-----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, BY3YTpaDKO3s6MNq7I4HVHwohMrIo01NX1EsMSrauu+USUinYTrsqT1lM46cBtjV QQytkYHG/bFdQ4u4/KkCdQ== 0000950128-97-000741.txt : 19970513 0000950128-97-000741.hdr.sgml : 19970513 ACCESSION NUMBER: 0000950128-97-000741 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07410 FILM NUMBER: 97600344 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-Q 1 MELLON BANK CORP. 1 - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------ FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 incorporation or organization) Identification No.) 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Outstanding as of Class March 31, 1997 ----- -------------- Common Stock, $.50 par value 128,831,420
- ------------------------------------------------------------------------------ 2 TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
Page No. -------- Part I - Financial Information - ------------------------------ Financial Highlights 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2) 3 Financial Statements (Item 1): Consolidated Balance Sheet 37 Consolidated Income Statement 38 Consolidated Statement of Cash Flows 40 Consolidated Statement of Changes in Shareholders' Equity 41 Notes to Financial Statements 42 Selected Statistical Information: Consolidated Balance Sheet - Average Balances and Interest Yields/Rates 46 Deposits 48 Part II - Other Information - --------------------------- Legal Proceedings (Item 1) 48 Exhibits and Reports on Form 8-K (Item 6) 48 Signature 49 Corporate Information 50 Index to Exhibits 51
3
- ------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS (dollar amounts in millions, except per share amounts) 1997 1996 - ------------------------------------------------------------------------------------------------ PER COMMON SHARE - FIRST QUARTER Net income-fully diluted: Pre-stock split $ 1.38 $ 1.24 Post-stock split .69 .62 Dividends paid: Pre-stock split .60 .55 Post-stock split .30 .275 Closing common stock price: Pre-stock split 72.75 55.25 Post-stock split 36.375 27.625 Book value at quarter-end: Pre-stock split 27.19 25.55 Post-stock split 13.60 12.78 - ------------------------------------------------------------------------------------------------ FIRST QUARTER Net income $ 191 $ 179 Net income applicable to common stock 182 169 Dividends paid on common stock 77 75 Average common shares and equivalents outstanding-fully diluted (in thousands): Pre-stock split 131,602 136,721 Post-stock split 263,204 273,442 - ------------------------------------------------------------------------------------------------ KEY PERFORMANCE MEASURES Return on average common shareholders' equity (a) 21.2% 19.7% Return on average assets (a) 1.83 1.76 Fee revenue as a percentage of total revenue (FTE) 59 58 Efficiency ratio 62 65 Efficiency ratio excluding amortization of intangibles and trust-preferred securities expense 59 62 - ------------------------------------------------------------------------------------------------ TANGIBLE OPERATING RESULTS (b) Fully diluted tangible earnings per common share: Pre-stock split $ 1.54 $ 1.37 Post-stock split .77 .69 Tangible net income applicable to common stock 203 188 Return on tangible common shareholders' equity (a) 36.3% 30.1% Return on tangible assets (a) 2.09 1.99 Tangible book value at quarter-end: Pre-stock split $ 17.76 $ 18.50 Post-stock split 8.88 9.25 - ------------------------------------------------------------------------------------------------ BALANCES AT MARCH 31 Loans $ 27,525 $ 26,857 Total assets 42,068 41,582 Deposits 29,936 29,898 Common shareholders' equity 3,503 3,384 Market capitalization 9,372 7,317 - ------------------------------------------------------------------------------------------------ CAPITAL RATIOS AT MARCH 31 Common shareholders' equity to assets 8.33% 8.14% Tier I capital 8.74 7.69 Total (Tier I plus Tier II) capital 13.65 12.20 Leverage capital 8.75 7.52 - ------------------------------------------------------------------------------------------------
(a) Annualized. (b) See page 5 for the definition of these ratios. NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS. 2 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT FINANCIAL EVENTS - -------------------------------------------------------------------------------- Two-for-one common stock split On April 15, 1997, the Corporation announced a two-for-one split of the Corporation's common stock. The two-for-one stock split is being structured as a stock dividend of one additional share of common stock being paid on each currently outstanding share of common stock. The additional shares resulting from the split will be distributed on June 2, 1997, to shareholders of record at the close of business on May 1, 1997. Common dividend increased 10% On April 15, 1997, the Corporation announced a 10% increase in its quarterly common dividend to $.66 per common share on a pre-stock split basis. On a post-stock split basis, the Corporation's quarterly dividend will be $.33 per common share. The increased dividend is payable May 15, 1997, to shareholders of record at the close of business on April 30, 1997. This is the sixth quarterly common dividend increase that the Corporation has announced in the last three years, resulting in a total common dividend per share increase of 161%. Acquisition of Buck Consultants, Inc. On March 17, 1997, the Corporation and Buck Consultants, Inc. (Buck) announced that they have signed a definitive agreement by which the Corporation will acquire Buck, a leading global benefits consulting firm. Buck is headquartered in New York and provides a broad array of pension and health and welfare actuarial services, employee benefit, compensation and human resources consulting and administrative services to approximately 5,000 clients, ranging from large multinational corporations to small businesses. Buck is a privately owned firm with 67 offices in 16 countries. Buck reported total revenues of approximately $200 million for the fiscal year ended March 31, 1996. Including revenues from a recent acquisition, Buck's annual revenues would have totaled approximately $250 million. The transaction is expected to close in mid-1997, subject to Buck shareholder and regulatory approval. Acquisition of 1st Business Bank On April 14, 1997, the Corporation announced that it had reached a definitive agreement to acquire 1st Business Corporation and its principal subsidiary, 1st Business Bank, a full-service commercial bank serving midsize business firms in southern California. 1st Business Corporation is privately owned. With approximately $1.1 billion in assets, including approximately $450 million in loans, 1st Business Bank is a state-chartered bank with headquarters in Los Angeles. 1st Business Bank serves approximately 1,700 business customers in the manufacturing, wholesale trade and service industries. 1st Business Bank also provides personal banking services to professionals, entrepreneurs, and owners and officers of its business clients. The Corporation will purchase 1st Business Corporation with stock. Other terms of the agreement were not disclosed. 1st Business Bank will operate as a separate entity under the name Mellon 1st Business Bank. The transaction is expected to close in the second half of 1997, subject to regulatory approvals and certain closing conditions. 3 5 OVERVIEW OF THE FIRST QUARTER OF 1997 - ------------------------------------------------------------------------------- The Corporation reported record first quarter 1997 fully diluted earnings per common share of $1.38, on a pre-stock split basis, an increase of 11%, compared with $1.24 per common share in the first quarter of 1996. Net income applicable to common stock was $182 million in the first quarter of 1997, compared with $169 million in the prior-year period. On a post-stock split basis, the Corporation's first quarter 1997 earnings per common share was $.69, compared with $.62 per common share in the first quarter of 1996. Annualized return on common shareholders' equity and return on assets were 21.2% and 1.83%, respectively, in the first quarter of 1997, compared with 19.7% and 1.76%, respectively, in the first quarter of 1996. Annualized return on tangible common shareholders' equity and return on tangible assets were 36.3% and 2.09%, respectively, in the first quarter of 1997, compared with 30.1% and 1.99%, respectively, in the first quarter of 1996. Fully diluted tangible earnings per common share in the first quarter of 1997 were $1.54, on a pre-stock split basis, a 12% increase, compared with $1.37 in the first quarter of 1996. Earnings per common share in the first quarter of 1997 reflects the repurchase of 11.6 million common shares, prior to any reissuances, during 1996 and the first quarter of 1997. The Corporation's average level of treasury stock was approximately $345 million higher in the first quarter of 1997, compared with the first quarter of 1996. After giving effect to funding the higher level of treasury stock, valued at a short-term funding rate, the lower share count increased earnings per share 2%, while ongoing business growth increased earnings per share 9%. Compared with the first quarter of 1996, the Corporation's first quarter 1997 results reflected higher fee revenue and higher net interest revenue, offset in part by higher operating expense. The quarter's net income applicable to common stock also included an additional $3 million charge, or $.03 per common share on a pre-stock split basis, for issue costs recorded as preferred stock dividends in connection with the redemption of the Series J preferred stock. Net interest revenue was $370 million in the first quarter of 1997, an increase of $7 million from $363 million in the prior-year period. This increase resulted from the Mellon US Leasing and Mellon First United Leasing acquisitions in the second half of 1996 and a higher level of interest-free funds, partially offset by the November 1996 sale of a $770 million American Automobile Association (AAA) credit card portfolio, the 1996 home equity and insurance premium finance loan securitizations, lower loan fees and the repurchase of common shares. Fee revenue totaled $536 million, an increase of $61 million, or 13%, in the first quarter of 1997, compared with the prior-year period, excluding the $28 million gain on the home equity loan securitization recorded in the first quarter of 1996. Including the securitization gain, fee revenue increased $33 million, or 7%, compared with the prior-year period. The increase in fee revenue was attributable to higher trust and investment management fees, higher mortgage servicing fee revenue and higher cash management and deposit transaction charges. Operating expense before net revenue from acquired property and trust-preferred securities expense for the first quarter of 1997 was $565 million, down $3 million from $568 million in the first quarter of 1996. Operating expense in the first quarter of 1996 included $22 million of staff expense resulting from the retirement enhancement plan and severance expense, and $6 million of expense related to the reconfiguration of the retail delivery system. Excluding these items, operating expense before net revenue from acquired property and trust-preferred securities expense increased $25 million, or 5%, in the first quarter of 1997, compared with the prior-year period. The increase resulted primarily from acquisitions and business growth. Credit quality expense was $22 million in the first quarter of 1997, compared with $17 million in the first quarter of 1996. This $5 million increase resulted from lower net revenue from acquired property. Net credit losses were $32 million in the first quarter of 1997, an increase of $4 million, compared with the prior-year period resulting from higher credit card net credit losses. 4 6 OVERVIEW OF THE FIRST QUARTER OF 1997 (CONTINUED) - ------------------------------------------------------------------------------- Nonperforming assets totaled $170 million at March 31, 1997, compared with $174 million at December 31, 1996, and $250 million at March 31, 1996. The Corporation's nonperforming assets to total loans and net acquired property ratio was .62% at March 31, 1997, the lowest ratio in the Corporation's recent history, compared with .63% at December 31, 1996, and .93% at March 31, 1996. The Corporation's ratio of common shareholders' equity to assets was 8.33% at March 31, 1997. The Tier I, Total and Leverage capital ratios were 8.74%, 13.65% and 8.75%, respectively, at March 31, 1997, well in excess of the minimum required ratios. TANGIBLE OPERATING RESULTS - ------------------------------------------------------------------------------- Except for the merger with Dreyfus, which was accounted for under the "pooling of interests" method, the Corporation has been required to account for business combinations under the "purchase" method of accounting. The purchase method results in the recording of goodwill and other identified intangibles that are amortized as noncash charges in future years into operating expense. The pooling of interests method does not result in the recording of goodwill or intangibles. Since goodwill and intangible amortization expense does not result in a cash expense, the economic value to shareholders under either accounting method is essentially the same. Results, excluding the impact of intangibles, are shown in the table below.
- --------------------------------------------------------------------------------------------------- Quarter ended (dollar amounts in millions, March 31, ratios annualized) 1997 1996 Change - -------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 182 $ 169 $ 13 After tax impact of amortization of intangibles from purchase acquisitions 21 19 2 - -------------------------------------------------------------------------------------------------- Tangible net income applicable to common stock $ 203 $ 188 $ 15 Tangible earnings per common share-fully diluted: Pre-stock split $ 1.54 $ 1.37 12% Post-stock split .77 .69 12% - -------------------------------------------------------------------------------------------------- Average common equity $ 3,490 $ 3,459 $ 31 Average goodwill and other identified intangibles 1,223 946 277 - -------------------------------------------------------------------------------------------------- Average tangible common equity $ 2,267 $ 2,513 $ (246) Return on tangible common equity 36.3% 30.1% 620 bp - -------------------------------------------------------------------------------------------------- Average total assets $42,187 $40,848 $1,339 Average tangible assets $40,964 $39,902 $1,062 Return on tangible assets 2.09% 1.99% 10 bp - --------------------------------------------------------------------------------------------------
5 7 BUSINESS SECTORS - ------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31,
Consumer Corporate/Institutional (dollar amounts in millions, Investment Services Banking Services Investment Services Banking Services averages in billions) 1997 1996 1997 1996 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Revenue $112 $103 $ 372 $ 366 $276 $242 $125 $ 105 Credit quality expense (revenue) - - 29 23 - - 1 1 Operating expense 74 69 233 242 204 195 51 40 - -------------------------------------------------------------------------------------------------------------------------------- Income before taxes 38 34 110 101 72 47 73 64 Income taxes 16 14 40 37 28 19 27 23 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 22 $ 20 $ 70 $ 64 $ 44 $ 28 $ 46 $ 41 - ------------------------------------------------------------------------------------------------------------------------------- Tangible net income $ 23 $ 21 $ 80 $ 74 $ 50 $ 34 $ 50 $ 43 - ---------------------------------------------------------------------------------------------------------------------------------- Average assets $0.3 $0.3 $22.3 $22.4 $1.4 $1.7 $16.3 $13.9 Average common equity $0.2 $0.2 $ 1.2 $ 1.2 $0.6 $0.5 $ 1.6 $ 1.2 Average Tier I preferred equity $ - $ - $ - $ - $ - $ - $ - $ - Return on common shareholders' equity (a) 50% 49% 24% 22% 30% 22% 12% 13% Return on assets (a) NM NM 1.28% 1.15% NM NM 1.14% 1.19% Pretax operating margin 34% 33% 30% 28% 26% 20% 58% 61% Pretax operating margin excluding amortization of intangibles and trust-preferred securities expense 34% 34% 33% 31% 29% 23% 62% 63% Efficiency ratio excluding amortization of intangibles and trust-preferred securities expense 66% 66% 59% 62% 71% 77% 37% 36% - --------------------------------------------------------------------------------------------------------------------------------
(a) Annualized. NM - Not meaningful. 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 quarterly 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. Income before taxes for the Corporation's core sectors was $293 million in the first quarter of 1997, an increase of $47 million, or 18%, compared with the prior-year quarter. This increase resulted from a $69 million increase in revenue, partially offset by a $16 million increase in operating expense and a $6 million increase in credit quality expense. Return on common shareholders' equity for the core sectors was 21% in the first quarter, compared with 20% in the first quarter of 1996. Return on assets was 1.83% in the first quarter of 1997, compared with 1.61% in the first quarter of 1996. Consumer Investment Services Consumer Investment Services includes private asset management services and retail mutual funds. Income before taxes for the Consumer Investment sector was $38 million in the first quarter of 1997, an increase of $4 million, or 9%, from the prior-year period. The increase was a result of higher private asset management fee revenue and higher mutual fund management revenue, which resulted from new business and an increase in the market value of assets under management. This sector provided excellent returns, as the annualized return on common shareholders' equity was 50% in the first quarter of 1997, compared with 49% in the first quarter of 1996. 6 8
- -------------------------------------------------------------------------------------------------------------------------------- Total Real Estate Other Total All Core Sectors Workout Corporate Activity Sectors 1997 1996 1997 1996 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- $ 885 $ 816 $ 8 $ 5 $ 20 $ 51 $ 913 $ 872 30 24 (3) (7) (5) - 22 17 562 546 1 1 22 21 585 568 - -------------------------------------------------------------------------------------------------------------------------------- 293 246 10 11 3 30 306 287 111 93 3 4 1 11 115 108 - -------------------------------------------------------------------------------------------------------------------------------- $ 182 $ 153 $ 7 $ 7 $ 2 $ 19 $ 191 $ 179 - -------------------------------------------------------------------------------------------------------------------------------- $ 203 $ 172 $ 7 $ 7 $ 2 $ 19 $ 212 $ 198 - -------------------------------------------------------------------------------------------------------------------------------- $40.3 $38.3 $0.2 $0.3 $ 1.7 $2.2 $42.2 $40.8 $ 3.6 $ 3.1 $ - $ - $(0.1) $0.4 $ 3.5 $ 3.5 $ - $ - $ - $ - $ 1.2 $ .9 $ 1.2 $ .9 21% 20% NM NM NM NM 21% 20% 1.83% 1.61% NM NM NM NM 1.83% 1.76% 33% 30% NM NM NM NM 33% 33% 36% 33% NM NM NM NM 39% 36% 61% 64% NM NM NM NM 59% 62% - --------------------------------------------------------------------------------------------------------------------------------
Consumer Banking Services Consumer Banking Services includes consumer lending and deposit products, business banking, branch banking, credit card, mortgage loan origination and servicing and jumbo residential mortgage lending. Income before taxes for this sector totaled $110 million in the first quarter of 1997, compared with $101 million in the first quarter of 1996, a 9% improvement. Revenue increased $6 million compared with the prior-year period, primarily as a result of: higher mortgage servicing fees, primarily relating to portfolio servicing acquisitions; higher electronic tax return filing fees; increased net interest revenue due to a higher level of noninterest-bearing deposits; and higher ATM network processing fees. Partially offsetting these increases was a decrease in credit card revenue reflecting lower fee revenue from the securitized credit card portfolio, due in part to higher credit losses in this portfolio, and the sale of the AAA credit card portfolio in November 1996. The $6 million increase in credit quality expense resulted from the higher level of credit card losses in 1997. The $9 million decrease in operating expense reflected $6 million of expense related to the reconfiguration of the retail delivery system recorded in the first quarter of 1996. Also contributing to the decrease in expense was lower operating expense related to the sale of the AAA credit card portfolio. Partially offsetting these decreases were higher expenses in support of portfolio servicing acquisitions. The annualized return on common shareholders' equity for this sector was 24% in the first quarter of 1997, compared with 22% in the first quarter of 1996. Corporate/Institutional Investment Services Corporate/Institutional Investment Services includes institutional asset and institutional mutual fund management and administration, institutional trust and custody, securities lending, foreign exchange, cash management, stock transfer, corporate trust and services for defined contribution plans. Income before taxes for this sector was $72 million in the first quarter of 1997, an increase of $25 million, or 53%, compared with the first quarter of 1996. Revenue increased $34 million due to increased institutional trust fees, higher cash management revenue, an increase in securities lending revenue, higher foreign exchange fees and increased fees from services provided for corporate defined contribution plans. Operating expense increased $9 million in support of higher transaction volumes and technology investments, partially 7 9 BUSINESS SECTORS (CONTINUED) - -------------------------------------------------------------------------------- Corporate/Institutional Investment Services (continued) offset by lower expenses in the global custody business line as a result of reengineering efforts. The annualized return on common shareholders' equity for this sector was 30% in the first quarter of 1997, compared with 22% in the first quarter of 1996. Corporate/Institutional Banking Services Corporate/Institutional Banking Services includes large corporate and middle market lending, asset-based lending, lease financing, commercial real estate lending, insurance premium financing, securities underwriting and trading and international banking. Income before taxes for the Corporate/Institutional Banking Services sector was $73 million for the first quarter of 1997, an increase of $9 million, or 14%, from the first quarter of 1996. Revenue increased $20 million primarily as a result of higher net interest revenue resulting from the lease financing acquisitions. Operating expense increased $11 million as a result of the lease financing acquisitions. The annualized return on common shareholders' equity for this sector was 12% in the first quarter of 1997, compared with 13% in the first quarter of 1996. Real Estate Workout Real Estate Workout includes commercial real estate recovery and mortgage banking recovery operations. Income before taxes for Real Estate Workout was $10 million in the first quarter of 1997, compared with $11 million in the first quarter of 1996. The results in both periods reflect net revenue from acquired property and the improved credit quality of the portfolio. Other The Other sector's pretax income for the first quarter of 1997 was $3 million. Revenue for the first quarter of 1997 reflects earnings on the use of proceeds from the trust-preferred securities and earnings on preferred capital above that required for the core sectors. Revenue for the first quarter 1996 reflects the $28 million gain on the home equity loan securitization and earnings on excess capital. Credit quality revenue for 1997 represents loan recoveries from loans to lesser developed countries. Operating expense for the first quarter of 1997 includes $20 million of trust-preferred securities expense while the first quarter of 1996 includes the $18 million charge resulting from the retirement enhancement plan. 8 10 BUSINESS SECTORS (CONTINUED) - -------------------------------------------------------------------------------- The following tables distribute net income and return on average common shareholders' equity for the Corporation's core sectors between customers serviced and products offered.
- ------------------------------------------------------------------------------------------ Customers serviced ----------------------------------------- Total Total Corporate/ FOR THE THREE MONTHS ENDED MARCH 31, Consumer Institutional (dollar amounts in millions) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------ Net income $92 $84 $90 $69 Return on average common shareholders' equity (a) 27% 25% 17% 16% - ------------------------------------------------------------------------------------------ (a) Annualized. Products offered ----------------------------------------- Total Total FOR THE THREE MONTHS ENDED MARCH 31, Investment Banking (dollar amounts in millions) 1997 1996 1997 1996 ----------------------------------------------------------------------------------------- Net income $66 $ 48 $116 $105 Return on average common shareholders' equity (a) 35% 28% 17% 18% - ------------------------------------------------------------------------------------------
(a) Annualized. 9 11
NET INTEREST REVENUE - -------------------------------------------------------------------------------------------- Three months ended March 31, 1997 1996 (taxable equivalent basis, AVERAGE AVERAGE Average Average dollar amounts in millions) BALANCE RATE balance rate - -------------------------------------------------------------------------------------------- Money market investments $ 1,032 5.12% $ 1,290 5.34% Trading account securities 161 5.58 138 5.17 Securities 6,018 6.73 5,339 6.64 Loans 27,404 8.21 27,058 8.45 ------- ------- Total interest-earning assets $34,615 7.85 $33,825 8.03 - ------------------------------------------------------------------------------------------ Financed by: Interest-bearing liabilities $27,485 4.38% $27,986 4.45% Noninterest-bearing liabilities 7,130 - 5,839 - ------- ------- Total $34,615 3.48 $33,825 3.68 - -------------------------------------------------------------------------------------------- Net interest revenue $ 373 4.37% $ 366 4.35% - --------------------------------------------------------------------------------------------
Note: Average rates are annualized and are calculated on a taxable equivalent basis at tax rates approximating 35%. Loan fees, as well as nonaccrual loans and their related income effect, have been included in the calculation of average rates. Net interest revenue, on a taxable equivalent basis, for the first quarter of 1997 totaled $373 million, up $7 million compared with the first quarter of 1996. The net interest margin was 4.37% in the first quarter of 1997, up 2 basis points from 4.35% in the first quarter of 1996. The increase in net interest revenue and the net interest margin in the first quarter of 1997, compared with the first quarter of 1996, resulted from $1.6 billion of lease financing acquisitions, the use of proceeds from the $1 billion of trust-preferred securities issued in December 1996, the impact of a higher level of noninterest-bearing deposits and loan growth. The cost of the trust-preferred securities is reported in operating expense. Primarily offsetting these factors was the effect of the sale of the AAA credit card portfolio, lower loan fees, the December 1996 $500 million insurance premium finance securitization, the March 1996 $650 million home equity loan securitization and funding costs related to the repurchase of common stock. Excluding the effect of the loan securitizations and the equity repurchases, the net interest revenue and net interest margin for the first quarter of 1997 would have been approximately $426 million and 4.70%, compared with approximately $401 million and 4.63% in the first quarter of 1996. The foregone net interest revenue from the loan securitizations is substantially offset by higher servicing fee revenue and lower net credit losses. Average loans increased $346 million in the first quarter of 1997, compared with the prior-year period. Excluding the effect of loan securitizations, the AAA credit card sale and lease financing acquisitions, the Corporation experienced loan growth of approximately $650 million in the first quarter of 1997, compared with the prior-year period, primarily in wholesale and retail lending. 10 12
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES - ------------------------------------------------------------------------------ Three months ended March 31, (in millions) 1997 1996 Change - ------------------------------------------------------------------------------ Provision for credit losses $25 $25 $ - Net revenue from acquired property (3) (8) (5) - ------------------------------------------------------------------------------ Credit quality expense $22 $17 $ 5 - ------------------------------------------------------------------------------
Credit quality expense, defined as the provision for credit losses less the net revenue from acquired property, increased $5 million in the first quarter of 1997, compared with the first quarter of 1996, as a result of a $5 million decrease in net revenue from acquired property. A summary of the Corporation's net credit losses is presented on the following page. The $4 million increase in net credit losses, compared with the first quarter of 1996, resulted from a $15 million increase in credit card net credit losses, partially offset by a reduction in commercial real estate net credit losses and an increase in international loan recoveries. The increase in credit card net credit losses resulted from the return to a more normal level of delinquencies in the CornerStone(SM) portfolio following the creation of the accelerated resolution portfolio in December 1995, offset in part by a decrease in credit losses resulting from the sale of the AAA credit card portfolio. At March 31, 1997, the CornerStone(SM) credit card portfolio had total outstandings of $574 million, compared with $631 million at December 31, 1996, and $720 million at March 31, 1996. The net carrying value of the accelerated resolution portfolio at March 31, 1997, was $19 million, compared with $30 million at December 31, 1996, and $65 million at March 31, 1996. The Corporation maintains a credit loss reserve that, in management's judgment, is adequate to absorb future losses inherent in the loan portfolio. Management establishes the credit loss reserve using a documented loan loss assessment process that estimates loss potential in the portfolio as a whole. For further information regarding the methodology used in determining the adequacy of the reserve, see the "Reserve for credit losses and review of net credit losses" discussion in the Corporation's 1996 Annual Report on Form 10-K. The reserve for credit losses totaled $518 million at March 31, 1997, compared with $525 million at December 31, 1996, and $468 million at March 31, 1996. The $50 million increase in the reserve for credit losses from March 31, 1996, reflects the additional fourth quarter 1996 credit loss provision related to the credit card portfolio and $23 million of reserves acquired in the lease financing acquisitions. The ratio of the loan loss reserve to nonperforming loans at March 31, 1997, was 543%, compared with 556% at year-end 1996 and 265% at March 31, 1996. 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 also can vary with shifts in loan portfolio mix. The increase in this ratio from March 31, 1996, primarily resulted from a decrease in the level of nonperforming loans. 11 13
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES (CONTINUED) - ------------------------------------------------------------------------------ - ----------------------------------------------------------------------------- CREDIT LOSS RESERVE ACTIVITY (a) Three months ended March 31, (dollar amounts in millions) 1997 1996 Change - ----------------------------------------------------------------------------- Reserve at beginning of period $525 $471 $54 Credit losses: Domestic: Commercial and financial 9 7 2 Commercial real estate 1 8 (7) Consumer credit: Credit cards 33 19 14 Consumer mortgage - 3 (3) Other consumer credit 6 5 1 - ----------------------------------------------------------------------------- Total domestic credit losses 49 42 7 - ----------------------------------------------------------------------------- Recoveries: Domestic: Commercial and financial (4) (2) 2 Commercial real estate (3) (5) (2) Consumer credit: Credit cards (2) (3) (1) Consumer mortgage - (1) (1) Other consumer credit (3) (2) 1 - ----------------------------------------------------------------------------- Total domestic (12) (13) (1) International (5) (1) 4 - ----------------------------------------------------------------------------- Total recoveries (17) (14) 3 - ----------------------------------------------------------------------------- Net credit losses (recoveries): Domestic: Commercial and financial 5 5 - Commercial real estate (2) 3 (5) Consumer credit: Credit cards 31 16 15 Consumer mortgage - 2 (2) Other consumer credit 3 3 - - ----------------------------------------------------------------------------- Total domestic 37 29 8 International (5) (1) (4) - ----------------------------------------------------------------------------- Total net credit losses 32 28 4 Provision for credit losses 25 25 - - ----------------------------------------------------------------------------- Reserve at end of period $518 $468 $50 - ----------------------------------------------------------------------------- Reserve as a percentage of total loans 1.88% 1.74% 14 bp - ----------------------------------------------------------------------------- Annualized net credit losses to average loans .48% .41% 7 bp - -----------------------------------------------------------------------------
(a) Excludes the reserve and net credit losses on segregated assets. 12 14
NONINTEREST REVENUE - ----------------------------------------------------------------------------------------- Three months ended March 31, (in millions) 1997 1996 Change - ----------------------------------------------------------------------------------------- Fee revenue: Trust and investment revenue: Management: Mutual fund $ 87 $ 83 $ 4 Private asset 42 35 7 Institutional asset 37 34 3 - ----------------------------------------------------------------------------------------- Total management revenue 166 152 14 Administration/Custody: Institutional trust 66 59 7 Mutual fund 30 27 3 Private asset 4 3 1 - ----------------------------------------------------------------------------------------- Total administration/custody revenue 100 89 11 - ----------------------------------------------------------------------------------------- Total trust and investment fee revenue 266 241 25 Cash management and deposit transaction charges 56 49 7 Mortgage servicing fees 51 41 10 Foreign currency and securities trading revenue 25 21 4 Credit card fees 24 33 (9) Information services fees 13 9 4 Other 101 109 (8) - ----------------------------------------------------------------------------------------- Total fee revenue 536 503 33 Gains on sale of securities - 1 (1) - ----------------------------------------------------------------------------------------- Total noninterest revenue $536 $504 $32 - ----------------------------------------------------------------------------------------- Fee revenue as a percentage of total revenue (FTE) 59% 58% 1 Trust and investment fee revenue as a percentage of total revenue (FTE) 29% 28% 1 - -----------------------------------------------------------------------------------------
Fee revenue increased $61 million, or 13%, in the first quarter of 1997, compared with the prior-year period, excluding the $28 million gain on the home equity loan securitization recorded in the first quarter of 1996. Including the securitization gain, fee revenue increased $33 million, or 7%, compared with the prior-year period. Total trust and investment fee revenue The $25 million, or 11%, increase in trust and investment fee revenue in the first quarter of 1997, compared with the prior-year period, resulted from a $14 million, or 9%, increase in management revenue and an $11 million, or 13%, increase in administration/custody revenue. The increase in management revenue resulted from a $7 million, or 21%, increase in private asset management revenue and a $4 million, or 4%, increase in mutual fund management revenue. The increase in private asset management revenue resulted from new business and an increase in the market value of assets under management. The higher revenue from the management of mutual funds resulted from a higher average level of mutual fund assets managed at Dreyfus, which was partially offset by an increase of $2 million in management fee waivers. Mutual fund management fees are discussed further on the following pages. The increase in trust and investment administration and custody fee revenue primarily resulted from a $7 million, or 13%, increase in institutional trust fees. The increase in institutional trust revenue resulted from a $5 million increase in securities lending revenue and new business. The increase in securities lending revenue resulted primarily from improved margins, as well as a higher volume of securities lent in the first quarter of 1997. On April 11, 1997, the Corporation announced its intention to sell its Corporate Trust business. This business generated approximately $16 million in fee revenue in 1996. The sale is not expected to materially affect the 13 15 NONINTEREST REVENUE (CONTINUED) - -------------------------------------------------------------------------------- Corporation's earnings and will not affect the Corporation's other trust businesses. It is anticipated that this transaction will be completed in the second half of 1997. As shown in the table below, the market value of trust assets under management was $259 billion at March 31, 1997, a $3 billion increase from $256 billion at December 31, 1996. This increase resulted from new business as well as a very moderate general market increase in the equity markets which was partially offset by a decrease in the fixed income markets. At March 31, 1997, compared to December 31, 1996, the S&P 500 index increased 2.2% while the Lehman Brothers Long-Term Government Bond Index decreased 3.3%.
- ---------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE OF ASSETS UNDER MANAGEMENT IN WHOLLY OWNED AND AFFILIATED COMPANIES MARCH 31, Dec. 31, Sept. 30, June 30, March 31, (in billions) 1997 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Mutual funds managed - proprietary: Taxable money market funds: Institutions $ 27 $ 27 $ 26 $ 25 $ 25 Individuals 10 9 10 9 10 Equity funds 16 15 14 14 12 Tax-exempt bond funds 16 17 17 18 18 Tax-exempt money market funds 8 7 7 7 8 Fixed-income funds 4 5 5 5 5 - ---------------------------------------------------------------------------------------------------------------------------------- Total proprietary mutual funds managed 81 80 79 78 78 Mutual funds managed - nonproprietary 7 7 6 5 5 - ---------------------------------------------------------------------------------------------------------------------------------- Total managed mutual fund assets $ 88 $ 87 $ 85 $ 83 $ 83 Private asset 28 28 26 26 25 Institutional asset (a) 143 141 133 127 127 - ---------------------------------------------------------------------------------------------------------------------------------- Total market value of assets under management $259 $256 $244 $236 $235 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes assets managed at Pareto Partners of $21 billion at March 31, 1997, $20 billion at December 31, $18 billion at September 30, and $16 billion at June 30 and March 31, 1996. Previously these assets were not included in the prior disclosures of the Corporation's total assets under management following the sale of a portion of the Corporation's ownership of Pareto Partners in the second quarter of 1996. The Corporation has had a 30% equity interest in Pareto Partners since the second quarter of 1996. At March 31, 1996, the Corporation had a 65% equity interest. The market value of assets under administration/custody, shown in the table below, was $1,061 billion at March 31, 1997, an increase of $15 billion compared with $1,046 billion at December 31, 1996. This increase resulted from new business, partially offset by a decrease in the market value of fixed income assets under administration/custody, as well as an increase in the value of the U.S. dollar relative to non-U.S. dollar denominated securities held.
- ---------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY MARCH 31, Dec. 31, Sept. 30, June 30, March 31, (in billions) 1997 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Institutional trust $ 976 $ 962 $819 $794 $786 Mutual fund 58 57 60 57 61 Private asset 27 27 26 25 23 - ---------------------------------------------------------------------------------------------------------------------------------- Total market value of assets under administration/custody $1,061 $1,046 $905 $876 $870 - ----------------------------------------------------------------------------------------------------------------------------------
14 16 NONINTEREST REVENUE (CONTINUED) - ------------------------------------------------------------------------------ Mutual fund management fees Mutual fund management fees are based upon the average net assets of each fund. Average proprietary funds managed at Dreyfus in the first quarter of 1997 were $85 billion, compared with $81 billion in the first quarter of 1996. This increase resulted primarily from a $4 billion average increase in equity funds.
- --------------------------------------------------------------------------------------- MANAGED MUTUAL FUND FEE REVENUE Three months ended March 31, (in millions) 1997 1996 Change - --------------------------------------------------------------------------------------- Managed mutual fund fees $98 $92 $ 6 Less: Fees waived 9 7 2 Less: Fund expense reimbursements 2 2 - - --------------------------------------------------------------------------------------- Net managed mutual fund fees $87 $83 $ 4 - --------------------------------------------------------------------------------------- Net managed mutual fund fees by fund category: Proprietary funds: Taxable money market funds: Institutions $15 $14 $ 1 Individuals 9 10 (1) Equity funds 24 18 6 Tax-exempt bond funds 24 26 (2) Tax-exempt money market funds 7 7 - Fixed income funds 5 6 (1) - ---------------------------------------------------------------------------------------- Total proprietary fund fees 84 81 3 Nonproprietary fund management fees 3 2 1 - --------------------------------------------------------------------------------------- Net managed mutual fund fees $87 $83 $ 4 - ---------------------------------------------------------------------------------------
Cash management and deposit transaction charges The $7 million, or 15%, increase in cash management and deposit transaction charges resulted primarily from higher volumes of business in customer receivable, payable and treasury management products. Mortgage servicing fees The $10 million, or 25%, increase in mortgage servicing fees in the first quarter of 1997, compared with the prior-year period, resulted from a higher level of mortgage servicing rights acquired through portfolio servicing acquisitions. At March 31, 1997, the Corporation's total servicing portfolio was $74 billion, comprised of $64 billion of residential and $10 billion of commercial servicing. At March 31, 1996, the total servicing portfolio was $55 billion, comprised of $48 billion of residential and $7 billion of commercial servicing. Foreign currency and securities trading revenue The $4 million, or 16%, increase in foreign currency and securities trading revenue in the first quarter of 1997, compared with the prior-year period, was attributable to higher foreign exchange fees earned as a result of higher levels of market volatility and customer activity. 15 17 NONINTEREST REVENUE (CONTINUED) - ------------------------------------------------------------------------------ Credit card fees The $9 million, or 26%, decrease in credit card fee revenue in the first quarter of 1997, compared with the first quarter of 1996, resulted from lower fee revenue from the securitized credit card portfolio, due in part to higher credit losses in this portfolio, and the sale of the AAA credit card portfolio in November 1996. Additional information on the effect of the credit card securitization is presented in the table below. Information services fees The $4 million, or 50%, increase in information services fees revenue, compared with the first quarter of 1996, resulted from higher ATM network processing fees and higher earnings at the ChaseMellon Shareholder Services joint venture. Other fee revenue Other fee revenue was $101 million in the first quarter of 1997, a decrease of $8 million compared with the first quarter of 1996. This decrease primarily resulted from the $28 million gain on the home equity loan securitization recorded in the first quarter of 1996. Partially offsetting this decrease was an $11 million increase in servicing fee revenue from the securitization of insurance premium finance and home equity loans, a $6 million increase resulting from the disposition of assets and sale of equity securities and a $5 million increase in fees relating to the electronic filing of income tax returns. Additional information on the effect of the loan securitizations is presented below. Buck Consultants, Inc. Fee revenue will be impacted in 1997 upon completion of the acquisition of Buck Consultants, Inc. (Buck). Buck generated total revenues of approximately $200 million for its fiscal year ended March 31, 1996. Including revenues from a recent acquisition, Buck's annual revenues would have totaled approximately $250 million. LOAN SECURITIZATIONS - -------------------------------------------------------------------------------- The Corporation securitized $950 million of credit card receivables in November 1995, $650 million of home equity loans in March 1996, and $500 million of insurance premium finance loans in December 1996. Securitizations are an effective way to diversify funding sources and manage the size of the balance sheet. The Corporation no longer recognizes net interest revenue on the securitized portfolios, however, the decrease in net interest revenue is substantially offset by increased servicing fee revenue and lower net credit losses. The Corporation continues to service the securitized loans. For analytical purposes, the impact of the securitizations on first quarter 1997 and 1996 results are shown below.
- -------------------------------------------------------------------------- SECURITIZED CREDIT CARD RECEIVABLES Three months ended March 31, (in millions) 1997 1996 - -------------------------------------------------------------------------- Lower net interest revenue $23 $24 Lower net credit losses 14 10 Higher fee revenue 9 13 Lower loans - average 950 950 - --------------------------------------------------------------------------
16 18 LOAN SECURITIZATIONS (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------ SECURITIZED HOME EQUITY LOANS Three months ended March 31, (in millions) 1997 1996 - ------------------------------------------------------------------------ Lower net interest revenue $ 6 $ - Higher fee revenue 4 - Lower loans - average 650 21 - ------------------------------------------------------------------------
- ------------------------------------------------------------------------ SECURITIZED INSURANCE PREMIUM FINANCE LOANS Three months ended March 31, (in millions) 1997 1996 - ------------------------------------------------------------------------ Lower net interest revenue $ 7 $- Higher fee revenue 7 - Lower loans - average 500 - - ------------------------------------------------------------------------
OPERATING EXPENSE - ------------------------------------------------------------------------------------------------------------ Three months ended March 31, (dollar amounts in millions) 1997 1996 Change - ------------------------------------------------------------------------------------------------------------ Staff expense $268 $277 $(9) Net occupancy expense 52 56 (4) Professional, legal and other purchased services 46 47 (1) Business development 37 33 4 Equipment expense 36 35 1 Amortization of mortgage servicing assets and purchased credit card relationships 28 28 - Amortization of goodwill and other intangible assets 27 25 2 Communications expense 26 23 3 Other expense 45 44 1 - ------------------------------------------------------------------------------------------------------------ Operating expense before net revenue from acquired property and trust-preferred securities expense 565 568 (3) Trust-preferred securities expense 20 - 20 Net revenue from acquired property (3) (8) 5 - ------------------------------------------------------------------------------------------------------------ Total operating expense $582 $560 $22 - ------------------------------------------------------------------------------------------------------------ Average full-time equivalent staff 25,200 24,600 600 - ------------------------------------------------------------------------------------------------------------ Efficiency ratio (a) 62% 65% (3) Efficiency ratio excluding amortization of intangibles and trust-preferred securities expense 59 62 (3) - ------------------------------------------------------------------------------------------------------------
(a) Operating expense before net revenue from acquired property and trust-preferred securities expense, as a percentage of revenue, computed on a taxable equivalent basis, excluding gains on the sale of securities. Operating expense before net revenue from acquired property and trust-preferred securities expense decreased $3 million in the first quarter of 1997, compared with the prior-year period. Excluding an $18 million charge for the Corporation's retirement enhancement program, $4 million of severance accruals and $6 million of expense relating to the reconfiguration of the retail delivery system recorded in the first quarter of 1996, operating expense before net revenue from acquired property and trust-preferred securities expense increased $25 million, or 5%, compared with the first quarter of 1996. 17 19 OPERATING EXPENSE (CONTINUED) - -------------------------------------------------------------------------------- Staff expense increased $13 million, excluding the $22 million of expense for the retirement enhancement program and severance accruals recorded in the first quarter of 1996, primarily from higher salaries expense, due in part to the leasing acquisitions, as well as an increase in incentive expense. The decrease in net occupancy expense resulted from the expense related to the reconfiguration of the retail delivery system recorded in the first quarter of 1996. The increase in the amortization of goodwill and other intangibles resulted from the 1996 leasing acquisitions. The increase in other expenses, including business development and communications expense, resulted from expenses in support of revenue growth. The $20 million of trust-preferred securities expense resulted from the issuance of $1 billion of these securities in December 1996. The proceeds from these securities were used to fund interest-earning assets. See note 13 in the Corporation's 1996 Annual Report on Form 10-K for a further discussion of these securities. INCOME TAXES - -------------------------------------------------------------------------------- The provision for income taxes totaled $108 million in the first quarter of 1997, compared with $103 million in the first quarter of 1996. The Corporation's effective tax rate for the first quarter of 1997 was 36.3%, compared with 36.5% for the first quarter of 1996. It is currently anticipated that the effective tax rate will remain at approximately this same level for the remainder of 1997.
ASSET/LIABILITY MANAGEMENT - -------------------------------------------------------------------------------- Three months ended March 31, (average balances in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS: Money market investments $ 1,032 $ 1,290 Trading account securities 161 138 Securities 6,018 5,339 Loans 27,404 27,058 - -------------------------------------------------------------------------------- Total interest-earning assets 34,615 33,825 Noninterest-earning assets 8,098 7,500 Reserve for credit losses (526) (477) - -------------------------------------------------------------------------------- Total assets $42,187 $40,848 - -------------------------------------------------------------------------------- FUNDS SUPPORTING TOTAL ASSETS: Core funds $33,758 $32,073 Wholesale and purchased funds 8,429 8,775 - -------------------------------------------------------------------------------- Funds supporting total assets $42,187 $40,848 - --------------------------------------------------------------------------------
The increase in the Corporation's average interest-earning assets in the first quarter of 1997, compared with the first quarter of 1996, reflects a $679 million increase in average securities and a $346 million increase in average loans, partially offset by a $258 million decrease in money market investments. The increase in average securities reflects the purchase of securities for asset/liability management purposes, as well as the utilization of a higher level of deposits with pledging requirements in the first quarter of 1997, compared with the prior-year period. Average loans increased as a result of the lease financing acquisitions and loan growth, partially offset by the home equity and insurance premium finance loan securitizations and the AAA credit card sale. Excluding the loan securitizations, the AAA credit 18 20 ASSET/LIABILITY MANAGEMENT (CONTINUED) - ------------------------------------------------------------------------------- card sale and lease financing acquisitions, average loans increased approximately $650 million, compared with the prior-year period, primarily as a result of increases in wholesale and retail loans. Core funds, which are considered to be the most stable sources of funding, are defined principally as money market and other savings deposits, savings certificates, demand deposits, shareholders' equity, notes and debentures with original maturities over one year and trust-preferred securities. Core funds primarily support core assets, which consist of loans, net of the reserve and noninterest-earning assets. Average core assets increased $895 million in the first quarter of 1997 from the prior-year period, reflecting a higher level of noninterest-earning assets and higher loan levels. The increase in noninterest-earnings assets primarily reflects a higher level of goodwill resulting from the lease financing acquisitions and a higher level of mortgage servicing assets. Average core funds increased $1,685 million in the first quarter of 1997 from the prior-year period, primarily reflecting the issuance of the trust-preferred securities in December 1996 and a higher level of notes and debentures. Core funds averaged 97% of core assets in the first quarter of 1997, up from 93% in the fourth quarter of 1996 and 94% in the first quarter of 1996. Wholesale and purchased funds are defined as deposits in foreign offices, negotiable certificates of deposit, federal funds purchased and securities under repurchase agreements, other time deposits, U.S. Treasury tax and loan demand notes, commercial paper, short-term bank notes and other funds borrowed. Average wholesale and purchased funds decreased $346 million compared with the prior-year period, primarily reflecting a decrease in deposits in foreign offices, short-term bank notes and federal funds purchased and securities under repurchase agreements, partially offset by an increase in negotiable certificates of deposit and other time deposits. As a percentage of total average assets, average wholesale and purchased funds decreased to 20% in the first quarter of 1997, from 24% in the fourth quarter of 1996 and 21% in the first quarter of 1996. COMPOSITION OF LOAN PORTFOLIO - -------------------------------------------------------------------------------- The loan portfolio increased $668 million at March 31, 1997, compared with March 31, 1996, as a result of the $1.6 billion of leases acquired in the Mellon US Leasing and Mellon First United Leasing acquisitions. This increase was partially offset by the November 1996 sale of $770 million AAA credit card loans and the December 1996 $500 million insurance premium finance securitization. At March 31, 1997, the composition of the loan portfolio was 58% commercial and 42% consumer.
- ---------------------------------------------------------------------------------------------------------------------------------- MARCH 31, Dec. 31, Sept. 30, June 30, March 31, (in millions) 1997 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- DOMESTIC LOANS Commercial and financial $10,518 (a) $10,196 $10,747 $11,014 $11,089 Commercial real estate 1,598 (b) 1,534 1,564 1,624 1,459 Consumer credit: Consumer mortgage 7,672 7,772 7,629 7,891 7,865 Credit card 1,197 1,296 2,071 2,120 1,984 Other consumer credit 2,756 2,640 2,668 2,598 2,551 - ---------------------------------------------------------------------------------------------------------------------------------- Total consumer credit 11,625 11,708 12,368 12,609 12,400 Lease finance assets 2,477 2,533 2,285 938 865 - ---------------------------------------------------------------------------------------------------------------------------------- Total domestic loans 26,218 25,971 26,964 26,185 25,813 INTERNATIONAL LOANS 1,307 1,422 1,265 1,171 1,044 - ---------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned discount (c) $27,525 $27,393 $28,229 $27,356 $26,857 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes $13 million of loans subject to the FDIC loss-sharing arrangement. (b) Includes $63 million of loans subject to the FDIC loss-sharing arrangement. (c) Excludes segregated assets. 19 21 COMPOSITION OF LOAN PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- 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. Total domestic commercial and financial loans decreased by $571 million, or 5%, at March 31, 1997, compared to March 31, 1996, primarily as a result of a decrease in money market loans and the $500 million insurance premium finance securitization. These decreases were partially offset by increases in corporate and institutional banking, as well as middle market lending and business banking. Commercial and financial loans represented 38% of the total loan portfolio at March 31, 1997, and 41% at March 31, 1996. At March 31, 1997, nonperforming domestic commercial and financial loans were .17% of total domestic commercial and financial loans, compared with .62% at March 31, 1996. This ratio has been less than 1% for 16 consecutive quarters. Commercial real estate The Corporation's $1,598 million domestic commercial real estate loan portfolio consists of commercial mortgages, which generally are secured by nonresidential and multifamily residential properties and commercial construction loans generally with maturities of 60 months or less. Also included in this portfolio are $399 million of loans that are secured by owner-occupied real estate, but made for purposes other than the construction or purchase of investment type real estate. The commercial real estate loan portfolio includes $63 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. Domestic commercial real estate loans increased by $139 million, or 9%, at March 31, 1997, compared with March 31, 1996. The increase resulted primarily from new loan originations partially offset by paydowns and transfers to OREO. Domestic commercial real estate loans were 6% of total loans at March 31, 1997, up from 5% a year earlier. Nonperforming commercial real estate loans were .87% of total domestic commercial real estate loans at March 31, 1997, compared with 3.61% at March 31, 1996.
- --------------------------------------------------------------------------------------------------- DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS Balance at Percent of March 31, total loans (in millions) 1997 outstanding - --------------------------------------------------------------------------------------------------- Commercial mortgage and construction loans $1,136 4% Owner-occupied loans 399 2 FDIC loss share loans 63 - - --------------------------------------------------------------------------------------------------- Total $1,598 6% - ---------------------------------------------------------------------------------------------------
Consumer mortgage The consumer mortgage portfolio includes jumbo residential mortgages, traditional one-to-four family residential mortgages, fixed-term home equity loans and home equity revolving credit line loans. At March 31, 1997, this portfolio totaled $7,672 million, down 2% from $7,865 million at March 31, 1996. The $193 million decrease in this portfolio from March 31, 1996, primarily reflects a decrease in the one-to-four family residential mortgage warehouse portfolio. Jumbo mortgages are variable rate residential mortgages that range from $250,000 to $3 million. These loans totaled $3.6 billion at March 31, 1997, essentially unchanged from March 31, 1996, as loan originations were primarily offset by loan sales and paydowns. 20 22 COMPOSITION OF LOAN PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- Loans secured by one-to-four family residential mortgages decreased approximately $400 million to $1.7 billion and fixed-term home equity loans increased approximately $160 million to $1.8 billion. Home equity revolving credit line loans were $600 million at March 31, 1997, virtually unchanged from March 31, 1996. Nonperforming consumer mortgages were .68% and .67% of total consumer mortgages at March 31, 1997, and March 31, 1996, respectively. Credit card At March 31, 1997, credit card loans totaled $1,197 million, a $787 million, or 40%, decrease from March 31, 1996. This decrease primarily resulted from the AAA credit card sale and credit losses, partially offset by growth. 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 2.25% at March 31, 1997, compared with 1.21% at March 31, 1996. The creation of the accelerated resolution portfolio in December 1995 resulted in this ratio being reduced at March 31, 1996. In addition, the past-due ratio at March 31, 1997, reflects the change in the mix of the portfolio following the AAA sale. The CornerStone(SM) credit card portfolio was 48% of total credit cards at March 31, 1997, compared with 36% at March 31, 1996. The CornerStone(SM) credit card product has historically experienced a higher past-due ratio and a higher level of credit losses than the Corporation's other credit card loans. At March 31, 1997, the CornerStone(SM) portfolio totaled $574 million, compared with $631 million at December 31, 1996, and $720 million at March 31, 1996. Other consumer credit Other consumer credit, which principally consists of student loans, installment loans and unsecured personal credit lines was $2,756 million at March 31, 1997, an increase of $205 million from March 31, 1996. 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. Student loans comprised approximately 58% of this portfolio at March 31, 1997. Lease finance assets Lease finance assets totaled $2,477 million at March 31, 1997, an increase of $1,612 million compared with March 31, 1996, resulting from the lease financing acquisitions. Lease finance assets represented 9% of the total loan portfolio at March 31, 1997, up from 3% at March 31, 1996. Nonperforming leases were .27% of total leases at March 31, 1997. International loans Loans to international borrowers totaled $1,307 million at March 31, 1997, up 25% from $1,044 at March 31, 1996, primarily due to increased activity with large corporate customers and foreign banks. There were no nonperforming international loans at March 31, 1997. Assets held for accelerated resolution In December 1995, the Corporation segregated $193 million of CornerStone(SM) credit card loans, which had a history of delinquency, into an accelerated resolution portfolio. 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 $19 million at March 31, 1997, compared with $30 million at December 31, 1996, and $65 million at March 31, 1996. 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. 21 23 COMPOSITION OF LOAN PORTFOLIO (CONTINUED) - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK March 31, (in millions) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit $27,628 (a) $23,046 Standby letters of credit and foreign guarantees 3,793 (b) 3,600 Commercial letters of credit 70 81 Residential mortgage loans serviced with recourse 116 147 Custodian securities lent with indemnification against broker default of return of securities 26,380 17,614 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Approximately 25% of these commitments are scheduled to expire within one year, with an additional 61% scheduled to expire within five years. (b) Net of participations and cash collateral totaling $399 million. CAPITAL - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ SELECTED CAPITAL DATA (dollar amounts in millions, MARCH 31, Dec. 31, March 31, except per share amounts) 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------------------------ Common shareholders' equity $3,503 $3,456 $3,384 Common shareholders' equity to assets ratio 8.33% 8.11% 8.14% Tangible common shareholders' equity $2,289 $2,218 $2,450 Tangible common equity to assets ratio (a) 5.60% 5.36% 6.03% Total shareholders' equity $3,696 $3,746 $3,819 Total shareholders' equity to assets ratio 8.79% 8.79% 9.19% Tier I capital ratio 8.74 8.38 7.69 Total (Tier I plus Tier II) capital ratio 13.65 13.58 12.20 Leverage capital ratio 8.75 8.31 7.52 Book value per common share: Pre-stock split $27.19 $26.86 $25.55 Post-stock split (b) 13.60 13.43 12.78 Tangible book value per common share: Pre-stock split 17.76 17.24 18.50 Post-stock split (b) 8.88 8.62 9.25 Closing common stock price: Pre-stock split 72.75 71.00 55.25 Post-stock split (b) 36.375 35.50 27.625 Market capitalization 9,372 9,134 7,317 Common shares outstanding (000): Pre-stock split 128,831 128,647 132,443 Post-stock split (b) 257,662 257,294 264,886 - ------------------------------------------------------------------------------------------------------------------------------
(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) Restated to reflect the two-for-one common stock split payable June 2, 1997. 22 24 CAPITAL (CONTINUED) - ------------------------------------------------------------------------------- The increase in the Corporation's common shareholders' equity at March 31, 1997, compared with March 31, 1996, resulted from earnings retention, partially offset by net common stock repurchases. The decrease in total shareholders' equity from March 31, 1996, resulted from the December 1996 redemption of the $150 million Series I preferred stock and the February 1997 redemption of the $100 million Series J preferred stock. The quarter's net income applicable to common stock included an additional $3 million charge, or $.03 per share, on a pre-stock split basis, for issue costs recorded as preferred stock dividends in connection with the redemption of the Series J preferred stock. COMMON SHARES OUTSTANDING - ------------------------------------------------------------------------------
FIRST QUARTER Full Year (in millions) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Beginning shares outstanding 128.6 137.2 Shares issued for stock-based benefit plans and dividend reinvestment plan 1.0 2.2 Shares repurchased (.8) (10.8) - --------------------------------------------------------------------------------------------------------------------------------- Ending shares outstanding 128.8 128.6 - --------------------------------------------------------------------------------------------------------------------------------
During the first quarter of 1997, the Corporation repurchased approximately .8 million shares of common stock. Since the beginning of 1996, the Corporation has repurchased 11.6 million common shares. At March 31, 1997, approximately 1.5 million shares remain available for repurchase under a 5 million share repurchase program authorized by the board of directors in May 1996. In addition, the Corporation has authorized the repurchase of a number of common shares, up to the number that will be issued in connection with the acquisitions of Buck and 1st Business Bank.
- -------------------------------------------------------------------------------------------------------------------------------- RISK-BASED AND LEVERAGE CAPITAL RATIOS March 31, (dollar amounts in millions) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Tier I capital: Common shareholders' equity (a) $ 3,541 $ 3,407 Trust-preferred securities (b) 988 - Qualifying preferred stock 193 435 Other items (9) (9) Goodwill and certain other intangibles (1,132) (831) - -------------------------------------------------------------------------------------------------------------------------------- Total Tier I capital 3,581 3,002 Tier II capital 2,013 1,762 - -------------------------------------------------------------------------------------------------------------------------------- Total qualifying capital $ 5,594 $ 4,764 - -------------------------------------------------------------------------------------------------------------------------------- Risk-adjusted assets: On-balance-sheet $27,666 $27,050 Off-balance-sheet 13,325 11,989 - -------------------------------------------------------------------------------------------------------------------------------- Total risk-adjusted assets $40,991 $39,039 - -------------------------------------------------------------------------------------------------------------------------------- Average assets-leverage capital basis $40,944 $39,923 - -------------------------------------------------------------------------------------------------------------------------------- Tier I capital ratio (c) 8.74% 7.69% Total capital ratio (c) 13.65 12.20 Leverage capital ratio (c) 8.75 7.52 - --------------------------------------------------------------------------------------------------------------------------------
(a) In accordance with regulatory guidelines, $38 million and $23 million of unrealized losses, net of tax, on assets classified as available for sale at March 31, 1997 and 1996, respectively, have been excluded. (b) The amount of trust-preferred securities that qualifies as Tier I capital is subject to the same regulatory limit of 25% of total Tier I capital that is applied to cumulative perpetual preferred stocks. (c) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8% and 3%, respectively, while the ratios required to maintain well-capitalized status are 6%, 10% and 5%, respectively. 23 25 CAPITAL (CONTINUED) - -------------------------------------------------------------------------------- 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 use 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 March 31, 1997. The Corporation intends to maintain the ratios of its banking subsidiaries above the well-capitalized levels. By maintaining ratios above the regulatory well-capitalized guidelines, the Corporation's banking subsidiaries receive the benefit of lower FDIC deposit insurance assessments. The increase in the Corporation's regulatory capital ratios, compared with March 31, 1996, reflects the issuance of $1 billion of trust-preferred securities in December 1996 following the decision by the Federal Reserve that accorded these securities Tier I capital status. The ability to apply Tier I capital treatment, as well as to deduct the expense for income tax purposes, provided the Corporation with a cost-effective way to raise capital for regulatory purposes. The trust-preferred securities are not included as a component of total shareholders' equity on the Corporation's balance sheet. During the third quarter of 1996, the regulatory agencies adopted a proposal to incorporate market risk into the risk-based capital guidelines. This amendment requires any bank or bank holding company whose trading activity is the lesser of 10% or more of its total assets, or $1 billion or greater, to measure its exposure to market risk using its own internal value-at-risk model and to hold capital in support of that exposure. This amendment was effective January 1, 1997, with mandatory compliance by January 1, 1998. The Corporation anticipates that this requirement will have a minimal impact on its risk-based capital ratios. When computing Tier I capital, the Corporation deducts all goodwill and certain other identified intangibles acquired subsequent to February 19, 1992, except mortgage servicing assets and purchased credit card relationships.
- --------------------------------------------------------------------------- MARCH 31, Dec. 31, March 31, (in millions) 1997 1996 1996 - --------------------------------------------------------------------------- Goodwill $1,097 $1,110 $775 - ---------------------------------------------------------------------------
The $322 million increase in goodwill at March 31, 1997, compared with March 31, 1996, resulted from a $296 million increase related to the Mellon US Leasing acquisition and an $84 million increase related to the Mellon First United Leasing acquisition, offset by $61 million of amortization. Based upon the current level and amortization schedule, the annual amortization of goodwill over the next 12 months is expected to be approximately $68 million. The annual amortization of goodwill for the full years 1998 through 2000 is expected to be approximately $68 million and decrease to approximately $65 million in 2001 and $63 million in 2002. The after-tax impact of the annual amortization of goodwill for the full years 1998 through 2000 is expected to be approximately $57 million and decrease to approximately $54 million in 2001 and approximately $52 million in 2002. The levels of goodwill and purchased core deposit intangibles are expected to increase by approximately $350 million following the acquisitions of Buck and 1st Business Corporation. 24 26 CAPITAL (CONTINUED) - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- MARCH 31, Dec. 31, March 31, (in millions) 1997 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Purchased core deposit intangibles $ 82 $ 88 $105 Covenants not to compete 2 6 17 Other identified intangibles 33 34 37 - ---------------------------------------------------------------------------------------------------------------------------------- Total purchased core deposit and other identified intangibles $117 $128 $159 - ----------------------------------------------------------------------------------------------------------------------------------
The decrease in purchased core deposit and other identified intangibles from March 31, 1996, resulted from amortization. Based upon the current level and amortization schedule, the amortization of purchased core deposit and other identified intangibles over the next 12 months will be approximately $27 million. The annual amortization of purchased core deposit and other identified intangibles for the full years 1998 through 2002 is expected to be approximately $26 million, $26 million, $14 million, $8 million and $6 million, respectively. The after-tax impact of the annual amortization of these items for the full years 1998 through 2002 is anticipated to be approximately $17 million, $17 million, $9 million, $5 million and $4 million, respectively.
MARCH 31, Dec. 31, March 31, (in millions) 1997 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Mortgage servicing assets $822 $745 $614 Purchased credit card relationships 27 29 87 - ---------------------------------------------------------------------------------------------------------------------------------- Total mortgage servicing assets and purchased credit card relationships $849 $774 $701 - ----------------------------------------------------------------------------------------------------------------------------------
The Corporation capitalized $96 million and $56 million in the first quarters of 1997 and 1996, respectively, of servicing assets in connection with both mortgage servicing portfolio purchases and loan originations. Mortgage servicing assets are amortized in proportion to estimated net servicing income over the estimated life of the servicing portfolio. Amortization expense totaled $27 million and $25 million in the first quarters of 1997 and 1996, respectively. The estimated fair value of capitalized mortgage servicing assets was $944 million at March 31, 1997. The $60 million decrease in purchased credit card relationships from March 31, 1996, resulted from the AAA credit card sale in November 1996 and amortization. In June 1996, the Financial Accounting Standards Board issued FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FAS No. 125 establishes the criteria for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. FAS No. 125 supersedes several accounting standards including FAS No. 122, "Accounting for Mortgage Servicing Rights." This standard was effective for transactions that occurred after December 31, 1996. Adoption of this statement was immaterial to the Corporation's financial position and results of operations. 25 27 LIQUIDITY AND DIVIDENDS - ------------------------------------------------------------------------------- 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'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 $300 million revolving credit agreement, with more than three years remaining until maturity, and a $25 million backup line of credit to provide support facilities for its commercial paper borrowings and for general corporate purposes. As shown in the Consolidated Statement of Cash Flows, cash and due from banks increased by $69 million during the first quarter of 1997 to $2,915 million at March 31, 1997. The increase reflected $830 million of net cash provided by investing activities and $20 million of net cash provided by operating activities, partially offset by $786 million of net cash used in financing activities. Net cash provided by investing activities principally reflected a decrease in securities available for sale and proceeds from the sale of loan portfolios, partially offset by loan growth. Net cash used in financing activities primarily reflected decreases in customer deposits, partially offset by an increase in short-term borrowings. On February 18, 1997, the Corporation redeemed the $100 million Series J preferred stock at a redemption price of $25 per share plus accrued dividends. Contractual maturities of parent term debt totaled $5 million in the first quarter of 1997 and will total $200 million in the remainder of 1997, all of which is due in December 1997. At March 31, 1997, the Corporation's senior debt and Mellon Bank, N.A.'s subordinated debt were rated "A2" by Moody's and "A" by Standard & Poor's. In the first quarter of 1997, Thomson Bank Watch, Inc. credit rating agency upgraded Mellon Bank Corporation's senior debt and Mellon Bank, N.A.'s subordinated debt to AA-. On April 15, 1997, the Corporation announced a 10% increase in the quarterly common stock dividend to $.66 per common share, on a pre-stock split basis. On a post-stock split basis, the Corporation's quarterly dividend will be $.33 per common share. The increased common dividend is payable May 15, 1997, to shareholders of record at the close of business on April 30, 1997. This is the sixth quarterly common dividend increase that the Corporation has announced in the last three years, resulting in a total common dividend per share increase of 161%. The Corporation paid $77 million in common stock dividends in the first quarter of 1997, compared with $75 million in the prior-year period. In addition, the Corporation paid $6 million in preferred stock dividends during the first quarter of 1997 and recorded $3 million of issue costs, or $.03 per share on a pre-stock split basis, as preferred stock dividends in connection with the redemption of the Series J preferred stock. The Corporation is currently targeting a common dividend payout ratio of approximately 45%. The common dividend payout ratio was 43% in the first quarter of 1997, compared with 44% in the first quarter of 1996. On a tangible earnings per common share basis, the common dividend payout ratio was 38% in the first quarter of 1997 and 40% in the first quarter of 1996. Based upon shares outstanding at March 31, 1997, and the new quarterly common dividend rate of $.66 per share, annualized dividend requirements for the common and preferred stock are expected to be approximately $355 million. The parent Corporation's principal sources of cash are interest and dividends from its subsidiaries. There are, however, certain limitations on the payment of dividends to the parent Corporation by its national bank subsidiaries. For a discussion of these limitations, see note 21 in the Corporation's 1996 Annual Report on Form 10-K. Under the more restrictive limitation, the Corporation's national bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to March 31, 1997, of approximately $410 million, less any dividends declared and plus or 26 28 LIQUIDITY AND DIVIDENDS (CONTINUED) - ------------------------------------------------------------------------------- minus net profits or losses, as defined, between April 1, 1997, and the date of any such dividend declaration. The national bank subsidiaries declared dividends to the parent Corporation of $50 million in the first quarter of 1997, $400 million in 1996 and $501 million in 1995. Dividends paid to the parent Corporation by nonbank subsidiaries totaled $11 million in the first quarter of 1997, $21 million in 1996 and $30 million in 1995. In addition, Mellon Bank, N.A. and The Boston Company returned $200 million and $150 million, respectively, of capital to the parent Corporation in 1996. 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. 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 analyses provide 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 29. 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 may choose to refinance fixed rate loans when 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. Guidelines used by the Corporation for assuming interest rate risk are presented in the "Interest rate sensitivity analysis" section on page 46 of the 1996 Annual Report on Form 10-K. The table below illustrates the simulation analysis of the impact of a 50, 100 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 March 31, 1997, 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 March 31, 1997, levels and remaining at those levels thereafter.
- -------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SIMULATION SENSITIVITY ANALYSIS Movements in interest rates from March 31, 1997 rates - -------------------------------------------------------------------------------------------------------------------------------- Increase Decrease Simulated impact in the next 12 months ------------------------------- ----------------------------- compared with March 31, 1997: +50bp +100bp +200bp -50bp -100bp -200bp ------------------------------- ----------------------------- Net interest revenue increase/(decrease) (.6)% (1.2)% (2.8)% .5% .9% 1.1% Return on common equity increase/(decrease) (15) bp (33) bp (75) bp 14 bp 23 bp 29 bp Earnings per share increase/(decrease) $(.04) $(.09) $(.20) $.04 $.06 $.08 - --------------------------------------------------------------------------------------------------------------------------------
27 29 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- The anticipated impact on net interest revenue under the 50, 100 and 200 basis point increase scenarios and the increase in net interest revenue under the 50, 100 and 200 basis point decrease scenarios are consistent with the Corporation's cumulative liability sensitive gap position at the one-year repricing period as shown in the interest rate sensitivity gap table on page 29. The interest rate sensitivity gap table shows the repricing characteristics of the Corporation's interest-earning assets and supporting funds at March 31, 1997. The data are based on contractual repricing or maturities and, where applicable, management's assumptions as to the estimated repricing characteristics of certain assets and supporting funds. At March 31, 1997, the Corporation had a liability sensitive interest rate risk position at the one-year repricing period. Generally, a liability sensitive gap indicates that rising interest rates could negatively affect net interest revenue, and falling rates could positively affect net interest revenue. Assets and liabilities with similar contractual repricing characteristics, however, may not reprice 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: U.S. government and federal agency securities, municipal securities, mortgage-backed securities, fixed rate wholesale term funding, 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 $3.8 billion, or 8.9% of total assets, at March 31, 1997. 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 $4.0 billion in this cumulative asset-sensitive position. These instruments reduced the cumulative gap at the one-year repricing period to a liability-sensitive amount of $.2 billion, or .6% of total assets. Alternatively, the Corporation could have acquired additional fixed-rate investment securities or other fixed-rate interest-earning assets of $4.0 billion to accomplish this objective. Correspondingly, the Corporation also would have had to acquire a comparable amount of wholesale funds 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. 28 30 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY GAP AT MARCH 31, 1997 Repricing period --------------------------------------------------------- 0-30 31-90 91-180 181-365 Over 1 (dollar amounts in millions) days days days days year Total - ---------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets $ 9,221 $ 9,140 $3,230 $2,192 $10,393 $34,176 Funds supporting interest-earning assets $ 7,415 $ 7,520 $2,360 $2,738 $14,143 $34,176 - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal $ 1,806 $ 1,620 $ 870 $ (546) $(3,750) $ - Off-balance-sheet instruments $(1,625) $(2,275) $ (85) $ (13) $ 3,998 $ - - ---------------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $ 181 $ (655) $ 785 $ (559) $ 248 $ - - ---------------------------------------------------------------------------------------------------------------------------------- Cumulative gap $ 181 $ (474) $ 311 $ (248) $ - $ - - ---------------------------------------------------------------------------------------------------------------------------------- Cumulative gap as a percentage of total assets .4% (1.1)% .7% (.6)% - ----------------------------------------------------------------------------------------------------------------------------------
Note: Repricing periods 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. 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. 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. 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. 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. 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; 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 to accomplish its objectives. 29 31 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- 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. Callable swaps are generic swaps with a call option at the option of the counterparty. The Corporation's off-balance-sheet instruments used to manage its interest rate risk are shown in the table below. Additional information regarding these contracts is presented in note 23 in the Corporation's 1996 Annual Report on Form 10-K.
- ---------------------------------------------------------------------------------------------------------------------------------- MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK Total at March 31, (notional amounts in millions) 1997 1998 1999 2000 2001 2002+ 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Receive fixed/pay floating generic swaps: (a) Notional amount $ 199 $ 22 $ - $ - $ - $ 400 $ 621 Weighted average rate: Receive 6.03% 4.78% - - - 6.32% 6.17% Pay 5.35% 4.72% - - - 5.64% 5.51% Receive fixed/pay floating indexed amortizing swaps: (b) Notional value $ 88 $ 674 $1,638 $ 85 $ 80 $ 492 $3,057 Weighted average rate: Receive 7.03% 5.95% 5.69% 7.14% 7.14% 7.13% 6.10% Pay 5.57% 5.59% 5.54% 5.56% 5.56% 5.56% 5.56% Receive fixed/pay floating callable swaps: (c) Notional value $ - $ - $ - $ - $ - $1,050 $1,050 Weighted average rate: Receive - - - - - 6.88% 6.88% Pay - - - - - 5.51% 5.51% Pay fixed/receive floating generic swaps: (a) Notional amount $102 $ 415 $ 202 $ - $ - $ 15 $ 734 Weighted average rate: Receive 5.68% 5.40% 5.65% - - 5.67% 5.52% Pay 6.28% 6.05% 6.20% - - 6.63% 6.14% Other products (d) $ 80 $ - $ - $ 40 $ 15 $ - $ 135 - ---------------------------------------------------------------------------------------------------------------------------------- Total notional amount $ 469 $1,111 $1,840 $ 125 $ 95 $1,957 $5,597 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Generic swaps' notional amounts and lives are not based on interest rate indices. (b) Amortizing swaps' notional amounts and lives change, based on certain interest rate indices. Generally, as rates fall, the notional amounts decline more rapidly and, as rates increase, notional amounts decline more slowly. (c) Callable swaps notional amounts are not based on interest rate indices. Callable swaps lives are subject to call options in August 1998, November 1998 and February 1999, at the option of the counterparty. If after a specified time period the call options are not exercised, the swaps will remain outstanding until their contractual maturity date. Contractual maturity dates are shown in the table above. (d) Average rates are not meaningful for these products. 30 32 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - ------------------------------------------------------------------------------- The gross notional amount of off-balance-sheet products used to manage the Corporation's interest rate risk was $5.6 billion at March 31, 1997, an increase of $.7 billion from $4.9 billion at December 31, 1996. 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 to assess its impact on the net interest margin. As discussed on page 28, 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 $3.8 billion, before the utilization of these instruments, to a cumulative one-year liability-sensitive position of $.2 billion at March 31, 1997. The following table presents the gross notional amounts of off-balance-sheet instruments used to manage interest rate risk, identified by the underlying rate-sensitive instruments.
- ----------------------------------------------------------------------------------- March 31, (in millions) 1997 1996 - ----------------------------------------------------------------------------------- Instruments associated with deposits $3,506 $4,341 Instruments associated with other liabilities 421 420 Instruments associated with loans 1,670 819 - ----------------------------------------------------------------------------------- Total notional amount $5,597 $5,580 - -----------------------------------------------------------------------------------
The Corporation entered into these off-balance-sheet instruments to reduce 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 revenue of $6 million and $5 million in the first quarter of 1997 and 1996, respectively. In response to tactical asset/liability management considerations, the Corporation terminated $200 million of pay fixed-rate generic interest rate swaps in the first quarter of 1997. These terminations resulted in a net deferred loss of less than $1 million. This loss will be amortized over the two years remaining on the original hedge. The Corporation amortized $1 million of termination gains into net interest revenue in the first quarter of 1997, resulting from terminations in 1996. The estimated unrealized fair value of the Corporation's interest rate management off-balance-sheet instruments at March 31, 1997, was a negative $118 million, compared with a negative $64 million at December 31, 1996. This increase was consistent with the increase in interest rates during the first quarter of 1997, which had the corresponding effect of increasing 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.
OFF-BALANCE-SHEET INSTRUMENTS USED FOR INTEREST RATE RISK MANAGEMENT PURPOSES (a) - --------------------------------------------------------------------------------------------------- March 31, (notional amounts in millions) 1997 1996 - --------------------------------------------------------------------------------------------------- Interest rate agreements: Interest rate swaps $5,462 $5,221 Options, caps and floors purchased (b) 55 344 Futures contracts 80 8 Forward rate agreements - 7 Other products 99 89 - ---------------------------------------------------------------------------------------------------
(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 may default. Credit risk associated with interest rate agreements was $8 million at March 31, 1997, and March 31, 1996. (b) At March 31, 1997 and 1996, there were no options, caps or floors written. 31 33 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- 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 the first quarter of 1997, the Corporation recorded $23 million of fee revenue from these activities, primarily from foreign exchange contracts entered into on behalf of customers, compared with $20 million in the first quarter of 1996. The total notional values of these contracts were $40 billion at March 31, 1997, and $35 billion at March 31, 1996, and are included on the off-balance-sheet instruments used for trading activities table below. The Corporation has established trading limits and related monitoring procedures to control trading risk. These limits are approved by the Office of The Chairman and reviewed by 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 would be 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 $2 million at March 31, 1997.
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a) - ----------------------------------------------------------------------------------------------------------- March 31, (notional amounts in millions) 1997 1996 - ----------------------------------------------------------------------------------------------------------- Foreign currency contracts: Commitments to purchase $13,303 $12,072 Commitments to sell 13,385 12,116 Foreign currency and other option contracts written 779 313 Foreign currency and other option contracts purchased 863 353 Interest rate agreements: Interest rate swaps 6,338 6,007 Options, caps and floors purchased 2,006 1,705 Options, caps and floors written 2,168 1,555 Futures and forward contracts 1,521 1,334 - -----------------------------------------------------------------------------------------------------------
(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 may default. Credit risk associated with these instruments was $487 million at March 31, 1997, and $368 million at March 31, 1996. 32 34 NONPERFORMING ASSETS - --------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31, (dollar amounts in millions) 1997 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans $ 95 $ 94 $131 $130 $177 Acquired property, net of the OREO reserve 75 80 78 73 73 - ---------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets (a) $170 $174 $209 $203 $250 - ---------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a percentage of total loans .35% .35% .46% .47% .66% Total nonperforming assets as a percentage of total loans and net acquired property .62% .63% .74% .74% .93% - ----------------------------------------------------------------------------------------------------------------------------------
(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 other real estate owned (OREO) acquired in connection with the collection effort on loans. Nonperforming assets do not include the $4 million of segregated assets, net of reserves, 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 the "Nonperforming assets" discussion and in note 1 in the Corporation's 1996 Annual Report on Form 10-K. At March 31, 1997, nonperforming assets totaled $170 million, a decrease of $4 million from December 31, 1996. This decrease reflects a reduction in OREO and nonaccrual commercial and financial loans partially offset by an increase in other consumer credit. Nonperforming assets decreased $80 million, or 32%, compared with March 31, 1996, primarily as a result of the repayment of commercial real estate loans and the resolution of commercial loans made to an engineering/construction company as well as other repayments, credit losses and returns to accrual status. The ratio of nonperforming assets to total loans and net acquired property was .62% at March 31, 1997, the lowest level in the Corporation's recent history, compared with .63% at December 31, 1996, and .93% at March 31, 1996. This ratio, which can be expected to vary over time with changes in the economy, has been lower than 1% for 11 consecutive quarters. 33 35 NONPERFORMING ASSETS (CONTINUED) - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------- NONPERFORMING ASSETS (a) MARCH 31, Dec. 31, Sept. 30, June 30, March 31, (dollar amounts in millions) 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------------------------------------------------------- Domestic nonaccrual loans: Commercial and financial $ 18 $ 21 $ 30 $ 27 $ 69 Commercial real estate 14 16 34 39 52 Consumer credit: Consumer mortgage 52 50 52 58 53 Other consumer credit 5 1 1 1 2 Lease finance assets 6 6 14 4 - - -------------------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 95 94 131 129 176 Restructured commercial real estate loans - - - 1 1 - -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans (b) 95 94 131 130 177 - -------------------------------------------------------------------------------------------------------------------------------- Acquired property: Real estate acquired 80 86 88 84 86 Reserve for real estate acquired (9) (10) (10) (11) (13) - --------------------------------------------------------------------------------------------------------------------------------- Net real estate acquired 71 76 78 73 73 Other assets acquired 4 4 - - - - -------------------------------------------------------------------------------------------------------------------------------- Total acquired property 75 80 78 73 73 - -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $170 $174 $209 $203 $250 - -------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a percentage of respective loan portfolio segments: Domestic commercial and financial loans .17% .21% .28% .24% .62% Domestic commercial real estate loans .87 1.03 2.15 2.48 3.61 Domestic consumer mortgage loans .68 .65 .68 .73 .67 Domestic lease finance assets .27 .23 .62 .38 - Total loans .35 .35 .46 .47 .66 Nonperforming assets as a percentage of total loans and net acquired property .62 .63 .74 .74 .93 - --------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. (b) Includes $17 million, $13 million, $49 million, $51 million and $104 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 FOR THE THREE MONTHS ENDED MARCH 31 (a) Domestic -------------------------------------------------------------- Lease Total Commercial Commercial Consumer Finance ----------------- (in millions) & Financial Real Estate Credit Assets 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans at beginning of period $21 $16 $51 $6 $94 $167 Additions 48 3 13 2 66 53 Payments (b) (42) (1) (3) - (46) (11) Return to accrual status - (3) (2) (2) (7) (11) Credit losses (9) (1) - - (10) (18) Transfers to acquired property - - (2) - (2) (3) - -------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans at March 31 $18 $14 $57 $6 $95 $177 - --------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. (b) Includes interest applied to principal and sales. 34 36 NONPERFORMING ASSETS (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------- ADDITIONAL NONPERFORMING LOAN DATA (a) March 31, (dollar amounts in millions) 1997 1996 - ------------------------------------------------------------------------------------------------- Book balance $ 95 $177 Contractual balance of nonperforming loans 111 224 Book balance as a percentage of contractual balance 86% 79% Year-to-date interest receipts applied to reduce principal $ - $ 1 Year-to-date interest receipts recognized in interest revenue 3 3 - -------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. A loan is considered impaired, as defined by FAS No. 114, "Accounting by Creditors for Impairment of a Loan," 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. Additional information regarding impairment is presented in note 1 in the Corporation's 1996 Annual Report on Form 10-K.
- -------------------------------------------------------------------------------------- IMPAIRED LOANS Three months ended March 31, (dollar amounts in millions) 1997 1996 - -------------------------------------------------------------------------------------- Impaired loans (a) $ 32 $122 Average impaired loans 49 113 Interest revenue recognized on impaired loans (b) 2 3 - --------------------------------------------------------------------------------------
(a) Includes $4 million and $61 million of impaired loans with a related impairment reserve of $1 million and $23 million at March 31, 1997 and March 31, 1996, respectively. (b) All income was recognized using the cash basis method of income recognition. Acquired property totaled $75 million at March 31, 1997, $80 million at December 31, 1996, and $73 million at March 31, 1996.
- -------------------------------------------------------------------------------------------------------------------------------- CHANGE IN ACQUIRED PROPERTY Three months ended March 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- OREO at beginning of period, net of the OREO reserve $76 $69 Foreclosures 3 4 Sales (8) (4) Write-downs, losses, OREO provision and other - 4 - -------------------------------------------------------------------------------------------------------------------------------- OREO at end of period, net of the OREO reserve 71 73 Other acquired assets 4 - - -------------------------------------------------------------------------------------------------------------------------------- Total acquired property, net of the OREO reserve (a) $75 $73 - --------------------------------------------------------------------------------------------------------------------------------
(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 that indicate a deterioration in the fair value of the property. Activity in the Corporation's OREO reserve is presented in the table on the following page. 35 37 NONPERFORMING ASSETS (CONTINUED) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------- CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) Three months ended March 31, (in millions) 1997 1996 - ----------------------------------------------------------------------------------------------------- Beginning balance $10 $18 Write-downs on real estate acquired - (1) Provision (1) (4) - ------------------------------------------------------------------------------------------------------ Ending balance $ 9 $13 - -----------------------------------------------------------------------------------------------------
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. All loans in this table are well secured and in the process of collection or are consumer loans that are not classified as nonaccrual because they are automatically charged off upon reaching 180 days past due.
- ---------------------------------------------------------------------------------------------------------------------------------- PAST-DUE LOANS MARCH 31, Dec. 31, Sept. 30, June 30, March 31, (dollar amounts in millions) 1997 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Consumer: Mortgages $ 37 $ 35 $ 35 $ 35 $ 36 Ratio (a) .48% .45% .45% .44% .46% Credit card (b) 27 29 38 35 24 Ratio (a) 2.25% 2.24% 1.84% 1.64% 1.21% Student - government guaranteed 40 47 50 30 37 Ratio (a) 2.52% 3.01% 3.23% 2.00% 2.53% Other consumer 1 2 1 1 1 Ratio (a) .13% .18% .13% .13% .13% - ---------------------------------------------------------------------------------------------------------------------------------- Total consumer 105 113 124 101 98 Ratio (a) .91% .97% 1.00% .80% .79% - ---------------------------------------------------------------------------------------------------------------------------------- Commercial (c) 12 10 8 7 7 - -------------------------------------------------------------------------------------------------------------------------------- Total past-due loans $117 $123 $132 $108 $ 105 - --------------------------------------------------------------------------------------------------------------------------------
(a) 90 days past due as a percentage of quarter-end loan balances. (b) Excludes past due CornerStone(SM) credit card loans included in the accelerated resolution portfolio. (c) Includes lease finance assets. 36 38 CONSOLIDATED BALANCE SHEET Mellon Bank Corporation (and its subsidiaries) - --------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31, (dollar amounts in millions) 1997 1996 1996 - -------------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 2,915 $ 2,846 $ 2,749 Interest-bearing deposits with banks 614 419 623 Federal funds sold and securities under resale agreements 197 460 757 Other money market investments 48 113 155 Trading account securities 110 84 168 Securities available for sale 3,376 4,111 3,164 Investment securities (approximate fair value of $2,274, $2,365 and $2,608) 2,306 2,375 2,628 Loans, net of unearned discount of $50, $57 and $57 27,525 27,393 26,857 Reserve for credit losses (518) (525) (468) --------- ---------- ------- Net loans 27,007 26,868 26,389 Customers' acceptance liability 265 238 232 Premises and equipment 572 569 555 Goodwill and other intangibles 1,214 1,238 934 Mortgage servicing assets and purchased credit card relationships 849 774 701 Acquired property, net of reserves of $9, $10 and $13 75 80 73 Other assets 2,520 2,421 2,454 ---------------------------------------------------------------------------------------------------------------- Total assets $42,068 $42,596 $41,582 - -------------------------------------------------------------------------------------------------------------------------------- Liabilities Noninterest-bearing deposits in domestic offices $ 8,371 $ 8,692 $ 7,978 Interest-bearing deposits in domestic offices 18,887 19,965 18,594 Interest-bearing deposits in foreign offices 2,678 2,717 3,326 ---------------------------------------------------------------------------------------------------------------- Total deposits 29,936 31,374 29,898 Federal funds purchased and securities under repurchase agreements 1,368 742 1,865 U.S. Treasury tax and loan demand notes 730 474 321 Term federal funds purchased 580 481 643 Commercial paper 50 122 187 Short-term bank notes 35 135 788 Other funds borrowed 367 293 359 Acceptances outstanding 265 238 232 Other liabilities 1,539 1,483 1,498 Notes and debentures (with original maturities over one year) 2,512 2,518 1,972 ---------------------------------------------------------------------------------------------------------------- Total liabilities 37,382 37,860 37,763 - -------------------------------------------------------------------------------------------------------------------------------- Trust- Guaranteed preferred beneficial interests preferred in Corporation's junior subordinated securities deferrable interest debentures 990 990 - - -------------------------------------------------------------------------------------------------------------------------------- Shareholders' Preferred stock 193 290 435 equity (a) Common shareholders' equity: Common stock - $.50 par value Authorized - 200,000,000 shares Issued - 147,165,480 shares 74 74 74 Additional paid-in capital 1,875 1,866 1,854 Retained earnings 2,569 2,480 2,207 Net unrealized loss on assets available for sale, net of tax (38) (1) (23) Treasury stock of 18,334,060; 18,518,290; and 14,722,287 shares, at cost (977) (963) (728) ----------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 3,503 3,456 3,384 ---------------------------------------------------------------------------------------------------------------- Total shareholders' equity 3,696 3,746 3,819 ---------------------------------------------------------------------------------------------------------------- Total liabilities, trust-preferred securities and shareholders' equity $42,068 $42,596 $41,582 ----------------------------------------------------------------------------------------------------------------
(a) Shareholders' equity at March 31, 1997, does not reflect the two-for-one stock split payable on June 2, 1997. See accompanying Notes to Financial Statements. 37 39 CONSOLIDATED INCOME STATEMENT Mellon Bank Corporation (and its subsidiaries) - --------------------------------------------------------------------------------
--------- MARCH 31, (in millions, except per share amounts) 1997 - -------------------------------------------------------------------------------------------------------------------------------- Interest revenue Interest and fees on loans (loan fees of $17, $24, $24, $24 and $24) $553 Interest-bearing deposits with banks 7 Federal funds sold and securities under resale agreements 5 Other money market investments 1 Trading account securities 2 Securities 99 ------------------------------------------------------------------------------------------------------------ Total interest revenue 667 - -------------------------------------------------------------------------------------------------------------------------------- Interest expense Deposits in domestic offices 181 Deposits in foreign offices 34 Federal funds purchased and securities under repurchase agreements 18 Other short-term borrowings 20 Notes and debentures 44 ------------------------------------------------------------------------------------------------------------ Total interest expense 297 - -------------------------------------------------------------------------------------------------------------------------------- Net interest Net interest revenue 370 revenue Provision for credit losses 25 ------------------------------------------------------------------------------------------------------------ Net interest revenue after provision for losses 345 - -------------------------------------------------------------------------------------------------------------------------------- Noninterest Trust and investment management fees 266 revenue Cash management and deposit transaction charges 56 Mortgage servicing fees 51 Foreign currency and securities trading 25 Credit card fees 24 Information services fees 13 Gain on sale of credit card portfolio - Other income 101 ------------------------------------------------------------------------------------------------------------ Total fee revenue 536 Gains on sales of securities - ------------------------------------------------------------------------------------------------------------ Total noninterest revenue 536 - -------------------------------------------------------------------------------------------------------------------------------- Operating Staff expense 268 expense Net occupancy expense 52 Professional, legal and other purchased services 46 Business development 37 Equipment expense 36 Amortization of mortgage servicing assets and purchased credit card relationships 28 Amortization of goodwill and other intangible assets 27 Communications expense 26 Other expense 45 Trust-preferred securities expense 20 Net revenue from acquired property (3) ------------------------------------------------------------------------------------------------------------- Total operating expense 582 - -------------------------------------------------------------------------------------------------------------------------------- Income Income before income taxes 299 Provision for income taxes 108 ------------------------------------------------------------------------------------------------------------ Net income 191 Dividends on preferred stock 9 ------------------------------------------------------------------------------------------------------------ Net income applicable to common stock $182 - -------------------------------------------------------------------------------------------------------------------------------- Per common Primary net income: share Pre-stock split $1.38 Post-stock split (a) .69 Fully diluted net income: Pre-stock split $1.38 Post-stock split (a) .69 ------------------------------------------------------------------------------------------------------------
(a) Per common share amounts have been restated to reflect the two-for-one common stock split payable June 2, 1997. See accompanying Notes to Financial Statements. 38 40
- -------------------------------------------------------------------------------------------------------------------------------- Three months ended - -------------------------------------------------------------------------------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, 1996 1996 1996 1996 - -------------------------------------------------------------------------------------------------------------------------------- $579 $558 $550 $566 8 9 10 9 7 10 7 6 1 3 1 2 1 2 2 2 103 108 107 88 - -------------------------------------------------------------------------------------------------------------------------------- 699 690 677 673 - -------------------------------------------------------------------------------------------------------------------------------- 197 180 165 167 43 49 51 51 20 21 26 27 24 31 29 37 44 37 34 28 - -------------------------------------------------------------------------------------------------------------------------------- 328 318 305 310 - -------------------------------------------------------------------------------------------------------------------------------- 371 372 372 363 80 25 25 25 - -------------------------------------------------------------------------------------------------------------------------------- 291 347 347 338 - -------------------------------------------------------------------------------------------------------------------------------- 259 246 248 241 56 54 52 49 49 46 44 41 19 20 20 21 28 29 30 33 16 14 11 9 57 - - - 82 67 69 109 - -------------------------------------------------------------------------------------------------------------------------------- 566 476 474 503 3 - - 1 - -------------------------------------------------------------------------------------------------------------------------------- 569 476 474 504 - -------------------------------------------------------------------------------------------------------------------------------- 267 256 255 277 49 50 50 56 50 48 50 47 34 35 35 33 39 35 36 35 25 27 27 28 27 24 24 25 25 24 24 23 43 38 40 44 3 - - - (3) (1) (1) (8) - --------------------------------------------------------------------------------------------------------------------------------- 559 536 540 560 - -------------------------------------------------------------------------------------------------------------------------------- 301 287 281 282 107 106 102 103 - -------------------------------------------------------------------------------------------------------------------------------- 194 181 179 179 15 9 10 10 - -------------------------------------------------------------------------------------------------------------------------------- $179 $172 $169 $169 - -------------------------------------------------------------------------------------------------------------------------------- $1.36 $1.31 $1.26 $1.24 .68 .66 .63 .62 $1.34 $1.31 $1.26 $1.24 .67 .66 .63 .62 - --------------------------------------------------------------------------------------------------------------------------------
39 41 CONSOLIDATED STATEMENT OF CASH FLOWS MELLON BANK CORPORATION (and its subsidiaries) - -------------------------------------------------------------------------------
Three months ended March 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net income $191 $179 OPERATING ACTIVITIES Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of goodwill and other intangible assets 27 25 Amortization of mortgage servicing assets and purchased credit card relationships 28 28 Depreciation and other amortization 26 25 Deferred income tax expense 21 10 Provision for credit losses 25 25 Provision for real estate acquired and other losses - (4) Net gains on dispositions of acquired property (3) (3) Net decrease in accrued interest receivable 3 2 Net increase in trading account securities (24) (104) Net (decrease) increase in accrued interest payable, net of amounts prepaid (14) 3 Net increase in residential mortgages held for sale (85) (34) Net decrease in other operating activities (175) (200) ---------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 20 (48) - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net increase in term deposits and other money INVESTING ACTIVITIES market investments (130) (143) Net decrease (increase) in federal funds sold and securities under resale agreements 263 (532) Funds invested in securities available for sale (2,340) (626) Proceeds from sales of securities available for sale 909 241 Proceeds from maturities of securities available for sale 2,126 181 Funds invested in investment securities (3) (204) Proceeds from maturities of investment securities 72 94 Net decrease (increase) in credit card receivables 68 (76) Home equity lines of credit securitized - 650 Net principal disbursed on loans to customers (535) (129) Loan portfolio purchases (4) (53) Proceeds from the sales of loan portfolios 404 442 Purchases of premises and equipment (31) (28) Proceeds from sales of acquired property 11 7 Net decrease (increase) in other investing activities 20 (24) ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 830 (200) - ---------------------------------------------------------------------------------------------------------------------------------
(continued) 40 42 CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) MELLON BANK CORPORATION (and its subsidiaries) - --------------------------------------------------------------------------------
Three months ended March 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net increase in transaction and savings deposits 603 1,512 FINANCING ACTIVITIES Net decrease in customer term deposits (2,041) (875) Net increase in federal funds purchased and securities under repurchase agreements 626 274 Net decrease in short-term bank notes (100) (269) Net increase (decrease) in term federal funds purchased 99 (262) Net increase in U.S. Treasury tax and loan demand notes 256 31 Net decrease in commercial paper (72) (97) Repurchase and repayments of longer-term debt (6) (20) Net proceeds from issuance of longer-term debt - 549 Proceeds from issuance of common stock 21 14 Dividends paid on common and preferred stock (87) (85) Repurchase of common stock for employee benefit purposes - (51) Repurchase of common stock-other (62) (238) Redemption of preferred stock (97) - Net increase in other financing activities 74 169 ----------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (786) 652 Effect of foreign currency exchange rates 5 3 - -------------------------------------------------------------------------------------------------------------------------------- CHANGE IN CASH AND Net increase in cash and due from banks 69 407 DUE FROM BANKS Cash and due from banks at beginning of period 2,846 2,342 ----------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $2,915 $2,749 ----------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Interest paid $ 311 $ 307 DISCLOSURES Net income taxes paid 25 9 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Mellon Bank Corporation (and its subsidiaries) - --------------------------------------------------------------------------------
Three months ended March 31, (dollar amounts in millions, except per share amounts) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Balance at beginning of period $3,746 $4,025 Net income 191 179 Dividends on common stock at $.60 per share in 1997 and $.55 per share in 1996 (77) (75) Dividends on preferred stock: Series I - (4) Series J (5) (2) Series K (4) (4) Common stock issued under dividend reinvestment and common stock purchase plan 5 4 Series J preferred stock redemption (97) - Exercise of stock options 30 22 Repurchase of common stock for employee benefit purposes and the dividend reinvestment and common stock purchase plan - (51) Repurchase of common stock-other (62) (238) Net unrealized loss on assets available for sale, net of tax (37) (41) Other 6 4 ----------------------------------------------------------------------------------------------------- Balance at end of period $3,696 $3,819 -----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 41 43 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1 -- Basis of presentation The unaudited consolidated financial statements of the Corporation are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements should be read in conjunction with the Corporation's 1996 Annual Report on Form 10-K. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods have been included. Note 2 -- Adoption of Financial Accounting Standards On January 1, 1997, FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," became effective. FAS No. 125 establishes the criteria for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. FAS No. 125 supersedes several accounting standards including FAS No. 122, "Accounting for Mortgage Servicing Rights." The adoption of FAS No. 125 was immaterial to the Corporation's financial position and results of operations. In February 1997, the Financial Accounting Standards Board issued FAS No. 128, "Earnings per Share." This statement simplifies the computation of earnings per share (EPS) and makes the U.S. standard for computing EPS more compatible with the EPS standards of other countries. The Corporation currently presents EPS as computed under APB Opinion No. 15. Opinion No. 15 requires entities with complex capital structures to present both primary and fully diluted EPS. Primary EPS is based on common shares outstanding and securities that are common stock equivalents. Fully diluted EPS is based on common shares outstanding and all potential issuances of common stock that would reduce EPS. FAS No. 128 supersedes Opinion No. 15 and requires that basic EPS and diluted EPS be presented. Basic EPS will be based on only the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted EPS will be essentially the same under both FAS No. 128 and Opinion No. 15, with some minor computational differences. Under FAS No. 128, basic and diluted earnings per share would have been $1.41 and $1.38, respectively, for the period ended March 31, 1997, and $1.26 and $1.24, respectively, for the period ended March 31, 1996. This statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. In February 1997, the Financial Accounting Standards Board issued FAS No. 129, "Disclosure of Information about Capital Structure." FAS No. 129 summarizes previously issued disclosure guidance contained within APB Opinions No. 10 and 15, as well as FAS No. 47. There will be no changes to the Corporation's disclosures pursuant to the adoption of FAS No. 129. This statement is effective for financial statements for periods ending after December 15, 1997. Note 3 -- 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 resulting risks are limited by entering into generally matching or offsetting positions. The Corporation also enters into positions in interest rate, foreign exchange and debt instruments based upon expectations of future market conditions. 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 on the following page. 42 44 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Note 3 -- Foreign currency and securities trading revenue (continued)
- ---------------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, (in millions) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Foreign exchange contracts $22 $19 Debt instruments 2 1 Interest rate contracts 1 - Futures contracts - 1 - ---------------------------------------------------------------------------------------------------------------------------------- Total foreign currency and securities trading revenue (a) $25 $21 - ----------------------------------------------------------------------------------------------------------------------------------
(a) The Corporation recognized an unrealized loss of less than $1 million at March 31, 1997, and March 31, 1996, related to securities held in the trading portfolio. Note 4 -- 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.
- ---------------------------------------------------------------------------------------------------------------------------------- Three months ended March 31, (in millions) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Net transfers to real estate acquired $3 $ 4 Net transfers to segregated assets - 4 - ----------------------------------------------------------------------------------------------------------------------------------
Note 5 -- Securities SECURITIES AVAILABLE FOR SALE
MARCH 31, 1997 March 31, 1996 --------------------------------------------- ------------------------------------------ AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair in millions) COST GAINS LOSSES VALUE cost Gains Losses value - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 166 $ - $ - $ 166 $ 197 $ - $ - $ 197 U.S. agency mortgage-backed 2,336 6 50 2,292 1,908 12 29 1,891 Other U.S. agency 850 1 2 849 937 1 - 938 - ---------------------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury and agency securities 3,352 7 52 3,307 3,042 13 29 3,026 Obligations of states and political subdivisions 51 - - 51 61 1 - 62 Other mortgage-backed 4 - - 4 6 - - 6 Other securities 14 - - 14 62 9 1 70 - ---------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $3,421 $7 $52 $3,376 $3,171 $23 $30 $3,164 - ----------------------------------------------------------------------------------------------------------------------------------
Note: There were no gross realized gains in the first quarter of 1997. Gross realized gains were $1 million in the first quarter of 1996. There were no gross realized losses in the first quarter of 1997 or 1996. Proceeds from the sale of securities available for sale totaled $909 million and $241 million in the first quarter of 1997 and 1996, respectively. 43 45 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Note 5 -- Securities (continued) INVESTMENT SECURITIES - --------------------------------------------------------------------------------
MARCH 31, 1997 March 31, 1996 --------------------------------------------- ------------------------------------------ AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair (in millions) COST GAINS LOSSES VALUE cost Gains Losses value - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 33 $1 $ 2 $ 32 $ 36 $1 $ - $ 37 U.S. agency mortgage-backed 2,196 4 35 2,165 2,496 4 26 2,474 - ---------------------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury and agency securities 2,229 5 37 2,197 2,532 5 26 2,511 Other mortgage-backed 27 - - 27 35 1 - 36 Other securities 50 - - 50 61 - - 61 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities $2,306 $5 $37 $2,274 $2,628 $6 $26 $2,608 - ----------------------------------------------------------------------------------------------------------------------------------
Note 6 -- Other assets - --------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31, (in millions) 1997 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Prepaid expense: Pension $ 317 $ 307 $ 281 Other 67 67 66 Interest receivable 232 235 242 Accounts receivable 227 283 248 Receivables related to off-balance-sheet instruments 475 329 364 Assets held for accelerated resolution 19 30 65 Segregated assets, net of reserve (a) 4 10 25 Other 1,179 1,160 1,163 - ---------------------------------------------------------------------------------------------------------------------------------- Total other assets $2,520 $2,421 $2,454 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Additional information regarding segregated assets is presented in note 8 in the Corporation's 1996 Annual Report on Form 10-K. Note 7 -- Preferred stock The following table summarizes the Corporation's preferred stock outstanding. Each series of preferred stock has a par value of $1.00 per share. The Corporation has authorized 50,000,000 shares of preferred stock. On February 18, 1997, the Series J preferred stock was redeemed at a redemption price of $25 per share plus accrued dividends. A detailed description of the Corporation's outstanding preferred stock is provided in note 14 in the Corporation's 1996 Annual Report on Form 10-K.
- ---------------------------------------------------------------------------------------------------------------------------------- Balances at Liquidation ----------------------------------- (dollar amounts in millions, preference Shares Shares MARCH 31, Dec. 31, March 31, except per share amounts) per share authorized issued 1997 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- 8.20% preferred stock (Series K) $25.00 8,000,000 8,000,000 $193 $193 $193 8.50% preferred stock (Series J) 25.00 - - - 97 97 9.60% preferred stock (Series I) 25.00 - - - - 145 - ---------------------------------------------------------------------------------------------------------------------------------- Total preferred stock $193 $290 $435 - ----------------------------------------------------------------------------------------------------------------------------------
44 46 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- Note 8 -- Legal proceedings A discussion of legal actions and proceedings against the Corporation and its subsidiaries is presented in Part II, Item 1, of this Form 10-Q. Note 9 -- Computation of primary and fully diluted net income per common share (a)
- ---------------------------------------------------------------------------------------------------------------------------------- Three months ended (dollar amounts in millions, except per March 31, share amounts; common shares in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- PRIMARY NET INCOME PER COMMON SHARE Net income applicable to common stock $182 $169 - ---------------------------------------------------------------------------------------------------------------------------------- Stock and stock equivalents (average shares): Common shares outstanding 129,005 134,670 Stock options 2,515 1,836 - ---------------------------------------------------------------------------------------------------------------------------------- Total stock and stock equivalents 131,520 136,506 - ---------------------------------------------------------------------------------------------------------------------------------- Primary net income per common share (b) $1.38 $1.24 - ---------------------------------------------------------------------------------------------------------------------------------- FULLY DILUTED NET INCOME PER COMMON SHARE Net income applicable to common stock (c) $182 $169 - ---------------------------------------------------------------------------------------------------------------------------------- Stock, stock equivalents and potentially dilutive items (average shares): Common shares outstanding 129,005 134,670 Stock options 2,515 1,941 Common shares issuable upon conversion of 7 1/4% Convertible Subordinated Capital Notes 82 110 - ---------------------------------------------------------------------------------------------------------------------------------- Total 131,602 136,721 - ---------------------------------------------------------------------------------------------------------------------------------- Fully diluted net income per common share (b) $1.38 $1.24 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Amounts have not been restated to reflect the two-for-one common stock split payable June 2, 1997. (b) Calculated based on unrounded numbers. (c) The after-tax benefit of interest expense on assumed conversion of the 7 1/4% Convertible Subordinated Capital Notes was less than $1 million for all periods shown. 45 47
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES - ----------------------------------------------------------------------------------------------------------------------------------- --------------------- MARCH 31, 1997 AVERAGE AVERAGE (dollar amounts in millions) BALANCE YIELDS/RATES - ----------------------------------------------------------------------------------------------------------------------------------- Assets Interest-earning assets: Interest-bearing deposits with banks $ 562 5.09% Federal funds sold and securities under resale agreements 407 5.34 Other money market investments 63 4.00 Trading account securities 161 5.58 Securities: U.S. Treasury and agency securities (a) 5,855 6.72 Obligations of states and political subdivisions (a) 51 7.93 Other (a) 113 6.36 Loans, net of unearned discount (a) 27,403 8.21 ------- Total interest-earning assets 34,615 7.85 Cash and due from banks 2,674 Premises and equipment 573 Customers' acceptance liability 260 Net acquired property 75 Other assets (a) 4,513 Reserve for credit losses (526) ----------------------------------------------------------------------------------------------------------------- Total assets $42,184 - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities, Interest-bearing liabilities: trust-preferred Deposits in domestic offices: securities and Demand $ 227 1.42% shareholders' Money market and other savings accounts 10,209 2.77 equity Retail savings certificates 6,723 4.88 Other time deposits 2,223 5.41 Deposits in foreign offices 2,814 4.83 ------- Total interest-bearing deposits 22,196 3.92 Federal funds purchased and securities under repurchase agreements 1,417 5.16 Short-term bank notes 76 5.61 Term federal funds purchased 471 5.46 U.S. Treasury tax and loan demand notes 408 5.11 Commercial paper 82 5.28 Other funds borrowed 318 8.30 Notes and debentures (with original maturities over one year) 2,517 7.10 ------- Total interest-bearing liabilities 27,485 4.38 Total noninterest-bearing deposits 8,084 Acceptances outstanding 260 Other liabilities (a) 1,632 ----------------------------------------------------------------------------------------------------------------- Total liabilities 37,461 ----------------------------------------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 990 ----------------------------------------------------------------------------------------------------------------- Shareholders' equity (a) 3,733 ----------------------------------------------------------------------------------------------------------------- Total liabilities, trust-preferred securities and shareholders' equity $42,184 - ----------------------------------------------------------------------------------------------------------------------------------- Rates Yield on total interest-earning assets 7.85% Cost of funds supporting interest-earning assets 3.48 ----------------------------------------------------------------------------------------------------------------- Net interest margin: Taxable equivalent basis 4.37% Without taxable equivalent increments 4.34 -----------------------------------------------------------------------------------------------------------------
(a) Amounts and yields exclude adjustments to fair value required by FAS No. 115. Note: Average rates are annualized and calculated on a taxable equivalent basis, at tax rates 46 48
- --------------------------------------------------------------------------------------------------------------------------------- Three months ended - --------------------------------------------------------------------------------------------------------------------------------- Dec. 31, 1996 Sept. 30, 1996 June 30, 1996 March 31, 1996 Average Average Average Average Average Average Average Average balance yields/rates balance yields/rates balance yields/rates balance yields/rates - --------------------------------------------------------------------------------------------------------------------------------- $ 609 5.53% $ 646 5.28% $ 765 5.11% $ 693 5.36% 517 5.32 762 5.42 490 5.52 473 5.40 146 3.19 165 6.88 132 4.65 124 5.00 96 6.19 169 4.65 181 6.05 138 5.17 6,033 6.50 6,406 6.52 6,478 6.48 5,074 6.68 22 8.80 23 8.85 48 8.61 62 8.24 141 12.29 143 7.18 157 5.74 171 6.02 27,907 8.28 27,190 8.20 26,819 8.27 27,078 8.44 ------- ------- ------- ------- 35,471 7.88 35,504 7.75 35,070 7.81 33,813 8.03 2,721 2,852 2,802 2,755 566 557 561 556 231 260 271 245 77 74 75 68 4,048 3,714 3,817 3,880 (476) (465) (469) (477) - --------------------------------------------------------------------------------------------------------------------------------- $42,638 $42,496 $42,127 $40,840 - --------------------------------------------------------------------------------------------------------------------------------- $ 226 2.20% $ 260 1.97% $ 1,241 1.60% $ 1,608 1.87% 10,190 2.75 10,252 2.70 9,746 2.83 9,546 3.01 6,716 4.89 6,575 4.81 6,413 4.83 6,408 4.97 3,188 5.36 2,211 5.38 1,091 5.35 553 6.03 3,365 5.05 3,786 5.09 4,038 5.12 3,878 5.29 ------- ------- ------- ------- 23,685 4.03 23,084 3.94 22,529 3.86 21,993 3.98 1,452 5.36 1,619 5.18 1,959 5.31 2,035 5.42 197 5.57 417 5.79 439 5.93 961 5.87 668 5.25 744 5.80 655 5.43 632 5.82 220 5.20 352 5.14 269 5.14 303 5.21 180 5.42 214 5.42 227 5.33 249 5.51 289 10.25 274 9.37 293 9.61 259 10.37 2,519 7.01 2,102 7.02 1,971 7.03 1,554 7.14 ------- ------- ------- ------- 29,210 4.47 28,806 4.39 28,342 4.34 27,986 4.45 7,884 8,458 8,420 7,281 231 259 271 245 1,362 1,176 1,301 1,442 - --------------------------------------------------------------------------------------------------------------------------------- 38,687 38,699 38,334 36,954 - --------------------------------------------------------------------------------------------------------------------------------- 129 - - - - --------------------------------------------------------------------------------------------------------------------------------- 3,822 3,797 3,793 3,886 - --------------------------------------------------------------------------------------------------------------------------------- $42,638 $42,496 $42,127 $40,840 - --------------------------------------------------------------------------------------------------------------------------------- 7.88% 7.75% 7.81% 8.03% 3.68 3.55 3.51 3.68 - --------------------------------------------------------------------------------------------------------------------------------- 4.20% 4.20% 4.30% 4.35% 4.17 4.17 4.27 4.32 - ---------------------------------------------------------------------------------------------------------------------------------
approximating 35%, using dollar amounts in thousands and actual number of days in the periods 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. 47 49 SELECTED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- DEPOSITS
Mellon Bank Corporation (and its subsidiaries) - --------------------------------------------------------------------------------------------------------------------------------- MARCH 31, Dec. 31, Sept. 30, June 30, March 31, (in millions) 1997 1996 1996 1996 1996 - --------------------------------------------------------------------------------------------------------------------------------- Deposits in domestic offices: Interest-bearing: Demand, money market and other savings accounts $10,605 $10,605 $10,414 $10,755 $11,816 Retail savings certificates 6,742 6,660 6,637 6,507 6,353 Other time deposits 1,540 2,700 3,118 1,490 425 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing 18,887 19,965 20,169 18,752 18,594 Noninterest-bearing 8,371 8,692 9,337 8,506 7,978 - --------------------------------------------------------------------------------------------------------------------------------- Total deposits in domestic offices 27,258 28,657 29,506 27,258 26,572 Deposits in foreign offices 2,678 2,717 3,049 4,446 3,326 - --------------------------------------------------------------------------------------------------------------------------------- Total deposits $29,936 $31,374 $32,555 $31,704 $29,898 - ---------------------------------------------------------------------------------------------------------------------------------
PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1. 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 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits 12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (parent Corporation). 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). 27.1 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed. 48 50 PART II - OTHER INFORMATION (CONTINUED) (b) Reports on Form 8-K During the first quarter of 1997, the Corporation filed the following Current Reports on Form 8-K: (1) A report dated January 8, 1997, which included, under Items 5 and 7, the Corporation's press release announcing that all outstanding shares of its 8.50% Series J preferred stock will be redeemed on February 18, 1997, at a redemption price of $25.00, plus accrued and unpaid dividends. (2) A report dated January 17, 1997, which included, under Items 5 and 7, the Corporation's press release regarding fourth quarter and full year 1996 results of operations. (3) A report dated March 17, 1997, which included, under Items 5 and 7, the Corporation's press release announcing the signing of a definitive agreement by which the Corporation will acquire Buck Consultants, Inc. ================================================================================ SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MELLON BANK CORPORATION (Registrant) By: /s/ Steven G. Elliott ------------------------------ Date: May 12, 1997 Steven G. Elliott Vice Chairman, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer of the Registrant) 49 51 CORPORATE INFORMATION - -------------------------------------------------------------------------------- Business Mellon Bank Corporation is a multibank holding company of the incorporated under the laws of Pennsylvania in August 1971 Corporation and registered under the Federal Bank Holding Company Act of 1956, as amended. Its principal direct subsidiaries are Mellon Bank, N.A., The Boston Company, Inc., Mellon Bank (DE) National Association, Mellon Bank (MD) National Association and a number of companies known as Mellon Financial Services Corporation. The Corporation also owns a federal savings bank headquartered in Pennsylvania, Mellon Bank, F.S.B. 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 engage in retail financial services, commercial banking, trust and investment management services, residential real estate loan financing, mortgage servicing, equipment leasing, mutual fund activities and various securities-related activities. The Mellon Financial Services Corporations, through their subsidiaries and joint ventures, 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 Corporation's principal executive office is located at One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA 15258-0001 (Telephone: (412) 234-5000). Exchange Mellon Bank Corporation's common and Series K preferred listing stocks are traded on the New York Stock Exchange. The trading symbols are MEL (common stock) and MEL Pr K. The Transfer Agent and Registrar is ChaseMellon Shareholder Services, L.L.C., P.O. Box 590, Ridgefield Park, NJ 07660-9940. For more information please call 1 800 205-7699. Dividend Subject to approval of the board of directors, dividends payments 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 Reinvestment Plan, registered holders of Mellon Bank Corporation's common and Common stock may purchase additional common shares at the market Stock Pur- value for such shares through reinvestment of common chase Plan dividends and/or optional cash payments. Purchases of shares through optional cash payments are subject to limitations. Plan details are in a Prospectus, which may be obtained from ChaseMellon Shareholder Services, L.L.C. Phone Corporate Communications/ contacts Media Relations (412) 236-1264 Media inquiries Securities Transfer Agent 1 800 205-7699 Questions regarding stock holdings, certificate replacement/transfer, dividends and address changes Dividend Reinvestment Plan 1 800 205-7699 Enrollment/Prospectus for Dividend Reinvestment Publication Requests 1 800 205-7699 Requests for the Annual Report or quarterly information Investor Relations (412) 234-5601 Questions regarding the Corporation's financial performance
Shareholder For a free copy of the Corporation's quarterly earnings news Publications release on Form 8-K, as filed with the Securities and Exchange Commission, please send a written request to the Secretary of the Corporation, 1820 One Mellon Bank Center, Pittsburgh, PA 15258-0001. Quarterly earnings and other news releases also can be obtained by fax by calling Company News on Call at 1 800 758-5804 and entering a six-digit code (552187). Internet Mellon: http://www.mellon.com Dreyfus: http://www.dreyfus.com 50 52 Index to Exhibits Exhibit No. Description ---------- ----------- 12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (parent Corporation). 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). 27.1 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed. 51 EX-12.1 2 MELLON BANK CORP. 1 EXHIBIT 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) - ----------------------------------------------------------------------------------------------------------------------------------- Three months ended March 31, (dollar amounts in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed net income (loss) of subsidiaries $30,038 $93,215 Fixed charges: interest expense, one-third of rental expense net of income from subleases, and amortization of debt issuance costs 24,159 23,495 - ---------------------------------------------------------------------------------------------------------------------------------- Total earnings (as defined) $54,197 $116,710 - ---------------------------------------------------------------------------------------------------------------------------------- Preferred stock dividend requirements (b) $13,418 $ 15,472 - ---------------------------------------------------------------------------------------------------------------------------------- Ratio of earnings (as defined) to fixed charges 2.24 4.97 Ratio of earnings (as defined) to combined fixed charges and preferred stock dividends 1.44 3.00 - ----------------------------------------------------------------------------------------------------------------------------------
(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, and Mellon Capital I and Mellon Capital II, special purpose business trusts formed by the Corporation, that exists solely to issue Capital Securities. Because these ratios exclude from earnings the equity in undistributed net income (loss) of subsidiaries, these ratios vary with the payment of dividends by such subsidiaries. (b) Preferred stock dividend requirements represent the pretax amounts required to cover preferred stock dividends. 52 EX-12.2 3 MELLON BANK CORP. 1 EXHIBIT 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) - ---------------------------------------------------------------------------------------------------------------------------------- Three months ended March 31, (dollar amounts in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 298,990 $281,993 Fixed charges: interest expense (excluding interest on deposits), one-third of rental expense net of income from subleases, and amortization of debt issuance costs 93,442 103,296 - ---------------------------------------------------------------------------------------------------------------------------------- Total earnings (as defined), excluding interest on deposits 392,432 385,289 Interest on deposits 214,716 217,480 - ---------------------------------------------------------------------------------------------------------------------------------- Total earnings (as defined) $607,148 $602,769 - ---------------------------------------------------------------------------------------------------------------------------------- Preferred stock dividend requirements (a) $ 13,418 $ 15,472 - ---------------------------------------------------------------------------------------------------------------------------------- Ratio of earnings (as defined) to fixed charges: Excluding interest on deposits 4.20 3.73 Including interest on deposits 1.97 1.88 Ratio of earnings (as defined) to combined fixed charges and preferred stock dividends: Excluding interest on deposits 3.67 3.24 Including interest on deposits 1.89 1.79 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Preferred stock dividend requirements represent the pretax amounts required to cover preferred stock dividends. 53 EX-27.1 4 MELLON BANK CORP.
9 0000064782 MELLON BANK CORP. 1,000,000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 2,915 614 197 110 3,376 2,306 2,274 27,525 518 42,068 29,936 3,130 1,804 2,512 990 193 74 3,429 42,068 553 99 13 667 215 297 370 25 0 582 299 299 0 0 191 1.38 1.38 4.37 95 117 0 0 525 49 17 518 0 0 0 This tag includes $990 million of guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures.
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