations, including 459 retail offices. The deposits of the national banking subsidiaries, BSDT, Mellon Bank (MD) and Mellon Bank, F.S.B. are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law. Other subsidiaries of the Corporation provide a broad range of bank-related services -- including equipment leasing, commercial loan financing, stock transfer services, cash management and numerous trust and investment management services. The types of financial products and services offered by the Corporation's subsidiaries are subject to change. For analytical purposes, management has focused the Corporation into four core business sectors: Consumer Investment Services, Consumer Banking Services, Corporate/Institutional Investment Services and Corporate/Institutional Banking Services. Further information regarding the Corporation's core business sectors, as well as certain non-core sectors such as Real Estate Workout, is presented in the Business Sectors section on pages 26 through 28 of the Corporation's 1995 Annual Report to Shareholders, which pages are incorporated herein by reference. A brief discussion of the business sectors is presented on the following page. There is considerable interrelationship among these sectors. 3 5 DESCRIPTION OF BUSINESS (CONTINUED) CONSUMER INVESTMENT SERVICES The Corporation provides a broad array of personal trust services, investment services and retail mutual funds to consumers. These products and services are offered principally through the private asset management trust group of Mellon Bank and BSDT, through Dreyfus and throughout the Corporation's retail banking network. CONSUMER BANKING SERVICES The Consumer Banking Services sector includes consumer lending, business banking, branch banking, credit card, mortgage loan origination and servicing, and jumbo residential mortgage lending. The consumer lending, branch banking and small business banking services primarily are offered through the Corporation's retail banking network which is comprised of 396 retail branches, 62 supermarket facilities, 670 ATM's, 9 loan sales offices and a telephone banking center. This network is primarily located in the Central Atlantic region of the United States. This banking network provides a full range of products to individuals including short- and long-term credit facilities, credit cards, mortgages, safe deposit facilities and access to ATM's. Jumbo residential mortgage lending is offered nationally through the private asset management representative offices. This sector also includes the core servicing function of the Corporation's mortgage banking operations located in Kansas City, Houston, Denver, Cleveland and Paramus, through which the Corporation originates and services residential and commercial mortgages for institutional investors and makes residential loans nationwide. CORPORATE/INSTITUTIONAL INVESTMENT SERVICES The Corporate/Institutional Investment Services sector serves the institutional markets (including employee benefit plans) by providing institutional trust and custody, institutional asset and institutional mutual fund management and administration, securities lending, foreign exchange, cash management and stock transfer services. The Corporation's subsidiaries provide trust and investment management services while operating under the umbrella name "Mellon Trust"; in addition, the subsidiaries provide institutional mutual fund management through Dreyfus. The Corporation also owns a number of subsidiaries that provide a variety of active and passive equity and fixed income investment management services, including management of international securities. Through the Global Cash Management department, the Corporation offers a broad range of cash management services, including remittance processing, collections and disbursements, check processing and electronic services. The Corporation's subsidiaries also provide services relating primarily to defined contribution employee benefit plans under the umbrella name "Dreyfus Retirement Services." Stock transfer services are provided in the United States through its joint venture operating under the name of Chemical Mellon Shareholder Services and in Canada through The R-M Trust Company. CORPORATE/INSTITUTIONAL BANKING SERVICES Corporate/Institutional Banking Services includes large corporate and middle market lending, asset-based lending, certain capital markets and leasing activities, commercial real estate lending and insurance premium financing. The Corporation provides lending and other institutional banking services to domestic and selected international markets through its Corporate Banking, Institutional Banking, Capital Markets and Leasing departments. These markets generally include large domestic commercial and industrial customers, U.S. operations of foreign companies, multinational corporations, state and local governments and various financial institutions (including banks, securities broker/dealers, insurance companies, finance companies and mutual funds). The Corporation also offers corporate finance and rate risk management products; syndicates, participates out and sells loans; offers a variety of capital markets products and services, including private placement and money market transactions; and provides equipment leasing, financing and lease advisory services. The Corporation maintains foreign offices in London, Tokyo, Hong Kong, Toronto, and Grand Cayman, British West Indies. Through these offices, the Corporation conducts trade finance activities, engages in correspondent banking and provides corporate banking and capital markets services. Included in this sector is a nationwide asset-based lending division which provides secured lending, principally through accounts receivable 4 6 DESCRIPTION OF BUSINESS (CONTINUED) and inventory financing. As part of this sector, Middle Market Banking serves companies with annual sales between $10 million and $250 million and the health care industry on a national basis. Real Estate lending consists of the Corporation's commercial real estate lending activities, through which it originates financing for residential, commercial, multi-family and other products. The Corporation provides property and casualty insurance premium financing to small, midsize and large companies in the United States through the AFCO Credit Corporation and in Canada through CAFO. The 1995 Annual Report to Shareholders summarizes principal locations and operating entities on pages 18 and 19, which pages are incorporated herein by reference. Exhibit 21.1 to this Annual Report on Form 10-K presents a list of the subsidiaries of the Corporation as of December 31, 1995. SUPERVISION AND REGULATION The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to the supervision of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Generally, the Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries, and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking and a proper incident thereto. Certain of the Corporation's subsidiaries are themselves bank holding companies under the Act. As a result of its Mellon Bank, F.S.B. subsidiary, the Corporation is also regulated under the Home Owners' Loan Act of 1933 as a savings and loan holding company. The Corporation's national banking subsidiaries are subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC"); BSDT is subject to supervision, regulation and examination by the FDIC and the Massachusetts Office of the Commissioner of Banks; Mellon Bank (MD) is subject to supervision, regulation and examination by the Federal Reserve Board and the State of Maryland; and Mellon Bank, F.S.B. is subject to supervision, regulation and examination by the Office of Thrift Supervision ("OTS"). Mellon Securities Trust Company, The Dreyfus Trust Company and Boston Safe Deposit and Trust Company of New York are New York trust companies and are supervised by the New York State Department of Banking. Boston Safe Deposit and Trust Company of California is a California trust company and is supervised by the State of California Banking Department. The Corporation's nonbank subsidiaries engaged in securities related activities are regulated by the Securities and Exchange Commission (the "SEC"). Dreyfus Investment Services Corporation, a subsidiary of the Corporation, conducts a brokerage operation, and Mellon Financial Markets, Inc., a subsidiary of the Corporation, engages in securities activities permitted to bank holding company subsidiaries under Section 20 of the Glass-Steagall Act. Dreyfus Service Corporation, a subsidiary of Dreyfus, acts as a broker/dealer for the sale of shares of mutual funds, including the Dreyfus family of mutual funds. Dreyfus Investment Services Corporation, Mellon Financial Markets, Inc. and Dreyfus Service Corporation are registered broker/dealers and members of the National Association of Securities Dealers, Inc., a securities industry self-regulatory organization. Certain subsidiaries of the Corporation are registered investment advisers under the Investment Advisers Act of 1940 and, as such, are supervised by the SEC. They are also subject to various federal and state laws and regulations and to the laws of any countries in which they do business. These laws and regulations are primarily intended to benefit clients and fund shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, the revocation of the registration as an investment adviser, censures and fines. Each investment company (as defined in the Investment Company Act of 1940) which is advised by a subsidiary of the Corporation, including the Dreyfus family of mutual funds, is registered with the SEC, and the shares of most are qualified for sale in all states in the 5 7 SUPERVISION AND REGULATION (CONTINUED) United States and the District of Columbia, except for investment companies that offer products only to residents of a particular state or of a foreign country and except for certain investment companies which are exempt from such registration or qualification. Certain of the Corporation's public finance activities are regulated by the Municipal Securities Rulemaking Board. Mellon Bank and certain of the Corporation's other subsidiaries are registered with the Commodity Futures Trading Commission (the "CFTC") as commodity pool operators or commodity trading advisors and, as such, are subject to CFTC regulation. The Corporation and its subsidiaries are subject to an extensive system of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Corporation's subsidiaries rather than holders of the Corporation's securities. These laws and regulations govern such areas as permissible activities, reserves, loans and investments, and rates of interest that can be charged on loans. The Corporation and its subsidiaries also are subject to general U.S. federal laws and regulations and to the laws and regulations of the states or countries in which they conduct their businesses. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and its subsidiaries. The references are not intended to be complete and are qualified in their entirety by reference to the statutes and regulations themselves. Changes in applicable law or regulation may have a material effect on the business of the Corporation. On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was enacted into Federal law. Under the Interstate Act, bank holding companies are permitted to acquire banks located in any state. The Interstate Act also provides for the nationwide interstate branching of banks. Under the Interstate Act, both national and state-chartered banks will be permitted to merge across state lines (and thereby create interstate branches) commencing June 1, 1997. States are permitted to "opt-out" of the interstate branching authority by taking action prior to the commencement date. States may also "opt-in" early (i.e., prior to June 1, 1997) to the interstate branching provisions. Pennsylvania has chosen to "opt-in" early, effective July 6, 1995, thereby enabling Pennsylvania banks to merge with out-of-state banks to create interstate branches inside or outside Pennsylvania. In addition, Pennsylvania permitted de novo branching into and out of Pennsylvania as long as the law of the other state involved is reciprocal in this regard. There are certain restrictions on the ability of the Corporation and certain of its non-bank affiliates to borrow from, and engage in other transactions with, its banking subsidiaries and on the ability of such banking subsidiaries to pay dividends to the Corporation. These restrictions are discussed in note 18 of the Notes to Financial Statements on page 84 of the Corporation's 1995 Annual Report to Shareholders. This note is incorporated herein by reference. The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity which, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to the Corporation, Mellon Bank (MD) and the Corporation's non-bank subsidiaries, including Mellon Securities Trust Company, a member of the Federal Reserve System. The FDIC has similar authority with respect to BSDT, and the OTS has similar authority with respect to Mellon Bank, F.S.B. Substantially all of the deposits of the banking subsidiaries are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit insurance assessments to maintain the BIF. The FDIC has adopted a risk-based assessment system to replace the previous flat rate system. The risk based system imposes insurance premiums based upon a matrix that takes into account a bank's capital level and supervisory rating. In November 1995, the FDIC approved a reduction in assessment rates imposed on banks for BIF deposit insurance. As a result of such reduction, such rates now range from zero for each $100 of domestic deposits for the healthiest institutions to $.27 for each $100 of domestic deposits for the weakest institutions. The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") contains a "cross-guarantee" provision that could result in any insured depository institution owned by the Corporation being assessed for losses incurred by the 6 8 SUPERVISION AND REGULATION (CONTINUED) FDIC in connection with assistance provided to, or the failure of, any other depository institution owned by the Corporation. Also, under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each of its banking subsidiaries and to commit resources to support each such bank in circumstances where such bank might not be in a financial position to support itself. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Among other things, federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA identifies the following capital tiers for financial institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Rules adopted by the federal banking agencies under FDICIA provide that an institution is deemed to be: "well capitalized" if the institution has a Total risk-based capital ratio of 10.0% or greater, a Tier I risk-based ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure; "adequately capitalized" if the institution has a Total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the institution is rated composite 1 in its most recent report of examination, subject to appropriate Federal banking agency guidelines), and the institution does not meet the definition of a well capitalized institution; "undercapitalized" if the institution has a Total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is rated composite 1 in its most recent report of examination, subject to appropriate Federal banking agency guidelines) and the institution does not meet the definition of a significantly undercapitalized or critically undercapitalized institution; "significantly undercapitalized" if the institution has a Total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0% and the institution does not meet the definition of a critically undercapitalized institution; and "critically undercapitalized" if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. At December 31, 1995, all of the Corporation's banking subsidiaries fell into the well capitalized category based on the ratios and guidelines noted above. The appropriate Federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution. The statute provides that an institution may be reclassified if the appropriate Federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. Legislation enacted in August 1993 provides that depositors and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution in the "liquidation or other resolution" of such an institution by any receiver. During recent years, regulatory guidelines have been adopted, and legislation has been proposed in Congress, to address concerns regarding retail sales by banks of various nondeposit investment products, including mutual funds. Legislative and regulatory attention to these matters is likely to continue, and may intensify, in the future. Although existing statutory and regulatory requirements in this regard have not had a significant effect on the Corporation's business, there can be no assurance that future requirements will not have such an effect. Various other legislation, including proposals to 7 9 SUPERVISION AND REGULATION (CONTINUED) restructure the banking regulatory system and the separation of banking from certain securities and other commercial activities, are from time to time introduced in Congress. The Corporation cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon its financial condition or operations. COMPETITION The Corporation and its subsidiaries continue to be subject to intense competition in all aspects and areas of their businesses from banks; other domestic and foreign depository institutions, such as savings and loan associations, savings banks and credit unions; and other providers of financial services, such as finance, mortgage and leasing companies, brokerage firms, credit card companies, money market mutual funds, investment companies and insurance companies. The Corporation also competes with nonfinancial institutions, including retail stores and manufacturers of consumer products that maintain their own credit programs, as well as governmental agencies that make available loans to certain borrowers. Also, in the Corporate/Institutional Investment Services business sector, the Corporation competes with a wide range of technologically capable service providers, such as data processing and outsourcing firms. In terms of domestic deposits, Mellon Bank is the second largest commercial banking institution in Pennsylvania where it competes with approximately 235 commercial banks, 130 thrifts and numerous credit unions and consumer finance institutions. Mellon Bank competes with approximately 30 commercial banks and 40 thrifts in the six-county Pittsburgh area of Western Pennsylvania. Mellon Bank competes with approximately 35 commercial banks and 50 thrifts in the five-county Philadelphia area, one of the largest metropolitan areas in the United States. In most of the markets in which the Corporation's banking subsidiaries operate, they compete with large regional and other banking organizations in making commercial, industrial and consumer loans, and in providing products and services. Competition has continued to increase in recent years in many areas in which the Corporation and its subsidiaries operate, in substantial part because other types of financial institutions and other entities are increasingly engaging in activities traditionally engaged in by commercial banks. Commercial banks face significant competition in acquiring quality assets due to such factors as the increase in commercial paper and long-term debt issued by industrial companies, increased activities by finance companies, foreign banks and credit unions, and the increased lending powers granted to and employed by many types of thrift institutions and credit unions. Commercial banks also face competition in attracting deposits at reasonable prices due to the activities of money market funds; increased activities of non-bank deposit takers, including brokerage firms; alternatives presented by foreign banks; and the increased availability of demand deposit type accounts at thrift institutions and credit unions. Unlike the Corporation, many of these competitors, with the particular exception of thrift institutions, are not subject to regulation as extensive as that described under the "Supervision and Regulation" section and, as a result, they may have a competitive advantage over the Corporation in certain respects. EMPLOYEES The Corporation and its subsidiaries had 24,300 full-time equivalent employees in December 1995. Statistical Disclosure by Bank Holding Companies Exchange Act Industry Guide 3 ("Guide 3") requires that the following statistical disclosures be made in Annual Reports on Form 10-K filed by bank holding companies. I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Information required by this section of Guide 3 is presented in the Rate/Volume Variance Analysis on page 9. Required information is also presented in the Financial Section of the Corporation's 1995 Annual Report to Shareholders in the Consolidated Balance Sheet -- Average Balances and Interest Yields/Rates on pages 100 and 101, and in Net Interest Revenue, on page 30, which is incorporated herein by reference. 8 10 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (CONTINUED)
RATE/VOLUME VARIANCE ANALYSIS - -------------------------------------------------------------------------------------------------------------- Year ended December 31, 1995 over (under) 1994 1994 over (under) 1993 Due to change in Net Due to change in Net (in millions) Rate Volume change Rate Volume change - -------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest revenue from interest-earning assets: Interest-bearing deposits with banks $ 11 $ (9) $ 2 $ 12 $(36) $(24) Federal funds sold and securities under resale agreements 11 (7) 4 14 (38) (24) Other money market investments 1 (4) (3) 2 (12) (10) Trading account securities 1 (6) (5) 2 7 9 Securities: U.S. Treasury and agency securities 38 (2) 36 9 34 43 Obligations of states and political subdivisions 1 (4) (3) 1 (4) (3) Other 6 (9) (3) 1 (8) (7) Loans (includes loan fees) 315 182 497 83 255 338 - -------------------------------------------------------------------------------------------------------------- Total 384 141 525 124 198 322 Increase (decrease) in interest expense on interest-bearing liabilities: Deposits in domestic offices: Demand 33 - 33 2 - 2 Money market and other savings accounts 96 (7) 89 27 15 42 Retail savings certificates 94 3 97 32 (33) (1) Other time deposits (4) 1 (3) - (11) (11) Deposits in foreign offices 33 101 134 7 45 52 Federal funds purchased and securities under repurchase agreements 32 17 49 17 26 43 Other short-term borrowings 18 64 82 5 26 31 Notes and debentures (with original maturities over one year) 14 (7) 7 2 (13) (11) - -------------------------------------------------------------------------------------------------------------- Total 316 172 488 92 55 147 - -------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest revenue $ 68 $(31) $ 37 $ 32 $143 $175 - --------------------------------------------------------------------------------------------------------------
Note: Amounts are calculated on a taxable equivalent basis where applicable, at tax rates approximating 35% in 1995, 1994 and 1993, and are before the effect of reserve requirements. Changes in interest revenue or interest expense arising from the combination of rate and volume variances are allocated proportionally to rate and volume based on their relative absolute magnitudes. 9 11 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (CONTINUED) II. Securities Portfolio A. Carrying values of securities at year-end are as follows:
- ------------------------------------------------------------------------------- INVESTMENT SECURITIES December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- U.S. Treasury and agency securities $2,408 $3,045 $1,897 Obligations of states and political subdivisions - 70 129 Other securities: Other mortgage-backed 39 48 85 Bonds, notes and debentures 30 29 85 Stock of Federal Reserve Bank 41 50 44 Other 1 2 192 - ------------------------------------------------------------------------------- Total other securities 111 129 406 - ------------------------------------------------------------------------------- Total investment securities $2,519 $3,244 $2,432 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- U.S. Treasury and agency securities $2,769 $1,739 $2,857 Obligations of states and political subdivisions 63 1 1 Other securities: Other mortgage-backed 7 9 22 Bonds, notes and debentures 12 12 21 Other 62 120 15 - ------------------------------------------------------------------------------- Total other securities 81 141 58 - ------------------------------------------------------------------------------- Total securities available for sale $2,913 $1,881 $2,916 - -------------------------------------------------------------------------------
B. Maturity Distribution of Securities Information required by this section of Guide 3 is presented in the Corporation's 1995 Annual Report to Shareholders in note 3 of Notes to Financial Statements on Securities on pages 71 through 73, which note is incorporated herein by reference. 10 12 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (CONTINUED) III. Loan Portfolio A. Types of Loans Information required by this section of Guide 3 is presented in the Credit Risk section of the Corporation's 1995 Annual Report to Shareholders on pages 49 through 58, which portions are incorporated herein by reference. B. Maturities and Sensitivities of Loans to Changes in Interest Rates
Maturity distribution of loans at December 31, 1995 - ------------------------------------------------------------------------------- (in millions) Within 1 year (a) 1-5 years Over 5 years Total - ------------------------------------------------------------------------------- Domestic:(b) Commercial and financial $4,731 $4,169 $2,069 $10,969 Commercial real estate 440 722 370 1,532 - ------------------------------------------------------------------------------- Total domestic 5,171 4,891 2,439 12,501 International 628 29 206 863 - ------------------------------------------------------------------------------- Total $5,799 $4,920 $2,645 $13,364 - ------------------------------------------------------------------------------- Note: Maturity distributions are based on remaining contractual maturities. (a) Includes demand loans and loans with no stated maturity. (b) Excludes consumer mortgages, credit card, other consumer credit and lease finance assets.
Sensitivity of loans at December 31, 1995 to changes in interest rates - ------------------------------------------------------------------------------- Domestic International (in millions) operations (a) operations Total - ------------------------------------------------------------------------------- Loans due in one year or less (b) $ 5,171 $628 $ 5,799 Loans due after one year: Variable rates 6,511 122 6,633 Fixed rates 819 113 932 - ------------------------------------------------------------------------------- Total loans $12,501 $863 $13,364 - ------------------------------------------------------------------------------- Note: Maturity distributions are based on remaining contractual maturities. (a) Excludes consumer mortgages, credit card, other consumer credit and lease finance assets. (b) Includes demand loans and loans with no stated maturity.
C. Risk Elements Information required by this section of Guide 3 is presented in the Credit Risk section of the Corporation's 1995 Annual Report to Shareholders on pages 49 through 58, which portions are incorporated herein by reference. IV. Summary of Loan Loss Experience The Corporation employs various estimation techniques in developing the credit loss reserve. Management reviews the specific circumstances of individual loans subject to more than the customary potential for exposure to loss. In establishing the level of the reserve, management also identifies market concentrations, changing business trends, industry risks, and current and anticipated specific and general economic factors that may adversely affect collectibility. Other factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; historical loss experience; lending policies; new products; the status and amount of nonperforming and past-due loans and adequacy of collateral. In addition, management assesses volatile factors such as interest rates and real estate market conditions that may significantly alter loss potential. The loss reserve methodology also provides for a portion of the reserve to act as an additional buffer against credit quality deterioration or risk of estimation error. Based on this evaluation, management believes that the credit loss reserve is adequate to absorb future losses inherent in the portfolio. 11 13 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (CONTINUED) The reserve is not specifically associated with individual loans or portfolio segments. Thus, the reserve is available to absorb credit losses arising from any individual loan or portfolio segment. When losses on specific loans are identified, management charges off the portion deemed uncollectible. In view of the fungible nature of the reserve and management's practice of charging off known losses, the Corporation does not maintain truly specific reserves on any loan. However, management has developed a loan loss reserve methodology designed to provide procedural discipline in assessing the adequacy of the reserve. The allocation of the Corporation's reserve for credit losses presented below is based on this loan loss reserve methodology.
- ------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------- Domestic reserve: Commercial and financial $169 $195 $182 $170 $193 Real estate: Commercial 92 157 189 212 277 Consumer 61 75 91 18 9 Consumer credit 135 141 102 83 77 Lease financing 6 17 15 4 6 - ------------------------------------------------------------------------------- Total domestic reserve 463 585 579 487 562 International reserve 8 22 21 19 34 - ------------------------------------------------------------------------------- Total reserve $471 $607 $600 $506 $596 - -------------------------------------------------------------------------------
Further information on the Corporation's credit policies, the factors that influenced management's judgment in determining the level of the reserve for credit losses, and the analyses of the credit loss reserve for the years 1991-1995 are set forth in the Financial Section of the Corporation's 1995 Annual Report to Shareholders in the Credit Risk section on pages 49 and 50, the Reserve for Credit Losses and Review of Net Credit Losses section on pages 57 and 58, in note 1 of Notes to Financial Statements under Reserve for Credit Losses on page 68 and in note 5 on page 73; which portions are incorporated herein by reference. For each category above, the ratio of loans to consolidated total loans is as follows:
- ------------------------------------------------------------------------------- December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------- Domestic loans: Commercial and financial 39.6% 37.5% 37.2% 40.7% 43.3% Real estate: Commercial 5.5 6.1 7.0 9.4 10.3 Consumer 32.4 32.5 33.4 21.4 17.3 Consumer credit 16.4 18.1 15.6 18.1 18.4 Lease financing 3.0 3.0 2.9 3.2 3.4 - ------------------------------------------------------------------------------- Total domestic loans 96.9 97.2 96.1 92.8 92.7 International loans 3.1 2.8 3.9 7.2 7.3 - ------------------------------------------------------------------------------- Total loans 100.0% 100.0% 100.0% 100.0% 100.0% - -------------------------------------------------------------------------------
12 14 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (CONTINUED) V. Deposits
- ---------------------------------------------------------------------------------------------------------------- Maturity distribution of domestic time deposits at December 31, 1995 Within 4-6 7-12 Over (in millions) 3 months months months 1 year Total - ---------------------------------------------------------------------------------------------------------------- Time certificates of deposit in denominations of $100,000 or greater $ 907 $ 126 $ 133 $ 150 $1,316 Time certificates of deposit in denominations of less than $100,000 1,345 1,445 1,249 1,742 5,781 - ---------------------------------------------------------------------------------------------------------------- Total time certificates of deposit 2,252 1,571 1,382 1,892 7,097 - ---------------------------------------------------------------------------------------------------------------- Other time deposits in denominations of $100,000 or greater - 3 - 8 11 Other time deposits in denominations of less than $100,000 22 - - - 22 - ---------------------------------------------------------------------------------------------------------------- Total other time deposits 22 3 - 8 33 - ---------------------------------------------------------------------------------------------------------------- Total domestic time deposits $2,274 $1,574 $1,382 $1,900 $7,130 - ----------------------------------------------------------------------------------------------------------------
The majority of foreign deposits of approximately $4.4 billion at December 31, 1995, were in amounts in excess of $100,000. Additional information required by this section of Guide 3 is set forth in the Corporation's 1995 Annual Report to Shareholders in Consolidated Balance Sheet -- Average Balances and Interest Yields/Rates on pages 100 and 101, which pages are incorporated herein by reference. VI. Return on Equity and Assets
Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------------- (1) Return on total assets(a), based on: Net income 1.72% 1.14% 1.29% Net income applicable to common stock 1.63 .95(b) 1.13(b) (2) Return on common shareholders' equity, based on net income applicable to common stock 17.77 9.79(b) 12.08(b) Return on total shareholders' equity, based on net income 16.84 10.13 11.61 (3) Dividend payout ratio of common stock, based on: Primary net income per share 44.18 54.66 31.28 Fully diluted net income per share 44.17 54.63 30.94 (4) Equity to total assets(a), based on: Common shareholders' equity 9.15 9.68 9.32 Total shareholders' equity 10.24 11.22 11.12 - -------------------------------------------------------------------------------------------------- (a) Computed on a daily average basis. (b) Computed using net income applicable to common stock after adding back Series D preferred stock dividends.
VII. Short-Term Borrowings Information required by this section of Guide 3 is contained in the Corporation's 1995 Annual Report to Shareholders in the Consolidated Balance Sheet on page 62, and in note 10 of Notes to Financial Statements on Short-term borrowings on page 75, which portions are incorporated herein by reference. 13 15 ITEM 2. PROPERTIES PITTSBURGH PROPERTIES In 1983 Mellon Bank entered into a long-term lease of One Mellon Bank Center, a 54-story office building in Pittsburgh, Pennsylvania. At December 31, 1995, Mellon Bank occupied approximately 72% of the building's approximately 1,525,000 square feet of rentable space and subleased substantially all of the remaining space to third parties. During 1984 Mellon Bank entered into a sale/leaseback arrangement of the Union Trust Building in Pittsburgh, Pennsylvania, also known as Two Mellon Bank Center, while retaining title to the land thereunder. At December 31, 1995, Mellon Bank occupied approximately 80% of this building's approximately 595,000 square feet of rentable space and subleased substantially all of the remaining space to third parties. Mellon Bank owns the 41-story office building in Pittsburgh, Pennsylvania, known as Three Mellon Bank Center. At December 31, 1995, Mellon Bank occupied approximately 98% of the approximately 943,000 square feet of rentable space, with the remainder leased to third parties. PHILADELPHIA PROPERTIES Mellon Bank owns a building known as One Mellon Bank Center located at the corner of Broad and Chestnut Streets in the Center City area of Philadelphia, Pennsylvania. At December 31, 1995, Mellon Bank occupied all of One Mellon Bank Center's approximately 63,700 square feet of rentable space. Mellon Bank also leases a large portion of a building in Philadelphia, Pennsylvania, known as Mellon Independence Center. At December 31, 1995, Mellon Bank leased approximately 74% of Mellon Independence Center's approximately 881,700 square feet of rentable space. Of the space leased by Mellon Bank, approximately 200,000 square feet of rentable space was subleased to third parties at December 31, 1995. In 1987 Mellon Bank entered into a 25-year lease for a portion of a 53-story office building known as Mellon Bank Center, at the corner of 18th and Market Streets in the Center City area of Philadelphia, Pennsylvania. At December 31, 1995, Mellon Bank leased approximately 19% of the building's approximately 1,245,000 square feet of rentable space. BOSTON PROPERTIES The Boston Company leases space in two downtown Boston office buildings: 41-story One Boston Place located at the corner of Court Street and Washington Street and 41-story Exchange Place located at 53 State Street. At December 31, 1995, The Boston Company leased approximately 34% of One Boston Place's approximately 769,150 square feet of rentable space and approximately 26% of Exchange Place's approximately 1,063,750 square feet of rentable space. Of The Boston Company's leased space at Exchange Place, approximately 237,960 square feet of rentable space is subleased to third parties. At December 31, 1995, The Boston Company also leased approximately 82,900 square feet of rentable space in the Park Square Building, 31 St. James Avenue, Boston. At December 31, 1995, The Boston Company also occupies space in three office buildings in the Wellington Business Center located in Medford, Massachusetts. The Boston Company owns a substantial interest in and fully occupies the approximately 117,000 square foot building known as Client Services Center II. The Boston Company also leases 100% of the approximately 319,600 square foot facility known as Client Services Center III. At December 31, 1995, The Boston Company leased approximately 36,000 square feet of rentable space in the building known as Wellington I. NEW YORK PROPERTIES At December 31, 1995, Dreyfus Service Corporation leased 270,429 square feet of rentable space at 200 Park Avenue in New York City. Other than 9,003 square feet of rentable space which is subleased to a third party, all of the space is currently occupied by Dreyfus. At December 31, 1995, Dreyfus Service Corporation leased 127,346 square feet of rentable space in EAB Plaza in Uniondale, New York. This space is 100% occupied by Dreyfus. 14 16 PROPERTIES (CONTINUED) OTHER PROPERTIES Mellon Bank (DE) owns a three-story office building known as the Pike Creek Building in New Castle County, Delaware, and currently occupies the building's entire 81,207 square feet of available floor space. Mellon Bank (DE) also leases approximately 34,000 square feet of rentable space of an 18-story office building in Wilmington, Delaware, and approximately 42,000 square feet of rentable space in Pencader, Delaware, for a credit card operations center. Mellon Bank (MD) leases approximately 40,460 square feet of rentable space of an office building in Rockville, Maryland, which is used for its headquarters. The banking subsidiaries' retail offices are located in 33 counties in western, northwestern, central, northeastern and eastern Pennsylvania, all three of Delaware's counties, four counties in New Jersey, three Maryland counties in the northern suburbs of Washington, D.C., and a single retail office in Boston, Massachusetts. At December 31, 1995, the banking subsidiaries of the Corporation owned 208 of the banking subsidiaries 459 retail offices and leased the remainder under leases expiring at various times through the year 2020. Other subsidiaries of the Corporation lease office space primarily for their operations at many of the locations listed on pages 18 and 19 of the Principal Locations and Operating Entities Section of the Corporation's 1995 Annual Report, which pages are incorporated herein by reference. For additional information on the Corporation's premises and equipment, see note 6 of Notes to Financial Statements on page 74 of the Corporation's 1995 Annual Report, which note is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS Various legal actions and proceedings are pending or are threatened against the Corporation and its subsidiaries, some of which seek relief or damages in amounts that are substantial. These actions and proceedings arise in the ordinary course of the Corporation's businesses and include suits relating to its lending, collections, servicing, investment, mutual fund, advisory, trust and other activities. Because of the complex nature of some of these actions and proceedings, it may be a number of years before such matters ultimately are resolved. After consultation with legal counsel, management believes that the aggregate liability, if any, resulting from such pending and threatened actions and proceedings will not have a material adverse effect on the Corporation's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to security holders for vote during the fourth quarter of 1995. 15 17 EXECUTIVE OFFICERS OF THE REGISTRANT The name and age of, and the positions and offices held by, each executive officer of the Corporation as of February 20, 1996, together with the offices held by each such person during the last five years, are listed below. Certain of the executive officers have executed employment contracts with the Corporation. All other executive officers serve at the pleasure of their appointing authority. No executive officer has a family relationship to any other listed executive officer.
Age Position and Year Elected --- ------------------------- Frank V. Cahouet 63 Chairman, President and Chief Executive 1990(1) Officer of the Corporation and of Mellon Bank Christopher M. Condron 48 Vice Chairman, Deputy Director Mellon Trust 1994(2) Vice Chairman, The Boston Company President and Chief Operating Officer, The 1995 Dreyfus Corporation Steven G. Elliott 49 Vice Chairman and Chief Financial 1992(3) Officer of the Corporation and of Mellon Bank Treasurer of the Corporation 1990 Jeffery L. Leininger 50 Vice Chairman, Specialized Commercial 1996(4) Banking Group David R. Lovejoy 47 Vice Chairman, Corporate Strategy and 1994(5) Development Martin G. McGuinn 53 Vice Chairman, Retail Financial Services 1993(6) Jeffrey L. Morby 58 Vice Chairman, Wholesale Banking 1990 Keith P. Russell 50 Vice Chairman, Chief Risk and Credit 1992(7) Officer Chairman, Credit Policy Committee of 1991 the Corporation W. Keith Smith 61 Vice Chairman, Mellon Trust 1993(8) Vice Chairman, The Dreyfus Corporation 1994 Chairman and Chief Executive Officer, The 1993 Boston Company Jamie B. Stewart, Jr. 51 Vice Chairman, Corporate Banking 1995(9)
16 18 EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) Michael K. Hughey 44 Senior Vice President and Controller of 1990 the Corporation and Senior Vice President, Director of Taxes and Controller of Mellon Bank (1) Mr. Cahouet has executed an employment contract with the Corporation which terminates December 31, 1998. (2) From June 1989 to January 1994, Mr. Condron was President of Boston Safe Deposit and Trust and Executive Vice President of The Boston Company. In January 1994, he assumed the title of Vice Chairman of The Boston Company and in November 1994, he assumed the title of Vice Chairman, Deputy Director, Mellon Trust of the Corporation and of Mellon Bank. (3) From January 1990 to June 1992, Mr. Elliott was Executive Vice President, Chief Financial Officer and Treasurer of the Corporation and Executive Vice President and Chief Financial Officer of Mellon Bank. (4) From 1988 to February 1994, Mr. Leininger was Senior Vice President and Manager of the Middle Market Banking department's western region. From February 1994 to February 1996, Mr. Leininger was Executive Vice President and Department Head of Middle Market Banking. (5) From January 1991 to December 1991, Mr. Lovejoy was self-employed. From January 1992 to December 1992, he was Chairman and Chief Executive Officer of Western Energy Management. From January 1993 to October 1994, he was Executive Vice President of Strategic Planning of Mellon Bank Corporation. In November 1994, Mr. Lovejoy assumed the title of Vice Chairman Corporate Strategy and Development of Mellon Bank Corporation. (6) From November 1990 to October 1992, Mr. McGuinn was Vice Chairman, Real Estate Finance, General Counsel and Secretary of the Corporation and Vice Chairman, Real Estate Finance and General Counsel of Mellon Bank. From October 1992 to November 1993, Mr. McGuinn was Vice Chairman, Special Banking Services of the Corporation and of Mellon Bank. (7) From 1983 to August 1991, Mr. Russell was President and Chief Operating Officer of GLENFED/Glendale Federal Bank. From September 1991 to November 1991, Mr. Russell was Executive Vice President, Information Management and Research, Technology Products and Mortgage Banking of Mellon Bank. From November 1991 to June 1992, Mr. Russell was Executive Vice President, Credit Policy of the Corporation and of Mellon Bank. (8) From January 1990 to November 1993, Mr. Smith was Vice Chairman, Service Products of the Corporation and of Mellon Bank. Mr. Smith was Chief Operating Officer of the Dreyfus Corporation from August 1994 to January 1995. Mr. Smith has executed an employment contract with the Corporation which terminates on July 31, 1996. (9) From December 1990 to January 1995, Mr. Stewart was Executive Vice President, Global Corporate Banking Department.
17 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is set forth in the Corporation's 1995 Annual Report to Shareholders in Liquidity and Dividends on pages 40 through 42, in Selected Quarterly Data on page 60, in note 18 of Notes to Financial Statements on page 84 and in General Information on page 102, which portions are incorporated herein by reference. In August 1989, the Corporation adopted a Shareholder Protection Rights Plan under which each shareholder receives one Right for each share of common stock ("voting stock") of the Corporation held. The Rights are currently represented by the certificates for, and trade only with, the voting stock. The Rights would separate from the voting stock and become exercisable only if a person or group acquires 20 percent or more of the voting power of the voting stock or ten days after a person or group commences a tender offer that would result in ownership of 20 percent or more of such voting power. At that time, each Right would entitle the holder to purchase for $200 (the "exercise price") one one-hundredth of a share of participating preferred stock. Each share of such preferred stock would be entitled to cumulative dividends equal to 1% per annum, plus the amount of dividends that would be payable on 100 shares of the Corporation's common stock, and would have a liquidation preference of the greater of 100 times the exercise price or the amount to be distributed in liquidation to a holder of 100 shares of the Corporation's common stock. Should a person or group actually acquire 20% or more of the voting power of the voting stock, each Right held by the acquiring person or group (or their transferees) would become void and each Right held by the Corporation's other shareholders would entitle those holders to purchase for the exercise price a number of shares of the Corporation's common stock having a market value of twice the exercise price. Should the Corporation be involved in a merger or similar transaction with a 20% owner or sell more than 50% of its assets or assets generating more than 50% of its operating income or cash flow to any person or group, each outstanding Right would then entitle its holder to purchase for the exercise price a number of shares of such other company having a market value of twice the exercise price. In addition, if any person or group acquires between 20% and 50% of the voting power of the voting stock, the Corporation may, at its option, exchange one share of common stock for each outstanding Right. The Rights are not exercisable until the above events occur and will expire on August 15, 1999, unless earlier exchanged or redeemed by the Corporation. The Corporation may redeem the Rights for $.01 per Right under certain circumstances. The distribution of the Rights was not a taxable event. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is set forth in the Corporation's 1995 Annual Report to Shareholders in the Financial Summary on page 23, in the Significant Events in 1995 on pages 24 and 25, in the Overview of 1995 results on page 29, in note 1 of Notes to Financial Statements on pages 66 through 70, and in the Consolidated Balance Sheet -- Average Balances and Interest Yields/Rates on pages 100 and 101, which portions are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required by this Item is set forth in the Corporation's 1995 Annual Report to Shareholders in the Financial Review on pages 23 through 60 and in note 18 of Notes to Financial Statements on page 84, which portions are incorporated herein by reference. 18 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to Item 14 on page 20 hereof for a detailed listing of the items under Financial Statements, Financial Statement Schedules, and Other Financial Data which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is included in the Corporation's proxy statement for its 1996 Annual Meeting of Shareholders (the "1996 Proxy Statement") in the Election of Directors-Biographical Summaries of Nominees and Continuing Directors section on pages 4 through 7 and in the Additional Information section on page 31, each of which sections is incorporated herein by reference, and in Part I of this Form 10-K under the heading "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included in the 1996 Proxy Statement in the Directors' Compensation section on page 9 and in the Executive Compensation section on pages 15 through 30, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included in the 1996 Proxy Statement in the Beneficial Ownership of Stock section on pages 13 and 14, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included in the 1996 Proxy Statement in the Business Relationships; Related Transactions and Certain Legal Proceedings section on page 12, and is incorporated herein by reference. 19 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The financial statements and schedules required for the Annual Report of the Corporation on Form 10-K are included, attached or incorporated by reference as indicated in the following index. Page numbers below refer to pages of the Financial Section of the Corporation's 1995 Annual Report to Shareholders:
(i) Financial Statements Page No. -------------------- -------- Mellon Bank Corporation (and its subsidiaries): Consolidated Income Statement 61 Consolidated Balance Sheet 62 Consolidated Statement of Changes in Shareholders' Equity 63 Consolidated Statement of Cash Flows 64 and 65 Notes to Financial Statements 66 through 98 Report of Independent Auditors 99
(ii) Financial Statement Schedules ----------------------------- Schedules I and II and all other schedules are omitted either because they are not required or are not applicable, or because the required information is shown in the financial statements or notes thereto. (iii) Other Financial Data -------------------- Selected Quarterly Data 60
(b) Current Reports on Form 8-K during the fourth quarter of 1995: A report dated October 17, 1995, which included the Corporation's press release regarding third quarter and year-to-date 1995 financial results; and which included the Corporation's press release regarding a common stock repurchase program and dividend increase. (c) Exhibits The exhibits listed on the Index to Exhibits on pages 22 through 27 hereof are incorporated by reference or filed herewith in response to this item. 20 22 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. Mellon Bank Corporation By: /s/ Frank V. Cahouet ---------------------- Frank V. Cahouet Chairman, President and Chief Executive Officer DATED: March 19, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Corporation and in the capacities and on the date indicated.
Signature Capacities - -------------------------------- -------------------------- By: /s/ Frank V. Cahouet Director and Principal ---------------------------- Executive Officer Frank V. Cahouet By: /s/ Steven G. Elliott Principal Financial Officer ---------------------------- and Principal Accounting Steven G. Elliott Officer Burton C. Borgelt; Carol R. Brown; Directors J. W. Connolly; Charles A. Corry; C. Frederick Fetterolf; Ira J. Gumberg; Pemberton Hutchinson; Rotan E. Lee; Andrew W. Mathieson; Edward J. McAniff; Robert Mehrabian; Seward Prosser Mellon; David S. Shapira; W. Keith Smith; Howard Stein; Joab L. Thomas; Wesley W. von Schack; and William J. Young By: /s/ Carl Krasik DATED: March 19, 1996 ---------------------------- Carl Krasik Attorney-in-fact
21 23 INDEX TO EXHIBITS
Exhibit No. Description Method of Filing - ------- --------------------------------------- --------------------------------------- 3.1 Restated Articles of Incorporation of Previously filed as Exhibit 3.1 to Mellon Bank Corporation, as amended the Quarterly Report on Form 10-Q and restated as of September 2, 1993. (File No. 1-7410) for the quarter ended September 30, 1993, and incorporated herein by reference. 3.2 Statement Affecting Series B Preferred Previously filed as Exhibit 3.2 to the Stock, $1.00 Par Value. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1993, and incorporated herein by reference. 3.3 Statement Affecting Series D Preferred Previously filed as Exhibit 3.3 to the Stock, $1.00 Par Value. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1994, and incorporated herein by reference. 3.4 Statement Affecting Series H Preferred Previously filed as Exhibit 3.1 to the Stock, $1.00 Par Value. Quarterly Report on Form 10-Q (File No. 1-7410) for the quarter ended March 31, 1995, and incorporated herein by reference. 3.5 By-Laws of Mellon Bank Corporation, Previously filed as Exhibit 3.2 to as amended, effective July 17, 1990. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1990, and incorporated herein by reference. 4.1 Instruments defining the rights See Exhibits 3.1, 3.2, 3.3 and 3.4 above of securities holders. and the undertaking on page 27. 4.2 Shareholder Protection Rights Agreement Previously filed as Exhibit 1 to Form between Mellon Bank Corporation and 8-A Registration Statement (File Mellon Bank, N.A., as Rights Agent, No. 1-7410) dated August 15, 1989, dated as of August 15, 1989. and incorporated herein by reference. 10.1 Purchase Agreement, dated as of Previously filed as Exhibit 10.1 July 25, 1988, among Mellon Bank to Quarterly Report on Form 10-Q Corporation (as Seller) and Warburg, (File No. 1-7410) for the quarter ended Pincus Capital Company, L.P. and September 30, 1988, and incorporated Warburg, Pincus Capital Partners, herein by reference. L.P. (as Purchasers) relating to the sale and purchase of Mellon Series D Junior Preferred Stock.
22 24 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- --------------------------------------- --------------------------------------- 10.2 Purchase Agreement, dated as of Previously filed as Exhibit 10.2 July 25, 1988, between Mellon Bank to Quarterly Report on Form 10-Q Corporation (as Seller) and Drexel (File No. 1-7410) for the quarter ended Burnham Lambert Incorporated (as September 30, 1988, and incorporated Purchaser) relating to the sale herein by reference. and purchase of Mellon Series D Junior Preferred Stock. 10.3 Exchange Agreement dated as of Previously filed as Exhibit 10.4 March 30, 1990, between Warburg, to Annual Report on Form 10-K Pincus Capital Company, L. P., (File No. 1-7410) for the year ended Warburg, Pincus Capital Partners, December 31, 1990, and incorporated L. P. and Mellon relating to the herein by reference. exchange of Series D Preferred Stock for shares of Mellon's Common Stock. 10.4 Lease dated as of February 1, 1983, Previously filed as Exhibit 10.4 between 500 Grant Street Associates to Annual Report on Form 10-K Limited Partnership and Mellon (File No. 1-7410) for the year ended Bank, N.A. with respect to One Mellon December 31, 1992, and incorporated Bank Center. herein by reference. 10.5 First Amendment to Lease Agreement Previously filed as Exhibit 10.1 dated as of November 1, 1983, to Registration Statement on Form between 500 Grant Street S-15 (Registration No. 2-88266) Associates Limited Partnership and incorporated herein by and Mellon Bank, N.A. reference. 10.6* Mellon Bank Corporation Profit Previously filed as Exhibit 10.7 Bonus Plan, as amended. to Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1990, and incorporated herein by reference. 10.7* Mellon Bank Corporation Long-Term Previously filed as Exhibit 10.7 to Profit Incentive Plan (1981), Annual Report on Form 10-K (File as adjusted to reflect the Corporation's No. 1-7410) for the year ended three-for-two common stock split December 31, 1994, and incorporated declared in November 1994 (the "Common herein by reference. Stock Split").
* Management contract or compensatory plan arrangement. 23 25 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- ---------------------------------- -------------------------------------- 10.8* Mellon Bank Corporation Stock Previously filed as Exhibit 10.8 to Option Plan for Outside Directors Annual Report on Form 10-K (File (1989), as adjusted to reflect the No. 1-7410) for the year ended Common Stock Split. December 31, 1994, and incorporated herein by reference. 10.9* Mellon Bank Corporation 1990 Previously filed as Exhibit 19.1 Elective Deferred Compensation Plan to Quarterly Report on Form 10-Q for Directors and Members of the (File No. 1-7410) for the quarter ended Advisory Board, as amended and September 30, 1992, and incorporated restated, effective July 21, 1992. herein by reference. 10.10* Mellon Bank Corporation Elective Previously filed as Exhibit 10.10 to Deferred Compensation Plan for Annual Report on Form 10-K (File Senior Officers, as amended and No. 1-7410) for the year ended restated, effective June 1, 1994. December 31, 1994, and incorporated herein by reference. 10.11* Mellon Bank IRC Section 401(a)(17) Previously filed as Exhibit 10.11 to Plan, as amended and restated, effective Annual Report on Form 10-K (File January 1, 1993. No. 1-7410) for the year ended December 31, 1992, and incorporated herein by reference. 10.12* Mellon Bank Optional Life Previously filed as Exhibit 10.12 to Insurance Plan, effective January 1, Annual Report on Form 10-K (File 1993. No. 1-7410) for the year ended December 31, 1992, and incorporated herein by reference. 10.13* Mellon Bank Executive Life Previously filed as Exhibit 10.13 to Insurance Plan, effective January 1, Annual Report on Form 10-K (File 1993. No. 1-7410) for the year ended December 31, 1992, and incorporated herein by reference. 10.14* Mellon Bank Senior Executive Previously filed as Exhibit 10.14 to Life Insurance Plan, effective Annual Report on Form 10-K (File January 1, 1993. No. 1-7410) for the year ended December 31, 1992, and incorporated herein by reference.
* Management contract or compensatory plan arrangement. 24 26 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- ---------------------------------------- ---------------------------------------- 10.15* Mellon Bank Corporation Retirement Plan Previously filed as Exhibit 10.1 to for Outside Directors, effective Quarterly Report on Form 10-Q (File January 1, 1994. No. 1-7410) for the quarter ended June 30, 1995, and incorporated herein by reference. 10.16* Mellon Bank Corporation Phantom Previously filed as Exhibit 10.2 to Stock Unit Plan (1995) Quarterly Report on Form 10-Q (File No. 1-7410) for the quarter ended June 30, 1995, and incorporated herein by reference. 10.17* Employment Agreement between Filed herewith. Mellon Bank, N.A. and Frank V. Cahouet, effective as of July 25, 1993, and amended and restated as of October 17, 1995. 10.18* Employment Agreement between Previously filed as Exhibit 10.2 Mellon Bank, N.A. and to Quarterly Report on Form 10-Q W. Keith Smith, effective as of (File No. 1-7410) for the quarter ended July 25, 1993, and amended and September 30, 1995, and incorporated restated as of August 1, 1995. herein by reference. 10.19* The Dreyfus Corporation 1989 Previously filed as Exhibit 10.19 Non-Qualified Stock Option Plan. to Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1994, and incorporated herein by reference. 10.20* The Dreyfus Corporation Amended Previously filed as Exhibit 10(iii)(A) Deferred Compensation Plan. to The Dreyfus Corporation's Annual Report on Form 10-K (File No. 1-5240) for the year ended December 31, 1992, and incorporated herein by reference. 10.21* The Dreyfus Corporation Contingent Previously filed as Exhibit 10.21 to Benefit Plan. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1994, and incorporated herein by reference.
* Management contract or compensatory plan arrangement. 25 27 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- ---------------------------------- ------------------------------------- 10.22 Stock Purchase Agreement dated as Previously filed as Exhibit 2.1 of September 14, 1992, between to Current Report on Form 8-K Shearson Lehman Brothers Inc. and (File No. 1-7410) dated September 14, the Corporation (including the form 1992, and incorporated herein by of Warrant Agreement attached reference. thereto as Exhibit C). 10.23 Agreement and Plan of Merger dated Previously filed as Exhibit 10.19 as of December 5, 1993, by and among to the Annual Report on Form 10-K Mellon Bank Corporation, Mellon (File No. 1-7410) for the year ended Bank, N.A., XYZ Sub Corporation and December 31, 1993, and incorporated The Dreyfus Corporation. herein by reference. 11.1 Computation of Primary and Fully Filed herewith. Diluted Net Income Per Common Share. 12.1 Computation of Ratio of Earnings Filed herewith. to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends--parent Corporation. 12.2 Computation of Ratio of Earnings Filed herewith. to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends--Mellon Bank Corporation and its subsidiaries. 13.1 All portions of the Mellon Bank Corporation Filed herewith. 1995 Annual Report to Shareholders that are incorporated herein by reference. 21.1 List of Subsidiaries of the Filed herewith. Corporation. 23.1 Consent of Independent Accountants. Filed herewith. 24.1 Powers of Attorney. Filed herewith. 27.1 Financial Data Schedule. Filed herewith.
26 28 INDEX TO EXHIBITS (continued) The documents identified below, which define the rights of holders of long-term debt of the Corporation, are not filed herewith because the total amount of securities authorized under each of them does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation hereby agrees to furnish a copy of such documents to the Securities and Exchange Commission upon request. 1 Indenture dated as of September 10, 1987, between the Corporation and Bank of New York, as Trustee, relating to 7-1/4% Convertible Subordinated Capital Notes Due 1999. 2 Indenture dated as of May 2, 1988, as supplemented by the First Supplemental Indenture dated as of November 29, 1990, among Mellon Financial Company, the Corporation and The Chase Manhattan Bank (National Association), as Trustee, providing for the issuance of debt securities in series from time to time. 3 Indenture dated as of April 15, 1991, as supplemented by the First Supplemental Indenture dated as of November 24, 1992, among Mellon Financial Company, the Corporation and First Trust of Illinois, N.A. (as successor to Continental Bank, National Association), providing for the issuance of subordinated debt securities in series from time to time. 4 Fiscal and Paying Agency Agreement dated as of May 17, 1993, between Mellon Bank, N.A. as Issuer, and The Chase Manhattan Bank (National Association), as Fiscal and Paying Agent relating to 6-1/2% Subordinated Notes due August 1, 2005 and 6-3/4% Subordinated Notes due June 1, 2003. 5 Indenture dated as of August 25, 1995, among Mellon Financial Company, the Corporation and First Interstate Bank of California, as Trustee, providing for the issuance of debt securities in series from time to time. 27 EX-10.17 2 MELLON BANK 10-K405 1 EX-10.17 EMPLOYMENT AGREEMENT BETWEEN MELLON BANK, N.A. AND FRANK V. CAHOUET EFFECTIVE AS OF JULY 25, 1993 (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 17, 1995) 2 THIS AGREEMENT, made effective as of July 25, 1993 by and between Mellon Bank, N.A. (the "Company"), a national banking association, and Frank V. Cahouet (the "Executive"), WITNESSETH THAT: WHEREAS, the Executive, who has served as Chairman and Chief Executive Officer of the Company and Mellon Bank Corporation (the "Holding Company"), effective as of June 19, 1987, is willing to continue to serve in such capacity, and the Company desires to retain the Executive in such capacity on the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT. The Company agrees to continue to employ the Executive, and the Executive agrees to continue to be employed by the Company, for the Term provided in Paragraph 3(a) below and upon the other terms and conditions hereinafter provided. The Executive hereby represents and warrants that he has the legal capacity to execute and perform this Agreement, that it is a valid and binding agreement, enforceable against him according to its terms, and that its execution and performance by him does not violate the terms of any existing agreement or understanding to which the Executive is a party. In addition, the Executive represents and warrants that he knows of no reason why he is not physically capable of performing his obligations under this Agreement in accordance with its terms. 2. POSITION AND RESPONSIBILITIES. During the Term, the Executive (a) agrees to serve as the Chairman and Chief Executive Officer of the Company and the Holding Company, and to be responsible for the general management of the affairs of the Company and the Holding Company, reporting directly to the respective Boards of Directors of the Company (the "Board") and the Holding Company, and as a member of such boards for 3 the period for which he is and shall from time to time be elected, (b) shall be given such authority as is appropriate to carry out the duties described above, and (c) agrees to serve, if elected, as an officer and director of any other subsidiary or affiliate of the Company or the Holding Company. 3. TERM AND DUTIES. (a) TERM OF EMPLOYMENT. The term of the Executive's employment under this Agreement shall be deemed to have commenced on July 25, 1993 and shall continue thereafter through December 31, 1998 (the "Term"). (b) DUTIES. During the Term, and except for illness or incapacity and reasonable vacation periods of no more than 4 weeks in any calendar year (or such other period as shall be consistent with the Company's policies for other key executives), the Executive shall devote all of his business time, attention, skill and efforts exclusively to the business and affairs of the Company and the Holding Company and their subsidiaries and affiliates, shall not be engaged in any other business activity, and shall perform and discharge well and faithfully the duties which may be assigned to him from time to time by the board of directors of the Company or the Holding Company; provided, however, that nothing in this Agreement shall preclude the Executive from devoting time during reasonable periods required for: (i) serving, in accordance with the Company's policies and with the prior approval of the Board, as a director or member of a committee of any company or organization involving no actual or potential conflict of interest with the Company or the Holding Company or any of their subsidiaries or affiliates; (ii) delivering lectures and fulfilling speaking engagements; 4 (iii) engaging in charitable and community activities; and (iv) investing his personal assets in businesses in which his participation is solely that of an investor in such form or manner as will not violate Section 7 below or require any services on the part of the Executive in the operation or the affairs of such business, provided, however, that such activities do not materially affect or interfere with the performance of the Executive's duties and obligations to the Company or the Holding Company. 4. COMPENSATION. For all services rendered by the Executive in any capacity required hereunder during the Term, including, without limitation, services as an executive, officer, director, or member of any committee of the Company, the Holding Company or any subsidiary, affiliate or division thereof, the Executive shall be compensated as follows: (a) BASE SALARY. The Company shall pay the Executive a fixed salary ("Base Salary") of $760,000 per annum, subject to such periodic review (which shall occur at least annually) and such periodic increases as the Board shall deem appropriate in accordance with the Company's customary procedures and practices regarding the salaries of senior officers; provided, however, in determining such increases, the Board shall take into consideration the base salaries of the chief executive officers of the 10 largest bank holding companies in the United States, ranked by total assets, the performance of which is substantially similar to that of the Holding Company. Base Salary shall be payable in accordance with the customary payroll practices of the Company, but in no event less frequently than monthly. (b) BONUS. The Company shall pay the Executive such amounts, if any, as may be due under the terms of the Mellon Bank Corporation Profit Bonus Plan (or any successor plan), with such payments of bonus to be made in accordance with the terms of such bonus plan. For the Profit Bonus Plan award for 1994 (payable in 5 1995) and for future years, it is understood that the Executive may receive some portion of his Profit Bonus Plan award in the form of restricted stock or phantom stock units, such awards are to be made on the same terms as apply to other members of the Office of the Chairman. (c) STOCK OPTIONS. The Holding Company shall from time to time after the date of this Agreement consider the grant to the Executive of options to purchase shares of the Holding Company's Common Stock (the "Common Stock"). Such options shall be granted under and subject in all respects to the terms of the Holding Company's Long-Term Profit Incentive Plan (1981) (or any successor plan) and, in the event of retirement, shall be exercisable through their stated expiration date. (d) ADDITIONAL BENEFITS. Except as modified by this Agreement, the Executive shall be entitled to participate in all compensation or employee benefit plans or programs, and to receive all benefits, perquisites and emoluments for which any salaried employees are eligible under any plan or program, now or hereafter established and maintained by the Company or the Holding Company for senior officers, to the extent permissible under the general terms and provisions of such plans or programs and in accordance with the provisions thereof, including group hospitalization, health, dental care, senior executive life or other life insurance, travel or accident insurance, disability plans, tax-qualified or non-qualified pension, savings, thrift and profit-sharing plans, deferred compensation plans, termination pay programs, sick-leave plans, auto allowance or auto lease plans, and executive contingent compensation plans, including, without limitation, capital accumulation programs and stock purchase, restricted stock or stock option plans. Specifically, but not by way of limitation, the Company shall furnish the Executive, without cost to him, with life insurance for the benefit of the Executive's designated beneficiary in an amount at least equal to twice his Base Salary (without regard to any deferrals of Base Salary made by the Executive). 6 Notwithstanding the foregoing, nothing in this Agreement shall preclude the amendment or termination of any such plan or program, on the condition that such amendment or termination is applicable generally to all of the senior officers of the Company or any subsidiary or affiliate and that no such amendment may result in a reduction of the amount of benefits provided to the Executive under any such plan or program or the life insurance provided for the benefit of the Executive's designated beneficiary. (e) PERQUISITES. The Company will also furnish the Executive, without cost to him, with (i) a Company-owned or leased automobile and driver, (ii) membership in one country club located within the Pittsburgh metropolitan area and one business club located in Pittsburgh, (iii) an annual physical examination of the Executive by a physician selected by the Executive, (iv) participation in the Company's matching gifts program, and (v) personal financial, investment or tax advice, not to exceed a reasonable sum per annum, to the extent costs or expenses of the Executive to be reimbursed are properly documented for Federal income taxation purposes to preserve any deduction for such reimbursements to which the Company may be entitled. 5. BUSINESS EXPENSES. The Company shall pay or reimburse the Executive for all reasonable travel or other expenses incurred by the Executive (and his spouse where there is a legitimate business reason for his spouse to accompany him) in connection with the performance of his duties and obligations under this Agreement, subject to the Executive's presentation of appropriate vouchers in accordance with such procedures as the Company may from time to time establish for senior officers and to preserve any deductions for Federal income taxation purposes to which the Company may be entitled. 7 6. EFFECT OF TERMINATION OF EMPLOYMENT. (a) In the event the Executive's employment hereunder terminates due to either Permanent Disability, a Without Cause Termination, or a Constructive Discharge, the Company shall, as liquidated damages or severance pay, or both, continue, subject to the provisions of Section 7 below, to pay the Executive's Base Salary as in effect at the time of such termination from the date of termination until the end of the Term, provided, however, that in the case of Permanent Disability, such payments shall be offset by any amounts otherwise paid to the Executive under the Company's disability program generally available to other employees. In addition, earned but unpaid Base Salary as of the date of termination of employment shall be payable in full and the target bonus award (or, if higher, the bonus award the Executive would have received had he been employed throughout the bonus year), including any restricted stock or phantom stock units payable in lieu of any portion of the Profit Bonus Plan award, shall be payable on a pro-rated basis for the year in which such termination of employment occurs only. The Executive shall continue to participate through the end of the Term, or such longer period as shall be prescribed in any plan or program, in all compensation or employee benefit plans or programs maintained by the Company or the Holding Company in which he was participating on the date of termination, including group hospitalization, health, dental care, senior executive life or other life insurance, travel or accident insurance, disability plans, tax qualified savings plans, thrift and profit-sharing plans and deferred compensation plans, all in accordance with the terms and conditions of the applicable employee benefit plans in effect from time to time as applied to employees. The Executive shall continue to receive years of service credit under all tax-qualified or non-qualified retirement plans and related excess benefit plans maintained by the Company for the Executive through the end of the Term and shall be 100% vested in such plans as of the date of the termination of his employment. The Perquisites set forth in Paragraphs 4(e)(i), (ii) and (v) shall continue through the first anniversary of the Executive's termination of employment (except for the driver 8 which shall continue only for the 90-day period following the Executive's termination of employment). Any options to purchase shares of the Holding Company's Common Stock or shares of restricted stock which are unvested as of the date of the Executive's termination of employment shall continue to vest and be exercisable through the end of the Term and thereafter, as permitted by the applicable plan. The Executive shall have no duty or obligation to seek other employment through the end of the Term or thereafter. (b) In the event the Executive's employment hereunder terminates due to a Termination for Cause or the Executive terminates employment with the Company for reasons other than a Constructive Discharge, Permanent Disability or retirement pursuant to Section 8 below, earned but unpaid Base Salary as of the date of termination of employment shall be payable in full. However, no other payments shall be made, or benefits provided, by the Company under this Agreement except for stock options to the extent already vested and exercisable, and except for benefits, which have already become vested, under the Supplemental Pension provided in Section 8 of this Agreement and under the terms of employee benefit programs maintained by the Company or its affiliates for its employees generally. (c) For purposes of this Agreement, the following terms have the following meanings: (i) The term, "Termination for Cause", means, to the maximum extent permitted by applicable law, a termination of the Executive's employment by the Company by a vote of a majority of the Board members then in office, because the Executive has (a) been convicted of a criminal offense covered by Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. #1829, or (b) has entered a plea of nolo contendere thereto, or (c) has breached or failed to perform his duties hereunder, and such breach or failure to perform constitutes self-dealing, willful misconduct or recklessness, (within the meaning of 9 Section 1713(a) of the Pennsylvania Business Corporation Law, as amended), or a final determination has been reached that the Executive has violated the representations made in Section 1 above, or the provisions of Section 7, below; provided, however, that the Board has given the Executive advance notice of such Termination for Cause including the reasons therefor, together with a reasonable opportunity for the Executive to appear with counsel before the Board and to reply to such notice. (ii) The term, "Constructive Discharge", means a termination of the Executive's employment by the Executive due to a failure of the Company or its successors to fulfill the obligations under this Agreement in any material respect, including (a) any failure to elect or reelect or to appoint or reappoint the Executive to the offices of Chairman and Chief Executive Officer of the Company and the Holding Company or as a member of each of their boards of directors or (b) any other material change by the Company and the Holding Company in the functions, duties or responsibilities of the Executive's position with the Company and the Holding Company which would reduce the ranking or level, dignity, responsibility, importance or scope of such position, (c) any imposition on the Executive of a requirement to be permanently based at a location more than fifty miles from the principal office of the Company without the consent of the Executive, or (d) any reduction without the consent of the Executive in the Executive's salary below the amount then provided for under Paragraph 4(a) hereof. (iii) The term "Without Cause Termination" means a termination of the Executive's employment by the Company, upon 30 days notice to the Executive, other than due to Permanent Disability or expiration of the Term and other than a Termination for Cause. 10 (iv) The term "Permanent Disability" means the inability of the Executive to work for a period of six full calendar months during any eight consecutive calendar months due to illness or injury of a physical or mental nature, supported by the completion by the Executive's attending physician of a medical certification form outlining the disability and treatment. 7. OTHER DUTIES OF EXECUTIVE DURING AND AFTER TERM. (a) CONFIDENTIAL INFORMATION. The Executive recognizes and acknowledges that certain information pertaining to the affairs, business, clients, or customers of the Holding Company or any of its subsidiaries or affiliates (any or all of such entities hereinafter referred to as the "Business"), as such information may exist from time to time, is confidential information and is a unique and valuable asset of the Business, access to and knowledge of which are essential to the performance of his duties under this Agreement. The Executive shall not, through the end of the Term or thereafter, except to the extent reasonably necessary in the performance of his duties under this Agreement, divulge to any person, firm, association, corporation or governmental agency, any information concerning the affairs, business clients, or customers of the Business (except such information as is required by law to be divulged to a government agency or pursuant to lawful process or such information which is or shall become part of the public realm through no fault of the Executive), or make use of any such information for his own purposes or for the benefit of any person, firm, association or corporation (except the Business) and shall use his reasonable best efforts to prevent the disclosure of any such information by others. All records, memoranda, letters, books, papers, reports, accountings or other data, and other records and documents relating to the Business, whether made by the Executive or otherwise coming into his possession are, shall be, and shall remain the property of the Business. No copies thereof shall be made which are not retained by the Business, and the Executive agrees, on termination of his 11 employment, or on demand of the Holding Company, to deliver the same to the Holding Company. (b) NON-COMPETE. Through the end of the Term, the Executive shall not without express prior written approval by order of the Board, directly or indirectly own or hold any proprietary interest in, or be employed by or receive remuneration from, any corporation, partnership, sole proprietorship or other entity engaged in competition with the Company, the Holding Company or any of their affiliates (a "Competitor"), other than for severance type benefits from entities constituting prior employers of the Executive. The Executive also agrees that he will not solicit for the account of any Competitor, any customer or client of the Company, the Holding Company or their affiliates, or, in the event of the Executive's termination of employment, any entity or individual that was such a customer or client during the 12 month period immediately preceding the Executive's termination of employment. The Executive also agrees not to act on behalf of any Competitor to interfere with the relationship between the Company, the Holding Company or their affiliates and their employees. For purposes of the preceding sentence, (i) the term, "Proprietary interest", means direct or indirect legal or equitable ownership, whether through stockholdings or otherwise, of an equity interest in a business, firm or entity other than ownership through mutual funds or other similar diversified vehicles; provided, however, that the Executive shall not be required to divest any previously acquired equity interest and (ii) an entity shall be considered to be "engaged in competition" if such entity is a commercial bank located in Pittsburgh, Pennsylvania or any other major money center commercial bank or major regional commercial bank, in either case, with principal offices in any state east of the Mississippi River. Notwithstanding the foregoing, it is understood that the Executive is subject to all policies and procedures of the Company and the Holding Company regarding investment in securities of competitors. 12 (c) REMEDIES. The Company's obligation to make payments or provide for or increase any benefits under this Agreement (except to the extent vested) shall cease upon any violation of the preceding provisions of this Section; provided, however, that the Executive shall first have the right to appear before the Board with counsel and that such cessation of payments or benefits shall require a vote of a majority of the Board members then in office, and provided, further, that in the event of a violation of the preceding provisions of this Section following a "change in control" (as defined for purposes of the severance arrangements for employees of the Company adopted by the Board in a resolution dated June 15, 1987) the Company's obligations to make payments or provide for any benefits under this Agreement shall cease only to the extent of the Executive's remuneration from subsequent employers, or income from self employment which is subject to FICA taxation, during the period liquidated damages or severance compensation is to be paid by the Company. The Executive's agreement as set forth in this Section 7 shall survive the Executive's termination of employment with the Company. 8. RETIREMENT. (a) The Executive may elect, upon not less than 12 months' advance written notice, to retire under this Agreement, if then in effect, on the first day of any month coincident with or after his attainment of age 62. In the event of such retirement, the Term and the Company's obligation to make payments under Section 4 above shall cease as of the retirement date, except for (i) earned but unpaid Base Salary which shall be payable in full and the target bonus award (or, if higher, the bonus award the Executive would have received had he been employed throughout the bonus year), including any restricted stock or phantom stock units payable in lieu of any portion of the Profit Bonus Plan award, which shall be payable on a pro-rated basis for the year of retirement, (ii) vested benefits under Company plans or programs maintained for employees generally and (iii) the delivery of shares or cash 13 upon the exercise of stock options held by the Executive pursuant to the terms of the Holding Company's stock option plan. In addition, the Company shall pay a monthly supplemental retirement benefit to the Executive, commencing immediately and continuing for the remainder of his life, which benefit shall be payable in the form of a 50% joint and survivor annuity which shall be unreduced for the actuarial value of the survivor's benefit. If the Executive's spouse at the time of his death is not more than three years younger than the Executive, the survivor benefit shall be equal to 50% of the Executive's benefit and shall be payable for the remainder of the spouse's life. If the Executive's spouse at the time of his death is more than three years younger than the Executive, the benefit payable to the survivor shall be reduced to a benefit having the same actuarial value as the benefit that would have been payable had the spouse been three years younger than the Executive. The Executive shall also have the right to elect a 100% joint and survivor annuity, on an actuarially-reduced basis or a lump-sum payment, on an actuarially-reduced basis (if the Executive makes a timely lump-sum election which avoids constructive receipt), or any other form of payment available or provided under the "Supplemental Plans" defined in this Paragraph. Actuarial reductions shall be based on the actual ages of the Executive and his spouse at the time of retirement. In the event that the Executive elects a form of payment other than the automatic 50% joint and survivor annuity or other than a lump sum payment, and remarries subsequent to retirement, the benefits payable under this Section shall be actuarially adjusted at the time of the Executive's death to reflect the age of the subsequent spouse. If the Executive elects a lump sum payment at retirement, no further benefits will be payable under this Section. The amount of the monthly retirement benefit as an unreduced 50% joint and survivor annuity shall be equal to the product of (A) the "Compensation Percentage" multiplied by (B) the Executive's "Final Average Compensation" multiplied by (C) the Executive's "Vesting Percentage", with such product reduced by (D) the total monthly amount of benefit (measured for purposes of this offset as if the Executive elected a 50% joint and survivor annuity upon retirement) provided to or in respect of the Executive under 14 all tax-qualified retirement plans and related excess benefit and other benefit restoration plans maintained by the Company or the Holding Company for the Executive, including the Mellon Bank Benefit Restoration Plan and the Mellon Bank IRC Section 401(a)(17) Plan (the "Supplemental Plans") and benefits paid pursuant to Section 4.7 of the Mellon Bank Corporation Elective Deferred Compensation Plan for Senior Officers, but not including payments of any compensation previously deferred under any deferred compensation plan of the Company or the Holding Company, or interest thereon, or payments from the Mellon Bank Corporation Retirement Savings Plan, a 401(k) plan. The Executive owns interest in life insurance policies (the "Policies") as a participant in the Mellon Bank Senior Executive Life Insurance Plan. The supplemental retirement benefit payable to the Executive hereunder shall be further reduced by the Executive's interest in the cash value of the Policies. This reduction shall be calculated in the same manner as under the Supplemental Plans. If Executive retires after he attains age 65, Executive shall be entitled for the period after he attains age 65 until his actual retirement date to receive both (A) an actuarial increase in the gross supplemental retirement benefit which would have been payable to him if he had retired when he attained age 65 and (B) an additional incremental gross supplemental retirement benefit, without actuarial increase, based on his additional service and increase, if any, in his Final Average Compensation subsequent to attaining age 65. The increases described in the preceding sentence shall be calculated in the manner illustrated in Appendix A hereto, using for purposes of clause (A) the actuarial factors set forth in the Mellon Bank Retirement Plan. For purposes of determining the benefit described in clause (A) above, Final Average Compensation may be determined based on Base Salary for the 36 consecutive months from June 1, 1994 to May 31, 1997 and Bonus Awards paid to the Executive for work performed in the 36-month period from January 1, 1995 to December 31, 1997, if such Base Salary and Bonus Awards result in a higher Final 15 Average Compensation than Final Average Compensation as described in Paragraph 8(e). This adjusted gross supplemental retirement benefit shall then be reduced by other benefits which are payable to Executive and Executive's interest in the cash value of Policies as of his actual retirement date in the manner described above in this Paragraph 8(a). The Executive shall elect the form of payment of his supplemental retirement benefit at the same time and subject to the same provisions (including timing requirements and all reductions and/or penalties for late elections) as provided under the Supplemental Plans. After retirement, the Executive (or beneficiary who is receiving payments) may elect to receive his remaining supplemental retirement benefits which are payable hereunder in a lump sum payment, calculated in the same manner and subject to the same reductions as under the Supplemental Plans. In the event that the Executive elects a form of payment of his supplemental retirement benefits which provides for payments to continue after his death and the Executive dies without having received all payments of supplemental retirement benefits that may be payable hereunder, then the unpaid balance of such benefits shall be paid in accordance with the form of payment elected by the Executive. Any such remaining payments shall be made to the Executive's beneficiary provided under the Supplemental Plans, subject to any contrary written instructions from the Executive designating a different beneficiary for such payments. (b) The Executive may also elect, upon not less than 12 months' advance written notice, to retire under this Agreement on the first day of any month coincident with or after his attainment of age 60. Benefits will be computed on the basis of the years of service, "Final Average Compensation", "Compensation Percentage" and "Vesting Percentage" determined at the date of such retirement prior to age 62 and shall be actuarially reduced from the unreduced full payment required under this Agreement at age 62 to reflect such early retirement. In the event of such 16 retirement, the Term and the Company's obligations to make payments under Section 4 above shall cease as of the retirement date. (c) Notwithstanding the foregoing, in no event shall the Executive receive any payments under this Section 8 or be deemed to be retired from the Company while the Executive is entitled to payments under Paragraph 6(a). (d) As used in this Agreement, "Compensation Percentage" means 50% plus 2.5% for each full year of employment which the Executive has completed under this Agreement as of the date his active employment with the Company terminates, plus 2.5% for each full year the Executive receives payments under Paragraph 6(a) hereof (with such percentage pro-rated for the partial contract year in which such final termination of the Executive's employment occurs or in which such final payments under Paragraph 6(a) hereof are made, whichever shall be applicable). (e) As used in this Agreement, "Final Average Compensation" means the average monthly amount of the Executive's Base Salary and any bonus award for the 36 consecutive months of the Executive's employment by the Company, under this Agreement or prior agreements, which produces the highest average amount. The cash value of any portion of bonus payable as either restricted stock or phantom stock units (in lieu of any portion of the Profit Bonus Plan award) shall be determined on the date such restricted stock or phantom stock units are granted for purposes of determining Final Average Compensation. Any portion of the Executive's Base Salary and bonus award which is deferred by the Executive under prior agreements with the Company or under any Company or Holding Company employee benefit plan shall be included for purposes of determining Final Average Compensation. (f) As used in this Agreement, the term "Vesting Percentage" shall be determined from the following vesting schedule on the basis of the number of full months of 17 employment with the Company which the Executive has completed under this Agreement as of the date his active employment with the Company terminates plus the number of months during which the Executive receives payments under Paragraph 6(a). VESTING SCHEDULE
VESTING INTERVAL VESTING PERCENTAGE Less than 11 85% 11 or more 100%
In the event the Executive's employment is terminated during the first 11 months of the Term, the Executive's vesting percentage shall be 85% increased by a pro rata portion of the remaining 15% determined by dividing the number of whole months worked during such 11-month period by 11. In the event the Executive's termination of employment is due to death, prior to the commencement of the payment of pension benefits under this Section, and he shall be survived by a spouse, such spouse shall be entitled to receive a pre-retirement death benefit, payable in the form of a lifetime annuity, equal in value to the benefit which would have been payable to the Executive hereunder had he retired immediately prior to the date of his death and elected the unreduced 50% joint and survivor annuity provided under Paragraph (a) of this Section 8. If the Executive's spouse at the time of his death is more than three years younger than the Executive, the benefit payable to the survivor shall be reduced to a benefit having the same actuarial value as the benefit that would have been payable had the spouse been three years younger than the Executive. 18 9. LIMITATION AS TO AMOUNTS PAYABLE. (a) SECTION 280G LIMITATION. In the event that any payment, coverage or benefit provided under this Agreement would, in the opinion of counsel for the Company, not be deemed to be deductible in whole or in part in the calculation of the Federal income tax of the Company, or any other person making such payment or providing such coverage or benefit, by reason of Section 280G of the Code, the aggregate payments, coverages or benefits provided hereunder shall be reduced to the "safe harbor" level under Section 280G of the Code so that no portion of such amount which is paid to the Executive is not deductible by reason of Section 280G of the Code. Executive may determine which payments, coverages or benefits will be reduced in order to satisfy the "safe harbor" level under Section 280G. Furthermore, the Company shall hold such portions not paid to the Executive in escrow pending a final determination of whether such amounts would be deductible if paid to the Executive, and the Company shall use its best efforts to seek a ruling from the Internal Revenue Service that any portion of such payments, coverages or benefits not paid to the Executive pursuant to this Paragraph 9(a) would continue to be deductible if paid to the Executive and the Company shall pay to the Executive any portion of such amounts for which such a ruling is received. In the event the IRS will not rule on such matter, the Company shall pay to the Executive such amounts maintained in escrow pursuant to this Paragraph 9(a) as shall be determined at some point in time by a counsel, selected by the Company and the Executive, is likely to be deductible if paid to the Executive or shall be forfeited by the Executive in the event of a final determination by the IRS that such amounts are not deductible. For purposes of this Paragraph, the value of any non-cash benefit or coverage or any deferred or contingent payment or benefit shall be determined by the independent auditors of the Company in accordance with the principles of Section 280G of the Code. 19 (b) OFFSET. Within 90 days following any termination of his employment which constitutes a Without Cause Termination or Constructive Discharge (as such terms are defined in Paragraph 6(c)), Executive may elect, by written notice to Employer, to have the provisions of this Paragraph 9(b) apply to reduce the aggregate payments, coverages and benefits provided under this Agreement during the remainder of the Term of this Agreement following his termination of employment (hereafter the "Applicable Period"). If Executive does not make such election, this Paragraph 9(b) shall have no application or effect under this Agreement. If Executive elects to have this Paragraph 9(b) apply, the aggregate payments, coverages and benefits provided to Executive under this Agreement during the Applicable Period following his termination of employment shall be reduced by "mitigation" (as defined below) to comply with Regulations under Section 280G of the Code, including, in particular, Question and Answer 42(b). "Mitigation" shall mean that payments which are made and benefits which are provided by the Employer during the Applicable Period after termination of Executive's employment and which are attributable to the Applicable Period and not to any other period will be reduced by all earned income (within the meaning of Section 911(d)(2)(A) of the Code) received by Executive from persons or entities other than the Employer or from self employment during the Applicable Period. Not less frequently than annually (by December 31 of each year) during the Applicable Period, Executive shall account to the Employer with respect to all payments and benefits received by Executive from other employment or self employment during the Applicable Period which are required by reason of his duty of "mitigation" hereunder to be offset against payments or benefits received by Executive from the Employer during the Applicable Period. During the Applicable Period, if the Employer has paid amounts in excess of those to which Executive was entitled (after giving effect to the offsets provided above), Executive shall reimburse the Employer for such excess by December 31 of such year. 20 If Executive receives earned income from other employment or self employment during only a portion, but not all, of the Applicable Period, only payments which are made and benefits which are provided by the Employer that are attributable to the portion of the Applicable Period during which Executive receives earned income from other employment or self employment shall be subject to reduction and offset as provided above. If Executive elects to have this Paragraph 9(b) apply, Executive may elect, at any time, to be subject to a greater (but no lesser) duty of "mitigation" than otherwise provided above in this Paragraph 9(b), if counsel selected by Executive determines that such greater duty of "mitigation" is advisable in order to comply with Regulations under Section 280G. 10. LEGAL FEES, RELATED EXPENSES. The Company agrees to promptly reimburse the Executive for his reasonable legal and consulting fees incurred in the preparation and negotiation of this Agreement. In addition, in the event of any litigation or other proceeding between the Company and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company shall reimburse the Executive for his reasonable costs and expenses relating to such litigation or other proceeding, including attorneys' fees and expenses, provided that such litigation or proceeding results in any: (i) settlement requiring the Company to make a payment to the Executive; or (ii) judgment, order or award in favor of the Executive, unless such judgment, order or award is subsequently reversed on appeal or in a collateral proceeding. 11. WITHHOLDING TAXES. The Company may directly or indirectly withhold from any payments made under this Agreement all Federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 21 12. CONSOLIDATION, MERGER, OR SALE OF ASSETS. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation which assumes this Agreement and all obligations and undertakings of the Company hereunder. Upon such a consolidation, merger or transfer of assets and assumption, the term, "Company", as used herein shall mean such other corporation and this Agreement shall continue in full force and effect. 13. NOTICES. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if delivered or mailed, postage prepaid, by same day or overnight mail as follows: (a) To the Company: Director-Human Resources Department Mellon Bank, N.A. 1 Mellon Bank Center Pittsburgh, Pennsylvania 15258 (b) To the Executive: 615 East Drive Sewickley, Pennsylvania 15143 with copies to: Peter Mullin Management Compensation Group 644 S. Figueroa Street Los Angeles, California 90017 Joseph D. Mandel 15478 Longbow Drive Sherman Oaks, California 91403 or to such other address as either party shall have previously specified in writing to the other. 22 14. NO ATTACHMENT. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect, provided, however, that nothing in this Section 14 shall preclude the assumption of such rights by executors, administrators, or other legal representatives of the Executive or his estate and their assigning any rights hereunder to the person or persons entitled thereto. 15. SOURCE OF PAYMENTS. All payments provided for under this Agreement shall be paid in cash from the general funds of the Company. The Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title, or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. 16. BINDING AGREEMENT. This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Company and, as permitted by this Agreement, their respective successors, assigns, heirs, beneficiaries and representatives. 17. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. 23 18. COUNTERPARTS. This Agreement may be executed in counterparts, each of which, when executed, shall be deemed to be an original and both of which together shall be deemed to one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its officers thereunto duly authorized, and the Executive has signed this Agreement, all as of the first date above written. ATTEST: Mellon Bank, N.A. ELAINE BECK ORESTI By: D. MICHAEL ROARK - ---------------------- --------------------------- Elaine Beck Oresti D. Michael Roark Secretary Head of the Human Resources Department FRANK V. CAHOUET --------------------------- Frank V. Cahouet 24 APPENDIX A Frank Cahouet Employment Agreement Dated as of July 25, 1993 Amended through October 17, 1995 Supplemental Retirement Benefit Basis of Sample Calculation Birth Date: May 25, 1932 Spouse Birth Date: March 2, 1931 Assumed Retirement Date: January 1, 1999 Compensation Assumption: Salary or Bonus in Any Given Year is Greater Than or Equal to Prior Year Salary or Bonus Service at Age 65: Elapsed Time from 7/25/93 to 5/31/97 Rounded up to Complete Month = SVC65 Service at Retirement: Elapsed Time from 7/25/93 to 12/31/98 Rounded up to Complete Month = SVCRET Actuarial Equivalence: 1979 Buck (80% Male, 20% Female) Mortality, 7% Interest N(12)65 = N(12)65 N(12)66 7/12 = N(12)RET Life Annuity to 50% Joint & Contingent Annuity Conversion Factor = JS65:66 (Executive Age Nearest 65, Spouse Age Nearest 66) Life Annuity to 50% Joint & Contingent Annuity Conversion Factor = JS67:68 (Executive Age Nearest 67, Spouse Age Nearest 68)
Determination of Final Average Compensation at Age 65
/-----------------------------------------------------------------------------------------------------------/ Salary Bonus Total Date Salary Date Bonus Compensation /----------------------------------------------------------------------------------------------------------/ 6/1/94 - 5/31/95 Salary 1 1/1/95 - 12/31/95 Bonus 1 Salary 1 + Bonus 1 6/1/95 - 5/31/96 Salary 2 1/1/96 - 12/31/96 Bonus 2 Salary 2 + Bonus 2 6/1/96 - 5/31/97 Salary 3 1/1/97 - 12/31/97 Bonus 3 Salary 3 + Bonus 3 Average of Total Compensation = FAC65
Determination of Final Average Compensation at Retirement
/-----------------------------------------------------------------------------------------------------------/ Bonus Total Date Salary Date Bonus Compensation /----------------------------------------------------------------------------------------------------------/ 1/1/96 - 12/31/96 Salary 4 1/1/96 - 12/31/96 Bonus 2 Salary 4 + Bonus 2 1/1/97 - 12/31/97 Salary 5 1/1/97 - 12/31/97 Bonus 3 Salary 5 + Bonus 3 1/1/98 - 12/31/98 Salary 6 1/1/98 - 12/31/98 Bonus 4 Salary 6 + Bonus 4 Average of Total Compensation = FACRET
Calculation of Age 65 Benefit FAC65 x [50% + (2.5% x SVC65)] = BEN65
Calculation of Age 65 Benefit Actuarially Increased to reflect Delayed Commencement at 1/1/99 [BEN65 / JS65:66] x [N(12)65 / N(12)RET] x JS67:68 = BEN65A1
Calculation of Annual Benefit Payable Upon Retirement at 1/1/99 BEN65AI + [FACRET x [50% + (2.5% x SVCRET)] - BEN65] = BENRET
EX-11.1 3 MELLON BANK 10-K405 1 Ex-11.1 COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE Mellon Bank Corporation (and its subsidiaries)
Year ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- PRIMARY NET INCOME PER COMMON SHARE Net income applicable to common stock $652,234,000 $361,221,000(a) $401,398,000(a) - --------------------------------------------------------------------------------------------------------------------- Stock and stock equivalents (average shares): Common shares outstanding 143,428,078 145,036,812 141,610,182 Common shares issuable upon conversion of Series D preferred stock - 1,692,263 2,460,632 Other common stock equivalents, net of shares assumed to be repurchased under the treasury stock method: Stock options 1,377,077 1,886,912 2,406,069 Warrants 268,510 451,978 412,244 Series D preferred stock subscription rights - 817 55,356 Common stock subscription rights - - 137,706 - --------------------------------------------------------------------------------------------------------------------- Total stock and stock equivalents 145,073,665 149,068,782 147,082,189 - --------------------------------------------------------------------------------------------------------------------- Net income per common share $4.50 $2.42 $2.73 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- FULLY DILUTED NET INCOME PER COMMON SHARE Net income applicable to common stock $652,234,000 $361,221,000(a) $401,398,000(a) - --------------------------------------------------------------------------------------------------------------------- The after-tax benefit of interest expense on the assumed conversion of 7-1/4% Convertible Subordinated Capital Notes 206,000 204,000 200,000 - --------------------------------------------------------------------------------------------------------------------- Adjusted net income applicable to common stock $652,440,000 $361,425,000 $401,598,000 - --------------------------------------------------------------------------------------------------------------------- Stock, stock equivalents and potentially dilutive items (average shares): Common shares outstanding 143,428,078 145,036,812 141,610,182 Common shares issuable upon conversion of Series D preferred stock - 1,692,263 2,460,632 Other common stock equivalents, net of shares assumed to be repurchased under the treasury stock method: Stock options 2,186,923 1,914,398 2,480,068 Warrants 440,834 451,978 412,244 Series D preferred stock subscription rights - 817 55,356 Common stock subscription rights - - 137,706 Common shares issuable upon conversion of 7-1/4% Subordinated Capital Notes 126,593 133,492 136,497 - --------------------------------------------------------------------------------------------------------------------- Total 146,182,428 149,229,760 147,292,685 - --------------------------------------------------------------------------------------------------------------------- Net income per common share $4.46 $2.42 $2.73 - --------------------------------------------------------------------------------------------------------------------- (a) After adding back Series D preferred stock dividends of $3 million in 1994 and $4 million in 1993. Series D preferred stock was considered a common stock equivalent.
EX-12.1 4 MELLON BANK 10-K405 1 Ex-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Mellon Bank Corporation (parent Corporation)(a)
- --------------------------------------------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in thousands) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------- 1. Income before income taxes and equity in undistributed net income (loss) of subsidiaries $473,554 $434,035 $224,869 $137,594 $145,777 2. Fixed charges: interest expense, one-third of rental expense net of income from subleases, and amortization of debt issuance costs 96,971 95,193 110,739 79,709 103,001 - --------------------------------------------------------------------------------------------------------------------- 3. Income before income taxes and equity in undistributed net income (loss) of subsidiaries, plus fixed charges (line 1 + line 2) $570,525 $529,228 $335,608 $217,303 $248,778 - --------------------------------------------------------------------------------------------------------------------- 4. Preferred stock dividend requirements (b) $ 62,035 $124,260 $103,792 $ 61,197 $ 57,618 - --------------------------------------------------------------------------------------------------------------------- 5. Ratio of earnings (as defined) to fixed charges (line 3 divided by line 2) 5.88 5.56 3.03 2.73 2.42 6. Ratio of earnings (as defined) to combined fixed charges and preferred stock dividends [line 3 divided by (line 2 + line 4)] 3.59 2.41 1.56 1.54 1.55 - --------------------------------------------------------------------------------------------------------------------- (a) The parent Corporation ratios include the accounts of Mellon Bank Corporation (the "Corporation") and Mellon Financial Company, a wholly owned subsidiary of the Corporation that functions as a financing entity for the Corporation and its subsidiaries by issuing commercial paper and other debt guaranteed by the Corporation. For purposes of computing these ratios, earnings represent parent Corporation income before taxes and equity in undistributed net income (loss) of subsidiaries, plus the fixed charges of the parent Corporation. Fixed charges represent interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, and amortization of debt issuance costs. Because the ratio excludes from earnings the equity in undistributed net income (loss) of subsidiaries, the ratio varies with the payment of dividends by such subsidiaries. (b) Preferred stock dividend requirements for all years presented represent the pretax amount required to cover preferred stock dividends.
EX-12.2 5 MELLON BANK 10-K405 1 Ex-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Mellon Bank Corporation and its subsidiaries(a)
- -------------------------------------------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------- 1. Income $ 691,534 $ 433,365 $ 460,213 $ 527,955 $ 347,451 2. Provision for income taxes 400,058 278,040 298,034 104,099 62,199 - -------------------------------------------------------------------------------------------------------------------- 3. Income before provision for income taxes (line 1 + line 2) $1,091,592 $ 711,405 $ 758,247 $ 632,054 $ 409,650 - -------------------------------------------------------------------------------------------------------------------- 4. Fixed charges: a. Interest expense (excluding interest on deposits) $ 401,700 $ 263,054 $ 200,915 $ 211,998 $ 326,437 b. One-third of rental expense (net of income from subleases) and amortization of debt issuance costs 44,303 40,140 38,190 29,446 30,300 - -------------------------------------------------------------------------------------------------------------------- c. Total fixed charges (excluding interest on deposits) (line 4a + line 4b) 446,003 303,194 239,105 241,444 356,737 d. Interest on deposits 888,580 538,715 454,458 636,719 1,006,566 - -------------------------------------------------------------------------------------------------------------------- e. Total fixed charges (line 4c + line 4d) $1,334,583 $ 841,909 $ 693,563 $ 878,163 $1,363,303 - -------------------------------------------------------------------------------------------------------------------- 5. Preferred stock dividend requirements (b) $ 62,035 $ 124,260 $ 103,792 $ 61,197 $ 57,618 - -------------------------------------------------------------------------------------------------------------------- 6. Income before provision for income taxes, plus total fixed charges: a. Excluding interest on deposits (line 3 + line 4c) $1,537,595 $1,014,599 $ 997,352 $ 873,498 $ 766,387 - -------------------------------------------------------------------------------------------------------------------- b. Including interest on deposits (line 3 + line 4e) $2,426,175 $1,553,314 $1,451,810 $1,510,217 $1,772,953 - -------------------------------------------------------------------------------------------------------------------- 7. Ratio of earnings (as defined) to fixed charges: a. Excluding interest on deposits (line 6a divided by line 4c) 3.45 3.35 4.17 3.62 2.15 b. Including interest on deposits (line 6b divided by line 4e) 1.82 1.84 2.09 1.72 1.30 8. Ratio of earnings (as defined) to combined fixed charges and preferred stock dividends: a. Excluding interest on deposits [line 6a divided by (line 4c + line 5)] 3.03 2.37 2.91 2.89 1.85 b. Including interest on deposits [line 6b divided by (line 4e + line 5)] 1.74 1.61 1.82 1.61 1.25 - --------------------------------------------------------------------------------------------------------------------
2 Ex-12.2 (continued) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (a) For purposes of computing these ratios, earnings represent consolidated income, before income taxes plus consolidated fixed charges. Fixed charges, excluding interest on deposits, include interest expense (other than on deposits), one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, and amortization of debt issuance costs. Fixed charges, including interest on deposits, include all interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, and amortization of debt issuance costs. (b) Preferred stock dividend requirements for all years presented represent the pretax amount required to cover preferred stock dividends. EX-13.1 6 MELLON BANK 10-K405 1 MELLON BANK CORPORATION 1995 ANNUAL REPORT PRINCIPAL LOCATIONS AND OPERATING ENTITIES
RETAIL SUBSIDIARIES AND REGIONS OTHER DOMESTIC AND INTERNATIONAL LOCATIONS Mellon Bank Corporation operates the -MELLON BANK--WESTERN REGION serves ACCESS CAPITAL STRATEGIES specializes in following retail subsidiaries in the United consumer and small to midsize economically targeted investments in States: Mellon Bank, N.A., Mellon Bank commercial markets in western support of affordable housing and job (DE) National Association, Mellon Bank (MD), Pennsylvania. creation. Mellon PSFS (NJ) National Association Headquarters: Pittsburgh, Pennsylvania Locations: Cambridge, Massachusetts and Mellon Bank, F.S.B. Regional President: Milwaukee, Wisconsin Matthew Giles MELLON BANK, N.A. comprises six regions. Headquarters: Pittsburgh, Pennsylvania AFCO CREDIT CORPORATION, with its Chairman, President and CEO: Canadian affiliate, CAFO, Inc., is the Frank V. Cahouet -MELLON PSFS* In the Philadelphia area, nation's largest insurance premium MELLON BANK, N.A. uses the name MELLON financing company, with 22 offices in PSFS and serves consumer and small to the United States and Canada. - - MELLON BANK--CENTRAL REGION serves consumer midsize commercial markets in eastern Headquarters: New York, New York and small to midsize commercial markets Pennsylvania. in central Pennsylvania. Headquarters: Philadelphia, Pennsylvania Headquarters: State College, Pennsylvania Chairman and CEO: THE BOSTON COMPANY ASSET MANAGEMENT, Chairman, President and CEO: William J. Stallkamp INC. provides institutional investment Ralph J. Papa management services. Locations: Los Angeles, California San Francisco, California - - MELLON BANK--COMMONWEALTH REGION serves MELLON BANK (DE) NATIONAL ASSOCIATION Boston, Massachusetts consumer and small to midsize commercial serves consumer and small to midsize markets in southcentral Pennsylvania. commercial markets throughout Delaware BOSTON SAFE DEPOSIT AND TRUST COMPANY Headquarters: Harrisburg, Pennsylvania and provides nationwide cardholder provides trust and custody Chairman and CEO: processing services. administration for institutional Stephen R. Burke Headquarters: Wilmington, Delaware and private clients, private asset Chairman, President management and personal and and CEO: jumbo mortgage lending. - - MELLON BANK--NORTHEASTERN REGION serves Warner S. Waters, Jr. Locations: Los Angeles, California consumer and small to midsize commercial Newport Beach, California markets in northeastern Pennsylvania. Palo Alto, California Headquarters: Wilkes-Barre, Pennsylvania MELLON BANK (MD) serves consumer and San Francisco, California Chairman, President and CEO: small to midsize commercial markets Chicago, Illinois Peter B. Eglin throughout Maryland. Boston, Massachusetts Headquarters: Rockville, Maryland Medford, Massachusetts Chairman, President New York, New York - - MELLON BANK--NORTHERN REGION serves and CEO: Philadelphia, Pennsylvania consumer and small to midsize commercial Kenneth R. Dubuque Pittsburgh, Pennsylvania markets in northwestern Pennsylvania. McLean, Virginia Headquarters: Erie, Pennsylvania MELLON PSFS (NJ) NATIONAL Toronto, Ontario, Canada Chairman, President and CEO: ASSOCIATION serves consumer and London, England Thomas B. Black small to midsize commercial markets in southern New Jersey. Headquarters: Voorhees, New Jersey Chairman, President and CEO: Robert D. Davis MELLON BANK, F.S.B. provides corporate trust and personal trust services and serves consumer and small to midsize commercial markets. Headquarters: Paramus, New Jersey Chairman, President and CEO: William V. Healey
* Mellon PSFS is a registered service mark of Mellon Bank, N.A. 18 2 PRINCIPAL LOCATIONS AND OPERATING ENTITIES (CONTINUED) CCF-MELLON PARTNERS, a joint venture with DREYFUS MANAGEMENT, INC. provides The INSTITUTIONAL BANKING REPRESENTATIVE Credit Commercial de France, markets investment management services for OFFICE markets credit and other banking investment advisory and discretionary money institutions including corporations, services to broker/dealers. management services in North America and endowments, foundations, public retirement Location: New York, New York Europe. plans, jointly trusteed plans, colleges and Location: Pittsburgh, Pennsylvania universities, and labor unions. INTERNATIONAL BANKING OFFICES provide Location: New York, New York international banking services, including CERTUS ASSET ADVISORS is a stable- trade banking, demand deposits, loans, value market specialist providing DREYFUS RETIREMENT SERVICES provides a full capital markets products and foreign investment management services array of investment products, participant exchange to domestic and international to defined contribution plan education and administrative services to customers. sponsors. defined contribution plans nationwide. Locations: London, England Location: San Francisco, California Locations: Los Angeles, California Grand Cayman, San Francisco, California British, West Indies CHEMICAL MELLON SHAREHOLDER SERVICES Atlanta, Georgia provides securities transfer and Chicago, Illinois shareholder services. Boston, Massachusetts Locations: Encino, California New York, New York INTERNATIONAL REPRESENTATIVE OFFICES San Francisco, California Uniondale, New York serve as a liaison between the Hartford, Connecticut Philadelphia, Pennsylvania Corporation's banking subsidiaries Ridgefield Park, New Jersey Pittsburgh, Pennsylvania and overseas customers. New York, New York Providence, Rhode Island Locations: Tokyo, Japan Pittsburgh, Pennsylvania Dallas, Texas Hong Kong Dallas, Texas DREYFUS SERVICE CORPORATION provides LAUREL CAPITAL ADVISORS CORPORATE BANKING REPRESENTATIVE OFFICES advertising, marketing and servicing provides investment market credit and related services to large functions to all Dreyfus Funds. management services for corporate customers, exclusive of financial Location: New York, New York individuals and institutions. corporations through Locations: Los Angeles, California THE DREYFUS TRUST COMPANY provides invest- brokerage firms Chicago, Illinois ment management, trust and custody services throughout the Boston, Massachusetts to tax-qualified and non-qualified United States. New York, New York retirement plans and investment Location: Pittsburgh, Pennsylvania Philadelphia, Pennsylvania management services to the Pittsburgh, Pennsylvania institutional marketplace, offering The LEASING GROUP markets a Houston, Texas a wide range of investment broad range of leasing products for individuals, insur- and lease-related services The CORPORATE TRUST GROUP provides ance companies, corporations, to corporations throughout bond trustee, registrar, paying agent, public funds, endowments, foun- the United States with custodian, escrow agent and investment dations and Taft-Hartley plans. annual sales of more than management for municipal and Location: Uniondale, New York $250 million, as well as corporate clients. to corporations in the Locations: Indianapolis, Indiana FRANKLIN PORTFOLIO ASSOCIATES Central Atlantic Region Boston, Massachusetts provides investment management services with annual sales Ann Arbor, Michigan for employee benefit funds and between $10 million and Albany, New York institutional clients. $250 million. Cleveland, Ohio Location: Boston, Massachusetts Locations: Chicago, Illinois Columbus, Ohio Pittsburgh, Pennsylvania Harrisburg, Pennsylvania Philadelphia, Pennsylvania GLOBAL CASH MANAGEMENT REGIONAL OPERATING Pittsburgh, Pennsylvania AND MARKETING SITES provide cash Seattle, Washington management operating services to MELLON BANK CANADA is a chartered corporations and financial institutions. Canadian bank providing services to the THE DREYFUS CORPORATION is one of the Locations: Los Angeles, California corporate market throughout Canada. nation's leading mutual fund companies. Atlanta, Georgia Location: Toronto, Ontario, Canada Dreyfus manages or administers more Chicago, Illinois than $81 billion in more than 175 Boston, Massachusetts mutual fund portfolios. Philadelphia, Pennsylvania Headquarters: New York, New York Pittsburgh, Pennsylvania Dallas, Texas DREYFUS INVESTMENT SERVICES CORPORATION London, England provides a full range of securities brokerage services for individuals and institutional clients. Location: Pittsburgh, Pennsylvania
19 3 PRINCIPAL LOCATIONS AND OPERATING ENTITIES (CONTINUED) MELLON BANK COMMUNITY MELLON VENTURES, INC. or its PARETO PARTNERS provides investment DEVELOPMENT CORPORATION, affiliates invest in the management services for employee benefit one of the first holding company equity of middle market funds and institutional and high net CDCs regulated by the Federal operating companies worth clients. Reserve Board, invests in experiencing rapid growth Locations: New York, New York projects that are important or change in ownership. London, England to modest-income segments of Locations: Philadelphia, Pennsylvania Delaware, Maryland, New Jersey Pittsburgh, Pennsylvania and Pennsylvania. PREMIER UNIT TRUST ADMINISTRATION is a Location: Pittsburgh, Pennsylvania leading servicer of unit trusts, the MIDDLE MARKET BANKING REPRESENTATIVE equivalent of mutual funds in MELLON BOND ASSOCIATES provides OFFICES market a full range of financial the United Kingdom and Ireland. structured management for bond portfolios and banking services to commercial Locations: Brentwood, Essex, England of large national institutional clients. customers with annual sales between $10 Dublin, Ireland Locations: Philadelphia, Pennsylvania million and $250 million. Mellon's Pittsburgh, Pennsylvania Middle Market group also specializes in providing services to all segments of the THE R-M TRUST COMPANY provides health care industry nationwide. stock transfer and indenture trustee MELLON BUSINESS CREDIT markets a broad Locations: Los Angeles, California services to Canadian clients. range of commercial finance products and Wilmington, Delaware Locations: Calgary, Alberta, Canada banking services nationwide to corporations Rockville, Maryland Vancouver, British with borrowing requirements that exceed Boston, Massachusetts Columbia, Canada $5 million. Edison, New Jersey Winnipeg, Manitoba, Canada Locations: Los Angeles, California Voorhees, New Jersey Halifax, Nova Scotia, Atlanta, Georgia Buffalo, New York Canada Chicago, Illinois Cleveland, Ohio Toronto, Ontario, Canada New York, New York Erie, Pennsylvania Montreal, Quebec, Canada Philadelphia, Pennsylvania Harrisburg, Pennsylvania Regina, Saskatchewan, Pittsburgh, Pennsylvania Philadelphia, Pennsylvania Canada Pittsburgh, Pennsylvania Plymouth Meeting, Pennsylvania MELLON CAPITAL MANAGEMENT State College, Pennsylvania provides portfolio and investment Wilkes-Barre, Pennsylvania management services. Location: San Francisco, California MORTGAGE BANKING, operating as Mellon MELLON EQUITY ASSOCIATES provides Mortgage Company and Mellon Bank, focuses specialized equity management services to on the origination, purchasing and the national pension and public fund servicing of both residential and markets. commercial mortgage loans through more Location: Pittsburgh, Pennsylvania than 100 locations nationwide. Headquarters: Houston, Texas MELLON EUROPE LTD., a United Kingdom- chartered bank, provides trust and cash management services in Europe. The NETWORK SERVICES DIVISION provides Location: London, England electronic funds transfer services, including automated teller machine MELLON FINANCIAL MARKETS, INC. processing and full-service merchant conducts securities business, payment systems, to financial providing fixed-income institutions and corporations. underwriting, trading and sales Location: Pittsburgh, Pennsylvania services to clients and investors throughout the United States. Locations: Philadelphia, Pennsylvania Pittsburgh, Pennsylvania MELLON SECURITIES TRUST COMPANY provides securities processing and custody services. Location: New York, New York Principal locations and operating entities as of December 31, 1995.
20 4 DIRECTORS AND SENIOR MANAGEMENT COMMITTEE Directors MELLON BANK CORPORATION AND MELLON BANK, N.A. Andrew W. Mathieson(1)(3)(4) CHAIRMEN EMERITI MELLON BANK-COMMONWEALTH Burton C. Borgelt(5)(6) Executive Vice President REGION Chairman Richard K. Mellon and Sons J. David Barnes Glenn R. Aldinger Dentsply International, Inc. Investments and philanthropy William B. Eagleson, Jr. Burton C. Borgelt Manufacturer of artificial James H. Higgins Stephen R. Burke teeth and consumable dental Edward J. McAniff(5)(6) Nathan W. Pearson Miles J. Gibbons, Jr. products Partner James E. Grandon, Jr. O'Melveny & Meyers ADVISORY BOARD Ruth Leventhal Carol R. Brown(2)(6) Full-service law firm Henry E. L. Luhrs President Howard O. Beaver, Jr. Gregory L. Sutliff The Pittsburgh Robert Mehrabian(2)(7) Retired Chairman and Cultural Trust President Chief Executive Officer MELLON BANK- Cultural and economic Carnegie Mellon University Carpenter Technology NORTHERN REGION growth organization Private co-educational Corporation James D. Berry III research institution Thomas B. Black Frank V. Cahouet(1) Alexander W. Calder Eugene Cross Chairman, President Seward Prosser Mellon Retired Chairman, President William S. DeArment and Chief President and and Chief Executive Officer Steven G. Elliott Executive Officer Chief Executive Officer Joy Manufacturing Company Robert G. Liptak, Jr. Mellon Bank Corporation Richard K. Mellon and Sons Gary W. Lyons and Mellon Bank, N.A. Investments H. Bryce Jordan Charles J. Myron Richard King Mellon Foundation President Emeritus Ruthanne Nerlich J. W. Connolly(1)(2)(4) Philanthropy The Pennsylvania State John S. Patton Retired Senior Vice University Paul D. Shafer, Jr. President David S. Shapira(1)(2)(5)(7) Cyrus R. Wellman H.J. Heinz Company Chairman and John C. Marous Food manufacturer Chief Executive Officer Retired Chairman and MELLON BANK- Giant Eagle, Inc. Chief Executive Officer NORTHEASTERN REGION Charles A. Corry(1)(2)(3)(4) Retail grocery store chain Westinghouse Electric David T. Andes Retired Chairman and Corporation Joseph B. Conahan, Jr. Chief Executive Officer W. Keith Smith(1) Frank J. Dracos USX Corporation Vice Chairman Masaaki Morita Peter B. Eglin Energy and steel Mellon Bank Corporation Chairman Alan J. Finlay and Mellon Bank, N.A. Sony USA Foundation Glenn Y. Forney C. Frederick Fetterolf(1)(2)(5)(6) Thomas M. Jacobs Retired President and Howard Stein(1) Nathan W. Pearson Allan M. Kluger Chief Operating Officer Chairman and Financial Advisor Richard F. Laux Aluminum Company of Chief Executive Officer Paul Mellon Family Joseph R. Nardone America The Dreyfus Corporation Interests Joseph F. Palchak, Jr. Aluminum and chemicals Richard L. Pearsall Joab L. Thomas(4)(7) H. Robert Sharbaugh Joseph L. Persico Ira J. Gumberg(1)(2)(5) President Emeritus Retired Chairman Arthur K. Ridley President and The Pennsylvania State Sun Company, Inc. Keith P. Russell Chief Executive Officer University Rhea P. Simms J.J. Gumberg Co. Major public research Richard M. Smith Real estate management and university Retired Vice Chairman development Bethlehem Steel MELLON PSFS Wesley W. von Schack(1)(3)(4) Corporation Paul C. Brucker Pemberton Hutchinson(3)(5)(6) Chairman, President and (6)(7) Frank J. Coyne Retired Chairman Chief Executive Officer REGIONAL BOARDS Thomas F. Donovan Westmoreland Coal Company DQE Lon R. Greenberg Coal mining company Energy services company Roger S. Hillas MELLON BANK-CENTRAL Hiliary H. Holloway Rotan E. Lee(5)(6) REGION Pemberton Hutchinson Chief Operating Officer William J. Young(4)(5)(6) Frederick K. Beard Rotan E. Lee RMS Technologies, Inc. Retired President Galen E. Dreibelbis Roland Morris Information technology Portland Cement Association John Lloyd Hanson William J. Stallkamp Trade association for the Carol Herrmann Francis R. Strawbridge III Portland cement industry Daniel B. Hoover Steven A. Van Dyck S. Wade Judy William J. Young Michael M. Kranich, Sr. Edwin E. Lash Robert W. Neff Ralph J. Papa Nicholas Pelick Graham C. Showalter Alvin L. Snowiss Robert M. Welham (1) Executive Committee (2) Audit Committee (3) Nominating Committee (4) Human Resources Committee (5) Trust and Investment Committee (6) Community Responsibility Committee (7) Technology Committee Listing as of March 1, 1996.
21 5 MELLON BANK CORPORATION 1995 ANNUAL REPORT SUBSIDIARY BOARDS THE DREYFUS CORPORATION SENIOR MANAGERS Philip R. Roberts Mandell L. Berman Frederick K. Beard Executive Vice President MELLON BANK CANADA Frank V. Cahouet Executive Vice President Mellon Global Asset Management Frederick K. Beard Stephen E. Canter Institutional Banking Peter A. Crossgrove Christopher M. Condron Peter Rzasnicki Keith G. Dalglish Alvin E. Friedman Paul S. Beideman Executive Vice President Thomas C. MacMillan Lawrence M. Greene Executive Vice President Global Trust Services James A. Riley Lawrence S. Kash Retail Financial Services Peter Rzasnicki Julian M. Smerling Richard L. Solheim Owen C. Shewfelt W. Keith Smith Richard B. Berner Executive Vice President Allan P. Woods Howard Stein Executive Vice President Mortgage Banking Philip L. Toia Economics MELLON BANK (DE) David B. Truman William J. Stallkamp NATIONAL ASSOCIATION John T. Chesko Executive Vice President John S. Barry MELLON BANK, F.S.B. Executive Vice President Mellon Bank, N.A. Robert C. Cole, Jr. Michael L. Carousis Chief Credit Officer Chairman and Audrey K. Doberstein Walter D. Chambers Chief Executive Officer Arden B. Engebretson Robert R. Detore Larry F. Clyde Mellon PSFS Norman D. Griffiths William V. Healey Executive Vice President Garrett B. Lyons Larry A. Raymond Capital Markets Robert W. Stasik Martin G. McGuinn Donald W. Titzel Executive Vice President W. Charles Paradee, Jr. Daryl J. Zupan Kenneth R. Dubuque Global Cash Management Bruce M. Stargatt Executive Vice President Warner S. Waters, Jr. Mellon Bank, N.A. Philip L. Toia SENIOR MANAGEMENT Chairman, President and Vice Chairman MELLON BANK (MD) COMMITTEE Chief Executive Officer Operations and Administration Michael A. Besche Mellon Bank (MD) The Dreyfus Corporation Lawrence Brown, Jr. OFFICE OF THE CHAIRMAN Kenneth R. Dubuque Frank V. Cahouet Darryl J. Fluhme Sherman White Albert R. Hinton Chairman, President and Executive Vice President Executive Vice President Martin G. McGuinn Chief Executive Officer Global Securities Operations Credit Recovery Norman Robertson Michael A. Smilow Christopher M. Condron Richard L. Holl Allan P. Woods Vice Chairman Executive Vice President Executive Vice President THE BOSTON COMPANY, INC. Real Estate Credit Recovery Mellon Information Services AND BOSTON SAFE DEPOSIT Steven G. Elliott AND TRUST COMPANY Vice Chairman Lawrence S. Kash OTHER CORPORATE OFFICERS Dwight L. Allison, Jr. Executive Vice President Michael E. Bleier Christopher M. Condron Jeffery L. Leininger Investment Services General Counsel James E. Conway* Vice Chairman Charles C. Cunningham, Jr. Daniel M. Kilcullen Michael K. Hughey Hans H. Estin David R. Lovejoy Executive Vice President Corporate Controller Avram J. Goldberg Vice Chairman Global Securities Services Lawrence S. Kash Carl Krasik Robert P. Mastrovita Martin G. McGuinn Allan C. Kirkman Secretary George Putnam Vice Chairman Executive Vice President Keith P. Russell Real Estate Finance Sandra J. McLaughlin Charles W. Schmidt Jeffrey L. Morby Corporate Communications W. Keith Smith Vice Chairman J. David Officer Officer C. Vincent Vappi Executive Vice President Benaree Pratt Wiley Keith P. Russell Mellon Private Asset Vice Chairman Management MELLON PSFS (NJ) NATIONAL ASSOCIATION W. Keith Smith Robert M. Parkinson Robert D. Davis Vice Chairman Executive Vice President Peter B. Eglin Auditing and Credit Review Steven Kaplan Jamie B. Stewart, Jr. James Schermerhorn Vice Chairman D. Michael Roark Jacob C. Sheely III Executive Vice President William J. Stallkamp Human Resources * Director of The Boston Company, Inc. only.
22 6
MELLON BANK CORPORATION (and its subsidiaries) - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY (dollar amounts in millions, except per share amounts) 1995 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 Net interest revenue $ 1,548 $ 1,508 $ 1,329 $ 1,182 $ 1,012 $ 912 Provision for credit losses 105 70 125 185 250 315 Fee revenue 1,670 1,652 1,538 1,154 1,007 933 Gains (losses) on sale of securities (a) 6 (5) 100 129 81 28 Gain on sale of consumer finance subsidiary - - - - - 74 Operating expense 2,027 2,374 2,084 1,648 1,440 1,355 Provision for income taxes 401 278 298 104 62 41 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 691 $ 433 $ 460 $ 528 $ 348 $ 236 Net income applicable to common stock 652 358 397 477 299 186 - ---------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Net income $ 4.50 $ 2.42 $ 2.73 $ 3.56 $ 2.39 $ 1.57 Dividends paid 2.00 1.57 1.01 .93 .93 .93 Book value at year-end 26.17 25.06 24.28 21.37 18.44 16.60 Average common shares and equivalents outstanding (in thousands) 145,074 149,069 147,083 134,858 126,554 120,981 - ---------------------------------------------------------------------------------------------------------------------------------- RESULTS EXCLUDING CERTAIN ITEMS(b) Net income applicable to common stock $ 652 $ 593 $ 456 $ 347 $ 210 $ 132 Net income per common share 4.50 4.00 3.14 2.60 1.69 1.12 Return on average common shareholders' equity 17.77% 16.02% 13.71% 13.13% 8.97% 5.85% Return on average assets 1.72 1.71 1.46 1.29 .87 .59 - ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Money market investments $ 1,222 $ 1,656 $ 3,821 $ 1,905 $ 1,566 $ 2,927 Securities 4,922 5,149 4,804 6,500 5,778 5,238 Loans 27,321 25,097 21,763 18,235 18,514 18,845 Interest-earning assets 33,761 32,282 30,657 26,948 26,167 27,288 Total assets 40,097 38,106 35,635 30,758 29,878 31,078 Deposits 27,951 27,248 26,541 22,684 21,438 22,084 Notes and debentures 1,670 1,768 1,991 1,365 1,448 1,722 Redeemable preferred stock - - - - 51 94 Common shareholders' equity 3,671 3,691 3,323 2,603 2,190 2,042 Total shareholders' equity 4,106 4,277 3,964 3,112 2,614 2,437 - ---------------------------------------------------------------------------------------------------------------------------------- KEY RATIOS (based on balance sheet averages) Return on common shareholders' equity 17.77% 9.79% 12.08% 18.45% 13.78% 9.30% Return on assets 1.72 1.14 1.29 1.72 1.16 .76 Net interest margin: Taxable equivalent basis 4.62 4.71 4.39 4.46 3.99 3.49 Without taxable equivalent increments 4.58 4.67 4.34 4.39 3.86 3.34 Efficiency ratio 63 65 64 65 68 70 Efficiency ratio excluding amortization of intangibles (c) 60 62 61 63 66 69 Pretax operating margin 34 23 26 26 20 14 - ---------------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS Common shareholders' equity to assets 8.83% 9.54% 9.57% 8.85% 7.91% 6.67% Total shareholders' equity to assets 9.90 10.67 11.17 10.28 9.32 7.95 Tier I capital ratio 8.14 9.48 9.70 10.20 9.05 7.42 Total (Tier I plus Tier II) capital ratio 11.29 12.90 13.22 13.83 13.16 11.28 Leverage capital ratio 7.80 8.67 9.00 9.45 8.62 6.91 - ---------------------------------------------------------------------------------------------------------------------------------- (a) After tax gains (losses) on the sale of securities were as follows: 1995--$4 million; 1994--$(3) million; 1993--$61 million; 1992--$113 million; 1991--$76 million; and 1990--$23 million. (b) Results for 1994 exclude a $130 million after tax securities lending charge, $79 million after tax of Dreyfus merger-related expense, $10 million after tax of losses on the disposition of securities available for sale previously owned by Dreyfus and $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. Results for 1993 exclude $112 million after tax of merger expenses and $53 million after tax of gains on the sale of securities related to the acquisition of The Boston Company. Results for periods prior to 1993 were calculated by applying a normalized effective tax rate of approximately 38% to pretax income. The unrecorded tax benefit that existed at the beginning of the periods, prior to 1993, was included in the determination of the return on average common shareholders' equity. (c) Excludes amortization of goodwill and other intangible assets recorded in connection with purchase acquisitions.
NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS. 23 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT EVENTS IN 1995 - ------------------------------------------------------------------------------- Common dividend increases The Corporation increased its quarterly common stock dividend twice during 1995. In the second quarter, the Corporation increased its common stock dividend by 11%, to $.50 per share, from $.45 in the fourth quarter of 1994. In the fourth quarter of 1995, the Corporation increased its common stock dividend by 10%, to $.55 per share. The Corporation has increased its common stock dividend four times over the last two years, resulting in a 117% increase during that period. Mellon Bank Corporation and Chemical Banking Corporation joint venture In May 1995, the Corporation and Chemical Banking Corporation (Chemical) entered into a joint venture and formed Chemical Mellon Shareholder Services (CMSS), the nation's largest company that focuses exclusively on providing stock transfer and related shareholder services to publicly held companies. The Corporation contributed the assets and business of its Mellon Securities Transfer Services subsidiary to the joint venture and Chemical contributed its Geoserve Shareholder Services unit. CMSS has more than 14 million shareholder accounts and more than 2,000 corporate clients, including the largest share of companies listed on both the New York Stock Exchange and the American Stock Exchange. Repurchase of common stock and warrants In June 1995, the Corporation repurchased, in a privately negotiated transaction, the 3.75 million common shares and equity purchase options (warrants) for an additional 4.5 million common shares issued in 1993 as part of the purchase price of The Boston Company, Inc. The common stock and warrants were repurchased from American Express Travel Related Services Company, Inc., a subsidiary of American Express Company, for $213 million. In October 1995, the Board of Directors authorized the repurchase of up to 8 million shares of the Corporation's common stock. The repurchases are being made from time to time in the open market or through privately negotiated transactions and, subject to market conditions, are expected to be completed by March 31, 1996. At December 31, 1995, the Corporation had repurchased approximately 3.5 million shares under this authorization. In addition, during 1995 the Corporation repurchased 5.5 million shares of its common stock to be used to meet its current and near-term common stock requirements for its stock-based benefit plans and its dividend reinvestment plan. As of December 31, 1995, approximately 2.8 million of these repurchased shares had been reissued. As a result of the aforementioned repurchases, the Corporation returned $632 million to shareholders in 1995, before any reissuances, by repurchasing 12.8 million shares, or 9% of the common shares outstanding at the beginning of the year, as well as the warrants for 4.5 million common shares. Acquisition of Metmor Financial, Inc. In August 1995, Mellon Mortgage Company, the Corporation's mortgage banking subsidiary, completed its acquisition of Metmor Financial, Inc. (Metmor), the residential and commercial mortgage banking subsidiary of Metropolitan Life Insurance Company. Mellon Mortgage Company acquired 24 residential mortgage origination offices in the southwestern and midwestern United States and 8 commercial origination offices nationwide, as well as Metmor's $13 billion residential and commercial loan servicing portfolios. This acquisition makes Mellon Mortgage Company the 13th largest servicer of residential mortgages in the country with a residential servicing portfolio of $46.4 billion and the seventh largest servicer of commercial mortgages with a commercial servicing portfolio of $6.7 billion. The purchase price of this cash transaction was $165 million. 24 8 SIGNIFICANT EVENTS IN 1995 (CONTINUED) - -------------------------------------------------------------------------------- Securitization of credit card receivables The Corporation securitized $950 million, or one-third, of its credit card receivables in late November 1995. The securitization and sale of credit card receivables is an effective way to diversify funding sources and manage the balance sheet. The Corporation no longer recognizes interest revenue and certain fee revenue on the securitized portfolio; however, the decreases in these revenue categories are substantially offset by increased servicing fee revenue and lower net credit losses. The Corporation continues to service the securitized receivables. The effect of the credit card receivable securitization is discussed on page 35. CornerStone(sm) credit card losses In December 1995, the Corporation segregated $193 million of CornerStone(sm) credit card loans, which have a history of delinquency, into an accelerated resolution portfolio. In connection with this action, the Corporation evaluated the carrying value of these loans and recorded a credit loss of $106 million to reflect this portfolio's estimated net realizable value. Interest and principal receipts, fees and loan loss recoveries are applied to reduce the net carrying value of this portfolio, which totaled $82 million at December 31, 1995. No revenue will be recorded until the net carrying value is recovered. 25 9
BUSINESS SECTORS - ---------------------------------------------------------------------------------------------------------------------------------- (dollar amounts in Consumer Corporate/Institutional millions, averages Investment Services Banking Services Investment Services Banking Services in billions) 1995 1994 1995 1994 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Revenue $380 $375 $1,383 $1,261 $916 $964 $ 413 $ 428 Credit quality expense (revenue) - - 211 62 - - (8) - Operating expense 261 267 863 831 742 756 157 184 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before taxes 119 108 309 368 174 208 264 244 Income taxes 49 45 118 143 71 91 95 87 - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 70 $ 63 $ 191 $ 225 $103 $117 $ 169 $ 157 - ---------------------------------------------------------------------------------------------------------------------------------- Average assets $0.3 $0.4 $ 22.1 $ 20.9 $1.7 $0.9 $13.4 $13.2 Average common shareholders' equity $0.2 $0.2 $ 1.1 $ 1.0 $0.5 $0.4 $ 1.1 $ 1.1 Return on average common shareholders' equity 41% 37% 17% 23% 23% 26% 15% 15% Return on average assets NM NM .86% 1.08% NM NM 1.26% 1.19% Pretax operating margin 31% 29% 22% 29% 19% 22% 64% 57% Pretax operating margin excluding amortization of intangibles 32% 29% 26% 34% 22% 25% 66% 59% Efficiency ratio excluding amortization of intangibles 68% 71% 58% 61% 78% 75% 36% 41% - ---------------------------------------------------------------------------------------------------------------------------------- NM--Not a meaningful measure of performance for this sector.
NOTE: THE TABLE ABOVE AND DISCUSSION THAT FOLLOWS PRESENT THE OPERATING RESULTS OF THE CORPORATION'S MAJOR BUSINESS SECTORS, ANALYZED ON AN INTERNAL MANAGEMENT REPORTING BASIS. AMOUNTS ARE PRESENTED ON A TAXABLE EQUIVALENT BASIS. CAPITAL IS ALLOCATED USING THE FEDERAL REGULATORY GUIDELINES AS A BASIS, COUPLED WITH MANAGEMENT'S JUDGMENT REGARDING THE OPERATIONAL RISKS INHERENT IN THE BUSINESSES. THE CAPITAL ALLOCATIONS MAY NOT BE REPRESENTATIVE OF THE CAPITAL LEVELS THAT WOULD BE REQUIRED IF THESE SECTORS WERE NONAFFILIATED BUSINESS UNITS. Upon completion of the merger with Dreyfus, the Corporation's core business lines were realigned to reflect the distinct customers that are serviced-- consumers and corporations/institutions--and the products that are offered- - -investment and banking. Accordingly, the business sector results for 1994 have been realigned to reflect the change in methodology used by the Corporation to report business sector results. Income before taxes for the Corporation's core sectors was $866 million in 1995, down $62 million compared with the prior year. This decrease resulted from a $141 million increase in credit quality expense, primarily related to the CornerStone(sm) credit card product, partially offset by a $64 million increase in revenue and a $15 million decrease in operating expense. Return on average common shareholders' equity for the core sectors was 19% in 1995, compared with 21% in 1994. Return on average assets was 1.42% in 1995, compared with 1.59% in 1994. The Real Estate Workout sector showed higher profitability, as a result of lower credit quality expense, with income before taxes improving to $126 million in 1995, compared with $26 million in 1994. Consumer Investment Services Consumer Investment Services includes private asset management services and retail mutual funds. Income before taxes for the Consumer Investment sector was $119 million in 1995, an increase of $11 million from 1994. This increase resulted from lower operating expense, as well as higher private asset management fees and higher mutual fund management revenue, generated by a higher average level of assets managed. This sector realized a 41% increase in income before taxes in the second half of 1995, compared with the second half of 1994. This increase primarily resulted from an increase in private asset management and mutual fund management revenue. This sector continued to provide excellent returns, as return on average common shareholders' equity was 41% in 1995, up from 37% in 1994. 26 10
- ---------------------------------------------------------------------------------------------------------------------------------- Total Real Estate Other Total All Core Sectors Workout Corporate Activity Sectors 1995 1994 1995 1994 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- $3,092 $3,028 $ 14 $ 12 $139 $ 135 $3,245 $3,175 203 62 (118) (24) - 4 85 42 2,023 2,038 6 10 18 354 2,047 2,402 - ---------------------------------------------------------------------------------------------------------------------------------- 866 928 126 26 121 (223) 1,113 731 333 366 46 10 43 (78) 422 298 - ---------------------------------------------------------------------------------------------------------------------------------- $ 533 $ 562 $ 80 $ 16 $ 78 $(145) $ 691 $ 433 - ---------------------------------------------------------------------------------------------------------------------------------- $ 37.5 $ 35.4 $ 0.2 $0.3 $2.4 $2.4 $ 40.1 $ 38.1 $ 2.9 $ 2.7 $ - $ - $0.8 $1.0 $ 3.7 $ 3.7 19% 21% NM NM NM NM 18% 10% 1.42% 1.59% NM NM NM NM 1.72% 1.14% 28% 31% NM NM NM NM 34% 23% 31% 34% NM NM NM NM 37% 37% 62% 64% NM NM NM NM 60% 62% - ----------------------------------------------------------------------------------------------------------------------------------
Consumer Banking Services Consumer Banking Services includes consumer lending, business banking, branch banking, credit card, mortgage loan origination and servicing and jumbo residential mortgage lending. Income before taxes for this sector totaled $309 million in 1995, a $59 million decrease from 1994. The increase in revenue primarily reflects a higher level of average loans, higher mortgage servicing fees including $18 million related to the Metmor acquisition and higher electronic tax return filing fees, partially offset by a decline in revenue as the Corporation elected not to offer its seasonal tax refund anticipation loan program in 1995. The increase in credit quality expense reflected higher credit card losses resulting from the CornerStone(sm) credit card portfolio. The Corporation anticipates that credit quality expense for this sector will be lower in 1996 than in 1995 as a result of the actions taken to transfer the problem CornerStone(sm) credit card accounts to an accelerated resolution portfolio. The increase in operating expense primarily reflected higher expenses in support of mortgage servicing and credit card acquisitions, including an increase in the amortization of mortgage servicing rights and purchased credit card relationships. Partially offsetting the higher operating expenses was the reduction of the FDIC deposit insurance premium in the second half of 1995. The FDIC premium has been eliminated for at least the first half of 1996. Also impacting operating expense in 1995, compared with the prior year, was a decrease in marketing expense related to the CornerStone(sm) credit card product. The return on average common shareholders' equity for this sector was 17% in 1995, compared with 23% in 1994. Corporate/Institutional Investment Services Corporate/Institutional Investment Services includes institutional trust and custody, institutional asset and institutional mutual fund management and administration, securities lending, foreign exchange, cash management and stock transfer. Income before taxes for this sector was $174 million in 1995, a decrease of $34 million compared with 1994. The decrease primarily resulted from: lower mutual fund administration and custody fees including the impact of the second quarter 1994 sale of the Boston-based third-party mutual fund administration business; lower fee revenue resulting from the CMSS joint venture; and lower securities lending revenue reflecting narrower margins in 1995 compared with 1994. Partially offsetting these decreases was an increase in revenue from custody related foreign exchange fees. The $14 million decrease in operating expense reflected the formation of the CMSS joint venture, the sale of the third-party mutual fund business and expense management efforts, offset partially by expense growth in support of higher transaction volumes and investments. The return on average common shareholders' equity for this sector was 23% in 1995, compared with 26% in 1994. 27 11 BUSINESS SECTORS (CONTINUED) - ------------------------------------------------------------------------------- Corporate/Institutional Banking Services Corporate/Institutional Banking Services includes large corporate and middle market lending, asset-based lending, certain capital markets and leasing activities, commercial real estate lending and insurance premium financing. Income before taxes for the Corporate/Institutional Banking Services sector was $264 million in 1995, a $20 million increase from 1994. Revenue decreased primarily as a result of a decline in securities trading revenue and lower insurance premium finance spreads, partially offset by higher net interest revenue on higher loan levels as well as higher loan syndication fee revenue. The decrease in credit quality expense was primarily the result of credit recoveries. The decrease in operating expense, which more than offset the decrease in revenue, resulted from overall expense management efforts and lower overhead charges, and reflects the results of infrastructure reengineering in the insurance premium finance business. The return on average common shareholders' equity for this sector was 15% in 1995 and 1994. Real Estate Workout Real Estate Workout includes commercial real estate recovery and mortgage banking recovery operations. Income before taxes for Real Estate Workout was $126 million in 1995, compared with $26 million in 1994. The improvement primarily reflected a lower level of required loan loss reserves given the decline in both the volume and loss experience of the portfolio, as well as higher credit loss recoveries in 1995. Other The Other sector's pretax income of $121 million in 1995 principally reflected earnings on capital above that required in the core sectors. The results for 1994 primarily reflected the $223 million pretax securities lending charge and the pretax merger expenses and loss on disposition of securities totaling $119 million recorded in conjunction with the Dreyfus merger. The following tables distribute net income and return on common shareholders' equity for the Corporation's core sectors between customers serviced and products offered.
- ---------------------------------------------------------------------------------------------------------------------------------- Customers serviced ------------------------------------------------------------ Total Total Consumer Corporate/Institutional (dollar amounts in millions) 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $261 $288 $272 $274 Return on average common shareholders' equity 20% 25% 17% 18% - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- Products offered ------------------------------------------------------------ Total Total Investment Banking (dollar amounts in millions) 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $173 $180 $360 $382 Return on average common shareholders' equity 28% 29% 16% 19% - ----------------------------------------------------------------------------------------------------------------------------------
28 12 RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ OVERVIEW OF 1995 RESULTS - ------------------------------------------------------------------------------ The Corporation reported 1995 earnings per common share of $4.50 and net income applicable to common stock of $652 million. Reported 1994 earnings per common share were $2.42 on net income applicable to common stock of $358 million. Return on common shareholders' equity and return on assets were 17.77% and 1.72%, respectively, in 1995, compared with 9.79% and 1.14%, respectively, in 1994. Results in 1994 included a $130 million after tax securities lending charge, $89 million after tax of Dreyfus merger-related charges and $16 million of additional preferred stock dividends recorded in connection with the redemption of the Corporation's Series H preferred stock. Excluding these items, 1994 earnings per common share were $4.00 on net income applicable to common stock of $593 million, while return on common shareholders' equity and return on assets were 16.02% and 1.71%, respectively. The Corporation's 1995 financial results reflect continued efforts to diversify and expand revenue sources; manage expense growth; and effectively and efficiently integrate the activities of The Boston Company and Dreyfus into the Corporation's operations. Despite a very challenging operating environment, the Corporation's 1995 results, compared with 1994, show an improvement in net interest and fee revenue as well as lower operating expense, offset in part by higher credit quality expense. Net interest revenue increased to $1,548 million, up $40 million from $1,508 million in 1994, principally resulting from a higher average level of loans. Fee revenue increased to $1,670 million, up from $1,652 million in 1994, reflecting higher mortgage servicing fees, credit card fees and foreign currency and securities trading fees, partially offset by lower trust and investment management fees and the effect of divestitures. Operating expense before the net revenue from acquired property was well managed at $2,047 million in 1995, down $28 million from $2,075 million in 1994, excluding the securities lending charge and merger expense. This decrease resulted from lower FDIC deposit insurance assessment expense, lower marketing expense related to the CornerStone(sm) credit card and a decrease in professional, legal and other purchased services expense. Partially offsetting these decreases were increases in the amortization of purchased mortgage servicing rights and higher equipment expense. The provision for credit losses was $105 million in 1995, compared with $70 million in 1994. Net credit losses totaled $249 million in 1995, up from $67 million in 1994, principally reflecting higher losses on the CornerStone(sm) credit card product, including $106 million of credit losses on certain CornerStone(sm) accounts that were transferred to an accelerated resolution portfolio in the fourth quarter of 1995. Nonperforming assets totaled $236 million at December 31, 1995, a decrease of $3 million from $239 million at December 31, 1994. The Corporation's ratio of nonperforming assets to total loans and net acquired property was .85% at December 31, 1995, compared with .89% at December 31, 1994. This ratio has been less than one percent for six consecutive quarters. The Corporation's ratio of common shareholders' equity to assets was 8.83% at December 31, 1995. The Tier I, Total and Leverage capital ratios were 8.14%, 11.29% and 7.80%, respectively, at December 31, 1995, well in excess of the minimum required ratios. The Corporation reported net income applicable to common stock of $358 million, or $2.42 per common share, in 1994, compared with $397 million, or $2.73 per common share, in 1993. Results in 1993 included $112 million after tax of merger expenses and $53 million after tax of gains on the sale of securities, related to The Boston Company acquisition. Net interest revenue was $1,508 million in 1994, an increase of $179 million compared with 1993, partially reflecting a higher yielding asset mix. Fee revenue was $1,652 million in 1994, an increase of $114 million from 1993, reflecting the full-year impact of The Boston Company and internal growth, offset in part by the impact of divestitures and lower mutual fund management fee revenue. The provision for credit losses was $70 million in 1994, down $55 million from the prior year. Operating expense before the net expense (revenue) of acquired property, the securities lending charge and merger expenses, was $2,075 million in 1994, an increase of $225 million from 1993. The increase in operating expense was principally attributable to the full-year impact of The Boston Company. Net revenue from acquired property totaled $28 million in 1994, an $87 million improvement over 1993. 29 13 NET INTEREST REVENUE
- ------------------------------------------------------------------------------------------- (taxable equivalent basis, dollar amounts in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------------- Net interest revenue $ 1,558 $ 1,521 $ 1,346 Average loans 27,321 25,097 21,763 Average interest-earning assets 33,761 32,282 30,657 Net interest margin 4.62% 4.71% 4.39% - -------------------------------------------------------------------------------------------
Net interest revenue includes the interest spread on interest earning assets, as well as loan fees, cash receipts and interest reversals on nonperforming loans, dividend income, and revenue or expense on off-balance-sheet instruments used for interest rate risk management purposes. Net interest revenue on a taxable equivalent basis totaled $1,558 million in 1995, up $37 million compared with 1994. The improvement in net interest revenue in 1995, compared with the prior year, primarily resulted from higher average loan levels partially offset by the migration of retail customers from lower cost core deposit products to higher cost deposit products. The net interest margin was 4.62% in 1995, compared with 4.71% in 1994. The decrease in the net interest margin primarily reflects the movement of customers from lower yielding deposit products to higher yielding products, reflecting the industry-wide trend of customers seeking higher yielding investment alternatives. Also affecting the net interest margin compared with 1994 was a high level of prepayment on adjustable rate mortgages. Average loans increased $2,224 million in 1995 compared with 1994, primarily as a result of a $960 million increase in domestic wholesale loans, an $830 million increase in credit card loans, including $550 million related to the CornerStone(sm) credit card product and an increase of $555 million in retail loans. The increase in domestic wholesale loans primarily was driven by corporate banking, business banking, middle market lending and asset based lending, while the increase in retail loans primarily resulted from increases in home equity loans, personal credit lines and student loans. The late November 1995 securitization of $950 million of credit card receivables resulted in a $10 million decrease in net interest revenue in 1995, as well as a $107 million reduction in average loans. In accordance with generally accepted accounting principles, the foregone net interest revenue from the securitized credit card receivables is substantially offset by higher servicing fee revenue and lower net credit losses. Net interest revenue and the net interest margin will be reduced in 1996, compared with 1995, when a full-year impact of the credit card receivables securitization is reflected. All credit card servicing revenue related to the securitized portfolio is included in credit card fee revenue in noninterest revenue. Additional information on the effect of the securitization is presented in a table on page 35. Net interest revenue on a taxable equivalent basis in 1994 increased by $175 million compared with 1993, while the net interest margin increased by 32 basis points. The improvement in the net interest revenue and the net interest margin reflected a higher level of interest-earning assets and a higher yielding asset mix. Net interest revenue and the margin also benefited from a lower level of nonperforming assets, a lower average level of long-term debt and higher loan fees. CREDIT QUALITY EXPENSE
- ------------------------------------------------------------------------------------ (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------ Provision for credit losses $105 $ 70 $125 Net expense (revenue) of acquired property (20) (28) 59 - ------------------------------------------------------------------------------------ Credit quality expense $ 85 $ 42 $184 - ------------------------------------------------------------------------------------
Credit quality expense, defined as the provision for credit losses plus the net expense (revenue) of acquired property, increased $43 million in 1995 compared with 1994, as a result of a $35 million higher provision for credit losses primarily made in response to losses from the CornerStone(sm) credit card portfolio. The Corporation anticipates that the provision for credit losses in 1996 will be lower than in 1995 following the actions taken to transfer the problem CornerStone(sm) credit 30 14 CREDIT QUALITY EXPENSE (CONTINUED) - ------------------------------------------------------------------------------ card accounts into an accelerated resolution portfolio. However, there can be no assurance that the provision for credit losses will be lower in 1996 as asset quality is dependent in large part on future economic conditions that are beyond the Corporation's control. The net revenue from acquired property was $20 million in 1995, an $8 million decrease compared with 1994. The decrease reflects lower net gains on the sale of acquired property. The Corporation expects a further reduction in net gains on the sale of acquired property in 1996. NONINTEREST REVENUE
- -------------------------------------------------------------------------------------------- (in millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------- Fee revenue: Trust and investment management: Mutual fund: Management $ 309 $ 294 $ 310 Administration/Custody 115 159 119 Institutional trust 206 223 184 Institutional asset management 135 143 122 Private asset management 141 134 118 - -------------------------------------------------------------------------------------------- Total trust and investment management fees 906 953 853 Cash management and deposit transaction charges 191 197 192 Mortgage servicing fees 122 78 62 Foreign currency and securities trading revenue 91 76 46 Credit card fees 90 72 61 Other 270 276 324 - -------------------------------------------------------------------------------------------- Total fee revenue 1,670 1,652 1,538 Gains (losses) on sale of securities 6 (5) 100 - -------------------------------------------------------------------------------------------- Total noninterest revenue $1,676 $1,647 $1,638 - --------------------------------------------------------------------------------------------
The Corporation's long-standing strategy has been to balance its revenue between lending and nonlending businesses. The Corporation once again achieved this desired balance as revenues from fee-generating businesses represented 52% of total revenue for the year. Fee revenue totaled $1,670 million in 1995, an $18 million increase compared with 1994, resulting from higher mortgage servicing fees, credit card fees and foreign currency and securities trading revenue, partially offset by lower trust and investment management fee revenue. Total trust and investment management fees The Corporation's trust and investment management fee revenue represents 54% of the Corporation's total fee revenue. The $47 million, or 5%, decrease in trust and investment management fees in 1995 compared with 1994 resulted from several factors. Mutual fund administration and custody fees decreased $44 million, primarily resulting from lower levels of administered funds, as well as a $12 million decrease in revenue related to the second quarter 1994 sale of the Boston-based third-party mutual fund administration business. Securities lending revenue, which is included in institutional trust revenue, decreased $17 million from 1994. The decrease in securities lending revenue primarily resulted from narrower margins in 1995 compared with 1994, as well as a slightly lower volume of securities lent in 1995. Institutional asset management revenue decreased $8 million as a result of a divestiture as well as attrition of higher margin clients, primarily at TBC Asset Management. Partially offsetting these decreases was a $15 million increase in mutual fund management revenue. The increase in mutual fund management revenue resulted from lower fee waivers at Dreyfus and a higher average level of mutual fund assets managed. Mutual fund management fees are discussed further on page 33. The $7 million improvement in private asset management fees resulted from a general market increase and new business. 31 15 NONINTEREST REVENUE (CONTINUED) - ------------------------------------------------------------------------------ As shown in the table below, the market value of assets under management and administration/custody was $1,019 billion at December 31, 1995, up $172 billion, or 20%, compared with $847 billion at December 31, 1994. The market value of assets under management increased $43 billion, primarily as a result of: an increase in new institutional asset management business which more than offset the lost portion of TBC Asset Management business; an overall increase in the market values of assets managed, reflecting the improvement in the fixed income and equity markets in 1995 and an increase in institutional money market mutual funds. The $129 billion increase in the market value of assets under administration/custody primarily reflected new institutional trust business and a general market increase, partially offset by lost mutual fund administration/custody business. At December 31, 1995, compared with the prior year-end, the S&P 500 Index increased 34.11% while the Lehman Brothers Long Term Government Bond Index increased 30.72%.
- ------------------------------------------------------------------------------------------------------ MARKET VALUE OF ASSETS UNDER MANAGEMENT AND ADMINISTRATION/CUSTODY December 31, (in billions) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------ Institutional trust: Management $ 3 $ 3 $ 1 Administration/Custody 708 568 479 Mutual fund: Management (a) 81 73 82 Administration/Custody 60 76 128 Institutional asset management: Management 125 93 104 Private asset management: Management 24 21 24 Administration/Custody 18 13 13 - ------------------------------------------------------------------------------------------------------ Total: Management $233 $190 $211 Administration/Custody $786 $657 $620 - ------------------------------------------------------------------------------------------------------ (a) See table below for components of managed mutual fund assets.
- ------------------------------------------------------------------------------------------------------ MANAGED MUTUAL FUND ASSETS BY FUND CATEGORY December 31, (in billions) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------ Proprietary funds: Taxable money market funds: Institutions $24 $18 $23 Individuals 10 10 10 Tax-exempt money market funds 8 7 8 Tax-exempt bond funds 19 18 21 Fixed income funds 5 4 5 Equity funds 11 9 9 - ------------------------------------------------------------------------------------------------------ Total proprietary funds 77 66 76 Other managed funds 4 7 6 - ------------------------------------------------------------------------------------------------------ Total managed mutual fund assets $81 $73 $82 - ------------------------------------------------------------------------------------------------------
32 16 NONINTEREST REVENUE (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------ MANAGED MUTUAL FUND FEE REVENUE (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------------ Managed mutual fund fees $352 $348 $368 Less: Fees waived 35 44 48 Less: Fund expense reimbursements 8 10 10 - ------------------------------------------------------------------------------------------ Net managed mutual fund fees $309 $294 $310 - ------------------------------------------------------------------------------------------ Net managed mutual fund fees by fund category: Proprietary funds: Taxable money market funds: Institutions $ 48 $ 43 $ 60 Individuals 39 39 51 Tax-exempt money market funds 24 21 20 Tax-exempt bond funds 100 102 101 Fixed income funds 23 20 21 Equity funds 64 56 48 - ------------------------------------------------------------------------------------------ Total proprietary fund fees 298 281 301 Other managed fund fees 11 13 9 - ------------------------------------------------------------------------------------------ Net managed mutual fund fees $309 $294 $310 - ------------------------------------------------------------------------------------------
Mutual fund management fees Mutual fund management fees are based on the average net assets of each fund. Average proprietary funds managed at Dreyfus grew each quarter of 1995, to $78 billion in the fourth quarter, and averaged $74 billion for the year, compared with $72 billion in 1994. This increase resulted from higher average institutional money market funds, as well as an overall increase in the market values of assets managed, paralleling the improvement in the fixed income and equity markets in 1995. Cash management and deposit transaction charges The Corporation provides a number of cash management services, including remittance processing, collections and disbursements, check processing and electronic services. At December 31, 1995, the Corporation's cash management services ranked sixth nationally in market share. Cash management and deposit transaction charges totaled $191 million in 1995, a decrease of $6 million from 1994. This decrease partially reflected a shift to deposit balance-based compensation from fee-based compensation as a method of payment for cash management services. Including the revenue generated from deposit balances, which is in net interest revenue, cash management and deposit transaction charges increased compared with 1994. Mortgage servicing fees Mortgage servicing fees were $122 million in 1995, an increase of $44 million, or 57%, compared with 1994, resulting from acquisitions of mortgage servicing rights. The $13 billion Metmor residential and commercial loan servicing portfolio acquired in August 1995 generated $18 million of revenue in the last four months of 1995. At December 31, 1995, the Corporation's total servicing portfolio was $53 billion, up 44% compared with $37 billion at year-end 1994. At December 31, 1995, the Corporation had the 13th largest residential mortgage servicing portfolio in the United States. 33 17 NONINTEREST REVENUE (CONTINUED) - ------------------------------------------------------------------------------ Foreign currency and securities trading revenue Foreign currency and securities trading fees increased to $91 million, a 20% increase over the $76 million earned in 1994. The increase was primarily attributable to higher foreign exchange fees earned, primarily as a result of increased global custody and corporate customer activity. Credit card fees Credit card fee revenue, which principally consists of interchange and cardholder fees, increased by $18 million, or 24%, in 1995. This increase primarily resulted from fee revenue generated by portfolio acquisitions and the CornerStone(sm) credit card product. As a result of the securitization of $950 million of credit card receivables, interest and fee revenue in excess of interest paid to certificate holders and net of credit losses are now reported in credit card fee revenue. The net effect of the securitization on credit card fees was $5 million from late November 1995 to year-end 1995. Additional information on the effect of the securitization is presented in a table on page 35. Other fee revenue Other fee revenue decreased $6 million in 1995 from $276 million in 1994 as a result of several factors. The Corporation's decision not to offer its seasonal tax refund anticipation loan program in 1995 reduced other fee revenue by $31 million compared with 1994. In addition, the May 1995 formation of CMSS resulted in a $25 million reduction in other fee revenue. The Corporation accounts for the CMSS joint venture under the equity method of accounting by reporting its share of the net results of the joint venture as other fee revenue, rather than reporting the revenues and expenses of CMSS separately. These reductions were partially offset by: a $24 million increase in gains on the disposition of assets, including equity securities; an $8 million increase in syndication management fees; and an $8 million increase in revenue generated from the electronic filing of income tax returns. Gains (losses) on sale of securities The Corporation recorded $6 million in net gains on the sale of securities available for sale in 1995. The Corporation recorded $5 million in net losses on the sale of securities available for sale in 1994, resulting from the loss of $15 million, or $10 million after tax, related to the disposition of securities held by Dreyfus prior to its merger with the Corporation, that did not meet the investment objectives, interest rate or credit risk characteristics required by the Corporation. 1994 compared with 1993 Compared with 1993, fee revenue increased by $114 million, or 7%, in 1994, primarily resulting from fee revenue attributable to the full-year impact of The Boston Company and continued growth in the fee-based service products businesses, offset in part by the effect of divestitures. The improvement reflected increases of 12% in trust and investment management fees, 25% in mortgage servicing fees, 3% in cash management and deposit transaction charges, 19% in credit card fee revenue and 64% in foreign currency and securities trading fee revenue. These improvements were partially offset by the sale of two information services businesses in late 1993 that resulted in a $74 million decrease in revenues in 1994. The Corporation recorded $100 million in gains on the sale of securities during 1993. Included in the $100 million in gains were $87 million that resulted from sales undertaken as part of the financing plan and balance sheet restructuring related to the acquisition of The Boston Company. 34 18 SECURITIZATION OF CREDIT CARD RECEIVABLES - ------------------------------------------------------------------------------- The Corporation securitized and sold $950 million of credit card receivables in late November 1995. For analytical purposes, the impact of the securitization on 1995 results, with the net proceeds received from the securitization used to replace short-term borrowings, is shown below.
(in millions) 1995 - ------------------------------------------------------------------------------- Lower net interest revenue $ 10 Lower net credit losses 5 Higher fee revenue 5 Lower loans - year-end 950 Lower loans - average 107 - -------------------------------------------------------------------------------
OPERATING EXPENSE - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------- (dollar amounts in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Staff expense $ 957 $ 956 $ 854 Net occupancy expense 205 206 186 Professional, legal and other purchased services 186 210 163 Equipment expense 143 132 121 Business development 136 161 139 Amortization of goodwill and other intangible assets 96 98 78 Communications expense 86 84 77 Amortization of mortgage servicing rights and purchased credit card relationships 68 40 44 Forms and supplies 42 40 38 FDIC assessment and regulatory examination fees 31 63 60 Other expense 97 85 90 - ------------------------------------------------------------------------------------------------------------- Operating expense before the net expense (revenue) of acquired property, the securities lending charge and merger expenses 2,047 2,075 1,850 - ------------------------------------------------------------------------------------------------------------- Net expense (revenue) of acquired property (20) (28) 59 Securities lending charge - 223 - Merger expenses - 104 175 - ------------------------------------------------------------------------------------------------------------- Total operating expense $ 2,027 $ 2,374 $ 2,084 - ------------------------------------------------------------------------------------------------------------- Average full-time equivalent staff 24,300 24,300 22,300 - ------------------------------------------------------------------------------------------------------------- Efficiency ratio (a) 63% 65% 64% Efficiency ratio excluding amortization of goodwill and other intangible assets 60 62 61 - ------------------------------------------------------------------------------------------------------------- (a) Operating expense before the net expense (revenue) of acquired property, the securities lending charge and merger expenses as a percentage of revenue, computed on a taxable equivalent basis, excluding gains (losses) on the sale of securities.
Operating expense before the net expense (revenue) of acquired property, the securities lending charge and merger expenses totaled $2,047 million in 1995, a decrease of $28 million, or 1%, compared with 1994. The decrease primarily resulted from a lower FDIC assessment charge, lower marketing expense related to the CornerStone(sm) credit card product and a reduction in professional, legal and other purchased services. These decreases were partially offset by increases in the amortization of purchased mortgage servicing rights and equipment expense. The efficiency ratio improved by 2 percentage points in 1995. 35 19 OPERATING EXPENSE (CONTINUED) - ------------------------------------------------------------------------------ Staff expense totaled $957 million in 1995, an increase of $1 million compared with 1994. The May 1995 formation of the CMSS joint venture resulted in an $11 million reduction in staff expense, while the Metmor acquisition in August 1995 resulted in a $6 million increase in staff expense. In January 1996, the Corporation announced a retirement enhancement program that will enhance the pensions and health insurance of eligible associates electing early retirement effective April 1, 1996. The financial impact of this program can not be determined until March 31, 1996, the acceptance deadline. FDIC assessment and regulatory examination fees decreased $32 million in 1995 as a result of the reduction in the FDIC deposit insurance premium from $.23 to $.04 for every $100 of deposits, effective June 1, 1995. The FDIC premium has been eliminated for at least the first half of 1996. This will result in a $27 million further reduction in expense compared with 1995 assuming that there will be no premium for the full year 1996. Partially offsetting this benefit will be lower fee and/or net interest revenue of approximately $4 million from cash management customers where the FDIC premium on deposits is passed through to these customers. The amount passed through was approximately $2 million per quarter in 1995. Marketing expense, which is included in business development expense in the table on the previous page, decreased $23 million in 1995 due to lower expenditures related to the CornerStone(sm) credit card product. The $24 million reduction in professional, legal and other purchased services resulted from lower purchased data processing services at The Boston Company and lower consulting expenses. The amortization of mortgage servicing rights and purchased credit card relationships totaled $68 million in 1995, a $28 million increase from 1994 and reflects the $16 billion, or 44%, increase in the Corporation's mortgage servicing portfolio from December 31, 1994. Equipment expense increased $11 million in 1995 to $143 million and reflects the internalization of certain data processing operations at The Boston Company, as well as various equipment upgrades. In 1994, the Corporation recorded a one-time charge of $223 million, or $130 million after tax, as a result of actions taken to reduce the interest rate sensitivity of certain securities lending clients' portfolios. Merger expense of $104 million pretax, or $79 million after tax, was recorded in 1994 to reflect expense associated with the Dreyfus merger. The table below summarizes the usage of this expense.
- ------------------------------------------------------------------------------------------------- MERGER EXPENSE ANALYSIS-DREYFUS MERGER Expenditures and asset Expected Total adjustments at expenditures (in millions) expenses Dec. 31, 1995 in 1996 - ------------------------------------------------------------------------------------------------- Benefit and severance programs $ 42 $35 $7 Professional, consulting and other 27 27 - Facilities and assets 25 25 - Proxy solicitation 10 10 - - ------------------------------------------------------------------------------------------------- Total merger expense $104 $97 $7 - -------------------------------------------------------------------------------------------------
Merger expense of $175 million, or $112 million after tax, was recorded in 1993 to reflect expense associated with the acquisition of The Boston Company. All expenditures and asset adjustments related to this merger have been recorded. Operating expense before the net expense (revenue) of acquired property, the securities lending charge and merger expense in 1994 increased by $225 million, or 12%, over 1993. The increase primarily resulted from the second quarter 1993 acquisition of The Boston Company and marketing expense of $27 million recorded in 1994 related to the introduction of the CornerStone(sm) credit card product. The $87 million improvement in the net expense (revenue) of acquired property in 1994, compared with 1993, primarily resulted from $30 million in net gains on the sale of acquired property and no provision to the reserve for other real estate owned (OREO) in 1994, compared with 1993 which included a $54 million OREO reserve provision. 36 20 INCOME TAXES - ------------------------------------------------------------------------------- The provision for income taxes totaled $401 million in 1995, compared with $278 million in 1994 and $298 million in 1993. The Corporation's effective tax rate for 1995 was 36.65% and it is currently anticipated that the effective tax rate will decline to approximately 36.5% in 1996. Excluding the impact of the Dreyfus merger-related expenses, the losses on the disposition of Dreyfus securities and the securities lending charge, the Corporation's effective tax rate for 1994, was 38%. CAPITAL - -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------- SELECTED CAPITAL DATA (dollar amounts in millions, December 31, except per share amounts) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Common shareholders' equity $3,590 $ 3,687 $ 3,546 Common shareholders' equity to assets ratio 8.83% 9.54% 9.57% Tangible common shareholders' equity $2,632 $ 2,651 $ 2,462 Tangible common equity to assets ratio (a) 6.63% 7.05% 6.84% Total shareholders' equity $4,025 $ 4,122 $ 4,138 Total shareholders' equity to assets ratio 9.90% 10.67% 11.17% Tier I capital ratio 8.14 9.48 9.70 Total (Tier I plus Tier II) capital ratio 11.29 12.90 13.22 Leverage capital ratio 7.80 8.67 9.00 Book value per common share $26.17 $ 25.06 $ 24.28 (b) Closing common stock price $53.75 $30.625 $35.375 Market capitalization $7,374 $ 4,507 $ 5,070 - -------------------------------------------------------------------------------------------------------------------------------- (a) Common shareholders' equity less goodwill and other intangibles recorded in connection with purchase acquisitions divided by total assets less goodwill and other intangibles recorded in connection with purchase acquisitions. (b) The book value per common share assumed full conversion of the Series D preferred stock to common stock. Accordingly, this included the additional paid-in capital on the Series D preferred stock because this paid-in capital had no liquidation preference over the common stock. The Series D preferred stock was converted into common stock in 1994, pursuant to the terms of the Series D statement of designation.
The Corporation's capital management objectives are to maintain a strong capital base--in excess of all regulatory guidelines--while also maximizing shareholder value. Actions were taken in 1995 to enhance shareholder value by returning excess capital to shareholders' through both increased dividends and the repurchase of common stock. Common stock repurchases resulted in a decrease in the Corporation's common and total shareholders' equity at December 31, 1995, compared with December 31, 1994, offset in part by earnings retention. The decrease in the Corporation's equity ratios from December 31, 1994, resulted from common stock repurchases as well as asset growth. The common stock repurchases in 1995 included the June 1995 repurchase of the 3.75 million shares of common stock and warrants for an additional 4.5 million shares of common stock, issued in 1993 as part of the purchase price of The Boston Company. Also, during 1995, the Corporation repurchased 5.5 million shares of its common stock to be used to meet its current and near-term common stock requirements for its stock-based benefit plans and its dividend reinvestment plan. 37 21 CAPITAL (CONTINUED) - ------------------------------------------------------------------------------- At December 31, 1995, 2.8 million of these shares had been reissued. In October 1995, the Board of Directors of the Corporation authorized the repurchase of up to 8 million additional shares of the Corporation's common stock. As of December 31, 1995, the Corporation had repurchased approximately 3.5 million shares under this authorization and expects to repurchase the remaining shares under this authorization by March 31, 1996. As a result of these common stock repurchases, the Corporation returned $632 million to shareholders in 1995, prior to any reissuances, by repurchasing 12.8 million shares of common stock, or 9% of common shares outstanding at the beginning of the year, as well as warrants to purchase 4.5 million shares of common stock. Average common stock and stock equivalents used for the primary earnings per share computation was 145.1 million shares in 1995. At December 31, 1995, common stock and stock equivalents totaled 139.2 million shares.
- ------------------------------------------------------------------------------- RISK-BASED AND LEVERAGE CAPITAL RATIOS December 31, (dollar amounts in millions) 1995 1994 - ------------------------------------------------------------------------------- Tier I capital: Common shareholders' equity (a) $ 3,572 $ 3,742 Qualifying preferred stock 435 435 Other items (14) 13 Goodwill and certain other intangibles (849) (904) - ------------------------------------------------------------------------------- Total Tier I capital 3,144 3,286 Tier II capital 1,216 1,187 - ------------------------------------------------------------------------------- Total qualifying capital $ 4,360 $ 4,473 - ------------------------------------------------------------------------------- Risk-adjusted assets: On-balance-sheet $ 27,459 $26,213 Off-balance-sheet 11,152 8,465 - ------------------------------------------------------------------------------- Total risk adjusted assets $ 38,611 $34,678 - ------------------------------------------------------------------------------- Average assets--leverage capital basis $40,301 $37,882 - ------------------------------------------------------------------------------- Tier I capital ratio (b) 8.14% 9.48% Total capital ratio (b) 11.29 12.90 Leverage capital ratio (b) 7.80 8.67 - ------------------------------------------------------------------------------- (a) In accordance with regulatory guidelines, the $18 million of unrealized gains and $55 million of unrealized losses, net of tax, on assets classified as available for sale at December 31, 1995 and 1994, have been excluded. (b) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8% and 3%, respectively.
Tier I and Total capital are expressed as a percentage of risk-adjusted assets, which include various credit risk-weighted percentages of on- balance-sheet assets, as well as off-balance-sheet exposures. The Leverage capital ratio evaluates capital adequacy on the basis of the ratio of Tier I capital to quarterly average total assets as reported on the Corporation's regulatory financial statements, net of the loan loss reserve, goodwill and certain other intangibles. Federal regulators have adopted a capital-based supervisory system for all insured financial institutions. If a financial institution's capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a financial institution's capital position into one of five categories ranging from well-capitalized to critically undercapitalized. For an institution to qualify as well-capitalized, its Tier I, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of the Corporation's banking subsidiaries qualified as well-capitalized at December 31, 1995. The Corporation intends to maintain the ratios of its banking subsidiaries at the well-capitalized levels. 38 22 CAPITAL (CONTINUED) - ------------------------------------------------------------------------------- When computing Tier I capital, the Corporation deducts all goodwill and certain other identified intangibles acquired subsequent to February 19, 1992, except mortgage servicing rights and purchased credit card relationships.
- ------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- Goodwill $788 $824 $826 - -------------------------------------------------------------------------------
The $36 million decrease in goodwill at December 31, 1995, compared with December 31, 1994, resulted from $54 million of amortization, offset in part by an increase of $14 million related to corporate trust acquisitions. Based upon the current level and amortization schedule, the future annual amortization of goodwill for the years 1996-2000 is expected to be approximately $54 million.
- ------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- Purchased core deposit intangible $110 $133 $155 Covenants not to compete 22 38 57 Other identified intangibles 38 41 46 - ------------------------------------------------------------------------------- Total purchased core deposit and other identified intangibles $170 $212 $258 - -------------------------------------------------------------------------------
The amortization expense of purchased core deposit and other identified intangibles was $42 million in 1995. The future annual amortization of purchased core deposit and other identified intangibles for the full years 1996 through 2000 is anticipated to be approximately $42 million, $31 million, $26 million, $26 million and $14 million, respectively.
- ------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- Mortgage servicing rights $592 $292 $160 Purchased credit card relationships 90 60 44 - ------------------------------------------------------------------------------- Total mortgage servicing rights and purchased credit card relationships $682 $352 $204 - -------------------------------------------------------------------------------
During 1995, $376 million of servicing rights were capitalized in connection with both mortgage servicing portfolio purchases and loan originations, including $186 million related to the Metmor acquisition. Mortgage servicing rights are amortized in proportion to estimated net servicing income over the estimated life of the servicing portfolio. Amortization expense totaled $57 million in 1995. The estimated fair value of capitalized mortgage servicing rights was $661 million at December 31, 1995. See note 1 of Notes to Financial Statements for a further discussion of the Corporation's accounting policy for mortgage servicing rights. The $30 million increase in purchased credit card relationships in 1995 resulted from portfolio acquisitions net of $11 million of amortization. In March 1995, the Financial Accounting Standards Board released FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS No. 121 established guidelines for recognition of impairment losses related to long-lived assets and certain intangibles and related goodwill for both assets to be held and used as well as assets held for disposition. This statement excludes financial instruments, long-term customer relationships of financial institutions, mortgage and other servicing rights and deferred tax assets. This standard became effective on January 1, 1996. Adoption of FAS No. 121 is not expected to result in a material impact to the Corporation's financial position or results of operations. 39 23 CAPITAL (CONTINUED) - ------------------------------------------------------------------------------- The amortization expense of goodwill and other identified intangibles is the result of accounting for business combinations under the purchase method of accounting. Had the Corporation accounted for these transactions under the pooling of interests method of accounting, these intangibles and their related amortization would not have been reported. Net income applicable to common stock, return on tangible common equity and return on tangible assets, excluding the after tax impact of the amortization of these intangibles, are shown in the table below:
(dollar amounts in millions) 1995 1994 - ------------------------------------------------------------------------------- Net income applicable to common stock (a) $ 652 $ 593 After tax impact of amortization of intangibles from purchase acquisitions 73 76 - ------------------------------------------------------------------------------- Total $ 725 $ 669 Return on tangible common equity 27.1% 25.3% Average tangible common equity $ 2,678 $ 2,647 Return on tangible assets 1.96% 1.97% Average tangible assets $39,104 $37,063 - ------------------------------------------------------------------------------- (a) Results for 1994 exclude the $130 million after tax securities lending charge, $89 million after tax of Dreyfus merger-related charges and the additional $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock.
CORPORATE RISK - ------------------------------------------------------------------------------- RISK OVERVIEW - ------------------------------------------------------------------------------- Risk identification and management are essential elements for the successful management of the Corporation. The four primary risk exposures are liquidity risk; market risk, which includes interest rate and currency risk; credit risk; and fiduciary risk. Liquidity risk is the possibility that the Corporation will not be able to fund present and future financial obligations. Market risk is the possibility of lower net interest revenue or lower market values of assets and liabilities as interest rates or exchange rates fluctuate. Credit risk is the possibility of loss from a counterparty's failure to perform according to the terms of a transaction. Fiduciary risk is the possibility of loss from actions taken on behalf of clients. In addition, the Corporation is subject to other risks, particularly in its fee-generating businesses, that are transaction oriented. The Corporation controls and monitors these risks with policies, procedures and various levels of managerial oversight. Because of the nature of its businesses, external factors beyond the Corporation's control may, at times, result in losses to the Corporation or its customers. The Corporation is involved with various financial instruments that potentially create risk. These instruments are both on and off the balance sheet. On-balance-sheet instruments include securities, loans, deposits and borrowings. Off-balance-sheet instruments include loan commitments, standby letters of credit, interest rate swaps, foreign exchange contracts and interest rate futures and forwards. LIQUIDITY AND DIVIDENDS - ------------------------------------------------------------------------------- The Finance Committee of the Corporation is responsible for liquidity management. This committee of senior managers has a Liquidity Policy that covers all assets and liabilities, as well as off-balance-sheet items that are potential sources or uses of liquidity. The Corporation's liquidity management objective is to maintain the ability to meet commitments to fund loans and to purchase securities, as well as to repay deposits and other liabilities in accordance with their terms, including during periods of market or financial stress. The Corporation's overall approach to liquidity management is to ensure that sources of liquidity are sufficient in amount and diversity to accommodate changes in loan demand and core funding routinely without a material adverse impact on net income. The Corporation uses several key primary and secondary measures to assess the adequacy of the Corporation's liquidity position. The balance sheet is managed to ensure that these measures are maintained within approved limits. Each of these measures is monitored on a periodic basis giving consideration to the Corporation's expected requirements for funds and anticipated market conditions. 40 24 LIQUIDITY AND DIVIDENDS (CONTINUED) - ------------------------------------------------------------------------------- The Corporation's liquidity position is managed by maintaining adequate levels of liquid assets, such as money market assets and securities available for sale. Additional liquidity is available through the Corporation's ability to participate or sell commercial loans and to securitize selected loan portfolios. The Corporation also has a three-year $300 million revolving credit agreement and a $25 million backup line of credit to provide support facilities for its commercial paper borrowings and for general corporate purposes. The revolving credit facility contains tier 1 ratio, double leverage ratio and nonperforming asset covenants, as discussed in note 10 of Notes to Financial Statements. As shown in the consolidated statement of cash flows, cash and due from banks increased by $57 million during 1995 to $2,342 million at December 31, 1995. The increase primarily reflected $1,096 million of net cash provided by financing activities and $255 million of net cash provided by operating activities, offset in part by $1,313 million of net cash used in investing activities. Net cash provided by financing activities primarily reflected increases in customer deposits, short-term bank notes and term federal funds purchased, partially offset by common stock repurchases. Net cash used in investing activities principally reflected an increase in loans and securities. In March 1995, the Corporation redeemed the $160 million Series H preferred stock at the contractual redemption price of $26.30 per share plus accrued dividends. This transaction was funded with cash on hand. Contractual maturities of the parent Corporation's term debt totaled $327 million in 1995 and consisted primarily of the $100 million 5-3/8% Senior Notes due August 1995 and the $200 million 6-1/8% Senior Notes due November 1995. In June 1995, the Corporation issued $200 million of debt at a fixed rate of 6.30% maturing in the year 2000. The proceeds from this issuance were used to fund the debt that matured in the second half of 1995. Contractual maturities of existing debt will total $20 million in 1996. At December 31, 1995, the Corporation had a debt shelf registration statement on file with the Securities and Exchange Commission on which up to $1.5 billion of debt may be issued. The issuance of any debt securities from this debt shelf registration will depend on future market conditions, funding needs and other factors. In late November 1995, Mellon Bank, N.A., the Corporation's principal banking subsidiary, made available an offering circular to issue, from time to time, up to $4 billion of bank notes. Mellon Bank, N.A. can issue up to $3 billion of bank notes with maturities ranging from 30 to 270 days and $1 billion of bank notes with maturities ranging from more than 270 days to 15 years. Proceeds from the issuance of the bank notes will be used by Mellon Bank, N.A. for general funding purposes. At December 31, 1995, there was $1.1 billion of short-term bank notes outstanding under this program. At December 31, 1995, the Corporation's senior debt and Mellon Bank, N.A.'s subordinated debt were rated "A2" by Moody's and "A" by Standard and Poors. The Corporation increased its annual common stock dividend to $2.00 per common share in the second quarter of 1995, an increase of 11% from the previous annual rate of $1.80. In the fourth quarter of 1995, the Corporation again increased its annual common stock dividend to $2.20 per common share, an increase of 10%. The Corporation has increased its common stock dividend four times over the last two years, resulting in a 117% increase during that period. The Corporation paid $288 million in dividends on its outstanding shares of common stock during 1995. The common stock dividend payout ratio was 44% in 1995, compared with 55% in 1994. Excluding the $130 million after tax securities lending charge, the $89 million after tax of Dreyfus merger-related charges and the $16 million of additional preferred stock dividends, the dividend payout ratio would have been 33% in 1994. Using the current common stock dividend rate and shares outstanding at December 31, 1995, annual dividend requirements in 1996 for the common and preferred stock are expected to be approximately $340 million. The repurchase of the 4.5 million remaining shares under the 8 million share repurchase plan will reduce the cash requirement for the annual common stock dividend by approximately $10 million. The parent Corporation's principal sources of cash are interest and dividends from its subsidiaries. The ability of national bank subsidiaries to pay dividends to the parent Corporation is subject to certain limitations, as discussed in note 18 of Notes to Financial Statements. Under the more restrictive limitations, the Corporation's national bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to December 31, 1995, of approximately $175 million, less any dividends declared and plus or minus net profits or losses, as defined, between January 1, 1996, and the date of any such dividend declaration. The national bank subsidiaries declared dividends to the parent Corporation totaling $501 million in 1995, 41 25 LIQUIDITY AND DIVIDENDS (CONTINUED) - ------------------------------------------------------------------------------- $366 million in 1994 and $185 million in 1993. Dividends paid to the parent Corporation by nonbank subsidiaries totaled $30 million in 1995, compared with $122 million in 1994 and $116 million in 1993. In addition, Mellon Bank, N.A. returned $300 million of capital to the parent Corporation in 1995, and The Boston Company returned $100 million and $300 million of capital to the parent Corporation in 1994 and 1993, respectively. Banking regulators have issued additional guidelines that require bank holding companies and subsidiary banks to continuously evaluate the level of cash dividends in relation to their respective operating income, capital needs, asset quality and overall financial condition.
Balance sheet analysis - ------------------------------------------------------------------------------- (average balances in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- ASSETS: Money market investments $ 1,222 $ 1,656 $ 3,821 Trading account securities 296 380 269 Securities 4,922 5,149 4,804 Loans 27,321 25,097 21,763 - ------------------------------------------------------------------------------- Total interest-earning assets 33,761 32,282 30,657 Noninterest-earning assets 6,927 6,437 5,543 Reserve for credit losses (591) (613) (565) - ------------------------------------------------------------------------------- Total assets $40,097 $38,106 $35,635 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FUNDS SUPPORTING TOTAL ASSETS: Core funds $30,986 $32,101 $31,430 Wholesale and purchased funds 9,111 6,005 4,205 - ------------------------------------------------------------------------------- Funds supporting total assets $40,097 $38,106 $35,635 - -------------------------------------------------------------------------------
The change in the level and mix of the Corporation's average interest-earning assets in 1995, compared with 1994, reflects a higher average level of loans. Average loans increased $2.2 billion while money market investments and securities decreased $434 million and $227 million, respectively. The increase in average loans resulted from a $960 million increase in domestic wholesale loans, an $830 million increase in credit card loans and a $555 million increase in retail loans. The change in the mix of the Corporation's funding in 1995, compared with 1994, reflects the use of wholesale and purchased funds to support loan growth, as well as a decrease in core funds. Core funds, which are considered to be the most stable sources of funding, are defined principally as money market and other savings deposits, demand deposits, savings certificates, shareholders' equity and notes and debentures with original maturities over one year. Core funds primarily support core assets, which consist of loans, net of the reserve and noninterest-earning assets. Average core assets increased $2.7 billion in 1995 from the prior year, primarily reflecting increased loan levels. Average core funds decreased $1.1 billion in 1995 compared with 1994, primarily reflecting a lower average level of money market and savings deposits and demand deposits. Core funds averaged 92% of core assets in 1995, down from 104% in 1994 and 118% in 1993. Wholesale and purchased funds are defined as deposits in foreign offices and other time deposits, federal funds purchased and securities under repurchase agreements, short-term bank notes, negotiable certificates of deposit, U.S. Treasury tax and loan demand notes, commercial paper and other funds borrowed. Average wholesale and purchased funds increased $3.1 billion compared with 1994, primarily reflecting an increase in overnight foreign office deposits, short-term bank notes and federal funds purchased and securities under repurchase agreements. As a percentage of average total assets, average wholesale and purchased funds were 23% in 1995, 16% in 1994 and 12% in 1993. 42 26 INTEREST RATE SENSITIVITY ANALYSIS - ------------------------------------------------------------------------------- The objective of interest rate risk management is to control the effects that interest rate fluctuations have on net interest revenue and on the net present value of the Corporation's assets, liabilities and off-balance-sheet instruments. The Corporation's Finance Committee is responsible for managing interest rate risk and employing risk management policies that monitor and limit exposure to interest rate risk. Interest rate risk is measured using net interest margin simulation and asset/liability net present value sensitivity analyses. Simulation tools serve as the primary means to gauge interest rate exposure. The net present value sensitivity analysis is the means by which the Corporation's long-term interest rate exposure is evaluated. These methods provide the analysis needed for a full understanding of the range of potential impacts on net interest revenue and portfolio equity caused by interest rate movements. Modeling techniques that are used to estimate the impact of changes in interest rates on the net interest margin are a more relevant method of measuring interest rate risk than the less sophisticated interest rate sensitivity gap table shown on page 45. Assumptions regarding the replacement of maturing assets and liabilities are made to simulate the impact of future changes in rates and/or changes in balance sheet composition. The effect of changes in future interest rates on the mix of assets and liabilities may cause actual results to differ from simulated results. In addition, certain financial instruments provide customers a certain degree of "optionality." For instance, customers have migrated from lower cost deposit products to higher cost products. Also, customers will refinance mortgages as interest rates decrease. While the Corporation's simulation analysis considers these factors, the extent to which customers utilize the ability to exercise their financial options may cause actual results to differ from the simulation. The Corporation has established the following guidelines for assuming interest rate risk: Net interest margin simulation--Given a +/- 200 basis point parallel shift in interest rates, estimated net interest revenue may not decrease by more than 5% for a one-year period. Portfolio equity simulation--Portfolio equity is the net present value of the Corporation's existing assets, liabilities and off-balance-sheet instruments. Given a +/- 200 basis point parallel shift in interest rates, portfolio equity may not decrease by more than 20% of total shareholders' equity. The table below illustrates the simulation analysis of the impact of a 100 basis point or 200 basis point upward or downward movement in interest rates on net interest revenue, return on common shareholders' equity and earnings per share. This analysis was done assuming that interest-earning asset levels at December 31, 1995 remained constant, that the level of loan fees remains unchanged, and excludes the impact of interest receipts on nonperforming loans. The impact of the rate movements was developed by simulating the effect of rates changing over a six-month period from the December 31, 1995 levels. The simulated impact of rate changes shown below is compared to 1995 actual results adjusted for the pro forma full-year impact of the credit card securitization.
- ---------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY ANALYSIS Movements in interest rates from December 31, 1995 rates - ---------------------------------------------------------------------------------------- Increase Decrease Anticipated impact in the next 12 months -------------- ---------------- compared with 1995 actual results: +100bp +200bp -100bp -200bp ------------------------------------------ Net interest revenue increase/(decrease) 4.0% 5.4% .4% (1.5)% Return on common equity increase/(decrease) 105bp 140bp 11bp (39)bp Earnings per share increase/(decrease) $.27 $.36 $.03 $(.10) - ----------------------------------------------------------------------------------------
The anticipated impact on net interest revenue under the 100 and 200 basis points increase scenarios and the 200 basis point decrease scenario is consistent with the Corporation's asset sensitive gap position. Generally, an asset sensitive gap indicates that rising interest rates could positively affect net interest revenue, and falling rates could negatively affect net interest revenue. The increase in net interest revenue under the 100 basis points decrease scenario primarily results from short-term liabilities repricing more quickly than certain adjustable rate assets. 43 27 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - ------------------------------------------------------------------------------- The interest rate sensitivity gap table on the following page shows the repricing characteristics of the Corporation's interest-earning assets and supporting funds at December 31, 1995. The data are based upon contractual repricing or maturities and, where applicable, management's assumptions as to the estimated repricing characteristics of certain assets and supporting funds. At December 31, 1995, the Corporation had an asset-sensitive interest rate risk position at the one-year repricing period. Assets and liabilities with similar contractual repricing characteristics, however, may not reprice at the same time or to the same degree. As a result, the Corporation's static interest rate sensitivity gap position does not necessarily predict the impact of changes in general levels of interest rates on net interest revenue. The measurement of interest rate risk is meaningful only when all related on- and off-balance-sheet items are aggregated and the net positions are identified. Financial instruments that the Corporation uses to manage interest rate sensitivity include: money market assets, U.S. government and federal agency securities, municipal securities, mortgage-backed securities, corporate bonds, interest rate swaps, caps and floors, financial futures and financial options. The cumulative gap at the one-year repricing period, before the utilization of off-balance-sheet instruments, was asset sensitive in the amount of $4.2 billion, or 10.4% of total assets, at December 31, 1995. However, because the Corporation did not want to accept the level of interest rate risk presented by its naturally asset sensitive balance sheet, it entered into interest rate swaps and other off-balance-sheet instruments that resulted in a net reduction of $822 million in this cumulative asset-sensitive position. These instruments reduced the cumulative gap at the one-year repricing period to an asset-sensitive amount of $3.4 billion, or 8.4% of total assets. The Corporation uses off-balance-sheet instruments primarily to convert fixed-rate long-term deposits to variable-rate deposits that generally reprice quarterly. Alternatively, the Corporation could have acquired additional fixed-rate investment securities or other fixed-rate interest-earning assets of approximately $822 million to accomplish this objective. Correspondingly, the Corporation also would have had to acquire a comparable amount of wholesale funds in order to fund these additional interest-earning assets. By using off-balance-sheet instruments to manage interest rate risk, the effect is a smaller, more efficient balance sheet, with a lower wholesale funding requirement and a higher return on assets and net interest margin with a comparable level of net interest revenue and return on common shareholders' equity. 44 28 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY GAP AT DECEMBER 31, 1995 Repricing period ---------------------------------------------------------------------- 0-30 31-90 91-180 181-365 1-5 Over 5 (dollar amounts in millions) days days days days years years Total - ------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Money market investments $ 830 $ 26 $ 4 $ - $ - $ - $ 860 Trading account securities 62 - - - - - 62 Securities 1,113 247 821 470 1,676 1,105 5,432 Loans 12,034 5,221 2,726 1,883 3,256 2,570 27,690 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets $14,039 $ 5,494 $3,551 $2,353 $4,932 $ 3,675 $34,044 Funds supporting interest- earning assets: Interest-bearing deposits $ 5,412 $ 6,496 $2,792 $1,891 $2,532 $ 3,680 $22,803 Other borrowed funds 2,197 1,055 616 330 - 119 4,317 Notes and debentures (with original maturities over one year) 27 - - - 636 780 1,443 Noninterest-bearing liabilities 47 42 225 74 - 5,093 5,481 - ------------------------------------------------------------------------------------------------------------------------------ Total funds supporting interest-earning assets $ 7,683 $ 7,593 $3,633 $2,295 $3,168 $ 9,672 $34,044 - ------------------------------------------------------------------------------------------------------------------------------ Subtotal $ 6,356 $(2,099) $ (82) $ 58 $1,764 $(5,997) $ - - ------------------------------------------------------------------------------------------------------------------------------ Off-balance-sheet instruments $(2,193) $ (417) $1,060 $ 728 $1,068 $ (246) $ - - ------------------------------------------------------------------------------------------------------------------------------ Interest rate sensitivity gap $ 4,163 $(2,516) $ 978 $ 786 $2,832 $(6,243) $ - - ------------------------------------------------------------------------------------------------------------------------------ Cumulative gap $ 4,163 $ 1,647 $2,625 $3,411 $6,243 $ - $ - - ------------------------------------------------------------------------------------------------------------------------------ Cumulative gap as a percentage of total assets 10.2% 4.1% 6.5% 8.4% 15.4% - ------------------------------------------------------------------------------------------------------------------------------
Note: Repricing periods for securities, loans, interest-bearing deposits, noninterest-bearing liabilities and off-balance-sheet instruments are based upon contractual maturities, where applicable, as well as the Corporation's historical experience of the impact of interest rate fluctuations on the prepayment, repricing and withdrawal patterns of certain assets and liabilities. Managing interest rate risk with off-balance-sheet instruments The Corporation uses off-balance-sheet instruments, primarily interest rate swaps, in managing its overall interest rate exposure. By policy, the Corporation will not implement any new off-balance-sheet activity that, when aggregated into the total Corporate interest rate exposure, would cause the Corporation to exceed the interest rate risk limits outlined on page 43. The following off-balance-sheet instruments have been approved by the Corporation for managing the overall Corporate interest rate exposure: interest rate swaps; caps and floors; financial futures; forward rate agreements; and financial options. Their usage for speculative purposes is not permitted outside of those areas designated as trading and controlled with specific authorizations and limits. These instruments provide the Corporation flexibility in adjusting its interest rate risk position without exposure to principal risk and funding requirements. The Corporation primarily uses non-leveraged generic and index amortizing swaps in order to accomplish its objectives. Generic swaps involve the exchange of fixed and variable interest rates based on underlying contractual notional amounts. Index amortizing swaps involve the exchange of fixed and variable interest rates; however, their notional amount and maturities vary based on certain underlying indices. The use of financial futures and option contracts is permitted provided that: the transactions occur in a market with a size that ensures sufficient liquidity; the contract is traded on an approved exchange or, in the case of over-the-counter option contracts, is transacted with a credit-approved counterparty; and that the types of contracts have been authorized for use by the Board of Directors and the Finance Committee. The Corporation's off-balance-sheet instruments used to manage its interest rate risk are shown in the table on the following page. For a further discussion of these contracts, see note 20 of Notes to Financial Statements. 45 29 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK AT DECEMBER 31, 1995 Total at Dec. 31, (notional amounts in millions) 1996 1997 1998 1999 2000 2001+ 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Receive fixed/pay floating generic swaps: (a) Notional amount $ 267 $ 160 $ 15 $2,125 $ - $400 $2,967 Weighted average rate: Receive 5.34% 6.36% 5.22% 5.29% - 6.32% 5.49% Pay 5.87% 5.90% 5.88% 6.09% - 5.81% 6.02% Receive fixed/pay floating indexed amortizing swaps: (b) Notional value $1,637 $ 428 $481 $ 116 $ 60 $ 63 $2,785 Weighted average rate: Receive 4.91% 6.89% 7.15% 7.10% 7.10% 7.10% 5.79% Pay 5.90% 5.94% 5.94% 5.94% 5.94% 5.94% 5.92% Pay fixed/receive floating generic swaps: (a) Notional amount $ 20 $2,128 $ 30 $ 15 $ 12 $ 10 $2,215 Weighted average rate: Receive 6.01% 6.09% 3.74% 6.10% 5.88% 5.80% 6.06% Pay 9.44% 4.75% 5.62% 6.48% 6.11% 6.49% 4.83% Other products (c) $ 526 $ 100 $ 4 $ 2 $ 88 $ 15 $ 735 - ---------------------------------------------------------------------------------------------------------------------------------- Total notional amount $2,450 $2,816 $530 $2,258 $160 $488 $8,702 - ---------------------------------------------------------------------------------------------------------------------------------- (a) Generic swaps' notional amounts and lives are not based upon interest rate indices. (b) Amortizing swaps' notional amounts and lives change based upon certain interest rate indices. Generally, as rates fall, the notional amounts decline more rapidly and, as rates increase, notional amounts decline more slowly. (c) Average rates are not meaningful for these products.
46 30 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- The gross notional amount of off-balance-sheet instruments used to manage the Corporation's interest rate risk was $8.7 billion at December 31, 1995, a decrease of $2.6 billion from December 31, 1994. The reduction in these instruments resulted from maturities. The flat yield curve in 1995 enabled the Corporation to reduce the usage of interest rate swaps. This gross notional amount, which is presented in the table on the previous page, must be viewed in the context of the Corporation's overall interest rate risk management activities in order to assess its impact on the net interest margin. As discussed on page 44, these off-balance-sheet instruments modified the Corporation's asset-sensitive position, including the modification of the cumulative asset-sensitive position at the one-year repricing period, of $4.2 billion, before the utilization of these instruments, to a cumulative one-year asset-sensitive position of $3.4 billion at December 31, 1995. The following table presents the gross notional amounts of off-balance-sheet instruments used to manage interest rate risk, identified by the underlying interest rate sensitive instruments.
- -------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 - -------------------------------------------------------------------------------- Instruments associated with deposits $6,500 $ 9,436 Instruments associated with other liabilities 670 420 Instruments associated with loans 1,532 1,478 - -------------------------------------------------------------------------------- Total notional amount $8,702 $11,334 - --------------------------------------------------------------------------------
The Corporation entered into these off-balance-sheet instruments to neutralize the natural interest rate risk embedded in its assets and liabilities. The interest received and interest paid are recorded on an accrual basis in interest revenue and interest expense associated with the underlying assets and liabilities. The net differential resulted in interest expense of $2 million in 1995, compared with interest revenue of $117 million and $201 million in 1994 and 1993, respectively. The lower net interest revenue impact in 1995, compared with 1994 and 1993, resulted from the effect of higher average interest rates in 1995. The Corporation's analysis using interest rates at December 31, 1995, indicate that off-balance-sheet instruments will have a positive impact of more than $30 million on the net interest margin in 1996. The graph on the following page demonstrates the reduction in volatility of the net interest margin with the use of off-balance-sheet products. The net interest margin without the use of off-balance-sheet instruments would have fluctuated approximately 120 basis points from the second quarter of 1993 to the first quarter of 1995, while the net interest margin including the use of off-balance-sheet instruments fluctuated approximately 60 basis points during the same period. The Corporation did not terminate any interest rate agreements used for interest rate risk management purposes in 1995. Terminations of interest rate swaps in 1994 resulted in the amortization of less than $1 million of net deferred gains into net interest revenue in 1995. These gains were amortized over the remaining period of the original hedge, which was less than one year. The estimated unrealized fair value of the Corporation's interest rate management off-balance-sheet instruments at December 31, 1995, was a positive $30 million, compared to a negative $344 million at December 31, 1994. This improvement was consistent with lower interest rates at December 31, 1995, compared with the prior year-end, which had the corresponding effect of decreasing the fair value of on-balance-sheet core deposits. These values should be viewed in the context of the overall financial structure of the Corporation, including the aggregate net position of all on-and off-balance-sheet instruments. As more fully discussed in note 20 of Notes to Financial Statements, credit risk associated with off-balance-sheet instrument positions represents the aggregate replacement cost of contracts in a gain position. At December 31, 1995 and 1994, the amount of credit exposure associated with interest rate risk management instruments was $55 million and $10 million, respectively. 47 31 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- At this point in the 1995 Annual Report there appears a line graph as set out in the following table.
Trend of Net Interest Margin With Excluding off-balance-sheet off-balance-sheet instruments instruments ----------------- ----------------- 1st qtr 1993 4.65% 3.95% 2nd qtr 1993 4.30% 3.60% 3rd qtr 1993 4.25% 3.59% 4th qtr 1993 4.39% 3.75% 1st qtr 1994 4.70% 4.12% 2nd qtr 1994 4.63% 4.15% 3rd qtr 1994 4.66% 4.41% 4th qtr 1994 4.85% 4.70% 1st qtr 1995 4.80% 4.79% 2nd qtr 1995 4.69% 4.73% 3rd qtr 1995 4.56% 4.56% 4th qtr 1995 4.43% 4.41%
Off-balance-sheet instruments used for trading activities The Corporation offers off-balance-sheet financial instruments, primarily foreign exchange contracts, currency and interest rate option contracts, interest rate swaps and interest rate caps and floors, to enable customers to meet their financing objectives and to manage their interest- and currency-rate risk. Supplying these instruments provides the Corporation with fee revenue. The Corporation also uses such instruments, as well as futures and forward contracts, in connection with its proprietary trading account activities. All of these instruments are carried at market value with realized and unrealized gains and losses included in foreign currency and securities trading revenue. In 1995, the Corporation recorded $87 million of fee revenue from these activities, primarily from foreign exchange contracts entered into on behalf of customers, compared with $72 million in 1994. The total notional values of these contracts were $33 billion at December 31, 1995 and $34 billion at December 31, 1994, and are included on the off-balance-sheet instruments used for trading activities table on page 87 in note 20 of Notes to Financial Statements. Total credit risk of contracts used for trading activities was $389 million at December 31, 1995 and $281 million at December 31, 1994. The Corporation has established trading limits and related monitoring procedures to control trading risk. These limits are reviewed and approved by the Office of the Chairman and the Executive Committee of the Board of Directors. All limits are monitored for compliance by departmental compliance staff and by the Corporation's Internal Audit department. Exceptions to limits are reported to the Office of the Chairman and, in certain instances, to the Audit Committee of the Board of Directors. The financial risk associated with trading positions is managed by assigning position limits and stop loss guidance amounts to individual activities. Position limits are assigned to each family of financial instruments eligible for trading such that the aggregate value at risk in these activities at any point in time will not exceed a specified limit given a significant market movement. The extent of market movement deemed to be significant is based upon an analysis of the historical volatility of individual instruments that would cover 95% of likely daily market movements. Using the Corporation's methodology, which considers such factors as changes in interest rates, spreads and options volatility, the aggregate value at risk for trading activities was less than $1 million at December 31, 1995. 48 32 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- Trading activities are limited to products and markets in which liquidity is sufficient to allow positions to be closed quickly and without adversely affecting market prices, which limits loss potential below that assumed for a full-day adverse movement. Loss potential is further constrained in that it is highly unusual for all trading areas to be exposed to maximum limits at the same time and extremely rare for significant adverse market movements to occur in all markets simultaneously. Stop loss guidance is used when a certain threshold of loss is sustained. If stop loss guidance amounts are approached, open positions are liquidated to avoid further risk to earnings. The use of both stop loss guidance and position limits reduces the likelihood that potential trading losses would reach imprudent levels in relation to earnings capability. CREDIT RISK - -------------------------------------------------------------------------------- Credit risk exists in financial instruments that are both on and off the balance sheet. Financial instruments such as loans and leases are on the balance sheet. Off-balance-sheet credit exposures include loan commitments, standby letters of credit and the credit risk associated with financial instruments used to manage interest rate risk and used for trading activities. The objective of the credit risk management process is to reduce the risk of loss if a customer fails to perform according to the terms of a transaction. Essential to this process are stringent underwriting of new loan commitments, active monitoring of all loan portfolios and the early identification of potential problems and their prompt resolution. The Corporation establishes internal ownership, responsibility and accountability for all aspects of asset quality. Notwithstanding this process, however, asset quality is dependent in large part upon local, national, international and industry segment economic conditions that are beyond the Corporation's control. Management maintains a comprehensive centralized process through which the Corporation establishes exposure limits, extends new loans, monitors credit quality, actively manages problem credits and disposes of nonperforming assets. To help ensure adherence to the Corporation's credit policies, senior department credit officers report to both the Corporation's chief risk and credit officer and the head of each respective lending department. The responsibilities of these senior credit officers include all aspects of the credit process except credit review, credit recovery and aggregate portfolio management, which are centralized at the corporate level. The Corporation manages credit risk by maintaining a well-diversified credit portfolio and by adhering to its written credit policies, which specify general underwriting criteria as well as underwriting standards for specific industries and control credit exposure by borrower, degree of risk, industry and country. These measures are adopted by the Credit Policy Committee and are regularly updated to reflect the committee's evaluation of developments in economic, political and operating environments that could affect lending risks. The Corporation may adjust credit exposure to individual industries or customers through loan sales, syndications, participations and the use of master netting agreements when the Corporation has more than one transaction outstanding with the same customer. Except for certain well-defined loans made by the Consumer Banking Services sector, primarily to consumers and small businesses, all credit extensions are approved jointly by officers of the Credit Policy department and officers of the lending departments. The number and level of officer approvals required are determined by the dollar amount and risk characteristics of the credit extension. The amount of collateral, if any, obtained by the Corporation upon the extension of credit is based on industry practice as well as the credit assessment of the customer. The type and amount of collateral vary, but the form generally includes: accounts receivable; inventory; property, plant and equipment; other assets; and/or income-producing commercial properties with appraised values that exceed the contractual amount of the credit facilities by pre-approved ratios. The Corporation continually assesses the quality of its consumer and commercial credit facilities, and assigns a numerical quality rating to substantially all extensions of credit in its commercial, real estate and international portfolios. Lending officers have the primary responsibility for monitoring their portfolios, identifying emerging problem loans and recommending changes in quality ratings. To anticipate or detect problems that may result from economic downturns or deteriorating conditions in certain markets, lending units and credit management use a process designed to identify potential 49 33 CREDIT RISK (CONTINUED) - ------------------------------------------------------------------------------- credit problems, both for specific customers and for industries that could be affected by adverse market or economic conditions. When signs of credit deterioration are detected, credit recovery or other specialists become involved to minimize the Corporation's exposure to potential future credit losses. The Credit Review department provides an independent assessment of credit ratings, credit quality and the credit management process. For a further discussion of the credit risk associated with off-balance-sheet financial instruments, see the discussions of the various financial instruments in note 20 of Notes to Financial Statements. COMPOSITION OF LOAN PORTFOLIO AT YEAR-END - ------------------------------------------------------------------------------- The $957 million increase in the loan portfolio in 1995 resulted from increased loan demand, partially offset by the $950 million credit card securitization and the transfer of $193 million of CornerStone(sm) credit card loans to an accelerated resolution portfolio. Loan growth in 1995 reflects a $954 million increase in commercial and financial loans and a $280 million increase in consumer mortgages, partially offset by a $457 million decrease in credit card loans. At December 31, 1995, the composition of the loan portfolio was 51% commercial and 49% consumer.
- -------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1995(a) 1994(a) 1993(a) 1992(a) 1991 - -------------------------------------------------------------------------------------------------------------------------------- DOMESTIC LOANS Commercial and financial $10,969(b) $10,015 $ 9,091 $ 8,115 $ 8,270 Commercial real estate 1,532(c) 1,624 1,721 1,861 1,976 Consumer credit: Consumer mortgage 8,960 8,680 8,191 4,282 3,302 Credit card 1,924 2,381 1,441 1,361 1,216 Other consumer credit 2,612 2,455 2,372 2,258 2,292 - -------------------------------------------------------------------------------------------------------------------------------- Total consumer credit 13,496 13,516 12,004 7,901 6,810 Lease finance assets 830 815 718 650 658 - -------------------------------------------------------------------------------------------------------------------------------- Total domestic loans 26,827 25,970 23,534 18,527 17,714 INTERNATIONAL LOANS 863 763 950 1,434 1,395 - -------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned discount $27,690 $26,733 $24,484 $19,961 $19,109 - -------------------------------------------------------------------------------------------------------------------------------- (a) Excludes segregated assets. (b) Includes $21 million of loans subject to the FDIC loss sharing arrangement. (c) Includes $109 million of loans subject to the FDIC loss sharing arrangement. Note: There were no concentrations of loans to borrowers engaged in similar activities, other than those shown in this table, that exceeded 10% of total loans at year-end.
Commercial and financial The domestic commercial and financial loan portfolio primarily consists of loans to corporate borrowers in the manufacturing, service, energy, communications, wholesale and retail trade, public utilities and financial services industries. Numerous risk factors impact this portfolio, including industry specific risks such as the economy, new technology, labor rates and cyclicality, as well as customer specific factors such as cash flow, financial structure, operating controls and asset quality. The Corporation diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines. Diversification is intended to limit the risk of loss from any single unexpected economic event or trend. Total domestic commercial and financial loans increased by $954 million, or 10%, during 1995, primarily as a result of increases of $270 million in wholesale money market loans, $235 million in corporate banking and $195 million in middle market lending. Commercial and financial loans represented 40% of the total loan portfolio at December 31, 1995 and 37% at December 31,1994. At year-end 1995, nonperforming domestic commercial and financial loans and leases were .55% of total domestic commercial and financial loans and leases, compared with .60% at December 31, 1994. This ratio has been less than 1% for the last 11 quarters. 50 34 COMPOSITION OF LOAN PORTFOLIO AT YEAR-END (CONTINUED) - ------------------------------------------------------------------------------- Commercial real estate The Corporation's $1.532 billion domestic commercial real estate loan portfolio consists of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties, and commercial construction loans generally with maturities of 60 months or less. Also included in this portfolio are loans that are secured by owner-occupied real estate, but made for purposes other than the construction or purchase of real estate. The commercial real estate loan portfolio includes $109 million of loans acquired in the December 1992 Meritor retail office acquisition that are subject to a five-year 95% loss sharing arrangement with the FDIC. Commercial real estate loans carry many of the same customer and industry risks as the commercial and financial portfolio, as well as contractor/subcontractor performance risk in the case of commercial construction loans and cash flow risk based on project economics. Domestic commercial real estate loans decreased by $92 million, or 6%, at December 31, 1995, compared with December 31, 1994. The decrease primarily was a result of paydowns and transfers to OREO partially offset by new loan originations in 1995. Domestic commercial real estate loans were 6% of total loans at December 31, 1995 and 1994. Nonperforming commercial real estate loans were 2.55% of total domestic commercial real estate loans at December 31, 1995, compared with 1.73% at December 31, 1994. Consumer mortgage The consumer mortgage portfolio primarily includes jumbo residential mortgages, traditional one-to-four family residential mortgages, home equity loans and personal loans secured by residential properties. At December 31, 1995, this portfolio grew to $8,960 million, from $8,680 million at the prior year end. The $280 million increase in this portfolio from year-end 1994 primarily reflected a $345 million increase in residential mortgage loans held in the residential warehouse portfolio, a $155 million increase in home equity loans and a $130 million increase in personal loans secured by residential properties, partially offset by a $350 million decrease in jumbo residential mortgages. Jumbo residential mortgages, which totaled $3.9 billion at year-end 1995, are variable rate mortgages that range from $250,000 to $3 million. The $350 million decrease from December 31, 1994, resulted from loan sales and accelerated prepayments. Risks involved in holding jumbo mortgages include less liquidity than a traditional one-to-four family residential mortgage portfolio and increased exposure on an individual loan basis. The Corporation attempts to control these risks by requiring more stringent loan-to-value ratios and higher liquidity and cash flow requirements for each borrower. At December 31, 1995, the geographic distribution of the jumbo mortgages was as follows: 30% in the Mid-Atlantic region; 29% in New England; 25% in California; and 16% in other areas. Fueled by low interest rates in 1995, the Corporation's one-to-four family residential mortgages increased approximately $345 million, to $2.3 billion at December 31, 1995, from the prior year end. This increase primarily resulted from growth in the residential warehouse portfolio. Home equity loans increased approximately $155 million to $1.6 billion, and personal loans secured by residential properties increased approximately $130 million to $1.2 billion at December 31, 1995. Risks on these three portfolios are limited to payment and collateral risk and are primarily driven by regional economic factors. Nonperforming consumer mortgages were .68% of total consumer mortgages at December 31, 1995, compared with .64% at December 31, 1994. Credit card At December 31, 1995, credit card loans totaled $1,924 million, a $457 million decrease from December 31, 1994. The decrease in credit card loans resulted from the $950 million securitization of credit card receivables and the transfer of $193 million of CornerStone(sm) credit card loans to an accelerated resolution portfolio, both discussed below. Excluding the securitization and the creation of the accelerated resolution portfolio, credit card loans increased $686 million, or 29%, compared with the prior year-end. This increase resulted from growth in the existing portfolio and portfolio acquisitions. 51 35 COMPOSITION OF LOAN PORTFOLIO AT YEAR-END (CONTINUED) - ------------------------------------------------------------------------------- The primary risk associated with credit card loans is that these loans are unsecured and are solely dependent upon the credit-worthiness of the borrower. The Corporation monitors this risk using both internal and external statistical models. In addition to these models, the Corporation monitors factors such as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. Credit card loans are charged off after reaching 180 days delinquent and as such are not placed on nonperforming status prior to charge-off. The ratio of credit card loans 90 days or more past- due to total credit card loans was .66% at December 31, 1995, compared with 1.35% at December 31, 1994. Securitization of credit card receivables The Corporation securitized nearly one-third, or $950 million, of credit card receivables in late November 1995. The securitization and sale of credit card receivables is an effective way to diversify funding sources and manage the balance sheet. The Corporation continues to service the securitized receivables. The effect of the securitization is shown in the table on page 35. Assets held for accelerated resolution In December 1995, the Corporation segregated $193 million of CornerStone(sm) credit card loans, which have a history of delinquency, into an accelerated resolution portfolio. CornerStone(sm) outstandings were $845 million at that time, compared with $880 million at June 30, 1995 and $725 million at year-end 1994. In connection with this transfer, the Corporation evaluated the carrying value of these loans and recorded a credit loss of $106 million to reflect an estimated net realizable value of $87 million. Interest and principal receipts, fees and loan loss recoveries on loans in this portfolio are applied to reduce the carrying value of this portfolio, which totaled $82 million at December 31, 1995. No revenue will be recorded on this portfolio until the net carrying value is recovered. This portfolio is in other assets on the Corporation's balance sheet. Other consumer credit Other consumer credit, which principally consists of installment loans, unsecured personal credit lines and student loans, increased by $157 million, or 6%, from year-end 1994. This increase primarily reflected growth in the student loan portfolio. Other consumer credit loans are both secured and unsecured and, in the case of student loans, are government guaranteed. Other loans Loans to international borrowers increased to $863 million at December 31, 1995, from $763 million at year-end 1994. The Corporation's international lending strategy centers around establishing relationships with large foreign firms that are multinational in nature but also carry a significant U.S. presence. Lease finance assets increased to $830 million, up from $815 million at year-end 1994. 52 36 NONPERFORMING ASSETS - -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------- December 31, (dollar amounts in millions) 1995 (a) 1994 (a) 1993 (a) 1992 (a) 1991 - ----------------------------------------------------------------------------------------------------------------------- Nonperforming loans $167 $151 $202 $334 $528 Acquired property, net of the OREO reserve 69 88 139 261 405 - ------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $236 $239 $341 $595 $933 - ------------------------------------------------------------------------------------------------------------------------ Nonperforming loans as a percentage of total loans .60% .56% .83% 1.67% 2.77% Total nonperforming assets as a percentage of total loans and net acquired property .85% .89% 1.39% 2.94% 4.78% - ------------------------------------------------------------------------------------------------------------------------ (a)Excludes segregated assets.
Nonperforming assets is a term used to describe assets on which revenue recognition has been discontinued or is restricted. Nonperforming assets include both nonperforming loans and acquired property, primarily OREO acquired in connection with the collection effort on loans. Nonperforming assets do not include the segregated assets acquired in the December 1992 Meritor retail office acquisition. Nonperforming loans include both nonaccrual and "troubled debt" restructured loans. Past-due commercial loans are those that are contractually past due 90 days or more but are not on nonaccrual status because they are well-secured and in the process of collection. Past-due consumer loans, excluding consumer mortgages, are generally not classified as nonaccrual, but are charged off on a formula basis upon reaching various stages of delinquency. Additional information regarding the Corporation's practices for placing assets on nonaccrual status is presented in note 1 of Notes to Financial Statements. Nonperforming assets have decreased for four consecutive years and are at their lowest level since 1982. At December 31, 1995, nonperforming assets totaled $236 million, a $3 million decrease from 1994, reflecting a decrease in acquired property that was primarily offset by an increase in nonperforming loans. The tables on pages 54 and 55 show the factors that affected the change in the levels of nonperforming loans and acquired property. The ratio of nonperforming assets to total loans and net acquired property at December 31, 1995, was .85%, compared with .89% at year-end 1994. This ratio, which can be expected to vary over time with changes in the economy, has been lower than 1% for six consecutive quarters. In 1995, the Corporation adopted Financial Accounting Standards Board Statement (FAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for Impairment of a Loan - - Income Recognition and Disclosure." See note 1 of Notes to Financial Statements for a further discussion of FAS Nos. 114 and 118. A loan is considered impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. At December 31, 1995, the Corporation's impaired loans totaled $167 million, which was equal to the nonperforming loans total. Included in these impaired loans were $59 million, which had a related impairment reserve of $22 million, and $108 million that did not have a related reserve as a result of interest payments applied to reduce principal or credit losses previously taken on these loans. Average impaired loans during 1995 were $175 million. During the year, the Corporation recognized $13 million of interest revenue on impaired loans, all of which was recognized using the cash basis method of income recognition. 53 37 NONPERFORMING ASSETS (CONTINUED) - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- NONPERFORMING ASSETS December 31, (dollar amounts in millions) 1995(a) 1994(a) 1993(a) 1992(a) 1991 - ---------------------------------------------------------------------------------------------------------------------------------- Domestic nonaccrual loans: Commercial and financial $ 65 $ 61 $ 37 $109 $129 Commercial real estate 29 25 75 172 353 Consumer credit: Consumer mortgage 61 56 61 29 13 Other consumer credit 2 - 4 1 1 - ---------------------------------------------------------------------------------------------------------------------------------- Total domestic nonaccrual loans 157 142 177 311 496 International nonaccrual loans - 1 7 8 32 - ---------------------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 157 143 184 319 528 - ---------------------------------------------------------------------------------------------------------------------------------- Domestic restructured loans: Commercial and financial - 5 4 - - Commercial real estate 10 3 14 15 - - ---------------------------------------------------------------------------------------------------------------------------------- Total domestic restructured loans 10 8 18 15 - - ---------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans: Domestic 167 150 195 326 496 International - 1 7 8 32 - ---------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans(b) 167 151 202 334 528 - ---------------------------------------------------------------------------------------------------------------------------------- Acquired property: Real estate acquired 87 116 175 250 385 Reserve for real estate acquired (18) (29) (37) (10) (21) - ---------------------------------------------------------------------------------------------------------------------------------- Net real estate acquired 69 87 138 240 364 Other assets acquired - 1 1 21 41 - ---------------------------------------------------------------------------------------------------------------------------------- Total acquired property 69 88 139 261 405 - ---------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $236 $239 $341 $595 $933 - ---------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a percentage of respective loan portfolio segments: Domestic commercial and financial loans and leases .55% .60% .41% 1.25% 1.44% Domestic commercial real estate loans 2.55 1.73 5.17 10.03 17.87 Domestic consumer mortgage loans .68 .64 .75 .68 .40 Total loans .60 .56 .83 1.67 2.77 Nonperforming assets as a percentage of total loans and net acquired property .85 .89 1.39 2.94 4.78 - ---------------------------------------------------------------------------------------------------------------------------------- (a) Excludes segregated assets. (b) Includes $81 million, $58 million, $74 million, $187 million and $278 million, respectively, of loans with both principal and interest less than 90 days past due but placed on nonaccrual status by management discretion.
- ---------------------------------------------------------------------------------------------------------------------------------- CHANGE IN NONPERFORMING LOANS (a) Domestic --------------------------------------- Total Commercial Commercial Consumer --------------- (in millions) & Financial Real Estate Credit International 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans at beginning of year $ 66 $ 28 $ 56 $ 1 $151 $202 Acquired from Glendale Bancorporation - - - - - 13 Additions 92 43 51 - 186 205 Payments (b) (49) (16) (18) (1) (84) (124) Returned to accrual status (31) (4) (11) - (46) (72) Credit losses (12) (7) (7) - (26) (64) Transfers to acquired property (1) (5) (8) - (14) (9) - ---------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans at end of year $ 65 $ 39 $ 63 $ - $167 $151 - ---------------------------------------------------------------------------------------------------------------------------------- (a) Excludes segregated assets. (b) Includes interest applied to principal and sales.
54 38 NONPERFORMING ASSETS (CONTINUED) - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- ADDITIONAL NONPERFORMING LOAN DATA (a) December 31, (dollars in millions) 1995 1994 - ------------------------------------------------------------------------------- Book balance $167 $151 Contractual balance of nonperforming loans 202 214 Book balance as a percentage of contractual balance 83% 70% Full-year interest receipts applied to reduce principal $ 2 $ 6 Full-year interest receipts recognized in interest revenue 13 14 - ------------------------------------------------------------------------------- (a) Excludes segregated assets.
Acquired property consists of OREO and other assets acquired in connection with loan settlements. Acquired property totaled $69 million at December 31, 1995, down $19 million compared with year-end 1994. The decrease resulted from sales.
- ------------------------------------------------------------------------------- CHANGE IN ACQUIRED PROPERTY December 31, (in millions) 1995 1994 - ------------------------------------------------------------------------------- OREO at beginning of year, net of the OREO reserve $ 87 $138 OREO acquired from Glendale Bancorporation - 3 Foreclosures 22 14 Sales (36) (61) Write-downs, credit losses, OREO provision and other (4) (7) - ------------------------------------------------------------------------------- OREO at end of year, net of the OREO reserve 69 87 Other acquired assets - 1 - ------------------------------------------------------------------------------- Total acquired property, net of the OREO reserve (a) $ 69 $ 88 - ------------------------------------------------------------------------------- (a) Excludes segregated assets.
The Corporation recognizes any estimated potential decline in the value of OREO between appraisal dates on a property-by-property basis through periodic additions to the OREO reserve. Write-downs charged against this reserve are taken when OREO is sold at a loss or upon the receipt of appraisals which indicate a deterioration in the fair value of the property. Activity in the Corporation's OREO reserve for 1995, 1994 and 1993 is presented in the table below.
- ------------------------------------------------------------------------------- RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- Beginning balance $29 $ 37 $ 10 Write-downs on real estate acquired (3) (8) (27) Provision (8) - 54 - ------------------------------------------------------------------------------- Ending balance $18 $ 29 $ 37 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- FOREGONE INTEREST ON NONPERFORMING LOANS Year ended December 31, (in millions) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------- Contractual interest due $15 $15 $21 $32 $58 Interest revenue recognized 5 3 7 13 10 - ------------------------------------------------------------------------------- Interest revenue foregone $10 $12 $14 $19 $48 - -------------------------------------------------------------------------------
Note: This table includes interest revenue foregone on loans that were nonperforming at the end of each year. Interest receipts that the Corporation applied, for accounting purposes, to reduce principal balances of nonaccrual loans are included in contractual interest due, but not in interest revenue recognized. 55 39 NONPERFORMING ASSETS (CONTINUED) - ------------------------------------------------------------------------------- The following table presents the amount of loans that were 90 days or more past due as to principal or interest that are not classified as nonperforming.
- ------------------------------------------------------------------------------- PAST-DUE LOANS December 31, (dollar amounts in millions) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------- Domestic loans: Consumer: Mortgages $34 $ 27 $25 - - Ratio (a) .38% .31% .30% Credit card (b) 13 32 15 - - Ratio (a) .66% 1.35% 1.04% Student - Government guaranteed 44 36 37 - - Ratio (a) 3.11% 2.71% 3.26% Other consumer 1 1 1 - - Ratio (a) .09% .07% .09% - ------------------------------------------------------------------------------- Total Consumer $92 $ 96 $78 $96 (c) $67 (c) Ratio (a) .68% .71% .65% 1.22% .98% Commercial 6 10 6 1 2 - ------------------------------------------------------------------------------- Total domestic loans 98 106 84 97 69 International loans - - - - 6 - ------------------------------------------------------------------------------- Total past-due loans $98 $106 $84 $97 $75 - ------------------------------------------------------------------------------- (a) 90 days past-due as a percentage of year-end loan balances. (b) 1995 excludes past-due CornerStone(sm) credit cards loans included in the accelerated resolution portfolio. (c) Details by loan type not available for 1992 and 1991.
56 40 RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES - -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- (Dollar amounts in millions) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------- Reserve for credit losses at year-end $471 (a) $607 (a) $600 (a) $506 (a) $596 Reserve as a percentage of: Total loans 1.70% 2.27% 2.45% 2.54% 3.12% Nonperforming loans 282 403 297 152 113 Net credit losses as a percentage of average loans .91 (b) .27 .64 1.52 1.24 - -------------------------------------------------------------------------------------------------------------------- (a) Excludes reserve for segregated assets. (b) The ratio of net credit losses, excluding credit losses on assets held for accelerated resolution, to average loans was .53% in 1995.
The reserve for credit losses was $471 million at December 31, 1995, or 1.70% of total loans, compared with $607 million, or 2.27% of total loans at December 31, 1994. The decrease in the reserve for credit losses from December 31, 1994, primarily resulted from credit losses taken on $193 million of CornerStone(sm) credit card loans that were transferred to the accelerated resolution portfolio in December 1995. In connection with this transfer, the Corporation evaluated the carrying value of these loans, which have a history of delinquency, and recorded a credit loss of $106 million to reflect the estimated net realizable value. The Corporation maintains a credit loss reserve that, in management's judgment, is adequate to absorb future losses inherent in the loan portfolio. Management reviews the adequacy of the reserve at least quarterly. For analytical purposes, the reserve methodology estimates loss potential in both the commercial and consumer loan portfolios. This methodology includes an evaluation of loss potential on individual problem credits, as well as a portfolio review of market concentrations, changing business trends, industry risks, and current and anticipated specific and general economic factors that may adversely affect collectability. Other factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; historical loss experience; lending policies; new products; the status and amount of nonperforming and past-due loans and adequacy of collateral. In addition, management assesses volatile factors such as interest rates and real estate market conditions that may significantly alter loss potential. The loss reserve methodology also provides for a portion of the reserve to act as an additional buffer against credit quality deterioration or risk of estimation error. Although the determination of the adequacy of the reserve is based upon these factors, the reserve is not specifically associated with individual loans or portfolio segments. The ratio of the loan loss reserve to nonperforming loans at December 31, 1995, was 282%, compared with 403% at December 31, 1994. This ratio is not the result of a target or objective, but rather is an outcome of two interrelated but separate processes: the establishment of an appropriate loan loss reserve level for the portfolio as a whole, including but not limited to the nonperforming component in the portfolio; and the classification of certain assets as nonperforming in accordance with established accounting, regulatory and management policies. The ratio can vary significantly over time as the credit quality characteristics of the entire loan portfolio change. This ratio can also vary with shifts in portfolio mix. The decrease in this ratio from December 31, 1994, primarily resulted from credit losses recorded on the CornerStone(sm) credit card product. Net credit losses totaled $249 million in 1995, an increase of $182 million from 1994. This increase resulted from the high level of net credit card losses during the year, including $196 million related to the CornerStone(sm) credit card, a $190 million increase from 1994. The Corporation expects a significant reduction in net credit card losses in 1996 as a result of the actions taken on the delinquent portion of the CornerStone(sm) portfolio as well as the securitization of the $950 million of credit card loans. Partially offsetting net credit card losses were lower commercial real estate net credit losses in 1995. The level of credit losses and recoveries relative to outstanding loans can vary from period to period as a result of the size and number of individual credits that may require charge off, and the effects of changing economic conditions. 57 41 RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES (CONTINUED) - -------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- CREDIT LOSS RESERVE ACTIVITY (in millions) 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- Reserve at beginning of year $ 607 $ 600 $ 506 $ 596 $ 525 Net change in reserves from acquisitions and divestitures 8 4 108 2 50 Credit losses: Domestic: Commercial and financial (14) (42) (54) (70) (65) Commercial real estate (8) (16) (74) (161) (85) Consumer credit: Credit cards (167)(a) (61) (46) (49) (41) Consumer mortgage (6) (11) (13) (7) (2) Other consumer credit (19) (17) (22) (24) (26) Lease financing (16) - (1) (1) - - ---------------------------------------------------------------------------------------------------------------------------------- Total domestic (230) (147) (210) (312) (219) International - (4) (6) (19) (37) - ---------------------------------------------------------------------------------------------------------------------------------- Total credit losses (230) (151) (216) (331) (256) - ---------------------------------------------------------------------------------------------------------------------------------- Recoveries: Domestic: Commercial and financial 27 41 40 25 8 Commercial real estate 30 14 13 6 3 Consumer credit: Credit cards 14 9 7 6 5 Consumer mortgage 3 4 2 1 1 Other consumer credit 8 13 10 10 7 - ---------------------------------------------------------------------------------------------------------------------------------- Total domestic 82 81 72 48 24 International 5 3 5 6 3 - ---------------------------------------------------------------------------------------------------------------------------------- Total recoveries 87 84 77 54 27 - ---------------------------------------------------------------------------------------------------------------------------------- Net credit (losses) recoveries: Domestic: Commercial and financial 13 (1) (14) (45) (57) Commercial real estate 22 (2) (61) (155) (82) Consumer credit: Credit cards (153)(a) (52) (39) (43) (36) Consumer mortgage (3) (7) (11) (6) (1) Other consumer credit (11) (4) (12) (14) (19) Lease financing (16) - (1) (1) - - ---------------------------------------------------------------------------------------------------------------------------------- Total domestic (148) (66) (138) (264) (195) International 5 (1) (1) (13) (34) - ---------------------------------------------------------------------------------------------------------------------------------- Total net credit losses (143)(a) (67) (139) (277) (229) Provision for credit losses 105 70 125 185 250 Credit losses on assets held for accelerated resolution (106) - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Reserve at end of year $ 471 (b) $ 607 (b) $ 600 (b) $ 506 (b) $ 596 - ---------------------------------------------------------------------------------------------------------------------------------- (a) Excludes $106 million related to loans transferred to the accelerated resolution portfolio. (b) Excludes reserve for segregated assets.
58 42 FOURTH QUARTER REVIEW - ------------------------------------------------------------------------------- The Corporation reported net income applicable to common stock of $164 million and earnings per common share of $1.18 in the fourth quarter of 1995. These results compare with fourth quarter 1994 net income applicable to common stock of $157 million and earnings per common share of $1.05, excluding the $130 million after tax securities lending charge and the $16 million of preferred dividends recorded in connection with the redemption of the Series H preferred stock. Including the securities lending charge and the effects of the preferred stock redemption, fourth quarter 1994 net income applicable to common stock was $11 million, or $.07 per common share. Annualized return on common shareholders' equity and return on assets were 18.08% and 1.68%, respectively, in the fourth quarter of 1995. Annualized return on common shareholders' equity and return on assets, excluding the securities lending charge and the effect of the preferred stock redemption, were 16.49% and 1.74%, respectively in the fourth quarter of 1994. Annualized return on common shareholders' equity and return on assets, including the securities lending charge and the effect of the preferred stock redemption, were 1.10% and .42%, respectively, in the fourth quarter of 1994. Compared with the fourth quarter of 1994, the Corporation's fourth quarter 1995 results reflected higher fee revenue, offset in part by higher credit quality expense and lower net interest revenue. Net interest revenue totaled $382 million in the fourth quarter of 1995, down from $401 million in the fourth quarter of 1994. The decrease primarily resulted from the migration of retail customers from lower cost deposit products to higher cost products and the effect of the credit card securitization, which offset loan growth. The net interest margin on a taxable equivalent basis was 4.43% in the fourth quarter of 1995, a decrease of 42 basis points from 4.85% in the fourth quarter of 1994. Credit quality expense was $30 million in the fourth quarter of 1995, an increase of $20 million compared with the prior-year period. This increase resulted from a higher provision for credit losses that was made in response to credit losses taken on the CornerStone(sm) credit card portfolio. Net credit losses were $138 million in the fourth quarter of 1995, compared with $20 million in the fourth quarter of 1994. The increase resulted from a $123 million increase in net CornerStone(sm) credit card losses, including $106 million of credit losses on the CornerStone(sm) credit cards that were transferred to the accelerated resolution portfolio. Fee revenue was $444 million in the fourth quarter of 1995, an increase of $39 million compared with the fourth quarter of 1994. The increase primarily resulted from a $16 million increase in mortgage servicing revenues, a $7 million increase in credit card revenue, a $5 million increase in trust and investment management fees and a $3 million increase in syndication management fees. The increase in mortgage servicing revenue from the prior-year period, primarily resulted from acquisitions while the increase in credit card revenue was primarily related to the credit card securitization transaction. Operating expense for the fourth quarter of 1995 was $526 million, compared with $741 million in the prior-year period. Excluding net revenue from acquired property and the securities lending charge of $223 million recorded in the fourth quarter of 1994, operating expense increased 1% compared with the prior-year period. This increase primarily resulted from increases in the amortization of purchased mortgage servicing rights, staff expense and equipment expense partially offset by lower FDIC deposit insurance assessment expense and professional, legal and other purchased services expense. 59 43 SELECTED QUARTERLY DATA*
- ------------------------------------------------------------------------------------------------------------------------------ Quarter ended, 1995 1994 --------------------------------- --------------------------------- (dollar amounts in millions, DEC. SEPT. JUNE MARCH Dec. Sept. June March except per share amounts) 31 30 30 31 31 30 30 31 - ------------------------------------------------------------------------------------------------------------------------------ QUARTERLY CONSOLIDATED INCOME STATEMENT - ------------------------------------------------------------------------------------------------------------------------------ Net interest revenue $ 382 $ 392 $ 385 $ 389 $ 401 $ 376 $ 364 $ 367 Provision for credit losses 35 30 20 20 15 15 20 20 Fee revenue 444 422 405 399 405 399 412 436 Gains (losses) on sale of securities 6 - 1 (1) - (15) 8 2 Operating expense 526 506 500 495 741 595 508 530 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 271 278 271 272 50 150 256 255 Provision for income taxes 97 103 99 102 9 72 98 99 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME 174 175 172 170 41 78 158 156 Dividends on preferred stock 10 9 10 10 30 15 15 15 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME APPLICABLE TO COMMON STOCK $ 164 $ 166 $ 162 $ 160 $ 11 $ 63 $ 143 $ 141 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER COMMON SHARE $ 1.18 $ 1.15 $ 1.09 $ 1.08 $ .07 $ .42 $ .97 $ .96 - ------------------------------------------------------------------------------------------------------------------------------ RESULTS EXCLUDING CERTAIN ITEMS (a) - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 174 $ 175 $ 172 $ 170 $ 171 $ 167 $ 158 $ 156 Net income applicable to common stock 164 166 162 160 157 152 143 141 Net income per common share $ 1.18 $ 1.15 $ 1.09 $ 1.08 $ 1.05 $ 1.02 $ .97 $ .96 Annualized return on common shareholders' equity 18.08% 17.98% 17.47% 17.55% 16.49% 16.10% 15.75% 16.12% Annualized return on assets 1.68 1.70 1.75 1.77 1.74 1.74 1.69 1.67 - ------------------------------------------------------------------------------------------------------------------------------ QUARTERLY AVERAGE BALANCES - ------------------------------------------------------------------------------------------------------------------------------ Money market investments $ 1,206 $ 1,286 $ 1,165 $ 1,230 $ 1,213 $ 1,466 $ 1,813 $ 2,147 Trading account securities 283 363 220 316 281 351 386 504 Securities 5,178 4,938 4,681 4,890 5,062 5,421 5,306 4,798 Loans 27,747 27,774 27,076 26,670 26,401 25,084 24,251 24,636 Interest-earning assets 34,414 34,361 33,142 33,106 32,957 32,322 31,756 32,085 Total assets 41,141 40,955 39,370 38,886 38,792 38,016 37,497 38,113 Deposits 28,946 28,417 27,100 27,318 27,260 26,963 26,989 27,790 Notes and debentures 1,646 1,809 1,643 1,582 1,571 1,618 1,924 1,965 Shareholders' equity 4,045 4,083 4,161 4,135 4,313 4,346 4,260 4,185 - ------------------------------------------------------------------------------------------------------------------------------ Net interest margin (FTE) 4.43% 4.56% 4.69% 4.80% 4.85% 4.66% 4.63% 4.69% - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK DATA (dollars per share) (b) - ------------------------------------------------------------------------------------------------------------------------------ Market price range: High $56 1/2 $47 3/4 $44 3/4 $41 3/4 $38 3/8 $39 3/4 $40 3/8 $39 1/2 Low 44 5/8 39 5/8 37 3/4 30 5/8 30 37 36 1/8 35 Average 51.82 43.18 41.66 36.66 34.52 38.41 38.38 36.74 Close 53 3/4 44 3/4 41 5/8 40 3/4 30 5/8 37 1/2 37 1/2 37 3/8 Dividends .55 .50 .50 .45 .45 .3733 .3733 .3733 Market capitalization $ 7,374 $ 6,324 $ 5,925 $ 5,969 $ 4,507 $ 5,510 $ 5,400 $ 5,371 - ------------------------------------------------------------------------------------------------------------------------------ *Unaudited (a) Results for the fourth quarter of 1994 exclude the $130 million after tax securities lending charge, as well as the additional $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. Results for the third quarter of 1994 exclude $79 million after tax of merger expenses and $10 million after tax of losses on the disposition of securities available for sale previously owned by Dreyfus. (b) At December 31, 1995, there were 23,755 shareholders registered with the Corporation's stock transfer agent, compared with 23,092 at year-end 1994 and 22,222 at year-end 1993. In addition, there were approximately 18,465, 20,281, and 18,849 Mellon employees at December 31, 1995, 1994 and 1993, respectively, who participated in the Corporation's 401(k) Retirement Savings Plan and the Dreyfus retirement savings plan. All shares of Mellon Bank Corporation common stock held by the plans for its participants are registered in the name of Mellon Bank, N.A., as trustee.
60 44 CONSOLIDATED INCOME STATEMENT MELLON BANK CORPORATION (AND ITS SUBSIDIARIES)
- -------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in millions, except per share amounts) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- INTEREST REVENUE Interest and fees on loans (loan fees of $79, $87 and $71) $2,425 $1,926 $1,588 Interest-bearing deposits with banks 36 34 58 Federal funds sold and securities under resale agreements 34 30 54 Other money market investments 2 6 13 Trading account securities 19 24 15 Securities: U.S. Treasury and agency securities 305 269 226 Obligation of states and political subdivisions 3 5 7 Other 14 16 23 -------------------------------------------------------------------------------------------------- Total interest revenue 2,838 2,310 1,984 - -------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits in domestic offices 663 447 415 Deposits in foreign offices 226 92 40 Federal funds purchased and securities under repurchase agreements 125 76 33 Short-term bank notes 50 2 3 Other short-term borrowings 109 75 43 Notes and debentures 117 110 121 -------------------------------------------------------------------------------------------------- Total interest expense 1,290 802 655 - -------------------------------------------------------------------------------------------------------------------------- NET INTEREST REVENUE NET INTEREST REVENUE 1,548 1,508 1,329 Provision for credit losses 105 70 125 -------------------------------------------------------------------------------------------------- NET INTEREST REVENUE AFTER PROVISION FOR LOSSES 1,443 1,438 1,204 - -------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Trust and investment management fees 906 953 853 Cash management and deposit transaction charges 191 197 192 Mortgage servicing fees 122 78 62 Foreign currency and securities trading 91 76 46 Credit card fees 90 72 61 Other income 270 276 324 -------------------------------------------------------------------------------------------------- Total fee revenue 1,670 1,652 1,538 Gains (losses) on sales of securities 6 (5) 100 -------------------------------------------------------------------------------------------------- Total noninterest revenue 1,676 1,647 1,638 - -------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSE Staff expense 957 956 854 Net occupancy expense 205 206 186 Professional, legal and other purchased services 186 210 163 Equipment expense 143 132 121 Business development 136 161 139 Amortization of goodwill and other intangible assets 96 98 78 Communications expense 86 84 77 Amortization of mortgage servicing rights and purchased credit card relationships 68 40 44 Forms and supplies 42 40 38 FDIC assessment and regulatory examination fees 31 63 60 Other expense 97 85 90 Net expense (revenue) of acquired property (20) (28) 59 Securities lending charge - 223 - Merger expense - 104 175 -------------------------------------------------------------------------------------------------- Total operating expense 2,027 2,374 2,084 - -------------------------------------------------------------------------------------------------------------------------- INCOME Income before income taxes 1,092 711 758 Provision for income taxes 401 278 298 -------------------------------------------------------------------------------------------------- NET INCOME 691 433 460 Dividends on preferred stock 39 75 63 -------------------------------------------------------------------------------------------------- NET INCOME APPLICABLE TO COMMON STOCK $ 652 $ 358 $ 397 -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Primary net income $ 4.50 $ 2.42 $ 2.73 Fully diluted net income $ 4.46 $ 2.42 $ 2.73 --------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 61 45 CONSOLIDATED BALANCE SHEET MELLON BANK CORPORATION (AND ITS SUBSIDIARIES)
- ------------------------------------------------------------------------------------------------------------ December 31, (dollar amounts in millions) 1995 1994 - ------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 2,342 $ 2,285 Interest-bearing deposits with banks 553 429 Federal funds sold and securities under resale agreements 225 383 Other money market investments 82 48 Trading account securities 62 71 Securities available for sale 2,913 1,881 Investment securities (approximate fair value of $2,554 and $3,033) 2,519 3,244 Loans, net of unearned discount of $44 and $62 27,690 26,733 Reserve for credit losses (471) (607) Customers' acceptance liability 263 234 Premises and equipment 556 558 Acquired property, net of reserves of $18 and $29 69 88 Goodwill and other intangibles 958 1,036 Mortgage servicing rights and purchased credit card relationships 682 352 Other assets 2,203 1,909 --------------------------------------------------------------------------------------------- Total assets $40,646 $38,644 --------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------ LIABILITIES Noninterest-bearing deposits in domestic offices $ 6,458 $ 5,979 Interest-bearing deposits in domestic offices 18,412 18,121 Interest-bearing deposits in foreign offices 4,391 3,470 --------------------------------------------------------------------------------------------- Total deposits 29,261 27,570 Federal funds purchased and securities under repurchase agreements 1,591 2,023 Short-term bank notes 1,057 200 Term federal funds purchased 905 333 U.S. Treasury tax and loan demand notes 290 567 Commercial paper 284 178 Other funds borrowed 190 171 Acceptances outstanding 263 234 Other liabilities 1,337 1,678 Notes and debentures (with original maturities over one year) 1,443 1,568 --------------------------------------------------------------------------------------------- Total liabilities 36,621 34,522 - ------------------------------------------------------------------------------------------------------------ SHAREHOLDERS' Preferred stock 435 435 EQUITY Common shareholders' equity: Common stock--$.50 par value Authorized--200,000,000 shares Issued--147,165,480 shares 74 74 Additional paid-in capital 1,850 1,851 Retained earnings 2,118 1,780 Warrants - 37 Net unrealized gain (loss) on assets available for sale, net of tax 18 (55) Treasury stock of 9,978,407 and - shares at cost (470) - --------------------------------------------------------------------------------------------- Total common shareholders' equity 3,590 3,687 --------------------------------------------------------------------------------------------- Total shareholders' equity 4,025 4,122 --------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $40,646 $38,644 ---------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 62 46 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY MELLON BANK CORPORATION (CONSOLIDATED AND PARENT CORPORATION)
- ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gain Total Additional (loss) on assets share- Preferred Common paid-in Retained available for sale Treasury holders' (in millions) stock stock capital earnings Warrants (net of tax) stock equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1992 $ 467 $47 $1,612 $1,360 $ 6 $ - $(155) $3,337 Net income 460 460 Dividends on common stock at $1.01 per share (a) (121) (121) Dividends on preferred stock (63) (63) Issuance of 6.81 million shares of common stock, net of issuance costs 4 340 344 Issuance of warrants 37 37 Series K preferred stock issued, net of issuance costs 193 193 Series B preferred stock redemption/conversion (68) 1 2 (65) Purchase of treasury stock (89) (89) Common stock issued under dividend reinvestment and common stock purchase plan 35 6 41 Exercise of stock options 11 (11) 24 24 Exercise of warrants 1 24 (6) 19 Exercise of subscription rights 8 8 Other 7 4 2 13 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 $ 592 $52 $2,038 $1,629 $ 37 $ - $(210) $4,138 Net income 433 433 Dividends on common stock at $1.57 per share (a) (194) (194) Dividends on preferred stock (75) (75) Common stock issued under dividend reinvestment and common stock purchase plan 9 2 11 Series H preferred stock redemption (155) (155) Conversion of Series D preferred stock to common stock (2) 1 1 - Exercise of stock options 6 (6) 10 10 Net unrealized loss on assets available for sale, net of tax (55) (55) Additional common stock issued for stock split 24 (24) - Retirement of Dreyfus treasury stock (3) (187) 190 - Other 8 (7) 8 9 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 $ 435 $74 $1,851 $1,780 $ 37 $(55) $ - $4,122 NET INCOME 691 691 DIVIDENDS ON COMMON STOCK AT $2.00 PER SHARE (288) (288) DIVIDENDS ON PREFERRED STOCK (39) (39) COMMON STOCK ISSUED UNDER DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN 1 13 14 REPURCHASE OF COMMON STOCK - RELATED TO THE 1993 TBC ACQUISITION (159) (159) REPURCHASE OF WARRANTS (17) (37) (54) REPURCHASE OF COMMON STOCK FOR EMPLOYEE BENEFIT PURPOSES (235) (235) EXERCISE OF STOCK OPTIONS 12 (28) 78 62 REPURCHASE OF COMMON STOCK - OTHER (184) (184) NET UNREALIZED GAIN ON ASSETS AVAILABLE FOR SALE, NET OF TAX 73 73 OTHER 3 2 17 22 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $ 435 $74 $1,850 $2,118 $ - $ 18 $(470) $4,025 - ----------------------------------------------------------------------------------------------------------------------------------- (a) Dividends per share have not been restated to reflect the Dreyfus merger.
See accompanying Notes to Financial Statements. 63 47 CONSOLIDATED STATEMENT OF CASH FLOWS MELLON BANK CORPORATION (and its subsidiaries)
- -------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net income $ 691 $ 433 $ 460 OPERATING Adjustments to reconcile net income to net cash ACTIVITIES provided by operating activities: Amortization of goodwill and other intangible assets 96 98 78 Amortization of mortgage servicing rights and purchased credit card relationships 68 40 44 Depreciation and other amortization 107 95 90 Deferred income tax expense (benefit) 167 (14) 29 Provision for credit losses 105 70 125 Provision for real estate acquired and other losses (6) 1 65 Securities lending charge - 223 - Merger expenses - 104 175 Net gains on dispositions of acquired property (12) (30) (11) Net (increase) decrease in accrued interest receivable (45) (42) 69 Net (increase) decrease in trading account securities 12 52 (1) Net increase (decrease) in accrued interest payable, net of amounts prepaid 35 34 (18) Net (increase) decrease in residential mortgages held for sale (367) 217 76 Net increase (decrease) in other operating activities (596) (332) 276 ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 255 949 1,457 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net (increase) decrease in term deposits and other money INVESTING market investments (158) 715 968 ACTIVITIES Net (increase) decrease in federal funds sold and securities under resale agreements 158 191 (294) Funds invested in securities available for sale (5,070) (11,526) (11,872) Proceeds from sales of securities available for sale 1,845 3,808 9,511 Proceeds from maturities of securities available for sale 2,898 8,927 4,381 Funds invested in investment securities (175) (1,458) (846) Proceeds from sales of investment securities - - 664 Proceeds from maturities of investment securities 307 488 447 Net increase in credit card receivables (600) (870) (114) Net principal collected (disbursed) on loans to customers (1,662) (1,544) 788 Credit card receivables securitized 950 - - Loan portfolio purchases (302) (216) (83) Proceeds from sales of loan portfolios 815 286 116 Purchases of premises and equipment (101) (133) (120) Proceeds from sales of acquired property 49 93 102 Cash paid in purchase of Metmor Financial, Inc., including warehouse loans purchased of $166 million, net of cash received and escrow deposits (130) - - Cash paid in purchase of U.S. Bancorp Mortgage Company, including warehouse loans purchased of $81 million, net of escrow deposits - (98) - Cash paid in purchase of Glendale Bancorporation, net of cash received - (13) - Cash paid in purchase of The Boston Company and AFCO and CAFO, net of cash received - - (1,233) Net (increase) decrease in other investing activities (137) 75 (268) ------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (1,313) (1,275) 2,147 - --------------------------------------------------------------------------------------------------------------------------
-continued- 64 48 CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) MELLON BANK CORPORATION (and its subsidiaries)
- -------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net increase (decrease) in transaction and savings deposits 955 (1,070) 1,266 FINANCING Net increase (decrease) in customer term deposits 500 807 (2,726) ACTIVITIES Net increase (decrease) in federal funds purchased and securities under repurchase agreements (432) 1,045 (676) Net increase (decrease) in U.S. Treasury tax and loan demand notes (277) (144) 435 Net increase in short-term bank notes 857 200 - Net increase (decrease) in term federal funds purchased 572 325 (614) Net increase (decrease) in commercial paper 106 44 (45) Repayments of AFCO borrowings - - (1,058) Repurchase and repayments of longer-term debt (354) (425) (1,070) Net proceeds from issuance of longer-term debt 227 1 950 Redemption of preferred stock (155) - (65) Net proceeds from issuance of common and preferred stock 58 18 502 Dividends paid on common and preferred stock (346) (254) (183) Repurchase of common stock and warrants related to the 1993 TBC acquisition (213) - - Repurchase of common stock for employee benefit purposes (235) - (89) Repurchase of common stock - other (184) - - Net increase (decrease) in other financing activities 17 (127) (48) --------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 1,096 420 (3,421) Effect of foreign currency exchange rates 19 20 13 - -------------------------------------------------------------------------------------------------------------------------- CHANGE IN CASH Net increase in cash and due from banks 57 114 196 AND DUE FROM Cash and due from banks at beginning of year 2,285 2,171 1,975 BANKS --------------------------------------------------------------------------------------------------------- Cash and due from banks at end of year $2,342 $ 2,285 $ 2,171 --------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Interest paid $1,255 $ 768 $ 673 DISCLOSURES Net income taxes paid 182 284 211 ---------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 65 49 NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES Basis of presentation The accounting and financial reporting policies of Mellon Bank Corporation (the Corporation), a multibank holding company, conform to generally accepted accounting principles (GAAP) and prevailing industry practices. The consolidated financial statements of the Corporation include the accounts of the Corporation and its majority-owned subsidiaries. Investments in companies 20 - 50% owned are carried on the equity basis. Investments in companies less than 20% owned are carried at cost. Intracorporate balances and transactions are not reflected in the consolidated financial statements. The income statement includes results of acquired subsidiaries and businesses accounted for under the purchase method of accounting from the dates of acquisition. On August 24, 1994, the Corporation merged with The Dreyfus Corporation. This merger was accounted for as a pooling of interests. The financial information for all prior periods were restated in 1994 to present the combined balance sheet and results of operations of both companies as if the merger had been in effect for all periods presented. The parent Corporation financial statements in note 24 include the accounts of the Corporation and those of a wholly owned financing subsidiary that functions as a financing entity for the Corporation and its subsidiaries by issuing commercial paper and other debt guaranteed by the Corporation. Financial data for the Corporation and the financing subsidiary are combined for financial reporting because of the limited function of the financing subsidiary and the unconditional guarantee by the Corporation of the financing subsidiary's obligations. Securities and other property held in a fiduciary or agency capacity are not included in the balance sheet since these are not assets or liabilities of the Corporation. Nature of operations and use of estimates in the preparation of financial statements Mellon Bank Corporation is a multibank holding company whose principal wholly owned subsidiaries are Mellon Bank, N.A., The Boston Company, Inc. and Mellon Bank (DE) National Association. The Dreyfus Corporation, one of the nation's largest mutual fund companies, is a wholly owned subsidiary of Mellon Bank, N.A. The Corporation's banking subsidiaries primarily engage in retail financial services, commercial banking, mortgage banking, trust and investment management services and mutual funds activities. While the Corporation's major subsidiaries are headquartered in the Northeast and Central Atlantic regions, most of its products and services are offered nationwide and many are offered globally. The Corporation's customer base is diversified and primarily domestic. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenue and expense during the reporting period. Actual results could differ from those estimates. Trading account securities, securities available for sale and investment securities When purchased, securities are classified in either the trading account securities portfolio, the securities available for sale portfolio or the investment securities portfolio. Securities are classified as trading account securities when the intent is profit maximization through market appreciation and resale. Securities are classified as available for sale when management intends to hold the securities for an indefinite period of time or when the securities may be used for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure, prepayment risk and liquidity needs. Securities are classified as investment securities when management intends to hold these securities until maturity. Trading account securities, including interest rate agreements, are stated at fair value. Trading revenue includes both realized and unrealized gains and losses. The liability incurred on short-sale transactions, representing the obligation to deliver securities, is included in other funds borrowed at fair value. 66 50 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) On January 1, 1994, FAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," became effective. Beginning in 1994, securities available for sale are stated at fair value; prior years' securities available for sale were recorded at the lower of aggregate cost or market value, adjusted for amortization of premium and accretion of discount on a level yield basis. Adoption of this standard resulted in unrealized gains or losses on assets classified as available for sale, net of tax, being recorded as an addition to or deduction from shareholders' equity. Investment securities are stated at cost, adjusted for amortization of premium and accretion of discount on a level yield basis. Gains (losses) on sales of securities available for sale are reported in the income statement. The cost of securities sold is determined on a specific identification basis. Loans Loans are reported net of any unearned discount. Interest revenue on nondiscounted loans is recognized based on the principal amount outstanding. Interest revenue on discounted loans is recognized based on methods that approximate a level yield. Loan origination and commitment fees, as well as certain direct loan origination and commitment costs, are deferred and amortized as a yield adjustment over the lives of the related loans. Deferred fees and costs are netted against outstanding loan balances. Commercial loans generally are placed on nonaccrual status when either principal or interest is past due 90 days or more, unless the loan is well- secured and in the process of collection. Management also places loans on nonaccrual status when the collection of principal or interest becomes doubtful. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed against current period interest revenue. Interest receipts on nonaccrual loans are recognized as interest revenue or are applied to principal when management believes the ultimate collectability of principal is in doubt. Nonaccrual loans generally are restored to an accrual basis when principal and interest payments become current or when the loan becomes well-secured and is in the process of collection. Residential mortgage loans generally are placed on nonaccrual status when, in management's judgment, collection is in doubt or the loans have outstanding balances of $250,000 or greater and are 90 days or more delinquent, or have balances of less than $250,000 and are delinquent 12 months or more. Consumer loans, other than residential mortgages, and certain secured commercial loans of less than $5,000 are charged off upon reaching various stages of delinquency depending upon the loan type. Unearned revenue on direct financing leases is accreted over the lives of the leases in decreasing amounts to provide a constant rate of return on the net investment in the leases. Revenue on leveraged leases is recognized on a basis to achieve a constant yield on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Gains on sales of lease residuals are included in other noninterest revenue. On January 1, 1995, the Corporation adopted FAS No. 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." FAS No. 114 provides guidelines for measuring impairment losses on loans. A loan is considered to be impaired when it is probable that the Corporation will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. All of the Corporation's nonperforming loans, which totaled $167 million at December 31, 1995, are considered to be impaired loans. Average impaired loans during 1995 were $175 million. Under FAS No. 114, impaired loans subject to the statement are required to be measured based upon the present value of expected future cash flows, discounted at the loan's initial effective interest rate, or at the loan's market price or fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for credit losses or by a provision for credit losses, depending on the adequacy of the reserve for credit losses. Included in impaired loans at December 31, 1995 were $59 million that had a related impairment reserve of $22 million, and $108 million that did not have a related reserve as a result of 67 51 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) interest payments applied to reduce principal or credit losses previously taken on these loans. FAS No. 118 permits existing income recognition practices to continue. During the year, the Corporation recognized $13 million of interest revenue on impaired loans, all of which was recognized using the cash basis method of income recognition. Credit card securitization In November 1995, the Corporation securitized $950 million of credit card receivables. The amount of credit card interest revenue and fee revenue in excess of interest paid to certificate holders and credit losses is recognized monthly as servicing revenue in credit card fee revenue. Reserve for credit losses The reserve for credit losses is maintained to absorb future losses inherent in the credit portfolio based on management's judgment. Factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; industry concentrations; lending policies; new products; adequacy of collateral; historical loss experience; the status and amount of nonperforming and past-due loans; specific known risks; and current, as well as anticipated, specific and general economic factors that may affect certain borrowers. Credit losses are charged against the reserve; recoveries are added to the reserve. Acquired property Property acquired in connection with loan settlements, including real estate acquired, is stated at the lower of estimated fair value less estimated costs to sell, or the carrying amount of the loan. A reserve for real estate acquired is maintained on a property-by-property basis to recognize estimated potential declines in value that might occur between appraisal dates. Provisions for the estimated potential decrease in fair value between annual appraisals, net gains on the sale of real estate acquired and net direct operating expense attributable to these assets are included in net expense (revenue) of acquired property. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated over the estimated useful lives of the assets, limited in the case of leasehold improvements to the lease term, using the straight-line method. Goodwill, other identified intangibles, mortgage servicing rights and purchased credit card relationships Intangible assets are amortized using straight-line and accelerated methods over the remaining estimated benefit periods which approximated, on a weighted-average basis at December 31, 1995, 16 years for goodwill, five years for core deposit intangibles, eight years for credit card relationships and nine years for all other intangible assets except mortgage servicing rights. Intangible assets are reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Mortgage servicing rights (MSRs) are recorded at cost and are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. The Corporation adopted FAS No. 122, "Accounting for Mortgage Servicing Rights," in 1995. FAS No. 122 amends FAS No. 65, "Accounting for Certain Mortgage Banking Activities" and requires the recognition as separate assets the rights to service mortgage loans for others, however those servicing rights are acquired. This statement eliminates the previously existing accounting distinction between servicing rights acquired through purchase transactions and those acquired through loan originations. In 1995, $12 million of servicing rights were capitalized in connection with loan originations. 68 52 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) The carrying amount of MSRs was $592 million at December 31, 1995, with an estimated fair value of $661 million. The carrying amount of MSRs is measured for impairment each quarter based on the fair value of the MSRs. Quoted market prices are used, whenever available, as the basis for measuring the fair value of servicing rights. When quoted market prices are not available, fair values are based upon the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. For impairment measurement purposes, servicing rights acquired after April 1, 1995, are first stratified by loan type and then by interest rates within the loan type. If the carrying value of an individual stratum exceeds its fair value, a valuation allowance would be established. No valuation allowances were recorded at December 31, 1995, as the carrying values of the various stratifications were less than their respective fair value. MSRs acquired prior to April 1, 1995, are stratified by acquisition and evaluated for possible impairment using fair market values. On a weighted-average basis at December 31, 1995, the serviced mortgage loan portfolio had an interest rate of approximately 7.95%. Assets held for accelerated resolution During the fourth quarter of 1995, the Corporation segregated certain loans from the CornerStone(sm) credit card portfolio into an accelerated resolution portfolio. The excess of the carrying value of these loans, which have a history of delinquency, over the estimated net realizable value was recorded as a credit loss. Interest and principal receipts, fees and loan loss recoveries on loans in this portfolio are applied to reduce the net carrying value. No revenue will be recorded on this portfolio until the net carrying value is recovered. This portfolio is reported in other assets in the balance sheet. Income Taxes The Corporation, its domestic subsidiaries and Mellon Bank Canada file a consolidated U.S. income tax return. The provision for U.S. income taxes of each subsidiary is recorded as if each subsidiary filed a separate return, except that tax benefits of current year losses, tax credits and tax benefit carryforwards are allocated to the subsidiaries incurring such losses or credits to the extent they reduce consolidated tax expense. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated to U.S. dollars at the rate of exchange on the balance sheet date. Revenue and expense accounts are translated monthly at month-end rates of exchange. Net foreign currency positions are valued at rates of exchange--spot or future, as appropriate--prevailing at the end of the period, and resulting gains or losses are included in the income statement. Translation gains and losses on investments in foreign entities with functional currencies that are not the U.S. dollar are included in shareholders' equity. Fee revenue Trust and investment management fees are reported net of fees waived and expense reimbursements to certain mutual funds. Fees on standby letters of credit are recognized over the commitment term, while fees on commercial letters of credit, because of their short-term nature, are recognized when received. Fees on standby and commercial letters of credit are recorded in fee revenue. Fees for banking and other services generally are recognized over the periods the related services are provided. Off-balance-sheet instruments used for interest rate risk management The Corporation enters into interest rate swaps, futures and forward contracts and interest rate caps and floors to manage its sensitivity to interest rate risk. These instruments are designated as a hedge on the trade date and are highly correlated with the financial instrument being hedged. An example of a highly correlated hedge is the hedging of three-month Eurodollar deposits with three-month Eurodollar futures contracts. Interest revenue or interest expense on such transactions is accrued over the term of the agreement as an adjustment to the yield or cost of the related asset or liability. Transaction fees are deferred and amortized to interest revenue or interest expense over the term of the agreement. Realized gains and losses 69 53 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) are deferred and amortized over the life of the hedged transaction as interest revenue or interest expense, and any unamortized amounts are recognized as income or loss at the time of disposition of the assets or liabilities being hedged. Amounts payable to or receivable from counterparties are included in other liabilities or other assets. The fair values of interest rate swaps, futures and forward contracts and interest rate caps and floors used for interest rate risk management are not recognized in the financial statements. Hedge correlation of interest rate risk management positions is reviewed periodically. If correlation criteria are not met, the interest rate risk management position is no longer accounted for as a hedge. Under these circumstances, the accumulated change in market value of the hedge is recognized in current income to the extent that the hedge results have not been offset by the effects of interest rate or price changes of the hedged item. Off-balance-sheet instruments used for trading activities The Corporation enters into foreign exchange contracts, futures and forward contracts, interest rate swaps, option contracts and interest rate agreements to accommodate customers and for its proprietary trading activities. Realized and unrealized changes in the fair value of these instruments are recognized in the income statement in foreign currency and securities trading revenue in the period in which the changes occur. Interest revenue and expense on instruments held for trading activities are included in the income statement as part of net interest revenue. The fair value of contracts in gain positions is reported on the balance sheet in other assets and the fair value of contracts in loss positions is reported in other liabilities. Statement of Cash Flows For the purpose of reporting cash flows, the Corporation has defined cash and cash equivalents as cash and due from banks. Cash flows from assets and liabilities that have an original maturity date of three months or less generally are reported on a net basis. Cash flows from assets and liabilities that have an original maturity date greater than three months generally are reported on a gross basis. Cash flows from hedging activities are classified in the same category as the items hedged. Net income per common share Net income per common share is computed using the "if-converted" method by dividing net income applicable to common stock by the average number of shares of common stock and common stock equivalents outstanding, net of shares assumed to be repurchased using the treasury stock method. Common stock equivalents arise from the assumed conversion of outstanding stock options, warrants and subscription rights. The Series D preferred stock was converted to common stock in August 1994. If the inclusion of the Series D preferred stock as common stock equivalents was dilutive, dividends on the Series D preferred stock were added back to net income for the purpose of calculating net income per common share. The average number of shares of common stock and equivalents used to compute primary net income per common share in 1995, 1994 and 1993 was 145.1 million, 149.1 million and 147.1 million, respectively. Fully diluted net income per common share is computed by dividing net income applicable to common stock by the average number of shares of common stock and common stock equivalents outstanding for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method. These shares are increased by the assumed conversion of convertible items, if dilutive. The average number of shares of common stock and equivalents used to compute fully diluted net income per common share in 1995, 1994 and 1993 was 146.2 million, 149.2 million and 147.3 million, respectively. 2. CASH AND DUE FROM BANKS Cash and due from banks includes reserve balances that the Corporation's subsidiary banks are required to maintain with a Federal Reserve bank. These required reserves are based primarily on deposits outstanding and were $630 million at December 31, 1995, and $614 million at December 31, 1994. These balances averaged $569 million in 1995 and $621 million in 1994. 70 54 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 3. SECURITIES SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 December 31, 1994 ---------------------------------------- ---------------------------------------- AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair (in millions) COST GAINS LOSSES VALUE cost Gains Losses value - ------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 209 $ 1 $- $ 210 $ 425 $- $ 1 $ 424 U.S. agency mortgage-backed 1,572 38 4 1,606 527 - 42 485 Other U.S. agency 951 2 - 953 830 - - 830 - ------------------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury and agency securities 2,732 41 4 2,769 1,782 - 43 1,739 Obligations of states and political subdivisions 62 1 - 63 1 - - 1 Other mortgage-backed 7 - - 7 9 - - 9 Other securities 68 7 1 74 132 3 3 132 - ------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $2,869 $49 $5 $2,913 $1,924 $3 $46 $1,881 - -------------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------------------------- Contractual maturities at December 31, 1995 Obligations Total U.S. agency Total of states Other securities (dollar amounts U.S. mortgage- Other U.S. Treasury and political mortgage- Other available in millions) Treasury backed U.S. agency and agency subdivisions backed securities for sale - ------------------------------------------------------------------------------------------------------------------------------- Within one year Amortized cost $176 $ - $330 $ 506 $ 3 $- $ - $ 509 Fair value 176 - 330 506 3 - - 509 Yield 5.03% - 5.95% 5.63% 8.21% - - 5.64% 1 to 5 years Amortized cost 33 - 621 654 52 - 10 716 Fair value 34 - 623 657 53 - 10 720 Yield 6.05% - 5.97% 5.98% 7.95% - 6.14% 6.12% 5 to 10 years Amortized cost - - - - 1 - 2 3 Fair value - - - - 1 - 2 3 Yield - - - - 10.12% - 7.35% 8.20% Over 10 years Amortized cost - - - - 6 - 56 62 Fair value - - - - 6 - 62 68 Yield - - - - 8.98% - 10.05%(c) 9.76%(c) Mortgage-backed securities Amortized cost - 1,572 - 1,572 - 7 - 1,579 Fair value - 1,606 - 1,606 - 7 - 1,613 Yield - 7.14% - 7.14% - 6.72% - 7.14% - ------------------------------------------------------------------------------------------------------------------------------- Total amortized cost $209 $1,572 $951 $2,732 $62 $7 $68 $2,869 Total fair value 210 1,606 953 2,769 63 7 74 2,913 Total yield 5.19% 7.14% 5.96% 6.58% 8.09% 6.72% 8.32%(c) 6.63%(c) Weighted average contractual years to maturity .76 - (a) 2.36 2.07 (b) 4.02 - (a) 8.47 (c) - - ------------------------------------------------------------------------------------------------------------------------------- (a) The average expected lives of "U.S. agency mortgage-backed" and "Other mortgage-backed" securities were approximately 7.7 years and 2.5 years, respectively, at December 31, 1995. (b) Excludes maturities of "U.S. agency mortgage-backed" securities. (c) Excludes equity securities and other investments which have no stated yield.
Note: Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Rates are calculated on a taxable equivalent basis using a 35% federal income tax rate. 71 55 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 3. SECURITIES (CONTINUED) INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 December 31, 1994 ---------------------------------------- ---------------------------------------- AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair (in millions) COST GAINS LOSSES VALUE cost Gains Losses value - ------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 33 $ 4 $- $ 37 $ 24 $- $ 1 $ 23 U.S. agency mortgage-backed 2,375 34 4 2,405 3,017 - 209 2,808 Other U.S. agency - - - - 4 - - 4 - ------------------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury and agency securities 2,408 38 4 2,442 3,045 - 210 2,835 Obligations of states and political subdivisions - - - - 70 - 1 69 Other mortgage-backed 39 1 - 40 48 - 1 47 Other securities 72 - - 72 81 1 - 82 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities $2,519 $39 $4 $2,554 $3,244 $1 $212 $3,033 - -------------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------- Contractual maturities at December 31, 1995 Obligations U.S. agency Total of states Other Total (dollar amounts U.S. mortgage- Other U.S. Treasury and political mortgage- Other investment in millions) Treasury backed U.S. agency and agency subdivisions backed securities securities - ------------------------------------------------------------------------------------------------------------------------------- Within one year Amortized cost $15 $ - $- $ 15 $- $ - $13 $ 28 Fair value 15 - - 15 - - 13 28 Yield 4.62% - - 4.62% - - 5.73% 5.15% 1 to 5 years Amortized cost - - - - - - 8 8 Fair value - - - - - - 8 8 Yield - - - - - - 16.43% 16.43% 5 to 10 years Amortized cost 4 - - 4 - - 7 11 Fair value 4 - - 4 - - 7 11 Yield 5.76% - - 5.76% - - 9.89% 8.32% Over 10 years Amortized cost 14 - - 14 - - 44 (a) 58 Fair value 18 - - 18 - - 44 (a) 62 Yield 7.43% - - 7.43% - - 5.95% 6.75% Mortgage-backed securities Amortized cost - 2,375 - 2,375 - 39 - 2,414 Fair value - 2,405 - 2,405 - 40 - 2,445 Yield - 6.90% - 6.90% - 7.45% - 6.91% - ------------------------------------------------------------------------------------------------------------------------------- Total amortized cost $33 $2,375 $- $2,408 $- $39 $72 $2,519 Total fair value 37 2,405 - 2,442 - 40 72 2,554 Total yield 5.94% 6.90% - 6.88% - 7.45% 7.53% 6.91% Weighted average contractual years to maturity 8.57 - (b) - 8.57 (c) - - (b) 1.39 - - ------------------------------------------------------------------------------------------------------------------------------- (a) Includes Federal Reserve Bank stock of $41 million with a yield of 6.00% and no stated maturity. (b) The average expected lives of "U.S. agency mortgage-backed" and "Other mortgage-backed" securities were approximately 7.4 years and 4.5 years, respectively, at December 31, 1995. (c) Excludes maturities of "U.S. agency mortgage-backed" securities.
Note: Expected maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Rates are calculated on a taxable equivalent basis using a 35% federal income tax rate. 72 56 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 3. SECURITIES (CONTINUED) In late 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers." This guide permitted a one-time reassessment of the appropriateness of the classifications of securities as available for sale or held for investment. The Corporation elected to redesignate $530 million of GNMA fixed-rate pass-through securities with an unrealized gain of $22 million and $56 million of municipal securities with an unrealized gain of less than $1 million, from the investment securities category to the securities available for sale category. Gross realized gains on the sale of securities available for sale were $7 million, $16 million and $87 million in 1995, 1994 and 1993, respectively. Gross realized losses on the sale of securities available for sale were $1 million and $21 million in 1995 and 1994, respectively. There were no gross realized losses on the sale of securities available for sale in 1993. Proceeds from the sale of securities available for sale were $1.8 billion, $3.8 billion and $9.5 billion in 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994, net unrealized gains of $44 million and losses of $43 million, respectively, were recorded in shareholders' equity, net of tax, in accordance with FAS No. 115. There were no sales of investment securities in 1995 and 1994. In 1993, Dreyfus recorded $40 million of gross realized gains and $27 million of gross realized losses on the sale of investment securities. Proceeds from the sale of investment securities were $664 million in 1993. Securities available for sale, investment securities, trading account securities and loans, with book values of $3.1 billion at December 31, 1995, and $3.9 billion at December 31, 1994, were required to be pledged to secure public and trust deposits, and repurchase agreements, as well as for other purposes. 4. LOANS For details of the loans outstanding at December 31, 1995 and 1994, see the 1995 and 1994 columns of the "Composition of loan portfolio at year-end" table on page 50. The information in those columns is incorporated by reference into these Notes to Financial Statements. For details of the nonperforming and past-due loans at December 31, 1995 and 1994, see the amounts in the 1995 and 1994 columns of the "Nonperforming assets" and "Past-due loans" tables on pages 54 and 56. The information in those columns is incorporated by reference into these Notes to Financial Statements. Foregone interest on restructured loans was less than $1 million in 1995 and approximately $1 million in 1994. There was no foregone interest on restructured loans in 1993. 5. RESERVE FOR CREDIT LOSSES
- ------------------------------------------------------------------------------------------------------------------ (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Balance at beginning of period $ 607 $ 600 $ 506 Net change in reserve from mergers, asset acquisitions and divestitures 8 4 108 Additions (deductions): Credit losses, excluding losses on assets held for accelerated resolution (230) (151) (216) Recoveries 87 84 77 - ------------------------------------------------------------------------------------------------------------------ Net credit losses (143) (67) (139) Credit losses on assets held for accelerated resolution (106) - - Provision for credit losses 105 70 125 - ------------------------------------------------------------------------------------------------------------------ Balance at end of period $ 471 $ 607 $ 600 - ------------------------------------------------------------------------------------------------------------------
73 57 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 6. PREMISES AND EQUIPMENT
- -------------------------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 - -------------------------------------------------------------------------------------------------- Land $ 29 $ 30 Buildings 278 259 Equipment 648 600 Leasehold improvements 179 178 - -------------------------------------------------------------------------------------------------- Subtotal 1,134 1,067 Accumulated depreciation and amortization (578) (509) - -------------------------------------------------------------------------------------------------- Total premises and equipment $ 556 $ 558 - --------------------------------------------------------------------------------------------------
The table above includes capital leases for premises and equipment at a net book value of $2 million at December 31, 1995, and less than $1 million at December 31, 1994. Rental expense was $121 million, $117 million and $104 million, respectively, net of related sublease revenue of $25 million, $33 million and $29 million, in 1995, 1994 and 1993, respectively. Depreciation and amortization expense totaled $107 million, $95 million and $90 million in 1995, 1994 and 1993, respectively. Maintenance, repairs and utilities expenses totaled $90 million, $89 million and $85 million in 1995, 1994 and 1993, respectively. As of December 31, 1995, the Corporation and its subsidiaries are obligated under noncancelable leases (principally for banking premises) with expiration dates through 2020. A summary of the future minimum rental payments under noncancelable leases, net of related sublease revenue totaling $86 million, is as follows: 1996--$120 million; 1997--$114 million; 1998--$106 million; 1999--$107 million; 2000--$100 million and 2001 through 2020--$897 million. 7. RESERVE FOR REAL ESTATE ACQUIRED An analysis of the reserve for real estate acquired for 1995, 1994 and 1993 is presented in the "Reserve for real estate acquired" table on page 55 and is incorporated by reference into these Notes to Financial Statements. 8. SEGREGATED ASSETS Segregated assets represent commercial real estate and other commercial loans acquired in the December 1992 Meritor retail office acquisition that are on nonaccrual status, or are foreclosed properties, and are subject to a loss sharing arrangement with the FDIC. These delinquent assets, net of reserve, are reported in other assets in the balance sheet. The reserve for segregated assets is not included in the reserve for credit losses. Segregated assets totaled $24 million at December 31, 1995, including gross segregated assets of $28 million and a $4 million reserve for credit losses. At December 31, 1994, segregated assets totaled $85 million, including gross segregated assets of $89 million and a $4 million reserve for credit losses. As a result of the loss sharing arrangement with the FDIC, any of the performing commercial loans or performing commercial real estate loans acquired in the Meritor retail office acquisition that become nonaccrual before December 31, 1997, will be reclassified to segregated assets. The loss sharing provisions of the arrangement stipulate that, during the first five years, the FDIC will pay to Mellon Bank, N.A. 80% of the net credit losses on acquired commercial real estate and other commercial loans. During the sixth and seventh years of the arrangement, Mellon Bank, N.A. will pay to the FDIC 80% of any recoveries of charge-offs on such acquired loans that had occurred during the first five years of the arrangement. At the end of the 74 58 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 8. SEGREGATED ASSETS (CONTINUED) seventh year, the FDIC will pay to Mellon Bank, N.A. an additional 15% of the sum of net charge-offs on the acquired loans that occurred during the first five years, less the recoveries during the sixth and seventh years of the arrangement in excess of $60 million. The $60 million credit loss threshold was reached in the first quarter of 1993. The FDIC will also reimburse Mellon Bank, N.A. for expenses incurred to recover amounts owed and net expenses incurred with respect to foreclosed properties derived from the acquired commercial real estate or commercial loans. Expenses are reimbursed by the FDIC in the same proportion as the reimbursement of net loan losses. In addition, the FDIC will reimburse Mellon Bank, N.A. for up to 90 days of delinquent interest on the assets covered by the loss sharing arrangement. Mellon Bank, N.A. is required to administer assets entitled to loss sharing protection in the same manner as assets held by Mellon Bank, N.A. for which no loss sharing exists. 9. OTHER ASSETS
- ---------------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 - ---------------------------------------------------------------------------------------- Prepaid expense: Pension $ 290 $ 256 Other 65 42 Interest receivable 244 199 Accounts receivable 196 218 Receivables related to off-balance-sheet instruments 388 281 Assets held for accelerated resolution 82 - Other 938 913 - ---------------------------------------------------------------------------------------- Total Other assets $2,203 $1,909 - ----------------------------------------------------------------------------------------
10. SHORT-TERM BORROWINGS Federal funds purchased and securities under repurchase agreements represent funds acquired for securities transactions and other funding requirements. Federal funds purchased mature on the business day after execution. During 1995, the Corporation signed a $300 million three-year revolving credit agreement with several financial institutions that serves as a support facility for commercial paper and for general corporate purposes. This revolving credit facility has several restrictions, including a minimum 6% Tier 1 ratio, a 1.30 maximum double leverage limitation and a minimum nonperforming asset coverage ratio of 3 to 1. The nonperforming asset coverage ratio is Tier I capital plus the reserve for credit losses as a multiple of nonperforming assets. At December 31, 1995, the Corporation's double leverage ratio was 1.13 and the nonperforming asset coverage ratio was 15 to 1. The revolving credit facility is supplemented by a $25 million backup line of credit, bringing total commercial paper support facilities to $325 million. There were no other lines of credit to subsidiaries of the Corporation at December 31, 1995 or 1994. No borrowings were made under any facility in 1995 or 1994. Commitment fees totaled less than $1 million in each of the years 1993 through 1995. 75 59 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 11. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR)
- ------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 - ------------------------------------------------------------------------------------------------------------- Parent Corporation: 6.30% Senior Notes due 2000 $ 200 $ - 7-5/8% Senior Notes due 1999 200 200 6-1/2% Senior Notes due 1997 200 200 6-7/8% Subordinated Debentures due 2003 150 150 9-1/4% Subordinated Debentures due 2001 100 100 9-3/4% Subordinated Debentures due 2001 99 99 Medium Term Notes, Series A, due 1996-2001 (9.75% to 10.50% at December 31, 1995, and 9.56% to 10.50% at December 31, 1994) 47 48 7-1/4% Convertible Subordinated Capital Notes due 1999 4 4 6-1/8% Senior Notes due 1995 - 200 5-3/8% Senior Notes due 1995 - 100 Senior Medium Term Notes, Series B, due 1995 (8.85% to 9.00% at December 31, 1994) - 26 Subsidiaries: 6-1/2% Subordinated Notes due 2005 249 249 6-3/4% Subordinated Notes due 2003 149 149 Medium Term Bank Notes due 1998-2007 (6.57% to 8.55% at December 31, 1995 and December 31, 1994) 38 35 Various notes and obligations under capital leases due 1996-2001 (3.92% to 10.50% at December 31, 1995 and 3.92% to 15.29% at December 31, 1994) 7 8 - ------------------------------------------------------------------------------------------------------------- Total unsecured notes and debentures (with original maturities over one year) $1,443 $1,568 - -------------------------------------------------------------------------------------------------------------
In June 1995, the Corporation issued the 6.30% fixed rates notes due 2000. Prior to issuance, the Corporation hedged the cost of this debt with an interest rate swap. This swap was terminated upon issuance of the debt. The effective interest rate of this debt, including the effect of the interest rate swap, is 6.54%. The Corporation's notes and debentures pay interest semiannually and are not redeemable prior to maturities. During 1995, the 6-1/8% and 5-3/8% senior notes and the Series B medium term notes matured as scheduled. The 6-1/2% and 6-3/4% Subordinated Notes due 2005 and 2003, and the fixed-rate Medium Term Bank Notes due 1998 through 2007, are subordinated to obligations to depositors and other creditors of Mellon Bank, N.A. The aggregate amounts of notes and debentures that mature during the five years 1996 through 2000, for the Corporation, are as follows: $23 million, $207 million, $18 million, $209 million and $205 million, respectively. The aggregate amounts of notes and debentures that mature during the five years 1996 through 2000, for Mellon Bank Corporation (parent Corporation), are as follows: $20 million, $205 million, $12 million, $204 million and $205 million, respectively. 12. PREFERRED STOCK
- ------------------------------------------------------------------------------------------------------------------------------------ Liquidation Balances at 1995 Dividends (dollar amounts in millions, preference Shares Shares December 31, -------------------- except per share amounts) per share authorized issued 1995 1994 1993 Per share Aggregate - ------------------------------------------------------------------------------------------------------------------------------------ 9.60% preferred stock (Series I) $25.00 6,000,000 6,000,000 $145 $145 $145 $2.40 $14 8.50% preferred stock (Series J) 25.00 4,000,000 4,000,000 97 97 97 2.13 9 8.20% preferred stock (Series K) 25.00 8,000,000 8,000,000 193 193 193 2.05 16 Junior convertible preferred stock (Series D) 1.00 - - 2 - - 10.40% preferred stock (Series H) 25.00 - - 155 - - ---- ---- ---- Total preferred stock $435 $435 $592 - ------------------------------------------------------------------------------------------------------------------------------------
The Corporation has authorized 50,000,000 shares of Series Preferred Stock, par value $1.00 per share, at December 31, 1995. The table above summarizes the Corporation's preferred stock outstanding at December 31, 1995, 1994 and 1993. 76 60 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 12. PREFERRED STOCK (CONTINUED) The Series I, Series J and Series K preferred stocks are redeemable, in whole or in part, at the option of the Corporation at $25 per share plus accrued dividends at any time on or after August 15, 1996, February 15, 1997 and February 15, 1998, respectively. In the event of liquidation or dissolution of the Corporation, the rights of the Series I, Series J and Series K preferred stock are senior to the common stock with respect to dividends and distributions. If the equivalent of six quarterly dividends, whether or not consecutive, payable on Series I, Series J or Series K preferred stocks, are unpaid and not set aside for payment, the number of directors of the Corporation will be increased by two. The holders of the series of preferred stock for which dividends are unpaid, voting as a single class, will be entitled to elect the two additional directors to serve until all dividends in arrears have been paid or declared and set aside for payment. 13. EQUITY PURCHASE OPTIONS (WARRANTS) In connection with the acquisition of The Boston Company, the Corporation issued 4.5 million 10-year equity purchase options (warrants), each exercisable for one share of common stock. The warrants were exercisable at $33.33 per share at any time until their expiration on May 21, 2003. In 1995, the Corporation repurchased all of these warrants as part of a privately negotiated transaction with American Express Travel Related Services Company, Inc., a subsidiary of American Express Company. 14. NONINTEREST REVENUE The components of noninterest revenue for the three years ended December 31, 1995, are presented in the "Noninterest revenue" table on page 31. This table is incorporated by reference into these Notes to Financial Statements. 15. FOREIGN CURRENCY AND SECURITIES TRADING REVENUE The Corporation's trading activities involve a variety of financial instruments, including U.S. government securities, municipal securities and money market securities, as well as off-balance-sheet instruments. The majority of the Corporation's trading revenue is earned by structuring and executing off-balance-sheet instruments for customers. The Corporation also enters into positions in the interest rate, foreign exchange and debt markets based upon expectations of future market conditions. The resulting risks are limited by entering into generally matching or offsetting positions. Unmatched positions are monitored through established limits. To maximize net trading revenues, the market-making and proprietary positions are managed together by product. The results of the Corporation's foreign currency and securities trading activities are presented, by class of financial instrument, in the table below.
- ------------------------------------------------------------------------------------------------------------------------ Year ended December 31, (in millions) 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Foreign exchange contracts $88 $69 Debt instruments 4 4 Interest rate contracts - 3 Futures contracts (1) - - ------------------------------------------------------------------------------------------------------------------------ Total foreign currency and securities trading revenue (a) $91 $76 - ------------------------------------------------------------------------------------------------------------------------ (a) The Corporation recognized an unrealized loss of less than $1 million at December 31, 1995, and an unrealized gain of less than $1 million at December 31, 1994, related to securities held in the trading portfolio.
77 61 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 16. INCOME TAXES Income tax expense applicable to income before taxes consists of:
- ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Current taxes: Federal $213 $264 $224 State and local 17 26 45 Foreign 4 2 - - ---------------------------------------------------------------------------------------------------------------------------------- Total current tax expense 234 292 269 - ---------------------------------------------------------------------------------------------------------------------------------- Deferred taxes: Federal 138 (4) 35 State and local 28 (11) (7) Foreign 1 1 1 - ---------------------------------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit) 167 (14) 29 - ---------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes $401 $278 $298 - ---------------------------------------------------------------------------------------------------------------------------------- In addition to amounts applicable to income before taxes, the following income tax benefits (detriments) were recorded: - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial statement purposes $ 15 $ 3 $ 9 Shareholders' equity for the tax effect of net unrealized (gain) loss on assets available for sale (39) 30 - Goodwill for prior purchase business combinations with purchased excess tax basis - - 5 - ---------------------------------------------------------------------------------------------------------------------------------- Total tax benefits (detriments) $(24) $33 $14 - ---------------------------------------------------------------------------------------------------------------------------------- Significant components of deferred tax expense are as follows: - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Deferred tax expense (benefit), excluding the effect of other components listed below $160 $ (7) $(29) Reduction of deferred tax valuation allowance - (7) - Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates 7 - (4) Investment tax credit carryforward utilized - - 29 Alternative minimum tax credit carryforward utilized - - 33 - ---------------------------------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit) $167 $(14) $ 29 - ----------------------------------------------------------------------------------------------------------------------------------
78 62 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 16. INCOME TAXES (CONTINUED) The provision for income taxes was different from the amounts computed by applying the statutory federal income tax rate to income before income taxes due to the items listed in the following table.
- ------------------------------------------------------------------------------- (dollar amounts in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- Federal statutory tax rate 35% 35% 35% Tax expense computed at statutory rate $382 $249 $265 Increase (decrease) resulting from: State and local income taxes, net of federal tax benefit 29 10 25 Amortization of goodwill 13 15 9 Impact of book versus tax basis of acquired assets - - 14 Other, net (23) 4 (15) - ------------------------------------------------------------------------------- Provision for income taxes $401 $278 $298 - ------------------------------------------------------------------------------- Effective income tax rate 36.7% 39.1% 39.3% - -------------------------------------------------------------------------------
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
- ------------------------------------------------------------------------------ (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------ Deferred tax assets: Provision for credit losses and write-downs on real estate acquired $230 $254 $259 Accrued expense not deductible until paid 31 125 92 Occupancy expense 73 74 72 Other 28 77 32 - ------------------------------------------------------------------------------ Gross deferred tax assets 362 530 455 Valuation allowance - - (7) - ------------------------------------------------------------------------------ Gross deferred tax assets net of valuation allowance 362 530 448 - ------------------------------------------------------------------------------ Deferred tax liabilities: Lease financing revenue 282 250 207 Salaries and employee benefits 21 16 44 Other 33 38 13 - ------------------------------------------------------------------------------ Gross deferred tax liabilities 336 304 264 - ------------------------------------------------------------------------------ Net deferred tax asset $ 26 $226 $184 - ------------------------------------------------------------------------------
The Corporation determined that it was not required to establish a valuation allowance for deferred tax assets for 1995 and 1994 because it is management's assertion that the deferred tax asset likely will be realized through: carryback to taxable income in prior years; future reversals of existing taxable temporary differences; and, to a lesser extent, future taxable income. However, the Corporation did record a valuation allowance upon the acquisition of The Boston Company, Inc. and subsidiaries in 1993. This valuation allowance primarily represented federal net operating loss carryforwards that were subject to limitation on their usage. As of the end of 1995, these carryforwards were fully utilized and the valuation allowance was reversed. 79 63 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 17. EMPLOYEE BENEFITS Pension plans The Corporation's largest subsidiaries--Mellon Bank, N.A., The Boston Company and Dreyfus--sponsor trusteed, noncontributory, defined benefit pension plans. Together, the plans cover substantially all salaried employees of the Corporation. The plans provide benefits that are based on employees' years of service and compensation. In addition, several unfunded plans exist for certain employees or for purposes that are not addressed by the funded plans. The Mellon Bank, N.A. plan is significantly overfunded, The Boston Company plan is moderately overfunded and the fair market value of plan assets of the Dreyfus plan are approximately equal to its accumulated benefit obligation. The Corporation amortizes all actuarial gains and losses and prior service costs over a 10-year period. The tables below report the combined data of these plans. Data for 1993 was not restated for Dreyfus because the amounts were immaterial.
- ---------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 (dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded Funded Unfunded - ---------------------------------------------------------------------------------------------------------------------------------- Assumptions used in the accounting: Rates used for expense at January 1: Rate on obligation 7.5% 7.5% 6.0% 6.0% 6.9% 6.9% Rate of return on assets 10.0 - 10.0 - 10.0 - Actuarial salary scale 3.5 3.5 3.0 3.0 2.9 2.9 - --------------------------------------------------------------------------------------------------------------------------------- Components of pension expense (credit): Service cost $ 18 $ 1 $ 21 $ 2 $ 15 $ 1 Interest cost on projected benefit obligation 24 3 22 2 17 2 Return on plan assets (201) - (1) - (71) - Net amortization and deferral 140 1 (47) 1 27 - - ---------------------------------------------------------------------------------------------------------------------------------- Total pension expense (credit) $ (19) $ 5 $ (5) $ 5 $ (12) $ 3 - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- 1995 1994 (dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded - --------------------------------------------------------------------------------------------------------------------------------- Assumptions used for obligation at December 31: Rate on obligation 6.0% 6.0% 7.5% 7.5% Actuarial salary scale 3.0 3.0 3.5 3.5 - ------------------------------------------------------------------------------------------------------------------------------- Present value of benefit obligation at December 31: Vested $363 $ 43 $246 $ 34 Nonvested 31 1 25 1 - ------------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation 394 44 271 35 - ------------------------------------------------------------------------------------------------------------------------------- Effect of projected future compensation levels 61 4 49 3 - ------------------------------------------------------------------------------------------------------------------------------- Present value of projected benefit obligation $455 $ 48 $320 $ 38 - ------------------------------------------------------------------------------------------------------------------------------- Plan assets at fair market value at December 31: Cash and U.S. Treasury securities $173 $ - $173 $ - Corporate debt obligations 64 - 68 - Mellon Bank Corporation common stock (a) 40 - 23 - Other common stock and investments 588 - 398 - - ------------------------------------------------------------------------------------------------------------------------------- Total plan assets at fair market value $865 $ - $662 $ - - ------------------------------------------------------------------------------------------------------------------------------- Reconciliation of funded status with financial statements: Funded status at December 31 $410 $(48) $342 $(38) Unamortized net transition (asset) obligation (18) 1 (20) 1 Unrecognized prior service cost 14 3 16 3 Net deferred actuarial (gain) loss (116) 11 (82) 5 Adjustment required to recognize minimum liability - (11) - (6) - -------------------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) expense at December 31 $290 $(44) $256 $(35) - -------------------------------------------------------------------------------------------------------------------------------- (a) Represents 750,000 shares at December 31, 1995 and December 31, 1994. The Mellon Bank, N.A. retirement plan received $1.5 million and $1.2 million, respectively, of dividends from Mellon Bank Corporation's common stock in 1995 and 1994.
80 64 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 17. EMPLOYEE BENEFITS (CONTINUED) The Corporation has a Long-Term Profit Incentive Plan (1981) which provides for the issuance of stock options, stock appreciation rights, restricted stock units, deferred cash incentive awards and shares of restricted stock to officers and key employees of the Corporation and its subsidiaries as approved by the Human Resources Committee of the Board of Directors. In addition, Dreyfus has a 1989 Non-Qualified Stock Option Plan. Both plans are described below. Long-Term Profit Incentive Plan (1981) Stock options may be granted at prices not less than the fair market value of the common stock on the date of grant. Options may be exercised during fixed periods of time not to exceed 10 years from the date of grant. In the event of certain changes in control of the Corporation, these options may become immediately exercisable. Total outstanding grants as of December 31, 1995, were 7,464,163 shares, of which 2,314,665 shares were exercisable. During 1995, 1994 and 1993, options for 1,777,625; 3,067,206; and 1,554,644 shares, respectively, were granted. As of December 31, 1995, options for 1,387,267 shares were available for grant. Included in the December 31, 1995, 1994 and 1993 outstanding grants were options for 860,856; 1,044,428; and 631,353 shares, respectively, that were issued at exercise prices ranging from $13.17 to $53.38 per share. These options become exercisable near the end of their 10 year terms, but exercise dates may be accelerated by the Human Resources Committee of the Board of Directors, based on the optionee's performance. If so accelerated, compensation will be paid in the form of deferred cash incentive awards to reimburse the exercise price of these options if exercised prior to the original vesting date. The Corporation recognized $9 million of compensation expense for these options in 1995 and $8 million in both 1994 and 1993. As of December 31, 1995, the exercise date had been accelerated on options for 1,276,700 shares, of which 221,744; 4,972; and 301,482 were exercised in 1995, 1994 and 1993, respectively. Options for 1,382,327; 612,536; and 1,503,144 shares were exercised in 1995, 1994 and 1993, respectively, under the Long-Term Profit Incentive Plan, including the 221,744; 4,972; and 301,482 shares on which the exercise date was accelerated. 1989 Non-Qualified Stock Option Plan A stock option plan at Dreyfus prior to the August 1994 merger provided for the issuance of stock options to key employees and key consultants who rendered services to Dreyfus, at a price of not less than 95% of the price of Dreyfus' common stock on The New York Stock Exchange on the day the option was granted. Options were not exercisable within two years nor more than 10 years from the date of grant. Options for Dreyfus stock were automatically converted into options for the Corporation's common stock on the merger date. Total outstanding grants as of December 31, 1995, were 814,207 shares, of which 708,982 shares were exercisable. No options were granted in 1995 and 1994. In 1993, options for 66,013 shares were granted. No further options will be granted under this plan. The shares under option included in the December 31, 1995, 1994, and 1993 outstanding grants were issued at exercise prices ranging from $18.23 to $31.53 per share. Options for 906,339; 26,900; and 7,096 shares were exercised in 1995, 1994 and 1993, respectively. 81 65 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 17. EMPLOYEE BENEFITS (CONTINUED) The following table presents a summary of the aggregate options outstanding under the Corporation's Long-Term Profit Incentive Plan and the Dreyfus 1989 Non-Qualified Stock Option Plan:
- ------------------------------------------------------------------------------- Price of Number of shares shares under option ------------------------------- -------------------------- Eligible Aggregate Under option for exercise Per share (in millions) - ------------------------------------------------------------------------------- DECEMBER 31, 1995 8,278,370 3,023,647 $13.17-$53.38 $287 December 31, 1994 8,969,573 3,799,556 13.17-40.08 278 December 31, 1993 6,972,291 2,735,472 13.17-40.08 192 - -------------------------------------------------------------------------------
Stock Option Plan for Outside Directors (1989) The Corporation's Stock Option Plan for Outside Directors provides for the granting of options for shares of common stock to outside directors and advisory board members of the Corporation. The timing, amounts, recipients and other terms of the option grants are determined by the provisions of, or formulas in, the Directors' Option Plan. The exercise price of the options is equal to the fair market value of the common stock on the grant date. All options have a term of 10 years from the date of grant and become exercisable one year from the grant date. Directors elected during the year are granted options on a pro rata basis to those granted to the directors at the start of the year. Total outstanding grants as of December 31, 1995, were 376,008 shares, of which 327,408 were exercisable and 158,637 shares were available for grant. Shares under option ranged from $17.00 to $38.75 per share for an aggregate of $11 million. During 1995, 1994 and 1993, options for 48,600; 52,563; and 50,648 shares, respectively, were granted at prices ranging from $37.33 to $38.75 per share. Options for 20,429; 4,298; and 27,729 shares were exercised in 1995, 1994 and 1993, respectively. Retirement Savings Plan Since April 1988, employees' payroll deductions into retirement savings accounts have been matched by the Corporation's contribution of common stock, at the rate of $.50 on the dollar, up to six percent of the employee's annual base salary with an annual maximum corporate contribution of $3,000 per employee. In 1995, 1994 and 1993, the Corporation recognized $10 million, $10 million and $9 million, respectively, of expense related to this plan and contributed 239,071; 276,535; and 229,317 shares, respectively. A portion of the shares contributed in 1995, 1994 and 1993 were issued from treasury stock. The plan held 1,752,409; 1,672,200; and 1,505,303 shares of the Corporation's common stock at December 31, 1995, 1994 and 1993, respectively. Dreyfus has a separate retirement profit-sharing plan and a related deferred compensation plan that provide for the payment of death, disability and retirement benefits to Dreyfus employees or their beneficiaries in amounts equal to the value of their proportionate interests in the plan. Amounts expensed under the plans were $11 million, $10 million and $9 million for 1995, 1994 and 1993, respectively. Profit Bonus Plan Awards are made to key employees at the discretion of the Human Resources Committee of the Board of Directors. At the committee's election, awards may be paid in a lump sum or may be deferred and paid over a period of up to 15 years. Payouts under this plan were $20 million, $18 million and $19 million for 1995, 1994 and 1993, respectively, and can be in the form of cash, restricted stock or restricted stock units. 82 66 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 17. EMPLOYEE BENEFITS (CONTINUED) Employee Stock Ownership Plan In 1989, an Employee Stock Ownership Plan was formed to hold certain shares of Mellon Bank Corporation common stock previously held in other defined contribution plans sponsored by the Corporation and its subsidiaries. At December 31, 1995, 1994 and 1993, this plan held 96,055; 95,709; and 116,367 shares, respectively, of the Corporation's common stock. The Corporation may make contributions to this plan from time to time. No contributions were made in 1995, 1994 or 1993. Postretirement benefits other than pensions The Corporation shares in the cost of providing managed care, Medicare supplement, and/or major medical programs for employees that retired prior to January 1, 1991. Employees who retire subsequent to January 1, 1991, who were between the ages of 55 and 65 on January 1, 1991, and had at least 15 years of service, are provided with a defined dollar supplement to assist them in purchasing health insurance. Early retirees who do not meet these age and service requirements are eligible to purchase health coverage at their own expense under the standard plans that are offered to active employees. In addition, the Corporation provides a small subsidy toward health care coverage for other active employees when they retire. These benefits are provided through various insurance carriers whose premiums are based on claims paid during the year. The cost of providing these benefits amounted to $10 million in 1995, $10 million in 1994 and $8 million in 1993. The Corporation adopted FAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," on January 1, 1993. FAS No. 106 requires sponsors of plans providing certain health care and life insurance benefits to retired employees to expense the cost of these benefits over the estimated working lives of these employees, rather than expensing the costs as paid. The incremental expense of adopting FAS No. 106 was approximately $7 million for 1995, $7 million for 1994 and $3 million for 1993. This accounting standard was adopted on a prospective basis by beginning to amortize the transition obligation over a 20-year period. During 1995, the transition obligation was reduced by $18 million due to a change in the benefit program that requires current and future retirees to enroll in a managed care program. Previously, retirees were permitted to use any health care provider. - ------------------------------------------------------------------------------- ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
Accumulated Accrued postretirement postretirement Unrecognized benefit cost benefit obligation transition obligation ---------------------- ------------------ --------------------- (in millions) 1995 1994 1993 1995 1994 1993 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1 $(19) $(12) $ (4) $(70) $(83) $(63) $53 $56 $59 - ---------------------------------------------------------------------------------------------------------------------------------- Acquisition of The Boston Company - - (5) - - (5) - - - - ---------------------------------------------------------------------------------------------------------------------------------- Recognition of components of net periodic postretirement benefit costs: Service cost (1) (1) - (1) (1) - - - - Interest cost (6) (6) (5) (6) (6) (5) - - - Amortization of transition obligation (3) (3) (3) - - - (3) (3) (3) - ---------------------------------------------------------------------------------------------------------------------------------- (10) (10) (8) (7) (7) (5) (3) (3) (3) Change in APBO actuarial assumptions including a change in the discount rate - - - (1) 15 (15) - - - Benefit payments 3 3 5 5 5 5 - - - Plan changes - - - 18 - - (18) - - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 $(26) $(19) $(12) $(55) $(70) $(83) $32 $53 $56 - ----------------------------------------------------------------------------------------------------------------------------------
83 67 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 17. EMPLOYEE BENEFITS (CONTINUED) A weighted average discount rate of 8% was used to estimate the net periodic benefit cost, and a 7% rate was used to value the accumulated postretirement benefit obligation at year-end 1995. A health care cost trend rate was used to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. The future annual increase assumed in the cost of health care benefits was 11% for 1996 and was decreased gradually to 6% for 2003 and thereafter. The health care cost trend rate assumption can have a significant impact on the amounts reported. Increasing the assumed health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation by approximately $4 million and the aggregate of the service and interest cost components of net periodic postretirement health care benefit cost by less than $1 million. FAS No. 123, Accounting for Stock-Based Compensation In October 1995, the Financial Accounting Standards Board released FAS No. 123, "Accounting for Stock-Based Compensation." FAS No. 123 establishes a fair value based method of accounting for stock-based compensation plans. FAS No. 123 permits entities to expense an estimated fair value of employee stock options or to continue to measure compensation cost for these plans using the intrinsic value accounting method contained in APB Opinion No. 25. Entities that elect to continue to use the intrinsic value method must provide pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied. This standard became effective on January 1, 1996. The Corporation expects to continue to use the intrinsic value method of accounting for stock-based compensation plans and will provide pro forma disclosures of the fair value based method in 1996. 18. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS The prior approval of the Office of the Comptroller of the Currency (OCC) is required if the total of all dividends declared by a national bank subsidiary in any calendar year exceeds the bank subsidiary's net profits, as defined by the OCC, for that year, combined with its retained net profits for the preceding two calendar years. Additionally, national bank subsidiaries may not declare dividends in excess of net profits on hand, as defined, after deducting the amount by which the principal amount of all loans on which interest is past due for a period of six months or more exceeds the reserve for credit losses. Under the first and currently more restrictive of the foregoing dividend limitations, the Corporation's national bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to December 31, 1995, of up to approximately $175 million of their retained earnings of $2.122 billion at December 31, 1995, less any dividends declared and plus or minus net profits or losses, as defined, between January 1, 1996, and the date of any such dividend declaration. The payment of dividends is also limited by minimum capital requirements imposed on all national bank subsidiaries by the OCC. The Corporation's national bank subsidiaries exceed these minimum requirements. The national bank subsidiaries declared dividends to the parent Corporation of $501 million in 1995, $366 million in 1994 and $185 million in 1993. The Federal Reserve Board and the OCC have issued additional guidelines that require bank holding companies and national banks to continuously evaluate the level of cash dividends in relation to their respective operating income, capital needs, asset quality and overall financial condition. The Federal Reserve Act limits extensions of credit by the Corporation's bank subsidiaries to the Corporation and to certain other affiliates of the Corporation, requires such extensions to be collateralized and limits the amount of investments by the banks in these entities. At December 31, 1995, such extensions of credit and investments were limited to $465 million to the Corporation or any other affiliate and to $930 million in total to the Corporation and all of its other affiliates. Outstanding extensions of credit totaled $98 million at December 31, 1995. 84 68 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 19. LEGAL PROCEEDINGS Various legal actions and proceedings are pending or are threatened against the Corporation and its subsidiaries, some of which seek relief or damages in amounts that are substantial. These actions and proceedings arise in the ordinary course of the Corporation's businesses and include suits relating to its lending, collections, servicing, investment, mutual fund, advisory, trust and other activities. Because of the complex nature of some of these actions and proceedings, it may be a number of years before such matters ultimately are resolved. After consultation with legal counsel, management believes that the aggregate liability, if any, resulting from such pending and threatened actions and proceedings will not have a material adverse effect on the Corporation's financial condition. 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK Off-balance-sheet risk In the normal course of business, the Corporation becomes a party to various financial transactions that generally do not involve funding. Because these transactions generally are not funded, they are not reflected on the balance sheet and are referred to as financial instruments with off-balance-sheet risk. The Corporation offers off-balance-sheet financial instruments to enable its customers to meet their financing objectives and manage their interest- and currency-rate risk. Supplying these instruments provides the Corporation with an ongoing source of fee revenue. The Corporation also enters into these transactions to manage its own risks arising from movements in interest and currency rates and as part of its proprietary trading and funding activities. These off-balance-sheet instruments are subject to credit and market risk. Credit risk is limited to the estimated aggregate replacement cost of contracts in a gain position, should counterparties fail to perform under the terms of those contracts and any underlying collateral proves to be of no value. Credit risk is managed by subjecting the counterparties to the Corporation's credit approval and monitoring policies and procedures. Counterparty limits are monitored on an ongoing basis. Credit risk is often further mitigated by contractual agreements to net replacement cost gains and losses on multiple transactions with the same counterparty through the use of master netting agreements. Market risk arises from changes in the market value of contracts as a result of the fluctuations in interest and currency rates. The Corporation limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Position limits are set by the Finance Committee and approved by the Office of the Chairman and the Executive Committee of the Board of Directors. Portfolio outstandings are monitored against such limits by senior managers and compliance staff independent of line areas. Financial instruments with contract amounts that represent credit risk: - -------------------------------------------------------------------------------
December 31, (Notional amounts in millions) 1995 1994 - ------------------------------------------------------------------------------- Commitments to extend credit $21,264 $14,778 Standby letters of credit and foreign guarantees 3,446 2,923 Commercial letters of credit 98 137 Residential mortgage loans serviced with recourse 156 186 Custodian securities lent with indemnification against broker default of return of securities 18,157 15,127 - -------------------------------------------------------------------------------
Commitments to extend credit The Corporation enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specific rates and for specific purposes. Substantially all of the Corporation's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The majority of the Corporation's commitments to extend credit include material adverse change clauses within the commitment contracts. These clauses allow the Corporation to deny funding a loan commitment if the borrower's financial condition deteriorates during the commitment, such that the customer no longer meets the Corporation's credit standards. The Corporation's exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of the commitment to extend 85 69 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) credit. Accordingly, the credit policies utilized in committing to extend credit and in the extension of loans are the same. Market risk arises on fixed rate commitments if interest rates have moved adversely subsequent to the extension of the commitment. The Corporation believes the market risk associated with commitments is minimal. Since many of the commitments are expected to expire without being drawn upon, the total contractual amounts do not necessarily represent future cash requirements. The amount and type of collateral obtained by the Corporation is based upon industry practice, as well as its credit assessment of the customer. Of the $21 billion of contractual commitments for which the Corporation has received a commitment fee or which were otherwise legally binding--excluding credit card plans--approximately 27% of the commitments are scheduled to expire within one year, and an additional 58% are scheduled to expire within five years. Letters of credit and foreign guarantees There are two major types of letters of credit--standby and commercial letters of credit. The off-balance-sheet credit risk involved in issuing standby and commercial letters of credit is represented by their contractual amounts and is essentially the same as the credit risk involved in commitments to extend credit. The Corporation minimizes this risk by adhering to its written credit policies and by requiring security and debt covenants similar to those contained in loan agreements. The Corporation believes the market risk associated with letters of credit and foreign guarantees is minimal. Standby letters of credit and foreign guarantees obligate the Corporation to disburse funds to a third-party beneficiary if the Corporation's customer fails to perform under the terms of an agreement with the beneficiary. Standby letters of credit and foreign guarantees are used by the customer as a credit enhancement and typically expire without being drawn upon.
- ---------------------------------------------------------------------------------------------------------------------------------- STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES Weighted-average years to maturity December 31, at December 31, (dollar amounts in millions) 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Commercial paper and other debt $ 374 $ 333 1.5 1.3 Tax-exempt securities 759 630 1.9 2.1 Bid- or performance-related 1,061 1,019 1.0 1.0 Other 1,252 941 .6 .7 ------- ------ Total standby letters of credit and foreign guarantees (a) $ 3,446 $2,923 1.1 1.2 - ---------------------------------------------------------------------------------------------------------------------------------- (a) Net of participations and cash collateral totaling $230 million and $263 million at December 31, 1995 and 1994, respectively.
A commercial letter of credit is normally a short-term instrument used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller in accordance with the terms of the contract. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction. Normally, reimbursement from the buyer is coincidental with payment to the seller under commercial letter of credit drawings. As a result, the total contractual amounts do not necessarily represent future cash requirements. Residential mortgage loans serviced with recourse Certain residential mortgages were sold with servicing retained where the Corporation is subject to limited recourse provisions. The loans are collateralized by real estate mortgages and in certain instances are supported by either government sponsored or private mortgage insurance. 86 70 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Securities lending A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security through an agent (the Corporation) to a borrower, usually a broker/dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract. The borrower will collateralize the loan at all times, generally with cash or U.S. government securities, exceeding 100% of the market value of the loan, plus any accrued interest on debt obligations. The Corporation currently enters into two types of securities lending arrangements, lending with and without indemnification. In securities lending transactions without indemnification, the Corporation bears no contractual risk of loss. For transactions in which the Corporation provides an indemnification, risk of loss occurs if the borrower defaults on returning the securities and the value of the collateral declines. Because the Corporation generally indemnifies the owner of the securities only for the difference between the par value of the securities and any collateral deficiency, the total contractual amount does not necessarily represent future cash requirements. OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1995 1994 ------------------- ---------------------- NOTIONAL CREDIT Notional Credit (in millions) AMOUNT RISK Amount Risk - ---------------------------------------------------------------------------------------------------------------------------------- Foreign currency contracts: Commitments to purchase $10,771 (b) $10,326 (b) Commitments to sell 10,868 (b) 10,383 (b) Foreign currency and other option contracts written 461 - 59 - Foreign currency and other option contracts purchased 417 - 65 1 Futures and forward contracts 1,266 - 1,170 - Interest rate agreements: Interest rate swaps 5,531 52 6,127 51 Options, caps and floors purchased 2,043 3 3,262 16 Options, caps and floors written 1,871 - 2,219 - Forward rate agreements 155 - 50 - - ---------------------------------------------------------------------------------------------------------------------------------- (a) The amount of credit risk associated with these instruments is limited to the cost of replacing a contract in a gain position, on which a counterparty has defaulted. Credit risk associated with these instruments is discussed by type of instrument in the following paragraphs. (b) The combined credit risk on foreign currency contract commitments to purchase and sell was $334 million at December 31, 1995 and $213 million at December 31, 1994.
Foreign currency contracts Commitments to purchase and sell foreign currency facilitate the management of market risk by ensuring that, at some future date, the Corporation or a customer will have a specified currency at a specified rate. The Corporation enters into foreign currency contracts on behalf of its customers, as well as for its own account as part of its proprietary trading activities. The notional amount of these contracts at December 31, 1995, was $10.8 billion to purchase and $10.9 billion to sell. This notional amount does not represent the actual market or credit risk associated with this product. Market risk arises from changes in the market value of contractual positions caused by movements in currency rates. The Corporation limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk relates to the ability of the Corporation's counterparty to meet its obligations under the contract and generally is limited to the estimated aggregate replacement cost of those foreign currency contracts in a gain position. Replacement cost totaled approximately $334 million and $213 million at December 31, 1995 and 1994, respectively, and is recorded on the balance sheet. There were no settlement or counterparty default losses on foreign 87 71 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) currency contracts in 1995, 1994 or 1993. The Corporation manages credit risk by dealing only with approved counterparties under specific credit limits and by monitoring the amount of outstanding contracts by customer and in the aggregate against such limits. The future cash requirements, if any, related to foreign currency contracts are represented by the net contractual settlement between the Corporation and its counterparties. Foreign currency and other option contracts written and purchased Foreign currency and other option contracts grant the contract purchaser the right, but not the obligation, to purchase or sell a specified amount of a foreign currency or other financial instrument during a specified period at a predetermined price. The Corporation acts as both a purchaser and seller of foreign currency and other option contracts. Market risk arises from changes in the value of contractual positions caused by fluctuations in currency rates, interest rates and security values underlying the option contracts. Market risk is managed by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk and future cash requirements are similar to those of foreign currency contracts. The estimated aggregate replacement cost of purchased foreign currency and other option contracts in gain positions was less than $1 million at December 31, 1995 and $1 million at December 31, 1994, and is recorded on the balance sheet. There were no settlement or counterparty default losses on foreign currency and other option contracts in 1995, 1994 or 1993. Futures and forward contracts Futures and forward contracts on securities or money market instruments represent future commitments to purchase or sell a specified instrument at a specified price and date. Futures contracts are standardized and are traded on organized exchanges, while forward contracts are traded in over-the-counter markets and generally do not have standardized terms. The Corporation uses futures and forward contracts in connection with its proprietary trading activities. For instruments that are traded on an organized exchange, the exchange assumes the credit risk that a counterparty will not settle and generally requires a margin deposit of cash or securities as collateral to minimize potential credit risk. The Corporation has established policies governing which exchanges and exchange members can be used to conduct these activities, as well as the number of contracts permitted with each member and the total dollar amount of outstanding contracts. Credit risk associated with futures and forward contracts is limited to the estimated aggregate replacement cost of those futures and forward contracts in a gain position and was less than $1 million at December 31, 1995 and 1994. Credit risk related to futures contracts is substantially mitigated by daily cash settlements with the exchanges for the net change in futures contract value. There were no settlement or counterparty default losses on futures and forward contracts in 1995, 1994 or 1993. Market risk is similar to the market risk associated with foreign currency and other option contracts. The future cash requirements, if any, related to futures and forward contracts, are represented by the net contractual settlement between the Corporation and its counterparties. Interest rate swaps Interest rate swaps obligate two parties to exchange one or more payments generally calculated with reference to fixed or periodically reset rates of interest applied to a specified notional principal amount. Notional principal is the amount upon which interest rates are applied to determine the payment streams under interest rate swaps. Such notional principal amounts often are used to express the volume of these transactions but are not actually exchanged between the counterparties. The credit risk associated with interest rate swaps is limited to the estimated aggregate replacement cost of those agreements in a gain position. Replacement cost totaled $52 million and $51 million at December 31, 1995 and 1994, respectively, and is recorded on the balance sheet. Credit risk is managed through credit approval procedures that establish specific lines for 88 72 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) individual counterparties and limits of credit exposure to various portfolio segments. Counterparty and portfolio outstandings are monitored against such limits on an ongoing basis. Credit risk is further mitigated by contractual arrangements with the Corporation's counterparties that provide for netting replacement cost gains and losses on multiple transactions with the same counterparty. The Corporation has entered into collateral agreements with certain counterparties to interest rate swaps to further secure amounts due. The collateral is generally cash and/or U.S. government securities. There were no counterparty default losses on interest rate swaps in 1995, 1994 or 1993. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Corporation limits its exposure to market risk by generally entering into matching or offsetting positions and by establishing and monitoring limits on unmatched positions. The future cash requirements of interest rate swaps are limited to the net amounts payable under these swaps. At December 31, 1995, 94% of these interest rate swaps are scheduled to mature in less than five years. Options, caps, floors and forward rate agreements An interest rate option is a contract that grants the purchaser the right to either purchase or sell a financial instrument at a specified price within a specified period of time. An interest rate cap is a contract that protects the holder from a rise in interest rates or some other underlying index beyond a certain point. An interest rate floor is a contract that protects the holder against a decline in interest rates or some other underlying index below a certain point. A forward rate agreement is an agreement to exchange dollar amounts at a specified future date based on the difference between a particular interest rate index and an agreed upon fixed rate. The credit risk associated with options, caps and floors purchased was $3 million at year end 1995 and $16 million at year-end 1994 and is recorded on the balance sheet. Options, caps and floors written do not expose the Corporation to credit risk. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Corporation limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Off-balance-sheet instruments used for interest rate risk management purposes(a) - ------------------------------------------------------------------------------
December 31, 1995 1994 ---------------- ---------------- NOTIONAL CREDIT Notional Credit (in millions) AMOUNT RISK Amount Risk - -------------------------------------------------------------------------------- Interest rate agreements: Interest rate swaps $7,967 $51 $10,985 $2 Options, caps and floors purchased (b) 464 4 344 8 Forward rate agreements 265 - - - Futures contracts 6 - 5 - Other products 108 - - - - ------------------------------------------------------------------------------- (a) The amount of credit risk associated with these instruments is limited to the cost of replacing a contract in a gain position, on which a counterparty has defaulted. Credit risk associated with these instruments is discussed by type of instrument in the following paragraphs. (b) At December 31, 1995 and 1994, there were no options, caps and floors written.
Interest rate swaps The Corporation enters into interest rate swaps as part of its interest rate risk management strategy primarily to alter the interest rate sensitivity of its deposit liabilities. At December 31, 1995, the Corporation used $7,967 million of interest rate swaps for interest rate risk management purposes compared with $10,985 million at December 31, 1994. The credit and market risk associated with these instruments is explained on pages 88 and 89 under "Interest rate swaps." The replacement cost of swap agreements in a gain position was $51 million and $2 million at December 31, 1995 and 1994, respectively. Net interest revenue in 1995 and 1994 included less than $1 million and $3 million, respectively, of amortized deferred gains from terminated interest rate swaps. 89 73 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Options, caps, floors, forward rate agreements and futures contracts Other interest rate products--primarily options, interest rate caps, interest rate floors, forward rate agreements and futures contracts--also are used by the Corporation as part of its interest rate risk management strategy. The Corporation had $735 million and $349 million notional amounts of these instruments outstanding at December 31, 1995 and 1994, respectively. The credit and market risk associated with these instruments is explained on pages 88 and 89 under "Futures and forward contracts" and "Options, caps, floors and forward rate agreements." The replacement cost of those instruments in a gain position totaled $4 million and $8 million at December 31, 1995 and 1994, respectively. The Corporation periodically issues notes and debentures for general corporate purposes, including the funding of debt maturities. At December 31, 1995, a $250 million forward rate agreement was carried by the Corporation to lock in the cost of an anticipated 10-year debt issuance. At December 31, 1995, an unrealized net loss of $12 million was deferred on this forward rate agreement. This loss will be recognized as an increase in interest expense over the term of the debt, which is expected to be issued in the first quarter of 1996. Other products Other products consist of forward foreign exchange contracts and total return swaps. The Corporation had $35 million of forward foreign exchange contracts at December 31, 1995. These contracts are used to minimize the net income and capital impact of foreign currency translation gains or losses created by investments in foreign branches and subsidiaries. The Corporation had $73 million of total return swaps at December 31, 1995. These swaps are used by the Corporation to minimize the risk related to the Corporation's investment in start-up mutual funds that are based on specific market indices. Concentrations of credit risk In its normal course of business, the Corporation engages in activities with a significant number of domestic and international counterparties. The maximum risk of accounting loss from on- and off-balance-sheet financial instruments with these counterparties is represented by their respective balance sheet amounts and the contractual or replacement cost of the off- balance-sheet financial instruments. Approximately 33% of the Corporation's total on- and off-balance-sheet financial instruments with credit risk at December 31, 1995, were with consumers and consumer-related industries, compared with approximately 35% at December 31, 1994. This credit exposure consisted principally of loans and the related interest receivable on the balance sheet and off-balance-sheet loan commitments and letters of credit. Consumers to which the Corporation has credit exposure primarily are located within the Central Atlantic region and are affected by economic conditions within that region. Financial institutions--which include finance-related companies, domestic and international banks and depository institutions, securities and commodities brokers, and insurance companies--accounted for approximately 17% of the Corporation's total on- and off-balance-sheet financial instruments with credit risk at December 31, 1995, compared with approximately 16% at December 31, 1994. The Corporation's on-balance-sheet credit exposure to financial institutions included short-term liquid assets consisting of due from banks and money market investments, loans and the related interest receivable and investment securities. In addition, the Corporation had off-balance-sheet credit exposure to financial institutions consisting of commitments to extend credit and letters of credit. The Corporation had credit exposure to the U.S. government, including its corporations and agencies, totaling approximately 9% of its on- and off- balance-sheet financial instruments with credit risk at December 31, 1995, compared with approximately 10% at December 31, 1994. Substantially all of this exposure consisted of investment securities, 90 74 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) securities available for sale and the related interest receivable and balances due from the Federal Reserve. No other concentration of credit risk exceeded 10% of the Corporation's total credit risk arising from on- and off-balance-sheet financial instruments at December 31, 1995 and 1994, respectively. 21. FAIR VALUE OF FINANCIAL INSTRUMENTS FAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of the estimated fair value of on- and off-balance-sheet financial instruments. A financial instrument is defined by FAS No. 107 as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable terms. Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. FAS No. 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. Because no readily available market exists for a significant portion of the Corporation's financial instruments, fair value estimates for these instruments are based on judgments regarding current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates cannot always be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. Fair value estimates do not include anticipated future business or the value of assets, liabilities and customer relationships that are not considered financial instruments. For example, the Corporation's fee-generating businesses--which contributed 52% of revenue in 1995--are not incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include lease finance assets, deferred tax assets, lease contracts, premises and equipment and intangible assets. Accordingly, the estimated fair value amounts of financial instruments do not represent the entire value of the Corporation. The following methods and assumptions were used by the Corporation in estimating the fair value of its financial instruments at December 31, 1995 and 1994: Short-term financial instruments The carrying amounts reported on the Corporation's balance sheet generally approximate fair value for financial instruments that reprice or mature in 90 days or less, with no significant change in credit risk. The carrying amounts approximate fair value for cash and due from banks; money market investments; acceptances; demand deposits; money market and other savings accounts; federal funds purchased and securities under repurchase agreements; U.S. Treasury tax and loan demand notes; commercial paper; and certain other assets and liabilities. Trading account securities, securities available for sale and investment securities Trading account securities are recorded at market value on the Corporation's balance sheet, including amounts for off-balance-sheet instruments held for trading activities. Market values of trading account securities, securities available for sale and investment securities generally are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, market value is estimated using quoted market prices for securities with similar credit, maturity and interest rate characteristics. The tables in note 3 present in greater detail the carrying value and market value of securities available for sale and investment securities at December 31, 1995 and 1994. 91 75 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Loans The estimated fair value of performing commercial loans and certain consumer loans that reprice or mature in 90 days or less approximates their respective carrying amounts adjusted for a credit risk factor based upon the Corporation's historical credit loss experience. The estimated fair value of performing loans, except for consumer mortgage loans and credit card loans, that reprice or mature in more than 90 days is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and for similar maturities. Fair value of consumer mortgage loans is estimated using market quotes or discounting contractual cash flows, adjusted for prepayment estimates. Discount rates were obtained from secondary market sources, adjusted to reflect differences in servicing, credit and other characteristics. The estimated fair value of credit card loans is developed using estimated cash flows and maturities based on contractual interest rates and historical experience. Estimated cash flows are discounted using market rates adjusted for differences in servicing, credit and other costs. This estimate does not include the value that relates to new loans that will be generated from existing cardholders over the remaining life of the portfolio, a value that is typically reflected in market prices realized in credit card portfolio sales. The estimated fair value for nonperforming commercial real estate loans is the "as is" appraised value of the underlying collateral. For other nonperforming loans, the estimated fair value represents carrying value less a credit risk adjustment based upon the Corporation's historical credit loss experience. Deposit liabilities FAS No. 107 defines the estimated fair value of deposits with no stated maturity, which includes demand deposits and money market and other savings accounts, to be the amount payable on demand. Although market premiums paid for depository institutions reflect an additional value for these low- cost deposits, FAS No. 107 prohibits adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities. The fair value of fixed-maturity deposits which reprice or mature in more than 90 days is estimated using the rates currently offered for deposits of similar remaining maturities. Notes and debentures The fair value of the Corporation's notes and debentures is estimated using quoted market yields for the same or similar issues or the current yields offered by the Corporation for debt with the same remaining maturities. The table on the following page includes financial instruments, as defined by FAS No. 107 whose estimated fair value is not represented by the carrying value as reported on the Corporation's balance sheet. Management has made estimates of fair value discount rates that it believes to be reasonable considering expected prepayment rates, rates offered in the geographic areas in which the Corporation competes, credit risk and liquidity risk. However, because there is no active market for many of these financial instruments, management has no basis to verify whether the resulting fair value estimates would be indicative of the value negotiated in an actual sale. 92 76 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- -------------------------------------------------------------------------------- Carrying amount Estimated fair value --------------- -------------------- December 31, December 31, (dollars in millions) 1995 1994 1995 1994 - -------------------------------------------------------------------------------- Securities available for sale(a) $ 2,913 $ 1,881 $ 2,913 $ 1,881 Investment securities(a) 2,519 3,244 2,554 3,033 Loans(b): Commercial and financial 11,832 10,778 11,782 10,684 Commercial real estate 1,532 1,624 1,469 1,513 Consumer mortgage 8,960 8,680 8,960 8,374 Other consumer credit 4,536 4,836 4,719 5,000 ------- ------- Total loans 26,860 25,918 Reserve for credit losses(b) (465) (590) - - ------- ------- ------- ------- Net loans 26,395 25,328 26,930 25,571 Other assets(c) 1,281 1,031 1,306 1,031 Fixed-maturity deposits(d): Retail savings certificates 6,450 6,707 6,473 6,528 Negotiable certificates of deposit 656 223 655 223 Other time deposits 2,014 1,690 2,016 1,690 Other funds borrowed(c) 2,033 580 2,044 583 Notes and debentures(a) 1,443 1,568 1,529 1,488 - -------------------------------------------------------------------------------- NM--Not meaningful. (a) Market or dealer quotes were used to value the reported balance of these financial instruments. (b) Approximately 77% and 75% of total performing loans, excluding consumer mortgages and credit card receivables, reprice or mature within 90 days at December 31, 1995 and 1994, respectively. Excludes lease finance assets of $830 million and $815 million as well as the related reserve for credit losses of $6 million and $17 million at December 31, 1995 and 1994, respectively. Lease finance assets are not considered financial instruments as defined by FAS No. 107. (c) Excludes non-financial instruments. (d) FAS No. 107 defines the estimated fair value of deposits with no stated maturity, which includes demand deposits and money market and other savings accounts, to be equal to the amount payable on demand. Therefore, the positive effect of the Corporation's $20.141 billion and $18.950 billion of such deposits at December 31, 1995 and 1994, respectively, are not included in this table.
Commitments to extend credit, standby letters of credit and foreign guarantees These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit and foreign guarantees is estimated by discounting the remaining contractual fees over the term of the commitment using the fees currently charged to enter into similar agreements and the present credit-worthiness of the counterparties. Other off-balance-sheet financial instruments The estimated fair value of off-balance-sheet instruments used for trading activities--which includes foreign exchange contracts, interest rate swaps, option contracts, interest rate caps and floors and futures and forward contracts--is equal to the on-balance-sheet carrying amount of these instruments. The estimated fair value of off-balance-sheet instruments used for interest rate risk management purposes--which includes interest rate swaps, interest rate caps and floors and forward rate agreements--is estimated by obtaining quotes from brokers. These values represent the estimated amount the Corporation would receive or pay to terminate the agreements, considering current interest and currency rates, as well as the current credit-worthiness of the counterparties. Off-balance-sheet financial instruments are further discussed in note 20, "Financial instruments with off-balance-sheet risk and concentrations of credit risk." 93 77 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
ESTIMATED FAIR VALUE OF COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 December 31, 1994 -------------------------------------- --------------------------------------- ASSET Asset ------------------------ -------------------------- CONTRACT CARRYING ESTIMATED Contract Carrying Estimated (in millions) AMOUNT AMOUNT(a) FAIR VALUE amount amount(a) fair value - ---------------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit $21,264 $5 $86 $14,778 $ 5 $63 Standby letters of credit and foreign guarantees 3,446 2 20 2,923 2 21 - ---------------------------------------------------------------------------------------------------------------------------------- (a) Represents the on-balance-sheet receivables or deferred income arising from these financial instruments.
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR TRADING ACTIVITIES - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 December 31, 1994 ---------------------------------------- ------------------------------------------ ASSET (LIABILITY) Asset (Liability) NOTIONAL --------------------------- Notional ---------------------------- PRINCIPAL ESTIMATED AVERAGE Principal Estimated Average (in millions) AMOUNT FAIR VALUE(a) FAIR VALUE Amount fair value(a) fair value - ---------------------------------------------------------------------------------------------------------------------------------- Foreign currency contracts $21,639 $ 27 $ 25 $20,709 $ 5 $ 2 Options purchased 417 (11) (7) 65 1 7 Options written 461 13 8 59 (1) (6) Futures and forward contracts 1,266 (6) (3) 1,170 - - Interest rate swaps 5,531 5 8 6,127 2 2 Options, caps, floors and forward rate agreements 4,069 1 - 5,531 2 2 - ---------------------------------------------------------------------------------------------------------------------------------- (a) Recorded at fair value on the Corporation's balance sheet.
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR INTEREST RATE RISK MANAGEMENT PURPOSES - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 December 31, 1994 ------------------------------------------ ------------------------------------------ ASSET (LIABILITY) Asset (Liability) NOTIONAL --------------------------- Notional ---------------------------- PRINCIPAL CARRYING ESTIMATED Principal Carrying Estimated (in millions) AMOUNT AMOUNT(a) FAIR VALUE Amount amount(a) fair value - ---------------------------------------------------------------------------------------------------------------------------------- Interest rate swaps $7,967 $(1) $ 39 $10,985 $ 5 $(352) Options, caps, floors and forward rate agreements 729 (1) (8) 344 (1) 8 Futures contracts 6 - - 5 - - Other products 108 - (1) - - - - ---------------------------------------------------------------------------------------------------------------------------------- (a) Represents the on-balance-sheet receivables/payables or deferred income arising from these financial instruments.
94 78 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 22. SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS Noncash investing and financing transactions that, appropriately, are not reflected in the Consolidated Statement of Cash Flows are listed below.
- ------------------------------------------------------------------------------- Year ended December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- Transfer of CornerStone(sm) credit card loans to accelerated resolution portfolio $ 193 $ - $ - Net transfers to real estate acquired 22 14 33 Net transfers to segregated assets 10 12 134 Series H preferred stock redemption - 155 - Purchase acquisitions(a): Fair value of noncash assets acquired 385 390 8,582 Liabilities and escrow deposits assumed 255 279 7,197 Stock issued - - 115 Warrants issued - - 37 ----- ----- ------- Net cash paid (130) (111) (1,233) - ------------------------------------------------------------------------------- (a) Purchase acquisitions include: Metmor Financial, Inc. in 1995; U.S. Bancorp Mortgage Company and Glendale Bancorporation in 1994; The Boston Company, Inc. and AFCO and CAFO in 1993.
23. MERGER AND ACQUISITION On August 24, 1994, the Corporation merged with The Dreyfus Corporation, a mutual fund company headquartered in New York City. The Corporation issued 48.3 million shares of common stock for all of the outstanding common stock of Dreyfus. The merger was accounted for under the pooling of interests method of accounting. The Corporation's financial statements have been restated for all periods prior to the merger to include the reported results of Dreyfus. Operating results, prior to restatement, for the Corporation and Dreyfus for the period ended June 30, 1994, and the year ended December 31, 1993, are presented below.
- ------------------------------------------------------------------------------- Six months Year ended ended June 30, December 31, (in millions) 1994 1993 - ------------------------------------------------------------------------------- The Corporation Total revenue $1,398 $2,583 Net income $ 265 $ 361 - ------------------------------------------------------------------------------- Dreyfus Total revenue $ 191 $ 384 Net income $ 49 $ 99 - ------------------------------------------------------------------------------- Combined Total revenue $1,589 $2,967 Net income $ 314 $ 460 - -------------------------------------------------------------------------------
On May 21, 1993, the Corporation acquired The Boston Company, Inc. (TBC), headquartered in Boston. TBC, through Boston Safe Deposit and Trust Company and other subsidiaries, engages in the businesses of institutional trust and custody, institutional asset management and private asset management. Under the terms of the stock purchase agreement, the Corporation acquired all of the stock of Boston Group Holdings, Inc., the holding company for TBC and its subsidiaries, and paid a combination of $1.291 billion in cash, 3.75 million shares of the Corporation's common stock and 10-year warrants to purchase an additional 4.5 million shares of the Corporation's common stock at $33.33 per share. This acquisition was accounted for under the purchase method of accounting. The results of TBC have been included in the Corporation's income statement since the acquisition date. 95 79 NOTES TO FINANCIAL STATEMENTS (continued) - ------------------------------------------------------------------------------- 23. MERGER AND ACQUISITION (CONTINUED) The condensed pro forma combined operating results provided in the table below are presented as if the acquisition had been effective on January 1, 1993 and combines TBC's results of operations for the period January 1, 1993 through May 20, 1993 and the Corporation's historical results of operations for the year ended December 31, 1993, which include TBC's results of operations from May 21, 1993 to December 31, 1993. The pro forma results include adjustments for the effect of the amortization of goodwill and other intangibles, the elimination of certain assets and liabilities at the closing of the transaction, as well as the elimination of the revenues and expense attributable to nine subsidiaries of TBC that were conveyed via dividend to the seller prior to the closing date of the transaction. In addition, merger expenses of $175 million, or $112 million after tax, have been eliminated from the combined historical results of operations as these expenses do not represent ongoing expenses of the Corporation. The pro forma information is intended for informational purposes only and is not necessarily indicative of the results of operations that would have actually occurred had the acquisition been in effect for the period presented.
- ------------------------------------------------------------------------------- (Unaudited) Pro forma combined for the year ended (dollar amounts in millions, December 31, except per share amounts) 1993 - ------------------------------------------------------------------------------- Total revenue $3,181 Net income $ 588 Net income per common share $ 3.55 - -------------------------------------------------------------------------------
96 80 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 24. MELLON BANK CORPORATION (PARENT CORPORATION)
CONDENSED INCOME STATEMENT - ----------------------------------------------------------------------------------- Year ended December 31, (in millions) 1995 1994 1993 - ----------------------------------------------------------------------------------- Dividends from bank subsidiaries $501 $366 $185 Dividends from nonbank subsidiaries 30 122 116 Interest revenue from bank subsidiaries 37 38 34 Interest revenue from nonbank subsidiaries 27 21 26 Other revenue 3 4 2 - ----------------------------------------------------------------------------------- Total revenue 598 551 363 - ----------------------------------------------------------------------------------- Interest expense on commercial paper 13 7 6 Interest expense on notes and debentures 83 87 100 Operating expense 29 23 32 - ----------------------------------------------------------------------------------- Total expense 125 117 138 - ----------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARIES 473 434 225 Provision (benefit) for income taxes (17) (18) 11 Equity in undistributed net income (loss): Bank subsidiaries 111 69 343 Nonbank subsidiaries 90 (88) (97) - ----------------------------------------------------------------------------------- NET INCOME 691 433 460 Dividends on preferred stock 39 75 63 - ----------------------------------------------------------------------------------- NET INCOME APPLICABLE TO COMMON STOCK $652 $358 $397 - -----------------------------------------------------------------------------------
CONDENSED BALANCE SHEET - ----------------------------------------------------------------------------------- December 31, (in millions) 1995 1994 - ----------------------------------------------------------------------------------- ASSETS: Cash and money market investments with bank subsidiary $ 315 $ 346 Loans and other receivables due from nonbank subsidiaries 386 422 Investment in bank subsidiaries 4,285 4,307 Investment in nonbank subsidiaries 261 207 Subordinated debt and other receivables due from bank subsidiaries 79 343 Other assets 96 54 - ----------------------------------------------------------------------------------- Total assets $5,422 $5,679 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Commercial paper $ 284 $ 178 Other liabilities 113 252 Notes and debentures (with original maturities over one year) 1,000 1,127 - ----------------------------------------------------------------------------------- Total liabilities 1,397 1,557 - ----------------------------------------------------------------------------------- Shareholders' equity 4,025 4,122 - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $5,422 $5,679 - -----------------------------------------------------------------------------------
97 81 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 24. MELLON BANK CORPORATION (PARENT CORPORATION) (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 691 $ 433 $ 460 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 21 20 20 Equity in undistributed net income of subsidiaries (201) 19 (246) Net (increase) decrease in accrued interest receivable 3 (1) 1 Deferred income tax expense (benefit) - (4) 23 Net increase in other operating activities 42 6 26 - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 556 473 284 - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in term deposits - - 199 Net (increase) decrease in short-term deposits with affiliated banks 32 (125) 103 Funds invested in securities available for sale - (200) (1,251) Proceeds from maturities of securities available for sale - 460 849 Proceeds from sales of securities available for sale - - 142 Loans made to subsidiaries (284) (711) (1,066) Principal collected on loans to subsidiaries 581 771 1,292 Loans made to joint venture (15) - - Cash paid in purchase of Glendale Bancorporation - (28) - Cash paid in purchase of The Boston Company - - (1,291) Capital returned from (contributions to) subsidiaries 241 (15) 330 Net increase in other investing activities (14) (20) (10) - -------------------------------------------------------------------------------------------------------- Net cash provided (used) in investing activities 541 132 (703) - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in commercial paper 106 44 (45) Repayments of long-term debt (326) (413) (306) Net proceeds from issuance of long-term debt 199 - 545 Net proceeds from issuance of common and preferred stock 58 18 502 Redemption of preferred stock (155) - (65) Repurchase of common stock (578) - (89) Repurchase of warrants (54) - - Dividends paid on common and preferred stock (346) (254) (183) Net increase (decrease) in other financing activities - (5) 65 - -------------------------------------------------------------------------------------------------------- Net cash provided (used) in financing activities (1,096) (610) 424 - -------------------------------------------------------------------------------------------------------- CHANGE IN CASH AND DUE FROM BANKS: Net change in cash and due from banks 1 (5) 5 Cash and due from banks at beginning of year - 5 - - -------------------------------------------------------------------------------------------------------- Cash and due from banks at end of year $ 1 $ - $ 5 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES - -------------------------------------------------------------------------------------------------------- Interest paid $ 99 $ 98 $ 109 Net income taxes refunded (42) (20) (34) - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- NONCASH INVESTING AND FINANCING TRANSACTIONS - -------------------------------------------------------------------------------------------------------- Series H preferred stock redemption $ - $ 155 $ - Purchase of The Boston Company: Fair value of assets acquired, net of liabilities assumed - - 1,443 Stock and warrants issued - - (152) - -------------------------------------------------------------------------------------------------------- Cash paid $ - $ - $ 1,291 - --------------------------------------------------------------------------------------------------------
98 82 REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MELLON BANK CORPORATION: We have audited the accompanying consolidated balance sheets of Mellon Bank Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mellon Bank Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Corporation, as of January 1, 1994, adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania January 10, 1996 99 83 CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES - -------------------------------------------------------------------------------
MELLON BANK CORPORATION (and its subsidiaries) - ---------------------------------------------------------------------------------------------------------------------------------- 1995 AVERAGE AVERAGE YIELDS/ (dollar amounts in millions) BALANCE INTEREST RATES - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS INTEREST-EARNING ASSETS: Interest-bearing deposits with banks $ 567 $ 36 6.27% Federal funds sold and securities under resale agreements 598 34 5.64 Other money market investments 57 3 5.02 Trading account securities 296 19 6.59 Securities: U.S. Treasury and agency securities (a) 4,671 305 6.52 Obligations of states and political subdivisions (a) 64 5 7.73 Other (a) 203 14 7.09 Loans, net of unearned discount (a) 27,360 2,432 8.89 ------- ------ Total interest-earning assets 33,816 $2,848 8.44 Cash and due from banks 2,337 Customers' acceptance liability 229 Premises and equipment 555 Net acquired property 80 Other assets (a) 3,703 Reserve for credit losses (591) -------------------------------------------------------------------------------------------------------------- Total assets $40,129 -------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES, INTEREST-BEARING LIABILITIES: REDEEMABLE Deposits in domestic offices: PREFERRED STOCK Demand $ 1,916 $ 37 1.94% AND SHAREHOLDERS' Money market and other savings accounts 8,736 277 3.16 EQUITY Retail savings certificates 6,683 337 5.05 Other time deposits 263 12 4.70 Deposits in foreign offices 3,898 226 5.79 ------- ------ Total interest-bearing deposits 21,496 889 4.13 Federal funds purchased and securities under repurchase agreements 2,128 125 5.87 Short-term bank notes 815 50 6.20 Term federal funds purchased 644 39 5.98 U.S. Treasury tax and loan demand notes 400 23 5.69 Commercial paper 226 13 5.87 Other funds borrowed 395 34 8.68 Notes and debentures (with original maturities over one year) 1,670 117 7.04 ------- ------ Total interest-bearing liabilities 27,774 $1,290 4.65 Total noninterest-bearing deposits 6,455 Acceptances outstanding 229 Other liabilities 1,533 -------------------------------------------------------------------------------------------------------------- Total liabilities 35,991 -------------------------------------------------------------------------------------------------------------- Redeemable preferred stock - -------------------------------------------------------------------------------------------------------------- Shareholders' equity (a) 4,138 -------------------------------------------------------------------------------------------------------------- Total liabilities, redeemable preferred stock and shareholders' equity $40,129 -------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- RATES YIELD ON TOTAL INTEREST-EARNING ASSETS 8.44% COST OF FUNDS SUPPORTING INTEREST-EARNING ASSETS 3.82 -------------------------------------------------------------------------------------------------------------- NET INTEREST MARGIN: TAXABLE EQUIVALENT BASIS 4.62% WITHOUT TAXABLE EQUIVALENT INCREMENTS 4.58 -------------------------------------------------------------------------------------------------------------- (a) Amounts and yields in 1995 and 1994 exclude adjustments to fair value required by FAS No. 115. Note: Interest and yields were calculated on a taxable equivalent basis at tax rates approximating 35% in 1995, 1994 and 1993 and 34% in all other years presented, using dollar amounts in thousands and actual number of days
100 84
- ---------------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 Average Average Average Average Average yields/ Average yields/ Average yields/ Average yields/ balance Interest rates balance Interest rates balance Interest rates balance Interest rates - ---------------------------------------------------------------------------------------------------------------------------------- $ 756 $ 34 4.52% $ 1,592 $ 58 3.62% $ 839 $ 35 4.20% $ 738 $ 50 6.77% 762 30 3.98 1,801 54 3.03 789 27 3.47 605 35 5.76 138 6 4.29 428 16 3.73 277 17 6.02 223 16 7.34 380 24 6.27 269 15 5.71 308 21 6.74 309 23 7.41 4,713 269 5.71 4,120 226 5.49 5,595 423 7.55 4,445 392 8.82 110 8 7.14 166 11 6.85 147 11 7.77 442 47 10.63 352 17 4.80 518 24 4.49 758 44 5.94 891 66 7.41 25,107 1,935 7.71 21,763 1,597 7.34 18,235 1,474 8.07 18,514 1,748 9.44 - ------- ------ ------- ------ ------- ------ ------- ------ 32,318 $2,323 7.19 30,657 $2,001 6.53 26,948 $2,052 7.61 26,167 $2,377 9.09 2,337 2,170 1,975 1,815 165 133 115 187 537 518 490 475 113 198 371 323 3,273 2,524 1,448 1,452 (613) (565) (589) (541) - ---------------------------------------------------------------------------------------------------------------------------------- $38,130 $35,635 $30,758 $29,878 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- $ 2,143 $ 4 .21% $ 2,034 $ 2 .11% $ 1,728 $ 40 2.31% $ 1,398 $ 57 4.07% 9,439 188 1.99 8,768 146 1.66 6,364 193 3.03 5,528 266 4.81 6,597 240 3.64 7,556 241 3.19 7,581 324 4.27 8,202 541 6.60 246 15 6.05 422 26 6.00 453 31 6.87 903 61 6.68 2,053 92 4.46 1,024 40 3.89 922 49 5.36 1,100 82 7.49 - ------- ------ ------- ------ ------- ------ ------- ------ 20,478 539 2.63 19,804 455 2.29 17,048 637 3.73 17,131 1,007 5.88 1,777 76 4.29 1,096 33 3.01 1,623 56 3.46 2,333 131 5.62 29 2 5.68 81 3 3.98 71 3 4.33 - - - 176 8 4.58 61 2 3.79 12 1 4.61 - - - 564 22 3.93 224 6 2.85 664 23 3.42 664 36 5.50 155 7 4.33 198 6 3.22 173 6 3.70 222 13 6.04 494 38 7.80 401 29 7.13 359 29 8.20 355 29 7.87 1,768 110 6.20 1,991 121 6.08 1,365 94 6.88 1,448 117 8.08 - ------- ------ ------- ------ ------- ------ ------- ------ 25,441 $ 802 3.15 23,856 $ 655 2.75 21,315 $ 849 3.98 22,153 $1,333 6.02 6,770 6,737 5,636 4,307 165 134 115 187 1,453 944 580 566 - ---------------------------------------------------------------------------------------------------------------------------------- 33,829 31,671 27,646 27,213 - ---------------------------------------------------------------------------------------------------------------------------------- - - - 51 - ---------------------------------------------------------------------------------------------------------------------------------- 4,301 3,964 3,112 2,614 - ---------------------------------------------------------------------------------------------------------------------------------- $38,130 $35,635 $30,758 $29,878 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- 7.19% 6.53% 7.61% 9.09% 2.48 2.14 3.15 5.10 - ---------------------------------------------------------------------------------------------------------------------------------- 4.71% 4.39% 4.46% 3.99% 4.67 4.34 4.39 3.86 - ----------------------------------------------------------------------------------------------------------------------------------
in the years, and are before the effect of reserve requirements. Loan fees, as well as nonaccrual loans and their related income effect, have been included in the calculation of average interest yields/rates. 101 85 GENERAL INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders will be held on the 10th floor of the Union Trust Building, 501 Grant Street, Pittsburgh, Pa. at 10 a.m. on Tuesday, April 16, 1996. EXCHANGE LISTING Mellon Bank Corporation's common, Series I preferred, Series J preferred and Series K preferred stock are traded on the New York Stock Exchange. The trading symbols are MEL (common stock), MEL Pr I, MEL Pr J and MEL Pr K. The Transfer Agent and Registrar is Mellon Bank, N.A., c/o Securities Transfer Services, 85 Challenger Road, Overpeck Centre, Ridgefield Park, NJ 07660-9940. STOCK PRICES Current prices for Mellon Bank Corporation's common and preferred stocks can be obtained from any Touch-Tone telephone by dialing (412) 236-0834 (in Pittsburgh) or 1 800 648-9496 (outside Pittsburgh). When prompted to "enter I.D.," press MEL# (or 635#). This service is available free of charge, 24 hours a day, seven days a week, from anywhere in the continental United States. DIVIDEND PAYMENTS Subject to approval of the board of directors, dividends are paid on Mellon Bank Corporation's common and preferred stocks on or about the 15th day of February, May, August and November. DIVIDEND Under the Dividend Reinvestment and Common Stock Purchase Plan, registered holders of Mellon REINVESTMENT AND Bank Corporation's common stock may purchase additional common shares at the market value COMMON STOCK for such shares through reinvestment of common dividends and/or optional cash payments. Purchases PURCHASE PLAN of shares through optional cash payments are subject to limitations. Plan details are in a Prospectus dated December 15, 1993, which may be obtained from the Secretary of the Corporation. ELECTRONIC DEPOSIT Registered holders may have quarterly dividends paid on Mellon Bank Corporation's common and preferred stocks OF DIVIDENDS electronically deposited to their checking or savings account, free of charge. If you wish to have your dividends electronically deposited, please write to Chemical Mellon Shareholder Services, P.O. Box 590, Ridgefield Park, NJ 07660-9940. If you need more information, please call 1 800 205-7699. FORM 10-K AND A copy of the Corporation's Annual Report on Form 10-K or the quarterly earnings news release on QUARTERLY EARNINGS Form 8-K, as filed with the Securities and Exchange Commission, will be furnished, free of charge, NEWS RELEASE upon written request to the Secretary of the Corporation, 1820 One Mellon Bank Center, Pittsburgh, PA 15258-0001. REGULATORY A copy of the Corporation's Management Report on internal controls, as filed with the appropriate regulatory agencies, will be furnished, free of charge, upon written request to the Secretary of the Corporation, 1820 One Mellon Bank Center, Pittsburgh, PA 15258-0001. PHONE CONTACTS Corporate Communications/ Media Relations (412) 236-1264 Employee communications and media inquiries Dividend Reinvestment Plan 1 800 205-7699 Enrollment/Prospectus for Dividend Reinvestment Investor Relations (412) 234-5601 General questions regarding the Corporation's financial performance and securities Publication Requests 1 800 879-4816 Requests for the Annual Report or quarterly information Stock Transfer Agent 1 800 205-7699 Questions regarding specific shareholder accounts ELIMINATION OF If you receive duplicate mailings at one address, or if more than one person in your household DUPLICATE receives Mellon materials and you wish to discontinue such mailings, please write to Chemical Mellon MAILINGS Shareholder Services, P.O. Box 590, Ridgefield Park, NJ 07660-9940, stating your full name and address the way it appears on your account and explaining your request. By doing so, you will enable the Corporation to avoid unnecessary duplication of effort and related costs. If you need more information, please call 1 800 205-7699. CHARITABLE A report on Mellon's comprehensive community involvement, including charitable contributions, is CONTRIBUTIONS available by calling (412) 234-8680. SHAREHOLDER Quarterly earnings news releases are available to shareholders upon request. To receive Mellon's quarterly PUBLICATIONS earnings news releases, please write to the Secretary of the Corporation, 1820 One Mellon Bank Center, Pittsburgh, PA 15258-0001, or call Chemical Mellon Shareholder Services at 1 800 879-4816. Quarterly earnings and other news releases can be faxed to you by calling Company News on Call at 1 800 758-5804. This electronic, menu-driven system will request a six-digit code (552187) and will allow you to request specific releases to be sent to your fax machine. Additional Mellon information also can be accessed on its Web site at http://www.mellon.com/, and Dreyfus information can be accessed at http://www.dreyfus.com/. MELLON ENTITIES ARE EQUAL EMPLOYMENT OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYERS. Mellon is committed to providing equal employment opportunities to every employee and every applicant for employment, regardless of, but not limited to, such factors as race, color, religion, sex, national origin, age, familial or marital status, ancestry, citizenship, sexual orientation, veteran status or being a qualified individual with a disability.
86 Appendix to Graphic Material Graphic material has been omitted from Exhibit 13.1. The description of the omitted graphic material is in the appropriate section of Exhibit 13.1 as listed below: Trend of Net Interest Margin graph in the Interest rate sensitivity analysis section on page 48. EX-21.1 7 MELLON BANK 10-K405 1 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995* Central Counties Corporation State of Incorporation: Pennsylvania Certus Asset Advisors Corporation State of Incorporation: Delaware Collection Services Corporation State of Incorporation: Pennsylvania Dreyfus Investment Services Corporation State of Incorporation: Delaware Girard Corporation State of Incorporation: Pennsylvania Mellon Accounting Services, Inc. State of Incorporation: Delaware Mellon Asia Limited Incorporation: Hong Kong Mellon Bank Community Development Corporation State of Incorporation: Pennsylvania Mellon Bank, N.A. Incorporation: United States - Access Capital Strategies Corp. State of Incorporation: Massachusetts - AFCO Credit Corporation State of Incorporation: New York -- AFCO Acceptance Corporation State of Incorporation: California -- AFCO Service, Inc. State of Incorporation: California - A P Beaumeade, Inc. State of Incorporation: Delaware * Certain subsidiaries have been omitted from this list. These subsidiaries, when considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary as defined in Rule 1-02(v) of Regulation S-X. 2 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -2- - A P Colorado, Inc. State of Incorporation: Colorado - A P Colorado, Inc. #2 State of Incorporation: Colorado - APD Chimney Lakes, Inc. State of Incorporation: Florida - APD Cross Creek, Inc. State of Incorporation: Florida - APD Cypress Springs, Inc. State of Incorporation: Florida - A P East, Inc. State of Incorporation: Delaware - A P Management, Inc. State of Incorporation: Pennsylvania - AP Properties Minnesota, Inc. State of Incorporation: Minnesota - AP Residential Realty, Inc. State of Incorporation: Pennsylvania - A P Rural Land, Inc. State of Incorporation: Pennsylvania - AP Wheels, Inc. State of Incorporation: Michigan - APME Company, Inc. State of Incorporation: Wisconsin - APU Chimney Lakes, Inc. State of Incorporation: Florida - APU Cross Creek, Inc. State of Incorporation: Florida 3 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -3- - APU Cypress Springs, Inc. State of Incorporation: Florida - Citmelex Corporation State of Incorporation: Delaware - Commonwealth National Mortgage Company State of Incorporation: Pennsylvania - East Properties Inc. State of Incorporation: Delaware - MMIP, Inc. State of Incorporation: Delaware - Mellon Bank Canada Incorporation: Canada -- CAFO, Inc. Incorporation: Canada -- Mellon Bank Canada Leasing Inc. Incorporation: Canada -- The R-M Trust Company Incorporation: Canada - Mellon Bond Associates State of Organization: Pennsylvania - Mellon Consumer Leasing Corporation State of Incorporation: Pennsylvania - Mellon Equity Associates State of Organization: Pennsylvania - Mellon Europe Limited Incorporation: England 4 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -4- - Mellon Financial Services Corporation #3 State of Incorporation: Pennsylvania -- Mellon International Leasing Company State of Incorporation: Delaware -- Pontus, Inc. State of Incorporation: Delaware - Mellon Mortgage Company State of Incorporation: Colorado -- MetFirst Insurance Agency, Inc. State of Incorporation: Delaware - Mellon Overseas Investment Corporation Incorporation: United States -- Mellon Bank Representacoes, Ltda. Incorporation: Brazil -- Mellon International Investment Corporation Incorporation: British West Indies -- Mellon Securities Limited State of Incorporation: Pennsylvania -- B.I.E. Corporation Incorporation: British West Indies - Mellon Ventures, Inc. State of Incorporation: Pennsylvania - Melnamor Corporation State of Incorporation: Pennsylvania -- A P Colorado, Inc. #3 State of Incorporation: Colorado -- A P Meritor, Inc. State of Incorporation: Minnesota 5 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -5- -- Baldorioty de Castro Development Corporation Incorporation: Puerto Rico -- Bridgewater Land Company, Inc. State of Incorporation: Massachusetts -- Cacalaba, Inc. State of Incorporation: New Mexico -- Casals Development Corporation Incorporation: Puerto Rico -- CEBC, Inc. Incorporation: Puerto Rico -- Costamar Development Corporation Incorporation: Puerto Rico -- FSFC, Inc. State of Incorporation: Pennsylvania -- Festival, Inc. State of Incorporation: Virginia -- Holiday Properties, Inc. State of Incorporation: Alabama -- Laplace Land Company, Inc. State of Incorporation: Louisiana -- Promenade, Inc. State of Incorporation: California -- SKAP #7, Inc. State of Incorporation: Texas -- Texas AP, Inc. State of Incorporation: Texas -- Trilem, Inc. State of Incorporation: Pennsylvania 6 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -6- -- Vacation Properties, Inc. State of Incorporation: North Carolina - MelPenn Realty Company State of Incorporation: Pennsylvania - Meritor Capital Resources, Inc. State of Incorporation: Delaware - Meritor Mortgage Corporation - East State of Incorporation: Pennsylvania -- Central Valley Management Co., Inc. State of Incorporation: Pennsylvania - RECR, Inc. State of Incorporation: Pennsylvania - The Dreyfus Corporation State of Incorporation: New York -- Dreyfus - Lincoln, Inc. State of Incorporation: Delaware -- Dreyfus Management Inc. State of Incorporation: New York -- Dreyfus Personal Management, Inc. State of Incorporation: New York -- Dreyfus Precious Metals, Inc. State of Incorporation: Delaware -- Dreyfus Service Corporation State of Incorporation: New York --- Lion Management, Inc. State of Incorporation: Delaware -- Seven Six Seven Agency, Inc. State of Incorporation: New York 7 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -7- -- The Dreyfus Consumer Credit Corporation State of Incorporation: Delaware -- Dreyfus Transfer, Inc. State of Incorporation: Maryland - UPCON, Inc. State of Incorporation: Pennsylvania Boston Group Holdings, Inc. State of Incorporation: Delaware - Shearson Venture Capital Inc. State of Incorporation: Delaware -- Shearson Summit Euromanagement Inc. State of Incorporation: Delaware -- Shearson Summit Europartners Inc. State of Incorporation: Delaware -- Shearson Summit Management Inc. State of Incorporation: Delaware -- Shearson Summit Partners Inc. State of Incorporation: Delaware - The Boston Company, Inc. State of Incorporation: Massachusetts -- Boston Safe Deposit and Trust Company State of Incorporation: Massachusetts --- Boston Safe (Nominees) Limited Incorporation: England --- MY, Inc. State of Incorporation: Massachusetts 8 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -8- --- Reco, Inc. State of Incorporation: Massachusetts ---- Mitlock Limited Partnership State of Incorporation: Massachusetts ---- Tuckahoe Limited Partnership State of Incorporation: Massachusetts --- TBC Securities Co., Inc. State of Incorporation: Massachusetts --- The Boston Company Financial Services, Inc. State of Incorporation: Massachusetts --- Wellington-Medford II Associates LP State of Incorporation: Massachusetts -- Boston Safe Deposit and Trust Company of California State of Incorporation: California -- Boston Safe Deposit and Trust Company of New York State of Incorporation: New York -- Premier Administration Limited Incorporation: England -- The Boston Company Advisors, Inc. State of Incorporation: Delaware -- The Boston Company Asset Management, Inc. State of Incorporation: Massachusetts -- The Boston Company Energy Advisors, Inc. State of Incorporation: Massachusetts -- The Boston Company Financial Strategies Group, Inc. State of Incorporation: Massachusetts -- The Boston Company Financial Strategies, Inc. State of Incorporation: Massachusetts 9 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -9- -- The Boston Safe Advisors, Inc. State of Incorporation: Massachusetts -- The Boston Company of Southern California State of Incorporation: California -- Wellington-Medford II Properties, Inc. State of Incorporation: Massachusetts Mellon Bank (DE) National Association Incorporation: United States - Dreyfus Service Organization, Inc. State of Incorporation: Delaware - MBC Insurance Agency, Inc. State of Incorporation: Delaware - The Shelter Group, Inc. State of Incorporation: Delaware - Wilprop, Inc. State of Incorporation: Delaware Mellon EFT Services Corporation State of Incorporation: Pennsylvania Mellon Financial Company State of Incorporation: Pennsylvania Mellon Financial Corporation (MD) State of Incorporation: Maryland - Mellon Bank (MD) State of Incorporation: Maryland -- Baltimore Realty Corporation State of Incorporation: Maryland 10 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -10- Mellon Financial Markets, Inc. State of Incorporation: Delaware Mellon PSFS (NJ) National Association Incorporation: United States - A P Properties, Inc. State of Incorporation: New Jersey MBC Investments Corporation State of Incorporation: Delaware - Dreyfus Acquisition Corporation State of Incorporation: New York - Dreyfus Partnership Management, Inc. State of Incorporation: New York - Dreyfus Trust Company State of Incorporation: New York - Franklin Portfolio Associates Trust State of Incorporation: Massachusetts - Laurel Capital Advisors State of Incorporation: Pennsylvania - Major Trading Corporation State of Incorporation: New York -- Dreyfus Management GMBH Incorporation: Germany - Mellon Bank, F.S.B. Incorporation: United States - Mellon Capital Management Corporation State of Incorporation: Delaware 11 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -11- - Mellon Financial Services Corporation #1 State of Incorporation: Delaware -- Allomon Corporation State of Incorporation: Pennsylvania --- APT Holdings Corporation State of Incorporation: Delaware --- Lucien Land Company, Inc. State of Incorporation: Florida ---- APD Crossings, Inc. State of Incorporation: Florida -- Mellon Escrow Company State of Incorporation: Delaware -- Mellon Financial Services Corporation #2 State of Incorporation: Delaware -- Mellon Financial Services Corporation #4 State of Incorporation: Pennsylvania --- Beaver Valley Leasing Corporation State of Incorporation: Pennsylvania --- Katrena Corporation State of Incorporation: Delaware (80% ownership) --- Mellon Financial Services Corporation #13 State of Incorporation: Alabama --- MFS Leasing Corp. State of Incorporation: Delaware -- Mellon Financial Services Corporation #5 State of Incorporation: Louisiana --- Mellon Financial Services Corporation #10 State of Incorporation: Louisiana 12 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -12- -- Mellon Properties Company State of Incorporation: Louisiana - Mellon-France Corporation State of Incorporation: Pennsylvania -- CCF-Mellon Partners State of Incorporation: Pennsylvania (50% ownership) - Mellon Global Investing Corp. State of Incorporation: New York -- Pareto Partners (Pareto Partners, New York) State of Incorporation: New York (65% ownership) - Mellon Insurance Agency, Inc. State of Incorporation: Pennsylvania - MGIC-UK Ltd. Incorporation: England -- Pareto Partners (Pareto Partners, U.K.) Incorporation: England (65% ownership) - Mellon Life Insurance Company State of Incorporation: Delaware - Premier Administration (Dublin) Limited Incorporation: Ireland - The Truepenny Corporation State of Incorporation: New York -- The Trotwood Corporation State of Incorporation: New York --- The Trotwood Hunters Corporation State of Incorporation: New York --- The Trotwood Hunters Site A Corporation State of Incorporation: New York 13 Ex-21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1995 -13- Mellon Financial Services Corporation #17 (Mellon Securities Transfer Services) State of Incorporation: Delaware - Chemical Mellon Shareholder Services, L.L.C. (50% ownership) State of Incorporation: New Jersey Mellon Securities Trust Company State of Incorporation: New York NSD Holdings Corporation State of Incorporation: Delaware EX-23.1 8 MELLON BANK 10-K405 1 Exhibit 23.1 The Board of Directors of Mellon Bank Corporation: We consent to incorporation by reference in Registration Statement Nos. 2-73272 (Form S-8), 2-98357 (Form S-8), 33-16658 (Form S-3), 33-21838 (Form S-8), 33-23635 (Form S-8), 33-34430 (Form S-8), 33-41796 (Form S-8), 33-48486 (Form S-3), 33-65824 (Form S-8), 33-65826 (Form S-8), 33-54671 (Form S-8), 33-55059 (Form S-3), 33-59709 (Form S-3), and 33-62151 (Form S-3), of Mellon Bank Corporation of our report dated January 10, 1996, relating to the consolidated balance sheets of Mellon Bank Corporation and its subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, which report appears in the December 31, 1995 annual report on Form 10-K of Mellon Bank Corporation. KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania March 19, 1996 EX-24.1 9 MELLON BANK 10-K405 1 Ex-24.1 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1995, and any and all amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof by the following persons in the capacities indicated on this 20th day of February, 1996. FRANK V. CAHOUET CHARLES A. CORRY - ------------------------------ ------------------------------ Frank V. Cahouet, Director and Charles A. Corry, Director Principal Executive Officer BURTON C. BORGELT C. FREDERICK FETTEROLF - ------------------------------ ------------------------------ Burton C. Borgelt, Director C. Frederick Fetterolf, Director CAROL R. BROWN IRA J. GUMBERG - ------------------------------ ------------------------------ Carol R. Brown, Director Ira J. Gumberg, Director PEMBERTON HUTCHINSON ------------------------------ Pemberton Hutchinson, Director 2 ROTAN E. LEE W. KEITH SMITH - ------------------------------ ------------------------------ Rotan E. Lee, Director W. Keith Smith, Director ANDREW W. MATHIESON JOAB L. THOMAS - ------------------------------ ------------------------------ Andrew W. Mathieson, Director Joab L. Thomas, Director EDWARD J. McANIFF WESLEY W. von SCHACK - ------------------------------ ------------------------------ Edward J. McAniff, Director Wesley W. von Schack, Director ROBERT MEHRABIAN - ------------------------------ Robert Mehrabian, Director SEWARD PROSSER MELLON - ------------------------------ Seward Prosser Mellon, Director DAVID S. SHAPIRA - ------------------------------ David S. Shapira, Director 3 EX-24.1 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1995, and any and all amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof by the following persons in the capacities indicated on this 28th day of February, 1996. J. W. CONNOLLY ______________________________ J. W. Connolly, Director 4 EX-24.1 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1995, and any and all amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof by the following persons in the capacities indicated on this 22nd day of February, 1996. HOWARD STEIN ______________________________ Howard Stein, Director 5 EX-24.1 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1995, and any and all amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof by the following persons in the capacities indicated on this 29nd day of February, 1996. WILLIAM J. YOUNG ------------------------------ William J. Young, Director EX-27.1 10 MELLON BANK 10-K405
9 0000064782 MELLON BANK CORP. 1,000,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 2,342 553 225 62 2,913 2,519 2,554 27,690 (471) 40,646 29,261 4,317 1,600 1,443 74 0 435 3,516 40,646 2,425 322 72 2,838 889 1,290 1,548 105 6 2,027 1,092 1,092 0 0 691 4.50 4.46 4.62 167 98 10 0 607 230 87 471 463 8 0
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