<PAGE> 1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K/A
[ X ] Annual Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934 [No Fee Required]
Commission File No. 1-7410
MELLON BANK CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (412) 234-5000
THE PURPOSE OF THIS FORM 10-K/A IS TO CORRECT CERTAIN PORTIONS OF MELLON BANK
CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1993, AS FILED ON MARCH 31, 1994, BY FILING HEREWITH THE FOLLOWING MATERIALS:
1. CORRECTED FORM 10-K COVER PAGE REFLECTING THE DELETION OF THE CHECK MARK IN
THE BOX FOLLOWING THE PARAGRAPH RELATING TO DISCLOSURE PURSUANT TO ITEM 405
OF REGULATION S-K. THIS BOX WAS INADVERTENTLY CHECKED IN REGISTRANT'S
ORIGINAL FILING OF THE 10-K. DISCLOSURE OF DELINQUENT FILINGS PURSUANT TO
ITEM 405 OF REGULATION S-K WAS APPROPRIATELY REPORTED IN THE REGISTRANT'S
PROXY STATEMENT DATED MARCH 15, 1994.
2. CORRECTED RESPONSE TO ITEM 10. REGISTRANT'S RESPONSE HAS BEEN REVISED TO
INCORPORATE BY REFERENCE THE INFORMATION REGARDING DELINQUENT FILINGS
CONTAINED IN THE ADDITIONAL INFORMATION SECTION ON PAGE 22 OF THE
REGISTRANT'S PROXY STATEMENT DATED MARCH 15, 1994.
3. COMPLETE COPY OF CORRECTED EXHIBIT 13.1. DURING THE EDGAR FILING PROCESS,
PAGE 30 FROM THE 10-K DOCUMENT WAS INADVERTENTLY INCLUDED AS PAGE 30 TO
EXHIBIT 13.1. ACCORDINGLY, EXHIBIT 13.1, WITH THE CORRECT PAGE 30, IS
BEING FILED IN ITS ENTIRETY.
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<PAGE> 2
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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 and Exchange Act of 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934 [No Fee Required]
Commission File No. 1-7410
MELLON BANK CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (412) 234-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.50 Par Value New York Stock Exchange
Rights to Purchase Common Stock New York Stock Exchange
Preferred Stock, Series H, $1.00 Par Value New York Stock Exchange
Preferred Stock, Series I, $1.00 Par Value New York Stock Exchange
Preferred Stock, Series J, $1.00 Par Value New York Stock Exchange
Preferred Stock, Series K, $1.00 Par Value New York Stock Exchange
7-1/4% Convertible Subordinated Capital Notes Due 1999 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of February 15, 1994, there were 63,583,252 shares outstanding of the
registrant's voting common stock, $0.50 par value per share, of which
63,073,355 common shares having a market value of $3,405,961,000 were held by
nonaffiliates. As of such date, there were 2,236,226 shares outstanding of the
registrant's Series D Junior Preferred Stock, $1.00 par value per share, of
which 2,164,154 shares having an aggregate issue price of $37,873,000 were held
by nonaffiliates. Such shares of Series D Junior Preferred Stock, which are
not publicly traded, are subject to voting covenants.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in the
following parts of this Annual Report.
Mellon Bank Corporation 1994 Proxy Statement-Part III
Mellon Bank Corporation 1993 Annual Report to Shareholders-
Parts I, II and IV
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<PAGE> 3
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 1994 Annual Meeting of Shareholders (the "1994 Proxy
Statement") in the Election of Directors-Biographical Summaries of Nominees
section on pages 3 through 5 and in the Additional Information section on page
22, each of which sections is incorporated herein by reference, and in Part I
of this Form 10-K under the heading "Executive Officers of the Registrant."
<PAGE> 1
Ex - 13.1
FINANCIAL REVIEW
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY
(dollar amounts in millions, except per share amounts) 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31
Net interest revenue $ 1,307 $ 1,154 $ 974 $ 867 $ 819 $ 838
Provision for credit losses 125 185 250 315 297 321
Fee revenue 1,189 844 757 670 664 649
Gains on sale of securities(a) 87 121 78 8 2 5
Gain on sale of consumer finance subsidiary -- -- -- 74 -- --
Other noninterest revenue -- 7 13 70 119 71
Operating expense 1,858 1,449 1,264 1,181 1,103 1,279
Provision for income taxes 239 55 28 19 23 28
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary gains $ 361 $ 437 $ 280 $ 174 $ 181 $ (65)
Extraordinary gains on early retirement of debt -- -- -- -- 29 --
Net income (loss) 361 437 280 174 210 (65)
- -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income (loss) before extraordinary gains $ 4.63 $ 6.96 $ 4.66 $ 2.83 $ 3.33 $ (3.65)
Net income (loss) 4.63 6.96 4.66 2.83(b) 4.01 (3.65)
Dividends 1.52 1.40 1.40 1.40 1.40 1.40
Book value at year end 41.75 36.96 31.29 28.51 27.42 23.89
- -------------------------------------------------------------------------------------------------------------------------------
PRO FORMA FULLY TAXED(c)
Net income $ 420 $ 307 $ 191 $ 120 $ 127 NM
Net income per common share 5.59 4.63 2.89 1.63 2.07 NM
Return on average assets 1.21% 1.03% .66% .40% .41% NM
Return on average common shareholders' equity 14.06 13.58 8.72 4.56 6.19 NM
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Money market investments $ 3,521 $ 1,663 $ 1,344 $ 2,752 $ 6,204 $ 4,407
Securities 4,426 6,052 5,333 4,722 3,298 3,432
Loans 21,755 18,227 18,509 18,840 17,958 19,423
Interest-earning assets 29,971 26,250 25,495 26,592 27,693 27,410
Total assets 34,736 29,889 29,050 30,216 30,555 30,237
Deposits 26,511 22,641 21,384 22,029 21,240 20,605
Notes and debentures 1,991 1,365 1,448 1,722 1,762 1,950
Redeemable preferred stock -- -- 51 94 94 94
Common shareholders' equity 2,531 1,842 1,479 1,336 1,114 892
Total shareholders' equity 3,172 2,351 1,904 1,732 1,442 1,158
- ------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS (based on balance sheet averages)
Return on assets 1.04% 1.46% .96% .58%(b) .59%(d) *
Return on common shareholders' equity 11.93 21.12 15.80 9.56 (b) 12.97 (d) *
Net interest margin:
Taxable equivalent basis 4.39 4.44 3.93 3.38 3.10 3.24%
Without taxable equivalent increments 4.36 4.39 3.82 3.26 2.96 3.06
Efficiency ratio 65 66 69 70 66 70
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Common shareholders' equity to assets 7.53% 6.62% 5.61% 4.50% 3.88% 2.81%
Total shareholders' equity to assets 9.17 8.10 7.06 5.82 4.92 3.86
Tier I capital ratio 7.39 7.62 6.56 5.10 4.59 3.09
Total (Tier I plus Tier II) capital ratio 10.97 11.30 10.73 9.01 8.77 6.18
Leverage capital ratio 6.88 7.10 6.28 4.79 4.32 2.87
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Loss
NM--Not meaningful
(a) After-tax gains on the sale of securities were as follows: 1993--$53
million; 1992--$108 million; 1991--$74 million; 1990--$8 million;
1989--2 million; and 1988--$4 million.
(b) Excluding the $74 million gain on the sale of the consumer finance
subsidiary, net income per common share would have been $1.20; return on
assets would have been .33%; and return on common shareholders' equity would
have been 4.06%.
(c) Pro forma results for 1993 exclude $112 million after-tax in restructuring
expense and $53 million in after-tax gains on the sale of securities related
to the Corporation's acquisition of The Boston Company. Pro forma fully
taxed results for periods prior to 1993 were calculated by applying a
normalized effective tax rate of approximately 38% to pretax income. The
unrecorded tax benefit that existed at the beginning of the periods was
included in the determination of the return on common shareholders' equity.
(d) Excludes extraordinary gains. Including extraordinary gains, return on
assets was .69% and return on common shareholders' equity was 15.59%.
17
<PAGE> 2
FINANCIAL REVIEW
RESULTS OF OPERATIONS
- ---------------------------------------
OVERVIEW OF 1993 RESULTS
Mellon Bank Corporation reported 1993 net income, excluding a restructuring
charge and securities gains, of $420 million, or $5.59 per common share. These
1993 results compare with pro forma fully taxed net income of $307 million, or
$4.63 per common share, in 1992. Return on assets and return on common
shareholders' equity in 1993, excluding the effect of restructuring expense and
securities gains, were 1.21% and 14.06%, respectively. These ratios compare with
pro forma fully taxed return on assets and return on common shareholders' equity
of 1.03% and 13.58% in 1992.
The Corporation's 1993 results included a restructuring charge of $175
million taken in connection with The Boston Company acquisition and gains on
sales of securities of $87 million taken as part of the financing plan and
balance sheet restructuring related to this acquisition. The Corporation's 1992
results were favorably affected by tax benefits created by losses in 1987 and
1988. These benefits were exhausted in 1992 and, as a result, the Corporation
returned to a fully taxed status in 1993.
Including the restructuring charge and securities gains, the Corporation's
full-year 1993 net income and earnings per common share were $361 million and
$4.63, respectively; and return on assets and return on common shareholders'
equity were 1.04% and 11.93%, respectively. In 1992, the Corporation's net
income and net income per common share, including tax benefits of $130 million,
were $437 million and $6.96, respectively; and return on assets and return on
common shareholders' equity were 1.46% and 21.12%, respectively.
The financial results of the Corporation in 1993 reflected the impact of
management's efforts to diversify and expand revenue sources and to strengthen
asset quality. Compared with 1992, the Corporation's 1993 results reflected a
substantial improvement in net interest and noninterest revenue as well as lower
credit quality expense, offset in part by higher operating expense.
Net interest revenue increased by $153 million, or 13%, in 1993 compared
with 1992, primarily reflecting the effect of a higher level of interest-earning
assets resulting from the second quarter 1993 acquisition of The Boston Company
and the December 1992 Meritor branch acquisition. The improvement also was
attributable to a lower level of nonperforming assets. The net interest margin
was 4.36% in 1993, down slightly from 4.39% in 1992.
Fee revenue surpassed $1 billion for the first time in the Corporation's
history, totaling $1.189 billion in 1993, up 41% over 1992. The increase was
attributable to fee revenue from The Boston Company as well as internal growth.
Gains on the sale of securities were $87 million in 1993, compared with $121
million a year earlier.
The provision for credit losses was $125 million in 1993, the lowest
provision since 1984, down $60 million from $185 million in 1992. Net credit
losses totaled $139 million in 1993, a decrease of 50% from $277 million in
1992. Nonperforming assets totaled $341 million at December 31, 1993, down 43%
from $595 million at the prior year end. The reserve for credit losses increased
to 297% of nonperforming loans at December 31, 1993, up from 152% a year
earlier.
Operating expense for 1993 was $1.858 billion, compared with $1.449 billion
in 1992. The $409 million increase was principally attributable to The Boston
Company and Meritor branch acquisitions, including the $175 million
restructuring expense related to The Boston Company acquisition.
Capital levels continued to improve in 1993 as the Corporation completed
its financing of The Boston Company and Meritor acquisitions. Common
shareholders' equity increased $631 million, or 30%, compared with year-end
1992. The ratio of common shareholders' equity to assets improved 91 basis
points, to 7.53% at December 31, 1993, and the Tier I capital and leverage
capital ratios remained strong at 7.39% and 6.88%, respectively.
The Corporation reported net income of $437 million, or $6.96 per
common share, in 1992. This compared with net income of $280 million,
or $4.66 per common share, in 1991. Net interest revenue increased by
$180 million in 1992, compared with 1991, primarily reflecting the effect of
wider spreads and a low-interest-rate environment. The provision for credit
losses was $185 million in 1992, down $65 million from the prior year. Fee
revenue increased by $87 million in 1992, reflecting the continued strength of
the service products businesses and increased
At this point in the 1993 Annual Report there appears a line graph as set out
in the following table:
<TABLE>
<CAPTION>
COMPONENTS OF REVENUE
- ----------------------------
(Millions of dollars)
1991 1992 1993
---------------------------------
<S> <C> <C> <C>
Net Interest $ 974 $1,154 $1,307
Noninterest 770 851 1,189
Securities Gains 78 121 87
---------------------------------
Total $1,822 $2,126 $2,583
</TABLE>
18
<PAGE> 3
OVERVIEW OF 1993 RESULTS continued
business activity in a variety of fee-based services. Other revenue of $128
million and $91 million in 1992 and 1991, respectively, primarily reflected $121
million and $78 million of gains on the sale of securities. Operating expense in
1992 was up $185 million compared with 1991, resulting from increased net
expense of acquired property, restructuring expenses related to the Meritor
branch acquisition and the Corporation's expense reduction program as well as
acquisition-related increases.
SIGNIFICANT EVENTS IN 1993
Acquisition of The Boston Company
On May 21, 1993, the Corporation completed its acquisition of The
Boston Company, Inc. (TBC). The Corporation now ranks among the largest
national competitors in each of these major trust and investment businesses:
mutual fund administration; institutional trust and custody; institutional
asset management; and private asset management. The Corporation had
approximately $755 billion of assets under custody and management at December
31, 1993. The combined trust and investment business of Mellon Bank and TBC now
uses the umbrella name "Mellon Trust." TBC is headquartered in Boston,
Massachusetts, and employs approximately 3,200.
Additional information regarding the Corporation's acquisition of TBC is
presented in note 21 of Notes to Financial Statements.
Sale of Information Services Businesses
On December 1, 1993, the Corporation completed its sale of two of its
information services outsourcing businesses, known as Financial Institution
Outsourcing and Data-Link Systems, Inc., to FIserv, Inc. for approximately $52
million. FIserv may make additional payments to the Corporation contingent upon
the revenue growth of the businesses over the next three years. The sale of
these businesses will have a minimal impact on the Corporation's future
earnings. The businesses, which were no longer central to the Corporation's
strategic priorities, employed approximately 600.
Acquisition of AFCO Credit Corporation
On December 21, 1993, the Corporation completed its acquisition of AFCO Credit
Corporation and CAFO, Inc., the insurance premium financing subsidiaries of The
Continental Corporation (Continental). AFCO, headquartered in New York City, has
25 locations in the United States and Canada and employs approximately 450
full-time employees. This acquisition gives the Corporation the leading market
share in the insurance premium financing business. The purchase price was $100
million in cash, with a contingent payment over five years of up to $78 million
based on loan originations during the five years after the purchase. AFCO is a
subsidiary of Mellon Bank, N.A., the Corporation's principal banking subsidiary.
CAFO is a subsidiary of Mellon Bank Canada.
AFCO and CAFO's combined total assets at December 31, 1993, were $1.2
billion, consisting almost entirely of collateralized commercial loans.
Pending equity position in Electronic Payment Services
On December 2, 1993, the Corporation signed a definitive agreement to become an
equity partner in Electronic Payment Services, Inc. (EPS), the holding company
for Money Access Service (MAC), the largest processor of automated teller
machine transactions in the United States, and BUYPASS Corporation, the nation's
leading third-party processor of electronic transactions. The Corporation is
expected to contribute its Network Services Division and invest approximately
$29 million in cash for a first-tier equity ownership interest in EPS. The
transaction is expected to be completed during the first half of 1994, pending
regulatory approval.
Pending Dreyfus Corporation Merger
On December 5, 1993, the Corporation entered into a definitive agreement to
merge with The Dreyfus Corporation (Dreyfus). Dreyfus is the nation's sixth-
largest mutual fund company, with approximately $80 billion of assets under
management and administration. The merger of the Corporation and Dreyfus would
create a diversified financial services organization with revenues of more than
$3 billion, including fee revenues of about $1.6 billion. Dreyfus is
headquartered in New York City and employs approximately 2,000.
The transaction will be accounted for as a pooling-of-interests and will
involve an exchange of .88017 shares of the Corporation's common stock for each
of the approximately 37 million Dreyfus shares outstanding. As a result of the
additional shares of the Corporation's common stock to be issued to the Dreyfus
shareholders in this transaction, the Corporation anticipates that its earnings
per share growth will slow somewhat for the next several years. Nonetheless, it
expects continued growth in earnings per share over that period. Completion of
the merger is contingent upon the approval of the shareholders of the
Corporation and Dreyfus, subject to various regulatory approvals and certain
approvals by the shareholders of the mutual funds advised by Dreyfus. Additional
information regarding the pending merger with Dreyfus is presented in note 21 of
Notes to Financial Statements.
19
<PAGE> 4
FINANCIAL REVIEW
BUSINESS SECTORS (a)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in Retail
millions, averages Wholesale Banking Financial Services Service Products Total core sectors
in billions) 1993 1992 1991 1993 1992 1991 1993 1992 1991 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue(b) $ 343 $ 333 $ 308 $ 998 $ 892 $ 774 $1,134 $ 745 $ 689 $2,475 $1,970 $1,771
Credit quality
expense 31 28 83 60 66 75 4 -- (2) 95 94 156
Operating expense 127 143 137 612 582 533 849 549 522 1,588 1,274 1,192
- -----------------------------------------------------------------------------------------------------------------------------------
Income before
taxes(b) 185 162 88 326 244 166 281 196 169 792 602 423
Income taxes(b) 69 58 32 130 103 77 116 71 62 315 232 171
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 116 $ 104 $ 56 $ 196 $ 141 $ 89 $ 165 $ 125 $ 107 $ 477 $ 370 $ 252
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets $10.9 $10.8 $11.5 $17.4 $ 16.2 $ 14.8 $ 4.8 $ 1.2 $ .8 $ 33.1 $ 28.2 $ 27.1
Average common
equity $ .7 $ .6 $ .5 $ 1.0 $ .8 $ .8 $ .6 $ .3 $ .3 $ 2.3 $ 1.7 $ 1.6
Return on assets 1.07% .96% .49% 1.13% .87% .60% NM NM NM 1.44% 1.31% .93%
Return on common
equity 15 16 7 17 16 11 24% 32% 26% 19 19 13
Efficiency ratio 37 43 44 61 65 69 75 74 76 64 65 67
- -----------------------------------------------------------------------------------------------------------------------------------
Actual reported
results including
tax benefits(d):
Net income $ 143 $ 78 $ 209 $ 140 $ 171 $ 149 $ 523 $ 367
Return on assets 1.32% .68% 1.29% .95% NM NM 1.85% 1.36%
Return on common
equity 24 13 25 21 48% 42% 30 23
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Real Estate Banking Other Total all sectors
1993 1992 1991 1993 1992 1991 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue(b) $ 46 $ 10 $ (5) $ 72 $ 159 $ 85 $2,593 $2,139 $1,851
Credit quality expense 89 177 142 -- 9 (11) 184 280 287
Operating expense 27 28 27 184 52 8 1,799 1,354 1,227
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes(b) (70) (195) (174) (112) 98 88 610 505 337
Income taxes(b) (25) (71) (58) (41) 37 33 249 198 146
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (45) $ (124) $ (116) $ (71) $ 61 $ 55 $ 361 $ 307 $ 191
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets $ 1.6 $ 1.5 $ 1.8 $ -- $ .2 $ .2 $ 34.7 $ 29.9 $ 29.1
Average common equity $ .2 $ .1 $ .1 $ -- $ -- $ (.2) $ 2.5 $ 1.8 $ 1.5
Return on assets * * * NM NM NM 1.04%(c) 1.03% .66%
Return on common equity * * * NM NM NM 12(c) 14 9
Efficiency ratio NM NM NM NM NM NM 65 66 69
- -----------------------------------------------------------------------------------------------------------------------------------
Actual reported
results including
tax benefits(d):
Net income (loss) $ (174) $ (167) $ 88 $ 80 $ 437 $ 280
Return on assets * * NM NM 1.46% .96%
Return on common equity * * NM NM 21 16
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Results for 1992 and 1991 are reported on a pro forma fully taxed basis
calculated by applying a normalized effective tax rate of approximately 38%
to pretax income. The unrecorded tax benefit that existed at the beginning
of the period was included in the determination of the return on common
shareholders' equity.
(b) Fully taxable equivalent basis.
(c) Excluding $112 million after-tax in restructuring expense and $53 million in
after-tax gains on the sale of securities related to the acquisition of The
Boston Company, return on assets and return on common shareholders' equity
were 1.21% and 14%, respectively.
(d) There were no tax benefits in 1993.
NM--Not a meaningful measure of performance for this sector.
* Loss
Note: This table presents the operating results of the major business sectors
within the Corporation, analyzed on an internal management reporting basis.
Capital is allocated using the federal regulatory guidelines as a basis, coupled
with management's judgment regarding the operational risks inherent in the
businesses. The capital allocations may not be representative of the capital
levels that would be required if these sectors were nonaffiliated business
units.
20
<PAGE> 5
BUSINESS SECTORS continued
Income before taxes, on a fully taxable equivalent basis, for the Corporation's
core sectors was $792 million in 1993, up $190 million, or 32%, compared with
1992. The improvement resulted primarily from the impact of The Boston Company
and Meritor acquisitions as well as improved productivity and revenue growth.
Return on assets for the core sectors was 1.44% in 1993, compared with 1.31% in
1992 and return on common shareholders' equity was 19% in both 1993 and 1992.
Results in 1993 also reflected the significant improvement in the Real Estate
Banking sector. This sector's net loss before taxes in 1993 of $70 million was
$125 million lower than the prior year. Real Estate Banking's continued
improvement in 1993 was evidenced by reporting results nearing break-even in the
fourth quarter of 1993.
Wholesale Banking
Wholesale Banking includes large corporate and middle market lending; asset
based lending; and certain capital markets and leasing activities. Income before
taxes for this sector increased by $23 million, or 14%, compared with 1992. This
improvement resulted primarily from higher net interest revenue, deposit and
syndication fees, and foreign currency and trading revenue as well as lower
operating expense. Return on common shareholders' equity was 15% in 1993,
compared with 16% and 7% in 1992 and 1991, respectively.
Retail Financial Services
Retail Financial Services' income before taxes was $326 million in 1993, an
increase of $82 million, or 34%, compared with the prior-year period. This
increase resulted primarily from the December 1992 Meritor branch acquisition, a
lower cost of funds, growth in credit card and home equity loans, and increased
revenue from personal investment services. The lower cost of funds reflected the
lower retail deposit rates in 1993 compared with 1992. The increase in operating
expense in 1993 resulted primarily from the Meritor branch acquisition. Return
on assets for this sector was 1.13% in 1993, compared with .87% in 1992. Return
on common shareholders' equity was 17% in 1993, compared with 16% the prior
year.
Service Products
Service Products, which primarily includes trust and investment, cash
management, information services, jumbo mortgage lending, and mortgage loan
origination and servicing, continued to be very profitable in 1993. Income
before taxes for the Service Products sector was $281 million in 1993, an
increase of $85 million, or 43%, compared with 1992. This improvement primarily
reflected earnings from The Boston Company. The improvement in revenue resulted
primarily from higher trust and investment fees as well as higher mortgage
origination and servicing and cash management fees. Trust and investment fees
increased by $238 million in 1993, resulting primarily from $218 million of fees
earned at The Boston Company. Higher mortgage origination and servicing fees
resulted from growth in both originated and acquired servicing portfolios.
Improved cash management fees resulted from higher volumes. Partially offsetting
the revenue growth was higher operating expense resulting from The Boston
Company and in support of the revenue growth. The pretax operating margin in
this sector was 25% in 1993, compared with 26% and 25% in 1992 and 1991,
respectively.
Real Estate Banking
Real Estate Banking includes commercial real estate lending and mortgage banking
recovery operations. This sector's pretax loss was $70 million in 1993, compared
with a $195 million pretax loss in the prior year. The $125 million improvement
primarily reflected a decrease of $88 million in credit quality expense in 1993,
resulting from improving trends in asset quality for this sector. Revenue in
this sector improved by $36 million in 1993, reflecting a lower cost of carry on
nonperforming assets and revenue from the commercial real estate loans acquired
in the Meritor branch acquisition. This sector showed continued quarterly
improvement in 1993 and reported results nearing break-even in the fourth
quarter of 1993.
Other
The "Other" sector's pretax loss of $112 million in 1993 primarily reflected a
$175 million restructuring charge related to the Corporation's acquisition of
The Boston Company, partially offset by $87 million in gains on the sale of
securities. Results in this sector in 1992 included $121 million in gains on the
sale of securities and $36 million in restructuring expenses.
Review of 1992 vs. 1991
Income before taxes for the total core sectors increased by $179 million, or
42%, in 1992, compared with 1991. The improvement resulted from higher net
interest and fee revenue and lower credit quality expense, offset in part by
higher operating expenses.
Compared with 1991, Wholesale Banking income before taxes increased by $74
million in 1992 as a result of a lower credit quality expense and an increase in
net interest revenue, loan fees and trading and other revenue. Retail Financial
Services' income before taxes improved by $78 million in 1992 from the
21
<PAGE> 6
FINANCIAL REVIEW
BUSINESS SECTORS continued
previous year, primarily reflecting higher net interest revenue. Income before
taxes for the Service Products sector was $27 million higher in 1992 than in
1991. The increase was due to growth in the trust and investment, information
services, mortgage loan origination and servicing, and cash management
businesses. The Real Estate Banking sector's $21 million increase in its
pretax loss in 1992, compared with 1991, primarily reflected a higher credit
quality expense. Income before taxes in the "Other" sector in 1992 included $121
million in securities gains, compared with $78 million of securities gains in
1991. Expenses in this sector in 1992 included restructuring expenses of $36
million.
NET INTEREST REVENUE
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(taxable equivalent basis,
dollar amounts in millions) 1993 1992 1991
- ---------------------------------------------------------
<S> <C> <C> <C>
Net interest revenue $ 1,317 $ 1,166 $ 1,001
Average interest-earning
assets 29,971 26,250 25,495
- ---------------------------------------------------------
Net interest margin:
Without taxable
equivalent increments 4.36% 4.39% 3.82%
Taxable equivalent basis 4.39 4.44 3.93
- ---------------------------------------------------------
</TABLE>
The continued improvement in net interest revenue in 1993, compared with the
prior year, primarily reflected a higher level of interest-earning assets
resulting from the second quarter 1993 acquisition of The Boston Company and the
December 1992 Meritor branch acquisition. Net interest revenue on a fully
taxable equivalent basis totaled $1.317 billion in 1993, up $151 million, or
13%, compared with 1992, while the net interest margin was down slightly at
4.39% in 1993.
Net interest revenue and the margin also benefited from a lower level of
nonperforming assets. Partially offsetting these positive factors was the impact
from the reduction in higher-yielding securities that were sold in the first
quarter of 1993 as part of the financing plan and balance sheet restructuring
related to the acquisition of The Boston Company. Also impacting net interest
revenue and the net interest margin was a higher level of long-term debt that
was issued in connection with this acquisition.
Net interest revenue will be favorably impacted in 1994 by the full-year
effect of The Boston Company and AFCO acquisitions.
Net interest revenue on a taxable equivalent basis in 1992 increased by
$165 million compared with 1991, reflecting an increase of 51 basis points in
the net interest margin. The improvement primarily reflected the impact of wider
spreads in a declining interest rate environment in 1992 compared with 1991.
Also contributing to the improvement was the positive effect of an increase in
the level of higher-yielding credit card receivables, achieved in part through
mid-1991 credit card portfolio acquisitions.
CREDIT QUALITY EXPENSE
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(in millions) 1993 1992 1991
- ---------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $125 $185 $250
Net expense of acquired
property 59 95 37
- ---------------------------------------------------------
Credit quality expense $184 $280 $287
- ---------------------------------------------------------
</TABLE>
Credit quality expense, defined as the provision for credit losses plus the net
expense of acquired property, was $184 million in 1993, down $96 million
compared with the prior year, reflecting continuing improvement in the credit
quality of the loan portfolio and a lower level of real estate acquired. The
Corporation currently expects that credit quality expense will again decline
significantly in 1994.
The Corporation recorded a $125 million provision for credit losses in
1993, the lowest provision since 1984. A $185 million provision was recorded in
1992. The net expense of acquired property was $59 million in 1993, down from
$95 million in 1992. The net expense of acquired property is discussed in the
"Operating expense" section beginning on page 24.
Net credit losses were $139 million in 1993, down $138 million, or 50%,
compared with 1992. The decrease resulted from lower net credit losses in most
loan categories, with commercial real estate net credit losses decreasing by $94
million. Net credit losses totaled $277 million in 1992 and $229 million in
1991.
The provision for credit losses was $250 million in 1991. The net expense
of acquired property was $37 million in 1991.
Additional information on the loan loss reserve and net credit losses is
presented in the "Credit Risk and Asset Quality" section beginning on page 31.
At this point in the 1993 Annual Report there appears a line graph as set out
in the following table:
<TABLE>
<CAPTION>
CREDIT QUALITY EXPENSE*
- -------------------------------------------
(Millions of dollars)
Year Amount
--------------- --------------
<S> <C>
1991 $287
1992 280
1993 184
</TABLE>
*Provision for credit losses and net expense of acquired property
22
<PAGE> 7
NONINTEREST REVENUE
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(in millions) 1993 1992 1991
- -----------------------------------------------------------
<S> <C> <C> <C>
Fee revenue:
Trust and investment management:
Institutional trust $ 184 $117 $107
Institutional asset
management 121 76 71
Personal trust 119 98 92
Mutual fund 105 -- --
- -----------------------------------------------------------
Total trust and investment
management 529 291 270
Cash management and deposit
transaction charges 192 182 153
Information services 152 142 130
Mortgage servicing 62 41 31
Credit card 61 54 46
Foreign currency and securities
trading 45 19 15
Letters of credit and acceptance
financing 24 23 22
Other 124 92 90
- -----------------------------------------------------------
Total fee revenue 1,189 844 757
Gains on sale of securities 87 121 78
Other noninterest revenue -- 7 13
- -----------------------------------------------------------
Total noninterest revenue $1,276 $972 $848
- -----------------------------------------------------------
</TABLE>
Fee revenue grew $345 million, or 41%, in 1993, resulting primarily from $252
million of fee revenue attributable to The Boston Company as well as continued
growth in the fee-based service products businesses. Excluding the impact of
acquisitions and divestitures in 1993 and $18 million of favorable one-time
accrual adjustments made in 1992, fee revenue increased 11% compared with 1992.
Trust and investment advisory services are provided to both individuals and
corporations and represent the largest segment of the Corporation's fee-based
services. Trust and investment management fees increased $238 million, or 82%,
over the prior year. This increase was attributable primarily to $218 million of
fee revenue earned by The Boston Company as well as successful sales and
marketing efforts of existing products and the overall strength in U.S. debt and
equity markets. The market value of assets under management and custody was
approximately $755 billion at December 31, 1993, compared with approximately
$380 billion a year earlier. The increase reflected the addition of
approximately $305 billion of assets, at acquisition date, of The Boston
Company. Upon completion of the merger with The Dreyfus Corporation, the
Corporation expects to substantially increase its trust and investment
management fee revenue and become the largest bank manager of mutual funds. At
December 31, 1993, The Dreyfus Corporation had approximately $80 billion of
mutual fund assets under management and administration.
The Corporation provides a broad array of cash management services,
including remittance processing, collections and disbursements, electronic wire
transfer and check processing. Cash management and deposit transaction charges
totaled $192 million in 1993. Revenues of $182 million in 1992 included a $13
million one-time accrual adjustment. Excluding this adjustment, cash management
and deposit transaction charges increased 14% in 1993, primarily reflecting
increased volume of existing products provided to large corporate customers.
The Corporation's information services businesses primarily include data
processing and stock transfer services. Information services fees totaled $152
million in 1993 compared with $142 million in 1992, which included a $5 million
one-time accrual adjustment. The improvement was primarily due to revenue from a
Canadian stock transfer company. During the second quarter of 1993, the
Corporation increased its ownership interest in this company from 10% to 80%. In
December 1993, the Corporation sold two of its information outsourcing
businesses. These two businesses generated monthly revenues of approximately $7
million. Information services fees in 1994 will be further reduced following the
Corporation's acquisition of an equity position in Electronic Payment Services,
Inc. (EPS). The Corporation will contribute its Network Services Division and
cash in exchange for an equity ownership. Net results from this investment will
be reported in Other Fee Revenue in 1994.
Mortgage servicing fees increased by $21 million, or 53%, in 1993, compared
with 1992, primarily reflecting the full-year effect of servicing portfolio
acquisitions in 1992. The Corporation's servicing portfolio increased to $20
billion at December 31, 1993, compared with $19 billion at December 31, 1992.
Credit card fee revenue, which consists principally of interchange and
cardholder fees, increased by $7 million, or 13%, in 1993. This increase
reflected
At this point in the 1993 Annual Report there appears a line graph as set out
in the following table:
<TABLE>
<CAPTION>
TRUST ASSETS UNDER MANAGEMENT AND CUSTODY
- -------------------------------------------
(Billions of dollars)
Year Amount
--------------- --------------
<S> <C>
1991 $305
1992 380
1993 755
</TABLE>
23
<PAGE> 8
FINANCIAL REVIEW
NONINTEREST REVENUE continued
successful marketing efforts within the Corporation's region in 1993. Average
credit card assets increased to $1.351 billion in 1993, from $1.185 billion in
1992. Credit card fee revenue in 1994 also will be impacted by the contribution
of the Corporation's Network Services Division to EPS. Credit card processing
fees of $13 million were recorded by this division in 1993.
Foreign currency and securities trading fees increased to $45 million,
more than double the $19 million earned in 1992. This increase was
attributable primarily to foreign exchange fees earned, principally from
global custody customers, at The Boston Company.
Compared with 1991, fee revenue grew by $69 million, or 9%, in 1992,
excluding the one-time 1992 accrual adjustments resulting from a change in
accounting methodology. The improvement primarily reflected increases of 8% in
trust and investment management fees, 10% in cash management and deposit
transaction charges, 32% in mortgage servicing fees, 16% in credit card revenue
and 5% in information services fees.
The Corporation recorded $87 million in gains on the sale of securities
from the available for sale portfolio in 1993. These securities sales were
undertaken as part of the financing plan and balance sheet restructuring related
to the acquisition of The Boston Company. Gains on the sale of securities were
$121 million in 1992. These sales were undertaken primarily to reduce the
Corporation's exposure to prepayment risk associated with certain of its U.S.
agency mortgage-backed securities, as well as to enhance capital in anticipation
of The Boston Company acquisition. As a result of securities purchases, sales
and maturities during 1993, the fully taxable equivalent yield on the total
securities portfolio at December 31, 1993, was 5.11%, compared with 7.39% at
year-end 1992. Additional information regarding the Corporation's securities
portfolio is presented in note 3 of Notes to Financial Statements.
OPERATING EXPENSE
Operating expense before the net expense of acquired property and restructuring
expenses totaled $1.624 billion in 1993, an increase of $306 million, or 23%,
compared with $1.318 billion in 1992. The combined effect of The Boston
Company and Meritor branch acquisitions was the primary reason for higher
expenses in nearly all expense categories. Excluding the effect of
acquisitions, operating expense before the net expense of acquired property
and restructuring expense was essentially flat in 1993 compared with 1992.
Operating expense
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(dollar amounts in millions) 1993 1992 1991
- ------------------------------------------------------------
<S> <C> <C> <C>
Staff expense $ 745 $ 578 $ 553
Net occupancy expense 168 147 142
Professional, legal and other
purchased services 150 119 111
Amortization of goodwill and
other intangibles 122 79 58
Equipment expense 113 98 95
Business development 75 63 51
Communications expense 71 62 55
FDIC assessment and regulatory
examination fees 60 53 47
Office supplies 37 28 26
Other expense 83 91 89
- ------------------------------------------------------------
Operating expense before the
net expense of acquired
property and restructuring
expenses 1,624 1,318 1,227
- ------------------------------------------------------------
Net expense of acquired
property 59 95 37
- ------------------------------------------------------------
Restructuring expenses 175 36 --
- ------------------------------------------------------------
Total operating expense $1,858 $1,449 $1,264
- ------------------------------------------------------------
Average full-time equivalent
staff 20,200 17,500 16,300
- ------------------------------------------------------------
Efficiency ratio*:
Including amortization of
intangibles 65% 66% 69%
Excluding amortization of
intangibles 60 62 66
- ------------------------------------------------------------
</TABLE>
* Operating expense before the net expense of acquired property and
restructuring expense as a percentage of net interest revenue on a taxable
equivalent basis and noninterest revenue, excluding securities gains and
nonrecurring items
The $36 million decrease in the net expense of acquired property in 1993,
compared with 1992, resulted primarily from a lower provision to the reserve for
real estate acquired (OREO), reflecting the lower level of OREO.
A restructuring charge of $175 million pretax, or $112 million after-tax,
was recorded in the first quarter of 1993 to reflect management's estimate of
restructuring costs associated with The Boston Company.
The increase in the average full-time equivalent staff level in 1993,
compared with the prior-year period, was due primarily to the addition of the
employees of The Boston Company and the Meritor branches. The impact of the May
1993 acquisition of The Boston Company on the average full-time equivalent staff
level was approximately 1,900 in 1993. The Boston Company had a full-time
equivalent staff level of approximately 3,200 at December 31, 1993.
Operating expense in 1992 increased by $185 million, or 15% over 1991.
Approximately half of the increase resulted from higher net expense of real
24
<PAGE> 9
OPERATING EXPENSE continued
estate acquired and restructuring expenses. The remaining increase primarily
resulted from the Corporation's year-end 1991 acquisition of United Penn Bank
(UPB), as well as from new business ventures and other asset acquisitions.
Restructuring expenses for 1992 included $18 million related to the December
1992 Meritor branch acquisition and $18 million related to the Corporation's
expense reduction program.
The Corporation adopted Statement of Financial Accounting Standards No. 106
(FAS No. 106), "Employers' Accounting for Postretirement Benefits Other than
Pensions" in 1993, by beginning to amortize the transition obligation over a
20-year transition period. Adoption of this standard increased benefits expense
by approximately $3 million in 1993, compared with the prior-year period.
Additional information regarding the Corporation's adoption of this standard is
presented in note 15 of Notes to Financial Statements.
In November 1992, the Financial Accounting Standards Board released FAS No.
112, "Employers' Accounting for Postemployment Benefits." FAS No. 112 requires
employers to recognize the obligation to provide postemployment benefits to
former or inactive employees after employment but before retirement if: the
obligation is attributable to employees' services already rendered; employees'
rights to those benefits accumulate or vest; payment of the benefits is
probable; and the amount of the benefits can be reasonably estimated. This
standard becomes effective in 1994. The Corporation estimates that adoption of
FAS No. 112 will not be material to the Corporation's financial position or
results of operations.
TAXES
The Corporation returned to a fully taxable status in 1993 as all remaining tax
benefit carryforwards from losses in 1987 and 1988 were exhausted in late 1992.
The provision for income taxes totaled $239 million in 1993, for an effective
tax rate of approximately 40%, compared with $55 million in 1992 and $28 million
in 1991. Without the availability of unrecognized tax benefits to offset federal
income taxes, the Corporation's provision for income taxes in 1992 and 1991
would have been approximately $185 million and $128 million, respectively.
New tax legislation was enacted during the third quarter of 1993 that
resulted in a net benefit for the Corporation. Under the new tax legislation,
the Corporation revalued its net federal deferred tax asset to reflect a change
in the statutory tax rate and is permitted to deduct the amortization of certain
intangibles. The combined effect of these items more than offset the statutory
tax rate increase on earnings. Primarily as a result of the deductibility of
certain intangibles amortization, the Corporation's effective tax rate was 38.5%
for the third and fourth quarters, down from 41% for the first six months of
1993. The Corporation currently estimates that the ongoing effective tax rate
will be 38.5% until the completion of the merger with The Dreyfus Corporation,
after which it is currently anticipated that the effective tax rate will
increase to approximately 39%.
The Corporation adopted FAS No. 109 "Accounting for Income Taxes," on a
prospective basis in 1993. The cumulative effect of this change in accounting
for income taxes was less than $1 million and was included in income tax
expense. Additional information regarding the Corporation's adoption of this
standard is presented in note 14 of Notes to Financial Statements.
BALANCE SHEET REVIEW
- ----------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(average balances in millions) 1993 1992 1991
- -----------------------------------------------------------
ASSETS
- -----------------------------------------------------------
<S> <C> <C> <C>
Money market investments $ 3,521 $ 1,663 $ 1,344
Trading account securities 269 308 309
Securities 4,426 6,052 5,333
Loans 21,755 18,227 18,509
- -----------------------------------------------------------
Total interest-earning
assets 29,971 26,250 25,495
Noninterest-earning assets 5,330 4,228 4,096
Reserve for credit losses (565) (589) (541)
- -----------------------------------------------------------
Total assets $34,736 $29,889 $29,050
- -----------------------------------------------------------
FUNDS SUPPORTING TOTAL
ASSETS
- -----------------------------------------------------------
Core funds $30,534 $24,786 $23,114
Wholesale funds 2,249 2,301 2,407
Purchased funds 1,953 2,802 3,478
Redeemable preferred stock -- -- 51
- -----------------------------------------------------------
Funds supporting total
assets $34,736 $29,889 $29,050
- -----------------------------------------------------------
</TABLE>
Balance sheet mix
The change in the mix and size of the Corporation's average balance sheet in
1993 was largely a result of the May 1993 acquisition of The Boston Company,
including the related financing plan and balance sheet restructuring, and the
December 1992 Meritor branch acquisition. The Boston Company and the Meritor
branch acquisitions added approximately $5 billion to total average assets and
$4 billion to average core funds in 1993. The assets acquired in these
acquisitions were primarily loans. Additional factors that
25
<PAGE> 10
FINANCIAL REVIEW
ASSET/LIABILITY MANAGEMENT continued
affected the mix of average assets were the sale of securities related to the
financing and balance sheet restructuring for The Boston Company acquisition and
sluggish loan demand in 1993. A portion of the proceeds from the securities
sales and loan repayments were temporarily invested in money market investments
in 1993.
For balance sheet management purposes, the Corporation has identified core,
wholesale and purchased funds as its key sources of funding. Core funds, which
are considered to be stable sources of funding, are defined principally as all
money market and other savings deposits, savings certificates, demand deposits,
shareholders' equity and notes and debentures with original maturities over one
year. Core funds primarily support core assets, which consist of loans, net
of the reserve, and noninterest-earning assets. Core funds averaged 115% of
core assets in 1993, up from 113% in 1992 and 105% in 1991, primarily
reflecting the average impact of core deposits related to the acquisition
of The Boston Company and the Meritor branch acquisition. The improvement
in core funds also was attributable to an increase in average shareholders'
equity and notes and debentures.
Wholesale and purchased funds are defined as federal funds purchased and
securities sold under agreements to repurchase, deposits in foreign offices and
other time deposits, negotiable certificates of deposit, U.S. Treasury tax and
loan demand notes, commercial paper and other borrowed funds. Average wholesale
and purchased funds decreased by $901 million compared with a year ago,
reflecting the additional core funding from the Meritor and The Boston Company
acquisitions, and declined to 12% of total average assets in 1993, compared with
17% in 1992 and 20% in 1991.
Securities
In May 1993, the Financial Accounting Standards Board released FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." FAS No. 115
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and all investments in debt securities and
other securitized assets. Investment securities are to be classified into the
following three categories: debt securities that the Corporation has the
positive intent and ability to hold to maturity are classified as "held to
maturity securities" and reported at amortized cost; debt and equity securities
that are bought and held principally for the purpose of resale in the near
future are classified as "trading securities" and reported at fair value, with
unrealized gains and losses included in current period earnings; and debt and
equity securities not classified as either held to maturity securities or
trading securities are classified as "available for sale securities" and
reported at fair value, with unrealized gains and losses, net of tax, excluded
from earnings and reported as a separate component of shareholders' equity. This
standard becomes effective in the first quarter of 1994. The Corporation
currently estimates that adoption of FAS No. 115 will not initially have a
material impact on shareholders' equity; however, increased volatility of
shareholders' equity and related capital ratios could result from changes in
unrealized gains and losses on assets classified as available for sale.
Additional information regarding the Corporation's securities portfolio is
presented in note 3 of Notes to Financial Statements.
CAPITAL
Selected capital data
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
December 31,
(dollar amounts in millions, -----------------------------
except per share amounts) 1993 1992 1991
- ---------------------------------------------------------------
<S> <C> <C> <C>
Common shareholders' equity $2,721 $2,090 $1,648
Common shareholders' equity
to assets ratio 7.53% 6.62% 5.61%
Tangible common equity
ratio(a) 5.37 5.48 4.90
Total shareholders' equity $3,313 $2,557 $2,073
Total shareholders' equity
to assets ratio 9.17% 8.10% 7.06%
Tier I capital ratio 7.39 7.62 6.56
Total (Tier I plus Tier II)
capital ratio 10.97 11.30 10.73
Leverage capital ratio 6.88 7.10 6.28
Book value per common
share(b) $41.75 $36.96 $31.29
Closing common stock price 53.00 53.00 34.875
- ----------------------------------------------------------------
</TABLE>
(a) Common shareholders' equity less goodwill divided by total assets less
goodwill.
(b) The book value per common share assumes full conversion of the Series D
preferred stock to common stock. Accordingly, this includes the additional
paid-in capital on the Series D preferred stock because this paid-in capital
has no liquidation preference over the common stock.
The Corporation's capital position continued to improve in 1993. Common
shareholders' equity increased $631 million in 1993 to $2.7 billion, or 7.53% of
total assets, at December 31, 1993, compared with 6.62% of total assets at
year-end 1992. Total shareholders' equity improved to 9.17% of total assets at
December 31, 1993, from 8.10% at year-end 1992. These improvements resulted from
the common and preferred stock and warrants issued in connection with The Boston
Company and Meritor branch acquisitions and earnings retention.
26
<PAGE> 11
CAPITAL continued
In January 1993, the Corporation raised $229 million of net proceeds from
the issuance of 4.3 million shares of common stock and $193 million of net
proceeds from the issuance of 8 million shares of 8.20% Series K preferred stock
issued as part of the financing plan for the acquisition of The Boston Company
and the December 1992 Meritor branch acquisition. In May 1993, the Corporation
issued $115 million of common stock and $37 million of warrants as part of the
purchase price of The Boston Company. Partially offsetting the increase in total
shareholders' equity was the redemption of the $68 million of Series B
convertible preferred stock in December 1993.
During the fourth quarter of 1993, the Corporation repurchased
approximately 1 million shares of its common stock to be used to meet current
and near-term requirements for its stock-based benefit plans. Approximately
366,000 of these shares remained in treasury at December 31, 1993.
Upon consummation of the merger with The Dreyfus Corporation, which will be
accounted for as a pooling-of-interests, the Corporation expects to issue
approximately 32 million shares of common stock in exchange for the Dreyfus
common stock. The capital ratios of the Corporation following this merger will
be substantially higher than the year-end 1993 ratios. On a pro forma basis,
book value per common share would have been approximately 13% lower than the
year-end 1993 amount. Additional information regarding the Corporation's merger
with The Dreyfus Corporation is presented in note 21 of Notes to Financial
Statements.
At this point in the 1993 Annual Report there appears a line graph as set out
in the following table:
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
- -------------------------------------------
(Millions of dollars at year end)
1991 1992 1993
---------------------------------------
<S> <C> <C> <C>
Common Equity $1,648 $2,090 $2,721
Preferred Equity 425 467 592
---------------------------------------
Total Equity $2,073 $2,557 $3,313
</TABLE>
Risk-based and leverage capital ratios at
December 31, 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------
(dollar amounts in millions)
- --------------------------------------------------------
<S> <C>
Tier I capital:
Common shareholders' equity(a) $ 2,684
Qualifying preferred stock(a) 629
Minority interest 12
Goodwill and other intangibles (926)
- --------------------------------------------------------
Total Tier I capital 2,399
Tier II capital 1,160
- --------------------------------------------------------
Total qualifying capital $ 3,559
- --------------------------------------------------------
Risk-adjusted assets:
On-balance sheet $23,754
Off-balance sheet 8,689
- --------------------------------------------------------
Total $32,443
- --------------------------------------------------------
Average assets--leverage capital basis $34,890
- --------------------------------------------------------
Tier I capital ratio 7.39%
Total capital ratio 10.97
Leverage capital ratio 6.88
- --------------------------------------------------------
</TABLE>
(a) For the purpose of this computation, the additional paid-in capital on the
Series D preferred stock, totaling $37 million, is included in "Qualifying
preferred stock" rather than in "Common shareholders' equity."
Tier I and Total capital are expressed as a percentage of risk-adjusted assets,
which include various risk-weighted percentages of assets on the balance sheet
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.
The positive effect of the equity issuances and earnings retention in 1993
were offset by the effect of a higher level of goodwill and other intangibles
and higher asset levels. Although the Corporation's risk-based and leverage
capital ratios decreased slightly in 1993, they remained well above the
supervisory minimums.
Federal regulators have adopted a capital-based supervisory system for all
insured financial institutions. Should a financial institution's capital ratios
decline below predetermined levels, it would become subject to a series of
increasingly restrictive regulatory actions. The system categorizes a financial
institution's capital position into one of five categories ranging from well
capitalized to critically under-capitalized. For an institution to qualify
as well capitalized, Tier I capital, Total capital and leverage capital must
be at least 6%, 10% and 5%, respectively. All of the Corporation's banking
subsidiaries qualified as well capitalized at December 31, 1993. The
27
<PAGE> 12
FINANCIAL REVIEW
CAPITAL continued
Corporation intends to maintain the ratios of its banking subsidiaries at the
well capitalized levels.
The Corporation deducts goodwill and intangibles acquired subsequent to
February 19, 1992, except mortgage servicing rights and purchased credit card
intangibles, when computing Tier I capital. The components of the Corporation's
intangible assets are presented in the table below.
Goodwill and other intangibles
<TABLE>
<CAPTION>
- -------------------------------------------------------------
December 31,
---------------------------------
(in millions) 1993 1992 1991
- -------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $ 825 $380 $220
Purchased mortgage
servicing rights 160 140 52
Purchased core deposit
intangible 155 215 168
Covenant not to compete 57 7 16
Purchased credit card
intangibles 44 49 57
Other intangibles 46 32 38
- -------------------------------------------------------------
Total $1,287 $823 $551
- -------------------------------------------------------------
</TABLE>
The increase in goodwill and other intangibles during 1993 resulted from
$402 million of goodwill and a $55 million noncompete covenant recorded in
connection with The Boston Company acquisition and approximately $55 million of
goodwill and a $5 million noncompete covenant related to the acquisition of
AFCO. During 1993, the Corporation reclassified approximately $26 million from
purchased core deposit intangibles to goodwill following receipt of an
independent appraisal of the intangibles and the final valuation of Meritor's
assets and liabilities. The increase in purchased mortgage servicing rights
At this point in the 1993 Annual Report there appears a line graph as set out
in the following table:
<TABLE>
<CAPTION>
TOTAL COMMON EQUITY TO ASSETS AND
TANGIBLE COMMON EQUITY TO ASSETS*
- -------------------------------------------
(Percentage)
1991 1992 1993
-----------------------------
<S> <C> <C> <C>
Total Common Equity 5.61% 6.62% 7.53%
Tangible Common Equity 4.90% 5.48% 5.37%
</TABLE>
*Common shareholders' equity less goodwill divided by total
assets less goodwill
(PMSR) in both 1993 and 1992, resulted from mortgage servicing portfolio
acquisitions. A test for the impairment of value of PMSRs is conducted
quarterly. The estimated fair value of the PMSRs exceeded the carrying value at
December 31, 1993. For a further discussion of the Corporation's accounting
policy for PMSRs, see note 1 of Notes to Financial Statements. The increase in
goodwill and other intangibles during 1992 resulted principally from the
December 1992 Meritor branch acquisition and the purchase of mortgage servicing
portfolios.
LIQUIDITY AND DIVIDENDS
The Corporation's liquidity management strategy is to achieve an appropriate
balance between the maturities of its assets and liabilities. The Corporation
continually evaluates its funding needs and manages its liquidity position by
maintaining adequate levels of liquid assets, such as money market assets and
securities available for sale. Additional liquidity is available through the
Corporation's ability to participate or sell commercial loans and to securitize
selected loan portfolios. The Corporation also has a $200 million revolving
credit agreement and a $25 million backup line of credit to provide support
facilities for its commercial paper borrowings and for general corporate
purposes. The revolving credit facility contains tangible net worth and double
leverage ratio covenants, as discussed in note 9 of Notes to Financial
Statements.
During the second quarter of 1993, Moody's, a public credit rating agency,
upgraded its ratings on the Corporation's senior debt securities and other
obligations, primarily as a result of the Corporation's improved capital
position, lower level of nonperforming assets and continued growth in core
earnings. This upgrade should enable the Corporation to issue debt at lower
rates of interest and, overall, enhance the Corporation's access to funding
markets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
December 31,
--------------------------
SENIOR DEBT RATINGS 1993 1992 1991
- ------------------------------------------------------------
<S> <C> <C> <C>
MELLON BANK CORPORATION
Moody's A3 Baa1 Baa1
Standard & Poor's A- A- A-
- ------------------------------------------------------------
</TABLE>
As shown in the Consolidated Statement of Cash Flows, cash and due from
banks increased by $195 million during 1993 to $2.169 billion at December 31,
1993. The increase primarily reflected $1.392 billion in net cash provided by
operating activities and $2.137 billion of net cash provided by investing
activities, offset in part by $3.347 billion of net cash used by financing
activities. Net cash
28
<PAGE> 13
LIQUIDITY AND DIVIDENDS continued
provided by investing activities was the result of cash received from the sales
and maturities of securities net of purchases and the reduction in term deposits
offset in part by the purchase of The Boston Company. Cash used by financing
activities principally reflected a net reduction in customer deposits and the
repayment of AFCO borrowings at the acquisition date. Cash generated by
operating activities reflected $361 million of net income adjusted for noncash
charges and credits. Completion of the pending merger with The Dreyfus
Corporation will add approximately $750 million of cash and securities to the
total liquid assets of the Corporation.
In connection with the financing plan for the acquisition of The Boston
Company and the December 1992 Meritor branch acquisition, the Corporation raised
$229 million of net proceeds from the issuance of 4.3 million new shares of
common stock and $193 million of net proceeds from the issuance of 8 million
shares of 8.20% Series K preferred stock. Also in connection with these
acquisitions, the Corporation issued $199 million of 6 1/2% Senior Notes Due
1997, $150 million of 6 7/8% Subordinated Debentures due 2003 and $200 million
of Floating Rate Senior Notes Due 1996.
Several other issuances and redemptions of debt were undertaken in 1993
primarily to reposition and to reduce the overall cost of the Corporation's
long-term debt. The Corporation redeemed the entire $153 million of its 8 7/8%
Subordinated Capital Notes, the entire $68 million of its 9% notes due 1996 and
the entire $33 million of 8.6% Debentures Due 2009. The Corporation's principal
bank subsidiary, Mellon Bank, N.A., redeemed the entire $250 million of its
Floating Rate Subordinated Capital Notes due 1996. Mellon Bank, N.A., issued
$249 million of 6 1/2% Subordinated Notes due 2005 and $149 million of 6 3/4%
Subordinated Notes due 2003 during the year. Other 1993 activity included the
redemption of $68 million of Series B convertible preferred stock in the fourth
quarter of 1993.
Contractual maturities of the Corporation's term debt totaled $60 million
in 1993 and primarily included the $52 million maturity of fixed-and
variable-rate Medium Term Notes. Contractual matur-
ities of existing debt will total $219 million in 1994. The Corporation expects
to fund its 1994 debt maturities with a combination of cash presently on hand,
other internal funding sources and, if necessary, with the proceeds from the
public and/or private issuance of securities. The Corporation has on file with
the Securities and Exchange Commission a debt shelf registration statement on
which up to an additional $200 million of debt may be issued.
The Corporation paid $156 million of dividends on its outstanding shares of
common and preferred stock during 1993. The Corporation increased its annual
dividend on common stock to $1.52 per share in January 1993, an increase of 9%
from $1.40 per share in 1992. This resulted in a common stock dividend payout
ratio of 33% in 1993, compared with 20% in 1992. In November 1993, the
Corporation announced an increase in the dividend on its common stock commencing
in the first quarter of 1994 to $2.24 per share, an increase of 47% from $1.52.
Using the new common stock dividend rate, annual dividend requirements in 1994
for the common and preferred stock are expected to be approximately $205
million. Completion of the pending merger with The Dreyfus Corporation will
increase the outstanding common shares of the Corporation by approximately 32
million shares. This increase in outstanding common shares will result in an
increase in annual common dividends of approximately $72 million.
The parent Corporation's principal sources of cash are interest and
dividends from its subsidiaries. The ability of national bank subsidiaries to
pay dividends to the parent Corporation is subject to certain limitations, as
discussed in note 16 of Notes to Financial Statements. Under the currently more
restrictive of these limitations, the Corporation's national bank subsidiaries
can, without prior regulatory approval, declare dividends subsequent to December
31, 1993, of approximately $492 million, less any dividends declared and plus or
minus net profits or losses, as defined, between January 1, 1994, and the date
of any such dividend declaration. The national bank subsidiaries declared
dividends to the parent Corporation of $158 million in 1993, $130 million in
1992 and $129 million in 1991. Dividends paid to the parent Corporation by
nonbank subsidiaries totaled $116 million in 1993, including $62 million
attributable to The Boston Company, compared with $26 million in 1992 and $32
million in 1991. In addition, The Boston Company returned $300 million of
capital to the parent Corporation in 1993.
Banking regulators have issued additional guidelines that require bank
holding companies and subsidiary banks to continuously evaluate the level of
cash dividends in relation to their respective operating income, capital needs,
asset quality and overall financial condition. Dividends from the bank
subsidiaries to the parent Corporation in 1994 are not expected to exceed
earnings for those subsidiaries.
29
<PAGE> 14
FINANCIAL REVIEW
INTEREST RATE SENSITIVITY ANALYSIS
The Corporation actively manages its interest rate sensitivity position in order
to maintain an appropriate balance between the repricing characteristics of its
assets and liabilities. The interest rate sensitivity table shows the repricing
characteristics of the Corporation's interest-earning assets and supporting
funds at December 31, 1993. The data is based upon contractual repricing or
maturities and, where applicable, management's assumptions as to the estimated
repricing characteristics of certain assets and supporting funds. The
Corporation manages the impact of interest rate risk on assets, liabilities and
commitments by entering into financial instruments, either on-or off-balance-
sheet. Financial futures contracts, options and interest rate swaps are used in
managing the interest rate risk of the Corporation's assets and liabilities.
The cumulative gap at the one-year repricing period was asset sensitive in
the amount of $107 million, or .3% of total assets, at December 31, 1993. This
compared with a cumulative one-year liability sensitive gap of $810 million, or
2.6% of total assets, at December 31, 1992. The Corporation accomplished a
modest amount of balance sheet repositioning in the low-interest-rate
environment of 1993 to bring the interest rate gap closer to a balanced
position. Generally, an asset sensitive gap indicates that rising interest rates
could positively affect net interest revenue and falling rates could negatively
affect net interest revenue. Assets and liabilities with similar contractual
repricing characteristics, however, may not reprice at the same time or to the
same degree. As a result, the Corporation's static interest rate sensitivity gap
position does not necessarily predict the impact of changes in general levels of
interest rates on net interest revenue.
In order to measure the effect of interest rate fluctuations on the
Corporation's net interest margin, management simulates the potential effects of
changing interest rates through computer modeling, incorporating both the
current gap position and the expected magnitude of the repricing of specific
asset and liability categories. These analyses at December 31, 1993, indicated
that a 100-basis-point upward or downward movement in interest rates would have
less than a 1% positive or negative effect on the Corporation's 1994 anticipated
net interest revenue.
Interest rate sensitivity gap at December 31, 1993
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Repricing period
0-30 31-90 91-180 181-365 1-5 Over 5
(dollar amounts in millions) days days days days years years Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Money market investments $ 1,381 $ 65 $ 10 $ -- $ 11 $ -- $ 1,467
Trading account securities 116 -- -- -- -- -- 116
Securities 1,073 1,299 185 315 1,147 993 5,012
Loans 10,307 4,035 2,698 2,150 3,156 2,127 24,473
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $12,877 $ 5,399 $ 2,893 $2,465 $4,314 $ 3,120 $31,068
Funds supporting interest-
earning assets:
Interest-bearing deposits $ 3,090 $ 5,693 $ 2,932 $1,433 $3,756 $ 3,720 $20,624
Short-term borrowed funds 1,928 83 6 -- -- 109 2,126
Notes and debentures (with
original maturities over
one year) 376 10 -- 3 607 994 1,990
Noninterest-bearing liabilities 1,699 180 270 98 2 4,079 6,328
- -------------------------------------------------------------------------------------------------------------------------------
Total funds supporting
interest-earning assets $ 7,093 $ 5,966 $ 3,208 $1,534 $4,365 $ 8,902 $31,068
Off-balance-sheet instruments (2,849) (3,080) (381) 584 5,365 361 --
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 2,935 $(3,647) $ (696) $1,515 $5,314 $(5,421) $ --
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ 2,935 $ (712) $(1,408) $ 107 $5,421 $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage
of total assets 8.1% (2.0)% (3.9)% .3% 15.0% -- --
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Repricing periods for securities, loans, interest-bearing deposits,
noninterest-bearing liabilities and off-balance-sheet instruments are based upon
contractual maturities, where applicable, as well as the Corporation's
historical experience of the impact of interest rate fluctuations on the
prepayment and withdrawal patterns of certain assets and liabilities.
30
<PAGE> 15
CREDIT RISK AND ASSET QUALITY
- ---------------------------------------
CREDIT MANAGEMENT
The Corporation's credit management philosophy is designed to achieve controlled
asset generation while maintaining an appropriate balance between risk and
return. Essential to this process are stringent underwriting of new loans,
active monitoring of all loan portfolios, and the early identification of
potential problems and their prompt resolution. These are accomplished by
establishing internal ownership, responsibility and accountability for all
aspects of asset quality. Notwithstanding this process, however, asset quality
is dependent in large part upon local, national, international and industry
segment economic conditions that are beyond the Corporation's control.
Management maintains a comprehensive centralized process through which the
Corporation extends new loans, monitors credit quality, actively manages problem
credits and disposes of nonperforming assets. To help ensure adherence to the
Corporation's credit policies, senior department credit officers report to both
the chief credit officer and the head of each respective lending department. The
responsibilities of these senior credit officers include all aspects of the
credit process except credit review, credit recovery, and aggregate portfolio
management, which are centralized at the corporate level.
The Corporation manages credit risk by maintaining a well-diversified
credit portfolio and by adhering to its written credit policies, which specify
general underwriting criteria as well as underwriting standards by industry, and
control credit exposure by borrower, degree of risk, industry and country. These
measures are adopted by the Credit Policy Committee and are regularly updated to
reflect the committee's evaluation of developments in economic, political and
operating environments that could affect lending risks. The Corporation may
adjust credit exposure to individual industries or customers through loan sales,
syndications and participations.
Except for certain well-defined loans made by the Retail Financial Services
sector, primarily to consumers and small businesses, all credit extensions are
approved jointly by officers of the Credit Policy Department and officers of the
lending departments. The number and level of officer approvals required are
determined by the dollar amount and risk characteristics of the credit
extension. The amount of collateral, if any, obtained by the Corporation upon
the extension of credit is based on industry practice as well as on 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 existing 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 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. In order to anticipate or detect problems that may result from
economic downturns or deteriorating conditions in certain markets, lending units
and credit management utilize a process 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
Department provides an independent assessment of credit ratings, credit quality
and adherence to the credit management process.
31
<PAGE> 16
FINANCIAL REVIEW
COMPOSITION OF LOAN PORTFOLIO AT YEAR END
The increase in the loan portfolio in 1993 resulted primarily from the addition
of $4.4 billion in loans related to the acquisition of The Boston Company and
$1.2 billion in collateralized loans related to the acquisition of AFCO.
Excluding the effect of these acquisitions, period-end loans decreased in 1993
by approximately $1.1 billion, or 6%, compared with a year ago, reflecting the
weak demand primarily in commercial loans. Principally as a result of the
consumer loans acquired in The Boston Company acquisition, the Corporation's
loan portfolio is almost equally composed of consumer and commercial loans. At
December 31, 1993, the loan portfolio was composed of 51% commercial loans and
49% consumer loans. At year-end 1992, the split of commercial and consumer loans
was 60% and 40%, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1993(a)(b) 1992(a) 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $ 9,091 $ 8,115 $ 8,270 $ 8,096 $ 9,532
- ----------------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Commercial construction 423(c) 504 636 990 1,362
Commercial mortgage 1,298 1,357 1,340 1,220 1,295
- ----------------------------------------------------------------------------------------------------------------------------
Total commercial real estate 1,721(d) 1,861 1,976 2,210 2,657
- ----------------------------------------------------------------------------------------------------------------------------
Consumer credit:
Consumer mortgage 8,180 4,278 3,296 2,921 1,475
Other consumer credit 3,813 3,618 3,508 3,289 3,348
- ----------------------------------------------------------------------------------------------------------------------------
Total consumer credit 11,993 7,896 6,804 6,210 4,823
- ----------------------------------------------------------------------------------------------------------------------------
Lease finance assets 718 650 658 688 424
- ----------------------------------------------------------------------------------------------------------------------------
Total domestic loans 23,523 18,522 17,708 17,204 17,436
- ----------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL LOANS 950 1,434 1,395 1,534 1,962
- ----------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $24,473 $19,956 $19,103 $18,738 $19,398
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) At December 31, 1993, commercial loans, commercial construction loans and
commercial mortgages included $58 million, $8 million and $223 million,
respectively, of loans acquired in the Meritor branch acquisition which are
subject to the FDIC loss sharing arrangement as further discussed in note 8
of Notes to Financial Statements.
(c) Includes $321 million of loans related to real estate projects that are
designated as "substantially complete," indicating that no additional
funding is required to complete construction of the base building or that a
certificate of occupancy has been obtained from the municipality in which
the project is located.
(d) Includes $432 million of loans secured by owner-occupied commercial real
estate but not made for the purpose of real estate construction or
financing.
Note: There were no concentrations of loans to borrowers engaged in similar
activities, other than those shown on the table above, that exceeded 10% of
total loans at year end.
Commercial and financial
The domestic commercial and financial loan portfolio consists primarily of loans
to corporate borrowers in the manufacturing, service, energy, communications,
wholesale and retail trade, public utilities and financial services industries.
The Corporation diversifies risk within this portfolio by closely monitoring
industry concentrations and portfolios to ensure that established lending
guidelines are not exceeded. Diversification is intended to limit the risk of
loss from any single unexpected economic trend or event. Total domestic
commercial and financial loans increased by $976 million, or 12%, during 1993,
due to the acquisition of $1.2 billion in high-quality loans related to the AFCO
acquisition, offset partially by the reduced demand for loans in 1993. The level
of commercial loans continued to decrease in 1993, excluding the effect of
acquisitions, as the Corporation's customers recently have accessed the public
debt and equity markets more frequently, and as a consequence borrow less from
the Corporation. Commercial and financial loans represented 37% and 41% of the
total loan portfolio at December 31, 1993 and 1992, respectively. At year-end
1993, nonperforming domestic commercial and financial loans and leases were .41%
of total domestic commercial and financial loans and leases compared with 1.25%
at December 31, 1992.
Commercial real estate
The Corporation's $1.7 billion domestic commercial real estate loan portfolio
consists of commercial mortgages, which generally are secured by
32
<PAGE> 17
COMPOSITION OF LOAN PORTFOLIO AT YEAR END continued
nonresidential and multi-family residential properties, and commercial
construction loans with maturities of 60 months or less. Also included in this
portfolio are loans which are secured by owner-occupied real estate, but made
for purposes other than the construction or purchase of real estate. The
commercial real estate loan portfolio includes $231 million of loans acquired in
the December 1992 Meritor branch acquisition that are subject to a five year 95%
loss sharing arrangement with the FDIC. Domestic commercial real estate loans
decreased by $140 million, or 8%, in 1993. The decrease was primarily a result
of paydowns, net credit losses, transfers to OREO and sales, partially offset by
new loan originations in 1993. Domestic commercial real estate loan commitments
originated in 1993 totaled $95 million. Commercial real estate loan commitments
were $307 million at December 31, 1993, down slightly from $325 million at
December 31, 1992. Domestic commercial real estate loans were 7% of total loans
at December 31, 1993, down from 9% a year earlier. Nonperforming domestic
commercial real estate loans were 5.17% of total domestic commercial real estate
loans at December 31, 1993, compared with the peak level of 19.02% at September
30, 1991.
Management's strategy in real estate lending has been to limit the
Corporation's exposure to weakened real estate markets by concentrating
primarily on its existing selected customer base, adhering to stringent
underwriting criteria for new loans and strengthening the process for managing
nonperforming loans. The commercial real estate loan portfolio has been reduced
by approximately 55% since year-end 1986 despite the addition of commercial real
estate loans acquired in the Meritor branch, United Penn Bank and PSFS
acquisitions.
Distribution of domestic commercial real estate by size at December 31, 1993
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(dollar amounts in millions) Percent
of total
Principal amounts Outstandings outstandings
- ---------------------------------------------------------
<S> <C> <C>
Less than $10 $1,139 66%
$10 to $20 318 (a) 19
$20 to $40 206 (b) 12
$40 to $60 58 (c) 3
- ---------------------------------------------------------
Total $1,721 100%
- ---------------------------------------------------------
</TABLE>
(a) Represents loans to 23 borrowers.
(b) Represents loans to 7 borrowers.
(c) Represents a loan to a single borrower.
Consumer credit
Consumer mortgages grew to $8.2 billion, or 33% of total loans, at December 31,
1993. The $3.9 billion increase in this portfolio from year end 1992 reflected
the addition of approximately $4.2 billion of consumer mortgages, primarily
jumbo mortgages, from The Boston Company. At December 31, 1993, the geographic
distribution of the jumbo mortgages at The Boston Company was as follows: 33% in
New York; 28% in California; 25% in New England; and 14% in other areas. For the
Corporation's entire domestic consumer mortgage portfolio, nonperforming
mortgages were .75% of total consumer mortgages at December 31, 1993.
Other consumer credit, which consists principally of installment loans,
credit cards, personal credit lines and student loans, increased by $195 million
from year end 1992. This increase reflected the consumer loans added from The
Boston Company acquisition.
Other loans
Lease finance assets increased to $718 million, up from $650 million at year end
1992. Loans to international borrowers decreased to $950 million at December 31,
1993.
Highly leveraged transactions
A highly leveraged transaction (HLT) loan is a commercial loan involving a
leveraged buyout, acquisition or recapitalization of an existing business. In
addition, the loan substantially increases the borrower's leverage ratio. Given
the borrower's generally higher ratio of debt compared with equity, there may be
higher risk of default inherent in these transactions than in more traditional
financings.
The level of the Corporation's HLTs continued to decrease in 1993. Total
HLT loans were $498 million at December 31, 1993, down $90 million, or 15%, from
the prior year end. Total HLT credit exposure decreased by $89 million during
1993 to $693 million. These reductions primarily reflected payments received, as
well as the delisting of certain credit exposures that no longer met the revised
HLT definition. At December 31, 1993, HLT loans were 2% of total loans. The
largest HLT exposure by industry was cable television, with 10 companies and
credit exposure of $202 million at December 31, 1993. The credit quality of HLT
outstandings improved in 1993. Nonaccrual HLT loans at December 31, 1993
decreased to $11 million, or 2.23%, of total HLT loans compared with $24
million, or 4.11%, at December 31, 1992. The elimination of HLT activity would
not have a material impact on the Corporation's earnings.
33
<PAGE> 18
FINANCIAL REVIEW
COMPOSITION OF LOAN PORTFOLIO AT YEAR END continued
Distribution of domestic commercial real estate loans at December 31, 1993
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(in millions) Geographic Region
Central
Project type Atlantic Southeast Midwest West Southwest Northeast Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Office complexes $196 $ 46 $ 46 $36 $12 $ 6 $ 342
Retail 155 70 45 22 11 -- 303
Hotels 72 49 10 6 12 -- 149
Industrial 50 2 2 5 3 -- 62
Apartments 31 -- 17 -- 3 -- 51
Undeveloped land 6 18 10 9 -- -- 43
Health care 11 9 -- 4 4 -- 28
Residential 17 -- -- 3 4 -- 24
Other project types 56 -- -- -- -- -- 56
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal $594(a) $194(b) $130(c) $85(d) $49(e) $ 6 $1,058
- -----------------------------------------------------------------------------------------------------------------------------
Meritor loss share loans 231(f)
Owner-occupied loans 432(g)
- -----------------------------------------------------------------------------------------------------------------------------
Total $1,721
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $417 million of loans to borrowers located in Pennsylvania.
(b) Includes $75 million of loans to borrowers located in Florida.
(c) Includes $32 million of loans to borrowers located in Ohio.
(d) Includes $71 million of loans to borrowers located in California.
(e) Includes $25 million of loans to borrowers located in Texas.
(f) Commercial real estate loans acquired from the Meritor branch acquisition
that are subject to the FDIC loss sharing arrangement. Meritor commercial
real estate loans that become nonperforming loans are transferred to
segregated assets.
(g) Loans that are secured by owner-occupied commercial real estate but not
made for the purpose of real estate construction or financing.
Distribution of nonperforming commercial real estate loans and real estate
acquired at December 31, 1993
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
(in millions) Geographic Region
Central
Project type Atlantic Southeast Midwest West Southwest Northeast Canada Total
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Undeveloped land $ 12 $26 $10 $ 7 $22 $ 8 $-- $ 85
Office complexes (a) 48 3 1 -- 8 -- -- 60
Retail 5 12 -- 10 -- -- 16 43
Hotels 5 22 -- -- -- -- -- 27
Residential 13 9 -- 2 2 1 -- 27
Industrial 9 -- 1 -- -- -- -- 10
Other project types 12 -- -- -- -- -- -- 12
-----------------------------------------------------------------------------------------------------------------------------
Total by region $104(b) $72(c) $12(d) $19(e) $32(f) $ 9(g) $16(h) $264(i)(j)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes certain multi-use projects.
(b) Includes $38 million of nonperforming loans to borrowers and $22 million
of OREO located in Pennsylvania.
(c) Includes $22 million of nonperforming loans to borrowers and $35 million
of OREO located in Florida.
(d) Includes $10 million of nonperforming loans to borrowers located in
Illinois.
(e) Entire amount is OREO located in California.
(f) Includes $27 million of OREO located in Texas.
(g) Includes $8 million of OREO located in Massachusetts.
(h) Entire amount is OREO located in Quebec.
(i) Excludes segregated assets, as well as the reserve for real estate
acquired of $37 million.
(j) Includes approximately $21 million of consumer OREO.
34
<PAGE> 19
NONPERFORMING ASSETS
Nonperforming and past-due assets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31,
(dollar amounts in millions) 1993(a) 1992(a) 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic nonaccrual loans:
Commercial and financial $ 37 $109 $129 $ 96 $106
Commercial real estate:
Commercial construction 33 37 166 228 113
Commercial mortgage 42 135 187 180 46
Consumer credit:
Consumer mortgage 61 29 13 14 13
Other consumer credit 4 1 1 1 6
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic nonaccrual loans 177 311 496 519 284
International nonaccrual loans 7 8 32 7 168
- ---------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 184 319 528 526 452
- ---------------------------------------------------------------------------------------------------------------------------
Domestic restructured loans:
Commercial and financial 4 -- -- -- --
Commercial real estate 14 15 -- -- 40
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic restructured loans 18 15 -- -- 40
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans:
Domestic 195 326 496 519 324
International 7 8 32 7 168
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans(b) $202 $334 $528 $526 $492
- ---------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired through foreclosures 100 96 245 159 155
In-substance foreclosures 75 154 140 112 11
Reserve for real estate acquired (37) (10) (21) (18) (42)
- ---------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 138 240 364 253 124
Other assets acquired 1 21 41 2 4
- ---------------------------------------------------------------------------------------------------------------------------
Total acquired property 139 261 405 255 128
- ---------------------------------------------------------------------------------------------------------------------------
Investment in GSNB senior preferred stock,
net of deferred collection fees -- -- -- -- 76
- ---------------------------------------------------------------------------------------------------------------------------
Total acquired property 139 261 405 255 204
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $341 $595 $933 $781 $696
- ---------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective loan
portfolio segments:
Domestic commercial and financial loans and leases .41% 1.25% 1.44% 1.09% 1.07%
Domestic commercial real estate loans 5.17 10.03 17.87 18.47 7.51
Domestic consumer mortgage loans .75 .68 .40 .46 .86
Total loans .83 1.67 2.77 2.81 2.54
Nonperforming assets as a percentage of total loans, net acquired
property and net investment in GSNB senior preferred stock 1.39 2.94 4.78 4.11 3.55
- ---------------------------------------------------------------------------------------------------------------------------
Past-due loans:
Domestic loans:
Consumer credit $53 $50 $44 $33 $17
Real estate, primarily consumer mortgages 25 46 23 15 15
Commercial 6 1 2 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic loans $84 $97 $69 $48 $32
International loans -- -- 6 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total past-due loans $84 $97 $75 $48 $32
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes $74 million, $187 million, $278 million, $293 million and $31
million, respectively, of loans with both principal and interest less than
90 days past due but placed on nonaccrual status by management discretion.
35
<PAGE> 20
FINANCIAL REVIEW
NONPERFORMING ASSETS continued
"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 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. Additional information regarding the Corporation's
practices for placing assets on nonaccrual status is presented in note 1 of
Notes to Financial Statements.
Nonperforming assets do not include the segregated assets acquired in the
December 1992 Meritor branch acquisition. Segregated assets represent commercial
real estate and other commercial loans acquired in the Meritor branch
acquisition that are on nonaccrual status, or are foreclosed properties, and are
subject to a loss sharing arrangement with the FDIC. These delinquent assets,
net of reserve, are reported separately in the balance sheet. The reserve for
segregated assets is not included in the reserve for credit losses.
Nonperforming assets decreased in 1993 as the Corporation continued to
emphasize loan quality. At December 31, 1993, nonperforming assets totaled $341
million, the lowest level in more than 11 years, down $254 million, or 43%, from
the prior year end. Nonperforming assets have been reduced by nearly $1.4
billion from the peak level at June 30, 1987.
Domestic nonperforming real estate assets, which consist of nonperforming
commercial and consumer real estate loans and OREO net of the reserve, totaled
$288 million at December 31, 1993, a decrease of $168 million, or 37%, from the
previous year end. The reduction resulted primarily from asset sales, returns to
accrual status and credit losses, offset in part by an increase in nonperforming
consumer mortgages, primarily from The Boston Company. Nonperforming real estate
assets were 85% of total nonperforming assets at December 31, 1993. Domestic
commercial and financial nonperforming loans decreased by $68 million during
1993. The decrease primarily reflected repayments and credit losses.
Change in nonperforming loans
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Domestic
--------------------------------------------
Commercial Commercial Consumer Total
(in millions) & Financial Real Estate Credit International 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at beginning of year $109 $187 $ 30 $ 8 $ 334 $ 528
Additions 59 102 50 3 214 460
Acquired from TBC 7 -- 46 -- 53 --
Payments(a) (72) (43) (18) -- (133) (186)
Return to accrual status (16) (85) (18) -- (119) (40)
Credit losses (46) (51) (14) (4) (115) (215)
Transfers to acquired property -- (21) (11) -- (32) (213)
- ---------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at end of year(b) $ 41 $ 89 $ 65 $ 7 $ 202 $ 334
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest applied to principal and sales.
(b) Excludes segregated assets.
Acquired property consists of OREO and other assets acquired in connection
with loan settlements. OREO, net of the reserve, totaled $138 million at
December 31, 1993, down $102 million compared with year-end 1992. The decrease
resulted primarily from sales and write-downs, partially offset by new transfers
to OREO. Net gains on the sale of OREO were $8 million in 1993. Other assets
acquired totaled $1 million at December 31, 1993, down from $21 million a year
earlier. The decrease resulted primarily from asset sales and write-downs.
36
<PAGE> 21
NONPERFORMING ASSETS continued
Change in acquired property
<TABLE>
<CAPTION>
- ---------------------------------------------------------
December 31,
(in millions) 1993 1992
- ---------------------------------------------------------
<S> <C> <C>
OREO at beginning of year, net of
reserve $240 $ 364
Foreclosures(a) 44 224
OREO acquired from TBC 15 --
Sales (81) (213)
Write-downs, credit losses, OREO
provision and other (80) (135)
- ---------------------------------------------------------
OREO at end of period $138 $ 240
- ---------------------------------------------------------
Other acquired assets 1 21
- ---------------------------------------------------------
Total acquired property(b) $139 $ 261
- ---------------------------------------------------------
</TABLE>
(a) Includes foreclosures and in-substance foreclosures from loans and the
mortgage servicing portfolio.
(b) Excludes segregated assets.
The Corporation recognizes any estimated potential decline in the value of OREO
between appraisal dates on a property-by-property basis through periodic
additions to the OREO reserve. Write-downs charged against this reserve are
taken when OREO is sold at a loss or upon the receipt of appraisals which
indicate a deterioration in the fair value of the property. Activity in the
Corporation's OREO reserve for 1993, 1992 and 1991 is presented in the table
below.
Reserve for real estate acquired
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(in millions) 1993 1992 1991
- ----------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 10 $ 21 $ 18
UPB reserve acquired -- -- 1
Write-downs on real
estate acquired (27) (116) (37)
Provision charged to
operating expense 54 105 39
- ----------------------------------------------------------
Ending balance $ 37 $ 10 $ 21
- ----------------------------------------------------------
</TABLE>
Additional domestic nonaccrual loan data
<TABLE>
<CAPTION>
- --------------------------------------------------------
December 31,
(dollars in millions) 1993 1992
- --------------------------------------------------------
<S> <C> <C>
Book balance $177 $311
Contractual balance of nonaccrual
loans 252 433
Book balance as a percentage of
contractual balance 70% 72%
Full-year interest receipts applied to
reduce principal $ 10 $ 9
Full-year interest receipts recognized
in interest revenue 11 14
- --------------------------------------------------------
</TABLE>
Note: Excludes segregated assets.
In May 1993, the FASB released FAS No. 114, "Accounting by Creditors for
Impairment of a Loan." FAS No. 114 establishes standards to determine in what
circumstances a creditor should measure impairment of a loan based on either the
present (discounted) value of expected future cash flows related to the loan,
the market price of the loan or the fair value of the underlying collateral.
This standard will become effective in 1995. The Corporation currently estimates
that adoption of FAS No. 114 will not be material to the Corporation's financial
position or results of operations. The existing impaired loans at the date of
adoption, however, will determine the actual impact on the Corporation.
At this point in the 1993 Annual Report there appears a line graph as set out
in the following table:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS AS A PERCENTAGE
OF LOANS AND ACQUIRED ASSETS
- -------------------------------------------
Year Amount
--------------- --------------
<S> <C>
1989 3.55%
1990 4.11%
1991 4.78%
1992 2.94%
1993 1.39%
</TABLE>
37
<PAGE> 22
FINANCIAL REVIEW
NONPERFORMING ASSETS continued
Foregone interest on nonperforming loans at year end
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contractual interest due $21 $32 $58 $62 $94
Interest revenue recognized 7 13 10 30 33
- --------------------------------------------------------------------------------------------------------------------------
Interest revenue foregone $14 $19 $48 $32 $61
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: This table includes interest revenue foregone on loans that were included
as 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.
SEGREGATED ASSETS
At December 31, 1993, segregated assets totaled $187 million, or $183 million
net of the $4 million reserve, compared with $259 million, or $241 million net
of an $18 million reserve, at December 31, 1992.
Credit losses on segregated assets totaled $14 million in 1993, principally
as a result of losses on commercial real estate loans. These losses represented
the Corporation's share of the losses on the acquired Meritor loans.
Additional information regarding the Corporation's segregated assets is
presented in note 8 of Notes to Financial Statements.
Segregated assets at year end
<TABLE>
<CAPTION>
- --------------------------------------------------------
(in millions) 1993 1992
- --------------------------------------------------------
<S> <C> <C>
Nonaccrual loans:
Commercial real estate loans $ 84 $ 233
Commercial loans 28 26
- --------------------------------------------------------
Total nonaccrual loans 112 259
- --------------------------------------------------------
Real estate acquired 75 --
- --------------------------------------------------------
Total segregated assets $ 187 $ 259
Less: FDIC loss sharing(a) (178) (237)
- --------------------------------------------------------
Maximum credit exposure $ 9 $ 22
- --------------------------------------------------------
CREDIT LOSS ACTIVITY
- --------------------------------------------------------
Segregated asset losses:
Commercial real estate loans $ 10 $ --
Commercial loans 4 --
- --------------------------------------------------------
Total 14 --
- --------------------------------------------------------
Segregated asset recoveries -- --
- --------------------------------------------------------
Segregated assets losses $ 14 $ --
- --------------------------------------------------------
CHANGE IN RESERVE FOR SEGREGATED
ASSETS
- --------------------------------------------------------
Reserve for segregated assets at
beginning of period $ 18 $ --
Initial allowance -- 18
Segregated asset losses 14 --
- --------------------------------------------------------
Reserve at end of period(b) $ 4 $ 18
- --------------------------------------------------------
- --------------------------------------------------------
Past-due loans subject to
loss sharing $ -- $ 15
- --------------------------------------------------------
</TABLE>
(a) Represents the FDIC loss sharing arrangement of 80% of the first $60 million
of credit losses and 95% of the remaining balance of segregated assets.
At December 31, 1993, the entire balance of segregated assets was insured
at the 95% rate as the $60 million credit loss threshold was met in the
first quarter of 1993. Total credit losses on segregated assets, before
FDIC loss sharing, were $97 million in 1993.
(b) This reserve is not included in the reserve for credit losses.
38
<PAGE> 23
RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for credit losses at year end $600(a) $506(a) $596 $525 $610
Reserve as a percentage of:
Total loans 2.45% 2.54% 3.12% 2.80% 3.15%
Nonperforming loans 297 152 113 100 124
Net credit losses as a percentage of average loans .64 1.52 1.24 2.15 3.33
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes reserve for segregated assets.
The Corporation maintains a credit loss reserve which, 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 review
of market concentrations, changing business trends, industry risks, legislative
actions and general economic conditions that may adversely affect loan
collectibility.
Other factors considered in determining the level of the reserve include:
trends in portfolio volume, quality, maturity and composition; historical loss
experience; lending policies; new products; the status and amount of
nonperforming and past-due loans; adequacy of collateral; and current, as well
as anticipated, economic and industry-specific conditions that may affect
certain borrowers. In addition, management assesses volatile factors such as
interest rates and real estate market conditions that may significantly alter
loss potential. The loss reserve methodology also provides for a portion of the
reserve to act as an additional buffer against credit quality deterioration or
risk of estimation error. Although the determination of the adequacy of the
reserve is based upon these factors, the reserve is not specifically associated
with individual loans or portfolio segments.
The level of credit losses relative to outstanding loans can vary from
period to period due to the size and number of individual credits that may
require charge off, and the effects of changing economic conditions.
The reserve for credit losses was $600 million at December 31, 1993, or
2.45% of total loans, compared with $506 million at December 31, 1992, or 2.54%
of total loans. The increase at year-end 1993, compared with the prior year end,
resulted primarily from a $99 million addition to the reserve from The Boston
Company acquisition. The reserve continues to indicate strong reserve coverage
of nonperforming loans, increasing to 297% of nonperforming loans at December
31, 1993, compared with 152% at the prior year end. This higher coverage
resulted from the decrease in nonperforming loans in 1993 as well as the higher
reserve level.
Net credit losses totaled $139 million in 1993, down $138 million, or 50%,
compared with 1992. The decrease resulted from lower net credit losses in most
loan categories, with commercial real estate net credit losses decreasing by $94
million. The Corporation currently expects continued moderation in the level of
credit losses in 1994, particularly in the level of commercial real estate
credit losses.
39
<PAGE> 24
FINANCIAL REVIEW
RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES continued
Credit loss reserve activity
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(in millions) 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of year $ 506 $ 596 $ 525 $ 610 $ 909
Net change in reserves from acquisitions and
divestitures 108 2 50 5 2
Credit losses:
Domestic:
Commercial and financial (54) (70) (65) (51) (43)
Commercial real estate:
Commercial construction (9) (87) (38) (73) (43)
Commercial mortgage (65) (74) (47) (55) (23)
Consumer credit:
Credit cards (46) (49) (41) (24) (22)
Consumer mortgage (13) (7) (2) (2) (1)
Other consumer credit (22) (24) (26) (27) (31)
Lease financing (1) (1) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total domestic (210) (312) (219) (232) (163)
- --------------------------------------------------------------------------------------------------------------------------
International (6) (19) (37) (221) (464)
- --------------------------------------------------------------------------------------------------------------------------
Total credit losses (216) (331) (256) (453) (627)
- --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial 40 25 8 14 10
Commercial real estate:
Commercial construction 1 1 1 1 2
Commercial mortgage 12 5 2 -- 1
Consumer credit:
Credit cards 7 6 5 5 4
Consumer mortgage 2 1 1 -- --
Other consumer credit 10 10 7 7 10
- --------------------------------------------------------------------------------------------------------------------------
Total domestic 72 48 24 27 27
- --------------------------------------------------------------------------------------------------------------------------
International 5 6 3 21 2
- --------------------------------------------------------------------------------------------------------------------------
Total recoveries 77 54 27 48 29
- --------------------------------------------------------------------------------------------------------------------------
Net credit losses:
Domestic:
Commercial and financial (14) (45) (57) (37) (33)
Commercial real estate:
Commercial construction (8) (86) (37) (72) (41)
Commercial mortgage (53) (69) (45) (55) (22)
Consumer credit:
Credit cards (39) (43) (36) (19) (18)
Consumer mortgage (11) (6) (1) (2) (1)
Other consumer credit (12) (14) (19) (20) (21)
Lease financing (1) (1) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total domestic (138) (264) (195) (205) (136)
- --------------------------------------------------------------------------------------------------------------------------
International (1) (13) (34) (200) (462)
- --------------------------------------------------------------------------------------------------------------------------
Total net credit losses (139) (277) (229) (405) (598)
- --------------------------------------------------------------------------------------------------------------------------
Provision for credit losses 125 185 250 315 297
- --------------------------------------------------------------------------------------------------------------------------
Reserve at end of year $ 600(a) $ 506(a) $ 596 $ 525 $ 610
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes reserve for segregated assets.
40
<PAGE> 25
OFF-BALANCE-SHEET RISK
- ---------------------------------------
A detailed discussion of the Corporation's off-balance-sheet financial
instruments, including disclosures about the risk of accounting loss and
concentrations of credit risk arising from both on-and off-balance-sheet
activities, is presented in note 18 of the Notes to Financial Statements.
FOURTH QUARTER REVIEW
- ---------------------------------------
The Corporation reported net income of $114 million, or $1.50 per common share,
in the fourth quarter of 1993. These results compare with pro forma fully taxed
net income of $76 million, or $1.10 per common share, in the fourth quarter of
1992.
Annualized return on assets and return on common shareholders' equity were
1.26% and 14.62%, respectively, in the fourth quarter of 1993, compared with pro
forma fully taxed returns on assets and common shareholders' equity of 1.00% and
12.41%, respectively, in the fourth quarter of 1992.
Including tax benefits of $29 million, the Corporation's net income in the
fourth quarter of 1992 was $105 million, or $1.62 per common share. Annualized
return on assets and return on common shareholders' equity in the fourth quarter
of 1992 were 1.39% and 18.30%, respectively.
Compared with the fourth quarter of 1992, the Corporation's fourth quarter
1993 results reflected higher net interest and noninterest revenue, as well as a
lower provision for credit losses, offset in part by higher operating expense.
Net interest revenue totaled $339 million in the fourth quarter of 1993, up
$38 million or 12%, compared with the fourth quarter of 1992. The improvement
primarily reflected a higher level of interest-earning assets resulting from The
Boston Company and the Meritor branch acquisitions. A reduction in nonperforming
assets also contributed to the improved net interest revenue compared with the
prior-year period. Partially offsetting these positive factors was the impact on
net interest revenue and the net interest margin from the reduction in higher
yielding securities that were sold in the first quarter of 1993 as part of the
financing plan and balance sheet restructuring related to the acquisition of The
Boston Company. The net interest margin on a taxable equivalent basis was 4.39%
in the fourth quarter of 1993, down from 4.59% in the fourth quarter of 1992.
Credit quality expense, defined as the provision for credit losses plus the
net expense of acquired property, was $32 million in the fourth quarter of 1993,
down $34 million, compared with the prior-year period, reflecting continuing
improvement in the credit quality of the loan portfolio and the lower level of
real estate acquired. Net credit losses were $22 million, down $61 million
compared with the fourth quarter of 1992, primarily resulting from lower
commercial real estate net credit losses.
Fee revenue increased to $342 million, up 48%, in the fourth quarter of
1993, compared with $232 million in the fourth quarter of 1992. This increase
primarily reflected $109 million of fee revenue attributable to The Boston
Company.
Excluding the effect of acquisitions and divestitures and adjustments made
in the fourth quarter of 1992, fee revenue increased 9% in the fourth quarter of
1993, compared with the fourth quarter of 1992.
Trust and investment management fees improved $104 million, over the
prior-year period, principally as a result of fees earned at The Boston Company.
Cash management and deposit transaction charges decreased $8 million, compared
with the fourth quarter of 1992, as the result of a $13 million one-time accrual
adjustment in the fourth quarter of 1992, partially offset by increased volume.
Information services fees decreased $4 million compared with the prior-year
period, primarily as a result of a $5 million one-time accrual adjustment in the
fourth quarter of 1992, as well as the Corporation's completed sale of two
information services businesses. Partially offsetting the decrease in
information services fees was an increase in revenue from the Corporation's
Canadian stock transfer company. Foreign currency and securities trading
increased $12 million over the prior-year period primarily as a result of
foreign exchange fees earned at The Boston Company.
Operating expense was $471 million in the fourth quarter of 1993, an
increase of $90 million, or 24%, over the prior-year period. The increase was
primarily the result of The Boston Company and the Meritor branch acquisitions.
41
<PAGE> 26
SELECTED QUARTERLY DATA*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Quarter ended,
1993 1992
----------------------------------------- -------------------------------------------
(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
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest revenue $ 339 $ 337 $ 314 $ 317 $ 301 $ 292 $ 281 $ 280
Provision for credit losses 25 30 35 35 35 40 50 60
Fee revenue 342 334 281 232 232 207 203 202
Gains on sale of securities -- -- -- 87 -- 76 -- 45
Other noninterest revenue -- -- -- -- 2 4 3 (2)
Operating expense 471 463 391 533 381 368 333 367
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 185 178 169 68 119 171 104 98
Provision for income taxes 71 64 70 34 14 15 14 12
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME 114 114 99 34 105 156 90 86
Dividends on preferred stock 16 16 16 15 12 14 12 13
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO
COMMON STOCK $ 98 $ 98 $ 83 $ 19 $ 93 $ 142 $ 78 $ 73
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.50 $ 1.50 $ 1.32 $ .31 $ 1.62 $ 2.57 $ 1.41 $ 1.36
- ----------------------------------------------------------------------------------------------------------------------------
PRO FORMA(a)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 114 $ 114 $ 99 $ 93 $ 76 $ 106(b) $ 64 $ 61
Net income applicable to common stock 98 98 83 78 64 92 52 48
Net income per common share $ 1.50 $ 1.50 $ 1.32 $ 1.27 $ 1.10 $ 1.68 $ .95 $ .90
Annualized return on assets 1.26% 1.24% 1.16% 1.17% 1.00% 1.45% .88% .80%
Annualized return on common
shareholders' equity 14.62 14.95 13.69 13.86 12.41 19.29 11.37 10.90
- ----------------------------------------------------------------------------------------------------------------------------
QUARTERLY AVERAGE BALANCES
- ----------------------------------------------------------------------------------------------------------------------------
Money market investments $ 2,786 $ 3,822 $ 4,477 $ 2,997 $ 1,836 $ 1,493 $ 1,618 $ 1,704
Trading account securities 206 266 312 293 244 289 323 380
Securities 4,541 4,375 4,136 4,654 5,687 6,128 6,406 5,991
Loans 23,220 23,223 20,623 19,900 18,550 17,658 17,855 18,847
Interest-earning assets 30,753 31,686 29,548 27,844 26,317 25,568 26,202 26,922
Total assets 35,769 36,562 34,421 32,133 30,075 29,073 29,753 30,660
Deposits 27,476 27,747 25,886 24,893 23,427 22,135 22,409 22,592
Notes and debentures 2,019 2,124 2,050 1,765 1,399 1,348 1,295 1,417
Shareholders' equity 3,329 3,285 3,124 2,945 2,520 2,402 2,293 2,186
- ----------------------------------------------------------------------------------------------------------------------------
Net interest margin (non FTE) 4.36% 4.23% 4.27% 4.61% 4.55% 4.54% 4.31% 4.18%
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA (dollars per share)(c)
- ----------------------------------------------------------------------------------------------------------------------------
Market price range:
High $59 1/8 $60 1/4 $67 3/8 $ 62 $55 1/2 $ 45 $ 43 $42 1/4
Low 51 3/4 53 1/4 51 1/4 51 1/2 42 3/8 39 3/8 35 1/2 33 3/4
Average 54.25 56.19 56.40 57.49 47.83 41.67 40.17 38.34
Close 53 55 56 3/8 60 3/4 53 43 1/2 41 1/8 39
Dividends .38 .38 .38 .38 .35 .35 .35 .35
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unaudited.
(a) Pro forma results for first quarter 1993 exclude $112 million after-tax in
restructuring expense and $53 million in after-tax gains on the sale of
securities related to the Corporation's acquisition of The Boston Company.
Pro forma fully taxed 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 the 1992 periods was
included in the determination of the return on common shareholders' equity.
(b) Includes $46 million in after-tax gains on the sale of securities. These
gains contributed 84 cents to third quarter 1992 income per common share.
(c) At December 31, 1993, there were 20,322 shareholders registered with the
Corporation's stock transfer agent, compared with 20,283 at year-end 1992
and 20,765 at year-end 1991. In addition, there were approximately 17,597;
14,300; and 13,600 Mellon employees at December 31, 1993, 1992 and 1991,
respectively, who participated in the Corporation's 401(k) Retirement
Savings Plan. All shares of Mellon Bank Corporation common stock held by the
plan for its participants are registered in the name of Mellon Bank, N. A.,
as trustee.
42
<PAGE> 27
CONSOLIDATED INCOME STATEMENT
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(dollar amounts in millions, except per share amounts) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE Loans $1,517 $1,395 $1,680
Loan fees 70 65 53
Interest-bearing deposits with banks 58 35 50
Federal funds sold and securities purchased under
agreements to resell 54 27 35
Other money market investments 4 1 --
Trading account securities 15 21 23
Securities:
U.S. Treasury and agency securities 225 420 382
Obligations of states and political subdivisions -- 1 24
Other 18 35 56
----------------------------------------------------------------------------------------------
Total interest revenue 1,961 2,000 2,303
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE Deposits in domestic offices 414 585 921
Deposits in foreign offices 40 49 82
Federal funds purchased and securities sold under
agreements to repurchase 33 56 131
U.S. Treasury tax and loan demand notes 6 23 36
Commercial paper 6 6 13
Other funds borrowed 34 33 29
Notes and debentures 121 94 117
----------------------------------------------------------------------------------------------
Total interest expense 654 846 1,329
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE NET INTEREST REVENUE 1,307 1,154 974
Provision for credit losses 125 185 250
----------------------------------------------------------------------------------------------
NET INTEREST REVENUE AFTER PROVISION FOR
CREDIT LOSSES 1,182 969 724
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE Fee revenue 1,189 844 757
Gains on sale of securities 87 121 78
Other noninterest revenue -- 7 13
----------------------------------------------------------------------------------------------
Total noninterest revenue 1,276 972 848
- -------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE Staff expense 745 578 553
Net occupancy expense 168 147 142
Professional, legal and other purchased services 150 119 111
Amortization of goodwill and other intangibles 122 79 58
Equipment expense 113 98 95
Business development 75 63 51
Communications expense 71 62 55
FDIC assessment and regulatory examination fees 60 53 47
Office supplies 37 28 26
Other expense 83 91 89
Net expense of acquired property 59 95 37
Restructuring expenses 175 36 --
----------------------------------------------------------------------------------------------
Total operating expense 1,858 1,449 1,264
- -------------------------------------------------------------------------------------------------------------------------
INCOME Income before income taxes 600 492 308
Provision for income taxes 239 55 28
----------------------------------------------------------------------------------------------
NET INCOME 361 437 280
Dividends on preferred stock 63 51 49
----------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 298 $ 386 $ 231
----------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE Primary net income $ 4.63 $ 6.96 $ 4.66
Fully diluted net income $ 4.63 $ 6.84 $ 4.61
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
43
<PAGE> 28
CONSOLIDATED BALANCE SHEET
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
(dollar amounts in millions) 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 2,169 $ 1,974
Interest-bearing deposits with banks 889 994
Federal funds sold and securities purchased under agreements to
resell 574 276
Other money market investments 4 210
Trading account securities 116 106
Securities available for sale (approximate market value of $2,920
and $3,707) 2,916 3,613
Investment securities (approximate market value of $2,139 and
$2,128) 2,096 2,125
Loans, net of unearned discount of $74 and $62 24,473 19,956
Reserve for credit losses (600) (506)
------------------------------------------------------------------------------------------
Net loans 23,873 19,450
Customers' acceptance liability 146 114
Premises and equipment 463 433
Acquired property, net of reserves of $37 and $10 139 261
Goodwill 825 380
Other intangibles 462 443
Segregated assets, net of reserves of $4 and $18 183 241
Other assets 1,284 954
------------------------------------------------------------------------------------------
Total assets $36,139 $31,574
------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES Noninterest-bearing deposits in domestic offices $ 6,905 $ 5,633
Interest-bearing deposits in domestic offices 19,450 18,557
Noninterest-bearing deposits in foreign offices 9 7
Interest-bearing deposits in foreign offices 1,174 933
------------------------------------------------------------------------------------------
Total deposits 27,538 25,130
Federal funds purchased and securities sold under agreements
to repurchase 978 1,097
U.S. Treasury tax and loan demand notes 712 266
Commercial paper 134 179
Other funds borrowed 302 168
Acceptances outstanding 146 114
Other liabilities 1,026 476
Notes and debentures (with original maturities over one year) 1,990 1,587
------------------------------------------------------------------------------------------
Total liabilities 32,826 29,017
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' Preferred stock 592 467
EQUITY Common stock--$.50 par value
Authorized--200,000,000 and 120,000,000 shares
Issued--63,843,493 and 54,962,761 shares 32 27
Additional paid-in capital 1,774 1,349
Retained earnings 898 708
Warrants 37 6
Treasury stock--365,700 shares at cost (20) --
------------------------------------------------------------------------------------------
Total shareholders' equity 3,313 2,557
------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $36,139 $31,574
------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
44
<PAGE> 29
CONSOLIDATED STATEMENT OF CASH FLOWS
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM Net income $ 361 $ 437 $ 280
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 204 155 134
Provision for credit losses 125 185 250
Provision for real estate acquired and other losses 65 108 52
Restructuring expenses 175 36 --
Net gains on sale of assets (91) (124) (81)
Net decrease in accrued interest receivable 68 51 49
Deferred income tax expense (benefit) 30 (25) (7)
Net (increase) decrease in trading account securities
activity (1) (15) 21
Net decrease in accrued interest payable, net of
amounts prepaid (18) (52) (4)
Net increase (decrease) in other operating activities 474 (510) (62)
---------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,392 246 632
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Net (increase) decrease in term deposits 1,054 (389) (388)
INVESTING ACTIVITIES Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell (298) 167 187
Funds invested in securities (12,096) (3,809) (4,581)
Proceeds from sales of securities 9,511 2,795 3,372
Proceeds from maturities of securities 4,663 1,473 475
Net increase in credit card receivables (114) (188) (183)
Net principal collected on loans to customers 788 748 723
Loan portfolio purchases (83) (223) (351)
Proceeds from the sale of loan portfolios 116 191 --
Purchases of premises and equipment (98) (81) (61)
Proceeds from sale of acquired property 102 245 82
Cash paid in purchases of The Boston Company, AFCO and
CAFO and UPB, net of cash received (1,233) -- (40)
Cash received in purchases of Meritor and Standard
Federal branches, net of cash paid -- 269 --
Net (increase) decrease in other investing activities (175) 15 181
---------------------------------------------------------------------------------------------
Net cash provided (used) in investing activities 2,137 1,213 (584)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Net increase (decrease) in transaction and savings
FINANCING ACTIVITIES deposits 1,275 2,042 (211)
Net decrease in customer term deposits (2,726) (2,311) (1,396)
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase (676) (508) 312
Net increase (decrease) in U.S. Treasury tax and loan
demand notes 435 (499) 230
Net decrease in commercial paper (45) (8) (75)
Decrease in other borrowed funds (614) (20) (25)
Repayment of AFCO borrowings (1,058) -- --
Repayments of longer-term debt (1,070) (453) (386)
Net proceeds from issuance of longer-term debt 950 534 453
Net proceeds from issuance of common and preferred stock 502 221 325
Redemption of preferred stock (65) (55) (194)
Dividends paid on common and preferred stock (156) (125) (116)
Repurchase of common stock (54) -- --
Net increase (decrease) in other financing activities (45) 49 67
---------------------------------------------------------------------------------------------
Net cash used in financing activities (3,347) (1,133) (1,016)
Effect of foreign currency exchange rates 13 13 9
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND Net increase (decrease) in cash and due from banks 195 339 (959)
DUE FROM BANKS Cash and due from banks at beginning of year 1,974 1,635 2,594
---------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 2,169 $ 1,974 $ 1,635
---------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL Interest paid $ 672 $ 895 $ 1,333
DISCLOSURES Net income taxes paid 143 88 38
---------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
45
<PAGE> 30
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
MELLON BANK CORPORATION (consolidated and parent Corporation)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Total
Additional share-
Preferred Common paid-in Retained Treasury holders'
(in millions) stock stock capital earnings Warrants stock equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990 $380 $22 $1,035 $236 $15 $(14) $1,674
Net income 280 280
Issuance of 5.75 million shares of common
stock, net of issuance costs 3 146 149
Series I preferred stock issued,
net of issuance costs 145 145
Series G preferred stock redemption (100) (100)
Dividends on common stock at
$1.40 per share (66) (66)
Dividends on preferred stock (49) (49)
Exercise of warrants 1 15 (4) 12
Common stock issued under dividend
reinvestment and common stock
purchase plan 11 11
Common stock issued from treasury stock
for employee benefit plans 2 7 9
Exercise of subscription rights 7 7
Other 1 1
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 425 26 1,217 401 11 (7) 2,073
Net income 437 437
Series J preferred stock issued,
net of issuance costs 97 97
Series C-2 preferred stock redemption (55) (55)
Dividends on common stock at
$1.40 per share (74) (74)
Dividends on preferred stock (51) (51)
Common stock issued under dividend
reinvestment and common stock
purchase plan 1 78 79
Exercise of stock options 17 3 20
Exercise of warrants 25 (5) 20
Exercise of subscription rights 7 7
Other 5 (5) 4 4
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 467 27 1,349 708 6 -- 2,557
NET INCOME 361 361
ISSUANCE OF 6.81 MILLION SHARES OF COMMON
STOCK, NET OF ISSUANCE COSTS 4 340 344
ISSUANCE OF WARRANTS 37 37
SERIES K PREFERRED STOCK
ISSUED, NET OF ISSUANCE COSTS 193 193
SERIES B PREFERRED STOCK
REDEMPTION/CONVERSION (68) 1 2 (65)
DIVIDENDS ON COMMON STOCK AT
$1.52 PER SHARE (94) (94)
DIVIDENDS ON PREFERRED STOCK (63) (63)
PURCHASE OF TREASURY STOCK (54) (54)
COMMON STOCK ISSUED UNDER DIVIDEND
REINVESTMENT AND COMMON STOCK
PURCHASE PLAN 35 6 41
EXERCISE OF STOCK OPTIONS 11 (11) 24 24
EXERCISE OF WARRANTS 1 24 (6) 19
EXERCISE OF SUBSCRIPTION RIGHTS 8 8
OTHER 6 (3) 2 5
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 $592 $32 $1,774 $898 $37 $(20) $3,313
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
46
<PAGE> 31
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 and prevailing industry practices.
The consolidated financial statements of the Corporation include the
accounts of the Corporation and its majority-owned subsidiaries. Investments in
companies less than 20% owned are carried at cost. Intracorporate transactions
are not reflected in the consolidated financial statements. The consolidated
income statement includes results of acquired subsidiaries and businesses from
the dates of acquisition.
The parent Corporation financial statements in note 22 include the accounts
of the Corporation and those of a wholly owned financing subsidiary that
functions as a financing entity for the Corporation and its subsidiaries by
issuing commercial paper and other debt guaranteed by the Corporation. Financial
data for the Corporation and the financing subsidiary are combined for
financial reporting due to this limited function of the financing subsidiary
and the unconditional guarantee by the Corporation of the financing
subsidiary's obligations.
Trading account securities, securities available for sale and investment
securities
When purchased, securities are classified in either the trading account
securities portfolio, the securities available for sale portfolio, or the
investment securities portfolio. Securities are classified as trading account
securities when the intent is profit maximization through market appreciation
and resale. Securities are classified as available for sale when management
intends to hold the securities for an indefinite period of time or when the
securities may be utilized 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 it is management's intent to hold these securities until maturity.
Trading account securities, including interest rate agreements, are stated
at market 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 market
value.
Securities available for sale are stated at the lower of aggregate cost or
market value, adjusted for amortization of premium and accretion of discount on
a level-yield basis. Investment securities are stated at cost, adjusted for
amortization of premium and accretion of discount on a level-yield basis. The
cost of securities available for sale and investment 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 commitments costs, are deferred and
amortized as a yield adjustment over the lives of the related loans. Deferred
fees and costs are netted against outstanding loan balances.
Commercial loans generally are placed on nonaccrual status when either
principal or interest is past due 90 days or more, unless the loan is
well-secured and in the process of collection. Management also places loans on
nonaccrual status when the collection of principal or interest becomes doubtful.
When a loan is placed on nonaccrual status, previously accrued and uncollected
interest is reversed against current-period interest revenue. Interest receipts
on nonaccrual loans are recognized as interest revenue or are applied to
principal when management believes the ultimate collectibility of principal is
in doubt. Nonaccrual loans generally are restored to an accrual basis when
principal and interest payments become current or when the loan becomes well
secured and is in the process of collection.
Residential mortgage loans generally are placed on nonaccrual status when,
in management's judgment, collection is in doubt or the loans have out-
standing balances of $250 thousand or greater and are 90 days or more
delinquent, or have balances of less than $250 thousand and are delinquent
12 months or more. Consumer loans, other than residential mortgages, and
certain secured commercial loans of less than $5 thousand are charged off upon
reaching various stages of delinquency depending upon the loan type.
47
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
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.
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, economic, legislative and industry-specific conditions
that may affect certain borrowers. Credit losses are charged against the
reserve; recoveries are added to the reserve.
Acquired property
Property acquired in connection with loan settlements, including real estate
acquired, is stated at the lower of estimated fair value less estimated costs to
sell, or the carrying amount of the loan. A reserve for real estate acquired is
maintained on a property-by-property basis to recognize estimated potential
declines in value that might occur between appraisal dates. Provisions for the
estimated potential decrease in fair value between annual appraisals, net gains
on the sale of real estate acquired and net direct operating expense
attributable to these assets are included in net expense of acquired property.
In-substance foreclosures are reflected in real estate acquired when the
borrower has minimal equity in the property; the Corporation expects repayment
of the loan to come only from the operation or sale of the property; and the
borrower either has abandoned control of the property or is unlikely to rebuild
equity or otherwise meet the terms of the loan in the foreseeable future.
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 and other intangibles
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, 1993, 18 years for goodwill, seven years for core
deposit intangibles and eight years for all other intangible assets except
purchased mortgage servicing rights.
Goodwill and other intangible assets are reviewed for possible impairment
when events or changed circumstances may affect the underlying basis of the
asset. Purchased mortgage servicing rights (PMSRs) are recorded at cost and are
amortized over 12 years or the remaining economic life of the portfolio,
whichever is shorter. PMSRs are subsequently evaluated for possible impairment
on a quarterly basis using the undiscounted disaggregate method, consensus
industry prepayment estimates and current portfolio and economic factors. On a
weighted average basis at December 31, 1993, the serviced loan portfolio had an
interest rate of approximately 8.25%.
Taxes
The Corporation, its domestic subsidiaries and Mellon Bank Canada file a
consolidated U.S. income tax return. The provision for U.S. income taxes of each
subsidiary is recorded as if each subsidiary filed a separate return, except
that tax benefits of current-year losses, tax credits and tax benefit
carryforwards are allocated to the subsidiaries incurring such losses or credits
to the extent they reduce consolidated tax expense.
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated
to U.S. dollars at the rate of exchange on the balance sheet date. Revenue and
expense accounts are translated monthly at month-end rates of exchange. Net
foreign currency positions are valued at rates of exchange--spot or future, as
appropriate--prevailing at the end of the period, and resulting gains or losses
are included in the consolidated income statement. Premiums and discounts on
hedging contracts are amortized over the lives of the contracts. Translation
gains and losses on investments in foreign entities with functional currency
that is not the U.S. dollar are included in shareholders' equity.
48
<PAGE> 33
1. ACCOUNTING POLICIES continued
Fees on letters of credit
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.
Interest rate agreements and futures
and forward contracts
The Corporation enters into interest rate swaps to manage its interest rate
sensitivity position, to accommodate customers, and to a lesser degree as part
of its trading operations. For swaps used to manage the Corporation's interest
rate sensitivity position, interest is accrued to interest revenue or interest
expense over the terms of the swap agreements, while transaction fees are
deferred and amortized to interest revenue or interest expense over the terms
of the swap agreements. For swap agreements undertaken as part of its trading
activities, the Corporation records the change in the market value, less
accruals for credit and administrative expenses, in trading revenue.
Gains and losses on futures and forward contracts and interest rate
agreements used to hedge certain interest-sensitive assets and liabilities are
deferred and either are recognized as income or loss at the time of disposition
of the assets or liabilities being hedged, or are amortized over the life of
the hedged transaction as an adjustment to interest revenue or interest
expense. Gains and losses on futures and forward contracts and options used in
conjunction with trading account activities are recognized in trading revenue.
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.
Net income per common share
Primary net income per common share is computed using the "if-converted" method
by dividing net income applicable to common stock by the average number of
shares of common stock and common stock equivalents outstanding, net of shares
assumed to be repurchased using the treasury stock method. Common stock
equivalents arise from the assumed conversion of outstanding stock options,
warrants, the Series D preferred stock and subscription rights. If the inclusion
of the Series D preferred stock as common stock equivalents is dilutive,
dividends on the Series D preferred stock are added back to net income for the
purpose of calculating net income per common share. The average number of shares
of common stock and equivalents used to compute primary net income per common
share in 1993, 1992 and 1991 was 65.179 million, 55.912 million and 50.191
million, respectively.
Fully diluted net income per common share is computed by dividing net
income applicable to common stock by the average number of shares of common
stock and common stock equivalents outstanding for items that are dilutive, net
of shares assumed to be repurchased using the treasury stock method. These
shares are increased by the assumed conversion of convertible items if dilutive.
The average number of shares of common stock and equivalents used to compute
fully diluted net income per common share in 1993, 1992 and 1991 was 65.270
million, 57.559 million and 50.757 million, respectively.
2. CASH AND DUE FROM BANKS
Cash and due from banks includes reserve balances that the Corporation's
subsidiary banks are required to maintain with a Federal Reserve bank. These
required reserves are based primarily on deposits outstanding and were $663
million at December 31, 1993, and $578 million at December 31, 1992. These
balances averaged $615 million in 1993 and $472 million in 1992.
49
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
3. SECURITIES
Securities available for sale
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993 December 31, 1992
--------------------------------------------- ----------------------------------------------
BOOK GROSS UNREALIZED MARKET Book Gross unrealized Market
(in millions) VALUE GAINS LOSSES VALUE value Gains Losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 510 $ 2 $-- $ 512 $1,352 $31 $-- $1,383
U.S. agency mortgage-backed
securities 559 3 4 558 1,999 56 1 2,054
Other U.S. agency securities 1,788 -- -- 1,788 30 -- -- 30
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and
agency securities 2,857 5 4 2,858 3,381 87 1 3,467
Obligations of states and
political subdivisions 1 -- -- 1 1 -- -- 1
Other mortgage-backed
securities 22 -- -- 22 42 1 -- 43
Other securities 36 3 -- 39 189 7 -- 196
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $2,916 $ 8 $ 4 $2,920 $3,613 $95 $ 1 $3,707
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Maturity distribution of securities available for sale
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Contractual maturities at December 31, 1993
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
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within one year
Book value $490 $-- $1,788 $2,278 $-- $-- $14 $2,292
Market value 492 -- 1,788 2,280 -- -- 14 2,294
Yield 4.23% -- 3.14% 3.37% -- -- 4.89% 3.38%
1 to 5 years
Book value 20 -- -- 20 -- -- 6 26
Market value 20 -- -- 20 -- -- 6 26
Yield 6.77% -- -- 6.77% -- -- 6.10% 6.61%
5 to 10 years
Book value -- -- -- -- 1 -- 1 2
Market value -- -- -- -- 1 -- 1 2
Yield -- -- -- -- 9.23% -- 8.99% 9.06%
Over 10 years
Book value -- -- -- -- -- -- 15 15
Market value -- -- -- -- -- -- 18 18
Yield -- -- -- -- -- -- 6.35% 6.35%
Mortgage-backed
securities
Book value -- 559 -- 559 -- 22 -- 581
Market value -- 558 -- 558 -- 22 -- 580
Yield -- 5.15% -- 5.15% -- 4.07% -- 5.11%
- ----------------------------------------------------------------------------------------------------------------------------------
Total book value $510 $559 $1,788 $2,857 $1 $22 $36 $2,916
Total market value 512 558 1,788 2,858 1 22 39 2,920
Total yield 4.32% 5.15% 3.14% 3.74% 9.23% 4.07% 5.83% 3.77%
Weighted average
contractual years
to maturity .30 --(a) .08 .13(b) 6.17 --(a) 7.27 --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The average expected lives of "U.S. agency mortgage-backed" and "Other
mortgage-backed" securities were approximately 8.9 years and 2.0 years,
respectively, at December 31, 1993. Approximately 90% of the "U.S.
agency mortgage-backed securities" are floating rate securities
that reprice annually.
(b) 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.
50
<PAGE> 35
3. SECURITIES continued
Investment securities
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993 December 31, 1992
-------------------------------------------- ---------------------------------------
BOOK GROSS UNREALIZED MARKET Book Gross unrealized Market
(in millions) VALUE GAINS LOSSES VALUE value Gains Losses value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 17 $-- $-- $ 17 $ 2 $-- $-- $ 2
U.S. agency mortgage-backed
securities 1,863 46 4 1,905 1,957 13 12 1,958
- ---------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and agency
securities 1,880 46 4 1,922 1,959 13 12 1,960
Obligations of states and political
subdivisions 5 -- -- 5 1 -- -- 1
Other mortgage-backed securities 85 -- -- 85 126 2 -- 128
Other investment securities 126 1 -- 127 39 -- -- 39
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities $2,096 $47 $ 4 $2,139 $2,125 $15 $12 $2,128
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Maturity distribution of investment securities
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Contractual maturities at December 31, 1993
Obligations
U.S. agency Total of states Other Total
(dollar amounts U.S. mortgage- U.S. Treasury and political mortgage- Other investment
in millions) Treasury backed and agency subdivisions backed investments(a) securities
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Within one year
Book value $ 1 $ -- $ 1 $-- $-- $ 26 $ 27
Market value 1 -- 1 -- -- 26 27
Yield 9.53% -- 9.53% -- -- 4.63% 4.86%
1 to 5 years
Book value 16 -- 16 5 -- 55 76
Market value 16 -- 16 5 -- 56 77
Yield 4.61% -- 4.61% 8.08% -- 7.43% 6.86%
5 to 10 years
Book value -- -- -- -- -- -- --
Market value -- -- -- -- -- -- --
Yield -- -- -- -- -- -- --
Over 10 years
Book value -- -- -- -- -- 45 45
Market value -- -- -- -- -- 45 45
Yield -- -- -- -- -- 5.90% 5.90%
Mortgage-backed
securities
Book value -- 1,863 1,863 -- 85 -- 1,948
Market value -- 1,905 1,905 -- 85 -- 1,990
Yield -- 7.05% 7.05% -- 6.61% -- 7.03%
- -----------------------------------------------------------------------------------------------------------------------------
Total book value $17 $1,863 $1,880 $ 5 $85 $126 $2,096
Total market value 17 1,905 1,922 5 85 127 2,139
Total yield 4.95% 7.05% 7.03% 8.08% 6.61% 6.31% 6.98%
Weighted average
contractual years
to maturity 2.21 --(b) 2.21(c) 3.19 --(b) .98 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes Federal Reserve Bank stock of $44 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 6.1 years and 2.9 years,
respectively, at December 31, 1993.
(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.
51
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
3. SECURITIES continued
Gross realized gains on the sale of securities available for sale were $87
million and $76 million in 1993 and 1992, respectively. There were no sales of
investment securities during 1993. Gross realized gains and losses on the sale
of investment securities, prior to the Corporation's adoption of a methodology
to classify certain securities as "available for sale," were $48 million and
$3 million, respectively in 1992, and $94 million and $16 million, respectively
in 1991. Proceeds from the sale of securities available for sale totaled
$9.5 billion in 1993, compared with $1.8 billion in 1992. Proceeds from the
sale of investment securities totaled $980 million and $3.4 billion in 1992
and 1991, respectively.
Securities available for sale, investment securities, trading account
securities and loans, with book values of $3.7 billion at December 31, 1993, and
$1.2 billion at December 31, 1992, were required to be pledged to secure
public and trust deposits, and repurchase agreements, as well as for other
purposes.
4. LOANS
For details of the loans outstanding at December 31, 1993 and 1992, see the 1993
and 1992 columns of the "Composition of loan portfolio at year end" table on
page 32. 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, 1993
and 1992, see the amounts in the 1993 and 1992 columns of the "Nonperforming and
past-due assets" table on page 35. The information in those columns is
incorporated by reference into these Notes to Financial Statements. There was no
foregone interest on restructured loans in 1993 and 1991. Foregone interest on
restructured loans was less than $2 million in 1992.
5. RESERVE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(in millions) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 506 $ 596 $ 525
Net change in reserves from acquisitions and divestitures 108 2 50
Additions (deductions):
Credit losses (216) (331) (256)
Recoveries 77 54 27
- ---------------------------------------------------------------------------------------------------------------------
Net credit losses (139) (277) (229)
Provision for credit losses 125 185 250
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 600 $ 506 $ 596
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
6. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------
<S> <C> <C>
December 31,
(in millions) 1993 1992
- --------------------------------------------------------
Land $ 30 $ 24
Buildings 243 230
Equipment 451 493
Leasehold improvements 135 128
- --------------------------------------------------------
Subtotal 859 875
Accumulated depreciation and
amortization (396) (442)
- --------------------------------------------------------
Total premises and equipment $ 463 $ 433
- --------------------------------------------------------
</TABLE>
The table above includes capital leases for premises and equipment, at a net
book value of less than $1 million at December 31, 1993 and 1992.
Rental expense was $90 million, $72 million and $71 million, respectively,
net of related sublease revenue of $29 million, $24 million and $23 million in
1993, 1992 and 1991, respectively. Depreciation and amortization expense totaled
$82 million, $76 million and $76 million in 1993, 1992 and 1991, respectively.
Maintenance, repairs and utilities expenses amounted to $82 million, $72 million
and $63 million in 1993, 1992 and 1991, respectively.
As of December 31, 1993, 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 $110 million, is
as follows: 1994--$94 million; 1995-- $90 million; 1996--$88 million; 1997--$86
million; 1998--$85 million; and thereafter--$985 million.
52
<PAGE> 37
7. RESERVE FOR REAL ESTATE ACQUIRED
An analysis of the changes in the reserve for real estate acquired in 1993, 1992
and 1991 is presented in the "Reserve for real estate acquired" table on
page 37 and is incorporated by reference into these Notes to Financial
Statements.
8. SEGREGATED ASSETS
Segregated assets totaled $183 million at December 31, 1993. This amount
includes gross segregated assets of $187 million and a $4 million reserve for
credit losses. At December 31, 1992, segregated assets totaled $241 million,
including gross segregated assets of $259 million and an $18 million reserve for
credit losses.
Segregated assets represent commercial real estate and other commercial
loans acquired in the Meritor branch acquisition that are on nonaccrual status,
or are foreclosed properties, and are subject to a loss sharing arrangement with
the Federal Deposit Insurance Corporation (FDIC). These delinquent assets, net
of reserve, are reported separately in the balance sheet. The reserve for
segregated assets is not included in the reserve for credit losses.
As a result of the loss sharing arrangement with the FDIC, any of the
performing commercial loans or performing commercial real estate loans acquired
in the Meritor branch acquisition that become nonaccrual before December 31,
1997, will be reclassified to segregated assets. The loss sharing provisions of
the arrangement stipulate that, during the first five years, the FDIC will pay
to Mellon Bank, N.A., 80% of the net credit losses on acquired commercial real
estate and other commercial loans.
During the sixth and seventh years of the arrangement, Mellon Bank, N.A.,
will pay to the FDIC 80% of any recoveries of charge-offs on such acquired loans
that had occurred during the first five years of the arrangement. At the end of
the seventh year, the FDIC will pay to Mellon Bank, N.A., an additional 15% of
the sum of net charge-offs on the acquired loans that occurred during the first
five years less the recoveries during the sixth and seventh years of the
arrangement, in excess of $60 million. The $60 million credit loss threshold was
reached in the first quarter of 1993.
The FDIC will also reimburse Mellon Bank, N.A., for expenses incurred to
recover amounts owed and net expenses incurred with respect to foreclosed
properties derived from the acquired commercial real estate or commercial loans.
Expenses are reimbursed by the FDIC in the same proportion as the reimbursement
of net loan losses. In addition, the FDIC will reimburse the bank for up to 90
days of delinquent interest on the assets covered by the loss sharing
arrangement.
Mellon Bank, N.A., is required to administer assets entitled to loss
sharing protection in the same manner as assets held by Mellon Bank, N.A., for
which no loss sharing exists.
9. 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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold under agreements to repurchase:
Maximum month-end balance $1,406 $2,698
Average daily balance 1,096 1,623
Average rate during the year 3.0% 3.5%
Average rate at December 31 2.8 2.9
Federal funds purchased and securities sold under agreements to repurchase, net of
federal funds sold and securities purchased under agreements to resell:
Maximum month-end balance $ 708 $1,570
Average daily balance (704) 835
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
9. SHORT-TERM BORROWINGS continued
The average daily balance of commercial paper was $198 million in 1993.
During 1993, the Corporation signed a $200 million one-year revolving credit
agreement with several financial institutions that serves as a commercial paper
support facility. This revolving credit facility has several restrictions,
including a 1.30 maximum double leverage limitation and a minimum tangible net
worth limitation of $1.6 billion. At December 31, 1993, the Corporation's double
leverage ratio was 1.12 and tangible net worth was $2.0 billion. The revolving
credit facility is supplemented by a $25 million backup line of credit, bringing
total commercial paper support facilities to $225 million. The Corporation
expects to negotiate another revolving credit facility upon the expiration of
the current agreement, which is scheduled to expire in mid-1994.
There were no other lines of credit to subsidiaries of the Corporation at
December 31, 1993 or 1992. No borrowings were made under any facility in 1993 or
1992. Commitment fees totaled less than $1 million in each of the years 1991
through 1993.
<TABLE>
<CAPTION>
10. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR)
- ---------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Corporation:
Floating Rate Notes due 1994 (3.58% at December 31, 1993, and 3.73% at December 31, 1992) $ 200 $ 200
Floating Rate Senior Notes due 1996 (3.68% at December 31, 1993) 200 --
7 5/8% Senior Notes due 1999 200 200
6 1/8% Senior Notes due 1995 200 200
6 1/2% Senior Notes due 1997 199 --
6 7/8% Subordinated Debentures due 2003 150 --
9 1/4% Subordinated Debentures due 2001 100 100
5 3/8% Senior Notes due 1995 100 100
9 3/4% Subordinated Debentures due 2001 99 99
Medium Term Notes, Series A, due 1994-2001 (9.10% to 10.50% at December 31, 1993,
and 8.93% to 10.50% at December 31, 1992) 60 91
Senior Medium Term Notes, Series B, due 1995 (8.85% to 9.00% at December 31, 1993,
and 4.38% to 9.00% at December 31, 1992) 26 31
Various notes due 1999 (7.25% at December 31, 1993, and 7.25% to 8.60% at
December 31, 1992) 5 21
8 7/8% Subordinated Capital Notes due 1998 -- 142
9% Notes due 1996 -- 68
8.6% Debentures due 2009 -- 33
Subsidiaries:
6 1/2% Subordinated Notes due 2005 249 --
6 3/4% Subordinated Notes due 2003 149 --
Medium Term Bank Notes due 1998-2007 (6.57% to 8.55% at December 31, 1993, and
7.00% to 8.55% at December 31, 1992) 35 32
Various notes and obligations under capital leases due 1994-1999 (3.92% to 15.29% at
December 31, 1993, and 4.91% to 21.68% at December 31, 1992) 18 20
Floating Rate Subordinated Capital Notes due 1996 (5.25% at December 31, 1992) -- 250
- ---------------------------------------------------------------------------------------------------------------------
Total unsecured notes and debentures (with original maturities over one year) $1,990 $1,587
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Floating Rate Notes due 1994 pay interest quarterly at a rate of .20% per
annum above LIBOR for three-month Eurodollar deposits. These notes are listed on
the Luxembourg Stock Exchange and do not trade in the United States. The notes
are redeemable, in whole or in part, at the option of the Corporation at 100% of
their principal amount plus accrued interest on any interest payment date.
The Floating Rate Senior Notes due 1996, issued in April 1993, pay interest
quarterly at a rate of .30% per annum above LIBOR for three-month Eurodollar
deposits. The notes are redeemable at the option of the Corporation, beginning
April 1, 1994, at 100% of their principal amount plus accrued interest.
The following notes pay interest semiannually and are not redeemable prior
to maturity: 7 5/8%, 6 1/8%, 6 1/2%, and 5 3/8% Senior Notes; 6 7/8%, 9 1/4% and
9 3/4% Subordinated Debentures.
The fixed-and variable-rate Medium Term Notes, Series A and B, were issued
from December 1990 through May 1991. During 1993, $31 million of fixed-rate
notes and all of the variable-rate notes matured. The remaining notes pay
interest semiannually and are not redeemable prior to maturity.
54
<PAGE> 39
10. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR) continued
The 8 7/8% Subordinated Capital Notes due 1998 and 9% Notes due 1996 were
redeemed at the option of the Corporation in 1993 at 100% of their principal
amount plus accrued interest. The 8.6% Debentures due 2009 were redeemed at the
option of the Corporation in December 1993, at a redemption price of 103.74% of
the principal amount plus accrued interest.
The 6 1/2% and 6 3/4% Subordinated Notes due 2005 and 2003, respectively,
were issued in 1993. The notes pay interest semiannually and are not redeemable
prior to maturity. The notes are subordinated to obligations to depositors and
other creditors of Mellon Bank, N.A.
The fixed-rate Medium Term Bank Notes due 1998 through 2007 were issued in
May 1992 through April 1993. The notes pay interest semiannually and are not
redeemable prior to maturity.
The Floating Rate Subordinated Capital Notes due 1996 were redeemed at the
option of Mellon Bank, N.A., in August 1993 at 100% of their principal amount
plus accrued interest.
The aggregate amounts of notes and debentures that mature during the five
years 1994 through 1998 are as follows: $219 million, $331 million, $224
million, $206 million and $18 million, respectively.
11. PREFERRED STOCK
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Liquidation Balances at 1993 Dividends
(dollar amounts in millions, preference Shares Shares December 31, ---------------------
except per share amounts) per share authorized issued 1993 1992 1991 Per share Aggregate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Junior convertible preferred stock
(Series D) $ 1.00 4,388,117 2,236,226 $ 2 $ 2 $ 2 $ 1.75 $ 4
10.40% preferred stock (Series H) 25.00 6,400,000 6,400,000 155 155 155 2.60 17
9.60% preferred stock (Series I) 25.00 6,000,000 6,000,000 145 145 145 2.40 14
8.50% preferred stock (Series J) 25.00 4,000,000 4,000,000 97 97 -- 2.13 9
8.20% preferred stock (Series K) 25.00 8,000,000 8,000,000 193 -- -- 1.91 15
Convertible preferred stock (Series B) 25.00 -- -- -- 68 68 1.54 4
Stated rate auction preferred stock
(Series C-2) 100.00 -- -- -- -- 55 -- --
----- ---- ----
Total preferred stock $592 $467 $425
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation has authorized 50,000,000 shares of Series Preferred Stock, par
value $1.00 per share, at December 31, 1993. The table above summarizes the
Corporation's preferred stock outstanding at December 31, 1993, 1992 and 1991.
The Series D junior convertible preferred stock was issued in a private
placement in July 1988. The stock bears noncumulative dividends at the rate of
1.15 times the regular cash dividend paid on the common stock and participates
with the common stock in noncash and extraordinary dividends. Each share of
Series D preferred stock is convertible into .7609 shares of common stock.
On March 30, 1990, the Corporation issued approximately 7,393,000 shares of
common stock in exchange for approximately 8,755,000 shares, or 83%, of its
outstanding Series D preferred stock. The economic terms of this exchange were
designed to be substantially neutral to both the Corporation and the exchanging
holders of the Series D preferred stock. The shareholders who participated in
the exchange were required to reinvest a portion of their dividends in
additional shares of common stock so that, subject to certain conditions, the
common shares outstanding held by the Series D shareholders who participated
in the exchange would be equal to the number of common shares into which
their Series D stock would have been converted had the exchange not occurred.
The original holders of the Series D preferred stock agreed to certain
limitations on the ownership, voting and disposition of these shares and of any
common shares resulting from the conversion or exchange of the Series D
preferred stock. The provisions agreed to by the original holders limited their
ability to transfer the shares of Series D preferred stock--and any common stock
issued resulting from the conversion or exchange of the Series D preferred
stock--for a period of five years. These provisions expired in 1993. The
provisions also contain additional terms that ensure a broad distribution of
such shares should the holders decide to sell their shares in years 1994 through
1998. The Corporation has retained the right of first refusal should the holders
seek to sell such shares in a registered public offering in years 1994 through
1998.
Holders of Series D preferred stock will vote as a single class with the
common stock, with each share of Series D preferred stock being entitled to one
vote. The holders also have agreed to vote all of the voting stock they control,
including common stock, in favor of the
55
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
11. PREFERRED STOCK continued
Corporation's nominees for election to the board of directors and may vote on
all other matters at their discretion. In the event, however, that they
determine not to vote their shares in favor of a position recommended by the
board of directors, they shall allocate their votes so that such shares are
voted no less favorably to the position recommended by the board of directors
than the allocation of the votes by all other shareholders. The provisions of
the stock purchase agreements also provide that, in the event a tender offer is
made for the Corporation's shares and the board of directors recommends against
such tender offer, the holders agree not to tender their shares to such bidder.
Generally, these limitations on voting and distribution had an original
term of 10 years, but are subject to earlier termination at the option of the
holders upon the occurrence of certain events. These events include any person
acquiring more than 50% of the outstanding voting securities of the Corporation
or replacing a majority of the board of directors; failure of the Corporation
to meet certain financial tests; or the departure of the current chief
executive officer.
The Series H preferred stock, issued in March 1990, bears an annual
cumulative dividend of $2.60 per share. The stock is redeemable, in whole or
in part, at the option of the Corporation at $26.30 per share plus accrued
dividends during the 12-month period beginning March 1, 1995. The redemption
price declines $.26 per share, during each of the following 12-month periods,
until a final redemption price of $25 per share is set on March 1, 2000, at
which price the shares will be redeemable thereafter.
The Series I preferred stock, issued in August 1991, bears an annual
cumulative dividend of $2.40 per share. The stock is redeemable, in whole or in
part, at the option of the Corporation at $25 per share plus accrued dividends
at any time on or after August 15, 1996.
The Series J preferred stock, issued in January 1992, bears an annual
cumulative dividend of $2.125 per share. The stock is redeemable, in whole or in
part, at the option of the Corporation at $25 per share plus accrued dividends
at any time on or after February 15, 1997.
The Series K preferred stock, issued in January 1993 to partially finance
the purchase price of TBC and the Meritor branches, bears an annual cumulative
dividend of $2.05 per share. The stock is redeemable, in whole or in part, at
the option of the Corporation at $25 per share plus accrued dividends at any
time on or after February 15, 1998.
The Series B convertible preferred stock was redeemed at the option of the
Corporation on December 1, 1993, at a price of $25 per share plus accrued
dividends. The effective annualized dividend rate was $1.6875 per share for
1993.
In the event that the equivalent of six quarterly dividends, whether or not
consecutive, payable on Series H, Series I, Series J or Series K preferred
stocks, are unpaid and not set aside for payment, the number of directors of the
Corporation will be increased by two. The holders of the series of preferred
stock for which dividends are unpaid, voting as a single class, will be entitled
to elect the two additional directors to serve until all dividends in arrears
have been paid or declared and set aside for payment.
In the event of liquidation or dissolution of the Corporation, the rights of
the Series H, Series I, Series J and Series K preferred stock are senior to the
Series D preferred stock and the common stock with respect to dividends and
distributions. Upon liquidation or dissolution, holders of the Series D
preferred stock are entitled to receive $1.00 per share and then participate
pro rata with the common shareholders. The Series D preferred stock is on a
parity with the common stock with respect to dividends. Common shareholders'
equity includes the additional paid-in capital on the Series D preferred
stock because this preferred stock is, in almost all respects, a direct
substitute for common stock, and its additional paid-in capital has no
liquidation preference over the common stock.
12. EQUITY PURCHASE OPTIONS (WARRANTS)
In May 1993, in connection with the acquisition of The Boston Company, the
Corporation issued three million 10-year equity purchase options (warrants),
each exercisable for one share of common stock. The warrants are exercisable at
$50 per share at any time until their expiration on May 21, 2003. At December
31, 1993, all three million warrants were outstanding.
In 1988, the Corporation issued three million equity purchase options
(warrants), each exercisable for one share of common stock. The warrants are
exercisable at $25 per share at any time until their expiration on August 7,
1994. At December 31, 1993, there were approximately 14,600 of these warrants
outstanding, compared with approximately 800,000 warrants outstanding at
December 31, 1992. The reduction in warrants outstanding resulted from the
exercise of warrants for common stock.
All of the Corporation's warrants are registered with the Securities and
Exchange Commission and are noncallable.
56
<PAGE> 41
13. NONINTEREST REVENUE
The components of noninterest revenue for the three years ended December 31,
1993, are presented in the "Noninterest revenue" table on page 23. This table is
incorporated by reference into these Notes to Financial Statements.
14. TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 (FAS No. 109), "Accounting for Income
Taxes." Under the asset and liability method of FAS No. 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under FAS No. 109, the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
The Corporation adopted FAS No. 109 as of January 1, 1993, on a prospective
basis. The cumulative effect of this change in accounting for income taxes was
less than $1 million and was included in income tax expense.
Income tax expense consists of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(in millions) 1993 1992 1991
- ----------------------------------------------------------
<S> <C> <C> <C>
Current taxes:
Federal $175 $ 76 $ 25
State 34 5 7
Foreign -- (1) 2
- ----------------------------------------------------------
Total current taxes 209 80 34
- ----------------------------------------------------------
Deferred taxes:
Federal 37 (21) (8)
State (8) 2 3
Foreign 1 (6) (1)
- ----------------------------------------------------------
Total deferred taxes 30 (25) (6)
- ----------------------------------------------------------
Provision for income
taxes $239 $ 55 $ 28
- ----------------------------------------------------------
</TABLE>
In addition to the items in the table above, $5 million of income tax benefit
was recorded as an adjustment to goodwill for recognition of deferred tax assets
on prior purchase business combinations with purchased excess tax basis, and $9
million of income tax benefit was recorded as additional paid-in capital for the
tax effect of compensation expense for tax purposes in excess of amounts
recognized for financial reporting purposes.
Significant components of deferred tax expense for the year ended December 31,
1993, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(in millions) 1993
- --------------------------------------------------------
<S> <C>
Deferred tax benefit, excluding the effect of
other components listed below $(28)
Adjustment to deferred tax assets and liabilities
for enacted changes in tax laws and rates (4)
Investment tax credit carryforward 29
Alternative minimum tax credit carryforward 33
- --------------------------------------------------------
Total deferred tax expense $ 30
- --------------------------------------------------------
</TABLE>
The effective tax rates for 1993, 1992 and 1991 were 40%, 11% and 9%,
respectively. Income tax expense was different from the amounts computed by
applying the statutory federal income tax rate to income before income taxes
because of the items listed in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(dollar amounts in millions) 1993 1992 1991
- ---------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35% 34% 34%
Tax expense computed at
statutory rate $ 210 $ 167 $ 105
Increase (decrease)
resulting from:
State income taxes, net of
federal tax benefit 17 5 6
Alternative minimum tax -- (13) 6
Tax-exempt income from
loans and securities (4) (6) (15)
Amortization of goodwill 9 5 5
Impact of book versus tax
basis of acquired assets 14 16 15
Recognized tax benefits -- (130) (100)
Other, net (7) 11 6
- ---------------------------------------------------------
Provision for income
taxes $ 239 $ 55 $ 28
- ---------------------------------------------------------
</TABLE>
57
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
14. TAXES continued
For the years ended December 31, 1992 and 1991, deferred income tax benefits of
$25 and $6, respectively, resulted from temporary differences in the recognition
of income and expense for income tax and financial reporting purposes. The
principal items of income and expense that give rise to deferred income taxes
are shown, for those years, in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(in millions) 1992 1991
- ---------------------------------------------------------
<S> <C> <C>
Deferred loss on sale of assets to GSNB $ 13 $ 26
Provision for credit losses and
write-downs of real estate acquired 23 (27)
Investment tax credit 20 7
Lease financing revenue 21 9
Depreciation and amortization 9 3
Alternative minimum tax (13) (27)
Tax loss carryforward 36 96
Other, net (4) 7
- ---------------------------------------------------------
Net deferred tax expense before
recognized tax benefits 105 94
Recognized tax benefits (130) (100)
- ---------------------------------------------------------
Deferred tax benefit recognized $ (25) $ (6)
- ---------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1993,
are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
Deferred tax Deferred tax
(in millions) assets liabilities
- -------------------------------------------------------
<S> <C> <C>
Provision for credit
losses and write-downs
on real estate
acquired $259 $ --
Lease financing revenue -- 207
Salaries and employee
benefits -- 38
Accrued expense not
deductible until paid 92 --
Net occupancy expense 72 --
Other 26 12
- -------------------------------------------------------
Total gross deferred
tax assets and
liabilities 449 257
Less: valuation allowance 7 --
- -------------------------------------------------------
Net deferred tax assets
and liabilities $442 $257
- -------------------------------------------------------
</TABLE>
The Corporation determined that it was not required to establish a
valuation allowance for deferred tax assets upon adoption of FAS No. 109 since
it is more likely than not that the deferred tax asset will be realized through
carryback to taxable income in prior years, future reversals of existing taxable
temporary differences, and, to a lesser extent, future taxable income. However,
the Corporation did record a valuation allowance upon the acquisition of The
Boston Company, Inc., and subsidiaries. This valuation allowance is primarily
for federal net operating loss carryforwards that are subject to limitation on
their usage.
The Corporation's locations domiciled outside of the United States
generated pretax loss of $15 million, in both 1993 and 1992 and $16 million in
1991.
58
<PAGE> 43
15. EMPLOYEE BENEFITS
Pension plans
The Corporation's two largest subsidiaries, Mellon Bank, N.A., and The Boston
Company, sponsor trusteed, non-contributory, defined benefit pension plans.
Together, the two 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.
Effective January 1, 1991, the actuarial assumptions for mortality and
employee turnover were changed to reflect recent experience. 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. These plans are
appropriately funded with the Mellon Bank plan significantly overfunded and the
fair market value of the plan assets of The Boston Company approximately equal
to its accumulated benefit obligation.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
(dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded Funded Unfunded
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assumptions used in the accounting:
Rates used for expense at January 1:
Rate on obligation 6.9% 6.9% 7.6% 7.6% 8.4% 8.4%
Rate of return on assets 10.0 -- 10.0 -- 10.0 --
Actuarial salary scale 2.9 2.9 3.6 3.6 4.4 4.4
- ---------------------------------------------------------------------------------------------------------------------------
Components of pension expense:
Service cost $ 15 $1 $ 10 $1 $ 9 $1
Interest cost on projected benefit
obligation 17 2 13 1 11 1
Return on plan assets (71) -- (58) -- (105) --
Net amortization and deferral 27 -- 20 -- 72 --
- ---------------------------------------------------------------------------------------------------------------------------
Total pension expense (credit) $(12) $3 $(15) $2 $ (13) $2
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1993 1992
(dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions used in the accounting:
Rates used for obligation at December 31:
Rate on obligation 6.0% 6.0% 6.9% 6.9%
Actuarial salary scale 3.0 3.0 2.9 2.9
- -------------------------------------------------------------------------------------------------------------------------
Present value of benefit obligation at December 31:
Vested $255 $ 31 $163 $ 17
Nonvested 37 2 12 --
- -------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 292 33 175 17
- -------------------------------------------------------------------------------------------------------------------------
Effect of projected future compensation levels 50 2 35 1
- -------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $342 $ 35 $210 $ 18
- -------------------------------------------------------------------------------------------------------------------------
Plan assets at fair market value at December 31:
Cash and U.S. Treasury securities $107 $ -- $ 98 $ --
Corporate debt obligations 54 -- 27 --
Mellon Bank Corporation common stock* 27 -- 52 --
Other common stock and investments 457 -- 347 --
- -------------------------------------------------------------------------------------------------------------------------
Total plan assets at fair market value $645 $ -- $524 $ --
- -------------------------------------------------------------------------------------------------------------------------
Reconciliation of funded status with financial statements:
Funded status at December 31 $303 $(35) $314 $(18)
Unamortized net transition (asset) obligation (21) 2 (24) 2
Unrecognized prior service cost 13 -- 3 --
Net deferred actuarial (gain) loss (52) 8 (74) 2
Adjustment required to recognize minimum liability -- (8) -- --
- -------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) expense at December 31 $243 $(33) $219 $(14)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents 500,000 and 972,887 shares at December 31, 1993 and 1992,
respectively.
59
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
15. EMPLOYEE BENEFITS continued
Long-Term Profit Incentive Plan (1981)
The Long-Term Profit Incentive Plan provides for the issuance of stock options,
stock appreciation rights, performance units, deferred cash incentive awards and
shares of restricted stock to officers and key employees of the Corporation and
its subsidiaries as approved by the Human Resources Committee of the board of
directors. During 1993 and 1991, the Long-Term Profit Incentive Plan was amended
with shareholder approval to increase the shares available for grant by
3,000,000 and 2,500,000 shares, respectively. Stock options may be granted at
prices not less than the fair market value of the common stock on the date of
grant. Options may be exercised during fixed periods of time not to exceed 10
years from the date of grant. In the event of certain changes in control of the
Corporation, these options may become immediately exercisable.
Total outstanding grants as of December 31, 1993, were 3,394,942 shares, of
which 1,293,015 shares were exercisable. During 1993, 1992 and 1991, options for
1,036,429; 1,406,500; and 631,050 shares, respectively, were granted. As of
December 31, 1993, options for 3,226,049 shares were available for grant.
Included in the December 31, 1993, 1992 and 1991 outstanding grants were
options for 420,902; 582,040; and 296,928 shares, respectively, that were issued
at exercise prices ranging from $19.75 to $56.63 per share. These options become
exercisable near the end of their 10-year terms, but exercise dates may be
accelerated by the Human Resources Committee of the board of directors, based on
the optionee's performance. If so accelerated, compensation will be paid in the
form of deferred cash incentive awards to reimburse the exercise price of these
options if exercised prior to the original vesting date. The Corporation
recognized $8 million of compensation expense for these options in 1993, $7
million in 1992 and $5 million in 1991. As of December 31, 1993, the exercise
date had been accelerated on options for 698,186 shares, of which 200,988;
137,356; and 140,411 were exercised in 1993, 1992 and 1991, respectively.
Options for 1,002,096; 711,565; and 204,132 shares were exercised in 1993,
1992 and 1991, respectively, under the Long-Term Profit Incentive Plan,
including the 200,988; 137,356; and 140,411 shares on which the exercise date
was accelerated.
Options outstanding under this plan were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Price of
Number of shares shares under option
------------------------------- ----------------------------
Eligible Aggregate
Under option for exercise Per share (in millions)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993 3,394,942 1,293,015 $19.75-60.13 $150
December 31, 1992 3,477,166 1,482,207 19.75-60.13 130
December 31, 1991 2,933,014 1,540,441 19.75-60.13 96
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock Option Plan for Outside Directors (1989)
The Corporation's Stock Option Plan for Outside Directors provides for the
granting of options for shares of common stock to outside directors and advisory
board members of the Corporation. During 1993, the Stock Option plan for Outside
Directors was amended with shareholder approval to increase the shares available
for grant by 200,000 shares. The timing, amounts, recipients and other terms of
the option grants are determined by the provisions of, or formulas in, the
Directors' Options 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 course of the year are granted options on a
pro rata basis having terms identical to those granted to the directors at the
start of the year.
Total outstanding grants as of December 31, 1993, were 201,063 shares,
of which 168,648 were exercisable. During 1993, 1992 and 1991, options for
33,765; 65,759; and 48,012 shares, respectively, were granted at prices
ranging from $30.88 to $56.00 per share. As of December 31, 1993, 171,851
shares were available for grant. Options for 18,486; 6,600; and 2,000 shares
were exercised in 1993, 1992 and 1991, respectively.
Retirement Savings Plan
Since April 1988, employees' payroll deductions for deposit into retirement
savings accounts have been matched by the Corporation's contribution of common
stock, at the rate of $.50 on the dollar, up to six percent of the employee's
annual base salary with an annual maximum corporate contribution of $3,000 per
employee. In 1993, 1992 and 1991, the Corporation recognized $9 million, $6
million and $5 million,
60
<PAGE> 45
15. EMPLOYEE BENEFITS continued
respectively, of expense related to this plan and contributed 152,878; 146,505;
and 174,543 shares, respectively, into this plan. Certain shares contributed in
1993 and 1992 and all of the shares contributed in 1991 were issued from
treasury stock. The plan held 1,003,535; 930,124; and 831,094 shares of common
stock at December 31, 1993, 1992 and 1991, respectively.
Profit Bonus Plan
Awards are made to key employees at the discretion of the Human Resources
Committee of the board of directors of the Corporation. 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 $19 million, $13 million
and $11 million for 1993, 1992 and 1991, respectively.
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, 1993, 1992 and 1991, this plan held 77,578; 88,460; and 91,321
shares, respectively, of the Corporation's common stock that previously were
held in other plans. The Corporation may make contributions to this plan from
time to time. No contributions were made in 1993, 1992 or 1991.
Postretirement benefits other than pensions
The Corporation shares in the cost of providing certain health care and life
insurance benefits for retired employees. 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 $8 million in 1993, $4
million in 1992, and $3 million in 1991.
In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106 (FAS No. 106), "Employers' Accounting
for Postretirement Benefits Other than Pensions." FAS No. 106 requires sponsors
of plans providing certain health care and life insurance benefits to retired
employees to expense the cost of these benefits over the estimated working lives
of these employees, rather than expensing the costs as paid.
Effective January 1, 1993, the Corporation adopted FAS No. 106 on a
prospective basis by beginning to amortize the transition obligation over a
20-year period. The incremental expense for adopting FAS No. 106 was
approximately $3 million for the full year 1993.
The Boston Company adopted FAS No. 106 in 1992 by electing to recognize the
entire transition obligation into income in 1992.
The Corporation shares in the cost of providing certain health care and
life insurance benefits for active and retired employees. 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 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 to the arrangements above, the
Corporation provides a small subsidy toward health care coverage for other
active employees when they retire.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
- -------------------------------------------------------------------------------------------------------------------------
Accrued Accumulated Unrecognized
Postretirement Postretirement Transition
Benefit Cost Benefit Obligation Obligation
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1993 $(5) $(63) $58
- -------------------------------------------------------------------------------------------------------------------------
Acquisition of TBC -- (5) --
Recognition of components of net periodic
postretirement benefit costs:
Service cost --(a) --(a) --
Interest cost (5) (5) --
Amortization of transition obligation (3) -- (3)
- -------------------------------------------------------------------------------------------------------------------------
(8) (10) (3)
Change in APBO actuarial assumptions including a
change in the discount rate from 8% to 7% -- (15) --
Benefit payments 5 5 --
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1993 $(8) $(83) $55
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts were less than $1 million in 1993.
61
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS
15. EMPLOYEE BENEFITS continued
A weighted average discount rate of 8% was used to determine the net
periodic benefit cost and a 7% rate was used to value the accumulated
postretirement benefit obligation at year end. 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 12% for 1994 and was decreased gradually to
6% in 2002 and thereafter. The health care cost trend rate assumption can have a
significant impact on the amounts reported. Increasing the assumed health care
cost trend by one percentage point in each year would increase the accumulated
postretirement benefit obligation by approximately $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.
16. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS
The prior approval of the Office of the Comptroller of the Currency (OCC) is
required if the total of all dividends declared by a national bank subsidiary in
any calendar year exceeds the bank subsidiary's net profits, as defined by the
OCC, for that year, combined with its retained net profits for the preceding two
calendar years. Additionally, national bank subsidiaries may not declare
dividends in excess of net profits on hand, as defined, after deducting the
amount by which the principal amount of all loans on which interest is past due
for a period of six months or more exceeds the reserve for credit losses.
Under the first and currently more restrictive of the foregoing dividend
limitations, the Corporation's national bank subsidiaries can, without prior
regulatory approval, declare dividends subsequent to December 31, 1993, of up to
approximately $492 million of their retained earnings of $1.229 billion at
December 31, 1993, less any dividends declared and plus or minus net profits or
losses, as defined, between January 1, 1994, and the date of any such dividend
declaration. The payment of dividends is also limited by minimum capital
requirements imposed on all national banks by the OCC. The Corporation's
national banks exceed these minimum requirements. The national bank subsidiaries
declared dividends to the parent Corporation of $158 million in 1993, $130
million in 1992 and $129 million in 1991.
The Federal Reserve Act limits extensions of credit by the Corporation's
bank subsidiaries to the Corporation and to certain other affiliates of the
Corporation, requires such extensions to be collateralized, and limits the
amount of investments by the banks in these entities. At December 31, 1993, such
extensions of credit and investments were limited to $397 million as to the
Corporation and any other affiliate and to $794 million as to the Corporation
and all of its other affiliates. Outstanding extensions of credit totaled $154
million at December 31, 1993.
17. 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, investments and trust activities. Due to
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.
On February 12, 1991, a jury in Colorado rendered a verdict in a lender
liability lawsuit in which the Corporation is one of the defendants. The jury
awarded actual damages of $42 million and punitive damages of $23 million in
favor of the plaintiffs. In the lawsuit, the plaintiffs contended that the
Corporation breached certain obligations and failed to disclose certain
information in connection with its lending relationships with the plaintiffs. On
June 6, 1991, a district judge in Colorado entered a judgment reducing the award
to $16 million in actual damages, plus interest, and $12 million in punitive
damages. On January 27, 1994, the Colorado Court of Appeals affirmed the
judgment for plaintiffs for compensatory damages in the reduced amount of $5.36
million, plus interest since November 1, 1989, and vacated the judgment for
punitive damages and remanded to the trial court with the direction to
reconsider the amount, if any, of punitive damages. By Colorado law, the amount
of the punitive damages cannot exceed the amount of the compensatory damages.
The Corporation intends to petition the Colorado Court of Appeals for rehearing
and it is possible that the other parties
62
<PAGE> 47
17. LEGAL PROCEEDINGS continued
may also appeal. Because of the uncertainty as to the ultimate resolution, no
provision has been made in the financial statements for this matter.
On August 7, 1992, a judge in the United States District Court for the
Eastern District of Pennsylvania entered a judgment ordering Mellon Bank to
reimburse certain of its trust customers the amount of sweep fees which were
charged to their trust accounts since 1981, plus interest. In this class-action
proceeding, the plaintiffs claimed that Mellon Bank, and other banks, breached
their fiduciary duties with regard to the provision of sweep services, alleging
that the banks charged unreasonable fees, failed to disclose fully their fees
for sweep services and wrongfully invested sweep funds in internal or affiliated
accounts or investment vehicles. The court found that the total amount of sweep
fees collected by Mellon Bank since 1981 for both fiduciary and non-fiduciary
accounts was approximately $55 million. On May 18, 1993, the Third Circuit Court
of Appeals vacated the judgment entered by the district court and remanded the
case for dismissal. On June 18, 1993, the Third Circuit Court of Appeals denied
plaintiff's Petition for Rehearing. The district court ordered the case
dismissed on July 6, 1993. On September 13, 1993, the plaintiffs petitioned the
United States Supreme Court for a writ of certiorari, and on November 8, 1993,
the Supreme Court denied this petition.
On July 28, 1993, a second lawsuit arising out of Mellon Bank's sweep fees
practices was filed with the United States District Court for the Eastern
District of Pennsylvania against Mellon Bank and its directors. On August 30,
1993, a third lawsuit, similar to the second, was filed in the same court and
was consolidated with the second. On December 16, 1993, these suits also were
dismissed. Plaintiffs have appealed this decision to the Third Circuit.
On September 10, 1993, the Corporation filed complaints in the United
States District Court for the Western District of Pennsylvania against four
financial services companies. The complaints involved claims arising from the
breach of the contract under which the Corporation purchased The Boston Company,
as well as violations of other obligations to the Corporation. The claims
related to administration services the Corporation provides to a family of
mutual funds now known as the Smith Barney Shearson Funds. The defendant
companies were: Smith Barney, Harris Upham & Co. Incorporated (Smith Barney);
its parent organization, Primerica Corporation (now The Travelers Inc.); Lehman
Brothers Inc. (formerly Shearson Lehman Brothers); and its parent organization,
American Express Company. The Corporation's mutual funds administration services
are provided through The Boston Company.
In its complaint against Smith Barney and Primerica (which purchased
Shearson's mutual fund and brokerage businesses in 1993), the Corporation
asserted that, despite expressly agreeing that they were bound by, and would
comply with, the terms and provisions of the contract between Shearson and the
Corporation, Smith Barney and Primerica violated that contract. The Corporation
sought money damages and a court order requiring that Smith Barney and Primerica
cease their unlawful conduct and honor the contract between the Corporation and
Shearson.
A hearing was held in November 1993. As a result, the Corporation was
granted injunctive relief preventing Smith Barney, for a period of seven years,
from competing with Mellon in providing administration services to funds in the
Smith Barney Shearson family, other than Smith Barney funds that existed prior
to Smith Barney's March 12, 1993, agreement to purchase Shearson Lehman
Brothers' mutual fund and brokerage businesses. The injunction covered all new
funds created or underwritten by Smith Barney, however named, after March 12,
1993, and obligated Smith Barney to recommend Mellon as the provider of
administration services.
Effective January 1, 1994, Mellon and Smith Barney Shearson Inc. settled
their litigation. Under the terms of the settlement agreement, which will remain
in effect through May 2000, the companies will work together to provide
administration services to certain funds affiliated with Smith Barney. Smith
Barney will seek to be appointed administrator for certain of its affiliated
funds, in addition to its current roles as investment advisor and distributor.
Smith Barney would, in turn, enter into sub-administration agreements with
Mellon for certain administration services.
Incorporated in the settlement agreement are certain Smith Barney Shearson
funds that existed prior to Smith Barney's March 12, 1993, agreement to purchase
Shearson Lehman Brothers' mutual fund and brokerage businesses, as well as
certain Smith Barney Shearson sponsored funds covered by the above injunction.
63
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
Off-balance-sheet financial instruments
<TABLE>
<CAPTION>
- ---------------------------------------------------------
December 31,
(in millions) 1993(a) 1992
- ---------------------------------------------------------
<S> <C> <C>
Financial instruments with contract
amounts that represent credit
risk:
Commitments to extend credit $12,507 $11,606
Standby letters of credit and
foreign guarantees 2,952 2,966
Commercial letters of credit 140 122
Custodian securities lent with
indemnification 11,152 841
Financial instruments with notional
or contract amounts that exceed
the amount of credit risk:(b)
Foreign currency contracts:
Commitments to purchase 9,219 5,223
Commitments to sell 9,216 5,229
Foreign currency and other option
contracts written:
Commitments to purchase 354 221
Commitments to sell 175 188
Foreign currency and other option
contracts purchased:
Commitments to purchase 345 233
Commitments to sell 161 190
Futures and forward contracts:
Commitments to purchase 107 3,482
Commitments to sell 426 614
Interest rate agreements (notional
principal amounts):
Interest rate swaps 13,647 11,888
Other interest rate products 2,560 1,882
Forward rate agreements 595 --
- ---------------------------------------------------------
</TABLE>
(a) Increases in off-balance-sheet financial instruments at December 31, 1993,
compared with December 31, 1992, were due primarily to the May 1993
acquisition of The Boston Company.
(b) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract on which a counterparty has defaulted.
Credit risk associated with these instruments is discussed by type of
instrument in the following paragraphs.
In the normal course of business, the Corporation becomes a party to various
financial transactions that generally do not involve funding. These transactions
involve various risks, including market and credit risk. Since 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 these financial instruments to enable its customers to
meet their financing objectives, and manage their interest-and currency-rate
risk. Supplying these instruments provides the Corporation with an ongoing
source of fee revenue. The Corporation also enters into these transactions to
manage its own risks arising from movements in interest and currency rates, and
as a part of its trading activities.
Off-balance-sheet financial instruments involve varying degrees of market
and credit risk that exceed the amounts recognized on the balance sheet. The
Corporation limits its exposure to loss from these instruments by subjecting
them to the same credit approval and monitoring procedures as for on-
balance-sheet instruments, as well as by entering into offsetting or matching
positions to hedge interest-and currency-rate risk.
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 if interest
rates, at the time a fixed-rate commitment is funded, have moved adversely
subsequent to the extension of the commitment. The Corporation believes the
market risk associated with commercial commitments is minimal. Since many of the
commitments are expected to expire without being drawn upon, the total
contractual amounts do not necessarily represent future cash requirements. The
amount and type of collateral obtained by the Corporation is based upon industry
practice, as well as its credit assessment of the customer. Of the $13 billion
of contractual commitments for which the Corporation has received a commitment
fee or which were otherwise legally binding--excluding credit card
plans--approximately 30% of the commitments are scheduled to expire within one
year, and an additional 56% 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
64
<PAGE> 49
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK continued
letters of credit is represented by their contractual amounts and is essentially
the same as the credit risk involved in commitments to extend credit. The
Corporation minimizes this risk by adhering to its written credit policies and
by requiring security and debt covenants similar to those contained in loan
agreements. The Corporation believes the market risk associated with letters of
credit and foreign guarantees is minimal.
Standby letters of credit and foreign guarantees obligate the Corporation
to disburse funds to a third-party beneficiary if the Corporation's customer
fails to perform under the terms of an agreement with the beneficiary. Standby
letters of credit and foreign guarantees are used by the customer as a credit
enhancement and typically expire without being drawn upon.
The Corporation has issued standby letters of credit to customers who
currently are experiencing financial difficulties. During 1993, certain
customers with standby letters of credit failed to perform according to the
terms of the agreements with the beneficiaries, resulting in credit losses of
$16 million being recognized. The Corporation recognizes losses in these
situations based on the estimated fair value of the underlying collateral. The
Corporation evaluates various approaches that would enable the Corporation not
to fund these standby letters of credit. Should these approaches prove
unsuccessful, the Corporation would have access to the underlying collateral.
While the Corporation has provided for specific losses on $8 million of
exposures under standby letters of credit to customers experiencing financial
difficulties, management believes that the loss potential is substantially less
than the amount of the exposures due to the existence of the collateral.
Management believes that the Corporation has provided adequate reserves for
potential losses on these instruments.
A commercial letter of credit is normally a short-term instrument used to
finance a commercial contract for the shipments 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.
Outstanding standby letters of credit and foreign guarantees
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Weighted-average
years to maturity
December 31, at December 31,
(dollar amounts in millions) 1993 1992 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Standby letters of credit and foreign guarantees:*
Commercial paper and other debt $ 335 $ 391 1.6 1.9
Tax-exempt securities 703 589 2.1 2.4
Bid-or performance-related 1,055 813 1.0 .9
Other 859 1,173 .7 .8
------ ------
Total standby letters of credit and foreign guarantees $2,952 $2,966 1.3 1.3
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Net of participations and cash collateral totaling $320 million and $348
million at December 31, 1993 and 1992, respectively.
Securities Lending
A securities loan 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 pre-arranged contract. The borrower will collateralize the
loan at all times, generally with cash or U.S. government securities, at a
minimum of 100% of the market value of the loan, plus any accrued interest on
debt obligations. The borrower will also pay a fee to the lender for the
duration of the loan. The level of securities lent with indemnification
increased following the acquisition of The Boston Company.
The Corporation currently enters into two types of securities lending
arrangements, lending with and without indemnification. In securities lending
transactions without indemnification, the Corporation bears no risk of loss. For
transactions in which the Corporation provides an indemnification, risk of loss
occurs if the borrower defaults and the value of the collateral declines. The
Corporation currently does not anticipate any losses on the securities lending
transactions with indemnification.
65
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK continued
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. Market risk arises from
changes in the market value of contractual positions due to 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 settlement obligations under the
contract and generally is limited to the estimated aggregate replacement cost of
those foreign currency contracts in a gain position. In general, such
replacement cost is significantly smaller than the amount of the contract and
totaled approximately $116 million and $93 million at December 31, 1993 and
1992, respectively. There were no settlement or counterparty default losses on
foreign currency contracts in 1993, 1992 or 1991. 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
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 due to 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 approximately $6 million at December 31,
1993, and 1992. There were no settlement or counterparty default losses on
foreign currency and other option contracts in 1993, 1992 or 1991.
Futures and forward contracts
Futures and forward contracts on securities or money market instruments
represent future commitments to purchase or sell a specified instrument at a
specified price and date. Futures contracts are standardized and are traded on
organized exchanges, while forward contracts are traded in over-the-counter
markets and generally do not have standardized terms. The Corporation uses
futures and forward contracts in connection with its trading activities and to
hedge its asset, liability and off-balance-sheet positions.
For instruments that are traded on a regulated 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 totaled less than $1
million at December 31, 1993 and $1 million at December 31, 1992. Credit risk
related to futures contracts is substantially mitigated by daily cash
settlements with the exchanges for the net change in futures contract value.
There were no settlement or counterparty default losses on futures and forward
contracts in 1993, 1992 or 1991.
Market risk is similar to the market risk associated with foreign currency
and other option contracts. The future cash requirements, if any, related to
futures and forward contracts, are represented by the net contractual settlement
between the Corporation and its counterparties.
Interest rate agreements
Interest rate agreements obligate two parties to exchange, or contingently
exchange, one or more payments 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 agreements. Such notional
principal amounts often are used to express the volume of these transactions but
are not actually exchanged between the counterparties. Interest rate swaps
obligate each party to make periodic payments based upon a contractual fixed or
periodically reset rate of interest. Other
66
<PAGE> 51
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK continued
interest rate products obligate a contract "seller" to make payments to a
contract "purchaser" in the event a designated rate index exceeds a contractual
"ceiling" level or, alternatively, falls below a specified "floor" level. The
Corporation acts as both a "purchaser" and "seller" with respect to such
contracts. Forward rate agreements obligate each party contingently to make a
one-time payment, the amount and direction of which is determined by the
difference between a contractual rate of interest and the future level of a
designated interest rate index. The Corporation enters into interest rate
agreements to hedge its interest rate risk, primarily on deposit liabilities,
and part of its trading activities. The weighted average original maturity of
these interest rate agreements was less than five years. There were no deferred
gains or losses from terminated interest rate agreements at December 31, 1993.
The credit risk associated with interest rate agreements is limited to the
estimated aggregate replacement cost of those agreements in a gain position, and
was $306 million and $220 million at December 31, 1993 and 1992, respectively.
Credit risk is managed through credit approval procedures which 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 agreements to further
secure amounts due. The collateral is generally cash and/or U.S. government
securities. There were no counterparty default losses on interest rate
agreements in 1993 or 1992, compared with $5 million in 1991. Off-balance-sheet
market risk arises from changes in the market value of contractual positions due
to 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. The future cash
requirements of interest rate agreements are limited to the net amounts payable
under these agreements.
Concentrations of credit risk
In its normal course of business, the Corporation engages in activities with a
significant number of domestic and international counterparties. The maximum
risk of accounting loss from on-and off-balance-sheet financial instruments with
these counterparties is represented by their respective balance sheet amounts
and the contractual or replacement cost of the off-balance-sheet financial
instruments.
Approximately 34% of the Corporation's total on-and off-balance-sheet
financial instruments with credit risk at December 31, 1993, were with consumers
and consumer-related industries, compared with approximately 28% at December 31,
1992. This credit exposure consisted principally of loans and the related
interest receivable on the balance sheet and off-balance-sheet loan commitments
and letters of credit.
Consumers to whom the Corporation has credit exposure are located primarily
within the Central Atlantic region and are affected by economic conditions
within that region. As a result of the TBC acquisition, the Corporation has
increased its consumer credit exposure in California and the Northeast.
Financial institutions--which include finance-related companies; domestic
and international banks and depository institutions; securities and commodities
brokers; and insurance companies--accounted for approximately 17% of the
Corporation's total on-and off-balance-sheet financial instruments with credit
risk at December 31, 1993, compared with approximately 18% at December 31, 1992.
The Corporation's on-balance-sheet credit exposure to financial institutions
included short-term liquid assets consisting of due from banks and money market
investments, loans and the related interest receivable and investment
securities. In addition, the Corporation had off-balance-sheet credit exposure
to financial institutions consisting of commitments to extend credit and letters
of credit.
The Corporation had credit exposure to the federal government, including
its corporations and agencies, totaling approximately 10% of its on-and off-
balance-sheet financial instruments with credit risk at December 31, 1993
compared with approximately 12% at December 31, 1992. Substantially all of this
exposure consisted of investment securities and the related interest receivable
on the balance sheet. No other concentration of credit risk exceeded 10% of the
Corporation's total credit risk arising from on-and off-balance-sheet financial
instruments at December 31, 1993 and 1992, respectively.
Impact of FASB Interpretation No. 39
In March 1992, the FASB released Interpretation No. 39, "Offsetting of Amounts
Related to Certain Contracts." This interpretation is applicable to the balance
sheet presentation of unrealized gains and losses recognized for interest rate
and foreign exchange contracts. It generally requires the reporting of
unrealized gains as assets and unrealized losses as
67
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK continued
liabilities. This interpretation becomes effective in 1994.
The Corporation currently reports unrealized gains and losses related to
foreign exchange contracts, interest rate agreements, and similar contracts on a
net basis. The adoption of this interpretation for balance sheet presentation
purposes will not affect the net income or capital of the Corporation. At
December 31, 1993, the Corporation's assets and liabilities would have increased
by approximately $250 million under this interpretation. The balance sheet
impact of this interpretation at future dates will fluctuate as the unrealized
gains and losses on these contracts increase or decrease with changes in
remaining maturity and market rates, as well as the ability to net amounts under
master netting arrangements.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (FAS No. 107), "Disclosures
about Fair Value of Financial Instruments," requires the Corporation to disclose
the estimated fair value of its 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 and the value of assets, liabilities and customer relationships that
are not considered financial instruments. For example, the Corporation's
significant Service Products businesses--which contributed approximately 45% of
revenue in 1993--is 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, 1993:
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 sold under agreements to repurchase; U.S.
Treasury tax and loan demand notes; commercial paper; and certain other assets
and liabilities.
Trading account securities, securities available for sale and investment
securities
Trading account securities are recorded at market value on the Corporation's
balance sheet, including appropriate amounts for off-balance-sheet instruments
held for trading purposes. Market values of trading account securities,
securities available for sale and investment securities are generally 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, 1993
and 1992.
68
<PAGE> 53
19. 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 mortgages and credit card receivables, 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 receivables is based on the loan
balances existing at December 31, 1993 and 1992. Cash flows and maturities are
estimated based on contractual interest rates and historical experience and 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
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.
The estimated fair value of the Corporation's variable-rate loans which
reprice in more than 90 days and fixed-rate loans was favorably impacted by the
low-interest-rate environment at December 31, 1993.
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 equal to 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 that 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. Contractual yields,
repricing/maturity periods and discount rates presented are for financial
instruments that reprice or mature in more than 90 days. 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.
69
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS
19. FAIR VALUE OF FINANCIAL INSTRUMENTS continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993
------------------------------------------
Carrying Amount AVERAGE Estimated fair value
----------------- REPRICING ----------------------
December 31, CONTRACTUAL OR MATURITY DISCOUNT December 31,
(dollars in millions) 1993 1992 YIELD (YEARS) RATES USED 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Securities available for
sale(a) $ 2,916 $ 3,613 -- -- -- $ 2,920 $ 3,707
Investment securities(a) 2,096 2,125 -- -- -- 2,139 2,128
Loans(b):
Commercial and
financial 10,041 9,549 3.6-14.0% 2.6 3.5- 9.2% 10,019 9,489
Commercial real estate 1,721 1,861 5.5-10.5 4.1 3.5- 9.7 1,695 1,827
Consumer mortgage 8,180 4,278 6.0-10.4 12.2 3.9-11.8 8,280 4,268
Other consumer credit 3,813 3,618 8.6-12.3 1.1 7.3-14.5 3,927 3,704
------- -------
Total loans 23,755 19,306
Reserve for credit
losses(b) (585) (502) -- -- -- -- --
------- ------- ------- -------
Net loans 23,170 18,804 23,921 19,288
Segregated assets(c) 108 241 NM NM NM 108 241
Other assets(c) 720 580 NM NM NM 737 595
Fixed-maturity
deposits(d):
Retail savings
certificates 6,813 8,459 2.3- 7.4 1.2 2.3-5.5 6,837 8,483
Negotiable
certificates of
deposit 251 246 3.2- 5.7 1.3 3.4-3.6 258 260
Other time deposits 644 735 0.3-10.5 13.5 2.5-8.2 649 736
Other funds borrowed(c) 151 66 NM NM NM 151 66
Other liabilities(c) 179 106 NM NM NM 179 106
Notes and debentures(a) 1,990 1,586 -- -- -- 2,086 1,641
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM--Not meaningful.
(a) Market or dealer quotes were used to value the reported balance of these
financial instruments.
(b) Approximately 76% and 80% of total performing loans, excluding consumer
mortgages and credit card receivables, reprice or mature within 90 days at
December 31,1993 and 1992, respectively. Excludes lease finance assets of
$718 and $650 million as well as the related reserve for credit losses of
$15 million and $4 million at December 31, 1993 and 1992, respectively.
Lease finance assets are not considered financial instruments as defined by
FAS No. 107.
(c) Excludes nonfinancial 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 $19.830 billion and $15.690 billion of
such deposits at December 31, 1993 and 1992, respectively, are not included
in this table.
Commitments to extend credit, standby letters of credit and foreign guarantees
These financial instruments generally are not sold or traded, and estimated fair
values are not readily available. However, the fair value of commitments to
extend credit and standby letters of credit and foreign guarantees is estimated
by discounting the remaining contractual fees over the term of the commitment
using the fees currently charged to enter into similar agreements and the
present creditworthiness of the counterparties.
Other off-balance-sheet financial instruments
The estimated fair value of off-balance-sheet financial instruments used for
hedging purposes--which includes futures and forward contracts and interest rate
agreements--is estimated by obtaining quotes from brokers. These values
represent the estimated amount the Corporation would receive or pay to terminate
the agreements, considering current interest and currency rates, as well as the
current creditworthiness of the counterparties. Off-balance-sheet financial
instruments are further discussed in note 18, "Financial instruments with
off-balance-sheet risk and concentrations of credit risk."
70
<PAGE> 55
19. FAIR VALUE OF FINANCIAL INSTRUMENTS continued
The estimated fair values for the Corporation's off-balance-sheet financial
instruments, excluding instruments in trading account securities which are
carried at market value, are summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993 December 31, 1992
CONTRACT ASSET (LIABILITY) Contract Asset (Liability)
OR NOTIONAL ---------------------------- or notional ----------------------------
PRINCIPAL CARRYING ESTIMATED principal Carrying Estimated
(in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a) fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit $12,507 $ 3 $53 $11,606 $ 3 $45
Standby letters of credit and
foreign guarantees 2,952 2 25 2,966 2 25
Futures and forward contracts -- -- -- 3,148 (1) (1)
Interest rate swaps 8,568 40 72 6,891 42 96
Other interest rate products 768 2 3 263 4 7
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amounts shown under "carrying amount" represent the on-balance-sheet
receivables or deferred income arising from these unrecognized financial
instruments.
20. 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net transfers to real estate acquired $ 33 $ 223 $ 224
In-substance foreclosure of other assets -- 3 40
Net transfers to segregated assets 134 -- --
Acquisitions(a):
Fair value of noncash assets acquired 8,582 2,702 1,433
Liabilities assumed 7,197 2,973 1,393
Stock issued 115 -- --
Warrants issued 37 -- --
-------- ------ ------
Net cash received (paid) (1,233) 271 (40)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Acquisitions include: The Boston Company, Inc., in 1993; AFCO and CAFO in
1993; Meritor Savings Bank and Standard Federal Savings Bank branches in
1992; and United Penn Bank in 1991.
21. ACQUISITION AND PENDING MERGER
Acquisition of The Boston Company, Inc.
On May 21, 1993, the Corporation completed its acquisition of The Boston
Company, Inc. (TBC), a Shearson Lehman Brothers Inc. (Shearson) subsidiary based
in Boston. TBC, through Boston Safe Deposit and Trust Company and other
subsidiaries, engages in the businesses of mutual fund administration,
institutional trust and custody, institutional asset management and private
asset management. TBC had total assets of $6.3 billion at December 31, 1993,
including $4.4 billion of loans, $462 million of securities and $483 million of
money market investments. Deposit liabilities totaled $3.6 billion and consisted
primarily of money market, demand and time deposits.
Under the terms of the stock purchase agreement with Shearson, the
Corporation acquired all of the stock of Boston Group Holdings, Inc., the
holding company for TBC and its subsidiaries, and paid to Shearson at the
closing a combination of $1.291 billion in cash, 2.5 million shares of the
Corporation's common stock and 10-year warrants to purchase an additional 3
million shares of the Corporation's common stock at $50 per share.
This transaction was recorded under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16. The condensed pro
forma combined operating results provided in the table are presented as if the
acquisition had been effective on January 1, 1993 and January 1, 1992,
respectively. The condensed pro forma combined operating results for the year
ended December 31, 1993, combines The Boston Company's results of operations for
the period January 1, 1993 through May 20, 1993 and the Corporation's historical
results of operations for the year ended December 31, 1993,
71
<PAGE> 56
NOTES TO FINANCIAL STATEMENTS
21. ACQUISITION AND PENDING MERGER continued
which include The Boston Company's results of operations from May 21, 1993, to
December 31, 1993. The excess of the purchase price over the estimated fair
value of tangible net assets acquired on May 21, 1993, was approximately $457
million. This includes a $55 million noncompete covenant with Shearson. The
estimated lives used for the straight-line amortization of the noncompete
covenant and goodwill are seven and 20 years, respectively. Goodwill and other
intangible valuations may vary as a final appraisal and additional information
becomes available. The pro forma results include adjustments for the effect of
the amortization of goodwill and other intangibles, the elimination of certain
assets and liabilities at the closing of the transaction, as well as the
elimination of the revenues and expense attributable to nine subsidiaries of The
Boston Company that were conveyed via dividend to Shearson prior to the closing
date of the transaction. In addition, restructuring expenses of $175 million, or
$112 million after-tax, have been eliminated from the combined historical
results of operations for the year ended December 31, 1993, as these expenses do
not represent ongoing expenses of the Corporation. This charge reflected
management's estimates of additional loan loss reserve, systems conversion
costs, severance, legal and consulting expenses and other restructuring charges.
The pro forma information is intended for informational purposes only and is not
necessarily indicative of the future results of operations of the Corporation,
or the results of operations that would have actually occurred had the
acquisition been in effect for the periods presented.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(Unaudited)
Pro forma
combined
for the
year ended
(dollar amounts in millions, December 31,
except per share amounts) 1993 1992
- ---------------------------------------------------------
<S> <C> <C>
Net interest income $1,368 $1,310
Income before cumulative effect
of changes in accounting
principles 489 467
Net income 489 527
Earnings per share:
Income before cumulative effect
of changes in accounting
principles 6.48 6.36
Net income per common share 6.48 7.32
- ---------------------------------------------------------
</TABLE>
Pending Dreyfus Corporation Merger
On December 5, 1993, the Corporation entered into a definitive agreement to
merge with The Dreyfus Corporation, the sixth-largest mutual fund company in the
United States. The transaction will be accounted for as a pooling-of-interests.
Under the terms of the definitive agreement, Dreyfus shareholders will receive
.88017 shares of the Corporation's common stock for each share of Dreyfus common
stock outstanding.
At December 31, 1993, Dreyfus had approximately 37 million common shares
outstanding. In connection with the transaction, the Corporation expects to
record a one-time after-tax restructuring charge of approximately $73 million to
be recorded at closing, which is anticipated in mid-1994.
Completion of the merger is contingent upon the approval of the
shareholders of the Corporation and Dreyfus, subject to various regulatory
approvals and certain approvals by the shareholders of the mutual funds advised
by Dreyfus. Subsequent to the announcement of the proposed merger with Dreyfus,
public shareholders of Dreyfus commenced six purported class action suits in the
Supreme Court of the State of New York, County of New York, naming Dreyfus, the
Corporation and the individual directors of Dreyfus as defendants, with respect
to the transactions contemplated by the agreement to merge. The Corporation
believes that these complaints lack merit and intends to defend them vigorously.
At December 31, 1993, Dreyfus had approximately $80 billion of assets under
management and administration. Dreyfus' revenue for 1993 was $386 million and
net income was $99 million.
72
<PAGE> 57
22. MELLON BANK CORPORATION (PARENT CORPORATION)
The condensed financial statements for Mellon Bank
Corporation and its wholly owned financing subsidiary
are as follows:
Condensed Income Statement
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from bank subsidiaries $ 158 $130 $129
Dividends from nonbank subsidiaries 116 26 32
Interest revenue from bank subsidiaries 34 35 62
Interest revenue from nonbank subsidiaries 26 24 22
Dividends on GSNB senior preferred stock -- -- 4
Other revenue 2 -- 3
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 336 215 252
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense on commercial paper 6 6 13
Interest expense on notes and debentures 100 73 88
Operating expense 32 23 25
- ---------------------------------------------------------------------------------------------------------------------------
Total expense 138 102 126
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET
INCOME (LOSS) OF SUBSIDIARIES 198 113 126
Provision for income taxes 11 (20) (8)
Equity in undistributed net income (loss):
Bank subsidiaries 277 216 183
Nonbank subsidiaries (103) 88 (37)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME 361 437 280
Dividends on preferred stock 63 51 49
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 298 $386 $231
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Condensed Balance Sheet
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and money market investments with bank subsidiary $ 226 $ 324
Other money market investments 1 200
Securities available for sale 260 --
Loans and other receivables due from nonbank subsidiaries 486 424
Investment in bank subsidiaries 3,443 2,485
Investment in nonbank subsidiaries 270 119
Subordinated debt and other receivables due from bank subsidiaries 344 490
Other assets 33 23
- ---------------------------------------------------------------------------------------------------------------------
Total assets $5,063 $4,065
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Commercial paper $ 134 $ 179
Other liabilities 77 44
Notes and debentures (with original maturities over one year) 1,539 1,285
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 1,750 1,508
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' equity 3,313 2,557
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $5,063 $4,065
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS
22. MELLON BANK CORPORATION (PARENT CORPORATION) continued
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 361 $ 437 $ 280
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 20 8 9
Change in equity of subsidiaries from
undistributed net income after dividends (174) (304) (146)
Net decrease in accrued interest receivable 1 3 --
Net increase (decrease) in other operating
activities 49 18 (22)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 257 162 121
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in term deposits 199 (199) --
Net (increase) decrease in short-term deposits
with affiliate banks 103 83 (117)
Funds invested in securities (1,251) -- --
Proceeds from maturities of securities 849 -- --
Proceeds from sales of securities 142 -- --
Loans made to subsidiaries (1,066) (1,803) (781)
Principal collected on loans to subsidiaries 1,292 1,690 815
Cash paid in purchase of The Boston Company (1,291) -- --
Capital contributions to subsidiaries (5) (189) (78)
Decrease in investment in subsidiaries 300 20 --
Proceeds from the retirement of GSNB senior
preferred stock -- 9 16
Net increase in other investing activities (10) (9) --
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (738) (398) (145)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in commercial paper (45) (8) (75)
Repayments of long-term debt (306) (294) (357)
Net proceeds from issuance of long-term debt 545 497 439
Net proceeds from issuance of common and
preferred stock 502 221 325
Redemption of preferred stock (65) (55) (194)
Repurchase of common stock (54) -- --
Dividends paid on common and preferred stock (156) (125) (116)
Net increase in other financing activities 65 -- 2
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 486 236 24
- ---------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND DUE FROM BANKS:
Net change in cash and due from banks 5 -- --
Cash and due from banks at beginning of year -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 5 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
- ---------------------------------------------------------------------------------------------------------------------
Interest paid $ 109 $ 87 $ 94
Net income taxes paid (refunded) (34) (22) 13
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING TRANSACTIONS
- ---------------------------------------------------------------------------------------------------------------------
Purchase of The Boston Company:
Fair value of assets acquired, net of
liabilities assumed $ 1,443 $ -- $ --
Stock and warrants issued (152) -- --
- ---------------------------------------------------------------------------------------------------------------------
Cash paid $ 1,291 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE> 59
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, 1993 and 1992, 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, 1993.
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, 1993 and 1992, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1993, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick
Pittsburgh, Pennsylvania
January 13, 1994
75
<PAGE> 60
CONSOLIDATED BALANCE SHEET--AVERAGE
BALANCES AND INTEREST YIELDS/RATES
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1993
AVERAGE
AVERAGE YIELDS/
(dollar amounts in millions) BALANCE INTEREST RATES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks $ 1,592 $ 58 3.62%
Federal funds sold and securities purchased under
agreements to resell 1,800 54 3.02
Other money market investments 129 4 3.01
Trading account securities 269 15 5.71
Securities:
U.S. Treasury and agency securities 4,090 225 5.49
Obligations of states and political subdivisions 4 -- 4.75
Other 332 18 5.39
Loans, net of unearned discount 21,755 1,597 7.34
-------- -------
Total interest-earning assets 29,971 $1,971 6.58%
Cash and due from banks 2,164
Customers' acceptance liability 133
Premises and equipment 469
Net acquired property 198
Other assets 2,366
Reserve for credit losses (565)
-------------------------------------------------------------------------------------------
Total assets $34,736
-------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES, INTEREST-BEARING LIABILITIES:
REDEEMABLE Deposits in domestic offices:
PREFERRED STOCK Demand $ 2,034 $ 2 .11%
AND SHAREHOLDERS' Money market and other savings accounts 8,739 145 1.66
EQUITY Retail savings certificates 7,556 241 3.19
Negotiable certificates of deposit 224 17 7.40
Other time deposits 198 9 4.42
Deposits in foreign offices 1,024 40 3.89
-------- -------
Total interest-bearing deposits 19,775 454 2.29
Federal funds purchased and securities sold under
agreements to repurchase 1,096 33 3.01
U.S. Treasury tax and loan demand notes 224 6 2.85
Commercial paper 198 6 3.22
Other funds borrowed 540 34 6.31
Notes and debentures (with original maturities over
one year) 1,991 121 6.08
-------- -------
Total interest-bearing liabilities 23,824 $ 654 2.75%
Deposits in domestic offices--noninterest-bearing 6,728
Deposits in foreign offices--noninterest-bearing 8
--------
Total noninterest-bearing deposits 6,736
Acceptances outstanding 134
Other liabilities 870
-------------------------------------------------------------------------------------------
Total liabilities 31,564
-------------------------------------------------------------------------------------------
Redeemable preferred stock --
-------------------------------------------------------------------------------------------
Shareholders' equity 3,172
-------------------------------------------------------------------------------------------
Total liabilities, redeemable preferred stock and
shareholders' equity $34,736
-------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATES YIELD ON TOTAL INTEREST-EARNING ASSETS 6.58%
COST OF FUNDS SUPPORTING INTEREST-EARNING ASSETS 2.19
-------------------------------------------------------------------------------------------
NET INTEREST MARGIN:
TAXABLE EQUIVALENT BASIS 4.39%
WITHOUT TAXABLE EQUIVALENT INCREMENTS 4.36
-------------------------------------------------------------------------------------------
</TABLE>
Note: Interest and yields were calculated on a taxable equivalent basis at
rates approximating 35% in 1993 and 34% in all other years presented, 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 yields/rates.
76
<PAGE> 61
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1992 1991 1990
Average Average Average
Average yields/ Average yields/ Average yields/
balance Interest rates balance Interest rates balance Interest rates
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 837 $ 35 4.20% $ 733 $ 50 6.79% $1,383 $ 127 9.18%
788 27 3.47 605 35 5.76 1,076 92 8.51
38 1 3.47 6 -- 5.92 293 27 9.43
308 21 6.74 309 23 7.41 278 22 8.06
5,556 420 7.56 4,322 382 8.84 3,856 331 8.60
7 1 10.82 308 35 11.35 365 42 11.30
489 35 7.22 703 56 8.11 501 41 8.28
18,227 1,472 8.08 18,509 1,749 9.44 18,840 2,006 10.64
------ -------- ------ -------- ------ --------
26,250 $2,012 7.67% 25,495 $2,330 9.14% 26,592 $2,688 10.11%
1,973 1,813 1,866
115 187 305
442 427 445
371 312 163
1,327 1,357 1,319
(589) (541) (474)
- --------------------------------------------------------------------------------------------------------------
$29,889 $29,050 $30,216
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
$1,728 $ 40 2.31% $1,398 $ 57 4.07% $1,213 $ 54 4.46%
6,323 190 3.02 5,474 262 4.79 5,370 318 5.94
7,581 324 4.27 8,202 541 6.60 7,136 583 8.17
253 21 8.30 750 50 6.66 2,052 166 8.08
200 10 5.06 153 11 6.77 149 13 8.37
922 49 5.36 1,100 82 7.49 2,006 188 9.35
------ -------- ------ -------- ------ --------
17,007 634 3.73 17,077 1,003 5.87 17,926 1,322 7.37
1,623 56 3.46 2,333 131 5.62 2,680 220 8.21
664 23 3.42 664 36 5.50 430 34 7.94
173 6 3.70 222 13 6.04 357 29 8.21
440 33 7.47 350 29 8.01 287 30 10.28
1,365 94 6.88 1,448 117 8.08 1,722 153 8.90
------ -------- ------ -------- ------ --------
21,272 $ 846 3.98% 22,094 $1,329 6.01% 23,402 $1,788 7.64%
5,624 4,294 4,086
10 13 17
------ ------ ------
5,634 4,307 4,103
115 187 305
517 507 580
- --------------------------------------------------------------------------------------------------------------
27,538 27,095 28,390
- --------------------------------------------------------------------------------------------------------------
-- 51 94
- --------------------------------------------------------------------------------------------------------------
2,351 1,904 1,732
- --------------------------------------------------------------------------------------------------------------
$29,889 $29,050 $30,216
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
7.67% 9.14% 10.11%
3.23 5.21 6.73
- --------------------------------------------------------------------------------------------------------------
4.44% 3.93% 3.38%
4.39 3.82 3.26
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------
1989
Average
Average yields/
balance Interest rates
- -------------------------------------------
<S> <C> <C>
$2,886 $ 265 9.17%
2,827 264 9.34
491 31 6.45
233 21 8.88
2,313 179 7.74
379 43 11.22
606 54 8.92
17,958 2,004 11.16
------ -------
27,693 $2,861 10.33%
1,687
289
450
94
1,175
(833)
- -------------------------------------------
$30,555
- -------------------------------------------
- -------------------------------------------
$1,077 $ 50 4.61%
4,783 314 6.58
4,480 382 8.51
3,351 302 9.03
180 16 8.85
3,479 306 8.81
------ -------
17,350 1,370 7.90
3,862 357 9.25
335 30 9.10
526 49 9.18
357 32 8.82
1,762 165 9.38
------ ------
24,192 $2,003 8.28%
3,870
20
------
3,890
289
648
- -------------------------------------------
29,019
- -------------------------------------------
94
- -------------------------------------------
1,442
- -------------------------------------------
$30,555
- -------------------------------------------
- -------------------------------------------
10.33%
7.23
- -------------------------------------------
3.10%
2.96
- -------------------------------------------
</TABLE>
77
<PAGE> 62
PRINCIPAL LOCATIONS AND
OPERATING ENTITIES
BANKING SUBSIDIARIES
AND REGIONS
Mellon Bank Corporation operates three domestic banking subsidiaries: Mellon
Bank, N.A.; Mellon Bank (DE) National Association; and Mellon Bank (MD).
MELLON BANK, N.A. comprises six regions:
MELLON BANK-CENTRAL REGION serves consumer and small to mid-size commercial
markets in central Pennsylvania.
Headquarters:
State College, Pennsylvania
Chairman, President and CEO:
Ralph J. Papa
MELLON BANK-COMMONWEALTH REGION serves consumer and small to mid-size commercial
markets in south central Pennsylvania.
Headquarters:
Harrisburg, Pennsylvania
Chairman and CEO:
Stephen R. Burke
MELLON BANK-NORTHEASTERN REGION serves consumer and small to mid-size commercial
markets in northeastern Pennsylvania.
Headquarters:
Wilkes-Barre, Pennsylvania
Chairman, President and CEO:
Glenn Y. Forney
MELLON BANK-NORTHERN REGION serves consumer and small to mid-size commercial
markets in northwestern Pennsylvania.
Headquarters:
Erie, Pennsylvania
Chairman, President and CEO:
Robert D. Davis
MELLON BANK-WESTERN REGION serves consumer and small to mid-size commercial
markets in western Pennsylvania, and large commercial and financial institution
markets throughout the United States and in selected international markets.
Headquarters:
Pittsburgh, Pennsylvania
Mellon Bank, N.A. Chairman,
President and CEO:
Frank V. Cahouet
MELLON PSFS*-In the Philadelphia area, MELLON BANK, N.A. uses the name "MELLON
PSFS" and serves consumer and small commercial markets in eastern Pennsylvania
and mid-size customers in eastern Pennsylvania and portions of New Jersey.
Headquarters:
Philadelphia, Pennsylvania
Chairman and CEO:
Thomas F. Donovan
MELLON BANK (DE) NATIONAL ASSOCIATION serves consumer and small to mid-size
commercial markets throughout Delaware. Also provides nationwide cardholder
processing services.
Headquarters:
Wilmington, Delaware
Chairman, President and CEO:
Warner S. Waters, Jr.
MELLON BANK (MD) serves consumer and small to mid-size commercial
markets throughout Maryland.
Headquarters:
Rockville, Maryland
Chairman, President and CEO:
Kenneth R. Dubuque
OTHER DOMESTIC AND
INTERNATIONAL LOCATIONS
AFCO CREDIT CORPORATION, and its Canadian affiliate CAFO, Inc., is the nation's
largest insurance premium financing company with 25 offices in the United States
and Canada.
Location: New York, New York
THE ASSET BASED LENDING GROUP markets a broad range of commercial finance
products and banking services to corporations with borrowing requirements that
exceed $2 million in the Central Atlantic region and exceed $5 million beyond
that region.
Locations: Chicago, Illinois
Rockville, Maryland
Edison, New Jersey
Cleveland, Ohio
Philadelphia, Pennsylvania
Pittsburgh, Pennsylvania
THE BOSTON COMPANY, INC. is a leading provider of institutional trust and
custody, institutional asset management, private asset management and mutual
fund administration services.
Locations: Boston, Massachusetts
Pittsburgh, Pennsylvania
THE BOSTON COMPANY ADVISORS, INC. is the legal entity providing custody and
administrative services to registered investment companies (mutual funds).
Location: Boston, Massachusetts
THE BOSTON COMPANY INSTITUTIONAL INVESTORS, INC. provides institutional
investment management services.
Locations: Greenbrae, California
Boston, Massachusetts
*Mellon PSFS is a service mark of Mellon Bank, N.A.
78
<PAGE> 63
BOSTON SAFE DEPOSIT AND TRUST COMPANY
is the bank subsidiary affiliated with The Boston Company, offering
trust and custody administration for institutional and private clients, private
asset management and jumbo mortgage lending.
Locations: Los Angeles, California
Newport Beach, California
Palo Alto, California
San Francisco, California
Medford, Massachusetts
Boston, Massachusetts
New York, New York
McLean, Virginia
London, England
CCF-MELLON PARTNERS, a joint venture with Credit Commercial de France, markets
investment advisory and discretionary money management services in North America
and Europe.
Location: Pittsburgh, Pennsylvania
THE CAPITAL MARKETS REPRESENTATIVE OFFICE markets credit and other banking
services to broker-dealers.
Location: New York, New York
COMMUNITY DEVELOPMENT CORPORATION, one of 100 bank CDCs chartered nationwide,
supports development of affordable housing and of minority-
owned businesses in low-and moderate-income areas of Delaware, Maryland and
Pennsylvania.
Location: Pittsburgh, Pennsylvania
CONSUMER REPRESENTATIVE OFFICES market credit products to consumers, including
home equity credit lines and loans.
Locations: Baltimore, Maryland
Columbus, Ohio
CORPORATE BANKING REPRESENTATIVE OFFICES market credit and related services to
large corporate customers, exclusive of financial institutions.
Locations: Los Angeles, California
Chicago, Illinois
Boston, Massachusetts
New York, New York
Philadelphia, Pennsylvania
Pittsburgh, Pennsylvania
Houston, Texas
FRANKLIN PORTFOLIO ASSOCIATES TRUST provides investment management services for
employee benefit funds and institutional clients.
Location: Boston, Massachusetts
GLOBAL CASH MANAGEMENT REGIONAL OPERATING AND MARKETING SITES provide cash
management operating services to corporations and financial institutions.
Locations: Los Angeles, California
Atlanta, Georgia
Chicago, Illinois
Boston, Massachusetts
Philadelphia, Pennsylvania
Pittsburgh, Pennsylvania
Dallas, Texas
London, England
INTERNATIONAL BRANCH OFFICES provide international banking services, including
trade banking, demand deposits, loans, capital markets products and foreign
exchange to domestic and international customers.
Locations: London, England
Grand Cayman, British
West Indies
INTERNATIONAL REPRESENTATIVE OFFICES serve as a liaison between the
Corporation's banking subsidiaries and overseas customers.
Locations: Tokyo, Japan
Hong Kong
INVESTNET(R) CORPORATION provides a full range of securities brokerage services
for individuals and institutional clients.
Location: Pittsburgh, Pennsylvania
THE LEASING GROUP markets a broad range of leasing and lease-related services to
corporations throughout the United States with annual sales of more than $250
million, as well as to corporations in the Central Atlantic region with annual
sales between $10 million and $250 million.
Locations: Chicago, Illinois
Pittsburgh, Pennsylvania
MELLON ACCOUNTING SERVICES, INC. provides operations outsourcing, trust
accounting software and institutional custody services to the domestic and
international financial services industry.
Locations: Chicago, Illinois
Pittsburgh, Pennsylvania
MELLON BANK CANADA is a chartered Canadian bank providing services to the
corporate market throughout Canada.
Location: Toronto, Ontario, Canada
MELLON BOND ASSOCIATES provides structured management for bond portfolios of
large national institutional clients.
Location: Pittsburgh, Pennsylvania
79
<PAGE> 64
PRINCIPAL LOCATIONS AND
OPERATING ENTITIES
MELLON CAPITAL MANAGEMENT
CORPORATION provides portfolio and investment management services.
Location: San Francisco, California
MELLON EQUITY ASSOCIATES provides specialized equity management services to the
national pension and public fund markets.
Location: Pittsburgh, Pennsylvania
MELLON EUROPE LTD., a United Kingdom-chartered bank, provides trust and cash
management services in Europe.
Location: London, England
MELLON/MCMAHAN REAL ESTATE
ADVISORS, INC. provides real estate investment management and consulting
services.
Locations: Phoenix, Arizona
San Francisco, California
Boston, Massachusetts
MELLON SECURITIES TRANSFER SERVICES provides securities transfer and shareholder
services.
Locations: Ridgefield Park, New Jersey
Pittsburgh, Pennsylvania
MELLON SECURITIES TRUST COMPANY
provides securities processing and custody services.
Location: New York, New York
MELLON TRUST* is the umbrella name under which the Corporation provides various
trust and investment services to individuals, institutions, corporations and
public entities.
MIDDLE MARKET BANKING REPRESENTATIVE OFFICES market a full range of financial
and banking services to commercial customers with annual sales between $10
million and $250 million.
Locations: Los Angeles, California
Wilmington, Delaware
Rockville, Maryland
Boston, Massachusetts
Cherry Hill, New Jersey
Edison, New Jersey
Buffalo, New York
Altoona, Pennsylvania
Erie, Pennsylvania
Harrisburg, Pennsylvania
Philadelphia, Pennsylvania
Pittsburgh, Pennsylvania
Plymouth Meeting,
Pennsylvania
State College, Pennsylvania
Wilkes-Barre, Pennsylvania
MELLON MORTGAGE COMPANY focuses on the origination, purchasing and servicing of
residential mortgage loans as well as the brokering and servicing of income
property mortgage loans.
Locations: Denver, Colorado
Cleveland, Ohio
Houston, Texas
THE NETWORK SERVICES DIVISION provides electronic funds transfer services,
including automated teller machine processing and full-service merchant payment
systems, to financial institutions and corporations.
Location: Pittsburgh, Pennsylvania
PARETO PARTNERS provides investment management services for employee benefit
funds and institutional and high net worth clients.
Locations: London, England
New York, New York
PREMIER UNIT TRUST ADMINISTRATION
is a leading servicer of unit trusts, the British equivalent of mutual funds, in
the United Kingdom.
Location: Brentwood, Essex, England
THE R-M TRUST COMPANY, a joint venture with Royal Trustco Limited of Toronto,
provides stock transfer and indenture trustee services to Canadian clients.
Locations: Calgary, Alberta, Canada
Vancouver, British Columbia,
Canada
Winnipeg, Manitoba, Canada
Halifax, Nova Scotia, Canada
Toronto, Ontario, Canada
Montreal, Quebec, Canada
Regina, Saskatchewan, Canada
ADDITIONAL LOCATIONS
Through Mellon Bank-Central Region, Mellon Bank-Commonwealth Region, Mellon
Bank-Northeastern Region, Mellon Bank-Northern Region, Mellon Bank-Western
Region, Mellon PSFS, Mellon Bank (DE) National Association and
Mellon Bank (MD), the Corporation operates 631 domestic retail banking
locations, including 432 branch offices. Mortgage Banking and the Mellon
Mortgage Company operate 25 mortgage banking offices in 10 states.
* Mellon Trust is a service mark of Mellon Bank Corporation.
Principal Locations and Operating Entities as of December 31, 1993
80
<PAGE> 65
<TABLE>
<CAPTION>
DIRECTORS AND SENIOR MANAGEMENT
COMMITTEE
<S> <C> <C>
DIRECTORS
MELLON BANK CORPORATION
Burton C. Borgelt (5)(6) Pemberton Hutchinson (3)(5)(6) Richard M. Smith (1)(2)(3)(5)
Chairman Chairman Retired Vice Chairman
Dentsply International, Inc. Westmoreland Coal Company Bethlehem Steel Corporation
Manufacturer of artificial teeth Coal mining company Integrated steel producer engaged
and consumable dental products primarily in the manufacture and
Rotan E. Lee sale of steel and steel products
Carol R. Brown (6) Partner
President Fox, Rothschild, W. Keith Smith (1)
The Pittsburgh Cultural Trust O'Brien & Frankel Vice Chairman
Cultural and economic growth Full service Law firm encompass- Mellon Bank Corporation and
assistance in downtown Pittsburgh ing corporate law to litigation Mellon Bank, N.A.
Chairman and Chief
Frank V. Cahouet (1) John C. Marous (1)(3)(4) Executive Officer
Chairman, President and Retired Chairman and The Boston Company
Chief Executive Officer Chief Executive Officer
Mellon Bank Corporation and Westinghouse Electric Joab L. Thomas
Mellon Bank, N.A. Corporation President
Diversified provider of electronic The Pennsylvania State
J. W. Connolly (2)(4) products and services University
Retired Senior Vice President A major public research
H. J. Heinz Company Andrew W. Mathieson (1)(3)(4) university
Food Manufacturer Executive Vice President
Richard K. Mellon and Sons Wesley W. von Schack (1)(2)(6)
Charles A. Corry (1)(2)(4) Investments and philanthropy Chairman, President and
Chairman and Chief Executive Officer
Chief Executive Officer Robert Mehrabian DQE
USX Corporation President Energy services holding company
Diversified company engaged Carnegie Mellon University
principally in the energy A private co-educational William J. Young(4)(5)
and steel businesses research institution Retired President
Portland Cement Association
C. Frederick Fetterolf (4)(6) Seward Prosser Mellon Trade association for the Portland
Retired President and President cement industry
Chief Operating Officer Richard K. Mellon and Sons
Aluminum Company of America Investments and philanthropy
Production and sale of alumina and CHAIRMEN EMERITI
chemical products, primary David S. Shapira (1)(2)(5) J. David Barnes
aluminum and aluminum mill Chief Executive Officer William B. Eagleson, Jr.
products Giant Eagle, Inc. James H. Higgins
Retail grocery store chain Nathan W. Pearson
Ira J. Gumberg (1)(2)
President and H. Robert Sharbaugh (1)(2)(4) ADVISORY BOARD
Chief Executive Officer Retired Chairman John M. Arthur
J. J. Gumberg Co. Sun Company, Inc. Howard O. Beaver, Jr.
Real estate management and Energy Alexander W. Calder
development Edward Donley
H. Bryce Jordan
Masaaki Morita
Nathan W. Pearson
Leon H. Sullivan
(1) Executive Committee
(2) Audit Committee
(3) Nominating Committee
(4) Human Resources Committee
(5) Trust and Investment Committee
(6) Community Responsibility Committee
</TABLE>
Directors as of January 1, 1994
81
<PAGE> 66
<TABLE>
<CAPTION>
DIRECTORS AND SENIOR MANAGEMENT
COMMITTEE
<S> <C> <C> <C>
REGIONAL SUBSIDIARY
BOARDS BOARDS
MELLON BANK- MELLON BANK- MELLON BANK-
CENTRAL REGION NORTHERN REGION NORTHEASTERN REGI0N MELLON BANK(DE)
Frederick K. Beard James D. Berry III Joseph B. Conahan, Jr. John S. Barry
James E. Davis Conrad A. Conrad Frank J. Dracos Robert D. Burris
Galen E. Dreibelbis Eugene Cross Alan J. Finlay Robert C. Cole, Jr.
John Lloyd Hanson Robert D. Davis Glenn Y. Forney Carl DeMartino
Carol Herrmann William S. DeArment R. Dale Hughes Arden B. Engebretsen
Daniel B. Hoover Steven G. Elliott Thomas M. Jacobs Robert F. Gurnee
S. Wade Judy John J. Finn Allan M. Kluger Garrett B. Lyons
Michael M. Kranich, Sr. M. Fletcher Gornall Richard F, Laux Martin G. McGuinn
Edwin E. Lash Robert G. Liptak, Jr. John L. McDowell III W. Charles Paradee, Jr.
Dale W. Miller Gary W. Lyons Joseph R. Nardone Bruce M. Stargatt
Robert W. Neff Charles J. Myron Joseph F. Palchak, Jr. Warner S. Waters, Jr.
Ralph J. Papa Ruthann Nerlich Richard L. Pearsall
Nicholas Pelick John S. Patton Joseph L. Persico MELLON BANK (MD)
Alvin L. Snowiss Paul D. Shafer, Jr. Arthur K. Ridley Michael A. Besche
Robert M. Welham Cyrus R. Wellman Phyllis Rubin Lawrence Brown, Jr.
Keith P. Russell Thomas F. Donovan
MELLON BANK- MELLON BANK- Rhea P. Simms Kenneth R. Dubuque
COMMONWEALTH REGION WESTERN REGION Albert R. Hinton
Glenn R. Aldinger Burton C. Borgelt MELLON PSFS Norman Robertson
Burton C. Borgelt Carol R. Brown Paul C. Brucker
Stephen R. Burke Frank V. Cahouet Frank J. Coyne THE BOSTON COMPANY,
Jack P. Cook J. W. Connolly Thomas F. Donovan INC. AND BOSTON
Thomas F. Donovan Charles A. Corry Hiliary H. Holloway SAFE DEPOSIT AND
Ruth Leventhal C. Frederick Fetterolf Roger S. Hillas TRUST COMPANY
Henry E. L. Luhrs Ira J. Gumberg Pemberton Hutchinson Dwight L. Allison, Jr.*
Horace G. McCarty Pemberton Hutchinson Rotan E. Lee Robert M. Boyles
R. Wesley Shope Rotan E. Lee Roland Morris Christopher M. Condron
Gregory L. Sutliff John C. Marous Francis R. Strawbridge III James E. Conway*
Andrew W. Mathieson James A. Sutton Charles C. Cunningham, Jr.
Robert Mehrabian Steven A. Van Dyck Hans H. Estin
Seward Prosser Mellon William J. Young Avram L. Goldberg
David S. Shapira Lawrence S. Kash
H. Robert Sharbaugh Robert P. Mastrovita
Richard M. Smith Jeffrey L. Morby
W. Keith Smith George Putnam
Joab L. Thomas Charles W. Schmidt
Wesley W. von Schack W. Keith Smith
William J. Young C. Vincent Vappi
*Directors of The Boston Company, Inc. only
Regional Boards as of February 15, 1994
</TABLE>
82
<PAGE> 67
<TABLE>
<CAPTION>
SENIOR MANAGEMENT COMMITTEE
<S> <C> <C> <C>
OFFICE OF THE CHAIRMAN** SENIOR MANAGERS** Darryl J. Fluhme Robert W. Stasik
Frank V. Cahouet Frederick K. Beard Executive Vice President Executive Vice President
Chairman, President and Executive Vice President Institutional Trust Global Cash Management
Chief Executive Officer and Chief Credit Officer Services
Wholesale Banking Jamie B. Stewart, Jr.
Thomas F. Donovan Richard L. Holl Executive Vice President
Vice Chairman Richard B. Berner Executive Vice President Global Corporate Banking
Chairman and Senior Vice President Real Estate Credit Recovery
Chief Executive Officer Economics Donald W. Titzel
Mellon PSFS Chief Economist Lawrence S. Kash Executive Vice President
Executive Vice President Retail Financial Services
Steven G. Elliott Robert M. Boyles Investment Services
Vice Chairman Executive Vice President President D. Bruce Wheeler
Chief Financial Officer Global Asset Management The Boston Company Executive Vice President
and Treasurer Retail Financial Services
Larry F. Clyde Daniel M. Kilcullen
Richard A. Gaugh Executive Vice President Executive Vice President Sherman White
Vice Chairman Capital Markets Global Securities Executive Vice President
Special Banking Services Services Credit Recovery
Sarah B. Collins
Martin G. McGuinn Senior Vice President Allan C. Kirkman Allan P. Woods
Vice Chairman Credit Review Executive Vice President Executive Vice President
Retail Financial Services Real Estate Finance Mellon Information Services
Christopher M. Condron
Jeffrey L. Morby Executive Vice President Jeffery L. Leininger OTHER CORPORATE OFFICERS
Vice Chairman Private Asset Management Executive Vice President Michael E. Bleier
Wholesale Banking and Institutional Trust Middle Market Banking General Counsel
President
Keith P. Russell Boston Safe Deposit and David R. Lovejoy James M. Gockley
Vice Chairman Trust Company Executive Vice President Secretary
Credit Policy Strategic Planning
Chief Credit Officer Kenneth R. Dubuque Michael K. Hughey
Executive Vice President J. David Officer Corporate Controller
W. Keith Smith Mellon Bank, N.A. Executive Vice President
Vice Chairman Chairman, President and Mellon Private Asset
Mellon Trust Chief Executive Officer Management
Chairman and Chief Mellon Bank (MD)
Executive Officer Donald J. O'Reilly
The Boston Company Senior Vice President
Auditing
Corporate Chief Auditor
D. Michael Roark
Executive Vice President
Human Resources
Philip R. Roberts
Executive Vice President
Mellon Global Asset
Management
Peter Rzasnicki
Executive Vice President
Mortgage Banking and
Insurance Premium Finance
William J. Stallkamp
Executive Vice President
Mellon Bank, N.A.
Director
Wholesale Banking, Trust
and Service Products
Mellon PSFS
**As of February 1, 1994
</TABLE>
83
<PAGE> 68
<TABLE>
<CAPTION>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------------------------------------
<S> <C>
ANNUAL MEETING The Annual Meeting of Shareholders will be held in Room 201 of the Pennsylvania
Convention Center, northeast corner of 12th and Arch Streets, Philadelphia,
Pennsylvania, on Tuesday, April 19, 1994, at 10 a.m.
- --------------------------------------------------------------------------------------------------------------
EXCHANGE LISTING Mellon Bank Corporation's common, Series H preferred, Series I preferred, Series J
preferred and Series K preferred stock are traded on the New York Stock Exchange.
The trading symbols are MEL (common stock), and MEL Pr H, MEL Pr I, MEL Pr J and
MEL Pr K. The Transfer Agent and Registrar is Mellon Bank, N.A., P.O. Box 444,
Pittsburgh, PA 15230-0444.
- --------------------------------------------------------------------------------------------------------------
STOCK PRICES Current prices for Mellon Bank Corporation's common and preferred stocks can be
obtained from any touch-tone telephone by dialing (412) 236-0834 (in Pittsburgh)
or 1 800 648-9496 (outside Pittsburgh). When prompted to "enter I.D.," press MEL#
(or 635#) to receive the information. This service is available free of charge, 24
hours a day, seven days a week, from anywhere in the continental United States.
- --------------------------------------------------------------------------------------------------------------
DIVIDEND PAYMENTS Subject to approval of the board of directors, dividends are paid on Mellon Bank
Corporation's common and preferred stocks on or about the 15th day of February,
May, August and November.
- --------------------------------------------------------------------------------------------------------------
DIVIDEND Under the Dividend Reinvestment and Common Stock Purchase Plan, registered holders
REINVESTMENT AND of Mellon Bank Corporation's common stock may purchase additional common shares at
COMMON STOCK the market value for such shares through reinvestment of common dividends and/or
PURCHASE PLAN optional cash payments. Purchases of shares through optional cash payments are
subject to limitations. Plan details are in a Prospectus dated December 15,1993,
which may be obtained from the Secretary of the Corporation.
- --------------------------------------------------------------------------------------------------------------
ELECTRONIC DEPOSIT Registered holders may have quarterly dividends paid on Mellon Bank Corporation's
OF DIVIDENDS common and preferred stocks electronically deposited to their checking or savings
account, free of charge. If you wish to have your dividends electronically
deposited, please write to Mellon Bank Corporation, P.O. Box 590, Ridgefield Park,
NJ 07660-9940. If you need more information, please call (412) 236-8000.
- --------------------------------------------------------------------------------------------------------------
FORM 10-K A copy of the Corporation's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, will be furnished, free of charge, upon
written request to the Secretary of the Corporation, 1820 One Mellon Bank Center,
Pittsburgh, PA 15258-0001.
- --------------------------------------------------------------------------------------------------------------
REGULATORY A copy of the Corporation's Management Report on internal controls, as filed with
the appropriate regulatory agencies, will be furnished, free of charge, upon
written request to the Secretary of the Corporation, 1820 One Mellon Bank Center,
Pittsburgh, PA 15258-0001.
- --------------------------------------------------------------------------------------------------------------
PHONE CONTACTS Corporate Communications (412) 236-1264
Dividend Reinvestment Plan (412) 236-8000
Investor Relations (412) 234-5601
Publication requests (412) 234-8252
Stock Transfer Agent (412) 236-8000
- --------------------------------------------------------------------------------------------------------------
ELIMINATION OF If you receive duplicate mailings at one address, or if more than one person in
DUPLICATE your household receives Mellon materials and you wish to discontinue such
MAILINGS mailings, please write to Mellon Bank Corporation, P.O. Box 590, Ridgefield Park,
NJ 07660-9940, stating your full name and address the way it appears on your
account and explaining your request. By doing so, you will enable the Corporation
to avoid unnecessary duplication of effort and related costs. If you need more
information, please call (412) 236-8000.
- --------------------------------------------------------------------------------------------------------------
CHARITABLE A report on Mellon's comprehensive community involvement, including charitable
CONTRIBUTIONS contributions, is available by calling (412) 234-8252.
----------------------------------------------------------------------------------
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.
</TABLE>
84
<PAGE> 69
Appendix to Graphic Material
Graphic material has been omitted from Exhibit 13.1. The description of the
omitted graphic material is in the appropriate section of Exhibit 13.1 as
listed below:
COMPONENTS OF REVENUE chart in the Overview section on page 18
CREDIT QUALITY EXPENSE chart in the Credit Quality expense section on page 22
TRUST ASSETS UNDER MANAGEMENT AND CUSTODY chart in the Noninterest Revenue
section on page 23
SHAREHOLDERS' EQUITY chart in the Capital section on page 27
TOTAL COMMON EQUITY TO ASSETS AND TANGIBLE COMMON EQUITY TO ASSETS chart in the
Capital section on page 28
NONPERFORMING ASSETS AS A PERCENTAGE OF LOANS AND ACQUIRED ASSETS chart in the
Nonperforming assets section on page 37
<PAGE> 70
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this Amendment on Form 10-K/A to
its Annual Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Mellon Bank Corporation
(Registrant)
By: /s/ Steven G. Elliott
--------------------------
Steven G. Elliott
Vice Chairman, Chief Financial
Officer and Treasurer
(Duly Authorized Officer and
Principal Financial Officer
of the Registrant)
DATED: April 4, 1994
