-----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, TgadLwjFFap9rPrphndUWToTFWqoNRu1OF2y+QPPXt05fgf3FUk1LEWhFqw3GuLJ v4xuvM2c66UI+PSOfjcvQA== 0000950128-98-000643.txt : 19980323 0000950128-98-000643.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950128-98-000643 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 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-K SEC ACT: SEC FILE NUMBER: 001-07410 FILM NUMBER: 98569604 BUSINESS ADDRESS: STREET 1: ONE MELLON BANK CTR 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-K 1 MELLON BANK CORPORATION 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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 Identification No.) incorporation or organization) One Mellon Bank Center Pittsburgh, Pennsylvania 15258-0001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code - (412) 234-5000 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $0.50 Par Value New York Stock Exchange 7-1/4% Convertible Subordinated Capital Notes Due 1999 New York Stock Exchange Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 28, 1998, there were 259,743,150 shares outstanding of the registrant's voting common stock, $0.50 par value per share, of which 257,148,040 common shares having a market value of $16,023,537,243 were held by nonaffiliates. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the following parts of this Annual Report. Mellon Bank Corporation 1998 Proxy Statement-Part III Mellon Bank Corporation 1997 Annual Report to Shareholders-Parts I, II and IV 2 The Form 10-K filed with the Securities and Exchange Commission contains the Exhibits listed on the Index to Exhibits beginning on page 23, including the Financial Review and Statements and Notes; Principal Locations and Operating Entities; Directors and Senior Management Committee; and Corporate Information Sections of the Registrant's 1997 Annual Report to Shareholders. For a free copy of the Corporation's 1997 Annual Report to Shareholders, the Proxy Statement for its 1998 Annual Meeting, or a copy of the Corporation's Management Report on Internal Controls, as filed with the appropriate regulatory agencies, please send a written request to the Secretary of the Corporation, 4826 One Mellon Bank Center, Pittsburgh, PA 15258-0001. Cautionary Statement This Annual Report on Form 10-K contains and incorporates by reference statements relating to future results of the Corporation that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, the Year 2000 project, loan loss reserve adequacy, simulation of changes in interest rates and litigation results. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within the Corporation's markets, equity and fixed income market fluctuations, personal and corporate customers' bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological change, changes in law, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties detailed from time to time in the filings of the Corporation with the Securities and Exchange Commission. 3 MELLON BANK CORPORATION Form 10-K Index - -------------------------------------------------------------------------------- PART I
PAGE ---- Item 1. Business Description of Business 3 Supervision and Regulation 5 Competition 8 Employees 8 Statistical Disclosure by Bank Holding Companies 9 Item 2. Properties 14 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 PART III Item 10. Directors and Executive Officers of the Registrant 17 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Related Transactions 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
2 4 PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS Mellon Bank Corporation (the "Corporation") is a multibank holding company incorporated under the laws of Pennsylvania in August 1971 and registered under the Federal Bank Holding Company Act of 1956, as amended. The Corporation provides a comprehensive range of financial products and services in domestic and selected international markets. The Corporation's six banking subsidiaries are located in Pennsylvania, Massachusetts, Delaware, Maryland, New Jersey, California and Florida. Other subsidiaries are located in key business centers throughout the United States and abroad. At December 31, 1997, the Corporation was the twenty-third largest bank holding company in the United States in terms of assets. The Corporation's principal direct subsidiaries are Mellon Bank, N.A. ("Mellon Bank"), The Boston Company, Inc. ("TBC"), Mellon Bank (DE) National Association, Buck Consultants, Inc. ("Buck") and a number of companies known as Mellon Financial Services Corporation. The Dreyfus Corporation ("Dreyfus"), one of the nation's largest mutual fund companies, is a wholly owned subsidiary of Mellon Bank. Buck is a leading global actuarial and human resources consulting firm. 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. Mellon Bank, which has its executive offices in Pittsburgh, Pennsylvania, became a subsidiary of the Corporation in November 1972. With its predecessors, Mellon Bank has been in business since 1869. Mellon Bank is comprised of six operating regions throughout Pennsylvania and southern New Jersey. Dreyfus, headquartered in New York, New York, serves primarily as an investment adviser, manager and administrator of mutual funds. TBC, through Boston Safe Deposit and Trust Company ("BSDT") and other subsidiaries, engages in the business of institutional trust and custody, institutional asset management, private investment management, jumbo mortgage lending and other banking services. TBC is headquartered in Boston, Massachusetts. Buck, headquartered in New York, New York, is a global actuarial and human resources consulting firm. It provides a broad array of services in the areas of defined benefit and defined contribution plans, health and welfare plans, communications and compensation consulting, and outsourcing and administration of employee benefit programs. Mellon Bank (DE) National Association, headquartered in Wilmington, Delaware, serves consumer and small to midsize commercial markets throughout Delaware and provides nationwide cardholder processing services. The Corporation's banking subsidiaries operate 1,183 domestic banking locations. The deposits of the banking subsidiaries are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law. Other subsidiaries of the Corporation provide a broad range of bank-related services -- including equipment leasing, commercial loan financing, stock transfer services, cash management and numerous trust and investment management services. The types of financial products and services offered by the Corporation's subsidiaries are subject to change. For analytical purposes, management has focused the Corporation into four core business sectors: Consumer Fee Services, Consumer Banking, Business Fee Services and Business Banking. Further information regarding the Corporation's core business sectors, as well as certain non-core sectors such as Real Estate Workout, is presented in the Business Sectors section on pages 32 through 35 of the Corporation's 1997 Annual Report to Shareholders, which pages are incorporated herein by reference. A brief discussion of the business sectors is presented on the following pages. There is considerable interrelationship among these sectors. 3 5 DESCRIPTION OF BUSINESS (continued) CONSUMER FEE SERVICES Consumer Fee Services includes private asset management services, retail mutual funds, discount brokerage services and residential mortgage loan origination and servicing. These products and services are offered principally through the private asset management group of Mellon Bank and BSDT, as well as through Dreyfus, the discount brokerage operation of Dreyfus Brokerage Services, Inc. and throughout the Corporation's retail banking network. This sector also includes the mortgage banking operations through which the Corporation originates and services residential mortgages for institutional investors and makes residential loans nationwide. CONSUMER BANKING The Consumer Banking sector includes consumer lending and deposit products, business banking, credit card and jumbo residential mortgage lending. The consumer lending, branch banking and small business banking services primarily are offered through the Corporation's retail banking network which is comprised of 447 retail outlets which includes 290 traditional retail branches, 102 supermarket facilities, 28 downscale/drive-ups, 16 financial centers and 11 specialty stores. The retail banking network also includes 729 ATM's, 6 loan sales offices and a telephone banking center. This network is primarily located in the mid-Atlantic region of the United States, southern Florida and California. This banking network provides a full range of products to individuals including short- and long-term credit facilities, credit cards, mortgages, safe deposit facilities and access to ATM's. Jumbo residential mortgage lending is offered nationally through the private asset management representative offices. BUSINESS FEE SERVICES The Business Fee Services sector serves the institutional markets by providing institutional asset and institutional mutual fund management and administration, institutional trust and custody, securities lending, foreign exchange, cash management, stock transfer, commercial mortgage loan origination and servicing, network services, benefits consulting and administrative services and services for defined contribution plans. The Corporation's subsidiaries provide trust and investment management services while operating under the umbrella name "Mellon Trust"; in addition, the subsidiaries provide institutional mutual fund management through Dreyfus. The Corporation also owns a number of subsidiaries that provide a variety of active and passive equity and fixed income investment management services, including management of international securities. Through Buck, the Corporation offers benefits consulting and administrative services and services for defined contribution plans. Through the Global Cash Management department, the Corporation offers a broad range of cash management services, including remittance processing, collections and disbursements, check processing and electronic services. This sector includes the commercial mortgage origination and servicing operations of the mortgage banking group. The Corporation's subsidiaries also provide services relating primarily to defined contribution employee benefit plans under the umbrella name "Dreyfus Retirement Services." Stock transfer services are provided in the United States through its joint venture operating under the name of ChaseMellon Shareholder Services and in Canada through the CIBC Mellon Trust Company. BUSINESS BANKING Business Banking 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. The Corporation provides lending and other institutional banking services to domestic and selected international markets through its Corporate Banking, Institutional Banking, Capital Markets and Leasing departments. These markets generally include large domestic commercial and industrial customers, U.S. operations of foreign companies, multinational corporations, state and local governments and various financial institutions (including banks, securities broker/dealers, insurance companies, finance companies and mutual funds). The Corporation also offers corporate finance and rate risk management products; syndicates, participates out and sells loans; offers a variety of capital markets products and services, including private placement and money market transactions; and provides equipment leasing, financing and lease 4 6 DESCRIPTION OF BUSINESS (continued) advisory services. The Corporation maintains foreign offices in London, Tokyo, Hong Kong, Toronto, and Grand Cayman, British West Indies. Through these offices, the Corporation conducts trade finance activities, engages in correspondent banking and provides corporate banking and capital markets services. Included in this sector is a nationwide asset-based lending division which provides secured lending, principally through accounts receivable and inventory financing. As part of this sector, Middle Market Banking serves companies with annual sales between $20 million and $500 million. This group also specializes in providing services to segments of coal and government services industries. Real Estate lending consists of the Corporation's commercial real estate lending activities, through which it originates financing for commercial, multi-family and other products. The Corporation provides property and casualty insurance premium financing to small, midsize and large companies in the United States through the AFCO Credit Corporation and in Canada through CAFO. The 1997 Annual Report to Shareholders summarizes principal locations and operating entities on pages 22 and 23, which pages are incorporated herein by reference. Exhibit 21.1 to this Annual Report on Form 10-K presents a list of the subsidiaries of the Corporation as of December 31, 1997. Year 2000 Project For a discussion regarding the Corporation's Year 2000 Project, see page 44 of the Corporation's 1997 Annual Report to Shareholders, which discussion is incorporated herein by reference. SUPERVISION AND REGULATION The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to the supervision of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Generally, the Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries, and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking and a proper incident thereto. Certain of the Corporation's subsidiaries are themselves bank holding companies under the Act. As a result of its Mellon Bank, F.S.B. subsidiary, the Corporation is also regulated under the Home Owners' Loan Act of 1933 as a savings and loan holding company. The Corporation's national banking subsidiaries are subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC"); BSDT is currently subject to supervision, regulation and examination by the Federal Reserve; and Mellon Bank, F.S.B. is subject to supervision, regulation and examination by the Office of Thrift Supervision ("OTS"). Mellon Securities Trust Company, The Dreyfus Trust Company and Mellon Trust of New York are New York trust companies and are supervised by the New York State Department of Banking. Mellon Trust of California is a California trust company and is supervised by the State of California Department of Financial Institutions. Mellon 1st Business Bank is a state non-member bank and is subject to supervision, regulation and examination by the FDIC and the State of California Department of Financial Institutions. The Corporation's nonbank subsidiaries engaged in securities related activities are regulated by the Securities and Exchange Commission (the "SEC"). Dreyfus Investment Services Corporation and Dreyfus Brokerage Services, Inc. conduct brokerage operations, and Mellon Financial Markets, Inc. engages in securities activities permitted to bank holding company subsidiaries under Section 20 of the Glass-Steagall Act. Dreyfus Service Corporation, a subsidiary of Dreyfus, acts as a broker/dealer for the sale of shares of mutual funds, including the Dreyfus family of mutual funds. Dreyfus Brokerage Services, Inc., a subsidiary of Mellon Bank, is a self-clearing deep discount broker providing services to individual investors nationwide. Dreyfus Investment Services Corporation, Mellon Financial Markets, Inc., Dreyfus Service Corporation and Dreyfus Brokerage Services, Inc. are registered broker/dealers and members of the National Association of Securities Dealers, Inc., a securities industry self-regulatory organization. 5 7 SUPERVISION AND REGULATION (continued) Certain subsidiaries of the Corporation are registered investment advisers under the Investment Advisers Act of 1940 and, as such, are supervised by the SEC. They are also subject to various federal and state laws and regulations and to the laws of any countries in which they do business. These laws and regulations are primarily intended to benefit clients and fund shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, the revocation of the registration as an investment adviser, censures and fines. Each investment company (as defined in the Investment Company Act of 1940) which is advised by a subsidiary of the Corporation, including the Dreyfus family of mutual funds, is registered with the SEC, and the shares of most are qualified for sale in all states in the United States and the District of Columbia, except for investment companies that offer products only to residents of a particular state or of a foreign country and except for certain investment companies which are exempt from such registration or qualification. Certain of the Corporation's public finance activities are regulated by the Municipal Securities Rulemaking Board. Mellon Bank and certain of the Corporation's other subsidiaries are registered with the Commodity Futures Trading Commission (the "CFTC") as commodity pool operators or commodity trading advisors and, as such, are subject to CFTC regulation. The Corporation and its subsidiaries are subject to an extensive system of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Corporation's subsidiaries rather than holders of the Corporation's securities. These laws and regulations govern such areas as permissible activities, reserves, loans and investments, and rates of interest that can be charged on loans. The Corporation and its subsidiaries also are subject to general U.S. federal laws and regulations and to the laws and regulations of the states or countries in which they conduct their businesses. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and its subsidiaries. The references are not intended to be complete and are qualified in their entirety by reference to the statutes and regulations. Changes in applicable law or regulation may have a material effect on the business of the Corporation. On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was enacted into Federal law. Under the Interstate Act, commencing on September 29, 1995, bank holding companies are permitted to acquire banks located in any state regardless of the state law in effect at the time. The Interstate Act also provides for the nationwide interstate branching of banks. Under the Interstate Act, both national and state-chartered banks are permitted to merge across state lines (and thereby create interstate branches) commencing June 1, 1997. States were permitted to "opt-out" of the interstate branching authority by taking action prior to the commencement date. States could also "opt-in" early (i.e., prior to June 1, 1997) to the interstate branching provisions. Pennsylvania chose to "opt-in" early, effective July 6, 1995, thereby enabling Pennsylvania banks, including national banks having their main office in Pennsylvania, to merge with out-of-state banks to create interstate branches inside or outside Pennsylvania. In addition, Pennsylvania has permitted de novo branching into and out of Pennsylvania as long as the law of the other state involved is reciprocal in this regard. There are certain restrictions on the ability of the Corporation and certain of its non-bank affiliates to borrow from, and engage in other transactions with, its banking subsidiaries and on the ability of such banking subsidiaries to pay dividends to the Corporation. These restrictions are discussed in note 22 of the Notes to Financial Statements on pages 94 and 95 of the Corporation's 1997 Annual Report to Shareholders. This note is incorporated herein by reference. The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity which, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to the Corporation and the Corporation's non-bank subsidiaries, including Mellon Securities Trust Company, a member of the Federal Reserve System. The OTS has similar authority with respect to Mellon Bank, F.S.B. 6 8 SUPERVISION AND REGULATION (continued) Substantially all of the deposits of the banking subsidiaries of the Corporation are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit insurance assessments to maintain the BIF. The FDIC utilizes a risk-based assessment system which imposes insurance premiums based upon a matrix that takes into account a bank's capital level and supervisory rating. Such premiums now range from 0 cents for each of $100 of domestic deposits for the healthiest institutions to 27 cents for each $100 of domestic deposits for the weakest institutions. In addition, the Deposit Insurance Fund Act of 1996 authorizes the Financing Corporation ("FICO") to impose assessments on BIF assessable deposits in order to service the interest on FICO's bond obligations. The FICO assessment on these deposits is approximately 1.3 cents for each $100 of domestic deposits. The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") contains a "cross-guarantee" provision that could result in any insured depository institution owned by the Corporation being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other depository institution owned by the Corporation. Also, under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each of its banking subsidiaries and to commit resources to support each such bank in circumstances where such bank might not be in a financial position to support itself. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Among other things, federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA identifies the following capital tiers for financial institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Rules adopted by the federal banking agencies under FDICIA provide that an institution is deemed to be: "well capitalized" if the institution has a Total risk-based capital ratio of 10.0% or greater, a Tier I risk-based ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure; "adequately capitalized" if the institution has a Total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the institution is rated composite 1 in its most recent report of examination, subject to appropriate Federal banking agency guidelines), and the institution does not meet the definition of a well capitalized institution; "undercapitalized" if the institution has a Total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is rated composite 1 in its most recent report of examination, subject to appropriate Federal banking agency guidelines) and the institution does not meet the definition of a significantly undercapitalized or critically undercapitalized institution; "significantly undercapitalized" if the institution has a Total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0% and the institution does not meet the definition of a critically undercapitalized institution; and "critically undercapitalized" if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. At December 31, 1997, all of the Corporation's banking subsidiaries were well capitalized based on the ratios and guidelines noted above. A bank's capital category, however, is determined solely for the purpose of applying the prompt corrective action rules and may not constitute an accurate representation of the bank's overall financial condition or prospects. The appropriate Federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution. The statute provides that an institution may be reclassified if the appropriate 7 9 SUPERVISION AND REGULATION (continued) Federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. Legislation enacted in August 1993 provides that depositors and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution in the "liquidation or other resolution" of such an institution by any receiver. During recent years, regulatory guidelines have been adopted, and legislation has been proposed in Congress, to address concerns regarding retail sales by banks of various nondeposit investment products, including mutual funds. Legislative and regulatory attention to these matters is likely to continue, and may intensify, in the future. Although existing statutory and regulatory requirements in this regard have not had a significant effect on the Corporation's business, there can be no assurance that future requirements will not have such an effect. Various other legislative initiatives, including proposals to restructure the banking regulatory system and the separation of banking from certain securities and other commercial activities, are from time to time introduced in Congress. The Corporation cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon its financial condition or operations. COMPETITION The Corporation and its subsidiaries continue to be subject to intense competition in all aspects and areas of their businesses from bank holding companies and banks; other domestic and foreign depository institutions, such as savings and loan associations, savings banks and credit unions; and other service providers, such as finance, mortgage and leasing companies, brokerage firms, credit card companies, benefits consultants, mutual funds, investment banking companies, investment management firms and insurance companies. The Corporation also competes with nonfinancial institutions, including retail stores and manufacturers of consumer products that maintain their own credit programs, as well as governmental agencies that make available loans to certain borrowers. Also, in the Business Fee Services sector, the Corporation competes with a wide range of technologically capable service providers, such as data processing and outsourcing firms. Many of the Corporation's competitors, with the particular exception of thrift institutions, are not subject to regulation as extensive as that described under the "Supervision and Regulation" section and, as a result, they may have a competitive advantage over the Corporation in certain respects. EMPLOYEES The Corporation and its subsidiaries had an average of approximately 27,500 full-time equivalent employees in the fourth quarter of 1997. 8 10 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES Securities Act Industry Guide 3 and the Exchange Act Industry Guide 3 ("Guide 3"), requires that the following statistical disclosures be made in Annual Reports on Form 10-K filed by bank holding companies. I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Information required by this section of Guide 3 is presented in the Rate/Volume Variance Analysis below. Required information is also presented in the Financial Section of the Corporation's 1997 Annual Report to Shareholders in the Consolidated Balance Sheet -- Average Balances and Interest Yields/Rates on pages 36 and 37, and in Net Interest Revenue, on page 35, which is incorporated herein by reference.
RATE/VOLUME VARIANCE ANALYSIS - ------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1997 over (under) 1996 1996 over (under) 1995 Due to change in Net Due to change in Net (in millions) Rate Volume Change Rate Volume Change - ------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in interest revenue from interest-earning assets: Interest-bearing deposits with banks $ (2) $ (8) $(10) $ (6) $ 6 $ - Federal funds sold and securities under resale agreements - - - (2) (2) (4) Other money market investments 1 (2) (1) - 4 4 Trading account securities - 1 1 (3) (8) (11) Securities: U.S. Treasury and agency securities 13 (38) (25) - 87 87 Obligations of states and political subdivisions - - - - (2) (2) Other (1) (3) (4) 1 (3) (2) Loans (includes loan fees) (32) 46 14 (162) (9) (171) - ---------------------------------------------------------------------------------------------------------------------------- Total (21) (4) (25) (172) 73 (99) Increase (decrease) in interest expense on interest-bearing liabilities: Deposits in domestic offices: Demand 1 (12) (11) (2) (20) (22) Money market and other savings accounts (3) 9 6 (39) 42 3 Retail savings certificates 8 32 40 (11) (8) (19) Other time deposits 4 1 5 2 82 84 Deposits in foreign offices (9) (56) (65) (25) (7) (32) Federal funds purchased and securities under repurchase agreements 3 (20) (17) (11) (20) (31) Other short-term borrowings (5) (11) (16) (4) (34) (38) Notes and debentures (with original maturities over one year) (1) 47 46 - 26 26 - ---------------------------------------------------------------------------------------------------------------------------- Total (2) (10) (12) (90) 61 (29) - ---------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest revenue $ (19) $ 6 $(13) $ (82) $ 12 $ (70) - ----------------------------------------------------------------------------------------------------------------------------
Note: Amounts are calculated on a taxable equivalent basis where applicable, at a tax rate approximating 35% and are before the effect of reserve requirements. Changes in interest revenue or interest expense arising from the combination of rate and volume variances are allocated proportionally to rate and volume based on their relative absolute magnitudes. 9 11 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) II. Securities Portfolio A. Carrying values of securities at year-end are as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT SECURITIES December 31, (in millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and agency securities $1,994 $2,292 $2,408 Other securities: Other mortgage-backed 23 29 39 Bonds, notes and debentures 14 16 30 Stock of Federal Reserve Bank 50 37 41 Other 1 1 1 - ---------------------------------------------------------------------------------------------------------------------------------- Total other securities 88 83 111 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities $2,082 $2,375 $2,519 - ---------------------------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE December 31, (in millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and agency securities $2,727 $4,010 $2,769 Obligations of states and political subdivisions 26 49 63 Other securities: Other mortgage-backed 3 4 7 Bonds, notes and debentures 11 12 12 Other - 36 62 - ---------------------------------------------------------------------------------------------------------------------------------- Total other securities 14 52 81 - ---------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $2,767 $4,111 $2,913 - ----------------------------------------------------------------------------------------------------------------------------------
B. Maturity Distribution of Securities Information required by this section of Guide 3 is presented in the Corporation's 1997 Annual Report to Shareholders in note 3 of Notes to Financial Statements on Securities on pages 78 through 80, which note is incorporated herein by reference. 10 12 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) III. Loan Portfolio A. Types of Loans Information required by this section of Guide 3 is included in the Corporate Risk section of the Corporation's 1997 Annual Report to Shareholders on pages 57 through 66, which portions are incorporated herein by reference. B. Maturities and Sensitivities of Loans to Changes in Interest Rates
Maturity distribution of loans at December 31, 1997 - ---------------------------------------------------------------------------------------------------------------- (in millions) Within 1 year (a) 1-5 years Over 5 years Total - ---------------------------------------------------------------------------------------------------------------- Domestic:(b) Commercial and financial $3,258 $5,771 $1,797 $10,826 Commercial real estate 371 750 388 1,509 - ---------------------------------------------------------------------------------------------------------------- Total domestic 3,629 6,521 2,185 12,335 International 964 178 424 1,566 - ---------------------------------------------------------------------------------------------------------------- Total $4,593 $6,699 $2,609 $13,901 - ----------------------------------------------------------------------------------------------------------------
Note: Maturity distributions are based on remaining contractual maturities. (a) Includes demand loans and loans with no stated maturity. (b) Excludes consumer mortgages, credit card, other consumer credit and lease finance assets.
Sensitivity of loans at December 31, 1997, to changes in interest rates - ---------------------------------------------------------------------------------------------------------------------------- Domestic International (in millions) operations (a) operations Total - ---------------------------------------------------------------------------------------------------------------------------- Loans due in one year or less (b) $ 3,629 $ 964 $ 4,593 Loans due after one year: Variable rates 7,775 494 8,269 Fixed rates 931 108 1,039 - ---------------------------------------------------------------------------------------------------------------------------- Total loans $12,335 $1,566 $13,901 - ----------------------------------------------------------------------------------------------------------------------------
Note: Maturity distributions are based on remaining contractual maturities. (a) Excludes consumer mortgages, credit card, other consumer credit and lease finance assets. (b) Includes demand loans and loans with no stated maturity. C. Risk Elements Information required by this section of Guide 3 is included in the Corporate Risk section of the Corporation's 1997 Annual Report to Shareholders on pages 57 through 66, which portions are incorporated herein by reference. IV. Summary of Loan Loss Experience The Corporation employs various estimation techniques in developing the credit loss reserve. Management reviews the specific circumstances of individual loans subject to more than the customary potential for exposure to loss. In establishing the level of the reserve, management also identifies market concentrations, changing business trends, industry risks, and current and anticipated specific and general economic factors that may adversely affect collectibility. Other factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; historical loss experience; lending policies; new products; year 2000 issues; the status and amount of nonperforming and past-due loans and adequacy of collateral. In addition, management assesses volatile factors such as interest rates and global economic conditions that may significantly alter loss potential. The loss reserve methodology also provides for a portion of the reserve to act as an additional buffer against credit quality deterioration or risk of estimation error. Based on this evaluation, management believes that the credit loss reserve is adequate to absorb future losses inherent in the portfolio. 11 13 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) The reserve is not specifically associated with individual loans or portfolio segments. Thus, the reserve is available to absorb credit losses arising from any individual loan or portfolio segment. When losses on specific loans are identified, management charges off the portion deemed uncollectible. In view of the fungible nature of the reserve and management's practice of charging off known losses, the Corporation does not maintain truly specific reserves on any loan. However, management has developed a loan loss reserve methodology designed to provide procedural discipline in assessing the adequacy of the reserve. The allocation of the Corporation's reserve for credit losses presented below is based on this loan loss reserve methodology.
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, (in millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Domestic reserve: Commercial and financial $162 $117 $169 $195 $182 Real estate: Commercial 88 98 92 157 189 Consumer 51 58 61 75 91 Consumer credit 132 198 135 141 102 Lease finance assets 30 43 6 17 15 - ------------------------------------------------------------------------------------------------------------------------------------ Total domestic reserve 463 514 463 585 579 International reserve 12 11 8 22 21 - ------------------------------------------------------------------------------------------------------------------------------------ Total reserve $475 $525 $471 $607 $600 - ------------------------------------------------------------------------------------------------------------------------------------
Further information on the Corporation's credit policies, the factors that influenced management's judgment in determining the level of the reserve for credit losses, and the analyses of the credit loss reserve for the years 1993-1997 are set forth in the Financial Section of the Corporation's 1997 Annual Report to Shareholders in the Credit Risk section on pages 57 and 58, the Reserve for Credit Losses and Review of Net Credit Losses section on pages 65 and 66, in note 1 of Notes to Financial Statements under Reserve for Credit Losses on page 75 and in note 5 on page 81, which portions are incorporated herein by reference. For each category above, the ratio of loans to consolidated total loans is as follows:
- ------------------------------------------------------------------------------------------------------------------------------- December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Domestic loans: Commercial and financial 37.1% 37.2% 39.6% 37.5% 37.2% Real estate: Commercial 5.2 5.6 5.5 6.1 7.0 Consumer 29.1 28.4 32.4 32.5 33.4 Consumer credit 14.1 14.4 16.4 18.1 15.6 Lease finance assets 9.1 9.2 3.0 3.0 2.9 - ------------------------------------------------------------------------------------------------------------------------------- Total domestic loans 94.6 94.8 96.9 97.2 96.1 International loans 5.4 5.2 3.1 2.8 3.9 - ------------------------------------------------------------------------------------------------------------------------------- Total loans 100.0% 100.0% 100.0% 100.0% 100.0% - -------------------------------------------------------------------------------------------------------------------------------
12 14 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) V. Deposits
------------------------------------------------------------------------------------------------------------------ Maturity distribution of domestic time deposits at December 31, 1997 Within 4-6 7-12 Over (in millions) 3 months months months 1 year Total ------------------------------------------------------------------------------------------------------------------ Time certificates of deposit in denominations of $100,000 or greater $1,229 $ 677 $ 296 $ 276 $2,478 Time certificates of deposit in denominations of less than $100,000 1,345 1,322 1,847 1,688 6,202 ------------------------------------------------------------------------------------------------------------------ Total time certificates of deposit 2,574 1,999 2,143 1,964 8,680 ------------------------------------------------------------------------------------------------------------------ Other time deposits in denominations of $100,000 or greater 69 1 17 57 144 Other time deposits in denominations of less than $100,000 17 - - - 17 ------------------------------------------------------------------------------------------------------------------ Total other time deposits 86 1 17 57 161 ------------------------------------------------------------------------------------------------------------------ Total domestic time deposits $2,660 $2,000 $2,160 $2,021 $8,841 ------------------------------------------------------------------------------------------------------------------
The majority of foreign deposits of approximately $3.4 billion at December 31, 1997, were in amounts in excess of $100,000. Additional information required by this section of Guide 3 is set forth in the Corporation's 1997 Annual Report to Shareholders in Consolidated Balance Sheet -- Average Balances and Interest Yields/Rates on pages 36 and 37, which pages are incorporated herein by reference. VI. Return on Equity and Assets
Year ended December 31, 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------------- (1) Return on total assets (a), based on: Net income 1.80% 1.74% 1.72% Net income applicable to common stock 1.75 1.64 1.63 (2) Return on common shareholders' equity (a), based on net income applicable to common stock 21.47 20.38 17.77 Return on total shareholders' equity (a), based on net income 20.83 19.23 16.84 (3) Dividend payout ratio of common stock, based on: Diluted net income per share (b) 44.00 44.95 44.17 (4) Equity to total assets (a), based on: Common shareholders' equity 8.14 8.05 9.15 Total shareholders' equity 8.62 9.07 10.24 -----------------------------------------------------------------------------------------------------------------------
(a) Computed on a daily average basis. (b) Presented in accordance with the requirements of Financial Accounting Standard No. 128, "Earnings per share," which was adopted by the Corporation at year-end 1997. 13 15 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) VII. Short-Term Borrowings Federal funds purchased and securities sold under agreements to repurchase represent funds acquired for securities transactions and other funding requirements. Federal funds purchased mature on the business day after execution. Selected balances and rates are as follows:
---------------------------------------------------------------------------------------------------- (dollar amounts in millions) 1997 1996 ---------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase: Maximum month-end balance $2,063 $2,159 Average daily balance $1,390 $1,765 Average rate during the year 5.5% 5.3% Balance at December 31 $1,997 $ 742 Average rate at December 31 5.8% 6.1% ----------------------------------------------------------------------------------------------------
ITEM 2. PROPERTIES Pittsburgh properties In 1983 Mellon Bank entered into a long-term lease of One Mellon Bank Center, a 54-story office building in Pittsburgh, Pennsylvania. At December 31, 1997, Mellon Bank occupied approximately 76% of the building's approximately 1,525,000 square feet of rentable space and subleased substantially all of the remaining space to third parties. During 1984 Mellon Bank entered into a sale/leaseback arrangement of the Union Trust Building in Pittsburgh, Pennsylvania, also known as Two Mellon Bank Center, while retaining title to the land thereunder. At December 31, 1997, Mellon Bank occupied approximately 77% of this building's approximately 595,000 square feet of rentable space and subleased substantially all of the remaining space to third parties. Mellon Bank owns the 41-story office building in Pittsburgh, Pennsylvania, known as Three Mellon Bank Center. At December 31, 1997, Mellon Bank occupied approximately 99% of the approximately 943,000 square feet of rentable space, with the remainder leased to third parties. Philadelphia properties Mellon Bank leases a building in Philadelphia, Pennsylvania, known as Mellon Independence Center. At December 31, 1997, Mellon Bank occupied approximately 60% of Mellon Independence Center's approximately 882,000 square feet of rentable space, with the remainder of the space in the building subleased to third parties. In 1990 Mellon Bank entered into a 25-year lease for a portion of a 53-story office building known as Mellon Bank Center, at the corner of 18th and Market Streets in the Center City area of Philadelphia, Pennsylvania. At December 31, 1997, Mellon Bank leased approximately 19% of the building's approximately 1,245,000 square feet of rentable space. Boston properties The Boston Company leases space in a 41-story downtown Boston, Massachusetts office building known as One Boston Place. At December 31, 1997, The Boston Company leased approximately 34% of One Boston Place's approximately 770,000 square feet of rentable space. 14 16 PROPERTIES (continued) At December 31, 1997, The Boston Company also occupied space in three office buildings in the Wellington Business Center located in Medford, Massachusetts. At December 31, 1997, The Boston Company owned a substantial interest in and fully occupied the approximately 117,000 rentable square foot building known as Client Services Center II. At December 31, 1997, The Boston Company leased 100% of the approximately 320,000 rentable square foot building known as Client Services Center III and leased approximately 22,000 square feet of rentable space in the building known as Client Services Center I. New York properties At December 31, 1997, The Dreyfus Corporation leased approximately 277,000 square feet of rentable space at 200 Park Avenue in New York City. Other than 14,000 square feet of rentable space which is subleased to a third party, all of the space is currently occupied by Dreyfus. At December 31, 1997, Dreyfus Service Corporation leased approximately 165,000 square feet of rentable space in EAB Plaza in Uniondale, New York. This space is 100% occupied by Dreyfus. At December 31, 1997, Buck leased approximately 55,000 square feet of rentable space in Two Penn Plaza in New York City. In addition, Buck leased approximately 124,000 square feet of rentable space in Secaucus, New Jersey, for an operations center. Other properties Mellon Bank (DE) owns an 81,000 square foot, three-story office building known as the Pike Creek Building in New Castle County, Delaware, and currently occupies the entire building. Mellon Bank (DE) also leases approximately 34,000 square feet of rentable space of an 18-story office building in Wilmington, Delaware, and approximately 42,000 square feet of rentable space in Pencader, Delaware, for a credit card operations center. The banking subsidiaries' retail offices are both owned and leased under leases expiring at various times through the year 2020. Other subsidiaries of the Corporation lease office space primarily for their operations at many of the locations listed on pages 22 and 23 of the Principal Locations and Operating Entities Section of the Corporation's 1997 Annual Report, which pages are incorporated herein by reference. For additional information on the Corporation's premises and equipment, see note 6 of Notes to Financial Statements on page 81 of the Corporation's 1997 Annual Report, which note is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS Various legal actions and proceedings are pending or are threatened against the Corporation and its subsidiaries, some of which seek relief or damages in amounts that are substantial. These actions and proceedings arise in the ordinary course of the Corporation's businesses and include suits relating to its lending, collections, servicing, investment, mutual fund, advisory, trust and other activities. Because of the complex nature of some of these actions and proceedings, it may be a number of years before such matters ultimately are resolved. After consultation with legal counsel, management believes that the aggregate liability, if any, resulting from such pending and threatened actions and proceedings will not have a material adverse effect on the Corporation's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to security holders for vote during the fourth quarter of 1997. 15 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is set forth in the Corporation's 1997 Annual Report to Shareholders in Liquidity and Dividends on pages 49 through 52, in Selected Quarterly Data on page 68, in note 22 of Notes to Financial Statements on pages 94 and 95 and in Corporate Information on page 110, which portions are incorporated herein by reference. In October 1996, the board of directors declared a dividend, paid October 31, 1996, of one right (a "Right") issued pursuant to the Shareholder Protection Rights Agreement, dated as of October 15, 1996 (the "Rights Agreement"), for each outstanding share of the Corporation's Common Stock (the "Common Stock"). The Rights are not currently exercisable and trade only with the Common Stock (and are currently evidenced only in connection with the Common Stock). The Rights would separate from the Common Stock and become exercisable only when a person or group acquires 15% or more of the Common Stock or ten days after a person or group commences a tender offer that would result in ownership of 15% or more of the Common Stock. At that time, each Right would entitle the holder to purchase for $112.50 (the "exercise price") one one-hundredth of a share of participating preferred stock, which is designed to have economic and voting rights generally equivalent to one share of common stock. Should a person or group actually acquire 15% or more of the Common Stock, each Right held by the acquiring person or group (or their transferees) would become void and each Right held by the Corporation's other shareholders would entitle those holders to purchase for the exercise price a number of shares of the Common Stock having a market value of twice the exercise price. Should the Corporation, at any time after a person or group has become a 15% beneficial owner and acquired control of the Corporation's board of directors, be involved in a merger or similar transaction with any person or group or sell assets to any person or group, each outstanding Right would then entitle its holder to purchase for the exercise price a number of shares of such other company having a market value of twice the exercise price. In addition, if any person or group acquires 15% or more of the Common Stock, the Corporation may, at its option and to the fullest extent permitted by law, exchange one share of Common Stock for each outstanding Right. The Rights are not exercisable until the above events occur and will expire on October 31, 2006, unless earlier exchanged or redeemed by the Corporation. The Corporation may redeem the Rights for one-half cent per Right under certain circumstances. The foregoing description is not intended to be complete and is qualified in its entirety by reference to the Rights Agreement, which is an exhibit to this Report. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is set forth in the Corporation's 1997 Annual Report to Shareholders in the Financial Summary on page 27, in the Significant Financial Events in 1997 on pages 28 and 29, in the Overview of 1997 results on pages 30 and 31, in the Consolidated Balance Sheet -- Average Balances and Interest Yield/Rates on pages 36 and 37, and in note 1 of Notes to Financial Statements on pages 73 through 78, which portions are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is set forth in the Corporation's 1997 Annual Report to Shareholders in the Financial Review on pages 28 through 68 and in note 22 of Notes to Financial Statements on pages 94 and 95, which portions are incorporated herein by reference. 16 18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is set forth in the Corporation's 1997 Annual Report to Shareholders in the Interest Rate Sensitivity Analysis on pages 52 through 57 and in note 1 of Notes to Financial Statements under Off-balance-sheet instruments used for risk management purposes and Off-balance-sheet instruments used for trading activities on pages 77 and 78, which portions are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to Item 14 on page 20 hereof for a detailed listing of the items under Financial Statements, Financial Statement Schedules, and Other Financial Data which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is included in the Corporation's proxy statement for its 1998 Annual Meeting of Shareholders (the "1998 Proxy Statement") in the Election of Directors-Biographical Summaries of Nominees and Continuing Directors section on pages 2 through 7 and in Section 16(a) Beneficial Ownership Reporting Compliance section on page 26, each of which sections is incorporated herein by reference, and in the following section "Executive Officers of the Registrant." EXECUTIVE OFFICERS OF THE REGISTRANT The name and age of, and the positions and offices held by, each executive officer of the Corporation as of March 1, 1998, together with the offices held by each such person during the last five years, are listed below. Mr. Cahouet has executed an employment contract with the Corporation, and the Corporation intends to execute employment contracts with Messrs. McGuinn, Condron and Elliott. All other executive officers serve at the pleasure of their appointing authority. No executive officer has a family relationship to any other listed executive officer.
Age Position and Year Elected --- ------------------------- Frank V. Cahouet 65 Chairman, President and Chief Executive 1990(1) Officer of Mellon Bank Corporation John T. Chesko 48 Vice Chairman, Chief Risk and Chief 1997(2) Credit Officer, Mellon Bank Corporation and Mellon Bank, N.A.
17 19 EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Christopher M. Condron 50 President and Chief Operating Officer, 1998 (3) Mellon Bank, N.A. President and Chief Executive Officer, The 1996 Dreyfus Corporation Vice Chairman, Mellon Bank Corporation 1994 Vice Chairman, The Boston Company 1994 Steven G. Elliott 51 Senior Vice Chairman and Chief Financial 1998 (4) Officer, Mellon Bank, N.A. Vice Chairman and Chief Financial 1992 Officer of Mellon Bank Corporation Treasurer of Mellon Bank Corporation 1990 Jeffery L. Leininger 52 Vice Chairman, Specialized Commercial 1996 (5) Banking, Mellon Bank Corporation and Mellon Bank, N.A. David R. Lovejoy 49 Vice Chairman, Financial Markets and 1994 (6) Corporate Development, Mellon Bank Corporation and Mellon Bank, N.A. Martin G. McGuinn 55 Chairman and Chief Executive Officer, 1998 (7) Mellon Bank, N.A. Vice Chairman, Retail Financial Services, 1993 Mellon Bank Corporation Keith P. Russell 52 Vice Chairman, West Coast, Mellon Bank 1996 (8) Corporation and Mellon Bank, N.A. W. Keith Smith 63 Senior Vice Chairman, Mellon Bank, N.A. 1998 (9) Chairman, Buck Consultants, Inc. 1997 Vice Chairman, Mellon Bank Corporation 1993 Chairman and Chief Executive Officer, The 1993 Boston Company Chairman of the Board, The Dreyfus 1996 Corporation Jamie B. Stewart, Jr. 53 Vice Chairman, Wholesale Banking and 1996 (10) Cash Management, Mellon Bank Corporation and Mellon Bank, N.A.
18 20
Executive Officers of the Registrant (continued) Michael K. Hughey 46 Senior Vice President and Controller of 1990 Mellon Bank Corporation and Senior Vice President, Director of Taxes and Controller, Mellon Bank, N.A. (1) Mr. Cahouet has executed an employment contract with the Corporation which expires December 31, 1998. Through February 28, 1998, Mr. Cahouet also served as Chairman, President and Chief Executive Officer of Mellon Bank, N.A. (2) From December 1991 to December 1994, Mr. Chesko was Senior Vice President and Senior Credit Approval Officer of the Credit Policy Department of Mellon Bank, N.A. From December 1994 to June 1997, Mr. Chesko was Executive Vice President, Risk Management, of Mellon Bank, N.A. and Chief Compliance Officer of Mellon Bank Corporation and Mellon Bank, N.A. In April 1996, Mr. Chesko was named Chief Credit Officer of Mellon Bank Corporation and Mellon Bank, N.A. (3) From June 1989 to January 1994, Mr. Condron was President of Boston Safe Deposit and Trust Company and Executive Vice President of The Boston Company. In November 1994, he assumed the title of Vice Chairman, Mellon Bank Corporation and Mellon Bank, N.A., Deputy Director Mellon Trust. From October 1995 to August 1996, Mr. Condron was President and Chief Operating Officer, The Dreyfus Corporation. Through February 28, 1998, Mr. Condron served as Vice Chairman, Mellon Bank, N.A. and Deputy Director Mellon Trust. (4) Through February 28, 1998, Mr. Elliott served as Vice Chairman of Mellon Bank, N.A. (5) From 1988 to February 1994, Mr. Leininger was Senior Vice President and Manager of the Middle Market Banking Department's western region. From February 1994 to February 1996, Mr. Leininger was Executive Vice President and Department Head of Middle Market Banking of Mellon Bank, N.A. (6) From January 1993 to October 1994, Mr. Lovejoy was Executive Vice President of Strategic Planning of Mellon Bank, N.A. From November 1994 to February 1996, Mr. Lovejoy was Vice Chairman, Corporate Strategy and Development of Mellon Bank Corporation and Mellon Bank, N.A. (7) From October 1992 to November 1993, Mr. McGuinn was Vice Chairman, Special Banking Services of Mellon Bank Corporation and Mellon Bank, N.A. Through February 28, 1998, Mr. McGuinn served as Vice Chairman, Retail Financial Services, Mellon Bank, N.A. (8) From June 1992 to June 1996, Mr. Russell was Vice Chairman, Chief Risk and Credit Officer, Mellon Bank Corporation and Mellon Bank, N.A. (9) From January 1990 to November 1993, Mr. Smith was Vice Chairman, Service Products of Mellon Bank Corporation and Mellon Bank, N.A. Mr. Smith was Chief Operating Officer of The Dreyfus Corporation from August 1994 to January 1995 and Vice Chairman of The Dreyfus Corporation from January 1995 to August 1996. Through February 28, 1998, Mr. Smith served as Vice Chairman, Mellon Bank, N.A. From November 1994 through February 28, 1998, Mr. Smith also served as Director Mellon Trust. (10) From December 1990 to January 1995, Mr. Stewart was Executive Vice President, Global Corporate Banking Department. In 1995, Mr. Stewart was Vice Chairman, Corporate Banking of Mellon Bank Corporation and Mellon Bank, N.A.
19 21 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included in the 1998 Proxy Statement in the Directors' Compensation section on page 9 and in the Executive Compensation section on pages 14 through 20, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included in the 1998 Proxy Statement in the Beneficial Ownership of Stock section on pages 12 and 13, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included in the 1998 Proxy Statement in the Business Relationships and Related Transactions and Certain Legal Proceedings sections on page 11, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The financial statements and schedules required for the Annual Report of the Corporation on Form 10-K are included, attached or incorporated by reference as indicated in the following index. Page numbers refer to pages of the Financial Section of the Corporation's 1997 Annual Report to Shareholders.
(i) Financial Statements Page No. -------------------- -------- Mellon Bank Corporation (and its subsidiaries): Consolidated Income Statement 69 Consolidated Balance Sheet 70 Consolidated Statement of Changes in Shareholders' Equity 71 Consolidated Statement of Cash Flows 72 and 73 Notes to Financial Statements 73 through 108 Report of Independent Auditors 109
(ii) Financial Statement Schedules Financial Statement schedules are omitted either because they are not required or are not applicable, or because the required information is shown in the financial statements or notes thereto. (iii) Other Financial Data Selected Quarterly Data 68
(b) Current Reports on Form 8-K during the fourth quarter of 1997: A report dated October 14, 1997, which included, under Items 5 and 7, the Corporation's press release regarding third quarter 1997 and first nine months 1997 results of operations. A report dated November 14, 1997, which included, under Items 5 and 7, the Corporation's press release announcing the completion of its acquisition of Pacific Brokerage Services, Inc., a self-clearing deep discount broker and member of the New York Stock Exchange. 20 22 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) A report dated November 24, 1997, which included, under Items 5 and 7, the Corporation's press release announcing a definitive agreement to acquire United Bankshares, Inc. and its principal subsidiary, United National Bank, a full-service commercial bank. A report dated November 24, 1997, which described, under Item 5, the completion of the Corporation's sale of its corporate trustee and agency business to The Chase Manhattan Bank. A report dated December 11, 1997, which included, under Items 5 and 7, the Corporation's press release announcing a definitive agreement to acquire Founders Asset Management, Inc., which manages growth-oriented no-load equity mutual funds and other investment portfolios. (c) Exhibits The exhibits listed on the Index to Exhibits on pages 23 through 29 hereof are incorporated by reference or filed herewith in response to this Item. In addition, Exhibit 11.1, Computation of Basic and Diluted Net Income Per Common Share, is set forth in the Corporation's 1997 Annual Report to Shareholders in note 20 of Notes to Financial Statements on pages 87 and 88, which portions are incorporated herein by reference. 21 23 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. Mellon Bank Corporation By: /s/ Frank V. Cahouet ------------------------- Frank V. Cahouet Chairman, President and Chief Executive Officer DATED: March 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Corporation and in the capacities and on the date indicated.
Signature Capacities --------- ---------- By: /s/ Frank V. Cahouet Director and Principal -------------------------------------- Executive Officer Frank V. Cahouet By: /s/ Steven G. Elliott Principal Financial Officer -------------------------------------- and Principal Accounting Steven G. Elliott Officer Dwight L. Allison, Jr.; Directors Burton C. Borgelt; Carol R. Brown; Christopher M. Condron; J. W. Connolly; Charles A. Corry; C. Frederick Fetterolf; Ira J. Gumberg; Pemberton Hutchinson; George W. Johnstone; Rotan E. Lee; Andrew W. Mathieson; Edward J. McAniff; Martin G. McGuinn; Robert Mehrabian; Seward Prosser Mellon; David S. Shapira; W. Keith Smith; Joab L. Thomas; Wesley W. von Schack; and William J. Young By: /s/ Carl Krasik DATED: March 20, 1998 -------------------------------------- Carl Krasik Attorney-in-fact
22 24 Index to Exhibits
Exhibit No. Description Method of Filing --- ----------- ---------------- 3.1 Restated Articles of Incorporation of Previously filed as Exhibit 3.1 to Mellon Bank Corporation, as amended the Quarterly Report on Form 10-Q and restated as of September 2, 1993. (File No. 1-7410) for the quarter ended September 30, 1993, and incorporated herein by reference. 3.2 Amendment of April 16, 1997 to Previously filed as Exhibit 3.7 to the Mellon Bank Corporation's Restated Quarterly Report on Form 10-Q (File Articles of Incorporation. No. 1-7410) for the quarter ended June 30, 1997, and incorporated herein by reference. 3.3 Amendment of September 26, 1997 to Previously filed as Exhibit 4.3 to Mellon Bank Corporation's Restated Registration Statement on Form S-3 Articles of Incorporation. (Registration No. 333-38213) and incorporated herein by reference. 3.4 Statement Affecting Series B Preferred Previously filed as Exhibit 3.2 to the Stock, $1.00 Par Value. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1993, and incorporated herein by reference. 3.5 Statement Affecting Series D Preferred Previously filed as Exhibit 3.3 to the Stock, $1.00 Par Value. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1994, and incorporated herein by reference. 3.6 Statement Affecting Series H Preferred Previously filed as Exhibit 3.1 to the Stock, $1.00 Par Value. Quarterly Report on Form 10-Q (File No. 1-7410) for the quarter ended March 31, 1995, and incorporated herein by reference. 3.7 Statement Affecting Series I Preferred Stock, Previously filed as Exhibit 3.5 to $1.00 Par Value. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1996, and incorporated herein by reference. 3.8 Statement Affecting Series J Preferred Stock, Previously filed as Exhibit 3.6 to $1.00 Par Value. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1996 and incorporated herein by reference.
23 25 Index to Exhibits (continued)
Exhibit No. Description Method of Filing --- ----------- ---------------- 3.9 Statement Affecting Series K Preferred Stock, Filed herewith. 1.00 Par Value. 3.10 By-Laws of Mellon Bank Corporation, as Previously filed as Exhibit 4.4 to amended, effective September 16, 1997. Registration Statement on Form S-3 (Registration No. 333-38213) and incorporated herein by reference. 4.1 Instruments defining the rights See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, of securities holders. 3.7, 3.8, 3.9 and 3.10 above. 4.2 Shareholder Protection Rights Agreement Previously filed as Exhibit 1 to Form between Mellon Bank Corporation and 8-A Registration Statement (File Mellon Bank, N.A., as Rights Agent, No. 1-7410) dated October 29, 1996, dated as of October 15, 1996. and incorporated herein by reference. 4.3 Amendment No. 1, dated as of June 2, Previously filed as Exhibit 4.1 to the 1997, to Shareholder Protection Rights Quarterly Report on Form 10-Q (File Agreement between Mellon Bank No. 1-7410) for the quarter ended Corporation and Mellon Bank, N.A., as June 30, 1997, and incorporated herein Rights Agent, dated as of October 15, 1996. by reference. 4.4 Junior Subordinated Indenture, dated as of Previously filed as Exhibit 4.1 December 3, 1996, between Mellon Bank to Current Report on Form 8-K Corporation and The Chase Manhattan Bank, (File No. 1-7410) dated December 3, as Debenture Trustee. 1996, and incorporated herein by reference. 4.5(a) Certificate representing the 7.72% Junior Previously filed as Exhibit 4.2 Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K Series A, of Mellon Bank Corporation. (File No. 1-7410) dated December 3, 1996, and incorporated herein by reference. 4.5(b) Certificate representing the 7.995% Junior Previously filed as Exhibit 4.2 Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K Series B, of Mellon Bank Corporation. (File No. 1-7410) dated December 20, 1996, and incorporated herein by reference. 4.6(a) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3 as of December 3, 1996, of Mellon Capital I, to Current Report on Form 8-K among Mellon Bank Corporation, as Depositor, (File No. 1-7410) dated December 3, The Chase Manhattan Bank, as Property Trustee, 1996, and incorporated herein by Chase Manhattan Bank Delaware, as Delaware reference. Trustee, and the Administrative Trustees named therein.
24 26 Index to Exhibits (continued)
Exhibit No. Description Method of Filing --- ----------- ---------------- 4.6(b) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3 as of December 20, 1996, of Mellon Capital II, to Current Report on Form 8-K among Mellon Bank Corporation, as Depositor, (File No. 1-7410) dated December 20, The Chase Manhattan Bank, as Property Trustee, 1996, and incorporated herein by Chase Manhattan Bank Delaware, as Delaware reference. Trustee, and the Administrative Trustees named therein. 4.7(a) Certificate representing the 7.72% Capital Previously filed as Exhibit 4.4 Securities, Series A, of Mellon Capital I. to Current Report on Form 8-K (File No. 1-7410) dated December 3, 1996, and incorporated herein by reference. 4.7(b) Certificate representing the 7.995% Capital Previously filed as Exhibit 4.4 Securities, Series B, of Mellon Capital II. to Current Report on Form 8-K (File No. 1-7410) dated December 20, 1996, and incorporated herein by reference. 4.8(a) Guarantee Agreement, dated as of December 3, Previously filed as Exhibit 4.5 1996, between Mellon Bank Corporation, as to Current Report on Form 8-K guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated December 3, Guarantee Trustee. 1996, and incorporated herein by reference. 4.8(b) Guarantee Agreement, dated as of December 20, Previously filed as Exhibit 4.5 1996, between Mellon Bank Corporation, as to Current Report on Form 8-K Guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated December 20, Guarantee Trustee. 1996, and incorporated herein by reference. 10.1 Purchase Agreement, dated as of Previously filed as Exhibit 10.1 July 25, 1988, among Mellon Bank to Quarterly Report on Form 10-Q Corporation (as Seller) and Warburg, (File No. 1-7410) for the quarter ended Pincus Capital Company, L.P. and September 30, 1988, and incorporated Warburg, Pincus Capital Partners, herein by reference. L.P. (as Purchasers) relating to the sale and purchase of Mellon Series D Junior Preferred Stock.
25 27 Index to Exhibits (continued)
Exhibit No. Description Method of Filing --- ----------- ---------------- 10.2 Exchange Agreement dated as of Previously filed as Exhibit 10.4 March 30, 1990, between Warburg, to Annual Report on Form 10-K Pincus Capital Company, L. P., (File No. 1-7410) for the year ended Warburg, Pincus Capital Partners, December 31, 1990, and incorporated L. P. and Mellon relating to the herein by reference. exchange of Series D Preferred Stock for shares of Mellon's Common Stock. 10.3 Lease dated as of February 1, 1983, Previously filed as Exhibit 10.4 between 500 Grant Street Associates to Annual Report on Form 10-K Limited Partnership and Mellon (File No. 1-7410) for the year ended Bank, N.A. with respect to One Mellon December 31, 1992, and incorporated Bank Center. herein by reference. 10.4 First Amendment to Lease Agreement Previously filed as Exhibit 10.1 dated as of November 1, 1983, to Registration Statement on Form between 500 Grant Street S-15 (Registration No. 2-88266) Associates Limited Partnership and incorporated herein by and Mellon Bank, N.A. reference. 10.5* Mellon Bank Corporation Profit Previously filed as Exhibit 10.7 Bonus Plan, as amended. to Annual Report on Form 10-K (File No. l-7410) for the year ended December 31, 1990, and incorporated herein by reference. 10.6* Mellon Bank Corporation Long-Term Previously filed as Exhibit 10.1 to the Profit Incentive Plan (1996), as Quarterly Report on Form 10-Q (File amended effective July 15, 1997. No. 1-7410) for the quarter ended June 30, 1997, and incorporated herein by reference. 10.7* Mellon Bank Corporation Stock Previously filed as Exhibit 10.2 to the Option Plan for Outside Directors Quarterly Report on Form 10-Q (File (1989), as amended effective May 1, 1997. No. 1-7410) for the quarter ended June 30, 1997, and incorporated herein by reference. 10.8* Mellon Bank Corporation 1990 Previously filed as Exhibit 10.9 to Elective Deferred Compensation Plan Annual Report on Form 10-K (File for Directors and Members of the No. 1-7410) for the year ended Advisory Board, as amended and December 31, 1996, and incorporated restated, effective January 1, 1997. herein by reference.
* Management contract or compensatory plan arrangement. 26 28 Index to Exhibits (continued)
Exhibit No. Description Method of Filing --- ----------- ---------------- 10.9* Mellon Bank Corporation Elective Previously filed as Exhibit 10.10 to Deferred Compensation Plan for Annual Report on Form 10-K (File Senior Officers, as amended and No. 1-7410) for the year ended restated, effective January 1, 1997. December 31, 1996, and incorporated herein by reference. 10.10* Mellon Bank IRC Section 401(a)(17) Previously filed as Exhibit 10.11 to Plan, as amended and restated, effective Annual Report on Form 10-K (File January 1, 1993. No. 1-7410) for the year ended December 31, 1992, and incorporated herein by reference. 10.11* Mellon Bank Optional Life Insurance Previously filed as Exhibit 10.1 to the Plan, effective January 1, 1993, as amended Quarterly Report on Form 10-Q (File effective September 16, 1997. No. 1-7410) for the quarter ended September 30, 1997, and incorporated herein by reference. 10.12* Mellon Bank Executive Life Insurance Previously filed as Exhibit 10.13 to Plan, effective January 1, 1993, as amended Annual Report on Form 10-K (File effective November 19, 1996. No. 1-7410) for the year ended December 31, 1996, and incorporated herein by reference. 10.13* Mellon Bank Senior Executive Life Previously filed as Exhibit 10.14 to Insurance Plan, effective January 1, 1993, Annual Report on Form 10-K (File as amended effective November 19, 1996. No. 1-7410) for the year ended December 31, 1996, and incorporated herein by reference. 10.14* Mellon Bank Corporation Retirement Plan Previously filed as Exhibit 10.1 to for Outside Directors, effective Quarterly Report on Form 10-Q (File January 1, 1994. No. 1-7410) for the quarter ended June 30, 1995, and incorporated herein by reference. 10.15* Mellon Bank Corporation Phantom Stock Previously filed as Exhibit 10.3 to the Unit Plan (1995), as amended, effective Quarterly Report on Form 10-Q (File May 1, 1997. No. 1-7410) for the quarter ended June 30, 1997, and incorporated herein by reference.
* Management contract or compensatory plan arrangement. 27 29 Index to Exhibits (continued)
Exhibit No. Description Method of Filing --- ----------- ---------------- 10.16* Employment Agreement between Mellon Previously filed as Exhibit 10.17 to Bank, N.A. and Frank V. Cahouet, Annual Report on Form 10-K effective as of July 25, 1993, and amended (File No. 1-7410) for the year ended and restated as of October 17, 1995. December 31, 1995, and incorporated herein by reference. 10.17* Letter Agreement, dated February 20, 1998, Filed herewith. between Mellon Bank Corporation and Frank V. Cahouet. 10.18* Employment Agreement between Mellon Previously filed as Exhibit 10.2 Bank, N.A. and W. Keith Smith, to Quarterly Report on Form 10-Q effective as of July 25, 1993, and amended (File No. 1-7410) for the quarter ended and restated as of August 1, 1995. September 30, 1995, and incorporated herein by reference. 10.19* Letter Agreement, dated February 20, 1998, Filed herewith. between Mellon Bank Corporation and W. Keith Smith. 10.20* Change in Control Severance Agreement Previously filed as Exhibit 10.4 to the between Mellon Bank Corporation and Frank V. Quarterly Report on Form 10-Q (File Cahouet, dated as of February 1, 1997, and No. 1-7410) for the quarter ended amended effective July 7, 1997. June 30, 1997, and incorporated herein by reference. 10.21* Form of Change in Control Severance Agreement Previously filed as Exhibit 10.5 to the between Mellon Bank Corporation and members Quarterly Report on Form 10-Q (File of the Office of the Chairman. No. 1-7410) for the quarter ended June 30, 1997, and incorporated herein by reference. 12.1 Computation of Ratio of Earnings Filed herewith. to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends--parent Corporation.
* Management contract or compensatory plan arrangement. 28 30 Index to Exhibits (continued)
Exhibit No. Description Method of Filing --- ----------- ---------------- 12.2 Computation of Ratio of Earnings Filed herewith. to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends--Mellon Bank Corporation and its subsidiaries. 13.1 All portions of the Mellon Bank Corporation Filed herewith. 1997 Annual Report to Shareholders that are incorporated herein by reference. 21.1 List of Subsidiaries of the Corporation. Filed herewith. 23.1 Consent of Independent Accountants. Filed herewith. 24.1 Power of Attorney. Filed herewith. 27.1 Financial Data Schedule. Submitted herewith.
Certain instruments, which define the rights of holders of long-term debt of the Corporation and its subsidiaries, are not filed herewith because the total amount of securities authorized under each of them does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation hereby agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 29 EX-3.9 2 MELLON BANK CORPORATION 1 EXHIBIT 3.9 MELLON BANK CORPORATION STATEMENT AFFECTING 8.20% SERIES K PREFERRED STOCK $1.00 PAR VALUE DECREASING THE AUTHORIZED NUMBER OF SHARES OF SUCH SERIES --------------------------------------------------------- PURSUANT TO THE REQUIREMENTS OF SECTION 1522 OF THE PENNSYLVANIA BUSINESS CORPORATION LAW The undersigned Corporation, desiring to decrease the authorized number of shares of its 8.20% Series K Preferred Stock, $1.00 par value (the "Series K Preferred Stock"), hereby certifies that: 1. The name of the Corporation is Mellon Bank Corporation. 2. The resolution of the Board of Directors of the Corporation establishing and designating the Series K Preferred Stock as the twelfth series of Preferred Stock $1.00 par value, of the Corporation authorized to be issued by Article FIFTH of its Articles, as heretofore restated and amended, was filed with the Department of State in a Statement of Designation on January 19, 1993. 3. By resolutions dated March 18, 1997, (copy attached hereto), the Board of Directors, as part of the Corporation's Capital and Funding Plan for 1997, approved the concept of redeeming the Series K Preferred Stock, authorized the restoration of any shares redeemed to the status of authorized but unissued shares of preferred stock of the Corporation, and further appointed a special committee (the "Redemption Committee") to have and to exercise all authority of the Board with respect to the redemption of the Series K Preferred Stock. 4. By resolutions dated January 8, 1998, (copy attached), the Redemption Committee authorized the Corporation to redeem all outstanding shares of its Series K Preferred Stock and further established the terms and conditions of such redemption. 5. Accordingly, the number of shares of preferred stock previously designated as Series K Preferred Stock is hereby decreased from 8,000,000 shares to -0- shares. 6. Since the filing of the Corporation's Restated Articles of Incorporation on September 2, 1993, there have been no statements filed under the 2 Pennsylvania Business Corporation Law pertaining to the Series K Preferred Stock. 7. This Statement shall be effective upon the filing thereof in the Department of State. IN TESTIMONY WHEREOF, THE UNDERSIGNED Corporation has caused this Statement to be signed by a duly authorized officer thereof this 17th day of February, 1998. MELLON BANK CORPORATION By: STEVEN G. ELLIOTT ------------------------------------ Steven G. Elliott Vice Chairman, Chief Financial Officer and Treasurer (SEAL) Attest: CARL KRASIK - ---------------------- Carl Krasik Secretary 3 RESOLUTIONS AUTHORIZING REDEMPTION OF 8.20% SERIES K PREFERRED STOCK March 18, 1997 WHEREAS, In connection with the Corporation's Capital and Funding Plan for 1997, the Executive Committee has recommended that the Board of Directors create a Redemption Committee to exercise all authority of this Board with respect to the redemption of the Corporation's 8.20% Series K Preferred Stock; and WHEREAS, The Corporation has issued 8.20% Series K Preferred Stock, $1.00 par value (the "Series K Preferred Stock") which by its terms is redeemable at the option of the Corporation, in whole or from time to time in part, at any time on or after February 15, 1998, at the cash redemption price of $25.00 per share, plus accrued dividends, the election of the Corporation to so redeem the Series K Preferred Stock to be evidenced by a resolution of this Board; NOW, THEREFORE, BE IT RESOLVED, That a special committee (the "Redemption Committee") of this Board be, and it hereby is, appointed to have and to exercise all authority of this Board with respect to the redemption of the Series K Preferred Stock, including, without limitation, the designation of amounts, times and methods of redemption; and it is further RESOLVED, That the Redemption Committee shall consist of the following directors: Frank V. Cahouet, W. Keith Smith and Andrew W. Mathieson, and that the Committee shall meet at such times and places as it may deem appropriate to exercise the authority granted to it by the foregoing resolution; and it is further RESOLVED, That a majority of the members at any meeting of the Redemption Committee shall constitute a quorum necessary and sufficient to transact business; however, if a quorum is not present, those Committee members who are present shall have the authority to appoint any member of the Board of Directors as alternate members of the Redemption Committee, and the Committee as then constituted shall exercise the powers granted by the foregoing resolutions; and it is further RESOLVED, That upon the instruction and authorization of the Redemption Committee, the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation to implement the redemption of the Series K Preferred Stock, in whole or from time to time in part, in accordance with its terms and upon such 4 further specific terms and conditions, consistent with the action of the Redemption Committee, as any such officer shall approve, the approval of such officer and of this Board to be evidenced conclusively by the action of such officer; and it is further RESOLVED, That in accordance with the terms of the Series K Preferred Stock, any shares of such stock so redeemed shall be restored to the status of authorized but unissued shares of preferred stock of the Corporation, without designation as to series, until such shares are once more designated as part of a particular series by this Board; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation to execute and deliver any and all agreements and other documents, make such filings and take any other such actions as any such officer may deem necessary, appropriate or desirable to effectuate the purposes of the foregoing resolutions. 5 REDEMPTION OF SERIES K PREFERRED STOCK January 8, 1998 WHEREAS, The Corporation has issued and outstanding a series of preferred stock, par value $1.00 per share, designated as 8.20% Series K Preferred Stock (the "Series K Preferred Stock"); and WHEREAS, Under the terms pursuant to which the Series K Preferred Stock was issued, such stock is redeemable at the option of the Corporation, in whole or from time to time in part, at any time on or after February 15, 1998, at a price of $25.00 per share, plus accrued dividends; and WHEREAS, By action taken on March 18, 1997, the Board of Directors, as part of the Corporation's Capital and Funding Plan for 1997, approved the concept of redeeming the Series K Preferred Stock and granted to this Committee all authority of the Board with respect to such redemption, including, without limitation, the designation of amounts, times and methods of redemption; NOW, THEREFORE, BE IT RESOLVED, That the Corporation be, and it hereby is, authorized to redeem all the outstanding shares of its Series K Preferred Stock on February 17, 1998 (the "Redemption Date"), at a redemption price of $25.00 per share, plus all dividends accrued and unpaid on such shares to the Redemption Date, even though not yet declared, (collectively such funds to be referred to as the "Redemption Funds"); and it is further RESOLVED, That in accordance with the terms of the Series K Preferred Stock as set forth in the Statement of Designation of such series, the Secretary of the Corporation be, and he hereby is, authorized to send via first class mail to all holders of Series K Preferred Stock, at their respective addresses on the books of the Corporation, a notice in the form attached hereto as Annex A (the "Redemption Notice"), with such changes and modifications as the Chairman, the Chief Executive Officer, the President, any Vice Chairman, or 6 the Secretary of the Corporation shall approve, the approval of such officer and of this Committee to be evidenced conclusively by the action of such officer; and it is further RESOLVED, That on or before the Redemption Date, such amount of money as is necessary for the redemption of all shares of the Series K Preferred Stock in accordance with its terms, be deposited in a separate account with Mellon Bank, N.A. to be held in trust for the account of the holders of the shares of Series K Preferred Stock called for redemption, with irrevocable instructions and authority to pay the Redemption Funds to the holders of such shares upon surrender of certificates therefor at any time on or after the Redemption Date; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman, the General Counsel, the Secretary or any other person so designated by any such officer be, and each hereby is, authorized in the name and on behalf of the Corporation, to make all filings with regulatory authorities and to take any related actions as such officer or designee may approve as necessary, appropriate or desirable in connection with such authorities' consideration of the redemption of the Series K Preferred Stock, the filing or doing of any such related action by such person conclusively establishing that person's authority therefor from this Committee and the approval and ratification by this Committee of the actions so taken; and WHEREAS, In accordance with the terms of the Series K Preferred Stock, any shares of such stock so redeemed shall be restored to the status of authorized but unissued shares of preferred stock of the Corporation, without designation as to series, until such shares are once more designated as part of a particular series by the Board; NOW, THEREFORE, BE IT RESOLVED, That in connection with the redemption of the Series K Preferred Stock as authorized hereby and upon the issuance of the Redemption Notice, the deposit of the Redemption Funds and the occurrence of 7 the Redemption Date, the Chairman, the Chief Executive Officer, the President, any Vice Chairman, or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation, under the corporate seal of the Corporation attested by its Secretary, to execute and to cause a Statement Affecting Series K Preferred Stock to be filed with the Department of State of the Commonwealth of Pennsylvania in accordance with Section 1522 of the Pennsylvania Business Corporation Law; and it is further RESOLVED, That any action relating to the redemption of the Series K Preferred Stock taken by any of the officers of the Corporation prior to the date of these resolutions that is otherwise within the authority conferred by these resolutions be, and it hereby is, ratified, confirmed and approved; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation to execute any and all agreements and other documents, make such filings and take any other such actions as such officer may deem necessary, appropriate or desirable to effectuate the purposes of the foregoing resolutions. EX-10.17 3 MELLON BANK CORPORATION 1 EXHIBIT 10.17 MELLON BANK CORPORATION Mellon Bank Center Pittsburgh, PA 15258-0001 February 20, 1998 Mr. Frank V. Cahouet Chairman, President and Chief Executive Officer Mellon Bank Corporation One Mellon Bank Center Pittsburgh, PA 15258-0001 Dear Mr. Cahouet: Mellon Bank Corporation (the "Company") hereby irrevocably and unconditionally agrees to make all payments provided for in the Employment Agreement (the "Agreement") between you and Mellon Bank, N.A. (the "Bank"), effective as of July 25, 1993, as amended and restated effective October 17, 1995, in the event that any such payment is not promptly made by the Bank. The Company's obligation in this letter agreement to make such payments is absolute and independent of any legal or other right of the Bank not to make such payments, and shall be binding on the Company irrespective of the enforceability, validity or voidability of the Agreement. The Company is entering into this letter agreement in consideration of your services to the Bank, which is the Company's principal subsidiary, to the Company and to the Company's other subsidiaries. Very truly yours, MELLON BANK CORPORATION By: /s/ A. W. MATHIESON --------------------------- Agreed and Accepted: By: /s/ FRANK V. CAHOUET --------------------------- Frank V. Cahouet EX-10.19 4 MELLON BANK CORPORATION 1 EXHIBIT 10.19 MELLON BANK CORPORATION Mellon Bank Center Pittsburgh, PA 15258-0001 February 20, 1998 Mr. W. Keith Smith Vice Chairman Mellon Bank Corporation One Mellon Bank Center Pittsburgh, PA 15258-0001 Dear Mr. Smith: Mellon Bank Corporation (the "Company") hereby irrevocably and unconditionally agrees to make all payments provided for in the Employment Agreement (the "Agreement") between you and Mellon Bank, N.A. (the "Bank"), effective as of July 25, 1993, as amended and restated effective August 1, 1995, in the event that any such payment is not promptly made by the Bank. The Company's obligation in this letter agreement to make such payments is absolute and independent of any legal or other right of the Bank not to make such payments, and shall be binding on the Company irrespective of the enforceability, validity or voidability of the Agreement. The Company is entering into this letter agreement in consideration of your services to the Bank, which is the Company's principal subsidiary, to the Company and to the Company's other subsidiaries. Very truly yours, MELLON BANK CORPORATION By: /s/ FRANK V. CAHOUET --------------------------- Frank V. Cahouet Agreed and Accepted: By: /s/ W. KEITH SMITH --------------------------- W. Keith Smith EX-12.1 5 MELLON BANK CORPORATION 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)
- -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- 1. Income before income taxes and equity in undistributed net income of subsidiaries $351,936 $349,900 $473,554 $434,035 $224,869 2. Fixed charges: interest expense, one-third of rental expense net of income from subleases, trust-preferred securities expense and amortization of debt issuance costs 175,027 101,010 96,971 95,193 110,739 - -------------------------------------------------------------------------------------------------------------------------------- 3. Income before income taxes and equity in undistributed net income of subsidiaries, plus fixed charges (line 1 + line 2) $526,963 $450,910 $570,525 $529,228 $335,608 - -------------------------------------------------------------------------------------------------------------------------------- 4. Preferred stock dividend requirements(b) $ 31,623 $ 68,503 $ 62,035 $124,260 $103,792 - -------------------------------------------------------------------------------------------------------------------------------- 5. Ratio of earnings (as defined) to fixed charges (line 3 divided by line 2) 3.01 4.46 5.88 5.56 3.03 6. Ratio of earnings (as defined) to combined fixed charges and preferred stock dividends [line 3 divided by (line 2 + line 4)] 2.55 2.66 3.59 2.41 1.56 - --------------------------------------------------------------------------------------------------------------------------------
(a) The parent Corporation ratios include the accounts of Mellon Bank Corporation (the "Corporation"), 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 exist solely to issue Capital Securities. For purposes of computing these ratios, earnings represent parent Corporation income before taxes and equity in undistributed net income of subsidiaries, plus the fixed charges of the parent Corporation. Fixed charges represent interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, trust-preferred securities expense and amortization of debt issuance costs. Because the ratio excludes from earnings the equity in undistributed net income of subsidiaries, the ratio varies with the payment of dividends by such subsidiaries. (b) Preferred stock dividend requirements for all years presented represent the pretax amount required to cover preferred stock dividends. EX-12.2 6 MELLON BANK CORPORATION 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(a)
- --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in thousands) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- 1. Income $ 770,927 $ 732,580 $ 691,534 $ 433,365 $ 460,213 2. Provision for income taxes 398,108 418,264 400,058 278,040 298,034 - --------------------------------------------------------------------------------------------------------------------------------- 3. Income before provision for income taxes (line 1 + line 2) $1,169,035 $1,150,844 $1,091,592 $ 711,405 $ 758,247 - --------------------------------------------------------------------------------------------------------------------------------- 4. Fixed charges: a. Interest expense (excluding interest on deposits) $ 370,712 $ 358,367 $ 401,700 $ 263,054 $ 200,915 b. One-third of rental expense (net of income from subleases), trust-preferred securities expense and amortization of debt issuance costs 126,737 44,553 44,303 40,140 38,190 - --------------------------------------------------------------------------------------------------------------------------------- c. Total fixed charges (excluding interest on deposits) (line 4a + line 4b) 497,449 402,920 446,003 303,194 239,105 d. Interest on deposits 878,462 902,726 888,580 538,715 454,458 - --------------------------------------------------------------------------------------------------------------------------------- e. Total fixed charges (line 4c + line 4d) $1,375,911 $1,305,646 $1,334,583 $ 841,909 $ 693,563 - --------------------------------------------------------------------------------------------------------------------------------- 5. Preferred stock dividend requirements (b) $ 31,623 $ 68,503 $ 62,035 $ 124,260 $ 103,792 - --------------------------------------------------------------------------------------------------------------------------------- 6. Income before provision for income taxes, plus total fixed charges: a. Excluding interest on deposits (line 3 + line 4c) $1,666,484 $1,553,764 $1,537,595 $1,014,599 $ 997,352 - --------------------------------------------------------------------------------------------------------------------------------- b. Including interest on deposits (line 3 + line 4e) $2,544,946 $2,456,490 $2,426,175 $1,553,314 $1,451,810 - --------------------------------------------------------------------------------------------------------------------------------- 7. Ratio of earnings (as defined) to fixed charges: a. Excluding interest on deposits (line 6a divided by line 4c) 3.35 3.86 3.45 3.35 4.17 b. Including interest on deposits (line 6b divided by line 4e) 1.85 1.88 1.82 1.84 2.09 8. Ratio of earnings (as defined) to combined fixed charges and preferred stock dividends: a. Excluding interest on deposits [line 6a divided by (line 4c + line 5)] 3.15 3.30 3.03 2.37 2.91 b. Including interest on deposits [line 6b divided by (line 4e + line 5)] 1.81 1.79 1.74 1.61 1.82 - ---------------------------------------------------------------------------------------------------------------------------------
2 (continued) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (a) For purposes of computing these ratios, earnings represent consolidated income, before income taxes plus consolidated fixed charges. Fixed charges, excluding interest on deposits, include interest expense (other than on deposits), one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, trust-preferred securities expense and amortization of debt issuance costs. Fixed charges, including interest on deposits, include all interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, trust-preferred securities expense and amortization of debt issuance costs. (b) Preferred stock dividend requirements for all years presented represent the pretax amount required to cover preferred stock dividends. EX-13.1 7 MELLON BANK CORPORATION 1 EXHIBIT 13.1 PRINCIPAL LOCATIONS AND OPERATING ENTITIES CONSUMER FEE SERVICES BOSTON SAFE DEPOSIT AND TRUST COMPANY provides trust and custody administration for institutional and private clients, private asset management, cash management, and personal and jumbo mortgage lending. (617) 722-7000 DREYFUS BROKERAGE SERVICES, INC. provides services to individual investors nationwide, a significant portion of which are conducted via the Internet. www.edreyfus.com (310) 276-0200 THE DREYFUS CORPORATION, one of the nation's leading mutual fund companies, manages or administers more than $93 billion in assets in more than 150 mutual fund portfolios. www.dreyfus.com (212) 922-6000 DREYFUS INVESTMENT SERVICES CORPORATION provides a full range of securities brokerage services for individuals and institutional clients of Mellon Bank Corporation. 1 800 243-7549 DREYFUS RETIREMENT SERVICES provides a full array of investment products, participant education and administrative services to defined contribution plans nationwide. 1 800 358-0910 DREYFUS SERVICE CORPORATION is the principal sales agent for the Dreyfus Family of Funds and a general securities broker/dealer. (212) 922-6000 CONSUMER BANKING Mellon Bank Corporation operates the following retail subsidiaries in the United States: Mellon Bank, N.A., Mellon Bank (DE) National Association, Mellon Bank (MD) National Association and Mellon United National Bank. MELLON BANK, N.A. comprises six regions serving consumer and small to midsize commercial markets throughout Pennsylvania. Headquarters: Pittsburgh, Pennsylvania (412) 234-5000 MELLON BANK-CENTRAL REGION serves central Pennsylvania. Headquarters: State College, Pennsylvania (814) 234-6392 MELLON BANK-COMMONWEALTH REGION serves southcentral Pennsylvania. Headquarters: Harrisburg, Pennsylvania 1 800 222-9034 MELLON BANK-NORTHEASTERN REGION serves northeastern Pennsylvania. Headquarters: Wilkes-Barre, Pennsylvania 1 800 222-1992 MELLON BANK-NORTHERN REGION serves northwestern Pennsylvania. Headquarters: Erie, Pennsylvania (814) 453-7400 MELLON BANK-WESTERN REGION serves western Pennsylvania. Headquarters: Pittsburgh, Pennsylvania (412) 234-5000 MELLON PSFS* serves southeastern Pennsylvania and southern New Jersey. Headquarters: Philadelphia, Pennsylvania (215) 553-3000 MELLON BANK (DE) NATIONAL ASSOCIATION serves consumer and commercial markets throughout Delaware and provides nationwide cardholder processing services. Headquarters: Wilmington, Delaware 1 800 323-7105 MELLON BANK (MD) NATIONAL ASSOCIATION serves consumer and commercial markets throughout Maryland, Virginia and Washington, D.C. Headquarters: Rockville, Maryland (301) 217-0600 MELLON BANK, F.S.B. provides personal trust services. Headquarters: Pittsburgh, Pennsylvania (412) 234-0661 MELLON MORTGAGE COMPANY focuses on the origination and servicing of both residential and commercial mortgage loans through more than 50 locations nationwide. 1 800 366-1230 MELLON BANK COMMUNITY DEVELOPMENT CORPORATION, one of the first holding company CDCs regulated by the Federal Reserve Board, invests in projects significant to modest-income segments of Delaware, Maryland, New Jersey and Pennsylvania. (412) 234-4580 MELLON UNITED NATIONAL BANK, a full-service commercial bank, serves South Florida. Headquarters: Miami, Florida (305) 825-9132 * Mellon PSFS is a service mark of Mellon Bank, N.A. BUSINESS FEE SERVICES THE BOSTON COMPANY ASSET MANAGEMENT, LLC provides institutional investment management services. (617) 722-7029 BOSTON SAFE ADVISORS provides investment management services for individuals and corporations through brokerage firms throughout the United States. 1 800 992-5560 BUCK CONSULTANTS, INC., a leading global actuarial and human resources consulting firm, provides a broad array of services in the areas of defined benefit and defined contribution plans, health and welfare plans, communications and compensation consulting, and outsourcing and administration of employee benefit programs. www.buckconsultants.com (212) 330-1000 CCF--MELLON PARTNERS, a joint venture with Credit Commercial de France, markets investment management services in Europe and North America. (412) 234-3678 CERTUS ASSET ADVISORS is a stable-value market specialist providing investment management services to defined contribution plan sponsors. (415) 399-4450 2 CHASEMELLON SHAREHOLDER SERVICES, a joint venture with The Chase Manhattan Corporation, provides securities transfer and shareholder services throughout the United States. www.chasemellon.com 1 800 313-9450 CIBC MELLON GLOBAL SECURITIES SERVICES COMPANY, the institutional trust and custody joint venture with Canadian Imperial Bank of Commerce, provides Canadian-based pension and institutional investors with domestic and global custody, multicurrency accounting, performance measurement, investment analytics and information delivery. (416) 643-5000 CIBC MELLON TRUST COMPANY provides stock transfer, trustee and related services to Canadian-based companies. (416) 813-4500 FRANKLIN PORTFOLIO ASSOCIATES provides investment management services for employee benefit funds and institutional clients. (617) 790-6400 LAUREL CAPITAL ADVISORS provides investment management services for individuals and corporations through brokerage firms throughout the United States. 1 800 626-6721 MELLON BOND ASSOCIATES provides structured management of bond portfolios for institutional clients. (412) 234-3839 MELLON CAPITAL MANAGEMENT CORPORATION is a global quantitative asset manager for institutional clients. (415) 546-6056 MELLON EQUITY ASSOCIATES provides specialized equity and balanced investment management services to pension plans, and nonprofit and public fund markets. (412) 234-7500 MELLON FUND ADMINISTRATION is a leading servicer of unit trusts, the equivalent of mutual funds in the United Kingdom and to the offshore market in Dublin. (###-##-####) 227300 (Brentwood) (011-353-1) 790-5000 (Dublin) MELLON GLOBAL CASH MANAGEMENT(SM) designs solutions through comprehensive cash management services to meet the specialized treasury needs of middle market to large, multinational corporations, government agencies, nonprofit organizations and financial institutions. 1 800 424-3004 MELLON NETWORK SERVICES(SM) provides electronic funds transfer services, including automated teller machine processing and full-service merchant payment systems, to financial institutions and corporations nationwide. 1 800 343-7064 MELLON SECURITIES TRUST COMPANY provides securities processing and custody services. (212) 374-1970 MELLON TRUST COMPANY OF ILLINOIS provides custody services, primarily for Illinois insurance companies. (312) 357-3425 PARETO PARTNERS, a partnership in which Mellon holds a 30 percent interest, provides investment management services for employee benefit funds and institutional and high net worth clients. (212) 527-1800 BUSINESS BANKING AFCO CREDIT CORPORATION, with its Canadian affiliate, CAFO, Inc., is the nation's largest insurance premium financing company with offices in the United States and Canada. (201) 876-6600 CORPORATE BANKING markets credit and related services to large corporate customers, exclusive of financial institutions. (412) 234-8808 INSTITUTIONAL BANKING markets credit and other banking services to broker/dealers, insurance companies, domestic commercial banks, mutual funds and investment managers. (412) 234-4494 INTERNATIONAL BANKING provides international trade and correspondent banking services and markets trade finance and logistics management services for clients selling products in foreign markets. (412) 234-6787 INTERNATIONAL REPRESENTATIVE office serves as a liaison between the Corporation's banking subsidiaries and overseas customers. (011-81-03) 3216-5861 (Tokyo) MELLON 1ST BUSINESS BANK provides full commercial banking services to midsize business firms, professionals, entrepreneurs and business owners, through its headquarters office and four regional offices in southern California. (213) 489-1000 MELLON BANK CANADA is a chartered Canadian bank providing credit, cash management, treasury, custody, asset management, insurance premium financing and shareholder services to the corporate market throughout Canada. (416) 860-0777 MELLON BUSINESS CREDIT markets a broad range of commercial finance products and banking services nationwide to corporations. (215) 553-2161 MELLON EUROPE-LONDON provides global custody, securities lending, treasury, foreign exchange, credit and cash management services to domestic and international customers. (011-44-171) 623-0800 MELLON FINANCIAL MARKETS, INC., the Corporation's Section 20 underwriting subsidiary, conducts securities business, providing fixed-income underwriting, trading and sales services to clients and investors throughout the United States. (412) 234-0424 MELLON LEASING CORPORATION markets a broad range of leasing and lease-related services to corporations throughout the United States and Canada through its three divisions: Leasing--Large Corporate; Middle Market--Mellon US Leasing; and Retail/Vendor--Mellon First United Leasing. (412) 234-5061 MELLON VENTURES, INC. or its affiliates invest in the equity of midsize operating companies experiencing rapid growth or change in ownership. (412) 236-3594 MIDDLE MARKET BANKING markets a full range of financial and banking services to commercial customers with annual sales between $20 million and $500 million. Mellon's Middle Market group also specializes in providing services to segments of coal and government services industries. (412) 236-1197 REAL ESTATE FINANCE provides short- and intermediate-term financing to real estate developers and investors located in the East, Mid-Atlantic, Southeast, Midwest, Texas and southern California. (412) 234-7560 3 DIRECTORS AND SENIOR MANAGEMENT COMMITTEE DIRECTORS MELLON BANK CORPORATION AND MELLON BANK, N.A. Dwight L. Allison Jr.(5)(6) Retired Chairman, President and Chief Executive Officer The Boston Company Burton C. Borgelt(5)(6) Retired Chairman and Chief Executive Officer Dentsply International, Inc. Manufacturer of artificial teeth and consumable dental products Carol R. Brown(2)(6) President The Pittsburgh Cultural Trust Cultural and economic growth organization Frank V. Cahouet(1) Chairman, President and Chief Executive Officer Mellon Bank Corporation Christopher M. Condron(1) President and Chief Operating Officer Mellon Bank, N.A. J. W. Connolly(1)(2)(4) Retired Senior Vice President H. J. Heinz Company Food manufacturer Charles A. Corry(1)(2)(3)(4) Retired Chairman and Chief Executive Officer USX Corporation Energy and steel C. Frederick Fetterolf(1)(2)(5)(6) Retired President and Chief Operating Officer Aluminum Company of America Aluminum and chemicals Ira J. Gumberg(1)(2)(5) President and Chief Executive Officer J. J. Gumberg Co. Real estate management and development Pemberton Hutchinson(3)(5)(6) Retired Chief Executive Officer Westmoreland Coal Company Coal mining George W. Johnstone(5) Retired President and Chief Executive Officer American Water Works Company, Inc. Water services Rotan E. Lee(5)(6) Chairman Talleyrand Atlantic, LLC Strategic planning company Andrew W. Mathieson(1)(3)(4) Vice Chairman Richard King Mellon Foundation Philanthropy Edward J. McAniff(5)(6) Partner O'Melveny & Myers Full-service law firm Martin G. McGuinn(1) Chairman and Chief Executive Officer Mellon Bank, N.A. Robert Mehrabian(1)(2)(7) Senior Vice President and Segment Executive Aerospace and Electronics Allegheny Teledyne Inc. Specialty metals and diversified businesses Seward Prosser Mellon President and Chief Executive Officer Richard K. Mellon and Sons Investments Richard King Mellon Foundation Philanthropy David S. Shapira(1)(2)(5)(7) Chairman and Chief Executive Officer Giant Eagle, Inc. Retail grocery chain W. Keith Smith(1) Senior Vice Chairman Mellon Bank, N.A. Joab L. Thomas(4)(7) President Emeritus The Pennsylvania State University Major public research university Wesley W. von Schack(1)(3)(4)(6)(7) Chairman, President and Chief Executive Officer New York State Electric & Gas Corporation Energy services William J. Young(4)(5)(6) Retired President Portland Cement Association Trade association for the Portland cement industry CHAIRMEN EMERITI J. David Barnes William B. Eagleson Jr. James H. Higgins Nathan W. Pearson ADVISORY BOARD Howard O. Beaver Jr. Retired Chairman and Chief Executive Officer Carpenter Technology Corporation John C. Marous Retired Chairman and Chief Executive Officer Westinghouse Electric Corporation Masaaki Morita Chairman Sony USA Foundation Nathan W. Pearson Financial Advisor Paul Mellon Family Interests H. Robert Sharbaugh Retired Chairman Sun Company, Inc. Richard M. Smith Retired Vice Chairman Bethlehem Steel Corporation REGIONAL BOARDS MELLON BANK-CENTRAL REGION Galen E. Dreibelbis John Lloyd Hanson Bruce K. Heim Carol Herrmann Daniel B. Hoover Michael M. Kranich Sr. Edwin E. Lash Robert W. Neff Ralph J. Papa Nicholas Pelick Graham C. Showalter Alvin L. Snowiss Jamie B. Stewart Jr. MELLON BANK-COMMONWEALTH REGION Paul S. Beideman Burton C. Borgelt Stephen R. Burke James E. Grandon Jr. Ruth Leventhal Henry E. L. Luhrs Ralph J. Papa Gregory L. Sutliff (1) Executive Committee (2) Audit Committee (3) Nominating Committee (4) Human Resources Committee (5) Trust and Investment Committee (6) Community Responsibility Committee (7) Technology Committee 4 MELLON BANK-NORTHEASTERN REGION David T. Andes Frank J. Dracos Peter B. Eglin Alan J. Finlay Thomas M. Jacobs Joseph E. Kluger Jeffery L. Leininger Joseph R. Nardone Joseph F. Palchak Jr. Joseph L. Persico Arthur K. Ridley Rhea P. Simms MELLON BANK-NORTHERN REGION James D. Berry III Thomas B. Black John T. Chesko Robert H. Cox Eugene Cross William S. DeArment Robert G. Liptak Jr. Gary W. Lyons Ruthanne Nerlich John S. Patton Paul D. Shafer Jr. Cyrus R. Wellman MELLON PSFS Paul C. Brucker Frank J. Coyne Thomas F. Donovan Lon R. Greenberg Pemberton Hutchinson George W. Johnstone Rotan E. Lee Roland Morris William J. Stallkamp Francis R. Strawbridge III Stephen A. Van Dyck SUBSIDIARY BOARDS THE BOSTON COMPANY, INC. AND BOSTON SAFE DEPOSIT AND TRUST COMPANY Dwight L. Allison Jr. Christopher M. Condron James E. Conway* Charles C. Cunningham Jr. Avram J. Goldberg Lawrence S. Kash* David F. Lamere Robert P. Mastrovita J. David Officer James. P. Palermo W. Keith Smith Jamie B. Stewart Jr.* Benaree Pratt Wiley* Willis F. Williams* THE DREYFUS CORPORATION Mandell L. Berman Burton C. Borgelt Frank V. Cahouet Stephen E. Canter Christopher M. Condron Lawrence S. Kash W. Keith Smith Richard F. Syron BUCK CONSULTANTS, INC. William Daniels Merril S. Delon Stephen D. Diamond Edward I. Farb Richard Koski Brian W. Kruse Joseph A. LoCicero J. Robinson Lynch Ronald P. O'Hanley Frederick W. Rumack Raymond E. Sharp W. Keith Smith Barry S. Sutton John W. Thompson Vincent M. Tobin Gregory J. Wiber MELLON 1ST BUSINESS BANK John E. Anderson William S. Anderson W. Peter Bohn Richard M. Ferry Ernest J. Friedman Robert M. Kommerstad Robert W. Kummer Jr. Bill LeVine Peter W. Mullin Keith P. Russell Joseph P. Sanford Thomas F. Savage Roland Seidler Jr. MELLON BANK CANADA Frederick K. Beard Peter A. Crossgrove Keith G. Dalglish Fraser M. Fell Thomas C. MacMillan James A. Riley Peter Rzasnicki MELLON BANK (DE) NATIONAL ASSOCIATION John S. Barry Robert C. Cole Jr. Donna M. Coughey Audrey K. Doberstein Arden B. Engebretson Norman D. Griffiths Garrett B. Lyons Martin G. McGuinn W. Charles Paradee Jr. Bruce M. Stargatt MELLON BANK, F.S.B. Bruno A. Bonacchi Christopher Flanagan Frank L. Reis Jr. Donald W. Titzel Daryl J. Zupan MELLON BANK (MD) NATIONAL ASSOCIATION Frederick K. Beard Michael A. Besche Lawrence Brown Jr. Albert R. Hinton David R. Lovejoy Martin G. McGuinn MELLON UNITED NATIONAL BANK Paul S. Beideman Joel Friedland Herschel V. Green Gerald Katcher Martin G. McGuinn J. David Officer Aaron S. Podhurst Howard Scharlin Sherwood M. Weiser SENIOR MANAGEMENT COMMITTEE OFFICE OF THE CHAIRMAN Frank V. Cahouet Chairman, President and Chief Executive Officer Martin G. McGuinn Christopher M. Condron W. Keith Smith Steven G. Elliott John T. Chesko Jeffery L. Leininger David R. Lovejoy Keith P. Russell Jamie B. Stewart Jr. EXECUTIVE MANAGERS Paul S. Beideman Joseph A. LoCicero J. David Officer D. Michael Roark Peter Rzasnicki William J. Stallkamp Allan P. Woods SENIOR MANAGERS Frederick K. Beard Richard B. Berner Michael E. Bleier Paul A. Briggs Michael A. Bryson Larry F. Clyde Paul H. Dimmick Kenneth R. Dubuque Paul Holmes Lawrence S. Kash Allan C. Kirkman David F. Lamere Peter A. Lofquist Robert G. Loughrey Sandra J. McLaughlin John P. O'Driscoll James P. Palermo Robert M. Parkinson Robert W. Stasik Sherman White CORPORATE CONTROLLER Michael K. Hughey CORPORATE SECRETARY Carl Krasik *Director of The Boston Company, Inc. only 5 MELLON BANK CORPORATION (and its subsidiaries) - -------------------------------------------------------------------------------- FINANCIAL SUMMARY
(dollar amounts in millions, except per share amounts) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 Net interest revenue $ 1,467 $ 1,478 $ 1,548 $ 1,508 $ 1,329 $ 1,182 Provision for credit losses 148 155 105 70 125 185 Fee revenue 2,418 2,019 1,670 1,652 1,538 1,154 Gains (losses) on sale of securities -- 4 6 (5) 100 129 Operating expense 2,568 2,195 2,027 2,374 2,084 1,648 Provision for income taxes 398 418 401 278 298 104 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 771 $ 733 $ 691 $ 433 $ 460 $ 528 Net income applicable to common stock 750 689 652 358 397 477 - ------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE (a) Basic net income $ 2.94 $ 2.63 $ 2.27 $ 1.23 $ 1.40 $ 1.84 Diluted net income 2.88 2.58 2.25 1.21 1.36 1.78 Dividends paid 1.29 1.18 1.00 .79 .51 .47 Book value at year end 14.39 13.43 13.09 12.53 12.14 10.69 Average common shares and equivalents outstanding - diluted (in thousands) 260,829 266,591 290,401 298,405 294,437 272,666 - ------------------------------------------------------------------------------------------------------------------------------- KEY RATIOS (based on balance sheet averages) Return on common shareholders' equity 21.5% 20.4% 17.8% 9.8% 12.1% 18.5% Return on assets 1.80 1.74 1.72 1.14 1.29 1.72 Net interest margin on a taxable equivalent basis 4.24 4.26 4.62 4.71 4.39 4.46 Fee revenue as a percentage of total revenue (FTE) 62 58 52 52 52 46 Efficiency ratio (b) 64 63 63 65 64 65 Efficiency ratio excluding amortization of intangibles 62 60 60 62 61 63 - ------------------------------------------------------------------------------------------------------------------------------- TANGIBLE OPERATING RESULTS (c) Diluted tangible earnings per common share $ 3.19 $ 2.87 $ 2.50 $ 1.47 $ 1.57 $ 1.91 Tangible net income applicable to common stock 832 765 725 434 458 513 Return on tangible common shareholders' equity 37.5% 32.2% 27.1% 16.5% 18.9% 23.9% Return on tangible assets 2.05 1.97 1.96 1.37 1.50 1.86 - ------------------------------------------------------------------------------------------------------------------------------- RESULTS EXCLUDING CERTAIN ITEMS (d) Net income applicable to common stock $ 750 $ 689 $ 652 $ 593 $ 456 $ 347 Diluted net income per common share (a) 2.88 2.58 2.25 2.00 1.57 1.30 Return on common shareholders' equity 21.5% 20.4% 17.8% 16.0% 13.7% 13.1% Return on tangible common shareholders' equity 37.5 32.2 27.1 25.3 21.3 17.3 Return on assets 1.80 1.74 1.72 1.71 1.46 1.29 Return on tangible assets 2.05 1.97 1.96 1.97 1.67 1.43 - ------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Money market investments $ 1,186 $ 1,381 $ 1,222 $ 1,656 $ 3,821 $ 1,905 Securities 5,593 6,184 4,922 5,149 4,804 6,500 Loans 27,823 27,233 27,321 25,097 21,763 18,235 Interest-earning assets 34,777 34,944 33,761 32,282 30,657 26,948 Total assets 42,942 42,013 40,097 38,106 35,635 30,758 Deposits 30,459 30,838 27,951 27,248 26,541 22,684 Notes and debentures 2,712 2,038 1,670 1,768 1,991 1,365 Trust-preferred securities 990 32 -- -- -- -- Common shareholders' equity 3,494 3,381 3,671 3,691 3,323 2,603 Total shareholders' equity 3,700 3,810 4,106 4,277 3,964 3,112 - ------------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS Common shareholders' equity to assets 8.13% 8.11% 8.83% 9.54% 9.57% 8.85% Tangible common shareholders' equity to assets (e) 5.12 5.36 6.63 7.05 6.84 7.03 Tier I capital 7.77 8.38 8.14 9.48 9.70 10.20 Total (Tier I plus Tier II) capital 12.73 13.58 11.29 12.90 13.22 13.83 Leverage capital 8.02 8.31 7.80 8.67 9.00 9.45 - -------------------------------------------------------------------------------------------------------------------------------
(a) Presented in accordance with the requirements of FAS No. 128, "Earnings per Share," which was adopted by the Corporation at year-end 1997. Prior-period amounts have been restated. In addition, prior-period amounts also were restated to reflect the two-for-one common stock split distributed on June 2, 1997. (b) See page 43 for the definition of this ratio. (c) See page 31 for the definition of tangible operating results. (d) Results for 1994 exclude a $130 million after-tax securities lending charge, $79 million after tax of Dreyfus merger-related expense, $10 million after tax of losses on the disposition of securities available for sale previously owned by Dreyfus and $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. Results for 1993 exclude $112 million after tax of merger expense and $53 million after tax of gains on the sale of securities related to the acquisition of The Boston Company. Results for 1992 were calculated by applying a normalized effective tax rate of approximately 38% to pretax income. The unrecorded tax benefit that existed at the beginning of 1992 was included in the determination of the return on average common shareholders' equity. (e) See page 45 for the definition of this ratio. NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS. 27 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT FINANCIAL EVENTS IN 1997 - -------------------------------------------------------------------------------- Two-for-one common stock split In April 1997, the Corporation authorized a two-for-one common stock split. The additional shares resulting from the split were distributed on June 2, 1997, to shareholders of record at the close of business on May 1, 1997. All earnings and dividend per share amounts have been restated to reflect the stock split. Common dividend increased 10% In the second quarter of 1997, the Corporation increased its quarterly common stock dividend by 10% to $.33 per common share. This was the sixth quarterly common dividend increase that the Corporation announced since the beginning of 1994, resulting in a total common dividend per share increase of 161%. Acquisition of Buck Consultants, Inc. In July 1997, the Corporation acquired Buck Consultants, Inc. (Buck), a leading global benefits consulting firm. Buck is headquartered in New York and has 64 offices in 17 countries. Buck provides a broad array of pension and health and welfare actuarial services, employee benefit, compensation and human resources consulting and administrative services, and total benefits outsourcing to approximately 5,000 clients, ranging from large multinational corporations to small businesses. The Corporation issued approximately 3.5 million shares of common stock in connection with this acquisition. These shares were repurchased in the second quarter of 1997. Repurchase of common stock During 1997, the Corporation repurchased approximately 12 million shares of its common stock, including 3.5 million shares reissued in connection with the Buck acquisition. Since the beginning of 1995, the Corporation has repurchased approximately 59 million common shares, prior to any reissuances, as well as warrants for 9 million additional shares. Acquisition of Pacific Brokerage Services, Inc. In November 1997, the Corporation acquired Pacific Brokerage Services, Inc., a self-clearing deep discount broker and member of the New York Stock Exchange. It was subsequently renamed Dreyfus Brokerage Services, Inc. (DBS) and operates as a separate Mellon entity under Mellon Bank, N.A. DBS is registered as a broker/dealer in all 50 states with headquarters in Los Angeles and additional offices in Beverly Hills, New York and Chicago. It provides services to individual investors nationwide, with a significant portion conducted via the Internet. The Corporation purchased DBS with cash. DBS' Internet address is http://www.edreyfus.com. Sale of Mellon corporate trustee and agency business In November 1997, the Corporation sold its corporate trustee and agency business to Chase Manhattan Bank. Substantially all of the accounts, the majority of which consisted of municipal and corporate issues of debt securities, for which Mellon served as trustee or agent have been transferred to Chase Global Trust. The sale did not include the Corporation's noncorporate trustee fiduciary businesses. This business generated $18 million of revenue in the first nine months of 1997 including approximately $12 million of fee revenue. A gain of $43 million was recorded on the sale. 28 7 SIGNIFICANT FINANCIAL EVENTS IN 1997 (CONTINUED) - -------------------------------------------------------------------------------- CornerStone(sm) credit card losses In December 1997, the Corporation segregated $231 million of CornerStone(sm) credit card loans into an accelerated resolution portfolio. In connection with this action, the Corporation evaluated the carrying value of these loans and recorded a credit loss of $65 million to reflect this portfolio's estimated net realizable value. Interest and principal receipts, fees and loan loss recoveries on these loans are applied to reduce the net carrying value of this portfolio, which totaled $157 million at December 31, 1997. Pending acquisition of 1st Business Corporation In April 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 Bank is a state-chartered bank, headquartered in Los Angeles, with approximately $1.2 billion in assets, including approximately $500 million in loans and lease finance assets. It serves approximately 1,700 business customers in the manufacturing, wholesale trade and service industries. It also provides personal banking services to professionals, entrepreneurs, and owners and officers of its business clients. The Corporation will purchase privately owned 1st Business Corporation with cash. 1st Business Bank will operate as a separate entity under the name Mellon 1st Business Bank. The transaction closed in the first quarter of 1998. Pending acquisition of United Bankshares, Inc. In November 1997, the Corporation announced that it had reached a definitive agreement to acquire United Bankshares, Inc. and its principal subsidiary, United National Bank, a full-service commercial bank serving South Florida. With approximately $820 million in assets, including approximately $440 million in loans and lease finance assets, United National Bank is a nationally chartered bank with headquarters in Miami and 11 regional banking offices in Dade, Broward and Palm Beach counties. United services small and midsize businesses, lawyers, accountants, real estate developers and other professionals. In addition, United also provides both private banking services and trade financing. The Corporation will acquire United National Bank with a combination of common stock and cash. To the extent that common stock is issued in this transaction, the Corporation's board of directors has authorized the repurchase of up to an equivalent number of common shares. United National Bank will operate as a separate entity under the name Mellon United National Bank. The transaction closed in the first quarter of 1998. Pending acquisition of Founders Asset Management, Inc. In December 1997, the Corporation announced that it had reached a definitive agreement to acquire Founders Asset Management, Inc. (Founders), a manager of growth-oriented no-load equity mutual funds and other investment portfolios. Founders offers 11 no-load mutual funds, including nine equity funds, with approximately $4.6 billion in assets among total assets under management of $6.4 billion. Founders will be purchased with cash and will operate as a separate subsidiary, headquartered in Denver, under Mellon Bank, N.A. With the inclusion of Founders' funds, the Dreyfus/Founders family of funds will total approximately $100 billion of assets managed, including approximately $27 billion of equity assets. The transaction is expected to close in the second quarter of 1998, subject to regulatory approvals and certain closing conditions. 29 8 RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- OVERVIEW OF 1997 RESULTS - -------------------------------------------------------------------------------- The Corporation reported 1997 diluted earnings per common share of $2.88, an increase of 12%, compared with diluted earnings per common share of $2.58 in 1996. Net income applicable to common stock was $750 million in 1997, compared with $689 million in 1996. Return on common shareholders' equity and return on assets were 21.5% and 1.80%, respectively, in 1997, compared with 20.4% and 1.74%, respectively, in 1996. Diluted tangible earnings per common share in 1997 were $3.19, an increase of 11%, compared with $2.87 in 1996. Return on tangible common shareholders' equity and return on tangible assets were 37.5% and 2.05%, respectively, in 1997, compared with 32.2% and 1.97%, respectively, in 1996. The Corporation's results in 1997 reflect its successful efforts to broaden its products and distribution network and to generate high returns. Compared with 1996, the Corporation's 1997 results reflected an increase in fee revenue, partially offset by higher operating expense and lower net interest revenue. Net interest revenue totaled $1,467 million, down $11 million from $1,478 million in 1996. This reduction primarily resulted from the sale of the American Automobile Association (AAA) credit card portfolio, funding costs related to the repurchase of common stock, the insurance premium finance securitization and lower loan fees. Primarily offsetting these factors were the full-year impact of the $1.6 billion lease financing acquisitions in 1996 and the use of proceeds from the $1 billion of trust-preferred securities. Fee revenue increased to $2,418 million, up $399 million from $2,019 million in 1996. The increase in fee revenue was primarily attributable to higher trust and investment fees resulting, in part, from the Buck acquisition in the third quarter of 1997, new business and an increase in the market value of assets under management. Excluding the Buck acquisition and the gain on the sale of the corporate trust business, both in 1997, and the gain on the sale of the AAA credit card portfolio in 1996, fee revenue increased $260 million, or 13%, compared with 1996. Operating expense before trust-preferred securities expense and net revenue from acquired property was $2,509 million in 1997, up $304 million from $2,205 million in 1996. The increase primarily resulted from the Buck acquisition, a full-year impact of the 1996 lease financing acquisitions and business growth. The Corporation's effective tax rate for 1997 was 34.1%, compared with 36.3% for 1996. The lower effective tax rate resulted from a fourth quarter 1997 realignment of Corporate entities. Credit quality expense was $129 million in 1997, a decrease of $13 million compared with $142 million in 1996. The decrease resulted from a decrease in the provision for credit losses and higher gains on the sale of other real estate owned (OREO). Net credit losses totaled $201 million in 1997, an increase of $77 million from $124 million in 1996. The higher level of credit losses in 1997 primarily resulted from $65 million of credit losses recorded on $231 million of CornerStone(sm) credit card loans that were transferred to an accelerated resolution portfolio in the fourth quarter of 1997. Nonperforming assets totaled $181 million at December 31, 1997, an increase of $7 million from $174 million at December 31, 1996. The Corporation's ratio of nonperforming assets to total loans and net acquired property was .62% at December 31, 1997, compared with .63% at December 31, 1996. This ratio has been less than 1% for 14 consecutive quarters. The Corporation's ratio of common shareholders' equity to assets was 8.13% at December 31, 1997. The Tier I, Total and Leverage capital ratios were 7.77%, 12.73% and 8.02%, respectively, at December 31, 1997, well in excess of the ratios required to maintain well-capitalized status. The Corporation repurchased approximately 12 million shares of its common stock in 1997, prior to any reissuances, or nearly 5% of its common shares outstanding at the beginning of the year. 30 9 OVERVIEW OF 1997 RESULTS (CONTINUED) - -------------------------------------------------------------------------------- 1996 compared with 1995 The Corporation reported net income applicable to common stock of $689 million, or $2.58 per common share on a diluted basis, in 1996, compared with $652 million, or $2.25 per common share, in 1995. Net interest revenue was $1,478 million in 1996, a decrease of $70 million compared with 1995, primarily resulting from the decrease in interest revenue related to the credit card and home equity loan securitizations and the funding costs related to the repurchase of common shares, partially offset by a higher level of noninterest-bearing deposits and loan growth. Fee revenue was $2,019 million in 1996, an increase of $349 million from 1995, reflecting higher institutional trust fees and mutual fund management revenue, the gain on the sale of the AAA credit card portfolio, higher mortgage servicing fees and increased credit card fee revenue. Operating expense before trust-preferred securities expense and net revenue from acquired property was $2,205 million in 1996, an increase of $158 million from 1995. The increase in operating expense primarily resulted from higher staff expense, due in part to higher incentive expense and the early retirement enhancement program, as well as higher amortization expense of purchased mortgage servicing rights. These increases were offset, in part, by lower FDIC deposit insurance assessment expense in 1996. The provision for credit losses was $155 million in 1996, compared with $105 million in 1995, reflecting an increase in the provision for credit losses related to the credit card portfolio. Net credit losses totaled $124 million in 1996, down from $249 million in 1995, principally reflecting lower losses on the CornerStone(sm) credit card product. The higher level of credit losses in 1995 primarily resulted from the $106 million of credit losses recorded on CornerStone(sm) accounts transferred to an accelerated resolution portfolio in the fourth quarter of 1995. 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.
- ------------------------------------------------------------------------------------------ (dollar amounts in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------ Net income applicable to common stock $ 750 $ 689 $ 652 After-tax impact of amortization of intangibles from purchase acquisitions 82 76 73 - ------------------------------------------------------------------------------------------ Tangible net income applicable to common stock $ 832 $ 765 $ 725 Tangible earnings per common share - diluted (a) $ 3.19 $ 2.87 $ 2.50 Average common equity $ 3,494 $ 3,381 $ 3,671 Average goodwill and other identified intangibles 1,275 1,003 993 - ------------------------------------------------------------------------------------------ Average tangible common equity $ 2,219 $ 2,378 $ 2,678 Return on tangible common equity 37.5% 32.2% 27.1% Average total assets $42,942 $42,013 $40,097 Average tangible assets $41,667 $41,010 $39,104 Return on tangible assets 2.05% 1.97% 1.96% - ------------------------------------------------------------------------------------------
(a) Prior-period amounts were restated to reflect the two-for-one common stock split distributed on June 2, 1997. 31 10 BUSINESS SECTORS - --------------------------------------------------------------------------------
Consumer Business (dollar amounts in millions, Fee Services Banking Fee Services Banking averages in billions) 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Revenue $706 $647 $1,108 $1,207 $1,441 $1,093 $ 523 $ 447 Credit quality expense (revenue) 2 1 152 153 - - 2 1 Operating expense: Intangible amortization expense 6 5 51 52 27 32 21 11 Trust-preferred securities expense - - 7 - - - 30 - Other operating expense 524 472 607 623 1,038 825 190 153 - ------------------------------------------------------------------------------------------------------------------------------------ Total operating expense 530 477 665 675 1,065 857 241 164 - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes 174 169 291 379 376 236 280 282 Income taxes 62 67 102 139 134 95 98 100 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $112 $102 $ 189 $ 240 $ 242 $ 141 $ 182 $ 182 - ------------------------------------------------------------------------------------------------------------------------------------ Tangible net income $116 $105 $ 227 $ 279 $ 267 $ 167 $ 197 $ 190 - ------------------------------------------------------------------------------------------------------------------------------------ Average assets $2.4 $2.1 $ 20.0 $ 21.0 $ 1.9 $ 1.5 $16.8 $14.9 Average common equity $0.3 $0.3 $ 1.0 $ 1.0 $ 0.7 $ 0.6 $ 1.3 $ 1.3 Average Tier I preferred equity $ - $ - $ 0.1 $ - $ - $ - $ 0.4 $ - Return on common shareholders' equity 36% 37% 19% 23% 37% 26% 14% 14% Return on average assets NM NM 0.95% 1.15% NM NM 1.08% 1.22% Pretax operating margin 26% 26% 26% 31% 27% 22% 54% 63% Pretax operating margin excluding amortization of intangibles and trust-preferred securities expense 26% 27% 31% 33% 28% 25% 63% 66% Efficiency ratio excluding amortization of intangibles and trust-preferred securities expense 74% 73% 55% 54% 72% 75% 36% 34% - ------------------------------------------------------------------------------------------------------------------------------------
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 RISKS INHERENT IN THE INDIVIDUAL LINES OF BUSINESS. THE CAPITAL ALLOCATIONS MAY NOT BE REPRESENTATIVE OF THE CAPITAL LEVELS THAT WOULD BE REQUIRED IF THESE SECTORS WERE NONAFFILIATED BUSINESS UNITS. The business sector results for 1996 have been restated to reflect a refinement in methodology that better reflects the Corporation's current organizational structure. The changes are as follows: The mortgage banking business line has been moved from the Consumer Banking sector and divided into two separate components. The residential business line, including mortgage origination and servicing, has been moved to the Consumer Fee Services sector while the commercial mortgage origination and servicing business line has been moved to the Business Fee Services sector. Also, the Network Services business line, which primarily encompasses ATM network processing and merchant card processing, has been moved from the Consumer Banking sector to the Business Fee Services sector. Income before taxes for the Corporation's core sectors was $1,121 million in 1997, an increase of $55 million, or 5%, compared with $1,066 million in 1996. This increase resulted from a $384 million increase in revenue, including $153 million of fee revenue from Buck, partially offset by a $328 million increase in operating expense, primarily due to acquisitions. Return on common shareholders' equity for the core sectors was 22% in 1997, compared with 21% in 1996. Return on average assets was 1.76% in 1997, compared with 1.69% in 1996. Consumer Fee Services Consumer Fee Services includes private asset management services, retail mutual funds and residential mortgage loan origination and servicing. Income before taxes for the Consumer Fee Services sector was $174 million in 1997, an increase 32 11
- ------------------------------------------------------------------------------------------------- Total Real Estate Other Total All Core Sectors Workout Corporate Activity Sectors 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------- $3,778 $3,394 $ 18 $ 20 $112 $109 $3,908 $3,523 156 155 (22) (13) (5) - 129 142 105 100 - - - - 105 100 37 - - - 41 3 78 3 2,359 2,073 3 7 42 25 2,404 2,105 - ------------------------------------------------------------------------------------------------- 2,501 2,173 3 7 83 28 2,587 2,208 - ------------------------------------------------------------------------------------------------- 1,121 1,066 37 26 34 81 1,192 1,173 396 401 13 9 12 30 421 440 - ------------------------------------------------------------------------------------------------- $ 725 $ 665 $ 24 $ 17 $ 22 $ 51 $ 771 $ 733 - ------------------------------------------------------------------------------------------------- $ 807 $ 741 $ 24 $ 17 $ 22 $ 51 $ 853 $ 809 - ------------------------------------------------------------------------------------------------- $ 41.1 $ 39.5 $0.2 $ 0.3 $1.6 $2.2 $ 42.9 $ 42.0 $ 3.3 $ 3.2 $ - $ - $0.2 $0.2 $ 3.5 $ 3.4 $ 0.5 $ - $ - $ - $0.7 $0.4 $ 1.2 $ 0.4 22% 21% NM NM NM NM 22% 20% 1.76% 1.69% NM NM NM NM 1.80% 1.74% 30% 31% NM NM NM NM 31% 33% 33% 34% NM NM NM NM 35% 35% 62% 61% NM NM NM NM 62% 60% - -------------------------------------------------------------------------------------------------
of $5 million from 1996. This increase resulted from higher profits at private asset management and Dreyfus offset, in part, by a lower contribution from mortgage originations. This sector provided strong returns, as return on common shareholders' equity was 36% in 1997, compared with 37% in 1996. Consumer Banking Consumer Banking includes consumer lending and deposit products, business banking, credit card and jumbo residential mortgage lending. Income before taxes for 1997 was $291 million, a decrease of $88 million compared with 1996. This decrease primarily resulted from factors relating to credit card lending. Revenue decreased $99 million, compared with 1996, primarily resulting from lower credit card net interest and fee revenue reflecting the sale of the AAA credit card portfolio in November 1996 and lower fee revenue from the securitized credit card portfolio, due in part to higher credit losses in this portfolio. In addition, results in 1996 include the $57 million gain on the sale of the AAA portfolio. Partially offsetting the decrease in revenue was higher electronic tax return filing fees. Credit quality expense in 1997 and 1996 included $48 million and $55 million, respectively, of additional provision for credit losses made in response to credit losses from the CornerStone(sm) portfolio. The Corporation anticipates that credit quality expense for this sector will be lower in 1998 than in 1997 as a result of the actions taken to transfer the problem CornerStone(sm) credit card accounts to an accelerated resolution portfolio. Operating expense decreased $10 million compared with 1996, primarily resulting from the sale of the AAA credit card portfolio, as well as $6 million of expense related to the reconfiguration of the retail delivery system recorded in the first quarter of 1996, partially offset by $7 million of trust-preferred securities expense. The return on common shareholders' equity for this sector was 19% in 1997, compared with 23% in 1996. 33 12 BUSINESS SECTORS (CONTINUED) - -------------------------------------------------------------------------------- Business Fee Services Business Fee Services includes institutional asset and institutional mutual fund management and administration, institutional trust and custody, securities lending, foreign exchange, cash management, stock transfer, commercial mortgage loan origination and servicing, corporate trust, network services, benefits consulting and administrative services and services for defined contribution plans. Income before taxes for this sector was $376 million in 1997, an increase of $140 million, or 59%, compared with 1996. Revenue increased $348 million due, in part, to the $153 million of fee revenue resulting from the Buck acquisition, higher institutional asset management fees, increased institutional trust fees including an increase in securities lending revenue, higher cash management fees, higher mutual fund management and administration fees as well as higher foreign exchange fees. Partially offsetting this increase was a decline in fee revenue resulting from the formation of Canadian Imperial Bank of Commerce (CIBC) Mellon Trust Company, which is now accounted for under the equity method of accounting. Operating expense increased $208 million due to the Buck acquisition, higher transaction volumes and technology investments, partially offset by lower expenses resulting from CIBC Mellon Trust Company. This sector provided excellent returns as the return on common shareholders' equity for this sector was 37% in 1997, compared with 26% in 1996. Business Banking Business Banking 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 Business Banking sector was $280 million for 1997, a decrease of $2 million from 1996. Revenue increased $76 million, primarily as a result of higher revenue resulting from the full-year impact of the lease financing acquisitions. Operating expense increased $77 million as a result of the full-year impact of the lease financing acquisitions and $30 million of trust-preferred securities expense. The return on common shareholders' equity for this sector was 14% in both 1997 and 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 $37 million in 1997, compared with $26 million in 1996. The results in both periods reflect net revenue from acquired property and the improved credit quality of the Real Estate Workout portfolio. The Corporation expects that the net revenue from acquired property will be much lower in 1998. Other The Other sector's pretax income was $34 million for 1997 and $81 million for 1996. Revenue for 1997 primarily reflects earnings on the use of proceeds from the trust-preferred securities and earnings on capital above that required for the core sectors, and the $43 million gain on the sale of the corporate trust business. Revenue for 1996 reflects earnings on excess capital not required in the lines of business, the $28 million gain on the securitization of home equity loans and a $13 million gain on the partial sale of an equity interest. Credit quality revenue for 1997 represents loan recoveries from loans to lesser developed countries. Operating expenses for 1997 includes $41 million of trust-preferred securities expense and the one-time expense related to the upgrade of computer hardware. Operating expense for 1996 includes the $18 million charge resulting from the retirement enhancement program. In June 1997, FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued and supersedes FAS No. 14, "Financial Reporting for Segments of a Business Enterprise." This statement establishes standards for reporting information about segments of a business in the footnotes to annual financial statements and also requires selected segment information in interim reports. The statement requires disclosure on a business segment basis, as defined by the Corporation, to include a description of products and services, interest income and expense, profit or loss as measured by the Corporation's management in assessing segment performance and geographic information on assets and revenue, if material. This statement is effective January 1, 1998, and need not be applied to interim periods during 1998. 34 13 BUSINESS SECTORS (CONTINUED) - -------------------------------------------------------------------------------- The following tables distribute net income and return on common shareholders' equity for the Corporation's core sectors between customers serviced and services provided.
- ---------------------------------------------------------------------------------------------------------------------------------- Customers serviced --------------------------------------------------------- Total Total Consumer Business (dollar amounts in millions) 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $301 $342 $424 $323 Return on average common shareholders' equity 23% 26% 22% 17% - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- Services provided --------------------------------------------------------- Total Total Fee Services Banking Services (dollar amounts in millions) 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $354 $243 $371 $422 Return on average common shareholders' equity 37% 29% 16% 18% - ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE - -------------------------------------------------------------------------------- Net interest revenue includes the interest spread on interest-earning assets, as well as loan fees, cash receipts and interest reversals on nonperforming loans and revenue or expense on off-balance-sheet instruments used for interest rate risk management purposes. Net interest revenue on a fully taxable equivalent basis totaled $1,475 million in 1997, down $13 million from $1,488 million in the prior year. The net interest margin was 4.24% in 1997, down 2 basis points compared with 4.26% in 1996. The decrease in net interest revenue in 1997, compared with the prior year, principally resulted from the November 1996 sale of the $770 million AAA credit card portfolio, funding costs related to the repurchase of common stock, the December 1996 $500 million insurance premium finance securitization and lower loan fees. Primarily offsetting these factors were the full-year impact of the $1.6 billion lease financing acquisitions in 1996 and the use of proceeds from the $1 billion of trust-preferred securities issued in December 1996. The cost of the trust-preferred securities is reported in operating expense. Excluding the effects of the loan securitizations and equity repurchases, net interest revenue and the net interest margin for 1997 would have been approximately $1,696 million and 4.60%, respectively, compared with approximately $1,649 million and 4.53% in 1996. The foregone net interest revenue from the loan securitizations is substantially offset by higher servicing fee revenue and lower net credit losses. 1996 compared with 1995 Net interest revenue on a fully taxable equivalent basis totaled $1,488 million in 1996, a decrease of $70 million compared with $1,558 million in 1995, while the net interest margin decreased by 36 basis points to 4.26% in 1996. The decrease in net interest revenue and the net interest margin primarily resulted from the effect of the November 1995 $950 million credit card securitization, the March 1996 $650 million home equity loan securitization and funding costs related to the repurchase of common stock, partially offset by a higher level of noninterest-bearing deposits, loan growth and higher loan fees. 35 14 NET INTEREST REVENUE (CONTINUED) - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------- 1997 AVERAGE AVERAGE YIELDS/ (dollar amounts in millions) BALANCE INTEREST RATES - ---------------------------------------------------------------------------------------------------------------------- ASSETS Federal funds sold and securities under resale agreements $ 560 $ 30 5.29% Interest-bearing deposits with banks 518 26 5.06 Other money market investments 108 6 5.41 Trading account securities 175 9 5.54 Securities: U.S. Treasury and agency securities (a) 5,440 367 6.75 Obligations of states and political subdivisions (a) 38 3 7.77 Other (a) 108 8 6.87 Loans, net of unearned discount (a) 27,816 2,275 8.18 ------- ------ Total interest-earning assets 34,763 $2,724 7.83 Cash and due from banks 2,844 Customers' acceptance liability 271 Premises and equipment 587 Net acquired property 68 Other assets (a) 4,905 Reserve for credit losses (512) ---------------------------------------------------------------------------------------------------- Total assets $42,926 ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES, Deposits in domestic offices: TRUST-PREFERRED Demand $ 232 $ 4 1.90% SECURITIES AND Money market and other savings accounts 10,046 286 2.84 SHAREHOLDERS' Retail savings certificates 7,166 358 5.00 EQUITY Other time deposits 1,787 101 5.65 Deposits in foreign offices 2,641 129 4.88 ------- ----- Total interest-bearing deposits 21,872 878 4.02 Federal funds purchased and securities under repurchase agreements 1,390 77 5.51 Term federal funds purchased 599 34 5.71 U.S. Treasury tax and loan demand notes 468 25 5.33 Short-term bank notes 144 8 5.83 Commercial paper 69 4 5.41 Other funds borrowed 423 34 8.09 Notes and debentures (with original maturities over one year) 2,712 189 6.97 ------- ------ Total interest-bearing liabilities 27,677 $1,249 4.51 Total noninterest-bearing deposits 8,587 Acceptances outstanding 271 Other liabilities (a) 1,711 ---------------------------------------------------------------------------------------------------- Total liabilities 38,246 Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 990 Shareholders' equity (a) 3,690 ---------------------------------------------------------------------------------------------------- Total liabilities, trust-preferred securities and shareholders' equity $42,926 ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- RATES YIELD ON TOTAL INTEREST-EARNING ASSETS 7.83% COST OF FUNDS SUPPORTING INTEREST-EARNING ASSETS 3.59 ---------------------------------------------------------------------------------------------------- NET INTEREST INCOME/MARGIN: TAXABLE EQUIVALENT BASIS $1,475 4.24% WITHOUT TAXABLE EQUIVALENT INCREMENTS 1,467 4.22 ----------------------------------------------------------------------------------------------------
(a) Amounts and yields in 1997, 1996, 1995 and 1994 exclude adjustments to fair value required by FAS No. 115. Note: Interest and yields were calculated on a taxable equivalent basis at a tax rate approximating 35%, using dollar amounts in thousands and actual number of days in the years, and are before the effect of reserve requirements. Loan fees, as well as nonaccrual loans and their related income effect, have been included in the calculation of average interest yields/rates. 36 15
- ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 Average Average Average Average Average yields/ Average yields/ Average yields/ Average yields/ balance Interest rates balance Interest rates balance Interest rates balance Interest rates - ------------------------------------------------------------------------------------------------------------------------------------ $ 561 $ 30 5.41% $ 598 $ 34 5.64% $ 762 $ 30 3.98% $ 1,801 $ 54 3.03% 678 36 5.31 567 36 6.27 756 34 4.52 1,592 58 3.62 142 7 5.00 57 3 5.02 138 6 4.29 428 16 3.73 146 8 5.46 296 19 6.59 380 24 6.27 269 15 5.71 5,999 392 6.54 4,671 305 6.52 4,713 269 5.71 4,120 226 5.49 39 3 8.53 64 5 7.73 110 8 7.14 166 11 6.85 153 12 7.67 203 14 7.09 352 17 4.80 518 24 4.49 27,250 2,261 8.30 27,360 2,432 8.89 25,107 1,935 7.71 21,763 1,597 7.34 ------- ------ ------- ------ ------- ------ ------- ------ 34,968 $2,749 7.86 33,816 $2,848 8.44 32,318 $2,323 7.19 30,657 $2,001 6.53 2,782 2,337 2,337 2,170 252 229 165 133 560 555 537 518 73 80 113 198 3,865 3,703 3,273 2,524 (472) (591) (613) (565) - ------------------------------------------------------------------------------------------------------------------------------------ $42,028 $40,129 $38,130 $35,635 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ $ 830 $ 15 1.80% $ 1,916 $ 37 1.94% $ 2,143 $ 4 .21% $ 2,034 $ 2 .11% 9,935 280 2.82 8,736 277 3.16 9,439 188 1.99 8,768 146 1.66 6,529 318 4.88 6,683 337 5.05 6,597 240 3.64 7,556 241 3.19 1,766 96 5.42 263 12 4.70 246 15 6.05 422 26 6.00 3,766 194 5.14 3,898 226 5.79 2,053 92 4.46 1,024 40 3.89 ------- ----- ------- ----- -------- ------- ------- ------- 22,826 903 3.95 21,496 889 4.13 20,478 539 2.63 19,804 455 2.29 1,765 94 5.32 2,128 125 5.87 1,777 76 4.29 1,096 33 3.01 675 38 5.58 644 39 5.98 176 8 4.58 61 2 3.79 286 15 5.17 400 23 5.69 564 22 3.93 224 6 2.85 502 29 5.84 815 50 6.20 29 2 5.68 81 3 3.98 217 12 5.42 226 13 5.87 155 7 4.33 198 6 3.22 279 27 9.89 395 34 8.68 494 38 7.80 401 29 7.13 2,038 143 7.04 1,670 117 7.04 1,768 110 6.20 1,991 121 6.08 ------- ------ ------- ------ ------- ------- ------- ------- 28,588 $1,261 4.41 27,774 $1,290 4.65 25,441 $ 802 3.15 23,856 $ 655 2.75 8,012 6,455 6,770 6,737 252 229 165 134 1,319 1,533 1,453 944 - ------------------------------------------------------------------------------------------------------------------------------------ 38,171 35,991 33,829 31,671 32 - - - 3,825 4,138 4,301 3,964 - ------------------------------------------------------------------------------------------------------------------------------------ $42,028 $40,129 $38,130 $35,635 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ 7.86% 8.44% 7.19% 6.53% 3.60 3.82 2.48 2.14 - ------------------------------------------------------------------------------------------------------------------------------------ $1,488 4.26% $1,558 4.62% $1,521 4.71% $1,346 4.39% 1,478 4.23 1,548 4.58 1,508 4.67 1,329 4.34 - ------------------------------------------------------------------------------------------------------------------------------------
37 16
CREDIT QUALITY EXPENSE - ------------------------------------------------------------------------------- (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------- Provision for credit losses $148 $155 $105 Net revenue from acquired property (19) (13) (20) - ------------------------------------------------------------------------------- Credit quality expense $129 $142 $ 85 - -------------------------------------------------------------------------------
Credit quality expense, defined as the provision for credit losses less net revenue from acquired property, decreased $13 million in 1997 compared with 1996, as a result of a $7 million decrease in the provision for credit losses and a $6 million increase in net revenue from acquired property. The full years 1997 and 1996 included $48 million and $55 million, respectively, of additional provision for credit losses made in response to credit losses from the CornerStone(sm) credit card portfolio. The increase in net revenue from acquired property in 1997, compared with 1996, was primarily due to higher gains on the sale of OREO properties.
NONINTEREST REVENUE - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Fee revenue: Trust and investment revenue: Investment management: Mutual fund $ 374 $ 340 $ 309 Private asset 182 150 132 Institutional asset 171 137 135 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment management revenue 727 627 576 Administration/custody/consulting: Mutual fund 133 108 115 Private asset 16 12 9 Institutional trust 327 247 206 Benefits consulting 108 - - - ---------------------------------------------------------------------------------------------------------------------------------- Total administration/custody/ consulting revenue 584 367 330 - ---------------------------------------------------------------------------------------------------------------------------------- Total trust and investment fee revenue 1,311 994 906 Cash management and deposit transaction charges 242 211 191 Mortgage servicing fees 213 180 122 Foreign currency and securities trading revenue 118 80 91 Credit card fees 97 120 90 Information services fees 42 50 48 Gain on sale of corporate trust business 43 - - Gain on sale of credit card portfolio - 57 - Other 352 327 222 - ---------------------------------------------------------------------------------------------------------------------------------- Total fee revenue 2,418 2,019 1,670 Gains on sale of securities - 4 6 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue $2,418 $2,023 $1,676 - ---------------------------------------------------------------------------------------------------------------------------------- Fee revenue as a percentage of total revenue (FTE) 62% 58% 52% Trust and investment fee revenue as a percentage of total revenue (FTE) 34% 28% 28% - ----------------------------------------------------------------------------------------------------------------------------------
Fee revenue increased $399 million, or 20%, in 1997, compared with 1996. Excluding $153 million of revenue resulting from the Buck acquisition, the $43 million gain on the sale of the corporate trust business, both in 1997, and the $57 million gain on the sale of the AAA credit card portfolio in 1996, fee revenue increased $260 million, or 13%, compared with the prior year. The increase in fee revenue, excluding Buck, resulted primarily from a $164 million increase in trust and investment fees, a $38 million increase in foreign currency and securities trading revenue, a $33 million increase in mortgage servicing fees and a $31 million increase in cash management and deposit transaction charges, partially offset by lower credit card and information services fees. 38 17 NONINTEREST REVENUE (CONTINUED) - -------------------------------------------------------------------------------- Total trust and investment fee revenue The $317 million, or 32%, increase in trust and investment fee revenue in 1997, compared with 1996, reflects $108 million of benefits consulting fees and $45 million of institutional trust fees resulting from the Buck acquisition. Excluding the fees resulting from the Buck acquisition, trust and investment fees increased $164 million, or 16%, compared with 1996. The $100 million increase in investment management revenue resulted from a $34 million, or 10%, increase in mutual fund management revenue, a $32 million, or 21%, increase in private asset management revenue and a $34 million, or 25%, increase in institutional asset management revenue. These increases resulted from new business and an increase in the market value of assets under management. Mutual fund management fees are discussed further on the following pages. As shown in the table below, the market value of assets under management was $305 billion at December 31, 1997, a $49 billion increase from $256 billion at December 31, 1996. This increase resulted from new business and a general market increase. The equity and fixed income markets both recorded strong performances during 1997 with the S&P 500 index increasing 31.0% and the Lehman Brothers Long-Term Government Bond Index increasing 14.9%.
- ----------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE OF ASSETS UNDER MANAGEMENT IN WHOLLY OWNED AND AFFILIATED COMPANIES December 31, (in billions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Mutual funds managed - proprietary: Taxable money market funds: Institutions $ 33 $ 27 $ 24 Individuals 9 9 10 Equity funds 22 15 11 Tax-exempt bond funds 17 17 19 Tax-exempt money market funds 7 7 8 Fixed-income funds 5 5 5 - ------------------------------------------------------------------------------------------------------------------------------------ Total proprietary mutual funds managed 93 80 77 Mutual funds managed - nonproprietary 11 7 4 - ------------------------------------------------------------------------------------------------------------------------------------ Total managed mutual fund assets 104 87 81 Private asset 36 28 24 Institutional asset (a) 165 141 128 - ------------------------------------------------------------------------------------------------------------------------------------ Total market value of assets under management $305 $256 $233 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes assets managed at Pareto Partners of $21 billion, $20 billion and $15 billion at December 31, 1997, 1996 and 1995, respectively. Since mid-year 1996, the Corporation has had a 30% equity interest in Pareto Partners. At year-end 1995, the Corporation held a 65% equity interest. 39 18 NONINTEREST REVENUE (CONTINUED) - -------------------------------------------------------------------------------- Mutual fund management fees Mutual fund management fees are based upon the average net assets of each fund. Average net assets of proprietary funds managed at Dreyfus in 1997 were $89 billion, up $9 billion from $80 billion in 1996. The increase from 1996 primarily resulted from a $6 billion increase in average net assets of equity funds which averaged $19 billion for 1997 and had a period-end total of $22 billion at December 31, 1997. In addition, average net assets of institutional taxable money market funds increased $4 billion over 1996 and had a period-end total of $33 billion.
- ----------------------------------------------------------------------------------------------------------------------------------- MUTUAL FUND MANAGEMENT FEE REVENUE (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Managed mutual fund fees $413 $377 $352 Less: Fees waived and fund expense reimbursements 39 37 43 - ----------------------------------------------------------------------------------------------------------------------------------- Net managed mutual fund fees $374 $340 $309 - ----------------------------------------------------------------------------------------------------------------------------------- Net managed mutual fund fees by fund category: Proprietary funds: Taxable money market funds: Institutions $ 68 $ 60 $ 48 Individuals 35 37 39 Equity funds 111 83 64 Tax-exempt bond funds 96 100 100 Tax-exempt money market funds 28 27 24 Fixed income funds 24 23 23 - ----------------------------------------------------------------------------------------------------------------------------------- Total proprietary fund fees 362 330 298 Nonproprietary fund management fees 12 10 11 - ----------------------------------------------------------------------------------------------------------------------------------- Net managed mutual fund fees $374 $340 $309 - -----------------------------------------------------------------------------------------------------------------------------------
Administration/custody/consulting fee revenue increased $217 million in 1997, compared with 1996, and included $108 million of benefits consulting fees and $45 million of institutional trust fees resulting from the Buck acquisition. Institutional trust fees, excluding the $45 million of fees resulting from the Buck acquisition, increased $35 million, or 14%, including a $13 million increase in securities lending revenue. Mutual fund administration/custody revenue increased $25 million, or 23%, and private asset administration/custody revenue increased $4 million, or 35%, in 1997 compared with the prior year. These increases resulted primarily from new business and higher transaction volumes. The market value of assets under administration/custody, shown in the table below, was $1,532 billion at December 31, 1997, an increase of $486 billion compared with $1,046 billion at December 31, 1996. This increase resulted from a higher level of assets administered by CIBC Mellon Global Securities Services, a 50% owned joint venture, as well as new business, the Buck acquisition and a general market increase, partially offset by the sale of the corporate trust business and its related assets under administration/custody of approximately $24 billion.
- ----------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY IN WHOLLY OWNED AND AFFILIATED COMPANIES December 31, (in billions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Institutional trust $1,440 (a) $ 962 $708 Mutual fund 60 57 60 Private asset 32 27 18 - ----------------------------------------------------------------------------------------------------------------------------------- Total market value of assets under administration/custody $1,532 $1,046 $786 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes $246 billion of assets administered by CIBC Mellon Global Securities Services, a 50% owned joint venture. 40 19 NONINTEREST REVENUE (CONTINUED) - -------------------------------------------------------------------------------- Cash management and deposit transaction charges The Corporation is a major national provider of a number of cash management services, including remittance processing, collections and disbursements, check processing and electronic services to assist corporate clients in the management of their accounts receivable, accounts payable and treasury management functions. At December 31, 1997, the Corporation ranked sixth among cash management banks for market penetration serving approximately one quarter of U.S. businesses and institutions with annual sales of more than $500 million. Cash management and deposit transaction charges totaled $242 million in 1997, an increase of $31 million, or 15%, from 1996. This increase resulted primarily from higher volumes of business in customer receivables, payables and treasury management products. Mortgage servicing fees Mortgage servicing fees totaled $213 million in 1997, an increase of $33 million, or 18%, compared with 1996, resulting primarily from a higher level of mortgage servicing rights acquired through portfolio acquisitions. At December 31, 1997, the Corporation's total servicing portfolio was $83 billion, composed of $66 billion of residential and $17 billion of commercial servicing. At December 31, 1996, the total servicing portfolio was $69 billion, composed of $58 billion of residential and $11 billion of commercial servicing. Foreign currency and securities trading revenue Foreign currency and securities trading fees were $118 million in 1997, a 48% increase from $80 million earned in 1996. The increase was primarily attributable to higher foreign exchange fees earned as a result of higher levels of market volatility and customer activity, primarily in the Corporation's global custody business. Credit card fees Credit card fee revenue, which principally consists of interchange, cardholder fees and servicing revenue from the securitized credit card receivables, decreased by $23 million, or 20%, in 1997. This decrease primarily resulted from the sale of the AAA credit card portfolio in November 1996 and lower fee revenue from the securitized credit card portfolio, due in part to higher credit losses in this portfolio. Additional information on the effect of the credit card securitization is presented in the table on the following page. Information services fees The $8 million, or 16%, decrease in information services fee revenue, compared with 1996, primarily resulted from the July 1997 sale of 50% of the Corporation's interest in the R-M Trust Company to the Canadian Imperial Bank of Commerce (CIBC). The R-M Trust Company, subsequently renamed CIBC Mellon Trust Company, is one of the largest stock transfer agencies in Canada. It offers transfer agency, trustee and related services to Canadian and international organizations. The Corporation accounts for its interest in CIBC Mellon Trust Company under the equity method of accounting with net results recorded as information services fee revenue. The R-M Trust Company reported information services fee revenue of approximately $12 million in the first half of 1997. Partially offsetting the decrease was an increase in fee revenue related to third-party ATM transactions processed for network services clients. Gain on sale of the corporate trust business In November 1997, the Corporation sold its corporate trust business to Chase Manhattan Bank. This business generated $18 million of revenue in the first nine months of 1997 including approximately $12 million of institutional trust administration/custody fee revenue. The Corporation recorded a gain of $43 million on the sale. The sale is not otherwise expected to materially affect the Corporation's earnings and will not affect the Corporation's other trust businesses. 41 20 NONINTEREST REVENUE (CONTINUED) - -------------------------------------------------------------------------------- Other fee revenue Other fee revenue increased $25 million in 1997 from $327 million in 1996. This increase primarily resulted from a $28 million increase in servicing fee revenue from the insurance premium finance and home equity loan securitizations. Additional information on the effect of these securitizations is presented in the tables below. In addition, the Corporation experienced a net increase of $25 million in 1997 from higher syndication fees, the realization of lease residuals, higher fees from the electronic filing of income tax returns and the sale of equity securities and other assets. This increase was offset by the $28 million gain recorded in 1996 on the home equity loan securitization. 1996 compared with 1995 Compared with 1995, fee revenue increased by $349 million, or 21%, in 1996. The improvement reflected increases of 10% in trust and investment fee revenue, 48% in mortgage servicing fees, 34% in credit card fees, 10% in cash management and deposit transaction charges and the $57 million gain on the sale of the AAA credit card portfolio. 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 these securitizations on 1997 and 1996 results are shown below.
- ----------------------------------------------------------------------------------------------------------------------------------- SECURITIZED CREDIT CARD RECEIVABLES (in millions) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Lower net interest revenue $ 86 $ 89 Lower net credit losses 57 47 Higher fee revenue 28 41 Lower loans - average 950 950 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- SECURITIZED HOME EQUITY LOANS (in millions) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Lower net interest revenue $ 23 $ 18 Lower net credit losses 1 - Higher fee revenue 13 11 Lower loans - average 650 494 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- SECURITIZED INSURANCE PREMIUM FINANCE LOANS (in millions) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Lower net interest revenue $ 28 $ 1 Lower net credit losses 1 - Higher fee revenue 27 1 Lower loans - average 500 18 - -----------------------------------------------------------------------------------------------------------------------------------
42 21
OPERATING EXPENSE - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (dollar amounts in millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Staff expense $1,242 $1,055 $ 957 Net occupancy expense 225 205 205 Professional, legal and other purchased services 219 195 186 Equipment expense 175 145 143 Business development 148 137 136 Amortization of mortgage servicing assets and purchased credit card relationships 118 107 68 Amortization of goodwill and other intangible assets 105 100 96 Communications expense 102 96 86 Other expense 175 165 170 - ---------------------------------------------------------------------------------------------------------------------------------- Operating expense before trust-preferred securities expense and net revenue from acquired property 2,509 2,205 2,047 Trust-preferred securities expense 78 3 - Net revenue from acquired property (19) (13) (20) - ---------------------------------------------------------------------------------------------------------------------------------- Total operating expense $2,568 $2,195 $2,027 - ---------------------------------------------------------------------------------------------------------------------------------- Average full-time equivalent staff 26,400 24,600 24,300 - ---------------------------------------------------------------------------------------------------------------------------------- Efficiency ratio (a) 64% 63% 63% Efficiency ratio excluding amortization of goodwill and other intangible assets 62 60 60 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Operating expense before trust-preferred securities expense and net revenue from acquired property, as a percentage of revenue, computed on a taxable equivalent basis, excluding gains on the sale of securities. Operating expense before trust-preferred securities expense and net revenue from acquired property totaled $2,509 million in 1997, an increase of $304 million, or 14%, compared with 1996. The increase primarily resulted from the Buck acquisition and a full-year impact of the 1996 lease financing acquisitions, business growth, business development and reengineering initiatives, and higher equipment expense. Staff expense totaled $1,242 million in 1997, an increase of $187 million compared with 1996. The increase resulted from the Buck acquisition and a full-year impact of the 1996 lease financing acquisitions, as well as an increase in performance-based incentive expense and higher expense of temporary help and contract programmers. Also impacting this comparison was a charge recorded in the first quarter of 1996 of $18 million for the Corporation's retirement enhancement program. Net occupancy expense increased $20 million compared with 1996, primarily from the Buck and lease financing acquisitions as well as write-downs related to the consolidation of branch and processing locations. Professional, legal and other purchased services totaled $219 million in 1997, an increase of $24 million compared with 1996. This increase primarily resulted from higher consulting expenses related to business growth and reengineering initiatives as well as from the Buck and lease financing acquisitions. Equipment expense increased $30 million compared with 1996, primarily from the one-time expense of upgrading computer hardware and from the Buck acquisition. Business development expense increased $11 million compared with 1996, due mainly to higher expenditures in support of revenue growth. The amortization of mortgage servicing assets and purchased credit card relationships increased $11 million compared with 1996, primarily resulting from a higher level of mortgage servicing rights (MSRs) acquired through portfolio acquisitions and a higher level of mortgage prepayments. Declines in interest rates can result in prepayments of the mortgage loans underlying the MSRs, which can decrease future net servicing revenue. Decreases in expected future net servicing revenue can result in accelerated amortization and potential impairment of MSRs. The Corporation has entered into various off- 43 22 OPERATING EXPENSE (CONTINUED) - -------------------------------------------------------------------------------- balance-sheet instruments to manage the prepayment risk associated with its mortgage servicing portfolio. See pages 55 and 56 for a further discussion of these instruments. The increase in the amortization of goodwill and other intangible assets, communications expense and other expense reflects the impact of acquisitions and business growth. The Corporation sold 50% of its interest in the R-M Trust Company in July 1997. As a result of this transaction, the Corporation accounts for its remaining interest under the equity method of accounting. The net results from this company were recorded as information services fee revenue. The R-M Trust Company recorded operating expense of approximately $12 million in the first half of 1997, primarily in staff expense. The $75 million increase in trust-preferred securities expense in 1997, compared with 1996, resulted from a full-year impact of the issuance of $1 billion of these securities in December 1996. The proceeds of these securities were used to fund interest-earning assets. See note 13 of the Notes to Financial Statements for a further discussion of these securities. Year 2000 Project In early 1996, the Corporation formed a Year 2000 project team to identify software systems and computer-related devices that require modification for the year 2000. A project plan has been developed with goals and target dates. The Corporation's business areas are in various stages of this project plan. The Corporation incurred expenses throughout 1997 related to this project and will continue to incur expenses over the next 24 months. A significant portion of total year 2000 project expenses is represented by existing staff that has been redeployed to this project. Incremental expenses are not expected to materially impact operating results in any one period. The Corporation could be negatively affected by the year 2000 date change to the extent that third parties have not successfully addressed the year 2000 issues. However, the Corporation has taken actions to help reduce this exposure. Third parties have been identified and contacted to determine their year 2000 plans and target dates. This process is ongoing. The Corporation will monitor the progress of critical third parties and will implement contingency plans in the event that such third parties fail to achieve their plans. There can be no assurance that any contingency plans will fully mitigate the effects of any such failure. 1996 compared with 1995 Operating expense before trust-preferred securities expense and net revenue from acquired property was $2,205 million in 1996, an increase of $158 million, or 8%, compared with 1995. The increase primarily resulted from increases in staff expense and the amortization of mortgage servicing assets partially offset by lower FDIC deposit insurance assessment expense. The increase in staff expense resulted from higher incentive and commission expense and base salaries, as well as the charge for the retirement enhancement plan offered in 1996. Higher amortization of mortgage servicing assets resulted from growth in the portfolio. The lower FDIC deposit insurance premium resulted from the suspension of this premium in 1996 for healthy institutions. INCOME TAXES - -------------------------------------------------------------------------------- The provision for income taxes totaled $398 million in 1997, compared with $418 million in 1996 and $401 million in 1995. The Corporation's effective tax rate for 1997 was 34.1% compared with 36.3% for 1996 and 36.7% for 1995. The lower effective tax rate in 1997 resulted from a fourth quarter 1997 realignment of Corporate entities. It is currently anticipated that the effective tax rate will be approximately 35.3% in 1998. 44 23 CAPITAL - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- SELECTED CAPITAL DATA (dollar amounts in millions, December 31, except per share amounts) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Common shareholders' equity $ 3,652 $3,456 $3,590 Common shareholders' equity to assets ratio 8.13% 8.11% 8.83% Tangible common shareholders' equity $ 2,227 $2,218 $2,632 Tangible common equity to assets ratio (a) 5.12% 5.36% 6.63% Total shareholders' equity $ 3,845 $3,746 $4,025 Total shareholders' equity to assets ratio 8.56% 8.79% 9.90% Tier I capital ratio 7.77 8.38 8.14 Total (Tier I plus Tier II) capital ratio 12.73 13.58 11.29 Leverage capital ratio 8.02 8.31 7.80 Book value per common share $ 14.39 $13.43 (b) $13.09 (b) Tangible book value per common share $ 8.77 $ 8.62 (b) $ 9.60 (b) Closing common stock price $ 60.63 $35.50 (b) $26.88 (b) Market capitalization $15,386 $9,134 $7,374 Common shares outstanding (000) 253,786 257,294 (b) 274,374 (b) - ------------------------------------------------------------------------------------------------------------------------------------
(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 distributed on June 2, 1997. The Corporation's capital management objectives are to maintain a strong capital base--in excess of all regulatory guidelines--while also maximizing shareholder value. During 1997, the Corporation continued to enhance shareholder value by returning excess capital to shareholders through the repurchase of common stock and increased dividends. The increase in the Corporation's common and total shareholders' equity at December 31, 1997, compared with December 31, 1996, reflects earnings retention and the common shares issued in the Buck acquisition, partially offset by common stock repurchases. Also impacting total shareholders' equity was the February 1997 redemption of the $100 million Series J preferred stock. The Corporation returned $534 million to shareholders in 1997, prior to any reissuances, by repurchasing 12.1 million shares of common stock, or nearly 5% of common shares outstanding at the beginning of the year. Since the beginning of 1995, the Corporation has repurchased 59.3 million common shares prior to any reissuances, as well as warrants for 9 million shares of common stock. In July 1997, the board of directors of the Corporation authorized the repurchase of up to 6 million shares of common stock. Average common stock and stock equivalents used in the computation of diluted earnings per share totaled 260.8 million shares in 1997, compared with 266.6 million shares in 1996. The Corporation's average level of treasury stock was approximately $300 million higher in 1997 compared with 1996. After giving effect to funding the higher level of treasury stock, valued at a short-term funding rate, the lower share count increased diluted earnings per share 1% while ongoing business growth increased diluted earnings per share 11%. 45 24 CAPITAL (CONTINUED) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- COMMON SHARES OUTSTANDING (in millions) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Beginning shares outstanding 257.3 274.4 Shares issued for stock-based benefit plans and dividend reinvestment plan 5.1 4.5 Shares issued for Buck acquisition 3.5 - Shares repurchased (12.1) (a) (21.6) (b) - ----------------------------------------------------------------------------------------------------------------------------------- Ending shares outstanding 253.8 257.3 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Purchase price of $534 million for an average share price of $44.01 per share. (b) Purchase price of $596 million for an average share price of $27.55 per share. Regulatory capital The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial results. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Corporation's and its banking subsidiaries' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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. To be well capitalized, the Corporation's banking subsidiaries must maintain Tier I, Total and Leverage capital ratios of at least 6%, 10% and 5%, respectively. All of the banking subsidiaries qualified as well capitalized at December 31, 1997 and 1996. The Corporation intends to maintain the ratios of its banking subsidiaries at the well-capitalized levels. By maintaining ratios above the regulatory well-capitalized guidelines, the Corporation's banking subsidiaries receive the financial benefit of lower FDIC deposit insurance assessments. 46 25 CAPITAL (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ RISK-BASED AND LEVERAGE CAPITAL RATIOS December 31, (dollar amounts in millions) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Tier I capital: Common shareholders' equity (a) $ 3,619 $ 3,457 Qualifying preferred stock 193 290 Trust-preferred securities (b) 991 863 Other items 4 (12) Goodwill and certain other intangibles (1,366) (1,150) - ------------------------------------------------------------------------------------------------------------------------------------ Total Tier I capital 3,441 3,448 Tier II capital 2,197 2,140 - ------------------------------------------------------------------------------------------------------------------------------------ Total qualifying capital $ 5,638 $ 5,588 - ------------------------------------------------------------------------------------------------------------------------------------ Risk-adjusted assets: On-balance-sheet $29,772 $27,717 Off-balance-sheet 14,515 13,436 - ------------------------------------------------------------------------------------------------------------------------------------ Total risk-adjusted assets $44,287 $41,153 - ------------------------------------------------------------------------------------------------------------------------------------ Average assets-leverage capital basis $42,926 $41,498 - ------------------------------------------------------------------------------------------------------------------------------------ Tier I capital ratio (c) 7.77% 8.38% Total capital ratio (c) 12.73 13.58 Leverage capital ratio (c) 8.02 8.31 - ------------------------------------------------------------------------------------------------------------------------------------
(a) In accordance with regulatory guidelines, the $33 million of unrealized gains and $1 million of unrealized loss, net of tax, on assets classified as available for sale at December 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. The decrease in the Corporation's regulatory capital ratios compared with year-end 1996 reflects a higher level of risk-adjusted assets as well as a higher level of goodwill and other intangibles, from acquisitions.
- ------------------------------------------------------------------------------------------------------------------------------------ RISK-BASED AND LEVERAGE CAPITAL RATIOS FOR SIGNIFICANT BANKING SUBSIDIARIES Mellon Boston Safe Bank, N.A. Deposit and Trust Capital Well- ---------- ----------------- adequacy capitalized December 31, December 31, (dollar amounts in millions) guidelines guidelines 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Amount: Tier I capital $ 2,646 $ 2,419 $ 355 $ 426 Total qualifying capital 4,228 3,712 381 460 Risk-adjusted assets 39,319 36,614 2,093 2,743 Average assets-leverage capital basis 37,555 36,811 4,266 4,157 Ratios: Tier I capital ratio 4% 6% 6.73% 6.61% 16.95% 15.52% Total capital ratio 8 10 10.75 10.14 18.20 16.78 Leverage capital ratio 3 5 7.05 6.57 8.31 10.24 - ------------------------------------------------------------------------------------------------------------------------------------
In 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: (1) 10% or more of its total 47 26 CAPITAL (CONTINUED) - -------------------------------------------------------------------------------- assets, or (2) $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. Goodwill and other intangibles
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Goodwill $1,341 $1,110 $788 - -----------------------------------------------------------------------------------------------------------------------------------
The $231 million increase in goodwill at December 31, 1997, compared with December 31, 1996, resulted from a $164 million increase related to the Buck acquisition and a $149 million increase related to the Pacific Brokerage Services, Inc. acquisition, partially offset by $74 million of amortization. Based upon the current level and amortization schedule, the annual amortization of goodwill for the years 1998 through 2000 is expected to be approximately $79 million and decrease to approximately $75 million in 2001 and 2002. The after-tax impact of the annual amortization of goodwill for the years 1998 through 2000 is expected to be approximately $69 million and decrease to approximately $65 million in 2001 and 2002. The levels of goodwill and purchased core deposit intangibles are expected to increase by approximately $750 million following the closing of the 1st Business Corporation, United Bankshares, Inc. and Founders Asset Management, Inc. acquisitions in the first half of 1998.
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Purchased core deposit intangibles $65 $ 88 $110 Covenants not to compete - 6 22 Other identified intangibles 19 34 38 - ----------------------------------------------------------------------------------------------------------------------------------- Total purchased core deposit and other identified intangibles $84 $128 $170 - -----------------------------------------------------------------------------------------------------------------------------------
The decrease in purchased core deposit and other identified intangibles from December 31, 1996, resulted from amortization expense of $31 million and the sale of 50% of the R-M Trust Company. Based upon the current level and amortization schedule, the annual amortization of purchased core deposit and other identified intangibles for the years 1998 through 2002 is expected to be approximately $24 million, $24 million, $12 million, $7 million and $5 million, respectively. The after-tax impact of the annual amortization of these items for the years 1998 through 2002 is anticipated to be approximately $16 million, $16 million, $8 million, $4 million and $3 million, respectively. Mortgage servicing assets and purchased credit card relationships
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Mortgage servicing assets $1,052 $745 $592 Purchased credit card relationships 23 29 90 - ----------------------------------------------------------------------------------------------------------------------------------- Total mortgage servicing assets and purchased credit card relationships $1,075 $774 $682 - -----------------------------------------------------------------------------------------------------------------------------------
48 27 CAPITAL (CONTINUED) - -------------------------------------------------------------------------------- In 1997 and 1996, the Corporation capitalized $433 million and $285 million, 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 $112 million, $96 million and $57 million in 1997, 1996 and 1995, respectively. The estimated fair value of capitalized mortgage servicing assets was $1.2 billion at December 31, 1997. See note 1 of Notes to Financial Statements for a further discussion of the Corporation's accounting policy for mortgage servicing assets. 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. CORPORATE RISK - -------------------------------------------------------------------------------- RISK OVERVIEW - -------------------------------------------------------------------------------- Risk identification and management are essential elements for the successful management of the Corporation. The four primary risk exposures are liquidity risk; market risk, which includes interest rate and currency risk; credit risk; and fiduciary risk. Liquidity risk is the possibility that the Corporation will not be able to fund present and future financial obligations. Market risk is the possibility of lower net interest revenue or lower market values of assets and liabilities as interest rates or exchange rates fluctuate. Credit risk is the possibility of loss from a counterparty's failure to perform according to the terms of a transaction. Fiduciary risk is the possibility of loss from actions taken on behalf of clients. In addition, the Corporation is subject to other risks, particularly in its fee-generating businesses, that are transaction oriented. The Corporation controls and monitors these risks with policies, procedures and various levels of managerial oversight. Because of the nature of its businesses, external factors beyond the Corporation's control may, at times, result in losses to the Corporation or its customers. The Corporation is involved with various financial instruments that potentially create risk. These instruments are both on and off the balance sheet. On-balance-sheet instruments include securities, loans, mortgage servicing rights, deposits and borrowings. Off-balance-sheet instruments include loan commitments, standby letters of credit, interest rate swaps, foreign exchange contracts and interest rate futures and forwards. LIQUIDITY AND DIVIDENDS - -------------------------------------------------------------------------------- The Finance Committee of the Corporation is responsible for liquidity management. This committee of senior managers has a Liquidity Policy that covers all assets and liabilities, as well as off-balance-sheet items that are potential sources or uses of liquidity. The Corporation's liquidity management objective is to maintain the ability to meet commitments to fund loans and to purchase securities, as well as to repay deposits and other liabilities in accordance with their terms, including during periods of market or financial stress. The Corporation's overall approach to liquidity management is to ensure that sources of liquidity are sufficient in amount and diversity to accommodate changes in loan demand and core funding routinely without a material adverse impact on net income. The Corporation uses several key primary and secondary measures to assess the adequacy of the Corporation's liquidity position. The balance sheet is managed to ensure that these measures are maintained within approved limits. Each of these measures is monitored on a periodic basis giving consideration to the Corporation's expected requirements for funds and anticipated market conditions. 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 parent Corporation also has a $300 million revolving credit agreement, with approximately three years remaining until maturity, and a $25 million backup line of credit to 49 28 LIQUIDITY AND DIVIDENDS (CONTINUED) - -------------------------------------------------------------------------------- provide support facilities for its commercial paper borrowings and for general corporate purposes. The revolving credit facility contains Tier I ratio, double leverage ratio and nonperforming asset covenants, as discussed in note 11 of Notes to Financial Statements. As shown in the consolidated statement of cash flows, cash and due from banks increased by $804 million during 1997 to $3,650 million at December 31, 1997. The increase reflected $517 million of net cash provided by operating activities, $188 million of net cash provided by investing activities and $70 million of net cash provided by 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 and an increase in mortgage servicing assets. Net cash provided by financing activities primarily reflected an increase in short-term borrowings, partially offset by a decrease in deposits and the repurchase of common stock. In May 1997, Mellon Bank, N.A., the Corporation's principal banking subsidiary, issued $300 million of subordinated debt at a fixed rate of 7.375%, maturing in 2007. This subordinated debt qualifies as Tier II capital for the Corporation's risk-based capital calculation. The proceeds from this issue were used for general corporate purposes. Contractual maturities of parent term debt totaled $205 million in 1997 and consisted primarily of the $200 million 6-1/2% Senior Notes that matured in December 1997. Contractual maturities of long-term debt will total $118 million in 1998, including $12 million of parent term debt. At December 31, 1997, the Corporation had a debt shelf registration statement on file with the Securities and Exchange Commission on which up to $1.25 billion of debt may be issued. The issuance of any debt securities from this debt shelf registration will depend on future market conditions, funding requirements and other factors. Mellon Bank, N.A. has an existing offering circular, under which it can issue up to $6 billion of bank notes. Up to $3 billion of these notes, outstanding at any one time, can have maturities of 7 to 270 days and up to $3 billion, in the aggregate, can have maturities of more than 270 days to 15 years. At December 31, 1997, the bank had $303 million of notes with original maturities greater than one year and $330 million of short-term notes outstanding under this program. Proceeds from these notes are used for general funding purposes of the bank. At December 31, 1997, the Corporation's and Mellon Bank, N.A.'s senior debt were rated "A2" and "A1", respectively, by Moody's and "A" and "A+", respectively, by Standard & Poor's. In August 1997, Standard & Poor's revised its ratings outlook on the Corporation and its affiliates to positive from stable. In February 1997, the Corporation redeemed the $100 million, 8.50% Series J preferred stock at a redemption price of $25 per share plus accrued dividends. The Corporation has announced that it will redeem the $200 million, 8.20% Series K preferred stock on February 17, 1998, at a redemption price of $25 per share plus accrued dividends. The Corporation increased its annual common stock dividend to $1.32 per common share in the second quarter of 1997, an increase of 10% from the previous annual rate, on a post-split basis, of $1.20. The Corporation has increased its common stock dividend six times over the last four years, resulting in a 161% increase during that period. Common dividends of $330 million were paid on the outstanding shares of common stock during 1997. The dividend payout ratio was 44% in 1997 and 45% in 1996. On a tangible earnings per common share basis, the dividend payout ratio was 40% in both 1997 and 1996. In addition, the Corporation paid $18 million in preferred stock dividends in 1997 and recorded $3 million of issue costs as preferred stock dividends in connection with the redemption of the Series J preferred stock. The Series K preferred stock redemption will result in $7 million of issue costs being recorded as preferred stock dividends in the first quarter of 1998. Using the current common stock dividend rate and shares outstanding at December 31, 1997, and excluding the Series K preferred stock, the annual dividend requirement in 1998 is expected to be approximately $335 million. The Corporation has reduced its annual preferred stock and common stock dividend requirements by approximately $93 million through the redemption of its preferred stocks and the repurchase of common stock since 1994, net of issuances. 50 29 LIQUIDITY AND DIVIDENDS (CONTINUED) - -------------------------------------------------------------------------------- The parent Corporation's principal sources of cash are dividends and interest from its subsidiaries. The ability of national and state member bank subsidiaries to pay dividends to the parent Corporation is subject to certain limitations, as discussed in note 22 of Notes to Financial Statements. Under the more restrictive limitation, the Corporation's national and state member bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to December 31, 1997, of approximately $535 million, less any dividends declared and plus or minus net profits or losses, as defined, between January 1, 1998, and the date of any such dividend declaration. The bank subsidiaries declared dividends to the parent Corporation totaling $450 million in 1997, $400 million in 1996 and $501 million in 1995. Dividends paid to the parent Corporation by nonbank subsidiaries totaled $34 million in 1997, $21 million in 1996 and $30 million in 1995. In 1997, The Boston Company returned $100 million of capital to the parent Corporation. 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. To comply with regulatory guidelines, the Corporation and its subsidiary banks continually evaluate the level of cash dividends in relation to their respective operating income, capital needs, asset quality and overall financial condition.
Balance sheet analysis - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE BALANCES (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: Money market investments $ 1,186 $ 1,381 $ 1,222 Trading account securities 175 146 296 Securities 5,593 6,184 4,922 Loans 27,823 27,233 27,321 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 34,777 34,944 33,761 Noninterest-earning assets 8,677 7,541 6,927 Reserve for credit losses (512) (472) (591) - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $42,942 $42,013 $40,097 - ------------------------------------------------------------------------------------------------------------------------------------ FUNDS SUPPORTING TOTAL ASSETS: Core funds $34,618 $32,068 $30,986 Wholesale and purchased funds 8,324 9,945 9,111 - ------------------------------------------------------------------------------------------------------------------------------------ Funds supporting total assets $42,942 $42,013 $40,097 - ------------------------------------------------------------------------------------------------------------------------------------
The decrease in the Corporation's average interest-earning assets in 1997, compared with 1996, reflects a $591 million decrease in average securities and a $195 million decrease in average money market investments, partially offset by a $590 million increase in loans. The decrease in average securities reflects a reduction in deposits with pledging requirements in 1997, compared with 1996. Average loans increased as a result of the full-year impact of the 1996 lease financing acquisitions and loan growth, partially offset by the AAA credit card sale and the insurance premium finance loan securitization. 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 $1,686 million in 1997 from the prior year, primarily reflecting a higher level of noninterest-earning assets. The increase in noninterest-earning assets includes a higher level of goodwill resulting from the lease financing and Buck acquisitions and higher levels of receivables, mortgage servicing assets and cash and due from banks. Average core funds increased $2,550 million in 1997 compared with 1996, primarily reflecting the issuance of the trust-preferred securities in December 1996, and higher levels of notes and debentures and corporate and retail deposits. Core funds averaged 96% of core assets in 1997, up from 93% in 1996 and 92% in 1995. Wholesale and purchased funds are defined as deposits in foreign offices, negotiable certificates of deposit, federal funds purchased and securities under repurchase agreements, U.S. Treasury tax and loan demand notes, other time deposits, short-term bank notes, commercial paper and other funds borrowed. Average wholesale and purchased funds decreased 51 30 LIQUIDITY AND DIVIDENDS (CONTINUED) - -------------------------------------------------------------------------------- $1,621 million compared with 1996, primarily reflecting a decrease in deposits in foreign offices, and federal funds purchased and securities under repurchase agreements. As a percentage of total average assets, average wholesale and purchased funds decreased to 19% in 1997, compared with 24% in 1996 and 23% in 1995. 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 are used to estimate the impact of changes in interest rates on the net interest margin. 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-interest deposit products to higher-interest 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 significantly differ from the simulation. The Corporation has established the following guidelines for assuming interest rate risk: Net interest margin simulation--Given a +/- 200 basis point parallel shift in interest rates, the estimated net interest revenue may not change by more than 5% for a one-year period. Portfolio equity simulation--Portfolio equity is the net present value of the Corporation's existing assets, liabilities and off-balance-sheet instruments. Given a +/- 200 basis point parallel shift in interest rates, portfolio equity may not change by more than 20% of total shareholders' equity. The measurement of interest rate risk is meaningful only when all related on- and off-balance-sheet items are aggregated and the net positions are identified. Financial instruments that the Corporation uses to manage interest rate sensitivity include: money market assets, U.S. government and federal agency securities, municipal securities, mortgage-backed securities, corporate bonds, asset-backed securities, fixed rate wholesale term funding, interest rate swaps, caps and floors, financial futures and financial options. The table below illustrates the simulation analysis of the impact of a 50, 100 or 200 basis point parallel shift upward or downward in interest rates on net interest revenue, earnings per share and return on common shareholders' equity. This analysis was done using the levels of all interest-earning assets and off-balance-sheet instruments used for interest rate risk management at December 31, 1997, assuming 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 in a parallel fashion over a six-month period from the December 31, 1997, levels and remaining at those levels thereafter. This analysis excludes the effect that rate movements can have on the value of mortgage servicing rights, discussed on pages 55 and 56.
- ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SIMULATION SENSITIVITY ANALYSIS Movements in interest rates from December 31, 1997, rates - ------------------------------------------------------------------------------------------------------------------------------------ Simulated impact in the next 12 months Increase Decrease compared with December 31, 1997: --------------------------------- --------------------------------- +50bp +100bp +200bp -50bp -100bp -200bp --------------------------------- --------------------------------- Net interest revenue decrease -% (.2)% (.8)% (.1)% (.5)% (1.3)% Earnings per share decrease $ - $(.01) $(.03) $ - $(.02) $(.05) Return on common equity decrease - bp (5) bp (21) bp (2) bp (12) bp (33) bp - ------------------------------------------------------------------------------------------------------------------------------------
52 31 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- Managing interest rate risk with off-balance-sheet instruments The Corporation uses interest rate swaps, including index amortizing swaps and callable swaps, in managing its overall interest rate exposure. By policy, the Corporation will not implement any new off-balance-sheet activity that, when aggregated into the total corporate interest rate exposure, would cause the Corporation to exceed the interest rate risk limits outlined previously. Interest rate swaps, caps and floors, financial futures and financial options have been approved by the board of directors for managing the overall corporate interest rate exposure. 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. 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. Interest rate swaps involve the exchange of fixed and variable interest payments based upon a contractual notional amount. In an index amortizing swap, the notional amount will vary based upon an underlying index. Generally, as rates fall, the notional amounts decline more rapidly and, as rates increase, notional amounts decline more slowly. Callable swaps are generic swaps with a call option at the option of the counterparty. Callable swaps' notional amounts are not based on interest rate indices, but call options will be exercised or not exercised on the basis of market interest rates. The callable swaps entered into by the Corporation 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. The use of financial futures and option contracts is permitted provided that: the transactions occur in a market with a size that ensures sufficient liquidity; the contract is traded on an approved exchange or, in the case of over-the-counter option contracts, is transacted with a credit-approved counterparty; and the types of contracts have been authorized for use by the board of directors and the Finance Committee. The Corporation's off-balance-sheet instruments used to manage its interest rate risk are shown in the table on the following page. Additional information regarding these contracts is presented in note 24 of Notes to Financial Statements. 53 32 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK Total at Dec. 31, (notional amounts in millions) 1998 1999 2000 2001 2002 2003+ 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Receive fixed/pay floating generic swaps: (a) Notional amount $ 29 $ - $ - $ - $ - $ 700 $ 729 Weighted average rate: Receive 4.64% - - - - 6.62% 6.54% Pay 4.59% - - - - 5.86% 5.81% Receive fixed/pay floating indexed amortizing swaps: Notional value $ 755 $1,622 $212 $93 $270 $ - $2,952 Weighted average rate: Receive 6.19% 5.71% 6.43% 7.15% 7.13% - 6.06% Pay 5.83% 5.82% 5.83% 5.85% 5.85% - 5.82% Receive fixed/pay floating callable swaps: (b) Notional value $ 650 $ 400 $ - $ - $ - $ - $1,050 Weighted average rate: Receive 6.90% 6.86% - - - - 6.88% Pay 5.82% 5.82% - - - - 5.82% Pay fixed/receive floating generic swaps: (a) Notional amount $444 $ 220 $ - $ - $ 5 $ 10 $ 679 Weighted average rate: Receive 5.78% 5.94% - - 5.81% 5.83% 5.83% Pay 5.92% 6.18% - - 6.59% 6.64% 6.02% Other products (c) $ - $ - $ 40 $ - $ - $ - $ 40 - ----------------------------------------------------------------------------------------------------------------------------------- Total notional amount $1,878 $2,242 $252 $93 $275 $ 710 $5,450 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Generic swaps' notional amounts and lives are not based upon interest rate indices. (b) Expected maturity dates, based upon interest rates at December 31, 1997, are shown in this table. (c) Average rates are not meaningful for these products. The gross notional amount of off-balance-sheet products used to manage the Corporation's interest rate risk was $5.5 billion at December 31, 1997, an increase of approximately $.6 billion from December 31, 1996. The increase in these instruments resulted from the addition of approximately $1.1 billion of callable swaps in the first quarter of 1997. This gross notional amount, which is presented in the table above, should be viewed in the context of the Corporation's overall interest rate risk management activities to assess its impact on the net interest margin. These off-balance-sheet products were used to modify the Corporation's natural asset-sensitive position. The table on the following page presents the gross notional amounts of off-balance-sheet instruments used to manage interest rate risk, identified by the underlying interest rate-sensitive instruments. 54 33 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Instruments associated with deposits $3,143 $3,888 Instruments associated with other liabilities 705 415 Instruments associated with loans 1,602 582 - ----------------------------------------------------------------------------------------------------------------------------------- Total notional amount $5,450 $4,885 - -----------------------------------------------------------------------------------------------------------------------------------
The Corporation entered into these off-balance-sheet products 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 $23 million in 1997, compared with interest revenue of $24 million in 1996 and interest expense of $2 million in 1995. The Corporation's analysis using interest rates at December 31, 1997, indicates that currently held off-balance-sheet instruments are expected to have a positive impact of approximately $15 million on the net interest margin in 1998. In response to tactical asset/liability management considerations, the Corporation terminated $200 million of pay fixed rate generic interest rate swaps in 1997, resulting in a net deferred loss of less than $1 million. This loss will be amortized over the two years remaining on the original hedge. This net unamortized deferred loss combined with net unaccreted deferred gains of $2 million resulting from the terminations of $4.6 billion of interest rate swaps during 1996 resulted in a net unaccreted deferred gain of $2 million, carried as other liabilities, at December 31, 1997. The Corporation accreted $3 million and $7 million of these gains into net interest revenue in 1997 and 1996, respectively. In addition, during 1996, the Corporation terminated $800 million of interest rate agreements that were used to lock in the cost of debt issuances in 1996. These terminations resulted in net unaccreted deferred gains, carried as other liabilities, totaling $11 million at December 31, 1997. These deferred gains are being accreted to interest expense over the term of the debt. Approximately $1 million of these gains was accreted into interest expense in both 1997 and 1996, respectively. The Corporation also has entered into off-balance-sheet contracts to manage the prepayment risk associated with a portion of its mortgage servicing portfolio. Mortgage servicing rights (MSRs) are interest rate sensitive due to the mortgage borrower's option to prepay the mortgage loan. If mortgage interest rates decrease, borrowers may prepay mortgage loans. Since mortgage loans underlie MSRs, a decrease in interest rates and an actual (or probable) increase in mortgage prepayments shorten the expected life of the MSR and reduces its value. Conversely, an increase in interest rates and an actual (or probable) decrease in mortgage prepayments lengthen the expected life of the MSR and increases its value. To mitigate the prepayment risk of decreasing long-term interest rates, higher than expected mortgage prepayments and a potential impairment to MSRs, the Corporation uses interest rate floor and interest rate swap contracts tied to yields on 10-year constant maturity Treasury notes. At December 31, 1997, the Corporation had approximately $1.85 billion of purchased interest-rate floor agreements outstanding and $1.0 billion of interest rate swap agreements outstanding. In addition, the Corporation had $273 million of principal only swaps outstanding at December 31, 1997. These instruments are collectively structured to gain value as interest rates decrease, therefore reducing the potential impairment of MSRs. Conversely, the value of these instruments will decrease as interest rates increase. Realized gains/losses and cash settlements on these instruments are recorded as adjustments to the carrying value of the MSRs. These instruments do not entirely eliminate risk. Mortgage prepayment rates may not occur as expected. The following table presents the gross notional amounts of off-balance-sheet instruments used to manage prepayment risk associated with MSRs. 55 34 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE PREPAYMENT RISK OF MSRS Total at Dec. 31 (dollar amounts in millions) 1998 1999 2000 2001 2002 2003+ 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate floors (notional) $ - $ - $ - $ - $1,850 $ - $1,850 Weighted average strike rates - - - - 5.67% - 5.67% Fair value 35 Receive fixed/pay floating interest rate swaps (notional) $ - $ - $ - $ - $ - $1,000 $1,000 Weighted average rates: Receive - - - - - 6.40% 6.40% Pay - - - - - 5.82% 5.82% Fair value 26 Principal only swaps (notional) (a) $273 $ - $ - $ - $ - $ - $ 273 Fair value 13 - ------------------------------------------------------------------------------------------------------------------------------------ Total notional amount $273 $ - $ - $ - $1,850 $1,000 $3,123 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Shown as maturing in 1998 because the swaps can be canceled at the Corporation's discretion. Contractual maturity is 2002. In addition to the risk management instruments previously discussed, the Corporation has entered into contracts to hedge anticipated transactions. The Corporation has entered into four interest rate swap contracts totaling $350 million to lock in the cost of a debt issuance anticipated in the first quarter of 1998. The Corporation also has entered into $229 million of interest rate futures to lock in the value of certain loans that are anticipated to be sold and/or securitized in the first half of 1998. There was an unrealized loss of less than $1 million related to these anticipated transactions at December 31, 1997. The estimated unrealized fair value of the Corporation's risk management off-balance-sheet products at December 31, 1997, was a positive $111 million, compared to a negative $64 million at December 31, 1996. This increase was consistent with the decrease in interest rates in 1997, which had the corresponding effect of decreasing the fair value of on-balance-sheet core deposits. Also impacting the market value was the positive fair value of the interest rate floors and swaps entered into in the second half of 1997 to hedge against value impairment of the Corporation's MSRs. These values should be viewed in the context of the overall financial structure of the Corporation, including the aggregate net position of all on- and off-balance-sheet instruments. As more fully discussed in note 24 of Notes to Financial Statements, credit risk associated with off-balance-sheet instrument positions represents the aggregate replacement cost of contracts in a gain position. At December 31, 1997 and 1996, the amount of credit exposure associated with risk management instruments was $114 million and $7 million, respectively. 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, interest rate caps and floors, and interest rate futures and forward contracts 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 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 1997, the Corporation recorded $115 million of fee revenue from these activities, primarily from foreign exchange contracts entered into on behalf of customers, compared with $76 million in 1996. The total notional values of these contracts were $45 billion at 56 35 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- December 31, 1997, and $36 billion at December 31, 1996, and are included in the off-balance-sheet instruments used for trading activities table on page 98 in note 24 of Notes to Financial Statements. Total credit risk of contracts used for trading activities was $533 million at December 31, 1997, and $345 million at December 31, 1996. 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 are reported to the Office of The Chairman and, in certain instances, to the Audit Committee of the board of directors. The financial risk associated with trading positions is managed by assigning position limits and stop loss guidance amounts to individual activities. The Corporation uses a value at risk methodology to estimate the potential daily amount that could be lost. Value at risk measures the volatility of the value of equity, which is the present value of future expected cash flows of assets, liabilities and off-balance-sheet instruments. 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. The loss analysis includes the off-balance-sheet instruments used for trading activities as well as the financial assets and liabilities that are classified as trading positions on the balance sheet. 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 approximately $1 million at December 31, 1997, primarily related to foreign currency contracts. Trading activities are generally limited to products and markets in which liquidity is sufficient to allow positions to be closed quickly and without adversely affecting market prices, which limits loss potential below that assumed for a full-day adverse movement. Loss potential is further constrained in that it is highly unusual for all trading areas to be exposed to maximum limits at the same time and extremely rare for significant adverse market movements to occur in all markets simultaneously. Stop loss guidance is used when a certain threshold of loss is sustained. If stop loss guidance amounts are approached, open positions are liquidated to avoid further risk to earnings. The use of both stop loss guidance and position limits reduces the likelihood that potential trading losses would reach imprudent levels in relation to earnings capability. CREDIT RISK - -------------------------------------------------------------------------------- Credit risk exists in financial instruments that are both on and off the balance sheet. Financial instruments such as loans and leases are on the balance sheet. Off-balance-sheet credit exposures include loan commitments, standby letters of credit and the credit risk associated with financial instruments used for risk management and trading activities. The objective of the credit risk management process is to reduce the risk of loss if a customer fails to perform according to the terms of a transaction. Essential to this process are stringent underwriting of new loan commitments, active monitoring of all loan portfolios and the early identification of potential problems and their prompt resolution. The Corporation establishes internal ownership, responsibility and accountability for all aspects of asset quality. Notwithstanding this process, however, asset quality is dependent in large part upon local, national, international and industry segment economic conditions that are beyond the Corporation's control. 57 36 CREDIT RISK (CONTINUED) - -------------------------------------------------------------------------------- Management maintains a comprehensive centralized process through which the Corporation establishes exposure limits, extends new loans, monitors credit quality, actively manages problem credits and disposes of nonperforming assets. The Corporation's board of directors is kept informed of credit activity through a series of monthly and quarterly reports. To help ensure adherence to the Corporation's credit policies, department credit officers report to both the Corporation's chief risk and credit officer and the head of each respective lending department. The responsibilities of these credit officers include all aspects of the credit process except credit review, credit recovery and aggregate portfolio management, which are centralized at the corporate level. The Corporation manages both on- and off-balance-sheet credit risk by maintaining a well-diversified credit portfolio and by adhering to its written credit policies, which specify general underwriting criteria as well as underwriting standards for specific industries and control credit exposure by borrower, counterparty, degree of risk, industry and country. These measures are adopted by the Credit Policy Committee and are regularly updated to reflect the committee's evaluation of developments in economic, political and operating environments that could affect lending risks. The Corporation may adjust credit exposure to individual industries or customers through loan sales, syndications, participations and the use of master netting agreements when the Corporation has more than one transaction outstanding with the same customer. Except for certain well-defined loans made by the Consumer Banking sector, primarily to consumers and small businesses, all credit extensions are approved jointly by officers of the Credit Policy department and officers of the lending departments. The number and level of officer approvals required are determined by the dollar amount and risk characteristics of the credit extension. The amount of collateral, if any, obtained by the Corporation upon the extension of credit is based on industry practice as well as the credit assessment of the customer. The type and amount of collateral vary, but the form generally includes: accounts receivable; inventory; property, plant and equipment; other assets; and/or income-producing commercial properties with appraised values that exceed the contractual amount of the credit facilities by pre-approved ratios. The Corporation continually assesses the quality of its consumer and commercial credit facilities, and assigns a numerical quality rating to substantially all extensions of credit in its commercial, real estate and international portfolios. Lending officers have the primary responsibility for monitoring their portfolios, identifying emerging problem loans and recommending changes in quality ratings. To anticipate or detect problems that may result from economic downturns or deteriorating conditions in certain markets, lending units and credit management use processes designed to identify potential credit problems, both for specific customers and for industries that could be affected by adverse market or economic conditions. When signs of credit deterioration are detected, credit recovery or other specialists become involved to minimize the Corporation's exposure to potential future credit losses. The Credit Review division provides an independent assessment of credit ratings, credit quality and the credit management process. For a further discussion of the credit risk associated with off-balance-sheet financial instruments, see the discussions of the various financial instruments in note 24 of Notes to Financial Statements. COMPOSITION OF LOAN PORTFOLIO AT YEAR END - -------------------------------------------------------------------------------- The loan portfolio increased $1,749 million in 1997, compared with the prior year, reflecting increases in consumer mortgages, other consumer credit, business banking, middle market lending and leasing. Partially offsetting these increases was a lower level of credit card loans due in part to the transfer of an additional $231 million of CornerStone(sm) credit card loans to an accelerated resolution portfolio in the fourth quarter of 1997. At December 31, 1997, the composition of the loan portfolio was 57% commercial and 43% consumer, unchanged from the prior year end. 58 37 COMPOSITION OF LOAN PORTFOLIO AT YEAR END (CONTINUED) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- DOMESTIC LOANS Commercial and financial $10,826 (a) $10,196 $10,969 $10,015 $ 9,091 Commercial real estate 1,509 (b) 1,534 1,532 1,624 1,721 Consumer credit: Consumer mortgage 8,505 7,772 8,960 8,680 8,191 Credit card 931 1,296 1,924 2,381 1,441 Other consumer credit 3,166 2,640 2,612 2,455 2,372 - ----------------------------------------------------------------------------------------------------------------------------------- Total consumer credit 12,602 11,708 13,496 13,516 12,004 Lease finance assets 2,639 2,533 830 815 718 - ----------------------------------------------------------------------------------------------------------------------------------- Total domestic loans 27,576 25,971 26,827 25,970 23,534 INTERNATIONAL LOANS 1,566 1,422 863 763 950 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned discount (c) $29,142 $27,393 $27,690 $26,733 $24,484 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes $7 million of loans subject to the FDIC loss-sharing arrangement that expired on January 1, 1998. (b) Includes $26 million of loans subject to the FDIC loss-sharing arrangement that expired on January 1, 1998. (c) Excludes segregated assets. Note: There were no concentrations of loans to borrowers engaged in similar activities, other than those shown in this table, that exceeded 10% of total loans at year end. Commercial and financial The domestic commercial and financial loan portfolio primarily consists of loans to corporate borrowers in the manufacturing, service, energy, communications, wholesale and retail trade, public utilities and financial services industries. Numerous risk factors impact this portfolio, including industry specific risks such as the economy, new technology, labor rates and cyclicality, as well as customer specific factors such as cash flow, financial structure, operating controls and asset quality. The Corporation diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines. Diversification is intended to limit the risk of loss from any single unexpected economic event or trend. Total domestic commercial and financial loans increased by $630 million, or 6%, during 1997, primarily as a result of increases in business banking and middle market lending to small and midsize businesses. Commercial and financial loans represented 37% of the total loan portfolio at December 31, 1997 and 1996. At year-end 1997, nonperforming domestic commercial and financial loans were .16% of total domestic commercial and financial loans, compared with .21% at December 31, 1996. This ratio has been less than 1% for nearly five years. Commercial real estate The Corporation's $1,509 million domestic commercial real estate loan portfolio consists of $968 million 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 $541 million of owner-occupied and other loans. Owner-occupied and other loans are loans that are secured by real estate; however, the commercial property is not being relied upon as the primary source of repayment. The commercial real estate loan portfolio includes $26 million of loans acquired in the December 1992 Meritor retail office acquisition that were subject to a five-year 95% loss-sharing arrangement with the FDIC. This loss-sharing arrangement ended on January 1, 1998. Commercial real estate loans carry many of the same customer and industry risks as the commercial and financial portfolio, as well as contractor/subcontractor performance risk in the case of commercial construction loans and cash flow risk based on project economics. Domestic commercial real estate loans decreased $25 million compared with December 31, 1996, as paydowns and credit losses were partially offset by new loan originations. Domestic commercial real estate loans were 5% of total loans at December 31, 1997, and 6% at December 31, 1996. Nonperforming commercial real estate loans were 3.25% of total domestic commercial real estate loans at December 31, 1997, compared with 1.03% at December 31, 1996. This increase was primarily due to the addition of one loan to nonperforming status. 59 38 COMPOSITION OF LOAN PORTFOLIO AT YEAR END (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS Percent of Dec. 31, total loans (in millions) 1997 outstanding - ----------------------------------------------------------------------------------------------------------------------------------- Commercial mortgage and construction loans $ 942 3% Owner-occupied and other loans 541 2 FDIC loss share loans 26 - - ----------------------------------------------------------------------------------------------------------------------------------- Total $1,509 5% - -----------------------------------------------------------------------------------------------------------------------------------
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 December 31, 1997, this portfolio totaled $8,505 million, up 9%, from $7,772 million at the prior year end. The $733 million increase in this portfolio from year-end 1996 resulted from an increase in the one- to four-family residential mortgage warehouse portfolio. Jumbo mortgages, which totaled $3.6 billion at year-end 1997, are variable rate residential mortgages that range from $250,000 to $3 million. These loans were virtually unchanged from December 31, 1996, as new loan originations were offset by paydowns and sales. Risks involved in holding jumbo mortgages include less liquidity than a traditional one- to four-family residential mortgage portfolio and increased exposure on an individual loan basis. The Corporation attempts to control these risks by requiring more stringent loan-to-value ratios and higher liquidity and cash flow requirements for each borrower. At December 31, 1997, the geographic distribution of the jumbo mortgages was as follows: 29% in the mid-Atlantic region; 27% in New England; 24% in California; and 20% in other domestic regions. The Corporation's one- to four-family residential mortgages increased approximately $770 million, to $2.5 billion at December 31, 1997, from the prior year end. This increase primarily resulted from an increase in the loans held in the residential warehouse portfolio. Fixed-term home equity loans totaled $1.8 billion, unchanged from December 31, 1996. Home equity revolving credit line loans were unchanged from year-end 1996 at $.6 billion. Risks on these three portfolios are limited to payment and collateral risk, and are primarily driven by regional economic factors. Nonperforming consumer mortgages were .62% of total consumer mortgages at December 31, 1997, compared with .65% at December 31, 1996. Credit card At December 31, 1997, credit card loans totaled $931 million, a $365 million, or 28%, decrease from December 31, 1996. The decrease primarily resulted from the transfer of $231 million of CornerStone(sm) credit card loans to an accelerated resolution portfolio in the fourth quarter of 1997 and from credit losses. The transfer of loans to an accelerated resolution portfolio is discussed on the following page. The primary risk associated with credit card loans is that these loans are unsecured and are solely dependent upon the credit-worthiness of the borrower. The Corporation monitors this risk using both internal and external statistical models. In addition to these models, the Corporation monitors factors such as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. Credit card loans are charged off after becoming 180 days delinquent and as such are not placed on nonperforming status prior to charge-off. The improvement in the ratio of credit card loans 90 days or more past due to total credit card loans of .84% at December 31, 1997, compared with 2.24% at December 31, 1996 resulted from the transfer of CornerStone(sm) loans to an accelerated resolution portfolio. The CornerStone(sm) credit card portfolio totaled $266 million, or 29% of total credit cards at year-end 1997, compared with $631 million, or 49%, at year-end 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. 60 39 COMPOSITION OF LOAN PORTFOLIO AT YEAR END (CONTINUED) - -------------------------------------------------------------------------------- Other consumer credit Other consumer credit, which principally consists of student loans, installment loans, unsecured personal credit lines and margin loans, was $3,166 million at December 31, 1997, an increase of $526 million from year-end 1996. The increase was primarily due to a higher level of margin loans following the November 1997 acquisition of Pacific Brokerage Services, Inc. Other consumer credit loans are both secured and unsecured and, in the case of student loans, are government guaranteed. Approximately 52% of this portfolio at December 31, 1997, consisted of student loans. Lease finance assets Lease finance assets totaled $2,639 million at December 31, 1997, an increase of $106 million compared with year-end 1996. Lease finance assets represented 9% of the total loan portfolio at December 31, 1997, unchanged from December 31, 1996. Nonperforming leases were .38% of total leases at December 31, 1997, compared with .23% at December 31, 1996. International loans Loans to international borrowers totaled $1,566 million at December 31, 1997, up 10% from $1,422 at year-end 1996, primarily due to increased activity with large corporate customers and foreign banks. There were no nonperforming international loans at December 31, 1997. In addition, the Corporation's Asian exposure was minimal at year-end 1997. The Corporation's international lending strategy centers around establishing relationships with large foreign firms that are multinational in nature but also carry a significant U.S. presence. Assets held for accelerated resolution In December 1997, the Corporation transferred $231 million of CornerStone(sm) credit card loans into an accelerated resolution portfolio. In connection with this transfer, the Corporation evaluated the carrying value of these loans and recorded a credit loss of $65 million to reflect an estimated net realizable value of $166 million. Interest and principal receipts, fees and loan loss recoveries on loans in this portfolio are applied to reduce the carrying value of the portfolio, which totaled $157 million at December 31, 1997. This portfolio is in other assets on the Corporation's balance sheet. NONPERFORMING ASSETS - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (dollar amounts in millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans $133 $ 94 $167 $151 $202 Acquired property, net of the OREO reserve 48 80 69 88 139 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets (a) $181 $174 $236 $239 $341 - ----------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a percentage of total loans .46% .35% .60% .56% .83% Total nonperforming assets as a percentage of total loans and net acquired property .62% .63% .85% .89% 1.39% - -----------------------------------------------------------------------------------------------------------------------------------
(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 $12 million of segregated assets acquired in the December 1992 Meritor retail office acquisition. The loss-sharing arrangement with the FDIC ended as of January 1, 1998. Beginning in 1998, any segregated assets will be reclassified as nonaccrual loans or OREO, as appropriate. Additional information regarding segregated assets is presented in note 8 of Notes to Financial Statements. 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 61 40 NONPERFORMING ASSETS (CONTINUED) - -------------------------------------------------------------------------------- classified as nonaccrual but are charged off on a formula basis upon reaching various stages of delinquency. Additional information regarding the Corporation's practices for placing assets on nonaccrual status is presented in note 1 of Notes to Financial Statements. At December 31, 1997, nonperforming assets totaled $181 million, an increase of $7 million from December 31, 1996, resulting primarily from the addition of a commercial real estate loan to nonperforming status, partially offset by a lower level of OREO. The ratio of nonperforming assets to total loans and net acquired property was .62% at December 31, 1997, the lowest year-end ratio in the Corporation's history. This ratio has been lower than 1% for 14 consecutive quarters, reflecting a strong economy and the effectiveness of the Corporation's loan administration and workout procedures.
- ----------------------------------------------------------------------------------------------------------------------------------- NONPERFORMING ASSETS (a) December 31, (dollar amounts in millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Domestic nonaccrual loans: Commercial and financial $ 17 $ 21 $ 65 $ 60 $ 35 Commercial real estate 49 16 29 25 75 Consumer credit: Consumer mortgage 52 50 61 56 61 Other consumer credit 5 1 2 - 4 Lease finance assets 10 6 - 1 2 - ----------------------------------------------------------------------------------------------------------------------------------- Total domestic nonaccrual loans 133 94 157 142 177 International nonaccrual loans - - - 1 7 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 133 94 157 143 184 - ----------------------------------------------------------------------------------------------------------------------------------- Domestic restructured loans: Commercial and financial - - - 5 4 Commercial real estate - - 10 3 14 - ----------------------------------------------------------------------------------------------------------------------------------- Total restructured loans - - 10 8 18 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans: Domestic 133 94 167 150 195 International - - - 1 7 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans (b) 133 94 167 151 202 - ----------------------------------------------------------------------------------------------------------------------------------- Acquired property: Real estate acquired 52 86 87 116 175 Reserve for real estate acquired (9) (10) (18) (29) (37) - ----------------------------------------------------------------------------------------------------------------------------------- Net real estate acquired 43 76 69 87 138 Other assets acquired 5 4 - 1 1 - ----------------------------------------------------------------------------------------------------------------------------------- Total acquired property 48 80 69 88 139 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $181 $174 $236 $239 $341 - ----------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a percentage of respective loan portfolio segments: Domestic commercial and financial loans .16% .21% .59% .65% .43% Domestic commercial real estate loans 3.25 1.03 2.55 1.73 5.17 Domestic consumer mortgage loans .62 .65 .68 .64 .75 Domestic lease finance assets .38 .23 - .11 .21 Total loans .46 .35 .60 .56 .83 Nonperforming assets as a percentage of total loans and net acquired property .62 .63 .85 .89 1.39 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. (b) Includes $44 million, $13 million, $81 million, $58 million and $74 million, respectively, of loans with both principal and interest less than 90 days past due but placed on nonaccrual status by management discretion. 62 41 NONPERFORMING ASSETS (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ CHANGE IN NONPERFORMING LOANS (a) Domestic --------------------------------------------------------- Lease Commercial Commercial Consumer Finance Total (in millions) & Financial Real Estate Credit Assets 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Nonperforming loans at beginning of year $21 $16 $51 $ 6 $ 94 $167 Acquired from USL/FUL - - - - - 5 Additions 68 69 44 20 201 137 Payments (b) (55) (8) (17) (5) (85) (125) Returned to accrual status - (4) (12) (3) (19) (33) Credit losses (17) (24) (3) (6) (50) (37) Transfers to acquired property - - (6) (2) (8) (20) - ------------------------------------------------------------------------------------------------------------------------------------ Nonperforming loans at end of year $17 $49 $57 $10 $133 $ 94 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. (b) Includes interest applied to principal and sales.
- ----------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL NONPERFORMING LOAN DATA (a) December 31, (dollar amounts in millions) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Book balance $133 $ 94 Contractual balance 191 115 Book balance as a percentage of contractual balance 70% 82% Full-year interest receipts applied to reduce principal $ 1 $ 1 Full-year interest receipts recognized in interest revenue 8 11 - -----------------------------------------------------------------------------------------------------------------------------------
(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 determination is presented in note 1 of Notes to Financial Statements.
- ------------------------------------------------------------------------------------------------------------------------------------ IMPAIRED LOANS (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Impaired loans at year end (a) $ 82 $ 56 $109 Average impaired loans for the year 47 86 116 Interest revenue recognized on impaired loans (b) 8 11 13 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes $19 million, $13 million and $59 million of impaired loans with a related impairment reserve of $2 million, $3 million and $22 million at December 31, 1997, December 31, 1996 and December 31, 1995, respectively. (b) All income was recognized using the cash basis method of income recognition. Acquired property consists of OREO and other assets acquired in connection with loan settlements. Acquired property totaled $48 million at December 31, 1997, a decrease of $32 million compared with year-end 1996.
- ------------------------------------------------------------------------------------------------------------------------------------ CHANGE IN ACQUIRED PROPERTY December 31, (in millions) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ OREO at beginning of year, net of the OREO reserve $76 $69 Foreclosures 12 23 Sales (47) (20) Write-downs, losses, OREO provision and other 2 4 - ------------------------------------------------------------------------------------------------------------------------------------ OREO at end of year, net of the OREO reserve 43 76 Other acquired assets 5 4 - ------------------------------------------------------------------------------------------------------------------------------------ Total acquired property, net of the OREO reserve (a) $48 $80 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. 63 42 NONPERFORMING ASSETS (CONTINUED) - -------------------------------------------------------------------------------- The Corporation recognizes any estimated potential decline in the value of OREO between appraisal dates on a property-by-property basis through periodic additions to the OREO reserve. Write-downs charged against this reserve are taken when OREO is sold at a loss or upon the receipt of appraisals which indicate a deterioration in the fair value of the property. Activity in the Corporation's OREO reserve for 1997, 1996 and 1995 is presented in the table below.
- ------------------------------------------------------------------------------------------------------------------------------------ CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Beginning balance $10 $18 $29 Write-downs on real estate acquired (1) (4) (3) Provision - (4) (8) - ------------------------------------------------------------------------------------------------------------------------------------ Ending balance $ 9 $10 $18 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ FOREGONE INTEREST ON NONPERFORMING LOANS Year ended December 31, (in millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Contractual interest due $15 $9 $15 $15 $21 Interest revenue recognized 10 3 5 3 7 - ------------------------------------------------------------------------------------------------------------------------------------ Interest revenue foregone $ 5 $6 $10 $12 $14 - ------------------------------------------------------------------------------------------------------------------------------------
Note: This table includes interest revenue foregone on loans that were nonperforming at the end of each year. Interest receipts that the Corporation applied, for accounting purposes, to reduce principal balances of nonaccrual loans are included in contractual interest due but not in interest revenue recognized. 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 December 31, (dollar amounts in millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Consumer: Mortgages $ 38 $ 35 $34 $ 27 $25 Ratio .44% .45% .38% .31% .30% Credit card 8 (a) 29 (a) 13 (a) 32 15 Ratio .84% 2.24% .66% 1.35% 1.04% Student - government guaranteed 44 47 44 36 37 Ratio 2.69% 3.01% 3.11% 2.71% 3.26% Other consumer 1 2 1 1 1 Ratio .09% .18% .09% .07% .09% - ------------------------------------------------------------------------------------------------------------------------------------ Total consumer $ 91 $113 $92 $ 96 $78 Ratio .72% .97% .68% .71% .65% Commercial (b) 13 10 6 10 6 - ------------------------------------------------------------------------------------------------------------------------------------ Total past-due loans $104 $123 $98 $106 $84 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Excludes past-due CornerStone(sm) credit card loans included in an accelerated resolution portfolio. (b) Includes lease finance assets. Note: Ratios are loans 90 days or more past-due as a percentage of year-end loan balances. 64 43 RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES - --------------------------------------------------------------------------------
(dollar amounts in millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Reserve for credit losses at year end (a) $475 $525 $471 $607 $600 Reserve as a percentage of: Total loans 1.63% 1.92% 1.70% 2.27% 2.45% Nonperforming loans 356 556 282 403 297 Net credit losses as a percentage of average loans .72(b) .46 .91(b) .27 .64 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Excludes reserve for segregated assets. (b) The ratio of net credit losses, excluding credit losses on assets held for accelerated resolution, to average loans was .49% in 1997 and .53% in 1995. The reserve for credit losses was $475 million at December 31, 1997, or 1.63% of total loans, compared with $525 million, or 1.92% of total loans, at December 31, 1996. The $50 million decrease in the reserve for credit losses from December 31, 1996, primarily resulted from credit losses on the CornerStone(sm) credit card loans including $65 million of credit losses taken on the CornerStone(sm) loans that were transferred to an accelerated resolution portfolio in December 1997. These loans were transferred at their estimated net realizable value. The excess of the carrying value over the estimated realizable value was recorded as a credit loss. The Corporation maintains a credit loss reserve that, in management's judgment, is adequate to absorb future losses inherent in the loan portfolio. Management reviews the adequacy of the reserve at least quarterly. For analytical purposes, the reserve methodology estimates loss potential in both the commercial and consumer loan portfolios. This methodology includes an evaluation of loss potential on individual problem credits, as well as a portfolio review of market concentrations, changing business trends, industry risks, and current and anticipated specific and general economic factors that may adversely affect collectability. Other factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; historical loss experience; lending policies; new products; year 2000 issues; the status and amount of nonperforming and past-due loans; and adequacy of collateral. In addition, management assesses volatile factors such as interest rates and global economic conditions that may significantly alter loss potential. The loss reserve methodology also provides for a portion of the reserve to act as an additional buffer against credit quality deterioration or risk of estimation error. Although the determination of the adequacy of the reserve is based upon these factors, the reserve is not specifically associated with individual loans or portfolio segments. The ratio of the loan loss reserve to nonperforming loans at December 31, 1997, was 356%, compared with 556% at December 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 portfolio mix. The decrease in this ratio from December 31, 1996, primarily resulted from an increase in the level of nonperforming loans. Net credit losses totaled $201 million in 1997, an increase of $77 million from 1996. This increase reflected a higher level of net credit card losses during the year. Net credit card credit losses totaled $172 million in 1997, or 85% of total net credit losses. Of the $172 million of net credit card losses, $146 million were from the CornerStone(sm) portfolio, including $65 million of credit losses on the loans transferred to an accelerated resolution portfolio. The Corporation expects a significant reduction in net credit card losses in 1998 as a result of the actions taken in 1997 on the CornerStone(sm) portfolio. In addition, domestic commercial loan net credit losses increased $23 million in 1997 compared to the prior year reflecting higher commercial real estate credit losses and lower commercial and financial loan recoveries. The level of credit losses and recoveries relative to outstanding loans can vary from period to period as a result of the size and number of individual credits that may require charge-off and the effects of changing economic conditions. 65 44 RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES (CONTINUED) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ CREDIT LOSS RESERVE ACTIVITY (a) (in millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Reserve at beginning of year $525 $471 $607 $600 $506 Net change in reserve primarily from acquisitions 3 23 8 4 108 Credit losses: Domestic: Commercial and financial (16) (19) (14) (42) (54) Commercial real estate (24) (12) (8) (16) (74) Consumer credit: Credit cards (116) (b) (127) (167) (b) (61) (46) Consumer mortgage (2) (6) (6) (11) (13) Other consumer credit (23) (21) (19) (17) (22) Lease finance assets (6) (5) (16) - (1) - ------------------------------------------------------------------------------------------------------------------------------------ Total domestic (187) (190) (230) (147) (210) International - - - (4) (6) - ------------------------------------------------------------------------------------------------------------------------------------ Total credit losses (187) (190) (230) (151) (216) - ------------------------------------------------------------------------------------------------------------------------------------ Recoveries: Domestic: Commercial and financial 11 25 27 41 40 Commercial real estate 14 14 30 14 13 Consumer credit: Credit cards 9 13 14 9 7 Consumer mortgage 2 4 3 4 2 Other consumer credit 7 8 8 13 10 Lease finance assets 3 1 - - - - ------------------------------------------------------------------------------------------------------------------------------------ Total domestic 46 65 82 81 72 International 5 1 5 3 5 - ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries 51 66 87 84 77 - ------------------------------------------------------------------------------------------------------------------------------------ Net credit (losses) recoveries: Domestic: Commercial and financial (5) 6 13 (1) (14) Commercial real estate (10) 2 22 (2) (61) Consumer credit: Credit cards (107) (114) (153) (52) (39) Consumer mortgage - (2) (3) (7) (11) Other consumer credit (16) (13) (11) (4) (12) Lease finance assets (3) (4) (16) - (1) - ------------------------------------------------------------------------------------------------------------------------------------ Total domestic (141) (125) (148) (66) (138) International 5 1 5 (1) (1) - ------------------------------------------------------------------------------------------------------------------------------------ Net credit losses (136) (124) (143) (67) (139) Credit losses on credit card assets held for accelerated resolution (65) - (106) - - - ------------------------------------------------------------------------------------------------------------------------------------ Total net credit losses (201) (124) (249) (67) (139) Provision for credit losses 148 155 105 70 125 - ------------------------------------------------------------------------------------------------------------------------------------ Reserve at end of year $475 $525 $471 $607 $600 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Excludes the reserve and net credit losses on segregated assets. (b) Excludes $65 million in 1997 and $106 million in 1995 of credit losses related to loans transferred to an accelerated resolution portfolio. 66 45 FOURTH QUARTER REVIEW - -------------------------------------------------------------------------------- The Corporation reported net income applicable to common stock of $191 million and diluted earnings per common share of $.75 in the fourth quarter of 1997. These results compare with fourth quarter 1996 net income applicable to common stock of $179 million and diluted earnings per common share of $.67. Annualized return on common shareholders' equity and return on assets were 21.2% and 1.75%, respectively, in the fourth quarter of 1997, compared with 20.9% and 1.80%, respectively, in the fourth quarter of 1996. Annualized return on tangible common shareholders' equity and return on tangible assets were 38.3% and 2.00%, respectively, in the fourth quarter of 1997, compared with 36.6% and 2.06%, respectively, in the fourth quarter of 1996. Diluted tangible earnings per common share in the fourth quarter of 1997 was $.83, compared with $.76 in the fourth quarter of 1996. Net interest revenue totaled $361 million in the fourth quarter of 1997, down from $371 million in the fourth quarter of 1996. The net interest margin on a taxable equivalent basis was 4.07% in the fourth quarter of 1997, a decrease of 13 basis points from 4.20% in the fourth quarter of 1996. The decrease principally resulted from the funding costs related to the repurchase of common stock, loan securitizations and loan sales primarily offset by the use of the proceeds from the $1 billion of trust-preferred securities issued in December 1996. Excluding the effect of the loan securitizations and the common equity repurchases, net interest revenue and the net interest margin for the fourth quarter of 1997 would have been approximately $420 million and 4.46%, compared with approximately $419 million and 4.49% in the fourth quarter of 1996. Credit quality expense was $61 million in the fourth quarter of 1997, a decrease of $16 million compared with the prior-year period. This decrease reflected a $9 million increase in the net revenue from acquired property and a $7 million decrease in the provision for credit losses. Net credit losses were $106 million in the fourth quarter of 1997, compared with $36 million in the fourth quarter of 1996. The increase resulted from a $52 million increase in credit card net credit losses due to losses in the CornerStone(sm) portfolio associated with the transfer of loans to an accelerated resolution portfolio, and an $18 million increase in commercial real estate net credit losses, primarily from one commercial real estate loan. Fee revenue was $707 million in the fourth quarter of 1997, up $141 million, compared with $566 million in the fourth quarter of 1996. The increase was primarily attributable to higher trust and investment fees resulting, in part, from the Buck acquisition in July 1997, new business and an increase in the market value of assets under management. Excluding the Buck acquisition and the $43 million gain on the sale of the corporate trust business, both in 1997, and the $57 million gain on the sale of the AAA credit card portfolio in 1996, fee revenue increased $79 million, or 16%, compared with the prior-year period. Operating expense before net revenue from acquired property and trust-preferred securities expense for the fourth quarter of 1997 was $722 million, up $163 million from $559 million in the fourth quarter of 1996. The increase primarily resulted from the Buck acquisition, business growth, business development and reengineering initiatives, and higher equipment expense. 67 46 SELECTED QUARTERLY DATA (UNAUDITED) - --------------------------------------------------------------------------------
Quarter ended, 1997 1996 --------------------------------------------- --------------------------------------- (dollar amounts in millions, DEC. SEPT. JUNE MARCH Dec. Sept. June March except per share amounts) 31 30 30 31 31 30 30 31 - --------------------------------------------------------------------------------------------------------------------------------- QUARTERLY CONSOLIDATED INCOME STATEMENT - --------------------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 361 $ 366 $ 370 $ 370 $ 371 $ 372 $ 372 $ 363 Provision for credit losses 73 25 25 25 80 25 25 25 Fee revenue 707 635 540 536 566 476 474 503 Gains on sale of securities - - - - 3 - - 1 Operating expense 729 670 587 582 559 536 540 560 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 266 306 298 299 301 287 281 282 Provision for income taxes 71 111 108 108 107 106 102 103 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME 195 195 190 191 194 181 179 179 Dividends on preferred stock 4 4 4 9 15 9 10 10 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME APPLICABLE TO COMMON STOCK $ 191 $ 191 $ 186 $ 182 $ 179 $ 172 $ 169 $ 169 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE: (a) BASIC $ .76 $ .75 $ .73 $ .70 $ .69 $ .67 $ .64 $ .63 DILUTED $ .75 $ .73 $ .71 $ .69 $ .67 $ .66 $ .63 $ .62 Annualized return on common shareholders' equity 21.2% 21.6% 21.9% 21.2% 20.9% 20.6% 20.4% 19.7% Annualized return on assets 1.75 1.81 1.79 1.83 1.80 1.71 1.70 1.76 - --------------------------------------------------------------------------------------------------------------------------------- QUARTERLY AVERAGE BALANCES - --------------------------------------------------------------------------------------------------------------------------------- Money market investments $ 1,397 $ 1,231 $ 1,081 $ 1,032 $ 1,272 $ 1,573 $ 1,387 $ 1,290 Trading account securities 159 171 210 161 96 169 181 138 Securities 5,293 5,469 5,600 6,018 6,198 6,538 6,658 5,339 Loans 28,476 27,596 27,806 27,404 27,900 27,170 26,798 27,058 Total interest-earning assets 35,325 34,467 34,697 34,615 35,466 35,450 35,024 33,825 Total assets 44,266 42,879 42,413 42,187 42,636 42,461 42,096 40,848 Deposits 31,085 30,349 30,113 30,280 31,569 31,542 30,949 29,274 Notes and debentures 2,781 2,832 2,716 2,517 2,519 2,102 1,971 1,554 Trust-preferred securities 990 990 990 990 129 - - - Common shareholders' equity 3,573 3,520 3,393 3,490 3,410 3,327 3,327 3,459 Total shareholders' equity 3,766 3,713 3,586 3,735 3,820 3,762 3,762 3,894 - --------------------------------------------------------------------------------------------------------------------------------- Net interest margin (FTE) 4.07% 4.24% 4.29% 4.37% 4.20% 4.20% 4.30% 4.35% - --------------------------------------------------------------------------------------------------------------------------------- TANGIBLE OPERATING RESULTS (b) - --------------------------------------------------------------------------------------------------------------------------------- Diluted tangible earnings per common share $ .83 $ .80 $ .79 $ .77 $ .76 $ .72 $ .70 $ .69 Tangible net income applicable to common stock 212 211 206 203 200 190 187 188 Annualized return on tangible common shareholders' equity 38.3% 37.6% 37.7% 36.3% 36.6% 31.2% 31.3% 30.1% Annualized return on tangible assets 2.00 2.05 2.04 2.09 2.06 1.92 1.92 1.99 - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK DATA (dollars per share) (c) - --------------------------------------------------------------------------------------------------------------------------------- Market price range: (a) High $64 13/16 $57 3/4 $47 1/4 $43 1/8 $ 37 3/8 $30 3/8 $ 30 1/16 $29 1/4 Low 47 1/8 44 7/8 35 3/4 34 1/2 29 15/16 25 1/4 25 13/16 24 1/8 Average 55.70 50.12 41.95 38.81 33.57 27.89 27.77 26.77 Close 60 5/8 54 3/4 45 1/8 36 3/8 35 1/2 29 5/8 28 1/2 27 5/8 Dividends (a) .33 .33 .33 .30 .30 .30 .30 .28 Market capitalization $ 15,386 $13,938 $11,353 $ 9,372 $ 9,134 $ 7,668 $ 7,414 $ 7,317 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Earnings per common share are presented in accordance with the requirements of FAS No. 128, "Earnings per Share," which was adopted by the Corporation at year-end 1997. Prior-period amounts have been restated. In addition, earnings per common share, market price range and dividends were also restated to reflect the two-for-one common stock split distributed on June 2, 1997. (b) See page 31 for the definition of tangible operating results. (c) At December 31, 1997, there were 23,948 shareholders registered with the Corporation's stock transfer agent, compared with 23,856 at year-end 1996 and 23,755 at year-end 1995. In addition, there were approximately 16,049, 15,271 and 15,651 Mellon employees at December 31, 1997, 1996 and 1995, respectively, who participated in the Corporation's 401(k) Retirement Savings Plan. All shares of Mellon Bank Corporation common stock held by the plans for its participants are registered in the name of Mellon Bank, N.A. as trustee. 68 47 CONSOLIDATED INCOME STATEMENT
MELLON BANK CORPORATION (AND ITS SUBSIDIARIES) - -------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in millions, except per share amounts) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST REVENUE Interest and fees on loans (loan fees of $81, $96 and $79) $2,268 $2,253 $2,425 Federal funds sold and securities under resale agreements 30 30 34 Interest-bearing deposits with banks 26 36 36 Other money market investments 6 7 2 Trading account securities 9 7 19 Securities: U.S. Treasury and agency securities 367 392 305 Obligation of states and political subdivisions 2 2 3 Other 8 12 14 ------------------------------------------------------------------------------------------------------ Total interest revenue 2,716 2,739 2,838 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits in domestic offices 749 709 663 Deposits in foreign offices 129 194 226 Federal funds purchased and securities under 77 94 125 repurchase agreements Short-term bank notes 8 29 50 Other short-term borrowings 97 92 109 Notes and debentures 189 143 117 ------------------------------------------------------------------------------------------------------ Total interest expense 1,249 1,261 1,290 - --------------------------------------------------------------------------------------------------------------------------------- NET INTEREST REVENUE Net interest revenue 1,467 1,478 1,548 Provision for credit losses 148 155 105 ------------------------------------------------------------------------------------------------------ Net interest revenue after provision for losses 1,319 1,323 1,443 - --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Trust and investment fees 1,311 994 906 Cash management and deposit transaction charges 242 211 191 Mortgage servicing fees 213 180 122 Foreign currency and securities trading revenue 118 80 91 Credit card fees 97 120 90 Information services fees 42 50 48 Gain on sale of corporate trust business 43 - - Gain on sale of credit card portfolio - 57 - Other income 352 327 222 ------------------------------------------------------------------------------------------------------ Total fee revenue 2,418 2,019 1,670 Gains on sales of securities - 4 6 ------------------------------------------------------------------------------------------------------ Total noninterest revenue 2,418 2,023 1,676 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSE Staff expense 1,242 1,055 957 Net occupancy expense 225 205 205 Professional, legal and other purchased services 219 195 186 Equipment expense 175 145 143 Business development 148 137 136 Amortization of mortgage servicing assets and purchased credit card relationships 118 107 68 Amortization of goodwill and other intangible assets 105 100 96 Communications expense 102 96 86 Other expense 175 165 170 Trust-preferred securities expense 78 3 - Net revenue from acquired property (19) (13) (20) ------------------------------------------------------------------------------------------------------- Total operating expense 2,568 2,195 2,027 - --------------------------------------------------------------------------------------------------------------------------------- INCOME Income before income taxes 1,169 1,151 1,092 Provision for income taxes 398 418 401 ------------------------------------------------------------------------------------------------------ NET INCOME 771 733 691 Dividends on preferred stock 21 44 39 ------------------------------------------------------------------------------------------------------ NET INCOME APPLICABLE TO COMMON STOCK $ 750 $ 689 $ 652 - --------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE (a) Basic net income $ 2.94 $ 2.63 $ 2.27 Diluted net income $ 2.88 $ 2.58 $ 2.25 ------------------------------------------------------------------------------------------------------
(a) Presented in accordance with the requirements of FAS No. 128, "Earnings per Share," which was adopted by the Corporation at year-end 1997. Prior-period amounts were restated. Prior-period amounts also were restated to reflect the two-for-one common stock split distributed on June 2, 1997. See accompanying Notes to Financial Statements. 69 48 CONSOLIDATED BALANCE SHEET
MELLON BANK CORPORATION (AND ITS SUBSIDIARIES) - -------------------------------------------------------------------------------- December 31, (dollar amounts in millions) 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 3,650 $ 2,846 Interest-bearing deposits with banks 553 419 Federal funds sold and securities under resale agreements 383 460 Other money market investments 72 113 Trading account securities 75 84 Securities available for sale 2,767 4,111 Investment securities (approximate fair value of $2,118 and $2,365) 2,082 2,375 Loans, net of unearned discount of $48 and $57 29,142 27,393 Reserve for credit losses (475) (525) ------- ------- Net loans 28,667 26,868 Customers' acceptance liability 182 238 Premises and equipment 573 569 Goodwill and other intangibles 1,425 1,238 Mortgage servicing assets and purchased credit card relationships 1,075 774 Acquired property, net of reserves of $9 and $10 48 80 Other assets 3,340 2,421 ------------------------------------------------------------------------------------------------------ Total assets $44,892 $42,596 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits in domestic offices $ 7,975 $ 8,692 Interest-bearing deposits in domestic offices 19,954 19,965 Interest-bearing deposits in foreign offices 3,376 2,717 ------------------------------------------------------------------------------------------------------ Total deposits 31,305 31,374 Federal funds purchased and securities under repurchase agreements 1,997 742 U.S. Treasury tax and loan demand notes 447 474 Term federal funds purchased 625 481 Short-term bank notes 330 135 Commercial paper 67 122 Other funds borrowed 278 293 Acceptances outstanding 182 238 Other liabilities 2,252 1,483 Notes and debentures (with original maturities over one year) 2,573 2,518 ------------------------------------------------------------------------------------------------------ Total liabilities 40,056 37,860 - --------------------------------------------------------------------------------------------------------------------------------- TRUST-PREFERRED Guaranteed preferred beneficial interests in Corporation's SECURITIES junior subordinated deferrable interest debentures 991 990 - --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' Preferred stock 193 290 EQUITY Common shareholders' equity: Common stock--$.50 par value Authorized--400,000,000 shares Issued--294,330,960 (a); and 147,165,480 shares 147 74 Additional paid-in capital 1,818 1,866 Retained earnings 2,872 2,480 Net unrealized gain (loss) on assets available for sale, net of tax 33 (1) Treasury stock of 40,545,114 (a) and 18,518,290 shares at cost (1,218) (963) ------------------------------------------------------------------------------------------------------- Total common shareholders' equity 3,652 3,456 ------------------------------------------------------------------------------------------------------ Total shareholders' equity 3,845 3,746 ------------------------------------------------------------------------------------------------------ Total liabilities, trust-preferred securities and shareholders' equity $44,892 $42,596 ------------------------------------------------------------------------------------------------------
(a) Reflects the two-for-one common stock split distributed on June 2, 1997. See accompanying Notes to Financial Statements. 70 49 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
MELLON BANK CORPORATION (CONSOLIDATED AND PARENT CORPORATION) - -------------------------------------------------------------------------------- Net unrealized gain Total Additional (loss) on assets share- Preferred Common paid-in Retained available for sale Treasury holders' (in millions) stock stock capital earnings Warrants (net of tax) stock equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 $ 435 $ 74 $ 1,851 $1,780 $ 37 $(55) $ -- $4,122 Net income 691 691 Dividends on common stock at $1.00 per share (288) (288) Dividends on preferred stock (39) (39) Common stock issued under dividend reinvestment and common stock purchase plan 1 13 14 Repurchase of common stock - related to the 1993 TBC acquisition (159) (159) Repurchase of warrants (17) (37) (54) Repurchase of common stock for employee benefit purposes (235) (235) Exercise of stock options 12 (28) 78 62 Repurchase of common stock - other (184) (184) Net unrealized gain on assets available for sale, net of tax 73 73 Other 3 2 17 22 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $ 435 $ 74 $ 1,850 $2,118 $-- $ 18 $ (470) $4,025 - ---------------------------------------------------------------------------------------------------------------------------------- Net income 733 733 Dividends on common stock at $1.18 per share (310) (310) Dividends on preferred stock (44) (44) Common stock issued under dividend reinvestment and common stock purchase plan 4 14 18 Series I preferred stock redemption (145) (145) Repurchase of common stock for employee benefit purposes (192) (192) Exercise of stock options 10 (17) 70 63 Repurchase of common stock - other (404) (404) Net unrealized loss on assets available for sale, net of tax (19) (19) Other 2 19 21 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 $ 290 $ 74 $ 1,866 $2,480 $-- $ (1) $ (963) $3,746 - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME 771 771 DIVIDENDS ON COMMON STOCK AT $1.29 PER SHARE (330) (330) DIVIDENDS ON PREFERRED STOCK (21) (21) COMMON STOCK ISSUED UNDER DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN 8 14 22 COMMON STOCK ISSUED IN CONNECTION WITH THE BUCK ACQUISITION 143 143 SERIES J PREFERRED STOCK REDEMPTION (97) (97) EXERCISE OF STOCK OPTIONS 20 (22) 97 95 REPURCHASE OF COMMON STOCK - OTHER (534) (534) NET UNREALIZED GAIN ON ASSETS AVAILABLE FOR SALE, NET OF TAX 34 34 ADDITIONAL COMMON STOCK ISSUED FOR STOCK SPLIT 73 (73) -- OTHER (3) (6) 25 16 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ 193 $ 147 $ 1,818 $2,872 $-- $ 33 $(1,218) $3,845 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements 71 50 CONSOLIDATED STATEMENT OF CASH FLOWS
MELLON BANK CORPORATION (and its subsidiaries) - -------------------------------------------------------------------------------- Year ended December 31, (in millions) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net income $ 771 $ 733 $ 691 OPERATING ACTIVITIES Adjustments to reconcile net income to net cash provided by operating activities: Amortization of goodwill and other intangible assets 105 100 96 Amortization of mortgage servicing assets and purchased credit card relationships 118 107 68 Depreciation and other amortization 108 105 107 Deferred income tax expense 42 95 167 Provision for credit losses 148 155 105 Net gains on dispositions of acquired property (21) (11) (12) Net (increase) decrease in accrued interest receivable (7) 9 (45) Net decrease (increase) in trading account securities 19 (15) 12 Net (decrease) increase in accrued interest payable, net of amounts prepaid (27) 15 35 Net (increase) decrease in residential mortgages held for sale (929) 340 (367) Net decrease (increase) in other operating activities 190 (270) (204) ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 517 1,363 653 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net (increase) decrease in term deposits and other money INVESTING ACTIVITIES market investments (93) 103 (158) Net decrease (increase) in federal funds sold and securities under resale agreements 249 (235) 158 Purchases of securities available for sale (6,373) (14,768) (5,070) Proceeds from sales of securities available for sale 2,790 1,453 1,845 Proceeds from maturities of securities available for sale 4,980 12,176 2,898 Purchases of investment securities (26) (219) (175) Proceeds from maturities of investment securities 317 360 307 Net decrease (increase) in credit card receivables 27 (387) (600) Sale of credit card portfolio - 886 - Net principal disbursed on loans to customers (1,914) (884) (1,662) Loan securitizations 125 1,150 950 Loan portfolio purchases (55) (254) (302) Proceeds from sales of loan portfolios 966 907 815 Purchases of premises and equipment (111) (125) (101) Proceeds from sales of acquired property 69 31 49 Cash paid in purchase of Buck (42) - - Cash paid in purchase of Pacific Brokerage Services, Inc. (137) - - Cash paid in purchase of USL - (1,688) - Cash paid in purchase of FUL - (136) - Cash paid in purchase of Metmor Financial, Inc., including warehouse loans purchased of $166 million, net of cash received and escrow deposits - - (130) Increase in mortgage servicing assets and purchased credit card relationships (323) (199) (398) Net increase in other investing activities (261) (111) (137) ------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 188 (1,940) (1,711) - ----------------------------------------------------------------------------------------------------------------------------------
-continued- 72 51 CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
MELLON BANK CORPORATION (and its subsidiaries) - -------------------------------------------------------------------------------- Year ended December 31, (in millions) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net increase (decrease) in transaction and savings deposits 1,298 (695) 955 FINANCING ACTIVITIES Net (decrease) increase in customer term deposits (1,848) 2,808 500 Net increase (decrease) in federal funds purchased and securities under repurchase agreements 1,255 (849) (432) Net increase (decrease) in short-term bank notes 195 (922) 857 Net increase (decrease) in term federal funds purchased 144 (424) 572 Net (decrease) increase in U.S. Treasury tax and loan demand notes (27) 184 (277) Net (decrease) increase in commercial paper (55) (162) 106 Net proceeds from issuance of Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures - 990 - Repurchase and repayments of longer-term debt (412) (24) (354) Net proceeds from issuance of longer-term debt 465 1,099 227 Redemption of preferred stock (97) (145) (155) Net proceeds from issuance of common stock 75 55 58 Dividends paid on common and preferred stock (352) (354) (346) Repurchase of common stock for employee benefit purposes - (192) (235) Repurchase of common stock - other (534) (404) (184) Repurchase of common stock and warrants related to the 1993 acquisition of TBC - - (213) Net (decrease) increase in other financing activities (37) 101 17 ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 70 1,066 1,096 Effect of foreign currency exchange rates 29 15 19 - --------------------------------------------------------------------------------------------------------------------------------- CHANGE IN CASH AND Net increase in cash and due from banks 804 504 57 DUE FROM BANKS Cash and due from banks at beginning of year 2,846 2,342 2,285 ------------------------------------------------------------------------------------------------------ Cash and due from banks at end of year $ 3,650 $ 2,846 $ 2,342 ------------------------------------------------------------------------------------------------------ SUPPLEMENTAL Interest paid $ 1,276 $ 1,246 $ 1,255 DISCLOSURES Net income taxes paid 364 283 182 ------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES Basis of presentation The accounting and financial reporting policies of Mellon Bank Corporation (the Corporation), a multibank holding company, conform to generally accepted accounting principles (GAAP) and prevailing industry practices. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the disclosure of contingent assets and liabilities and the reported amounts of related revenue and expense. Actual results could differ from these estimates. The consolidated financial statements of the Corporation include the accounts of the Corporation and its majority-owned subsidiaries. Investments in companies 20% to 50% owned are carried on the equity basis. Investments in companies less than 20% owned are carried at cost. Intracorporate balances and transactions are not reflected in the consolidated financial statements. The income statement includes results of acquired subsidiaries and businesses accounted for under the purchase method of accounting from the dates of acquisition. Securities and other property held in a fiduciary or agency capacity are not included in the balance sheet since these are not assets or liabilities of the Corporation. 73 52 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) The parent Corporation financial statements in note 27 include the accounts of the Corporation, those of a wholly owned financing subsidiary that functions as a financing entity for the Corporation and its subsidiaries by issuing commercial paper and other debt guaranteed by the Corporation and those of the business trusts discussed in note 13 on page 84. Financial data for the Corporation, the financing subsidiary and the business trusts are combined for financial reporting because of the limited function of the financing subsidiary and the business trusts, and the unconditional guarantee by the Corporation of their obligations. Nature of operations Mellon Bank Corporation is a multibank holding company whose principal wholly owned subsidiaries are Mellon Bank, N.A., The Boston Company, Inc., Mellon Bank (DE) National Association and Buck Consultants, Inc. The Dreyfus Corporation, one of the nation's largest mutual fund management companies, is a wholly owned subsidiary of Mellon Bank, N.A. The Corporation's banking subsidiaries primarily engage in retail financial services, commercial banking, mortgage banking, trust and investment management services, lease financing and mutual funds activities. Buck Consultants, Inc., a leading global benefits consulting firm, provides a broad array of pension and health and welfare actuarial services, employee benefit, compensation and human resources consulting and administrative services and total benefits outsourcing. While the Corporation's major subsidiaries are headquartered in the northeast and mid-Atlantic regions, most of its products and services are offered nationwide and many are offered globally. The Corporation's customer base is well diversified and primarily domestic. Trading account securities, securities available for sale and investment securities When purchased, securities are classified in the trading account securities portfolio, the securities available for sale portfolio or the investment securities portfolio. Securities are classified as trading account securities when the intent is profit maximization through market appreciation and resale. Securities are classified as available for sale when management intends to hold the securities for an indefinite period of time or when the securities may be used for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure, prepayment risk and liquidity needs. Securities are classified as investment securities when management intends to hold these securities until maturity. Trading account securities, including off-balance-sheet instruments, are stated at fair value. Trading revenue includes both realized and unrealized gains and losses. The liability incurred on short-sale transactions, representing the obligation to deliver securities, is included in other funds borrowed at fair value. Securities available for sale are stated at fair value. Unrealized gains or losses on assets classified as available for sale, net of tax, are recorded as an addition to or deduction from shareholders' equity. Investment securities are stated at cost, adjusted for amortization of premium and accretion of discount on a level yield basis. Gains (losses) on sales of securities available for sale are reported in the income statement. The cost of securities sold is determined on a specific identification basis. Loans Loans are reported net of any unearned discount. Interest revenue on nondiscounted loans is recognized based on the principal amount outstanding. Interest revenue on discounted loans is recognized based on methods that approximate a level yield. Loan origination and commitment fees, as well as certain direct loan origination and commitment costs, are deferred and amortized as a yield adjustment over the lives of the related loans. Deferred fees and costs are netted against outstanding loan balances. 74 53 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) Unearned revenue on direct financing leases is accreted over the lives of the leases in decreasing amounts to provide a constant rate of return on the net investment in the leases. Revenue on leveraged leases is recognized on a basis to achieve a constant yield on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Gains on sales of lease residuals are included in other noninterest revenue. Certain loans, primarily residential mortgages in the warehouse portfolio, are held for sale. Such loans are carried at the lower of aggregate cost or market value. Losses, if any, are recorded in noninterest income. Commercial loans, including commercial leases, generally are placed on nonaccrual status when either principal or interest is past due 90 days or more, unless the loan is well secured and in the process of collection. Management also places commercial loans on nonaccrual status when the collection of principal or interest becomes doubtful. Residential mortgage loans generally are placed on nonaccrual status when, in management's judgment, collection is in doubt or the loans have outstanding balances of $250,000 or greater and are 90 days or more delinquent, or have balances of less than $250,000 and are delinquent 12 months or more. Consumer loans, other than residential mortgages, and certain secured commercial loans are charged off upon reaching various stages of delinquency depending upon the loan type. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed against current period interest revenue. Interest receipts on nonaccrual and impaired loans are recognized as interest revenue or are applied to principal when management believes the ultimate collectability of principal is in doubt. Nonaccrual loans generally are restored to an accrual basis when principal and interest payments become current or when the loan becomes well secured and is in the process of collection. A loan is considered to be impaired, as defined by FAS No. 114, "Accounting by Creditors for Impairment of a Loan," when it is probable that the Corporation will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. The Corporation tests loans covered under FAS No. 114 for impairment if they are on nonaccrual status or have been restructured. Consumer credit nonaccrual loans are not tested for impairment because they are included in large groups of smaller-balance homogeneous loans that, by definition along with leases, are excluded from the scope of FAS No. 114. Impaired loans are required to be measured based upon the present value of expected future cash flows, discounted at the loan's initial effective interest rate, or at the loan's market price or fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for credit losses or by a provision for credit losses, depending on the adequacy of the reserve for credit losses. Impairment reserves are not needed when interest payments have been applied to reduce principal, or when credit losses have been recorded so that the recorded investment in an impaired loan is less than the loan valuation. Loan securitizations The amount of interest and fee revenue in excess of both interest paid to certificate holders and credit losses is recognized monthly as servicing revenue. The servicing revenue from the home equity and insurance premium finance receivables is reported as "other fee revenue." The servicing revenue from the credit card securitization is reported in "credit card fee revenue." Reserve for credit losses The reserve for credit losses is maintained to absorb future losses inherent in the credit portfolio based on management's judgment. Factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; industry concentrations; lending policies; new products; adequacy of collateral; historical loss experience; the status and amount of nonperforming and past-due loans; specific known risks; and current, as well as anticipated, specific and general economic factors that may affect certain borrowers. Credit losses are charged against the reserve; recoveries are added to the reserve. 75 54 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) Acquired property Property acquired in connection with loan settlements, including real estate acquired, is stated at the lower of estimated fair value less estimated costs to sell or the carrying amount of the loan. A reserve for real estate acquired is maintained on a property-by-property basis to recognize estimated potential declines in value that might occur between appraisal dates. Provisions for the estimated potential decrease in fair value between annual appraisals, net gains on the sale of real estate acquired and net direct operating expense attributable to these assets are included in net revenue from acquired property. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated over the estimated useful lives of the assets, limited in the case of leasehold improvements to the lease term, using the straight-line method. Goodwill, other identified intangibles, mortgage servicing assets and purchased credit card relationships Intangible assets are amortized using straight-line and accelerated methods over the remaining estimated benefit periods which approximated, on a weighted-average basis at December 31, 1997, 18 years for goodwill, three years for core deposit intangibles, five years for credit card relationships and 15 years for all other intangible assets except mortgage servicing assets. Intangible assets are reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Originated mortgage servicing rights (MSRs) are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. Purchased MSRs are recorded at cost. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. In 1997 and 1996, $433 million and $285 million, respectively, of MSRs were capitalized in connection with both mortgage servicing portfolio purchases and loan originations. The carrying amount of MSRs was $1.1 billion at December 31, 1997, with an estimated fair value of $1.2 billion, compared with a carrying amount and estimated fair value of $745 million and $870 million, respectively, at December 31, 1996. The carrying amount of MSRs is measured for impairment each quarter based on the fair value of the MSRs. Quoted market prices are used, whenever available, as the basis for measuring the fair value of servicing rights. When quoted market prices are not available, fair values are based upon the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. For impairment measurement purposes, all mortgage servicing rights are first stratified by loan type and then by interest rates within the loan type. If the carrying value of an individual stratum were to exceed its fair value, a valuation allowance would be established. No valuation allowances were recorded at December 31, 1997 and 1996, as the carrying values of the various stratifications were less than their respective fair value. On a weighted-average basis at December 31, 1997, the serviced mortgage loan portfolio had an interest rate of approximately 8.10%. Assets held for accelerated resolution During the fourth quarters of 1995 and 1997, the Corporation segregated certain loans from the CornerStonesm credit card portfolio into an accelerated resolution portfolio. The excess of the carrying value of these loans over the estimated net realizable value was recorded as a credit loss. Interest and principal receipts, fees and loan loss recoveries on loans in this portfolio are applied to reduce the net carrying value. This portfolio is reported in other assets in the balance sheet. 76 55 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) Income Taxes The Corporation files a consolidated U.S. income tax return. Deferred taxes are recognized for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities using enacted tax laws and rates. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated to U.S. dollars at the rate of exchange on the balance sheet date. Revenue and expense accounts are translated monthly at month-end rates of exchange. Net foreign currency positions are valued at rates of exchange--spot or future, as appropriate--prevailing at the end of the period, and resulting gains or losses are included in the income statement. Translation gains and losses on investments in foreign entities with functional currencies that are not the U.S. dollar are included in shareholders' equity. Fee revenue Trust and investment fees are reported net of fees waived and expense reimbursements to certain mutual funds. Fees on standby letters of credit are recognized over the commitment term, while fees on commercial letters of credit, because of their short-term nature, are recognized when received. Fees on standby and commercial letters of credit are recorded in fee revenue. Fees for banking and other services generally are recognized over the periods the related services are provided. Off-balance-sheet instruments used for risk management purposes The Corporation enters into interest rate swaps, interest rate caps and floors, financial futures and financial options primarily to manage its sensitivity to interest rate risk. This is accomplished by using these instruments to offset the inherent price or interest rate risk of specific on-balance-sheet assets or liabilities. The Corporation uses interest rate floor contracts and interest rate swap contracts to hedge against value impairment of its MSRs resulting from a decrease in interest rates. The Corporation also uses total return swaps to offset the inherent market value risk of investments in startup mutual funds. All of these instruments are designated as hedges on the trade date and are highly correlated with the financial instrument being hedged. High correlation is achieved if the following conditions hold true: The hedge instrument and the financial instrument being hedged are both of the same currency and fixed rate; the hedge instrument is structurally similar to the instrument being hedged; or a mathematical correlation analysis is performed and correlation has been found to be high. Hedge correlation of interest rate or market value risk management positions is reviewed periodically. If a hedged instrument is sold or matures, or correlation criteria are no longer met, the risk management position is no longer accounted for as a hedge. Under these circumstances, the accumulated change in market value of the hedge is recognized in current income to the extent that the hedge results have not been offset by the effects of interest rate or price changes of the hedged item. Tactical asset/liability management considerations require the Corporation to periodically terminate hedge instruments. Any deferred gain or loss resulting from the termination is amortized to income/expense of the corresponding hedged instrument over the remaining period of the original hedge or hedged instrument. The Corporation also enters into off-balance-sheet contracts to hedge anticipated transactions. If it is determined that an anticipated transaction that has been hedged will not occur, the results of the hedge will be recognized currently in the income category where the original anticipated transaction was to be reported. 77 56 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) Interest revenue or interest expense on hedge transactions is accrued over the term of the agreement as an adjustment to the yield or cost of the related asset or liability. Transaction fees are deferred and amortized to interest revenue or interest expense over the term of the agreement. Realized gains and losses are deferred and amortized over the life of the hedged transaction as interest revenue or interest expense, and any unamortized amounts are recognized as income or loss at the time of disposition of the assets or liabilities being hedged. Amounts payable to or receivable from counterparties are included in other liabilities or other assets. The fair values of interest rate swaps, caps and floors, financial futures and financial options used for risk management purposes are not recognized in the financial statements. Realized gains/losses and cash settlements on instruments associated with MSRs are deferred and included as an adjustment to the carrying value of the MSRs. These amounts are amortized over the same period as the MSRs. Changes in fair value of total return swaps are recognized in net unrealized gain/loss on assets available for sale within shareholders' equity. Off-balance-sheet instruments used for trading activities The Corporation enters into foreign exchange contracts, futures and forward contracts, currency and interest rate option contracts, interest rate swaps, and interest rate caps and floors to accommodate customers and for its proprietary trading activities. Realized and unrealized changes in the fair value of these instruments are recognized in the income statement in foreign currency and securities trading revenue in the period in which the changes occur. Interest revenue and expense on instruments held for trading activities are included in the income statement as part of net interest revenue. The fair value of contracts in gain positions is reported on the balance sheet in other assets and the fair value of contracts in loss positions is reported in other liabilities. Statement of Cash Flows For the purpose of reporting cash flows, the Corporation has defined cash and cash equivalents as cash and due from banks. Cash flows from assets and liabilities that have an original maturity date of three months or less generally are reported on a net basis. Cash flows from assets and liabilities that have an original maturity date greater than three months generally are reported on a gross basis. Cash flows from hedging activities are classified in the same category as the items hedged. 2. CASH AND DUE FROM BANKS Cash and due from banks includes reserve balances that the Corporation's subsidiary banks are required to maintain with a Federal Reserve bank. These required reserves are based primarily on deposits outstanding and were $405 million at December 31, 1997, and $347 million at December 31, 1996. These balances averaged $336 million in 1997 and $485 million in 1996. 3. SECURITIES Gross realized gains on the sale of securities available for sale were $2 million, $4 million and $7 million in 1997, 1996 and 1995, respectively. Gross realized losses on the sale of securities available for sale were $2 million, less than $1 million and $1 million in 1997, 1996 and 1995, respectively. After-tax net gains on the sale of securities were less than $1 million, $3 million and $4 million in 1997, 1996 and 1995, respectively. Proceeds from the sale of securities available for sale were $2.8 billion, $1.5 billion and $1.8 billion in 1997, 1996 and 1995, respectively. There were no sales of investment securities in 1997, 1996 and 1995. Securities available for sale, investment securities, trading account securities and loans with book values of $3.2 billion at December 31, 1997, and $4.5 billion at December 31, 1996, were required to be pledged to secure public and trust deposits, repurchase agreements and for other purposes. 78 57 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 3. SECURITIES (CONTINUED)
SECURITIES AVAILABLE FOR SALE - -------------------------------------------------------------------------------- DECEMBER 31, 1997 December 31, 1996 ---------------------------------------------------------------------------------------- AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair (in millions) COST GAINS LOSSES VALUE cost Gains Losses value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 175 $ - $ - $ 175 $ 395 $ - $ - $ 395 U.S. agency mortgage-backed 2,001 41 - 2,042 1,945 16 24 1,937 Other U.S. agency 509 1 - 510 1,676 2 - 1,678 - ----------------------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury and agency securities 2,685 42 - 2,727 4,016 18 24 4,010 Obligations of states and political subdivisions 26 - - 26 49 - - 49 Other mortgage-backed 3 - - 3 4 - - 4 Other securities 11 - - 11 42 6 - 48 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $2,725 $42 $ - $2,767 $4,111 $24 $24 $4,111 - -----------------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE - -------------------------------------------------------------------------------- Contractual maturities at December 31, 1997 Obligations Total U.S. agency Total of states Other securities (dollar amounts U.S. mortgage- Other U.S. Treasury and political mortgage- Other available in millions) Treasury backed U.S. agency and agency subdivisions backed securities for sale - ----------------------------------------------------------------------------------------------------------------------------------- Within one year Amortized cost $140 $ - $ - $ 140 $ 7 $ - $ 2 $ 149 Fair value 140 - - 140 7 - 2 149 Yield 5.33% - - 5.33% 7.05% - 7.30% 5.43% 1 to 5 years Amortized cost 35 - 309 344 11 - 6 361 Fair value 35 - 310 345 11 - 6 362 Yield 6.21% - 6.06% 6.08% 7.03% - 6.35% 6.11% 5 to 10 years Amortized cost - - 200 200 - - 3 203 Fair value - - 200 200 - - 3 203 Yield - - 6.04% 6.04% - - 6.40% 6.06% Over 10 years Amortized cost - - - - 8 - - 8 Fair value - - - - 8 - - 8 Yield - - - - 8.85% - - 8.85% Mortgage-backed securities Amortized cost - 2,001 - 2,001 - 3 - 2,004 Fair value - 2,042 - 2,042 - 3 - 2,045 Yield - 6.92% - 6.92% - 6.60% - 6.92% - ------------------------------------------------------------------------------------------------------------------------------------ Total amortized cost $175 $2,001 $509 $2,685 $26 $3 $11 $2,725 Total fair value 175 2,042 510 2,727 26 3 11 2,767 Total yield 5.51% 6.92% 6.05% 6.66% 7.64% 6.60% 6.50% 6.67% Weighted average contractual years to maturity .85 - (a) 1.20 1.11 (b) 6.96 - (a) 4.47 - ------------------------------------------------------------------------------------------------------------------------------------
(a) The average expected lives of "U.S. agency mortgage-backed" and "Other mortgage-backed" securities were approximately 7.1 years and 2.8 years, respectively, at December 31, 1997. (b) Excludes maturities of "U.S. agency mortgage-backed" securities. Note: Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Rates are calculated on a taxable equivalent basis using a 35% federal income tax rate. 79 58 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SECURITIES (CONTINUED)
INVESTMENT SECURITIES - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 December 31, 1996 --------------------------------------------------------------------------------------- AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair (in millions) COST GAINS LOSSES VALUE cost Gains Losses value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 41 $ 7 $ - $ 48 $ 30 $ 2 $ 1 $ 31 U.S. agency mortgage-backed 1,953 30 1 1,982 2,262 5 17 2,250 - ----------------------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury and agency securities 1,994 37 1 2,030 2,292 7 18 2,281 Other mortgage-backed 23 - - 23 29 1 - 30 Other securities 65 - - 65 54 - - 54 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities $2,082 $37 $ 1 $2,118 $2,375 $ 8 $18 $2,365 - -----------------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES - -------------------------------------------------------------------------------- Contractual maturities at December 31, 1997 U.S. agency Total Other Total (dollar amounts U.S. mortgage- U.S. Treasury mortgage- Other investment in millions) Treasury backed and agency backed securities securities - ---------------------------------------------------------------------------------------------------------------------------------- Within one year Amortized cost $ - $ - $ - $ - $ - $ - Fair value - - - - - - Yield - - - - - - 1 to 5 years Amortized cost 4 - 4 - - 4 Fair value 4 - 4 - - 4 Yield 5.76% - 5.76% - - 5.76% 5 to 10 years Amortized cost - - - - 14 14 Fair value - - - - 14 14 Yield - - - - 9.27% 9.27% Over 10 years Amortized cost 37 - 37 - 51 (a) 88 Fair value 44 - 44 - 51 (a) 95 Yield 7.02% - 7.02% - 5.86% 6.34% Mortgage-backed securities Amortized cost - 1,953 1,953 23 - 1,976 Fair value - 1,982 1,982 23 - 2,005 Yield - 7.09% 7.09% 7.26% - 7.09% - ---------------------------------------------------------------------------------------------------------------------------------- Total amortized cost $41 $1,953 $1,994 $23 $65 $2,082 Total fair value 48 1,982 2,030 23 65 2,118 Total yield 6.90% 7.09% 7.08% 7.26% 6.56% 7.07% Weighted average contractual years to maturity 17.09 - (b) 17.09 (c) - (b) 1.59 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes Federal Reserve Bank stock of $50 million with a yield of 6.00% and no stated maturity. (b) The average expected lives of "U.S. agency mortgage-backed" and "Other mortgage-backed" securities were approximately 6.6 years and 4.4 years, respectively, at December 31, 1997. (c) Excludes maturities of "U.S. agency mortgage-backed" securities. Note: Expected maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Rates are calculated on a taxable equivalent basis using a 35% federal income tax rate. 80 59 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 4. LOANS For details of the loans outstanding at December 31, 1997 and 1996, see the 1997 and 1996 columns of the "Composition of loan portfolio at year end" table on page 59. The information in those columns is incorporated by reference into these Notes to Financial Statements. For details of the nonperforming and past-due loans at December 31, 1997 and 1996, see the amounts in the 1997 and 1996 columns of the "Nonperforming assets" and "Past-due loans" tables on pages 62 and 64. The information in those columns is incorporated by reference into these Notes to Financial Statements. For details on impaired loans at December 31, 1997 and 1996, see the "Impaired loans" table on page 63. The information in this table is incorporated by reference into these Notes to Financial Statements. There was no foregone interest on restructured loans in 1997. Foregone interest on restructured loans was less than $1 million in 1996 and 1995. 5. RESERVE FOR CREDIT LOSSES For details of the reserve for credit losses for 1997, 1996 and 1995, see the 1997, 1996 and 1995 columns of the "Credit loss reserve activity" table on page 66. The information in those columns is incorporated by reference into these Notes to Financial Statements. 6. PREMISES AND EQUIPMENT - ------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - ------------------------------------------------------------------------------ Land $ 27 $ 29 Buildings 279 281 Equipment 794 744 Leasehold improvements 204 174 - ------------------------------------------------------------------------------ Subtotal 1,304 1,228 Accumulated depreciation and amortization (731) (659) - ------------------------------------------------------------------------------- Total premises and equipment $ 573 $ 569 - ------------------------------------------------------------------------------ The table above includes capital leases for premises and equipment at a net book value of less than $1 million at December 31, 1997, and $2 million at December 31, 1996. Rental expense was $137 million, $124 million and $121 million, respectively, net of related sublease revenue of $23 million, $25 million and $25 million, in 1997, 1996 and 1995, respectively. Depreciation and amortization expense totaled $108 million, $105 million and $107 million in 1997, 1996 and 1995, respectively. Maintenance, repairs and utilities expenses totaled $98 million, $93 million and $90 million in 1997, 1996 and 1995, respectively. As of December 31, 1997, the Corporation and its subsidiaries are obligated under noncancelable leases (principally for banking premises) with expiration dates through 2020. A summary of the future minimum rental payments under noncancelable leases, net of related sublease revenue totaling $83 million, is as follows: 1998--$141 million; 1999--$150 million; 2000--$142 million; 2001--$136 million; 2002--$135 million; and 2003 through 2020--$903 million. 7. RESERVE FOR REAL ESTATE ACQUIRED An analysis of the reserve for real estate acquired for 1997, 1996 and 1995 is presented in the "Change in reserve for real estate acquired" table on page 64 and is incorporated by reference into these Notes to Financial Statements. 81 60 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 8. SEGREGATED ASSETS Segregated assets represent commercial real estate and other commercial loans acquired in the December 1992 Meritor retail office acquisition that are on nonaccrual status or are foreclosed properties, and that have been subject to a loss-sharing arrangement with the FDIC. These delinquent assets are reported in other assets in the balance sheet. The loss-sharing arrangement with the FDIC ended on January 1, 1998. Thereafter, any segregated assets will be reclassified as nonaccrual loans or OREO, as appropriate. Segregated assets totaled $12 million at December 31, 1997. As a result of the loss-sharing arrangement with the FDIC, any of the performing commercial loans or performing commercial real estate loans acquired in the Meritor retail office acquisition that became nonaccrual on or before December 31, 1997, were reclassified to segregated assets. During the first five years, the FDIC paid Mellon Bank, N.A. 80% of the net credit losses on acquired commercial real estate and other commercial loans. During 1998 and 1999, the sixth and seventh years of the arrangement, Mellon Bank, N.A. will pay to the FDIC 80% of any recoveries of charge-offs on such acquired loans that had occurred during the first five years of the arrangement. At the end of the seventh year, the FDIC will pay to Mellon Bank, N.A. an additional 15% of the sum of net charge-offs on the acquired loans that occurred during the first five years, less the recoveries during the sixth and seventh years of the arrangement, in excess of $60 million. The $60 million credit loss threshold was reached in the first quarter of 1993. The FDIC also will reimburse Mellon Bank, N.A. for expenses incurred to recover amounts owed and net expenses incurred with respect to foreclosed properties derived from the acquired commercial real estate or commercial loans. Expenses are reimbursed by the FDIC in the same proportion as the reimbursement of net loan losses. In addition, the FDIC reimbursed Mellon Bank, N.A. for up to 90 days of delinquent interest on the assets covered by the loss-sharing arrangement. Mellon Bank, N.A. was required to administer assets entitled to loss sharing protection in the same manner as assets held by Mellon Bank, N.A. for which no loss sharing existed. 9. OTHER ASSETS - ------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - ------------------------------------------------------------------------------ Prepaid expense: Pension $ 391 $ 307 Other 80 67 Interest and fees receivable 376 322 Accounts receivable 373 283 Mortgage servicing advances 130 82 Receivables related to off-balance-sheet instruments 553 329 Assets held for accelerated resolution 157 30 Segregated assets 12 10 Other 1,268 991 - ------------------------------------------------------------------------------ Total other assets $3,340 $2,421 - ------------------------------------------------------------------------------ 10. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or greater was approximately $3.9 billion at December 31, 1997, and $6.0 billion at December 31, 1996. At December 31, 1997, the scheduled maturity of time deposits for the years 1998 through 2002 and thereafter are as follows: $8,059 million, $1,339 million, $310 million, $137 million and $235 million, respectively. 82 61 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 11. REVOLVING CREDIT AGREEMENT During 1996, the Corporation signed a four-year $300 million revolving credit agreement with several financial institutions that serves as a support facility for commercial paper and for general corporate purposes. This revolving credit facility has several restrictions, including a minimum 6% Tier 1 ratio, a 1.30 maximum double leverage limitation and a minimum nonperforming asset coverage ratio of 3 to 1. The nonperforming asset coverage ratio is Tier I capital plus the reserve for credit losses as a multiple of nonperforming assets. At December 31, 1997, the Corporation's double leverage ratio, which includes trust-preferred securities per the revolving credit agreement, was 1.03 and the nonperforming asset coverage ratio was 22 to 1. The revolving credit facility is supplemented by a $25 million backup line of credit, bringing total commercial paper support facilities to $325 million. There were no other lines of credit to subsidiaries of the Corporation at December 31, 1997 or 1996. No borrowings were made under any facility in 1997 or 1996. Commitment fees totaled less than $1 million in each of the years 1995 through 1997. 12. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR) - --------------------------------------------------------------------------------
December 31, (in millions) 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Parent Corporation: 6.70% Subordinated Debentures due 2008 $ 249 $ 249 6.30% Senior Notes due 2000 200 200 7-5/8% Senior Notes due 1999 200 200 6-1/2% Senior Notes due 1997 - 200 6-7/8% Subordinated Debentures due 2003 150 150 9-1/4% Subordinated Debentures due 2001 100 100 9-3/4% Subordinated Debentures due 2001 100 100 Medium Term Notes, Series A, due 1998-2001 (10.10% to 10.50% at December 31, 1997, and 10.00% to 10.50% at December 31, 1996) 22 27 7-1/4% Convertible Subordinated Capital Notes due 1999 2 3 Subsidiaries: 7-3/8% Subordinated Notes due 2007 298 - 7% Subordinated Notes due 2006 300 300 7-5/8% Subordinated Notes due 2007 249 249 6-1/2% Subordinated Notes due 2005 249 249 6-3/4% Subordinated Notes due 2003 149 149 Medium Term Bank Notes due 1998-2007 (5.64% to 8.55% at December 31, 1997, and 6.10% to 8.55% at December 31, 1996) 303 338 Various notes and obligations under capital leases due 1998-2001 (5.03% to 10.50% at December 31, 1997, and 3.92% to 10.50% at December 31, 1996) 2 4 - --------------------------------------------------------------------------------------------------------------------- Total unsecured notes and debentures (with original maturities over one year) $2,573 $2,518 - ---------------------------------------------------------------------------------------------------------------------
In May 1997, Mellon Bank, N.A., the Corporation's principal banking subsidiary, issued $300 million of subordinated debt at a fixed rate of 7.375%, maturing in 2007. This subordinated debt qualifies as Tier II capital for the Corporation's risk-based capital calculation. The proceeds from this issue were used for general corporate purposes. The Subordinated Notes and Medium Term Bank Notes shown in the table above were issued by Mellon Bank, N.A. These notes are subordinated to obligations to depositors and other creditors of Mellon Bank, N.A. The aggregate amounts of notes and debentures that mature during the five years 1998 through 2002, for the Corporation, are as follows: $118 million, $367 million, $210 million, $205 million and $9 million, respectively. The aggregate amounts of notes and debentures that mature during the five years 1998 through 2002, for Mellon Bank Corporation (parent Corporation) are as follows: $12 million, $202 million, $205 million, $205 million and none, respectively. 83 62 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 13. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES (TRUST-PREFERRED SECURITIES) In the fourth quarter of 1996, the Corporation formed two statutory business trusts, Mellon Capital I and Mellon Capital II. All of the common securities of these special purpose trusts are owned by the Corporation; the trusts exist solely to issue capital securities. For financial reporting purposes, the trusts are treated as subsidiaries and are consolidated into the financial statements of the Corporation. The capital securities are presented as a separate line item on the consolidated balance sheet as guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures (trust-preferred securities). The trusts have issued the trust-preferred securities and invested the net proceeds in junior subordinated deferrable interest debentures (subordinated debentures) issued to the trusts by the Corporation. The subordinated debentures are the sole assets of the trusts. The Corporation has the right to defer payment of interest on the subordinated debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on the subordinated debentures are deferred, the distributions on the trust-preferred securities also are deferred. Interest on the subordinated debentures is cumulative. The Corporation, through guarantees and agreements, has fully and unconditionally guaranteed all of the trusts' obligations under the trust-preferred securities. The Federal Reserve Bank has accorded the trust-preferred securities Tier I capital status. The ability to apply Tier I capital treatment, as well as to deduct the expense of the subordinated debentures for income tax purposes, provided the Corporation with a cost-effective way to raise regulatory capital. The trust-preferred securities are not included as a component of total shareholders' equity on the consolidated balance sheet. For purposes of the table below and discussion that follows, the terms and conditions of the trust-preferred securities are treated as identical to the underlying subordinated debentures. - -------------------------------------------------------------------------------- Liquidation Balances at (dollar amounts in millions, preference December 31, except per security amounts) per security 1997 1996 - -------------------------------------------------------------------------------- 7.72% Series A $1,000.00 $495 $494 7.995% Series B $1,000.00 496 496 ----- ----- Total $991 $990 - -------------------------------------------------------------------------------- The Series A and Series B trust-preferred securities pay cash distributions semiannually at the rate of 7.72% and 7.995% of the liquidation preference, respectively, per annum. Any unpaid distribution is cumulative. The Corporation recorded $78 million and $3 million of expense on these securities in 1997 and 1996, respectively. The securities were each issued for a face value of $500 million and reported net of issuance costs in the table above. The securities are unsecured and subordinate to all senior debt (as defined) of the Corporation. The Series A and Series B securities mature on December 1, 2026, and January 15, 2027, respectively. The Series A and Series B securities are redeemable, in whole or in part, at the option of the Corporation on or after December 1, 2006, and January 15, 2007, respectively, or prior to those dates, in whole, within 90 days following receipt of a legal opinion that, due to a change in the tax laws or an administrative or judicial decision, there is a substantial risk that the tax deductibility of the interest could be disallowed ("tax event") or the Corporation's reasonable determination that, due to a change in law or administrative or judicial decision, there is a substantial risk that Tier I capital treatment could be disallowed ("capital treatment event"). The Series A and Series B securities are redeemable at 103.86% and 103.9975%, respectively, of the liquidation amounts, plus accrued distributions, during the 12-month periods beginning December 1, 2006, and January 15, 2007, respectively (the call dates). The redemption prices decline for the Series A and Series B securities by approximately 39 basis points and approximately 40 basis points, respectively, during each of the following 12-month periods, until a final redemption price of 100% of the liquidation amount is set for December 1, 2016, and January 15, 2017, respectively, and thereafter. If the securities are redeemed following a tax event or capital treatment event, the greater of 100% of the principal amount or the sum of the present value of the first redemption price plus the present value of interest payments from the redemption date to the call dates will be paid. 84 63 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 14. PREFERRED STOCK - --------------------------------------------------------------------------------
Balances at December 31, 1997 Dividends (dollar amounts in millions, Shares Shares ---------------------------- --------------------- except per share amounts) authorized issued 1997 1996 1995 Per share Aggregate - ------------------------------------------------------------------------------------------------------------------------------ 8.20% preferred stock (Series K) 8,000,000 8,000,000 $193 $193 $193 $2.05 $16 8.50% preferred stock (Series J) - - - 97 97 .28 2 (a) 9.60% preferred stock (Series I) - - - - 145 - - ------ ------- ---- Total preferred stock $193 $290 $435 - ------------------------------------------------------------------------------------------------------------------------------
(a) As a result of the redemption of the Series J preferred stock, the Corporation recorded an additional $3 million of preferred stock dividends in 1997. These additional dividends reflect the write-off of issue costs. Including the additional dividends, total Series J preferred stock dividends were $5 million in 1997. The Corporation has authorized 50 million shares of preferred stock. Each series of preferred stock has or had a par value $1.00 per share and a liquidation preference of $25 per share. The Corporation redeemed the Series J preferred stock on February 18, 1997, and announced on January 8, 1998, that it will redeem the Series K preferred stock on February 17, 1998. The Series J preferred stock was redeemed, and the Series K preferred stock will be redeemed at a price of $25 per share plus accrued dividends. 15. EQUITY PURCHASE OPTIONS (WARRANTS) In connection with the 1993 acquisition of The Boston Company, the Corporation issued 9 million 10-year equity purchase options (warrants), on a post-split basis, each exercisable for one share of common stock. The warrants were exercisable at $16.66 per share, on a post-split basis, at any time until their expiration on May 21, 2003. In 1995, the Corporation repurchased all of these warrants as part of a privately negotiated transaction with American Express Travel Related Services Company, Inc., a subsidiary of American Express Company. 16. REGULATORY CAPITAL REQUIREMENTS A discussion about the Corporation's regulatory capital requirements for 1997 and 1996 is presented in the "Regulatory capital" section on pages 46 through 48 and is incorporated by reference into these Notes to Financial Statements. 17. NONINTEREST REVENUE The components of noninterest revenue for the three years ended December 31, 1997, are presented in the "Noninterest revenue" table on page 38. This table is incorporated by reference into these Notes to Financial Statements. 18. 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. 85 64 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 18. FOREIGN CURRENCY AND SECURITIES TRADING REVENUE (CONTINUED) The results of the Corporation's foreign currency and securities trading activities are presented, by class of financial instrument, in the table below.
- --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Foreign exchange contracts $108 $72 $88 Debt instruments 3 4 4 Interest rate contracts 14 2 - Futures contracts (7) 2 (1) - --------------------------------------------------------------------------------------------------------------------------------- Total foreign currency and securities trading revenue (a) $118 $80 $91 - ---------------------------------------------------------------------------------------------------------------------------------
(a) The Corporation recognized an unrealized loss of less than $1 million at December 31, 1997 , 1996 and 1995, related to securities held in the trading portfolio. 19. INCOME TAXES Income tax expense applicable to income before taxes consists of:
- ---------------------------------------------------------------------------- (in millions) 1997 1996 1995 - ---------------------------------------------------------------------------- Current taxes: Federal $321 $289 $213 State and local 24 25 17 Foreign 11 9 4 - ---------------------------------------------------------------------------- Total current tax expense 356 323 234 - ---------------------------------------------------------------------------- Deferred taxes: Federal 31 89 138 State and local 11 6 28 Foreign - - 1 - ---------------------------------------------------------------------------- Total deferred tax expense 42 95 167 - ---------------------------------------------------------------------------- Provision for income taxes $398 $418 $401 - ----------------------------------------------------------------------------
In addition to amounts applicable to income before taxes, the following income tax expense (benefit) amounts were recorded in shareholders' equity:
- -------------------------------------------------------------------------------------------------------- (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Compensation expense for tax purposes in excess of amounts recognized for financial statement purposes $(40) $(17) $(15) Change in net unrealized gain (loss) on assets available for sale 19 (10) 39 - -------------------------------------------------------------------------------------------------------- Total tax expense (benefit) $(21) $(27) $ 24 - --------------------------------------------------------------------------------------------------------
86 65 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 19. INCOME TAXES (CONTINUED) The provision for income taxes was different from the amounts computed by applying the statutory federal income tax rate to income before income taxes due to the items listed in the following table.
- ------------------------------------------------------------------------------------------------------ (dollar amounts in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Federal statutory tax rate 35% 35% 35% Tax expense computed at statutory rate $409 $403 $382 Increase (decrease) resulting from: State and local income taxes, net of federal tax benefit 23 20 29 Tax exempt income (39) (12) (12) Other, net 5 7 2 - ------------------------------------------------------------------------------------------------------ Provision for income taxes $398 $418 $401 - ------------------------------------------------------------------------------------------------------ Effective income tax rate 34.1% 36.3% 36.7% - ------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
- ------------------------------------------------------------------------------------------------- (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Deferred tax assets: Provision for credit losses and write-downs on real estate acquired $ 223 $205 $230 Occupancy expense 73 72 73 Accrued expense not deductible until paid 58 44 31 Other 15 21 28 - ------------------------------------------------------------------------------------------------- Total deferred tax assets 369 342 362 - ------------------------------------------------------------------------------------------------- Deferred tax liabilities: Lease financing revenue 451 359 282 Salaries and employee benefits 10 27 21 Other 48 22 33 - ------------------------------------------------------------------------------------------------- Total deferred tax liabilities 509 408 336 - ------------------------------------------------------------------------------------------------- Net deferred tax asset (liability) $(140) $(66) $ 26 - -------------------------------------------------------------------------------------------------
The Corporation determined that it was not required to establish a valuation allowance for deferred tax assets because it is management's assertion that the deferred tax assets are likely to be realized through carryback to taxable income in prior years, future reversals of existing taxable temporary differences and, to a lesser extent, future taxable income. 20. EARNINGS PER COMMON SHARE Effective December 31, 1997, the Corporation adopted FAS No. 128, "Earnings per Share." This statement establishes standards for computing and presenting basic and diluted earnings per common share (EPS). It supersedes Accounting Principles Board (APB) Opinion No. 15 that required the presentation of both primary and fully diluted EPS. Basic EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method using the average share price for the Corporation's common stock during the period. Common stock equivalents arise from the assumed conversion of outstanding stock options, warrants and convertible capital notes. 87 66 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 20. EARNINGS PER COMMON SHARE (CONTINUED) As required, all previously reported primary and fully diluted EPS have been replaced with the presentation of basic and diluted EPS. The impact of the adoption of this statement and the restatement of prior-period amounts was not material. The computation of basic and diluted earnings per common share is shown in the table below.
- ------------------------------------------------------------------------------------------------------ (dollar amounts in millions, except per Year ended December 31, shares amounts, shares in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER COMMON SHARE Net income applicable to common stock $750 $689 $652 - ------------------------------------------------------------------------------------------------------ Average common shares outstanding 255,356 262,411 286,856 Basic earnings per common share $2.94 $2.63 $2.27 DILUTED EARNINGS PER COMMON SHARE Net income applicable to common stock (a) $750 $689 $652 - ------------------------------------------------------------------------------------------------------ Average common shares outstanding 255,356 262,411 286,856 Common stock equivalents: Stock options (b) 5,360 3,978 2,755 Warrants - - 537 Common shares issuable upon conversion of 7-1/4% Convertible Subordinated Capital Notes 113 202 253 - ------------------------------------------------------------------------------------------------------ Total 260,829 266,591 290,401 - ------------------------------------------------------------------------------------------------------ Diluted earnings per common share $2.88 $2.58 $2.25 - ------------------------------------------------------------------------------------------------------
(a) The after-tax benefit of interest expense on the assumed conversion of the 7 1/4% Convertible Subordinated Capital Notes was less than $1 million for all periods presented. (b) Options to purchase 1,505; 1,453; and 395 shares of common stock were not included in the computation of diluted earnings per common share because the options' exercise prices were greater than the average market prices of the common shares for 1997, 1996 and 1995, respectively. Note: Per share amounts and average common shares and equivalents for 1996 and 1995 have been restated to reflect the two-for-one common stock split distributed on June 2, 1997. 21. EMPLOYEE BENEFITS Pension plans The Corporation's largest subsidiaries--Mellon Bank, N.A., The Boston Company, The Dreyfus Corporation and Buck Consultants, Inc.--sponsor trusteed, noncontributory, defined benefit pension plans. Together, these plans cover substantially all salaried employees of the Corporation. The plans provide benefits that are based on employees' years of service and compensation. In addition, several unfunded plans exist for certain employees or for purposes that are not addressed by the funded plans. 88 67 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 21. EMPLOYEE BENEFITS (CONTINUED) The Mellon Bank, N.A. plan is significantly overfunded and The Boston Company, Dreyfus and Buck plans are moderately overfunded. The Corporation amortizes all actuarial gains and losses and prior service costs over a 10-year period. The tables below report the combined data of these plans.
- ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 (dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded Funded Unfunded - ----------------------------------------------------------------------------------------------------------------------------------- Assumptions used in the accounting: Rates used for expense at January 1: Rate on obligation 7.0% 7.0% 7.0% 7.0% 7.5% 7.5% Rate of return on assets 10.0 - 10.0 - 10.0 - Actuarial salary scale 3.0 3.0 3.0 3.0 3.5 3.5 - ----------------------------------------------------------------------------------------------------------------------------------- Components of pension expense (credit): Service cost $ 23 $ 3 $ 20 $ 2 $ 18 $ 1 Interest cost on projected benefit obligation 35 5 27 3 24 3 Return on plan assets (257) - (143) - (201) - Net amortization and deferral 169 4 74 2 140 1 Special termination benefits - - 15 - - - - ----------------------------------------------------------------------------------------------------------------------------------- Total pension expense (credit) $(30) $12 $ (7) $ 7 $ (19) $ 5 - -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 (dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded - --------------------------------------------------------------------------------------------------------------------------------- Assumptions used for obligation at December 31: Rate on obligation 6.75% 6.75% 7.0% 7.0% Actuarial salary scale 3.0 3.0 3.0 3.0 - -------------------------------------------------------------------------------------------------------------------------------- Present value of benefit obligation at December 31: Vested $ 528 $ 79 $ 372 $ 54 Nonvested 34 3 30 1 - -------------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation 562 82 402 55 - -------------------------------------------------------------------------------------------------------------------------------- Effect of projected future compensation levels 68 8 50 2 - -------------------------------------------------------------------------------------------------------------------------------- Present value of projected benefit obligation $ 630 $ 90 $ 452 $ 57 - -------------------------------------------------------------------------------------------------------------------------------- Plan assets at fair market value at December 31: Cash and U.S. Treasury securities $ 415 $ - $ 228 $ - Corporate debt obligations 144 - 64 - Mellon Bank Corporation common stock (a) 91 - 53 - Other common stock and investments 755 - 661 - - -------------------------------------------------------------------------------------------------------------------------------- Total plan assets at fair market value $1,405 $ - $1,006 $ - - -------------------------------------------------------------------------------------------------------------------------------- Reconciliation of funded status with financial statements: Funded status at December 31 $ 775 $(90) $ 554 $(57) Unamortized net transition (asset) obligation (14) 1 (14) 1 Unrecognized prior service cost 9 7 10 11 Net deferred actuarial (gain) loss (379) 13 (243) 8 Adjustment required to recognize minimum liability - (13) - (18) - --------------------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) expense at December 31 $ 391 $(82) $ 307 $(55) - ---------------------------------------------------------------------------------------------------------------------------------
(a) Represents 1.5 million shares at December 31, 1997, and December 31, 1996. The Mellon Bank, N.A. retirement plan received approximately $2 million of dividends from Mellon Bank Corporation's common stock in both 1997 and 1996. 89 68 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 21. EMPLOYEE BENEFITS (CONTINUED) Long-Term Profit Incentive Plan The Corporation has a Long-Term Profit Incentive Plan (1996) which provides for the issuance of stock options, stock appreciation rights, performance units, deferred cash incentive awards and shares of restricted stock to officers and other key employees of the Corporation and its subsidiaries as approved by the Human Resources Committee of the board of directors. Stock options may be granted at prices not less than the fair market value of the common stock on the date of grant. Options may be exercised during fixed periods of time from one year to 10 years from the date of grant. In the event of a change in control of the Corporation, as defined in the plan, these options will become immediately exercisable, unless otherwise provided in the option agreement. Total outstanding grants as of December 31, 1997, 1996 and 1995 were 12,942,415; 15,882,628; and 14,928,326 shares, respectively. During 1997, 1996 and 1995, options for 1,665,336; 4,126,046; and 3,555,250 shares were granted and options for 3,466,527; 2,706,816; and 2,764,654 shares, respectively, were exercised. At December 31, 1997, 10,806,771 shares were available for grant. Included in the December 31, 1997, 1996 and 1995, outstanding grants were options for 1,188,468; 1,700,332; and 1,721,712 shares, respectively, that become exercisable in full near the end of their 10-year terms, but the exercise dates may be accelerated to an earlier date by the Human Resources Committee of the board of directors, based on the optionee's and the Corporation's performance. If so accelerated, compensation will be paid in the form of deferred cash incentive awards to reimburse the exercise price of these options if exercised prior to the original vesting date. The Corporation recognized $13 million of compensation expense for the acceleration of these options in 1997, $8 million in 1996 and $9 million in 1995. Stock Option Plan for Outside Directors The Corporation's Stock Option Plan for Outside Directors provides for the granting of options for shares of common stock to outside directors and advisory board members of the Corporation. The timing, amounts, recipients and other terms of the option grants are determined by the provisions of, or formulas in, the Directors' Option Plan. The exercise price of the options is equal to the fair market value of the common stock on the grant date. All options have a term of 10 years from the date of grant and become exercisable one year from the grant date. Directors elected during the service year are granted options on a pro rata basis to those granted to the directors at the start of the service year. Total outstanding grants as of December 31, 1997, 1996 and 1995, were 801,152; 829,844; and 752,016 shares, respectively. During 1997, 1996 and 1995, options for 110,994; 97,928; and 97,200 shares, respectively, were granted and options for 139,686; 20,100; and 40,858 shares, respectively, were exercised. At December 31, 1997, options for 112,402 shares were available for grant. Dreyfus Stock Option Plan A stock option plan at Dreyfus prior to the August 1994 merger with the Corporation provided for the issuance of stock options to key employees and key consultants who rendered services at Dreyfus, at a price of not less than 95% of the price of Dreyfus' common stock on The New York Stock Exchange on the day the option was granted. Options were not exercisable within two years nor more than 10 years from the date of grant. Options for Dreyfus stock were automatically converted into options for the Corporation's common stock on the merger date. Total outstanding grants as of December 31, 1997, 1996 and 1995, were 535,072; 978,624; and 1,628,414 shares, respectively. No options were granted in 1997, 1996 and 1995. No further options will be granted under this plan. Options for 443,552; 630,972; and 1,812,678 shares were exercised in 1997, 1996 and 1995, respectively. The table on the following page summarizes stock option activity for the Long-Term Profit Incentive Plan, the Stock Option Plan for Outside Directors and the Dreyfus Plan. Requirements for stock option shares can be met from either unissued or treasury shares. All shares issued in 1997 and 1996 were from treasury shares. 90 69 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 21. EMPLOYEE BENEFITS (CONTINUED) - ------------------------------------------------------------------------------- Shares subject Average exercise STOCK OPTION ACTIVITY (A) to option price - ------------------------------------------------------------------------------- Balance at December 31, 1994 18,638,870 $15.45 Granted 3,652,450 (b) 20.78 Exercised (4,618,190) 13.00 Forfeited (364,374) 17.12 - ------------------------------------------------------------------------------- Balance at December 31, 1995 17,308,756 17.19 Granted 4,223,974 (b) 28.24 Exercised (3,357,888) 15.38 Forfeited (483,746) 17.95 - ------------------------------------------------------------------------------- Balance at December 31, 1996 17,691,096 20.15 Granted 1,776,330 (b) 47.20 Exercised (4,049,765) 17.04 Forfeited (1,139,022) 21.88 - ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 14,278,639 $24.26 - ------------------------------------------------------------------------------- (a) Restated to reflect the two-for-one common stock split distributed on June 2, 1997. (b) Using the Black-Scholes option pricing model, the weighted-average fair value of options granted in 1997, 1996 and 1995, was estimated at $9.15, $5.40 and $3.90 per share, respectively. The following table summarizes the characteristics of stock options outstanding at December 31, 1997. - -------------------------------------------------------------------------------- STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1997
Outstanding Exercisable (b) ----------------------------------------- ---------------------- Average Average Average exercise exercise Exercise price range Shares life (a) price Shares price - ----------------------------------------------------------------------------------------------------------------------------------- $6.58 - $18.00 2,044,603 3.9 $12.50 1,961,201 $12.32 $18.08 - $20.44 6,393,330 6.6 19.25 5,172,997 19.14 $22.25 - $27.75 2,708,397 8.4 26.42 851,501 26.53 $28.50 - $43.75 1,626,989 8.9 32.73 217,478 31.49 $47.75 - $55.06 1,505,320 9.6 48.43 - - - ----------------------------------------------------------------------------------------------------------------------------------- 14,278,639 7.1 24.26 8,203,177 18.61 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Average contractual life remaining in years. (b) At December 31, 1996, 8,734,446 options were exercisable at an average exercise price of $16.52. At December 31, 1995, 6,702,110 options were exercisable at an average exercise price of $14.28. The Black-Scholes option pricing model requires the use of subjective assumptions which can materially affect fair value estimates. Therefore, this model does not necessarily provide a reliable single measure of the fair value of the Corporation's stock options. The fair value of each stock option granted was estimated on the date of the grant using the following weighted-average assumptions for grants in 1997, 1996 and 1995: (1) expected dividend yields ranged from 3.25% to 4.5%; (2) risk-free interest rates of approximately 6%; (3) expected volatility of 25%; and (4) expected lives of options ranged from three to four years. The Corporation accounts for its stock-based compensation plans under the provision of APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Corporation utilizes the intrinsic-value-based method, on which APB No. 25 is based. In accordance with FAS No. 123, "Accounting for Stock-Based Compensation," the Corporation adopted the disclosure-only option on January 1, 1996, and continued to apply the provisions of APB No. 25 for financial statement purposes. 91 70 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 21. EMPLOYEE BENEFITS (CONTINUED) Had the compensation cost for the Corporation's stock-based compensation plans been determined in accordance with the fair-value accounting provisions of FAS No. 123, net income applicable to common stock, basic net income per common share and diluted net income per common share for the years ended December 31, 1997, 1996 and 1995, would have been as follows:
(in millions except per share amounts) 1997 1996 1995 - -------------------------------------------------------------------------------------------- Net income applicable to common stock: As reported $ 750 $ 689 $ 652 Pro forma (a) $ 740 $ 684 $ 651 Basic net income per common share (b): As reported $2.94 $2.63 $2.27 Pro forma (a) $2.90 $2.61 $2.27 Diluted net income per common share (b): As reported $2.88 $2.58 $2.25 Pro forma (a) $2.84 $2.57 $2.24 - --------------------------------------------------------------------------------------------
(a) Because compensation expense associated with an award is recognized over the vesting period, the initial impact on pro forma results may not be representative of the pro forma results in future years when the effect of the amortization of multiple awards would be reflected on the income statement. (b) Earnings per common share are presented in accordance with FAS No. 128, which was adopted by the Corporation at year-end 1997. Prior-period amounts have been restated. In addition, prior-period amounts were restated to reflect the two-for-one common stock split distributed on June 2, 1997. Retirement Savings Plan Since April 1988, employees' payroll deductions into retirement savings accounts have been matched by the Corporation's contribution of common stock, at the rate of $.50 on the dollar, up to 6% of the employee's annual base salary, with an annual maximum Corporate contribution of $3,000 per employee. In 1997, 1996 and 1995, the Corporation recognized $11 million, $11 million and $10 million, respectively, of expense related to this plan and contributed 246,136; 378,024; and 478,142 shares, respectively. All shares contributed in 1997 and 1996 and a portion of the shares contributed in 1995 were issued from treasury stock. The plan held 6,663,606; 7,696,672; and 3,504,818 shares of the Corporation's common stock at December 31, 1997, 1996 and 1995, respectively. On September 1, 1996, The Dreyfus Corporation's profit sharing plan was merged into the Corporation's retirement savings plan. The Dreyfus plan held 4,034,790 shares of the Corporation's common stock when the plans were merged. Amounts expensed under the Dreyfus plan were $8 million and $11 million for 1996 and 1995, respectively. Buck Consultants, Inc. has a separate retirement savings plan in which employees' payroll deductions are matched at a rate of between 75% and 100%. The match is up to 6% of the employees' annual base salary with an annual maximum contribution of $9,500 per employee. Expense related to this plan was $3 million in 1997. Profit Bonus Plan Performance-based awards are made to key employees at the discretion of the Human Resources Committee of the board of directors. The granting of these awards is based upon the performance of the key employees and on the Corporation's overall performance in achieving its objectives. At the committee's election, awards may be paid in a lump sum or may be deferred and paid over a period of up to 15 years. Payouts under this plan were $29 million, $24 million and $20 million for 1997, 1996 and 1995, respectively, and can be in the form of cash, common stock, restricted stock or phantom stock units equivalent to restricted stock. The employee is generally prevented from selling or transferring restricted stock or phantom stock units for a three-year period and the shares or units are forfeited if employment is terminated during that period. Restricted stock totaling 73,150 shares, with a weighted-average fair value on the date of grant of $62.63 per share, 92 71 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 21. EMPLOYEE BENEFITS (CONTINUED) was awarded under this plan for 1997 performance. Restricted stock totaling 79,800 shares, with a weighted-average fair value on the date of grant of $37.35 per share, was awarded under this plan for 1996 performance. In addition to the restricted stock awarded in 1997 under the profit bonus plan 349,400 shares of restricted stock, with a weighted-average fair value on the date of grant of $48.17 per share, were granted to certain senior officers in 1997. Vesting occurs over a two- to three-year period if certain performance objectives are met. All restricted stock and phantom stock units were granted at the market value of the shares on the grant date. At December 31, 1997, 832,640 shares of restricted stock and phantom stock units were outstanding. Employee Stock Ownership Plan In 1989, an Employee Stock Ownership Plan was formed to hold certain shares of Mellon Bank Corporation common stock previously held in other defined contribution plans sponsored by the Corporation and its subsidiaries. At December 31, 1997, 1996 and 1995, this plan held 154,891; 155,574; and 192,110 shares, respectively, of the Corporation's common stock. The Corporation may make contributions to this plan from time to time. No contributions were made in 1997, 1996 or 1995. Postretirement benefits other than pensions The Corporation shares in the cost of providing managed care, Medicare supplement and/or major medical programs for employees who retired prior to January 1, 1991. Employees who retire subsequent to January 1, 1991, who were between the ages of 55 and 65 on January 1, 1991, and who had at least 15 years of service are provided with a defined dollar supplement to assist them in purchasing health insurance. Early retirees who do not meet these age and service requirements are eligible to purchase health coverage at their own expense under the standard plans that are offered to active employees. In addition, the Corporation provides a small subsidy toward health care coverage for other active employees when they retire. These benefits are provided through various insurance carriers whose premiums are based on claims paid during the year. The cost of providing these benefits amounted to $7 million in 1997, $9 million in 1996, including $3 million of early retirement charges, and $10 million in 1995. 93 72 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 21. EMPLOYEE BENEFITS (CONTINUED) The following table sets forth the components of the costs and liability of the Corporation's postretirement health care and life insurance benefits programs for current and future retirees.
- --------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION Accumulated Accrued postretirement postretirement Unrecognized benefit cost benefit obligation transition obligation -------------------------- -------------------------- ----------------------- (in millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Balance at January 1 $(33) $(26) $(19) $(46) $(55) $(70) $30 $32 $53 - --------------------------------------------------------------------------------------------------------------------------------- Recognition of components of net periodic postretirement benefit costs: Service cost (2) (1) (1) (2) (1) (1) - - - Interest cost (3) (3) (6) (3) (3) (6) - - - Retirement enhancement program - (3) - - (6) - - - - Amortization of transition obligation (2) (2) (3) - - - (2) (2) (3) - ---------------------------------------------------------------------------------------------------------------------------------- (7) (9) (10) (5) (10) (7) (2) (2) (3) Adjustment due to acquisition of Buck (13) - - (13) - - - - - Change in APBO actuarial assumptions including a change in the discount rate - - - 5 15 (1) - - - Benefit payments 3 2 3 4 4 5 - - - Plan changes - - - - - 18 - - (18) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 $(50) $(33) $(26) $(55) $(46) $(55) $28 $30 $32 - ----------------------------------------------------------------------------------------------------------------------------------
A weighted-average discount rate of 7.0% was used to estimate the 1997 net periodic benefit cost, and a 6.75% rate was used to value the accumulated postretirement benefit obligation at year-end 1997. A health care cost trend rate was used to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. The future annual increase assumed in the cost of health care benefits was 6.25% for 1998 and was decreased gradually to 4.25% for 2002 and thereafter. The health care cost trend rate assumption may have a significant impact on the amounts reported. Increasing the assumed health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation by approximately $6 million and the aggregate of the service and interest cost components of net periodic postretirement health care benefit cost by less than $1 million. During 1995, the transition obligation was reduced by $18 million due to a change in the benefit program that requires current and future retirees to enroll in a managed care program. Previously, retirees were permitted to use any health care provider. 22. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS The prior approval of the Office of the Comptroller of the Currency (OCC) or the Federal Reserve Board, as applicable, is required if the total of all dividends declared by a national or state member bank subsidiary in any calendar year exceeds the bank subsidiary's net profits, as defined, for that year, combined with its retained net profits for the preceding two calendar years. Additionally, such bank subsidiaries may not declare dividends in excess of net profits on hand, as defined, after deducting the amount by which the principal amount of all loans on which interest is past due for a period of six months or more exceeds the reserve for credit losses. 94 73 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 22. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS (CONTINUED) Under the first and currently more restrictive of the foregoing federal dividend limitations, the Corporation's national and state member bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to December 31, 1997, of up to approximately $535 million of their retained earnings of $2.702 billion at December 31, 1997, less any dividends declared and plus or minus net profits or losses, as defined, between January 1, 1998, and the date of any such dividend declaration. The payment of dividends also is limited by minimum capital requirements imposed on all bank subsidiaries. The Corporation's bank subsidiaries exceed these minimum requirements. The ability of state member banks to pay dividends is also limited by state banking regulations. The bank subsidiaries declared dividends to the parent Corporation of $450 million in 1997, $400 million in 1996 and $501 million in 1995. The Federal Reserve Board and the OCC have issued additional guidelines that require bank holding companies and national banks to continually evaluate the level of cash dividends in relation to their respective operating income, capital needs, asset quality and overall financial condition. The Federal Reserve Act limits extensions of credit by the Corporation's bank subsidiaries to the Corporation and to certain other affiliates of the Corporation, and requires such extensions to be collateralized and limits the amount of investments by the banks in these entities. At December 31, 1997, such extensions of credit and investments were limited to $507 million to the Corporation or any other affiliate and to $1,014 million in total to the Corporation and all of its other affiliates. Outstanding extensions of credit totaled $680 million at December 31, 1997. 23. 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. 24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK Off-balance-sheet risk In the normal course of business, the Corporation becomes a party to various financial transactions that generally do not involve funding. Because these transactions generally are not funded, they are not reflected on the balance sheet and are referred to as financial instruments with off-balance-sheet risk. The Corporation offers off-balance-sheet financial instruments to enable its customers to meet their financing objectives and manage their interest- and currency-rate risk. Supplying these instruments provides the Corporation with an ongoing source of fee revenue. The Corporation also enters into these transactions to manage its own risks arising from movements in interest and currency rates, to manage prepayment risk associated with its mortgage servicing portfolio 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. 95 74 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Position limits are set by the Finance Committee and approved by the Office of The Chairman and the Executive Committee of the board of directors. Portfolio outstandings are monitored against such limits by senior managers and compliance staff independent of line areas. FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK - --------------------------------------------------------------------------------
December 31, (in millions) 1997 1996 - ------------------------------------------------------------------------------------------ Commitments to extend credit $30,964 $26,777 Standby letters of credit and foreign guarantees 3,897 3,705 Commercial letters of credit 105 92 Residential mortgage loans serviced with recourse 112 120 Custodian securities lent with indemnification against broker default of return of securities 29,830 21,626 - ------------------------------------------------------------------------------------------
Commitments to extend credit The Corporation enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specific rates and for specific purposes. Substantially all of the Corporation's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The majority of the Corporation's commitments to extend credit include material adverse change clauses within the commitment contracts. These clauses allow the Corporation to deny funding a loan commitment if the borrower's financial condition deteriorates during the commitment, such that the customer no longer meets the Corporation's credit standards. The Corporation's exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of the commitment to extend credit. Accordingly, the credit policies utilized in committing to extend credit and in the extension of loans are the same. Market risk arises on fixed rate commitments if interest rates have moved adversely subsequent to the extension of the commitment. The Corporation believes the market risk associated with commitments is minimal. Since many of the commitments are expected to expire without being drawn upon, the total contractual amounts do not necessarily represent future cash requirements. The amount and type of collateral obtained by the Corporation are based upon industry practice, as well as its credit assessment of the customer. Of the $31 billion of contractual commitments for which the Corporation has received a commitment fee or which were otherwise legally binding--excluding credit card plans--approximately 29% of the commitments are scheduled to expire within one year, and approximately 87% are scheduled to expire within five years. Letters of credit and foreign guarantees There are two major types of letters of credit--standby and commercial letters of credit. The off-balance-sheet credit risk involved in issuing standby and commercial letters of credit is represented by their contractual amounts and is essentially the same as the credit risk involved in commitments to extend credit. The Corporation minimizes this risk by adhering to its written credit policies and by requiring security and debt covenants similar to those contained in loan agreements. The Corporation believes the market risk associated with letters of credit and foreign guarantees is minimal. 96 75 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Standby letters of credit and foreign guarantees obligate the Corporation to disburse funds to a third-party beneficiary if the Corporation's customer fails to perform under the terms of an agreement with the beneficiary. Standby letters of credit and foreign guarantees are used by the customer as a credit enhancement and typically expire without being drawn upon.
- ----------------------------------------------------------------------------------------------------------------------------------- STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES Weighted-average years to maturity December 31, at December 31, (in millions) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Commercial paper and other debt $ 400 $ 447 1.4 2.0 Tax-exempt securities 972 765 2.1 1.8 Bid- or performance-related 1,747 1,186 .6 .8 Other 778 1,307 .8 .5 ------- ----- Total standby letters of credit and foreign guarantees (a) $3,897 $3,705 1.1 1.0 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Net of participations and cash collateral totaling $306 million and $391 million at December 31, 1997 and 1996, respectively. A commercial letter of credit is normally a short-term instrument used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller in accordance with the terms of the contract. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction. Normally, reimbursement from the buyer is coincidental with payment to the seller under commercial letter of credit drawings. As a result, the total contractual amounts do not necessarily represent future cash requirements. Residential mortgage loans serviced with recourse Certain residential mortgages have been sold with servicing retained in which the Corporation is subject to limited recourse provisions. The loans are collateralized by real estate mortgages and in certain instances are supported by either government-sponsored or private mortgage insurance. Securities lending A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security through an agent (the Corporation) to a borrower, usually a broker/dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract. The borrower will collateralize the loan at all times, generally with cash or U.S. government securities, exceeding 100% of the market value of the loan, plus any accrued interest on debt obligations. The Corporation currently enters into two types of agency securities lending arrangements--lending with and without indemnification. In securities lending transactions without indemnification, the Corporation bears no contractual risk of loss. For transactions in which the Corporation provides an indemnification, risk of credit loss occurs if the borrower defaults on returning the securities and the value of the collateral declines. Because the Corporation generally indemnifies the owner of the securities against borrower default only, which is indemnification for the difference between the market value of the securities lent and any collateral deficiency, the total contractual amount does not necessarily represent future cash requirements. Additional market risk associated with securities lending transactions arises from interest rate movements that affect the spread between the rate paid to the securities borrower on the borrower's collateral and the rate the Corporation earns on that collateral. This risk is controlled through policies that limit the level of such risk that can be undertaken. 97 76 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (A) - -------------------------------------------------------------------------------- December 31, 1997 1996 -------------------- --------------------- NOTIONAL CREDIT Notional Credit (in millions) AMOUNT RISK Amount Risk - ----------------------------------------------------------------------------------------------------------------------------------- Foreign currency contracts: Commitments to purchase $14,808 (B) $11,473 (b) Commitments to sell 14,882 (B) 11,562 (b) Foreign currency and other option contracts purchased 796 13 438 14 Foreign currency and other option contracts written 789 - 450 - Interest rate agreements: (c) Interest rate swaps 5,077 33 6,665 25 Options, caps and floors purchased 403 - 2,047 1 Options, caps and floors written 567 - 2,107 - Futures and forward contracts 7,985 - 1,421 2 - -----------------------------------------------------------------------------------------------------------------------------------
(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. (b) The combined credit risk on foreign currency contract commitments to purchase and sell was $487 million at December 31, 1997, and $303 million at December 31, 1996. (c) The credit risk associated with interest rate agreements is calculated after considering master netting arrangements. Foreign currency contracts Commitments to purchase and sell foreign currency facilitate the management of market risk by ensuring that, at some future date, the Corporation or a customer will have a specified currency at a specified rate. The Corporation enters into foreign currency contracts to assist customers in managing their currency risk and as part of its proprietary trading activities. The notional amount of these contracts at December 31, 1997, was $14.8 billion of contracts to purchase and $14.9 billion of contracts to sell. This notional amount does not represent the actual market or credit risk associated with this product. Market risk arises from changes in the market value of contractual positions caused by movements in currency rates. The Corporation limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk relates to the ability of the Corporation's counterparty to meet its obligations under the contract and includes the estimated aggregate replacement cost of those foreign currency contracts in a gain position. Replacement cost totaled approximately $487 million and $303 million at December 31, 1997 and 1996, respectively, and is recorded on the balance sheet. There were no settlement or counterparty default losses on foreign currency contracts in 1997, 1996 or 1995. The Corporation manages credit risk by dealing only with approved counterparties under specific credit limits and by monitoring the amount of outstanding contracts by customer and in the aggregate against such limits. The future cash requirements, if any, related to foreign currency contracts are represented by the net contractual settlement between the Corporation and its counterparties. Foreign currency and other option contracts written and purchased Foreign currency and other option contracts grant the contract purchaser the right, but not the obligation, to purchase or sell a specified amount of a foreign currency or other financial instrument during a specified period at a predetermined price. The Corporation acts as both a purchaser and seller of foreign currency and other option contracts. Market risk arises from changes in the value of contractual positions caused by fluctuations in currency rates, interest rates and security values underlying the option contracts. Market risk is managed by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk and future cash requirements are similar to those of foreign currency contracts. The estimated aggregate replacement cost of purchased foreign currency and other option contracts in gain positions was $13 million at December 31, 1997, and $14 million at December 31, 1996, and is recorded on the balance sheet. There were no settlement or counterparty default losses on foreign currency and other option contracts in 1997, 1996 or 1995. 98 77 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Interest rate swaps Interest rate swaps obligate two parties to exchange one or more payments generally calculated with reference to fixed or periodically reset rates of interest applied to a specified notional principal amount. Notional principal is the amount upon which interest rates are applied to determine the payment streams under interest rate swaps. Such notional principal amounts often are used to express the volume of these transactions but are not actually exchanged between the counterparties. The credit risk associated with interest rate swaps is limited to the estimated aggregate replacement cost of those agreements in a gain position. Replacement cost totaled $33 million and $25 million at December 31, 1997 and 1996, respectively. Credit risk is managed through credit approval procedures that establish specific lines for individual counterparties and limits of credit exposure to various portfolio segments. Counterparty and portfolio outstandings are monitored against such limits on an ongoing basis. Credit risk is further mitigated by contractual arrangements with the Corporation's counterparties that provide for netting replacement cost gains and losses on multiple transactions with the same counterparty. The Corporation has entered into collateral agreements with certain counterparties to interest rate swaps to further secure amounts due. The collateral is generally cash, U.S. government securities or mortgage pass-through securities guaranteed by the Government National Mortgage Association (GNMA). There were no counterparty default losses on interest rate swaps in 1997, 1996 or 1995. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Corporation limits its exposure to market risk by generally entering into matching or offsetting positions and by establishing and monitoring limits on unmatched positions. The future cash requirements of interest rate swaps are limited to the net amounts payable under these swaps. At December 31, 1997, 83% of the notional principal amount of interest rate swaps were scheduled to mature in less than five years. Options, caps and floors An interest rate option is a contract that grants the purchaser the right to either purchase or sell a financial instrument at a specified price within a specified period of time. An interest rate cap is a contract that protects the holder from a rise in interest rates beyond a certain point. An interest rate floor is a contract that protects the holder against a decline in interest rates below a certain point. The credit risk associated with options, caps and floors purchased was less than $1 million at year-end 1997 and $1 million at year-end 1996 and is recorded on the balance sheet. Options, caps and floors written do not expose the Corporation to credit risk. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Corporation limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Futures and forward contracts Futures and forward contracts on loans, securities or money market instruments represent future commitments to purchase or sell a specified instrument at a specified price and date. Futures contracts are standardized and are traded on organized exchanges, while forward contracts are traded in over-the-counter markets and generally do not have standardized terms. The Corporation uses futures and forward contracts in connection with its proprietary trading activities. For instruments that are traded on an organized exchange, the exchange assumes the credit risk that a counterparty will not settle and generally requires a margin deposit of cash or securities as collateral to minimize potential credit risk. The Corporation has established policies governing which exchanges and exchange members can be used to conduct these activities, as well as the number of contracts permitted with each member and the total dollar amount of outstanding contracts. Credit risk associated with futures and forward contracts is limited to the estimated aggregate replacement cost of those futures and forward contracts in a gain position and was less than $1 million at December 31, 1997, and $2 million at December 31, 1996. Credit risk related to futures contracts is substantially mitigated by daily cash settlements with the exchanges for the net change in futures contract value. There were no settlement or counterparty default losses on futures 99 78 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) and forward contracts in 1997, 1996 or 1995. Market risk is similar to the market risk associated with foreign currency and other option contracts. The future cash requirements, if any, related to futures and forward contracts are represented by the net contractual settlement between the Corporation and its counterparties.
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (A) - ----------------------------------------------------------------------------------------------------------------------------------- December 31, 1997 1996 ------------------------ ------------------------ NOTIONAL CREDIT Notional Credit (in millions) AMOUNT RISK Amount Risk - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management instruments: (b) Interest rate swaps $5,410 $34 $4,789 $3 Options, caps and floors purchased (c) 40 - 63 - Futures contracts - - 33 - Mortgage servicing rights risk management instruments: Interest rate floors 1,850 35 - - Interest rate swaps 1,000 26 - - Principal only swaps 273 13 - - Other products: Total return swaps 139 6 118 4 Interest rate swaps and futures contracts hedging anticipated transactions 579 - - - - -----------------------------------------------------------------------------------------------------------------------------------
(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. (b) The credit risk associated with interest rate agreements is calculated after considering master netting arrangements. (c) At December 31, 1997 and 1996, there were no options, caps and floors written. Interest rate swaps The Corporation enters into interest rate swaps as part of its interest rate risk management strategy primarily to alter the interest rate sensitivity of its deposit liabilities, loans and certain other liabilities. At December 31, 1997, the Corporation used $5,410 million of interest rate swaps for interest rate risk management purposes, compared with $4,789 million at December 31, 1996. The credit and market risk associated with these instruments is explained on page 99 under "Interest rate swaps." The replacement cost of swap agreements in a gain position was $34 million and $3 million at December 31, 1997 and 1996, respectively. Net interest revenue in 1997 and 1996 included $4 million and $8 million, respectively, of amortized deferred gains from terminated interest rate swaps. Options, caps, floors and futures contracts Other interest rate products--primarily options, interest rate caps, interest rate floors and futures contracts--are also used by the Corporation as part of its interest rate risk management strategy. The Corporation had $40 million and $96 million notional amounts of these instruments outstanding at December 31, 1997 and 1996, respectively. The credit and market risk associated with these instruments is explained on page 99 under "Options, caps, floors" and "Futures and forward contracts." The replacement cost of those instruments in a gain position was less than $1 million at December 31, 1997 and less than $1 million at December 31, 1996. 100 79 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Mortgage servicing rights risk management instruments The value of the Corporation's mortgage servicing portfolio may be adversely impacted if mortgage interest rates decrease and actual or expected prepayments of loans serviced increase. To mitigate this risk and the potential resultant impairment to MSRs, the Corporation holds interest rate contracts including interest rate floors, interest rate swaps and principal only swaps. In an interest rate floor agreement, cash interest payments are received only if current interest rates fall below a predetermined interest rate. Principal only swaps increase in value if the underlying instrument, consumer mortgages, prepays at an accelerated rate. The Corporation had $3,123 million notional amount of these instruments outstanding at December 31, 1997. The replacement cost of those instruments in a gain position was $74 million at December 31, 1997. Total return swaps The Corporation had $139 million and $118 million of total return swaps at December 31, 1997 and 1996, respectively. Total return swaps are used by the Corporation to minimize the risk related to the Corporation's investment in startup mutual funds that are based on specific market indices. Credit risk associated with these products was $6 million at year-end 1997 and $4 million at year-end 1996. Anticipated transactions The Corporation periodically issues notes and debentures for general corporate purposes, including the funding of debt maturities. At December 31, 1997, there were open hedges of anticipated transactions to lock in the cost of a debt issuance anticipated in the first quarter of 1998 as well as to lock in the value of certain loans that are anticipated to be sold and/or securitized in the first half of 1998. There was an unrealized loss of less than $1 million related to these anticipated transactions at December 31, 1997. Concentrations of credit risk The Corporation manages both on- and off-balance-sheet credit risk by maintaining a well-diversified credit portfolio and by adhering to its written credit policies, which specify general underwriting criteria as well as underwriting standards for specific industries and control credit exposure by borrower, counterparty, degree of risk, industry and country. These measures are regularly updated to reflect the Corporation's evaluation of developments in economic, political and operating environments that could affect lending risks. The Corporation may adjust credit exposure to individual industries or customers through loan sales, syndications, participations and the use of master netting agreements when it has more than one transaction outstanding with the same customer. The amount of collateral, if any, obtained by the Corporation upon the extension of credit is based on industry practice as well as the credit assessment of the customer. The type and amount of collateral vary, but the form generally includes: accounts receivable; inventory; property, plant and equipment; other assets; and/or income-producing commercial properties with appraised values that exceed the contractual amount of the credit facilities by pre-approved ratios. The maximum risk of accounting loss from on- and off-balance-sheet financial instruments with these counterparties is represented by their respective balance sheet amounts and the contractual or replacement cost of the off-balance-sheet financial instruments. The only significant credit concentrations for the Corporation were consumers and the U.S. government. Consumer credit exposure consisted principally of loans and the related interest receivable on the balance sheet and off-balance-sheet loan commitments and letters of credit. Information on the Corporation's consumer loans is presented in note 4 of Notes to Financial Statements. Consumers to which the Corporation has credit exposure primarily are located within the mid-Atlantic region and are affected by economic conditions within that region. 101 80 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) The Corporation has credit exposure to the U.S. government, including its corporations and agencies. Substantially all of this exposure consisted of investment securities, securities available for sale and the related interest receivable and balances due from the Federal Reserve. There were no other significant concentrations of credit risk at December 31, 1997 and 1996, respectively. 25. FAIR VALUE OF FINANCIAL INSTRUMENTS FAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of the estimated fair value of on- and off-balance-sheet financial instruments. A financial instrument is defined by FAS No. 107 as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable terms. Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. FAS No. 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. Because no readily available market exists for a significant portion of the Corporation's financial instruments, fair value estimates for these instruments are based on judgments regarding current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates cannot always be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. Fair value estimates do not include anticipated future business or the value of assets, liabilities and customer relationships that are not considered financial instruments. For example, the Corporation's fee-generating businesses--which contributed 62% of revenue in 1997--are not incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include lease finance assets, deferred tax assets, lease contracts, premises and equipment, and intangible assets. Accordingly, the estimated fair value amounts of financial instruments do not represent the entire value of the Corporation. The following methods and assumptions were used by the Corporation in estimating the fair value of its financial instruments at December 31, 1997 and 1996. Short-term financial instruments The carrying amounts reported on the Corporation's balance sheet generally approximate fair value for financial instruments that reprice or mature in 90 days or less, with no significant change in credit risk. The carrying amounts approximate fair value for cash and due from banks; money market investments; acceptances; demand deposits; money market and other savings accounts; federal funds purchased and securities under repurchase agreements; U.S. Treasury tax and loan demand notes; commercial paper; and certain other assets and liabilities. Trading account securities, securities available for sale and investment securities Trading account securities and securities available for sale are recorded at market value on the Corporation's balance sheet, including amounts for off-balance-sheet instruments held for trading activities. Market values of trading account securities, securities available for sale and investment securities generally are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, market value is estimated using quoted market prices for securities with similar credit, maturity and interest rate characteristics. The tables in note 3 present in greater detail the carrying value and market value of securities available for sale and investment securities at December 31, 1997 and 1996. 102 81 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Loans The estimated fair value of performing commercial loans and certain consumer loans that reprice or mature in 90 days or less approximates their respective carrying amounts adjusted for a credit risk factor based upon the Corporation's historical credit loss experience. The estimated fair value of performing loans, except for consumer mortgage loans and credit card loans, that reprice or mature in more than 90 days is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and for similar maturities. Fair value of consumer mortgage loans is estimated using market quotes or discounting contractual cash flows, adjusted for prepayment estimates. Discount rates were obtained from secondary market sources, adjusted to reflect differences in servicing, credit and other characteristics. The estimated fair value of credit card loans is developed using estimated cash flows and maturities based on contractual interest rates and historical experience. Estimated cash flows are discounted using market rates adjusted for differences in servicing, credit and other costs. This estimate does not include the value that relates to new loans that will be generated from existing cardholders over the remaining life of the portfolio, a value that is typically reflected in market prices realized in credit card portfolio sales. The estimated fair value for nonperforming commercial real estate loans is the "as is" appraised value of the underlying collateral. For other nonperforming loans, the estimated fair value represents carrying value less a credit risk adjustment based upon the Corporation's historical credit loss experience. Deposit liabilities FAS No. 107 defines the estimated fair value of deposits with no stated maturity, which includes demand deposits and money market and other savings accounts, to be the amount payable on demand. Although market premiums paid for depository institutions reflect an additional value for these low-cost deposits, FAS No. 107 prohibits adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities. The fair value of fixed-maturity deposits which reprice or mature in more than 90 days is estimated using the rates currently offered for deposits of similar remaining maturities. Notes and debentures The fair value of the Corporation's notes and debentures is estimated using quoted market yields for the same or similar issues or the current yields offered by the Corporation for debt with the same remaining maturities. The table on the following page includes financial instruments, as defined by FAS No. 107, whose estimated fair value is not represented by the carrying value as reported on the Corporation's balance sheet. Management has made estimates of fair value discount rates that it believes to be reasonable considering expected prepayment rates, rates offered in the geographic areas in which the Corporation competes, credit risk and liquidity risk. However, because there is no active market for many of these financial instruments, management has no basis to verify whether the resulting fair value estimates would be indicative of the value negotiated in an actual sale. 103 82 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------- Carrying amount Estimated fair value December 31, December 31, (dollars in millions) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Securities available for sale (a) $ 2,767 $ 4,111 $ 2,767 $ 4,111 Investment securities (a) 2,082 2,375 2,118 2,365 Loans (b): Commercial and financial 12,392 11,618 12,368 11,553 Commercial real estate 1,509 1,534 1,492 1,486 Consumer mortgage 8,505 7,772 8,465 7,661 Other consumer credit 4,097 3,936 4,151 3,924 ------- ------- Total loans 26,503 24,860 Reserve for credit losses (b) (445) (482) - - ------- ------- ---------- ----------- Net loans 26,058 24,378 26,476 24,624 Other assets (c) 2,074 1,500 2,099 1,503 Fixed-maturity deposits (d): Retail savings certificates 7,421 6,660 7,464 6,639 Negotiable certificates of deposit 1,370 2,710 1,369 2,708 Other time deposits 1,289 2,557 1,288 2,554 Other funds borrowed (c) 1,095 784 1,095 783 Notes and debentures (a) 2,573 2,518 2,665 2,555 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Market or dealer quotes were used to estimate the fair value of these financial instruments. (b) Approximately 83% and 81% of total performing loans, excluding consumer mortgages and credit card receivables, reprice or mature within 90 days at December 31, 1997 and 1996, respectively. Excludes lease finance assets of $2,639 million and $2,533 million, as well as the related reserve for credit losses of $30 million and $43 million at December 31, 1997 and 1996, respectively. Lease finance assets are not considered financial instruments as defined by FAS No. 107. (c) Excludes non-financial instruments. (d) FAS No. 107 defines the estimated fair value of deposits with no stated maturity, which includes demand deposits and money market and other savings accounts, to be equal to the amount payable on demand. Therefore, the positive effect of the Corporation's $21,225 million and $19,447 million of such deposits at December 31, 1997 and 1996, respectively, are not included in this table. Commitments to extend credit, and standby letters of credit and foreign guarantees These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit, and standby letters of credit and foreign guarantees is represented by the remaining contractual fees receivable over the term of the commitments. Other off-balance-sheet financial instruments The estimated fair value of off-balance-sheet instruments used for trading activities--which includes foreign exchange contracts, interest rate swaps, option contracts, interest rate caps and floors, and futures and forward contracts--is equal to the on-balance-sheet carrying amount of these instruments. The estimated fair value of off-balance-sheet instruments used for risk management purposes--which primarily includes interest rate swaps, interest rate caps and floors, and futures contracts--is estimated by obtaining quotes from brokers. These values represent the estimated amount the Corporation would receive or pay to terminate the agreements, considering current interest and currency rates, as well as the current credit-worthiness of the counterparties. Off-balance-sheet financial instruments are further discussed in note 24, "Financial instruments with off-balance-sheet risk and concentrations of credit risk." 104 83 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
ESTIMATED FAIR VALUE OF COMMITMENTS TO EXTEND CREDIT, AND STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES - -------------------------------------------------------------------------------- DECEMBER 31, 1997 December 31, 1996 ---------------------------------------------- ------------------------------------- ASSET Asset ---------------------------- ----------------------- CONTRACT CARRYING ESTIMATED Contract Carrying Estimated (in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a)fair value - ---------------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit $30,964 $4 $102 $26,777 $5 $91 Standby letters of credit and foreign guarantees 3,897 1 19 3,705 2 18 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Represents the on-balance-sheet receivables or deferred income arising from these financial instruments.
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR TRADING ACTIVITIES - -------------------------------------------------------------------------------- DECEMBER 31, 1997 December 31, 1996 ------------------------------------------- ------------------------------------------- ASSET (LIABILITY) Asset (Liability) NOTIONAL -------------------------- Notional -------------------------- PRINCIPAL ESTIMATED AVERAGE principal Estimated Average (in millions) AMOUNT FAIR VALUE (a) FAIR VALUE amount fair value (a) fair value - ----------------------------------------------------------------------------------------------------------------------------------- Foreign currency contracts $29,690 $ 3 $ 14 $23,035 $ 5 $ 5 Options purchased 796 13 14 438 14 7 Options written 789 12 13 450 12 7 Interest rate swaps 5,077 13 7 6,665 6 4 Options, caps and floors 970 - - 4,154 - - Futures and forward contracts 7,985 (11) (10) 1,421 2 2 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Recorded at fair value on the Corporation's balance sheet.
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES DECEMBER 31, 1997 December 31, 1996 ---------------------------------------- -------------------------------------- ASSET (LIABILITY) Asset (Liability) NOTIONAL ------------------------ Notional ------------------------ PRINCIPAL CARRYING ESTIMATED principal Carrying Estimated (in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a) fair value - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management instruments: Interest rate swaps $5,410 $22 $32 $4,789 $5 $(67) Options, caps and floors 40 1 - 63 - 1 Futures contracts - - - 33 - - Mortgage servicing rights risk management instruments: Interest rate floors 1,850 23 35 - - - Interest rate swaps 1,000 6 26 - - - Principal only swaps 273 (1) 13 - - - Other products: Total return swaps 139 - 6 118 - 2 Interest rate swaps and futures contracts hedging anticipated transactions 579 - (1) - - - - -----------------------------------------------------------------------------------------------------------------------------------
(a) Represents the on-balance-sheet receivables/payables, unamortized premiums or deferred income arising from these financial instruments. 105 84 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 26. SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS Noncash investing and financing transactions that, appropriately, are not reflected in the Consolidated Statement of Cash Flows are listed below.
- ----------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Net transfers to real estate acquired $ 12 $ 23 $ 22 Net transfers to segregated assets 12 12 10 Purchase acquisitions (a): Fair value of noncash assets acquired 1,057 1,954 385 Liabilities and deposits assumed (720) (120) (255) Common stock issued, from treasury, and notes payable (158) (10) - ------- -------- ------ Net cash paid 179 1,824 130 Transfer of CornerStonesm credit card loans to accelerated resolution portfolio 231 - 193 - -------------------------------------------------------------------------------------------------
(a) Purchase acquisitions include: Buck Consultants, Inc. and Pacific Brokerage Services, Inc. in 1997; the business equipment finance unit of USL and FUL in 1996; and Metmor Financial, Inc. in 1995. In late 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers." This guide permitted a one-time reassessment of the appropriateness of the classifications of securities as available for sale or held for investment. In 1995, the Corporation elected to redesignate $530 million of GNMA fixed-rate pass-through securities with an unrealized gain of $22 million and $56 million of municipal securities with an unrealized gain of less than $1 million, from the investment securities category to the securities available for sale category. 106 85 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 27. MELLON BANK CORPORATION (PARENT CORPORATION)
CONDENSED INCOME STATEMENT - -------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Dividends from bank subsidiaries $450 $400 $501 Dividends from nonbank subsidiaries 34 21 30 Interest revenue from bank subsidiaries 39 25 37 Interest revenue from nonbank subsidiaries 25 25 27 Other revenue 6 12 3 - -------------------------------------------------------------------------------------------------------- Total revenue 554 483 598 - -------------------------------------------------------------------------------------------------------- Interest expense on commercial paper 4 12 13 Interest expense on notes and debentures 89 88 83 Other expense 31 29 29 Trust-preferred securities expense 78 3 - - -------------------------------------------------------------------------------------------------------- Total expense 202 132 125 - -------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 352 351 473 Provision (benefit) for income taxes (38) (21) (17) Equity in undistributed net income: Bank subsidiaries 189 228 111 Nonbank subsidiaries 192 133 90 - -------------------------------------------------------------------------------------------------------- NET INCOME 771 733 691 Dividends on preferred stock 21 44 39 - -------------------------------------------------------------------------------------------------------- NET INCOME APPLICABLE TO COMMON STOCK $750 $689 $652 - --------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEET - ------------------------------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - ------------------------------------------------------------------------------------------------------- ASSETS: Cash and money market investments with bank subsidiary $ 337 $ 917 Securities available for sale - 200 Loans and other receivables due from nonbank subsidiaries 566 347 Investment in bank subsidiaries 4,452 4,185 Investment in nonbank subsidiaries 515 362 Subordinated debt and other receivables due from bank subsidiaries 78 108 Other assets 147 108 - ------------------------------------------------------------------------------------------------------- Total assets $6,095 $6,227 - ------------------------------------------------------------------------------------------------------- LIABILITIES: Commercial paper $ 67 $ 122 Other liabilities 169 140 Notes and debentures (with original maturities over one year) 1,023 1,229 - ------------------------------------------------------------------------------------------------------- Total liabilities 1,259 1,491 - ------------------------------------------------------------------------------------------------------- TRUST-PREFERRED SECURITIES: Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 991 990 - ------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock 193 290 Common shareholders' equity 3,652 3,456 - ------------------------------------------------------------------------------------------------------- Total shareholders' equity 3,845 3,746 - ------------------------------------------------------------------------------------------------------- Total liabilities, trust-preferred securities and shareholders' equity $6,095 $6,227 - -------------------------------------------------------------------------------------------------------
107 86 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 27. MELLON BANK CORPORATION (PARENT CORPORATION) (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 771 $ 733 $ 691 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 12 21 21 Equity in undistributed net income of subsidiaries (399) (361) (201) Net (increase) decrease in accrued interest receivable (1) 1 3 Deferred income tax benefit (1) (3) - Net increase in other operating activities 39 10 42 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 421 401 556 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in short-term deposits with affiliated banks 581 (602) 32 Purchases of securities available for sale (605) (200) - Proceeds from maturities of securities available for sale 807 - - Loans made to subsidiaries (250) (298) (284) Principal collected on loans to subsidiaries 191 342 581 Loans collected from (made to) joint venture 14 1 (15) Net capital returned from subsidiaries 16 350 241 Net increase in other investing activities (52) (20) (14) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) in investing activities 702 (427) 541 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in commercial paper (55) (162) 106 Repayments of long-term debt (205) (20) (326) Net proceeds from issuance of long-term debt - 247 199 Proceeds from issuance of common stock 75 55 58 Redemption of preferred stock (97) (145) (155) Net proceeds from issuance of guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures - 990 - Repurchase of common stock (534) (596) (578) Repurchase of warrants - - (54) Dividends paid on common and preferred stock (352) (354) (346) Net increase in other financing activities 46 11 - - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) in financing activities (1,122) 26 (1,096) - ---------------------------------------------------------------------------------------------------------------------------------- CHANGE IN CASH AND DUE FROM BANKS: Net change in cash and due from banks 1 - 1 Cash and due from banks at beginning of year 1 1 - - ---------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of year $ 2 $ 1 $ 1 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Interest paid $ 97 $ 95 $ 99 Net income taxes refunded (27) (3) (42) - ----------------------------------------------------------------------------------------------------------------------------------
108 87 REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MELLON BANK CORPORATION: We have audited the accompanying consolidated balance sheets of Mellon Bank Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mellon Bank Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania January 15, 1998 109 88 CORPORATE INFORMATION Annual Meeting The Annual Meeting of Shareholders will be held on the 10th floor of the Union Trust Building, 501 Grant Street, Pittsburgh, PA, at 10 a.m. on Tuesday, April 21, 1998. Form 10-K and For a free copy of the Corporation's Annual Report on Shareholder Form 10-K or the quarterly earnings news release on Publications Form 8-K, as filed with the Securities and Exchange Commission, please send a written request to the Secretary of the Corporation, 4826 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). Exchange Listing Mellon's common stock is traded on the New York Stock Exchange. The trading symbol is MEL. Our Transfer Agent and Registrar is ChaseMellon Shareholder Services, P.O. Box 590, Ridgefield Park, NJ 07660-9940. For more information, please call 1 800 205-7699. Stock Prices Current prices for Mellon's common stock can be obtained from any Touch-Tone telephone by dialing (412) 236-0834 (in Pittsburgh) or 1 800 648-9496 (outside Pittsburgh). When prompted to "enter I.D.," press MEL# (or 635#). This service is available free of charge, 24 hours a day, seven days a week, from anywhere in the continental United States. Dividend Payments Subject to approval of the board of directors, dividends are paid on Mellon's common stock on or about the 15th day of February, May, August and November. Direct Stock Purchase The Direct Stock Purchase and Dividend Reinvestment and Dividend Plan provides a way to purchase shares of common Reinvestment Plan stock directly from the Corporation at the market value for such shares. Nonshareholders may purchase their first shares of the Corporation's common stock through the plan, and shareholders may increase their shareholdings by reinvesting cash dividends and through optional cash investments. Plan details are in a Prospectus, which may be obtained from ChaseMellon Shareholder Services by calling 1 800 842-7629. Electronic Deposit Registered shareholders may have quarterly dividends of Dividends paid on Mellon's common stock deposited electronically to their checking or savings account, free of charge. To have your dividends deposited electronically, please write to ChaseMellon Shareholder Services, P.O. Box 590, Ridgefield Park, NJ 07660-9940. For more information, please call 1 800 205-7699. Phone Contacts Corporate Communications/ Media Relations (412) 236-1264 Media inquiries Direct Stock Purchase and Dividend Reinvestment Plan 1 800 842-7629 Plan prospectus and enrollment materials Investor Relations (412) 234-5601 Questions regarding the Corporation's financial performance Publication Requests 1 800 205-7699 Requests for the Annual Report or quarterly information Securities Transfer Agent 1 800 205-7699 Questions regarding stock holdings, certificate replacement/transfer, dividends and address changes
Internet Access Mellon: www.mellon.com Dreyfus: www.dreyfus.com Buck: www.buckconsultants.com Dreyfus Brokerage Services: www.edreyfus.com ChaseMellon Shareholder Services: www.chasemellon.com Elimination of To eliminate duplicate mailings, please submit a Duplicate Mailings written request, with your full name and address the way it appears on your account, to ChaseMellon Shareholder Services, P.O. Box 590, Ridgefield Park, NJ 07660-9940. For more information, please call 1 800 205-7699. Charitable A report on Mellon's comprehensive community Contributions involvement, including charitable contributions, is available by calling (412) 234-8680. MELLON ENTITIES ARE EQUAL EMPLOYMENT OPPORTUNITY/ AFFIRMATIVE ACTION EMPLOYERS. Mellon is committed to providing equal employment opportunities to every employee and every applicant for employment, regardless of, but not limited to, such factors as race, color, religion, sex, national origin, age, familial or marital status, ancestry, citizenship, sexual orientation, veteran status or being a qualified individual with a disability. EX-21.1 8 MELLON BANK CORPORATION 1 EXHIBIT 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 Buck Consultants, Inc. State of Incorporation: New York o Buck Consultants Actuarios Consultores S.A. de C.V. Incorporation: Mexico o Buck Consultants GMbH Incorporation: Germany oo Buck Consultants S.A. Incorporation: Belgium oo Heissmann/IPC GMbH (25% ownership) Incorporation: Germany o Buck Consultants Limited Incorporation: Canada o Buck Consultants Limited Incorporation: England oo Bevis Trustees Limited Incorporation: England oo Buck Investment Consultants Limited Incorporation: England oo Buck & Willis Health Care Limited (51% ownership) Incorporation: England o Buck Consultants Limited Incorporation: Trinidad o Buck Consultants Pty. Incorporation: Australia oo Buck Consultants Pty. Ltd. (60% ownership) Incorporation: Australia Note: Certain subsidiaries have been omitted from the List of Subsidiaries of the Corporation. These subsidiaries, when considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary as defined in Rule 1-02(w) of Regulation S-X. 2 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -2- ooo Buck Consultants Nominees Pty. Ltd. Incorporation: Australia ooo Buck Consultants Services Pty. Ltd. Incorporation: Australia ooo Buck Consultants Taxation Services Pty. Ltd. Incorporation: Australia o Buck Consultants SNC Incorporation: France o Buck Investment Services, Inc. State of Incorporation: New Jersey o Buck Services Corporation State of Incorporation: Illinois Certus Asset Advisors Corporation State of Incorporation: Delaware Dreyfus Investment Services Corporation State of Incorporation: Delaware Mellon Accounting Services, Inc. State of Incorporation: Delaware Mellon Asia Limited Incorporation: Hong Kong Mellon Bank Community Development Corporation State of Incorporation: Pennsylvania Mellon Bank, N.A. Incorporation: United States o AFCO Credit Corporation State of Incorporation: New York oo AFCO Acceptance Corporation State of Incorporation: California 3 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -3- o A P Beaumeade, Inc. State of Incorporation: Delaware o A P Colorado, Inc. State of Incorporation: Colorado o A P Colorado, Inc. #2 State of Incorporation: Colorado o APD Chimney Lakes, Inc. State of Incorporation: Florida o APD Cross Creek, Inc. State of Incorporation: Florida o APD Cypress Springs, Inc. State of Incorporation: Florida o A P East, Inc. State of Incorporation: Delaware o A P Management, Inc. State of Incorporation: Pennsylvania o A P Properties, Inc. State of Incorporation: New Jersey o AP Properties Minnesota, Inc. State of Incorporation: Minnesota o AP Residential Realty, Inc. State of Incorporation: Pennsylvania o A P Rural Land, Inc. State of Incorporation: Pennsylvania o AP Wheels, Inc. State of Incorporation: Michigan o APME Company, Inc. State of Incorporation: Wisconsin 4 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -4- o APU Chimney Lakes, Inc. State of Incorporation: Florida o APU Cross Creek, Inc. State of Incorporation: Florida o APU Cypress Springs, Inc. State of Incorporation: Florida o Citmelex Corporation State of Incorporation: Delaware o Commonwealth National Mortgage Company State of Incorporation: Pennsylvania o Dreyfus Brokerage Services, Inc. State of Incorporation: California o Dreyfus Financial Services Corporation State of Incorporation: Delaware o East Properties Inc. State of Incorporation: Delaware o Mellon Bank Canada Incorporation: Canada oo CAFO, Inc. Incorporation: Canada oo CIBC Mellon Global Securities Services Company (50% ownership) Incorporation: Canada oo CIBC Mellon Trust Company (50% ownership) Incorporation: Canada oo Mellon Asset Management, Limited Incorporation: Ontario 5 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -5- oo Mellon Bank Canada Leasing Inc. Incorporation: Canada oo MBC SPC Leasing Co., Ltd. Incorporation: Alberta o Mellon Bond Associates (99% ownership)* State of Organization: Pennsylvania o Mellon Consumer Leasing Corporation State of Incorporation: Pennsylvania o Mellon Equity Associates (99% ownership)* State of Organization: Pennsylvania o Mellon Insurance Agency, Inc. State of Incorporation: Pennsylvania o Mellon Leasing Corporation State of Incorporation: Pennsylvania oo Mellon International Leasing Company State of Incorporation: Delaware oo Pontus, Inc. State of Incorporation: Delaware o Mellon Mortgage Company State of Incorporation: Colorado oo Mellon Residential Funding Corporation State of Incorporation: Delaware o Mellon Overseas Investment Corporation Incorporation: United States oo B.I.E. Corporation Incorporation: British West Indies * Remaining 1% owned by MMIP, Inc. 6 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -6- oo Dreyfus International (Ireland) Limited Incorporation: Ireland oo Mellon Bank Representacoes, Ltda. Incorporation: Brazil oo Mellon International Investment Corporation Incorporation: British West Indies oo Mellon Securities Limited State of Incorporation: Pennsylvania o Mellon Trust Company of Illinois State of Incorporation: Illinois o Mellon Ventures, Inc. State of Incorporation: Pennsylvania o Mellon Ventures, L.P. (98.5% ownership) State of Organization: Delaware o Melnamor Corporation State of Incorporation: Pennsylvania oo A P Colorado, Inc. #3 State of Incorporation: Colorado oo A P Meritor, Inc. State of Incorporation: Minnesota oo Baldorioty de Castro Development Corporation Incorporation: Puerto Rico oo Cacalaba, Inc. State of Incorporation: New Mexico oo Casals Development Corporation Incorporation: Puerto Rico oo CEBC, Inc. Incorporation: Puerto Rico 7 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -7- oo Costamar Development Corporation Incorporation: Puerto Rico oo Festival, Inc. State of Incorporation: Virginia oo FSFC, Inc. State of Incorporation: Pennsylvania oo Holiday Properties, Inc. State of Incorporation: Alabama oo Laplace Land Company, Inc. State of Incorporation: Louisiana oo Promenade, Inc. State of Incorporation: California oo SKAP #7, Inc. State of Incorporation: Texas oo Texas AP, Inc. State of Incorporation: Texas oo Trilem, Inc. State of Incorporation: Pennsylvania oo Vacation Properties, Inc. State of Incorporation: North Carolina o Meritor Mortgage Corporation - East State of Incorporation: Pennsylvania oo Central Valley Management Co., Inc. State of Incorporation: Pennsylvania o MMIP, Inc. State of Incorporation: Delaware 8 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -8- oo Mellon Bond Associates (1% ownership)* State of Organization: Pennsylvania oo Mellon Equity Associates (1% ownership)* State of Organization: Pennsylvania o RECR, Inc. State of Incorporation: Pennsylvania o The Dreyfus Corporation State of Incorporation: New York oo Dreyfus Investment Advisors, Inc. State of Incorporation: New York oo Dreyfus - Lincoln, Inc. State of Incorporation: Delaware oo Dreyfus Precious Metals, Inc. State of Incorporation: Delaware oo Dreyfus Service Corporation State of Incorporation: New York oo Dreyfus Transfer, Inc. State of Incorporation: Maryland oo Seven Six Seven Agency, Inc. State of Incorporation: New York oo The Dreyfus Consumer Credit Corporation State of Incorporation: Delaware Boston Group Holdings, Inc. State of Incorporation: Delaware o The Boston Company, Inc. State of Incorporation: Massachusetts *Remaining 99% owned by Mellon Bank, N.A. 9 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -9- oo Boston Safe Deposit and Trust Company State of Incorporation: Massachusetts ooo Boston Safe (Nominees) Limited Incorporation: England ooo Bridgewater Land Company, Inc. State of Incorporation: Massachusetts oooo Mellon Preferred Capital Corporation State of Incorporation: Massachusetts ooo Reco, Inc. State of Incorporation: Massachusetts oooo Mitlock Limited Partnership State of Organization: Massachusetts oooo Tuckahoe Limited Partnership State of Organization: Massachusetts ooo TBC Securities Co., Inc. State of Incorporation: Massachusetts ooo The Boston Company Financial Services, Inc. State of Incorporation: Massachusetts ooo Wellington-Medford Associates II LP (65% ownership) State of Organization: Massachusetts oo Boston Safe Advisors, Inc. State of Incorporation: Massachusetts oo Franklin Portfolio Associates, LLC (99% ownership) State of Organization: Massachusetts oo Franklin Portfolio Holdings, Inc. State of Incorporation: Massachusetts ooo Franklin Portfolio Associates, LLC (1% ownership) State of Organization: Massachusetts 10 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -10- oo Mellon Trust of California State of Incorporation: California oo Mellon Trust of Florida, National Association State of Incorporation: Florida oo Mellon Trust of New York State of Incorporation: New York oo The Boston Company Advisors, Inc. State of Incorporation: Delaware oo The Boston Company Asset Management, Inc. State of Incorporation: Massachusetts oo The Boston Company Energy Advisors, Inc. State of Incorporation: Massachusetts oo The Boston Company Financial Strategies, Inc. State of Incorporation: Massachusetts oo Wellington-Medford II Properties, Inc. State of Incorporation: Massachusetts Mellon Bank (DE) National Association Incorporation: United States o Dreyfus Service Organization, Inc. State of Incorporation: Delaware oo Dreyfus Insurance Agency of Massachusetts, Inc. State of Incorporation: Massachusetts o MBC Insurance Agency, Inc. State of Incorporation: Delaware o The Shelter Group, Inc. State of Incorporation: Delaware o Wilprop, Inc. State of Incorporation: Delaware 11 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -11- Mellon Bank (MD) National Association Incorporation: United States o Baltimore Realty Corporation State of Incorporation: Maryland Mellon Capital I** State of Organization: Delaware Mellon Capital II** State of Organization: Delaware Mellon EFT Services Corporation State of Incorporation: Pennsylvania Mellon Financial Company State of Incorporation: Pennsylvania Mellon Financial Markets, Inc. State of Incorporation: Delaware Mellon Financial Services Corporation #17 (Mellon Securities Transfer Services) State of Incorporation: Delaware o ChaseMellon Shareholder Services, L.L.C. (50% ownership) State of Organization: New Jersey MBC Investments Corporation State of Incorporation: Delaware o Dreyfus Management GMBH Incorporation: Germany o Dreyfus Trust Company State of Incorporation: New York o Laurel Capital Advisors State of Incorporation: Pennsylvania - ----------------- ** Trust created for the sole purpose of issuing trust-preferred securities. 12 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -12- o Mellon Bank, F.S.B. Incorporation: United States o Mellon Capital Management Corporation State of Incorporation: Delaware o Mellon Financial Services Corporation #1 State of Incorporation: Delaware oo Allomon Corporation State of Incorporation: Pennsylvania ooo APT Holdings Corporation State of Incorporation: Delaware ooo Lucien Land Company, Inc. State of Incorporation: Florida oooo APD Crossings, Inc. State of Incorporation: Florida oo Mellon Escrow Company State of Incorporation: Delaware oo Mellon Financial Services Corporation #2 State of Incorporation: Delaware oo Mellon Financial Services Corporation #4 State of Incorporation: Pennsylvania ooo Beaver Valley Leasing Corporation State of Incorporation: Pennsylvania ooo Katrena Corporation (80% ownership) State of Incorporation: Delaware ooo Mellon Financial Services Corporation #13 State of Incorporation: Alabama ooo MFS Leasing Corp. State of Incorporation: Delaware 13 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -13- oo Mellon Financial Services Corporation #5 State of Incorporation: Louisiana ooo Mellon Financial Services Corporation #10 State of Incorporation: Louisiana oo Mellon Properties Company State of Incorporation: Louisiana o Mellon-France Corporation State of Incorporation: Pennsylvania oo CCF-Mellon Partners (50% ownership) State of Organization: Pennsylvania o Mellon Fund Administration Limited Incorporation: England o Mellon Fund Administration (Dublin) Limited Incorporation: Ireland o Mellon Global Investing Corp. State of Incorporation: New York oo Pareto Partners - U.S. (30% ownership) State of Incorporation: New York o Mellon Life Insurance Company State of Incorporation: Delaware o Mellon Ventures II, LP (98.25% ownership) State of Organization: Delaware o MGIC-UK Ltd. Incorporation: England oo Pareto Partners - U.K. (30% ownership) Incorporation: England o The Truepenny Corporation State of Incorporation: New York 14 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1997 -14- oo The Trotwood Corporation State of Incorporation: New York ooo The Trotwood Hunters Corporation State of Incorporation: New York ooo The Trotwood Hunters Site A Corporation State of Incorporation: New York Mellon Securities Trust Company State of Incorporation: New York EX-23.1 9 MELLON BANK CORPORATION 1 Exhibit 23.1 The Board of Directors of Mellon Bank Corporation: We consent to incorporation by reference in Registration Statement Nos. 33-16658 (Form S-3), 33-21838 (Form S-8), 33-23635 (Form S-8), 33-34430 (Form S-8), 33-41796 (Form S-8), 33-48486 (Form S-3), 33-65824 (Form S-8), 33-65826 (Form S-8), 33-54671 (Form S-8), 33-62151 (Form S-3), 333-16743 (Form S-8), 333-16745 (Form S-8), 333-38213 (Form S-3), and 333-47377 (Form S-3) of Mellon Bank Corporation of our report dated January 15, 1998, relating to the consolidated balance sheets of Mellon Bank Corporation and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report is incorporated by reference in the December 31, 1997, annual report on Form 10-K of Mellon Bank Corporation. KPMG PEAT MARWICK LLP - -------------------------- KPMG Peat Marwick LLP Pittsburgh, Pennsylvania March 20, 1998 EX-24.1 10 MELLON BANK CORPORATION 1 Exhibit 24.1 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1997, and any and all amendments thereto, and to file same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney shall be effective as of February 17, 1998 and shall continue in full force and effect until revoked by the undersigned in a writing filed with the Secretary of the Corporation. /s/ FRANK V. CAHOUET /s/ ROTAN E. LEE - ------------------------------ ---------------------------- Frank V. Cahouet, Director and Rotan E. Lee, Director Principal Executive Officer /s/ DWIGHT L. ALLISON, JR. /s/ ANDREW W. MATHIESON - ------------------------------ ---------------------------- Dwight L. Allison, Jr., Director Andrew W. Mathieson, Director /s/ BURTON C. BORGELT /s/ EDWARD J. McANIFF - ------------------------------ ---------------------------- Burton C. Borgelt, Director Edward J. McAniff, Director /s/ CAROL R. BROWN /s/ MARTIN G. McGUINN - ------------------------------ ---------------------------- Carol R. Brown, Director Martin G. McGuinn, Director 2 /s/ CHRISTOPHER M. CONDRON /s/ ROBERT MEHRABIAN - ------------------------------ ---------------------------- Christopher M. Condron, Director Robert Mehrabian, Director /s/ J. W. CONNOLLY /s/ SEWARD PROSSER MELLON - ------------------------------ ------------------------------- J. W. Connolly, Director Seward Prosser Mellon, Director /s/ CHARLES A. CORRY /s/ DAVID S. SHAPIRA - ------------------------------ ------------------------------- Charles A. Corry, Director David S. Shapira, Director /s/ C. FREDERICK FETTEROLF /s/ W. KEITH SMITH - ------------------------------ ------------------------------- C. Frederick Fetterolf, Director W. Keith Smith, Director /s/ IRA J. GUMBERG /s/ JOAB L. THOMAS - ------------------------------ -- ---------------------------- Ira J. Gumberg, Director Joab L. Thomas, Director /s/ PEMBERTON HUTCHINSON /s/ WESLEY W. von SCHACK - ------------------------------ ------------------------------- Pemberton Hutchinson, Director Wesley W. von Schack, Director /s/ GEORGE W. JOHNSTONE /s/ WILLIAM J. YOUNG - ------------------------------ ------------------------------- George W. Johnstone, Director William J. Young, Director - 2 - EX-27.1 11 MELLON BANK CORPORATION
9 0000064782 MELLON BANK CORP. 1,000,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 3,650 553 383 75 2,767 2,082 2,118 29,142 475 44,892 31,305 3,744 2,434 2,573 991 193 147 3,505 44,892 2,268 377 62 2,716 878 1,249 1,467 148 0 2,568 1,169 1,169 0 0 771 2.94 2.88 4.24 133 104 0 0 525 187 51 475 463 12 0 THIS TAG INCLUDES $991 MILLION OF GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES. A TWO-FOR-ONE COMMON STOCK SPLIT WAS DISTRIBUTED TO SHAREHOLDERS OF RECORD ON JUNE 2, 1997. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THIS RECAPITALIZATION. IN ADDITION, THE CORPORATION ADOPTED FAS NO. 128, "EARNINGS PER SHARE" AT YEAR-END 1997. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR FAS NO. 128.
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