<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-7410
MELLON BANK CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code -- (412) 234-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding as of
Class June 30, 1996
----- -------------
<S> <C>
Common Stock, $.50 par value 130,069,111
</TABLE>
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<PAGE> 2
TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
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<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
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Financial Highlights 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2) 3
Financial Statements (Item 1):
Consolidated Balance Sheet 37
Consolidated Income Statement 38
Consolidated Statement of Cash Flows 40
Consolidated Statement of Changes in Shareholders' Equity 41
Notes to Financial Statements 42
Selected Statistical Information:
Consolidated Balance Sheet - Average Balances and Interest Yields/Rates 46
Deposits 48
Part II - Other Information
- ------------------------------
Legal Proceedings (Item 1) 48
Submission of Matters to a Vote of Security Holders (Item 4) 48
Exhibits and Reports on Form 8-K (Item 6) 49
Signature 50
Corporate Information 51
Index to Exhibits 52
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
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FINANCIAL HIGHLIGHTS Three months Six months
ended June 30, ended June 30,
(dollar amounts in millions, except per share amounts) 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Net income $ 179 $ 172 $ 358 $ 342
Net income applicable to common stock 169 162 338 322
Tangible net income applicable to common stock (a) 187 181 375 359
Dividends paid on common stock 79 74 154 140
Return on common shareholders' equity (b) 20.4% 17.5% 20.0% 17.5%
Return on tangible common shareholders' equity (a)(b) 31.3 26.6 30.7 26.8
Return on assets (b) 1.70 1.75 1.73 1.76
Return on tangible assets (a)(b) 1.92 1.99 1.96 2.00
Efficiency ratio 64 64 64 63
Efficiency ratio excluding amortization of intangibles 61 61 62 60
Pretax operating margin (c) 34 35 33 35
Average common shares and equivalents
outstanding (in thousands) (d) 133,229 148,055 134,869 148,398
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PER COMMON SHARE
Net income (primary) $ 1.26 $ 1.09 $ 2.50 $ 2.17
Net income (fully diluted) 1.26 1.09 2.50 2.16
Dividends paid .60 .50 1.15 .95
Closing common stock price 57.00 41.625 57.00 41.625
Book value at quarter-end 25.61 25.59 25.61 25.59
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BALANCES AT JUNE 30 1996 1995
Loans $27,356 $27,765
Total assets 42,769 40,016
Deposits 31,704 26,807
Common shareholders' equity 3,332 3,643
Market capitalization 7,414 5,925
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CAPITAL RATIOS AT JUNE 30 1996 1995
Common shareholders' equity to assets 7.79% 9.10%
Tangible common shareholders' equity to assets 5.79 6.78
Total shareholders' equity to assets 8.81 10.19
Tier I capital 7.51 8.98
Total (Tier I plus Tier II) capital 11.89 12.31
Leverage capital 7.24 8.32
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</TABLE>
(a) See page 5 for a definition of these ratios.
(b) Annualized.
(c) Calculated on a taxable equivalent basis.
(d) At June 30, 1996, common stock and stock equivalents totaled 132.0 million
shares.
NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS.
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
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Common dividend increase
On April 16, 1996, the Corporation announced a 9% increase in the quarterly
common dividend to $.60 per common share. The increased dividend was paid on
May 15, 1996, to shareholders of record on April 30, 1996. This is the fifth
quarterly common dividend increase that the Corporation has announced since the
beginning of 1994, resulting in a total common dividend per share increase of
137%.
Repurchase of common stock
In May 1996, the board of directors of the Corporation authorized the
repurchase of up to 5 million shares of common stock. This repurchase program
is in addition to the 3.5 million share repurchase program announced in the
first quarter of 1996. At June 30, 1996, the Corporation had completed the 3.5
million share repurchase program and had repurchased .2 million shares under
the 5 million share repurchase program. Since the beginning of 1995, the
Corporation has repurchased 21 million common shares, prior to any reissuances,
as well as warrants for 4.5 million shares of common stock. At June 30, 1996,
common stock and stock equivalents totaled 132.0 million shares.
3
<PAGE> 5
OVERVIEW
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The Corporation recorded earnings per common share of $1.26 in the second
quarter of 1996, an increase of 16% compared with $1.09 per common share in the
second quarter of 1995. Net income applicable to common stock was $169 million
in the second quarter of 1996, compared with $162 million in the prior-year
period. Annualized return on common shareholders' equity and return on assets
were 20.4% and 1.70%, respectively, in the second quarter of 1996, compared
with 17.5% and 1.75%, respectively, in the second quarter of 1995.
Earnings per common share in the second quarter of 1996 reflects the 1995 and
1996 repurchases of 21 million common shares, prior to any reissuances, as well
as the repurchase of warrants for 4.5 million common shares. After giving
effect to net repurchases of approximately $760 million of common shares and
warrants outstanding, valued at the short-term funding rate, the lower share
count increased earnings per share 7%, while ongoing business growth increased
earnings per share 9%.
Net interest revenue was $372 million in the second quarter of 1996, a decrease
of $13 million, or 4%, from $385 million in the prior-year period. This
reduction resulted primarily from the credit card and home equity loan
securitizations and the repurchase of common shares and warrants. Fee revenue
was $474 million, an increase of $69 million, or 17%, from $405 million in the
second quarter of 1995. The increase in fee revenue was attributable to higher
institutional trust fees and mutual fund management revenue, higher mortgage
servicing fees, increased credit card revenue and a gain on a partial sale of
an equity interest. The increase in credit card revenue resulted from the
credit card securitization.
Operating expense before net revenue from acquired property for the second
quarter of 1996 was $541 million, an increase of $33 million, or 7%, from $508
million in the second quarter of 1995. The increase resulted primarily from
higher staff expense and higher amortization expense from purchased mortgage
servicing rights, offset in part by lower FDIC deposit insurance assessment
expense.
Credit quality expense was $24 million in the second quarter of 1996, compared
with $12 million in the second quarter of 1995. This increase resulted from a
$7 million decrease in net revenue from acquired property and a $5 million
increase in the provision for credit losses. Net credit losses were $26 million
in the second quarter of 1996, compared with $46 million in the second quarter
of 1995, primarily as a result of lower credit card and commercial loan net
credit losses.
Nonperforming assets totaled $203 million at June 30, 1996, the lowest level
since 1982, compared with $250 million at March 31, 1996, and $276 million at
June 30, 1995. At June 30, 1996, the Corporation's ratio of nonperforming
assets to total loans and net acquired property was .74%, compared with .93% at
March 31, 1996, and .99% at June 30, 1995.
The Corporation's ratio of common shareholders' equity to assets was 7.79% at
June 30, 1996. The Tier I, Total and Leverage capital ratios were 7.51%, 11.89%
and 7.24%, respectively, at June 30, 1996, well in excess of the minimum
required ratios.
For the first six months of 1996, the Corporation recorded earnings per common
share of $2.50 and net income applicable to common stock of $338 million,
compared with $2.17 per common share and $322 million for the first six months
of 1995. Annualized return on common shareholders' equity and return on assets
were 20.0% and 1.73% in the first six months of 1996, compared with 17.5% and
1.76%, respectively, in the first six months of 1995.
4
<PAGE> 6
TANGIBLE OPERATING RESULTS
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Except for the merger with Dreyfus, which was accounted for under the "pooling
of interests" method, the Corporation has been required to account for business
combinations under the "purchase" method of accounting. The purchase method
results in the recording of goodwill and other identified intangibles that are
amortized as noncash charges in future years into operating expense. Had the
Corporation accounted for these business combinations under the pooling of
interests method, these intangibles and their related amortization would not
have been recorded. The tangible operating results are shown in the table
below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions, Three months Six months
common shares in thousands, ended June 30, ended June 30,
ratios annualized) 1996 1995 Change 1996 1995 Change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income applicable to common stock $ 169 $ 162 $ 7 $ 338 $ 322 $ 16
After tax impact of amortization of
intangibles from purchase acquisitions 18 19 (1) 37 37 -
- ------------------------------------------------------------------------------------------------------------------------------
Tangible net income applicable
to common stock $ 187 $ 181 $ 6 $ 375 $ 359 $ 16
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Average common equity $ 3,327 $ 3,726 $ (399) $ 3,393 $ 3,713 $ (320)
Average goodwill and other
identified intangibles 923 1,004 (81) 934 1,015 (81)
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Average tangible common equity $ 2,404 $ 2,722 $ (318) $ 2,459 $ 2,698 $ (239)
Return on tangible common equity 31.3% 26.6% 470 bp 30.7% 26.8% 390 bp
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Average total assets $42,096 $39,370 $2,726 $41,472 $39,130 $2,342
Average goodwill and other
identified intangibles 923 1,004 (81) 934 1,015 (81)
- -------------------------------------------------------------------------------------------------------------------------------
Average tangible assets $41,173 $38,366 $2,807 $40,538 $38,115 $2,423
Return on tangible assets 1.92% 1.99% (7) bp 1.96% 2.00% (4) bp
- -------------------------------------------------------------------------------------------------------------------------------
Average common shares and
equivalents outstanding (primary) 133,229 148,055 (14,826) 134,869 148,398 (13,529)
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</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
BUSINESS SECTORS
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FOR THE THREE MONTHS ENDED JUNE 30,
Consumer Corporate/Institutional
(dollar amounts in millions, Investment Services Banking Services Investment Services Banking Services
averages in billions) 1996 1995 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $108 $ 92 $ 351 $ 336 $261 $233 $ 101 $ 99
Credit quality expense (revenue) - - 26 35 - - (1) (4)
Operating expense 70 64 232 216 198 182 38 39
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Income before taxes 38 28 93 85 63 51 64 64
Income taxes 15 11 34 32 25 20 22 23
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Net income $ 23 $ 17 $ 59 $ 53 $ 38 $ 31 $ 42 $ 41
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Tangible net income $ 23 $ 18 $ 70 $ 63 $ 45 $ 37 $ 42 $ 42
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Average assets $0.3 $0.3 $23.2 $21.7 $1.5 $1.8 $14.5 $13.0
Average common equity $0.2 $0.2 $ 1.2 $ 1.1 $0.5 $0.4 $ 1.3 $ 1.1
Return on common
shareholders' equity (a) 52% 40% 20% 19% 28% 28% 13% 15%
Return on assets (a) NM NM 1.03% .98% NM NM 1.14% 1.26%
Pretax operating margin 34% 31% 27% 25% 24% 22% 63% 64%
Pretax operating margin
excluding amortization of
intangibles 35% 31% 30% 29% 27% 25% 65% 66%
Efficiency ratio excluding
amortization of intangibles 65% 69% 62% 60% 73% 75% 36% 38%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
<TABLE>
<CAPTION>
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FOR THE SIX MONTHS ENDED JUNE 30,
Consumer Corporate/Institutional
(dollar amounts in millions, Investment Services Banking Services Investment Services Banking Services
averages in billions) 1996 1995 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $211 $184 $ 717 $ 669 $503 $466 $ 206 $ 195
Credit quality expense (revenue) - - 49 64 - - - (4)
Operating expense 139 127 474 423 393 366 78 78
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Income before taxes 72 57 194 182 110 100 128 121
Income taxes 29 23 71 70 44 40 45 43
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Net income $ 43 $ 34 $ 123 $ 112 $ 66 $ 60 $ 83 $ 78
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Tangible net income $ 44 $ 35 $ 144 $ 133 $ 79 $ 72 $ 85 $ 80
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Average assets $0.3 $0.3 $22.8 $21.5 $1.6 $1.6 $14.2 $13.1
Average common equity $0.2 $0.2 $ 1.2 $ 1.1 $0.5 $0.4 $ 1.2 $ 1.1
Return on common
shareholders' equity (a) 51% 40% 21% 20% 25% 28% 13% 15%
Return on assets (a) NM NM 1.09% 1.06% NM NM 1.17% 1.19%
Pretax operating margin 34% 31% 27% 27% 22% 21% 62% 62%
Pretax operating margin
excluding amortization of
intangibles 35% 32% 31% 31% 25% 25% 64% 64%
Efficiency ratio excluding
amortization of intangibles 65% 69% 62% 59% 75% 75% 36% 38%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
Note: The tables above and discussion that follows present the operating
results of the Corporation's major business sectors, analyzed on an internal
management reporting basis. Amounts are presented on a taxable equivalent
basis. Capital is allocated quarterly using the federal regulatory guidelines
as a basis, coupled with management's judgment regarding the operational risks
inherent in the businesses. The capital allocations may not be representative
of the capital levels that would be required if these sectors were
nonaffiliated business units.
6
<PAGE> 8
<TABLE>
<CAPTION>
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Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1996 1995 1996 1995 1996 1995 1996 1995
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<S> <C> <C> <C> <C> <C> <C> <C>
$ 821 $ 760 $ 3 $ 2 $ 28 $ 32 $ 852 $ 794
25 31 (1) (19) - - 24 12
538 501 2 2 1 5 541 508
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258 228 2 19 27 27 287 274
96 86 1 7 11 9 108 102
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$ 162 $ 142 $ 1 $ 12 $ 16 $ 18 $ 179 $ 172
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$ 180 $ 160 $ 1 $ 12 $ 16 $ 19 $ 197 $ 191
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$39.5 $36.8 $0.3 $0.2 $2.3 $2.4 $42.1 $39.4
$ 3.2 $ 2.8 $ - $ - $0.1 $0.9 $ 3.3 $ 3.7
20% 20% NM NM NM NM 20% 17%
1.63% 1.55% NM NM NM NM 1.70% 1.75%
31% 30% NM NM NM NM 34% 35%
34% 33% NM NM NM NM 36% 38%
63% 63% NM NM NM NM 61% 61%
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</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1996 1995 1996 1995 1996 1995 1996 1995
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<S> <C> <C> <C> <C> <C> <C> <C>
$1,637 $1,514 $ 8 $ 6 $ 79 $ 67 $1,724 $1,587
49 60 (8) (32) - - 41 28
1,084 994 3 3 22 10 1,109 1,007
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504 460 13 35 57 57 574 552
189 176 5 13 22 21 216 210
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$ 315 $ 284 $ 8 $ 22 $ 35 $ 36 $ 358 $ 342
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$ 352 $ 320 $ 8 $ 22 $ 35 $ 37 $ 395 $ 379
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$ 38.9 $ 36.5 $0.3 $0.2 $2.3 $2.4 $ 41.5 $ 39.1
$ 3.1 $ 2.8 $ - $ - $0.3 $0.9 $ 3.4 $ 3.7
20% 21% NM NM NM NM 20% 18%
1.63% 1.57% NM NM NM NM 1.73% 1.76%
31% 30% NM NM NM NM 33% 35%
34% 34% NM NM NM NM 36% 38%
63% 62% NM NM NM NM 62% 60%
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</TABLE>
7
<PAGE> 9
BUSINESS SECTORS (CONTINUED)
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Income before taxes for the Corporation's core sectors was $258 million in the
second quarter of 1996, an increase of $30 million, or 13%, compared with the
prior-year quarter. This increase resulted from a $61 million increase in
revenue and a $6 million improvement in credit quality expense, partially
offset by a $37 million increase in operating expense. Income before taxes for
the core sectors in the first half of 1996 totaled $504 million, an increase of
$44 million, or 10%, compared with the prior-year period. This improvement
resulted from increased revenue and lower credit quality expense, partially
offset by higher operating expense. Return on common shareholders' equity for
the core sectors was 20% in both the second quarter and first half of 1996,
compared with 20% and 21% in the second quarter and first half of 1995. Return
on assets was 1.63% in the second quarter and first half of 1996, compared with
1.55% and 1.57% in the second quarter and first half of 1995.
Consumer Investment Services
Consumer Investment Services includes private asset management services and
retail mutual funds. Income before taxes for the Consumer Investment sector was
$38 million in the second quarter of 1996, an increase of $10 million from the
prior-year period. The increase was a result of higher mutual fund management
revenue generated by a higher level of assets managed, and increased private
asset management trust fees. Income before taxes for the first half of 1996 was
$72 million, compared with $57 million in the first half of 1995. This increase
resulted from the same factors responsible for the second quarter increase.
This sector provided excellent returns, as the annualized return on common
shareholders' equity was 52% and 51% in the second quarter and first half of
1996, respectively, compared with 40% in both the second quarter and first half
of 1995.
Consumer Banking Services
Consumer Banking Services includes consumer lending and deposit products,
business banking, credit card, mortgage loan origination and servicing and
jumbo residential mortgage lending. Income before taxes for this sector totaled
$93 million in the second quarter of 1996, compared with $85 million in the
second quarter of 1995. Revenue increased $15 million compared with the
prior-year period, primarily as a result of higher mortgage servicing fees,
primarily relating to acquisitions and higher net interest revenue due to a
higher level of average loans. Partially offsetting these increases were
decreases in credit card revenue resulting from the fourth quarter 1995 credit
card securitization and revenue from home equity loans resulting from the first
quarter 1996 home equity loan securitization. The $9 million decrease in credit
quality expense principally reflected the transfer of problem CornerStone(sm)
credit card accounts to an accelerated resolution portfolio in the fourth
quarter of 1995. The $16 million increase in operating expense reflected higher
expenses in support of mortgage servicing acquisitions, including an increase
in the amortization of purchased mortgage servicing rights. Partially
offsetting higher operating expense was the lower FDIC deposit insurance
premium. Income before taxes for the first six months of 1996 was $194 million,
an increase of $12 million compared with the first six months of 1995. The
increase resulted primarily from the same factors responsible for the second
quarter increase. Also impacting year-to-date results were an increase in
revenue resulting from higher electronic tax return filing fees and an increase
in operating expense related to the reconfiguration of the retail delivery
system, both recorded in the first quarter of 1996. The annualized return on
common shareholders' equity for this sector was 20% and 21% in the second
quarter and first half of 1996, compared with 19% and 20% in the second quarter
and first half of 1995.
Corporate/Institutional Investment Services
Corporate/Institutional Investment Services includes institutional trust and
custody, institutional asset and institutional mutual fund management and
administration, securities lending, foreign exchange, cash management, stock
transfer and corporate trust. Income before taxes for this sector was $63
million in the second quarter of 1996, an increase of
8
<PAGE> 10
BUSINESS SECTORS (CONTINUED)
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$12 million, compared with the second quarter of 1995. Revenue increased $28
million due to a higher level of institutional mutual fund assets managed, the
fourth quarter 1995 acquisition of two corporate trust businesses, an increase
in securities lending revenue and higher cash management revenue, offset in
part by lower foreign exchange fees. Operating expense increased $16 million in
support of higher transaction volumes and investments, as well as the corporate
trust acquisitions. Income before taxes for the first six months of 1996 was
$110 million, an increase of $10 million compared with the first six months of
1995. The increase resulted primarily from the same factors responsible for the
second quarter increase. The annualized return on common shareholders' equity
for this sector was 28% and 25% in the second quarter and first half of 1996,
compared with 28% in both the second quarter and first half of 1995.
Corporate/Institutional Banking Services
Corporate/Institutional Banking Services includes large corporate and middle
market lending, asset-based lending, lease financing, commercial real estate
lending, insurance premium financing and securities underwriting and trading.
Income before taxes for the Corporate/Institutional Banking Services sector was
$64 million for the second quarter of 1996, unchanged from the second quarter
of 1995. Revenue increased $2 million primarily as a result of higher net
interest revenue on higher loan levels and increased securities trading
revenue. Operating expense decreased $1 million. Credit quality expense
increased $3 million due to lower credit recoveries in the second quarter of
1996. Income before taxes in the first half of 1996 was $128 million, an
increase of $7 million, compared with the first six months of 1995, primarily
reflecting higher net interest revenue on higher loan levels and increased
securities trading revenue. The annualized return on common shareholders'
equity for this sector was 13% in both the second quarter and first half of
1996, compared with 15% in both the second quarter and first half of 1995.
Real Estate Workout
Real Estate Workout includes commercial real estate recovery and mortgage
banking recovery operations. Income before taxes for Real Estate Workout was $2
million and $13 million in the second quarter and first half of 1996, compared
with $19 million and $35 million in the second quarter and first half of 1995.
The results in both periods reflect lower levels of required reserves given
improvement in the loss experience of the portfolio; however, the amount of
improvement has slowed from the prior-year periods.
Other
The Other sector's pretax income was $27 million and $57 million in the second
quarter and first half of 1996, unchanged from the prior-year periods. Results
for the second quarter and first half of 1996 primarily include earnings on
capital above that required for the core sectors and a $13 million gain on the
partial sale of an equity interest. Also, year-to-date 1996 results reflect the
$28 million gain on the securitization of home equity loans, recorded in the
first quarter of 1996. Year-to-date operating expense in 1996 includes the $18
million first quarter charge resulting from the retirement enhancement program.
Results for the second quarter and first half of 1995 principally reflected
earnings on capital above that required in the core sectors.
9
<PAGE> 11
BUSINESS SECTORS (CONTINUED)
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The following tables distribute net income and return on common shareholders'
equity for the Corporation's core sectors between customers serviced and
products offered.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Customers Serviced
------------------------------------------
Total
Total Corporate/
FOR THE THREE MONTHS ENDED JUNE 30, Consumer Institutional
(dollar amounts in millions) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 82 $ 70 $ 80 $ 72
Return on common
shareholders' equity (a) 24% 22% 17% 19%
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $166 $146 $149 $138
Return on common
shareholders' equity (a) 25% 23% 17% 18%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Products Offered
------------------------------------------
Total Total
FOR THE THREE MONTHS ENDED JUNE 30, Investment Banking
(dollar amounts in millions) 1996 1995 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 61 $48 $101 $ 94
Return on common
shareholders' equity (a) 34% 31% 17% 17%
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $109 $94 $206 $190
Return on common
shareholders' equity (a) 31% 31% 17% 18%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
10
<PAGE> 12
<TABLE>
<CAPTION>
NET INTEREST REVENUE
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
(taxable equivalent basis, AVERAGE AVERAGE Average Average AVERAGE AVERAGE Average Average
dollar amounts in millions) BALANCE RATE balance rate BALANCE RATE balance rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money market investments $ 1,387 5.21% $ 1,165 6.07% $ 1,338 5.27% $ 1,197 5.99%
Trading account securities 181 6.05 220 6.65 160 5.67 268 7.20
Securities (a) 6,658 6.51 4,681 6.60 5,999 6.57 4,785 6.56
Loans (a) 26,798 8.27 27,076 9.05 26,928 8.36 26,874 8.97
------- ------- ------- -------
Total interest-earning assets $35,024 7.81 $33,142 8.58 $34,425 7.92 $33,124 8.51
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Financed by:
Interest-bearing liabilities $28,342 4.34% $27,236 4.73% $28,164 4.39% $27,144 4.59%
Noninterest-bearing liabilities 6,682 - 5,906 - 6,261 - 5,980 -
------- ------- ------- -------
Total $35,024 3.51 $33,142 3.89 $34,425 3.60 $33,124 3.76
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest revenue $ 374 4.30% $ 387 4.69% $ 740 4.32% $ 779 4.75%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Balances and rates include adjustments to fair value required by FAS No.
115.
Note: Average rates are annualized and are calculated on a taxable equivalent
basis at tax rates approximating 35%. Loan fees, as well as nonaccrual loans
and their related income effect, have been included in the calculation of
average rates.
Net interest revenue, on a taxable equivalent basis, for the second quarter of
1996 totaled $374 million, down $13 million, or 4%, compared with the second
quarter of 1995. The net interest margin was 4.30% in the second quarter of
1996, down 39 basis points from 4.69% in the second quarter of 1995.
The decrease in net interest revenue and the net interest margin in the second
quarter of 1996, compared with the second quarter of 1995, resulted from the
effect of the November 1995 $950 million credit card securitization, the March
1996 $650 million home equity loan securitization and funding costs related to
the repurchase of common stock and warrants. Excluding the effects of the loan
securitizations and the equity repurchases, the net interest revenue and net
interest margin for the second quarter of 1996 would have been approximately
$415 million and 4.55%. The foregone net interest revenue from the loan
securitizations is substantially offset by higher servicing fee revenue and
lower net credit losses. Net interest revenue in the second quarter of 1996 was
favorably impacted by higher loan fees, loan levels and a higher level of
retail demand deposits which were partially offset by the migration of retail
customers from lower cost interest-bearing deposit products to higher cost
products.
Average loans decreased $278 million in the second quarter of 1996, compared
with the prior-year period, primarily as a result of the loan securitizations
and jumbo residential mortgage loan sales. Excluding the loan securitizations
and sales, loans increased approximately $2.1 billion, compared with the
prior-year period, primarily as a result of increases in domestic wholesale,
credit card, retail and mortgage warehouse loans.
Net interest revenue and the net interest margin, on a taxable equivalent
basis, were $740 million and 4.32% in the first half of 1996, compared with
$779 million and 4.75% in the first half of 1995. The decreases principally
resulted from the same factors responsible for the second quarter decrease.
11
<PAGE> 13
<TABLE>
<CAPTION>
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES
- --------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
(in millions) 1996 1995 Change 1996 1995 Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for credit losses $25 $20 $ 5 $50 $40 $10
Net expense (revenue) from
acquired property (1) (8) (7) (9) (12) (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Credit quality expense $24 $12 $12 $41 $28 $13
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Credit quality expense, defined as the provision for credit losses less the net
revenue from acquired property, increased $12 million in the second quarter of
1996, compared with the second quarter of 1995, as a result of a $7 million
decrease in net revenue from acquired property and a $5 million increase in the
provision for credit losses.
A summary of the Corporation's net credit losses is presented on the following
page. The $20 million decrease in net credit losses compared with the second
quarter of 1995, resulted primarily from a lower level of lease finance and
credit card net credit losses, partially offset by higher commercial and
financial net credit losses. The reduction in credit card net credit losses
resulted from the December 1995 transfer of certain CornerStone(sm) credit card
loans, which had a history of delinquency, into an accelerated resolution
portfolio. The net carrying value of the accelerated resolution portfolio at
June 30, 1996, was $52 million, compared with $65 million at March 31, 1996,
and $82 million at December 31, 1995. The credit card securitization in the
fourth quarter of 1995 also was a factor in the reduction of credit card net
credit losses.
Net credit losses decreased $18 million in the first half of 1996, compared
with the first half of 1995, reflecting the lower level of credit card and
lease finance net credit losses, partially offset by higher commercial and
financial net credit losses.
Net credit losses of $26 million in the second quarter of 1996 were down $2
million from the first quarter of 1996 as an $11 million increase in credit
card net credit losses was substantially offset by lower commercial loan net
credit losses. The increase in credit card net credit losses reflected the
expected return to a higher level of delinquencies in the CornerStone(sm)
portfolio following the creation of the accelerated resolution portfolio. The
Corporation expects a further increase in credit card net credit losses in the
third quarter of 1996, which will fully reflect the delinquency characteristics
of the CornerStone(sm) portfolio following the creation of the accelerated
resolution portfolio.
The Corporation maintains a credit loss reserve that, in management's judgment,
is adequate to absorb future losses inherent in the loan portfolio. Management
establishes the credit loss reserve using a documented loan loss assessment
process that estimates loss potential in the portfolio as a whole. For further
information regarding the methodology used in determining the adequacy of the
reserve, see the "Reserve for credit losses and review of net credit losses"
discussion in the Corporation's 1995 Annual Report on Form 10-K. The reserve
for credit losses totaled $467 million at June 30, 1996, compared with $471
million at December 31, 1995, and $583 million at June 30, 1995. The $116
million decrease in the reserve for credit losses from June 30, 1995, resulted
primarily from credit losses taken on the CornerStone(sm) credit card loans
during 1995, including the loans that were transferred to the accelerated
resolution portfolio in the fourth quarter. The ratio of the loan loss reserve
to nonperforming loans at June 30, 1996, was 361%, compared with 282% at
year-end 1995 and 293% at June 30, 1995. This ratio is not the result of a
target or objective, but rather is an outcome of two interrelated but separate
processes: the establishment of an appropriate loan loss reserve level for the
portfolio as a whole, including but not limited to the nonperforming component
in the portfolio; and the classification of certain assets as nonperforming in
accordance with established accounting, regulatory and management policies. The
ratio can vary significantly over time as the credit quality characteristics of
the entire loan portfolio change. This ratio also can vary with shifts in loan
portfolio mix.
12
<PAGE> 14
<TABLE>
<CAPTION>
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY (A) Three months Six months
ended June 30, ended June 30,
(dollar amounts in millions) 1996 1995 Change 1996 1995 Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reserve at beginning of period $468 $601 $(133) $471 $607 $(136)
Reserve acquired in acquisition - 8 (8) - 8 (8)
Credit losses:
Domestic:
Commercial and financial 8 2 6 15 5 10
Commercial real estate - 3 (3) 8 6 2
Consumer credit:
Credit cards 31 45 (14) 50 74 (24)
Consumer mortgage 1 3 (2) 4 5 (1)
Other consumer credit 5 4 1 10 8 2
Lease financing - 16 (16) - 16 (16)
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic credit losses 45 73 (28) 87 114 (27)
- --------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial (10) (10) - (12) (16) (4)
Commercial real estate (2) (8) (6) (7) (11) (4)
Consumer credit:
Credit cards (4) (4) - (7) (6) 1
Consumer mortgage (1) (1) - (2) (2) -
Other consumer credit (2) (2) - (4) (3) 1
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic (19) (25) (6) (32) (38) (6)
International - (2) (2) (1) (4) (3)
- --------------------------------------------------------------------------------------------------------------------------------
Total recoveries (19) (27) (8) (33) (42) (9)
- --------------------------------------------------------------------------------------------------------------------------------
Net credit losses (recoveries):
Domestic:
Commercial and financial (2) (8) 6 3 (11) 14
Commercial real estate (2) (5) 3 1 (5) 6
Consumer credit:
Credit cards 27 41 (14) 43 68 (25)
Consumer mortgage - 2 (2) 2 3 (1)
Other consumer credit 3 2 1 6 5 1
Lease financing - 16 (16) - 16 (16)
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic 26 48 (22) 55 76 (21)
International - (2) 2 (1) (4) 3
- --------------------------------------------------------------------------------------------------------------------------------
Total net credit losses 26 46 (20) 54 72 (18)
Provision for credit losses 25 20 5 50 40 10
- --------------------------------------------------------------------------------------------------------------------------------
Reserve at end of period $467 $583 $(116) $467 $583 $(116)
- --------------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.71% 2.10% (39) bp 1.71% 2.10% (39) bp
- --------------------------------------------------------------------------------------------------------------------------------
Annualized net credit losses
to average loans .40% .67% (27) bp .41% .54% (13) bp
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the reserve and net credit losses on segregated assets.
13
<PAGE> 15
<TABLE>
<CAPTION>
NONINTEREST REVENUE
- --------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
(in millions) 1996 1995 Change 1996 1995 Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fee revenue:
Trust and investment management:
Mutual fund:
Management $ 84 $ 76 $ 8 $167 $147 $ 20
Administration/Custody 26 30 (4) 53 60 (7)
Institutional trust 62 51 11 121 102 19
Institutional asset management 35 34 1 69 68 1
Private asset management 41 34 7 79 67 12
- --------------------------------------------------------------------------------------------------------------------------------
Total trust and investment management fees 248 225 23 489 444 45
Cash management and deposit transaction charges 52 48 4 101 95 6
Mortgage servicing fees 44 25 19 85 50 35
Credit card fees 30 22 8 63 41 22
Foreign currency and securities trading 20 25 (5) 41 49 (8)
Other 80 60 20 198 125 73
- --------------------------------------------------------------------------------------------------------------------------------
Total fee revenue 474 405 69 977 804 173
Gains on sales of securities - 1 (1) 1 - 1
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue $474 $406 $68 $978 $804 $174
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fee revenue increased $69 million, or 17%, compared with the second quarter of
1995 and represented 56% of the Corporation's total revenue in the second
quarter of 1996. The increase in fee revenue resulted primarily from a $23
million increase in trust and investment management fees, a $19 million
increase in mortgage servicing fees, a $13 million gain on the partial sale of
an equity interest and an $8 million increase in credit card fees.
Total trust and investment management fees
The $23 million, or 10%, increase in trust and investment management fees in
the second quarter of 1996, compared with the prior-year period, resulted
primarily from an $11 million, or 23%, increase in institutional trust fees, an
$8 million, or 10%, increase in mutual fund management revenue and a $7
million, or 20%, increase in private asset management revenue. The increase in
institutional trust revenue resulted from new business, including the 1995
acquisition of two corporate trust businesses and a $5 million increase in
securities lending revenue. The increase in securities lending revenue resulted
primarily from improved margins in 1996, as well as a higher volume of
securities lent in the second quarter of 1996. The higher revenue from the
management of mutual funds resulted from a higher average level of mutual fund
assets managed and lower fee waivers at Dreyfus. Mutual fund management fees
are discussed further on the following pages. The increase in private asset
management revenue resulted primarily from an increase in the market value of
assets under management and new business.
As shown in the table on the following page, the market value of trust assets
under management was $220 billion at June 30, 1996, a decrease of $15 billion
compared with $235 billion at March 31, 1996. This decrease resulted from the
partial sale of an equity interest in an institutional investment management
firm. The market value of assets under administration/custody was $876 billion
at June 30, 1996, an increase of $6 billion compared with $870 billion at March
31, 1996. This increase resulted from new business.
14
<PAGE> 16
<TABLE>
<CAPTION>
NONINTEREST REVENUE (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT AND ADMINISTRATION/CUSTODY
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in billions) 1996 1996 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust:
Administration/Custody $794 $786 $708 $645 $621
Mutual fund:
Management (a) 83 83 81 80 79
Administration/Custody 57 61 60 55 71
Institutional asset management:
Management 111 127 128 105 101
Private asset management:
Management 26 25 24 24 23
Administration/Custody 25 23 18 17 15
- ----------------------------------------------------------------------------------------------------------------------------------
Total:
Management $220 $235 $233 $209 $203
Administration/Custody $876 $870 $786 $717 $707
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) See table below for components of managed mutual fund assets.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MANAGED MUTUAL FUND ASSETS BY FUND CATEGORY
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in billions) 1996 1996 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Proprietary funds:
Taxable money market funds:
Institutions $25 $25 $24 $23 $22
Individuals 9 10 10 11 10
Tax-exempt money market funds 7 8 8 8 8
Tax-exempt bond funds 18 18 19 18 18
Fixed-income funds 5 5 5 5 5
Equity Funds 14 12 11 11 10
- ----------------------------------------------------------------------------------------------------------------------------------
Total proprietary funds 78 78 77 76 73
Other managed funds 5 5 4 4 6
- ----------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund assets $83 $83 $81 $80 $79
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mutual fund management fees
Mutual fund management fees are based upon the average net assets of each fund.
Average proprietary funds managed at Dreyfus in the second quarter of 1996 were
$79 billion, compared with $72 billion in the second quarter of 1995. This
increase resulted primarily from higher average institutional money market
funds and equity funds.
15
<PAGE> 17
<TABLE>
<CAPTION>
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
MANAGED MUTUAL FUND FEE REVENUE Three months Six months
ended June 30, ended June 30,
(in millions) 1996 1995 Change 1996 1995 Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Managed mutual fund fees $93 $87 $ 6 $185 $170 $15
Less: Fees waived 6 9 3 13 18 5
Less: Fund expense reimbursements 3 2 (1) 5 5 -
- --------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $84 $76 $ 8 $167 $147 $20
- --------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees by fund category:
Proprietary funds:
Taxable money market funds:
Institutions $14 $12 $ 2 $ 28 $ 22 $ 6
Individuals 10 9 1 20 19 1
Tax-exempt money market funds 7 6 1 14 11 3
Tax-exempt bond funds 24 25 (1) 50 48 2
Fixed income funds 6 6 - 12 11 1
Equity funds 21 15 6 39 30 9
- --------------------------------------------------------------------------------------------------------------------------------
Total proprietary fund fees 82 73 9 163 141 22
Other managed fund fees 2 3 (1) 4 6 (2)
- --------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $84 $76 $ 8 $167 $147 $20
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash management and deposit transaction charges
The $4 million increase in cash management and deposit transaction charges
resulted primarily from higher volumes of new business in remittance processing
and electronic products.
Mortgage servicing fees
The $19 million increase in mortgage servicing fees, compared with the
prior-year period, resulted from the acquisition of mortgage servicing rights,
including the third quarter 1995 acquisition of Metmor Financial, Inc. At June
30, 1996, the Corporation's total servicing portfolio was $55 billion, up 48%
compared with $37 billion at June 30, 1995.
Credit card fees
The $8 million increase in credit card fee revenue in the second quarter of
1996, compared with the second quarter of 1995, resulted from servicing fee
revenue from the securitized credit card receivables. Additional information on
the effect of the credit card securitization is presented in the table on the
following page.
Foreign currency and securities trading revenue
The $5 million decrease in foreign currency and securities trading fee revenue
in the second quarter of 1996, compared with the prior-year period, was
attributable to lower foreign exchange fees earned as a result of lower levels
of market volatility and customer activity.
Other fee revenue
Other fee revenue was $80 million in the second quarter of 1996, an increase of
$20 million compared with the second quarter of 1995. This increase resulted
primarily from a gain on the partial sale of an equity interest in an
institutional investment management firm and servicing fee revenue from the
securitized home equity loans. Additional information on the effect of the home
equity loan securitization is presented in the table on the following page.
16
<PAGE> 18
NONINTEREST REVENUE (CONTINUED)
- ------------------------------------------------------------------------------
Fee revenue was $977 million in the first six months of 1996, compared with
$804 million in the prior-year period. This increase resulted primarily from
the same factors responsible for the second quarter increase. Also impacting
the comparison of year-to-date results were the following first quarter 1996
factors, which were recorded in other fee revenue: a $28 million gain on the
home equity loan securitization; a $14 million increase in gains on disposition
of assets and sales of equity securities; and a $10 million increase in fees
relating to the electronic filing of income tax returns.
SECURITIZATION OF CREDIT CARD RECEIVABLES
- -------------------------------------------------------------------------------
The Corporation securitized $950 million of credit card receivables in the
fourth quarter of 1995. For analytical purposes, the impact of the
securitization on second quarter and year-to-date 1996 results are shown below.
<TABLE>
<CAPTION>
Three months ended Six months ended
(in millions) June 30, 1996 June 30, 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lower net interest revenue $ 22 $ 46
Lower net credit losses 12 22
Higher fee revenue 10 23
Lower loans 950 950
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECURITIZATION OF HOME EQUITY LOANS
- ------------------------------------------------------------------------------
The Corporation securitized $650 million of home equity loans on March 29,
1996. For analytical purposes, the impact of the securitization on second
quarter and year-to-date 1996 results are shown below.
<TABLE>
<CAPTION>
Three months ended Six months ended
(in millions) June 30, 1996 June 30, 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lower net interest revenue $ 6 $ 6
Higher fee revenue 3 3
Lower loans - period-end 650 650
Lower loans - average 650 336
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
OPERATING EXPENSE
- ---------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
(dollar amounts in millions) 1996 1995 Change 1996 1995 Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Staff expense $255 $229 $26 $ 532 $ 469 $ 63
Net occupancy expense 50 48 2 106 99 7
Professional, legal and other purchased services 50 50 - 97 88 9
Equipment expense 36 34 2 71 68 3
Business development 35 37 (2) 68 70 (2)
Amortization of mortgage servicing rights
and purchased credit card relationships 27 13 14 55 26 29
Amortization of goodwill and other
intangible assets 24 24 - 49 48 1
Communications expense 24 20 4 47 42 5
FDIC assessment and regulatory examination fees 2 15 (13) 3 30 (27)
Other expense 38 38 - 81 67 14
- --------------------------------------------------------------------------------------------------------------------------------
Operating expense before net revenue
from acquired property 541 508 33 1,109 1,007 102
Net revenue from acquired property (1) (8) (7) (9) (12) (3)
- --------------------------------------------------------------------------------------------------------------------------------
Total operating expense $540 $500 $40 $1,100 $ 995 $105
- --------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 24,600 24,100 500 24,600 24,200 400
- --------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 64% 64% - 64% 63% 1
Efficiency ratio excluding amortization of
goodwill and other intangible assets 61 61 - 62 60 2
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before net revenue from acquired property as a
percentage of revenue, computed on a taxable equivalent basis,
excluding gains (losses) on the sale of securities.
Operating expense before net revenue from acquired property increased $33
million, or 7%, in the second quarter of 1996, compared with the prior-year
period. This increase resulted primarily from increases in staff expense and
the amortization of mortgage servicing rights, partially offset by lower FDIC
deposit insurance assessment expense.
The increase in staff expense resulted primarily from a $16 million increase in
incentive and commission expense, compared with a relatively low level in the
second quarter of 1995, and a $9 million increase in base salaries, resulting
in part from acquisitions. The increase in the amortization of mortgage
servicing rights reflects the increase in the Corporation's mortgage servicing
portfolio from June 30, 1995. Partially offsetting these increases was a
decrease in the FDIC deposit insurance assessment which resulted from the
suspension of this assessment in 1996 for healthy institutions.
Operating expense before net revenue from acquired property totaled $1,109
million in the first six months of 1996, compared with $1,007 million in the
first half of 1995. The increase resulted primarily from the same factors
responsible for the second quarter increase, as well as the following charges
recorded in the first quarter of 1996: an $18 million charge for the
Corporation's early retirement enhancement program that was offered during the
first quarter of 1996; $4 million of severance expense; and $6 million of
expense related to the further reconfiguration of the retail delivery system.
Excluding the expense from the early retirement enhancement program, severance
and the reconfiguration of the retail delivery system, operating expense before
net revenue from acquired property totaled $540 million in the first quarter of
1996, compared with $541 million in the second quarter of 1996.
18
<PAGE> 20
INCOME TAXES
- -------------------------------------------------------------------------------
The provision for income taxes totaled $205 million in the first half of 1996,
compared with $201 million in the first half of 1995. The Corporation's
effective tax rate for the first half of 1996 was 36.5%, compared with a 37%
effective tax rate for the first half of 1995. It is currently anticipated that
the effective tax rate will remain at approximately 36.5% for the remainder of
1996.
<TABLE>
<CAPTION>
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended
June 30,
(average balances in millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Money market investments $ 1,387 $ 1,165
Trading account securities 181 220
Securities 6,658 4,681
Loans 26,798 27,076
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 35,024 33,142
Noninterest-earning assets 7,541 6,834
Reserve for credit losses (469) (606)
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $42,096 $39,370
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $32,058 $30,725
Wholesale and purchased funds 10,038 8,645
- --------------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $42,096 $39,370
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in the Corporation's average interest-earning assets in the second
quarter of 1996, compared with the second quarter of 1995, reflects a $1,977
million increase in securities. Average loans decreased $278 million primarily
as a result of the $950 million credit card securitization, the $650 million
home equity loan securitization and approximately $805 million of jumbo
residential mortgage loan sales. Excluding the loan securitizations and sales,
loans increased approximately $2.1 billion, compared with the prior-year
period, primarily as a result of increases in domestic wholesale, credit card,
retail and mortgage warehouse loans.
Core funds, which are considered to be the most stable sources of funding, are
defined principally as money market and other savings deposits, demand
deposits, savings certificates, shareholders' equity and notes and debentures
with original maturities over one year. Core funds primarily support core
assets, which consist of loans, net of the reserve and noninterest-earning
assets. Average core assets increased $566 million in the second quarter of
1996 from the prior-year period, reflecting a higher level of
noninterest-earning assets. The increase in noninterest-earning assets
resulted primarily from higher levels of cash and due from banks. Average core
funds increased $1.3 billion in the second quarter of 1996 from the prior-year
period, primarily reflecting a higher level of money market and savings
deposits. Core funds averaged 95% of core assets in the second quarter of 1996,
up from 94% in the first quarter of 1996 and 92% in the second quarter of 1995.
Wholesale and purchased funds are defined as deposits in foreign offices,
negotiable certificates of deposit, federal funds purchased and securities
under repurchase agreements, short-term bank notes, other time deposits, U.S.
Treasury tax and loan demand notes, commercial paper and other funds borrowed.
Average wholesale and purchased funds increased $1.4 billion compared with the
prior-year period, primarily reflecting an increase in negotiable certificates
of deposit and foreign office deposits, partially offset by a decrease in
short-term bank notes. As a percentage of total average assets, average
wholesale and purchased funds increased to 24% in the second quarter of 1996,
from 21% in the first quarter of 1996 and 22% in the second quarter of 1995.
19
<PAGE> 21
COMPOSITION OF LOAN PORTFOLIO
- ------------------------------------------------------------------------------
The loan portfolio decreased $409 million at June 30, 1996, compared with June
30, 1995, as a result of the fourth quarter 1995 $950 million credit card
securitization; the sale of approximately $815 million of jumbo residential
mortgages; the March 1996 securitization of $650 million of home equity
revolving credit line loans; and the transfer in the fourth quarter of 1995 of
$193 million of CornerStone(sm) credit card loans to an accelerated resolution
portfolio. Excluding the securitizations and sales, loans increased
approximately $2.0 billion compared with June 30, 1995, primarily as a result
of increases in domestic wholesale, retail and credit card loans. At June 30,
1996, the composition of the loan portfolio was 54% commercial and 46%
consumer.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1996 1996 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $11,014 (a) $11,089 $10,969 $10,317 $10,163
Commercial real estate 1,624 (b) 1,459 1,532 1,505 1,512
Consumer credit:
Consumer mortgage 7,891 7,865 8,960 9,154 9,031
Credit card 2,120 1,984 1,924 2,799 2,766
Other consumer credit 2,598 2,551 2,612 2,625 2,641
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 12,609 12,400 13,496 14,578 14,438
Lease finance assets 938 865 830 828 807
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 26,185 25,813 26,827 27,228 26,920
INTERNATIONAL LOANS 1,171 1,044 863 845 845
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount (c) $27,356 $26,857 $27,690 $28,073 $27,765
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $17 million of loans subject to the FDIC loss-sharing
arrangement.
(b) Includes $87 million of loans subject to the FDIC loss-sharing
arrangement.
(c) Excludes segregated assets.
Commercial and financial
The domestic commercial and financial loan portfolio primarily consists of
loans to corporate borrowers in the manufacturing, service, energy,
communications, wholesale and retail trade, public utilities and financial
services industries. Total domestic commercial and financial loans increased
by $851 million, or 8%, at June 30, 1996, compared to June 30, 1995, as a
result of increases in almost all segments of the commercial and financial loan
portfolio. Commercial and financial loans represented 40% of the total loan
portfolio at June 30, 1996, and 37% at June 30, 1995. At June 30, 1996,
nonperforming domestic commercial and financial loans and leases were .26% of
total domestic commercial and financial loans and leases, compared with .87% at
June 30, 1995. This ratio has been less than 1% for more than 3 years.
Commercial real estate
The Corporation's $1,624 million domestic commercial real estate loan portfolio
consists of commercial mortgages, which generally are secured by nonresidential
and multifamily residential properties and commercial construction loans
generally with maturities of 60 months or less. Also included in this portfolio
are loans that are secured by owner-occupied real estate, but made for purposes
other than the construction or purchase of real estate. The commercial real
estate loan portfolio includes $87 million of loans acquired in the December
1992 Meritor retail office acquisition that are subject to a five-year 95%
loss-sharing arrangement with the FDIC. Domestic commercial real estate loans
increased by $112 million, or 7%, at June 30, 1996, compared with June 30,
1995. The increase resulted primarily from new loan originations partially
offset by paydowns and transfers to OREO. Domestic commercial real estate loans
were 6% of total loans at June 30, 1996, up from 5% a year earlier.
Nonperforming commercial real estate loans were 2.48% of total domestic
commercial real estate loans at June 30, 1996, compared with 2.80% at June 30,
1995.
20
<PAGE> 22
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- ----------------------------------------------------------------------------
Consumer mortgage
The consumer mortgage portfolio includes jumbo residential mortgages,
traditional one-to-four family residential mortgages, fixed-term home equity
loans and home equity revolving credit line loans. At June 30, 1996, this
portfolio totaled $7,891 million, down 13% from $9,031 million at June 30,
1995. The $1,140 million decrease in this portfolio from June 30, 1995,
primarily reflects the jumbo residential mortgage sales and the $650 million
home equity loan securitization.
Jumbo mortgages are variable rate residential mortgages that range from
$250,000 to $3 million. These loans decreased approximately $530 million from
June 30, 1995, to $3.7 billion at June 30, 1996, primarily as a result of loan
sales.
Loans secured by one-to-four family residential mortgages decreased
approximately $180 million to $1.9 billion and fixed-term home equity loans
increased approximately $170 million to $1.7 billion. Home equity revolving
credit line loans decreased approximately $600 million to $.6 billion as a
result of the $650 million securitization of home equity revolving credit line
loans. Nonperforming consumer mortgages were .73% and .66% of total consumer
mortgages at June 30, 1996, and June 30, 1995, respectively.
Credit card
At June 30, 1996, credit card loans totaled $2,120 million, a $646 million, or
23%, decrease from June 30, 1995. This decrease resulted from the $950 million
securitization of credit card receivables and the transfer of $193 million of
CornerStone(sm) credit card loans to an accelerated resolution portfolio,
partially offset by loan growth. Credit card loans are charged off after
becoming 180 days delinquent and as such are not placed on nonperforming status
prior to charge-off. The ratio of credit card loans 90 days or more past due to
total credit card loans was 1.64% at June 30, 1996, compared with 1.21% at
March 31, 1996, and 1.96% at June 30, 1995. The reduction in this ratio at June
30, 1996, and March 31, 1996, compared with June 30, 1995, resulted from the
creation of the accelerated resolution portfolio.
Other loans
Other consumer credit, which principally consists of student loans, installment
loans and unsecured personal credit lines, was $2,598 million at June 30, 1996,
a decrease of $43 million from June 30, 1995. Loans to international borrowers
increased to $1,171 million at June 30, 1996, from $845 million at June 30,
1995, primarily due to increased activity with large corporate customers. Lease
finance assets were $938 million, up from $807 million at June 30, 1995.
Assets held for accelerated resolution
In the fourth quarter of 1995, the Corporation segregated $193 million of
CornerStone(sm) credit card loans, which had a history of delinquency, into an
accelerated resolution portfolio. In connection with this transfer, the
Corporation evaluated the carrying value of these loans and recorded a credit
loss of $106 million. Interest and principal receipts, fees and loan loss
recoveries on loans in this portfolio are applied to reduce the carrying value
of this portfolio, which totaled $52 million at June 30, 1996, compared with
$65 million at March 31, 1996, and $82 million at December 31, 1995. No revenue
will be recorded on this portfolio until the net carrying value is recovered.
This portfolio is in other assets on the Corporation's balance sheet.
21
<PAGE> 23
<TABLE>
<CAPTION>
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK
- ----------------------------------------------------------------------------------------------------------------------------------
June 30,
(in millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $24,384 (A) $16,707
Standby letters of credit and foreign guarantees 3,270 (B) 2,959
Commercial letters of credit 88 141
Residential mortgage loans serviced with recourse 137 167
Custodian securities lent with indemnification
against broker default of return of securities 19,896 16,312
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Approximately 24% of these commitments are scheduled to expire within
one year, with an additional 61% scheduled to expire within five years.
(b) Net of participations and cash collateral totaling $333 million.
<TABLE>
<CAPTION>
CAPITAL
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA
(dollar amounts in millions, JUNE 30, March 31, Dec. 31, June 30,
except per share amounts) 1996 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shareholders' equity $ 3,332 $ 3,384 $ 3,590 $ 3,643
Common shareholders' equity to assets ratio 7.79% 8.14% 8.83% 9.10%
Tangible common shareholders' equity 2,426 2,450 2,632 2,646
Tangible common equity to assets ratio (a) 5.79% 6.03% 6.63% 6.78%
Total shareholders' equity $ 3,767 $ 3,819 $ 4,025 $ 4,078
Total shareholders' equity to assets ratio 8.81% 9.19% 9.90% 10.19%
Tier I capital ratio 7.51 7.69 8.14 8.98
Total (Tier I plus Tier II) capital ratio 11.89 12.20 11.29 12.31
Leverage capital ratio 7.24 7.52 7.80 8.32
Book value per common share $ 25.61 $ 25.55 $ 26.17 $ 25.59
Closing common stock price 57.00 55.25 53.75 41.625
Market capitalization 7,414 7,317 7,374 5,925
Common shares outstanding (000) 130,069 132,443 137,187 142,353
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Common shareholders' equity less goodwill and other intangibles recorded
in connection with purchase acquisitions divided by total assets less
goodwill and other intangibles recorded in connection with purchase
acquisitions.
The decrease in the Corporation's common and total shareholders' equity at June
30, 1996, compared with March 31, 1996, and June 30, 1995, resulted from
repurchases of common stock offset in part by earnings retention. In addition,
asset growth resulted in a decrease in the Corporation's capital ratios
compared with the prior-year periods.
In May 1996, the board of directors of the Corporation authorized the
repurchase of up to 5 million shares of common stock. This repurchase program
is in addition to the 3.5 million share repurchase program announced in the
first quarter of 1996. At June 30, 1996, the Corporation had completed the 3.5
million share repurchase program and had repurchased .2 million shares under
the 5 million share repurchase program. Since the beginning of 1995, the
Corporation has repurchased 21 million common shares, prior to any reissuances,
as well as warrants for 4.5 million shares of common stock. At June 30, 1996,
common stock and stock equivalents totaled 132.0 million shares.
22
<PAGE> 24
<TABLE>
<CAPTION>
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING
- --------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER YEAR TO DATE Full Year
(in millions) 1996 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning shares outstanding 132.4 137.2 147.2
Shares issued for stock-based benefit plans and dividend reinvestment plan .4 1.1 2.8
Shares repurchased (2.7) (8.2) (12.8)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 130.1 130.1 137.2
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation's qualifying capital under the Federal Reserve Board's
risk-based capital regulations is shown in the table below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS June 30,
(dollar amounts in millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier I capital:
Common shareholders' equity (a) $ 3,362 $ 3,664
Qualifying preferred stock 435 435
Other items (9) (13)
Goodwill and certain other intangibles (808) (876)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Tier I capital $ 2,980 $ 3,210
Tier II capital 1,740 1,189
- --------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $ 4,720 $ 4,399
- --------------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets:
On-balance-sheet $27,710 $26,868
Off-balance-sheet 11,973 8,869
- --------------------------------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $39,683 $35,737
- --------------------------------------------------------------------------------------------------------------------------------
Average assets-leverage capital basis $41,175 $38,585
- --------------------------------------------------------------------------------------------------------------------------------
Tier I capital ratio (b) 7.51% 8.98%
Total capital ratio (b) 11.89 12.31
Leverage capital ratio (b) 7.24 8.32
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) In accordance with regulatory guidelines, $30 million and $21 million of
unrealized losses, net of tax, on assets classified as available for sale at
June 30, 1996, and 1995, respectively, have been excluded.
(b) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3%, respectively.
Tier I and Total capital are expressed as a percentage of risk-adjusted assets,
which include various credit risk-weighted percentages of on-balance-sheet
assets, as well as off-balance-sheet exposures. The Leverage capital ratio
evaluates capital adequacy on the basis of the ratio of Tier I capital to
quarterly average total assets as reported on the Corporation's regulatory
financial statements, net of the loan loss reserve, goodwill and certain other
intangibles.
Federal regulators have adopted a capital-based supervisory system for all
insured financial institutions. If a financial institution's capital ratios
decline below predetermined levels, it would become subject to a series of
increasingly restrictive regulatory actions. The system categorizes a financial
institution's capital position into one of five categories ranging from
well-capitalized to critically undercapitalized. For an institution to qualify
as well-capitalized, its Tier I, Total and Leverage capital ratios must be at
least 6%, 10% and 5%, respectively. All of the Corporation's banking
subsidiaries qualified as well-capitalized at June 30, 1996. The Corporation
intends to maintain the ratios of its banking subsidiaries above the
well-capitalized levels.
23
<PAGE> 25
CAPITAL (CONTINUED)
- ------------------------------------------------------------------------------
When computing Tier I capital, the Corporation deducts all goodwill and certain
other identified intangibles acquired subsequent to February 19, 1992, except
mortgage servicing rights and purchased credit card relationships.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1996 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $757 $775 $788 $806
- --------------------------------------------------------------------------------
</TABLE>
The $49 million decrease in goodwill at June 30, 1996, compared with June 30,
1995, resulted from $53 million of amortization and $12 million related to
retail office and business sales, offset in part by an increase of $15 million
related to corporate trust acquisitions. Based upon the current level and
amortization schedule, the amortization of goodwill over the next 12 months is
expected to be approximately $53 million. The annual amortization of goodwill
for the full years 1997 through 2000 is expected to remain at approximately $53
million and decrease to approximately $50 million in 2001. The after-tax impact
of the annual amortization of goodwill for the full years 1997 through 2000 is
expected to be approximately $46 million and decrease to approximately $43
million in 2001.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1996 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchased core deposit intangible $ 99 $105 $110 $121
Covenants not to compete 14 17 22 30
Other identified intangibles 36 37 38 40
- ----------------------------------------------------------------------------------------------------------------------------------
Total purchased core deposit
and other identified intangibles $149 $159 $170 $191
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in purchased core deposit and other identified intangibles from
June 30, 1995, resulted from amortization. Based upon the current level and
amortization schedule, the annual amortization of purchased core deposit and
other identified intangibles over the next 12 months will be approximately $43
million. The annual amortization of purchased core deposit and other identified
intangibles for the full years 1997 through 2001 is anticipated to be
approximately $31 million, $26 million, $26 million, $14 million and $8
million, respectively. The after-tax impact of the annual amortization of these
items for the full years 1997 through 2001 is anticipated to be approximately
$20 million, $17 million, $17 million, $9 million and $5 million, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1996 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage servicing rights $650 $614 $592 $336
Purchased credit card relationships 84 87 90 96
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing rights and
purchased credit card relationships $734 $701 $682 $432
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the quarter, $65 million of servicing rights were capitalized in
connection with both mortgage servicing portfolio purchases and loan
originations. Mortgage servicing rights are amortized in proportion to
estimated net servicing income over the estimated life of the servicing
portfolio. Amortization expense totaled $24 million in the second quarter of
1996. The estimated fair value of capitalized mortgage servicing rights was
$744 million at June 30, 1996. The decrease in purchased credit card
relationships from June 30, 1995, resulted from amortization.
24
<PAGE> 26
CAPITAL (CONTINUED)
- ----------------------------------------------------------------------------
On January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." FAS No. 121 established
guidelines for recognition of impairment losses related to long-lived assets
and certain intangibles and related goodwill for both assets to be held and
used as well as assets held for disposition. This statement excludes financial
instruments, long-term customer relationships of financial institutions,
mortgage and other servicing rights and deferred tax assets. Adoption of this
statement was immaterial to the Corporation's financial position and results of
operations.
LIQUIDITY AND DIVIDENDS
- -----------------------------------------------------------------------------
The Corporation's liquidity management objective is to maintain the ability to
meet commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms, including during
periods of market or financial stress. The Corporation's overall approach to
liquidity management is to ensure that sources of liquidity are sufficient in
amount and diversity to accommodate changes in loan demand and core funding
routinely without a material adverse impact on net income. The Corporation's
liquidity position is managed by maintaining adequate levels of liquid assets,
such as money market assets and securities available for sale. Additional
liquidity is available through the Corporation's ability to participate or sell
loans and to securitize selected loan portfolios. The Corporation also has a
three-year $300 million revolving credit agreement and a $25 million backup
line of credit to provide support facilities for its commercial paper
borrowings and for general Corporate purposes.
As shown in the Consolidated Statement of Cash Flows, cash and due from banks
increased by $423 million during the first half of 1996 to $2,765 million at
June 30, 1996. The increase reflected $1,824 million of net cash provided by
financing activities and $538 million of net cash provided by operating
activities, partially offset by $1,946 million of net cash used in investing
activities. Net cash provided by financing activities primarily reflected
increases in customer deposits and long-term borrowings partially offset by a
decrease in short-term borrowings and common stock repurchases. Net cash used
in investing activities principally reflected an increase in securities
available for sale.
There were no contractual maturities of the Corporation's term debt during the
second quarter of 1996 and there will be no contractual maturities for the
remainder of 1996. Contractual maturities of term debt will total $205 million
in 1997, primarily as a result of $200 million in December 1997. At June 30,
1996, the Corporation's senior debt and Mellon Bank, N.A.'s subordinated debt
were rated "A2" by Moody's and "A" by Standard and Poor's.
On April 16, 1996, the Corporation announced a 9% increase in the quarterly
common stock dividend, to $.60 per common share. The increased dividend was
paid on May 15, 1996, to shareholders of record on April 30, 1996. This is the
fifth quarterly common dividend increase that the Corporation has announced
since the beginning of 1994, resulting in a total common dividend per share
increase of 137%. The Corporation paid $154 million in common stock dividends
in the first half of 1996, compared with $140 million in the prior-year period.
In addition, the Corporation paid $20 million in dividends on its outstanding
shares of preferred stock during the first half of 1996, unchanged from the
prior-year period. The common stock dividend payout ratio was 47% in the second
quarter of 1996, compared with 45% in the second quarter of 1995. Based upon
the current quarterly common dividend rate of $.60 per share and current shares
outstanding, annualized dividend requirements for the common and preferred
stock are expected to be approximately $350 million.
25
<PAGE> 27
LIQUIDITY AND DIVIDENDS (CONTINUED)
- ----------------------------------------------------------------------------
The parent Corporation's principal sources of cash are dividends and interest
from its subsidiaries. There are, however, certain limitations on the payment
of dividends to the parent Corporation by its national bank subsidiaries. For a
discussion of these limitations, see note 18 in the Corporation's 1995 Annual
Report on Form 10-K. Under the more restrictive limitation, the Corporation's
national bank subsidiaries can, without prior regulatory approval, declare
dividends subsequent to June 30, 1996, of approximately $252 million, less any
dividends declared and plus or minus net profits or losses, as defined, between
July 1, 1996, and the date of any such dividend declaration. The national bank
subsidiaries declared dividends to the parent Corporation of $200 million in
the first half of 1996, $501 million in the full-year 1995 and $366 million in
1994. Dividends paid to the parent Corporation by nonbank subsidiaries totaled
$11 million in the first half of 1996, $30 million in the full-year 1995 and
$122 million in 1994. In addition, Mellon Bank, N.A. returned $200 million and
$300 million of capital to the parent Corporation in the first half of 1996 and
the first half of 1995, respectively.
INTEREST RATE SENSITIVITY ANALYSIS
- ------------------------------------------------------------------------------
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest revenue and on the net present
value of the Corporation's assets, liabilities and off-balance-sheet
instruments. Interest rate risk is measured using net interest margin
simulation and asset/liability net present value sensitivity analyses.
Simulation tools serve as the primary means to gauge interest rate exposure.
The net present value sensitivity analysis is the means by which the
Corporation's long-term interest rate exposure is evaluated. These analyses
provide a full understanding of the range of potential impacts on net interest
revenue and portfolio equity caused by interest rate movements.
Modeling techniques that are used to estimate the impact of changes in interest
rates on the net interest margin are a more relevant method of measuring
interest rate risk than the less sophisticated interest rate sensitivity gap
table shown on page 28. Assumptions regarding the replacement of maturing
assets and liabilities are made to simulate the impact of future changes in
rates and/or changes in balance sheet composition. The effect of changes in
future interest rates on the mix of assets and liabilities may cause actual
results to differ from simulated results. In addition, certain financial
instruments provide customers a certain degree of "optionality." For instance,
customers have migrated from lower cost deposit products to higher cost
products. Also, customers will refinance mortgages as interest rates decrease.
While the Corporation's simulation analysis considers these factors, the extent
to which customers utilize the ability to exercise their financial options may
cause actual results to differ from the simulation. Guidelines used by the
Corporation for assuming interest rate risk are presented in the "Interest rate
sensitivity analysis" section on page 43 of the 1995 Annual Report on Form
10-K.
The table on the following page illustrates the simulation analysis of the
impact of a 100 basis point or 200 basis point upward or downward movement in
interest rates on net interest revenue, return on common shareholders' equity
and earnings per share. This analysis was done assuming that interest-earning
asset levels at June 30, 1996, remained constant, that the level of loan fees
remains unchanged, and excludes the impact of interest receipts on
nonperforming loans. The impact of the rate movements was developed by
simulating the effect of rates changing over a six-month period from the June
30, 1996, levels.
26
<PAGE> 28
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from June 30, 1996 rates
- --------------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
compared with June 30, 1996: --------------------- -------------------
+100bp +200bp -100bp -200bp
--------------------------------------------------
<S> <C> <C> <C> <C>
Net interest revenue increase (decrease) .7% .8% (.9)% (2.2)%
Return on common equity increase (decrease) 18 bp 22 bp (26) bp (62) bp
Earnings per share increase (decrease) $.05 $.06 $(.07) $(.16)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in net interest revenue under the 100 and 200 basis point increase
scenarios and the decrease in net interest revenue under the 100 and 200 basis
point decrease scenarios are consistent with the Corporation's asset sensitive
gap position at the one-year repricing period as shown in the interest rate
sensitivity gap table on page 28.
The interest rate sensitivity gap table shows the repricing characteristics of
the Corporation's interest-earning assets and supporting funds at June 30,
1996. The data are based on contractual repricing or maturities and, where
applicable, management's assumptions as to the estimated repricing
characteristics of certain assets and supporting funds. 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.
The measurement of interest rate risk is meaningful only when all related on-
and off-balance-sheet items are aggregated and the net positions are
identified. Financial instruments that the Corporation uses to manage interest
rate sensitivity include: money market assets, U.S. government and federal
agency securities, municipal securities, mortgage-backed securities, corporate
bonds, interest rate swaps, caps and floors, financial futures and financial
options. The cumulative gap at the one-year repricing period, before the
utilization of off-balance-sheet instruments, was asset-sensitive in the amount
of $4.1 billion, or 9.6% of total assets, at June 30, 1996. However, because
the Corporation did not want to accept the level of interest rate risk
presented by its naturally asset-sensitive balance sheet, it entered into
interest rate swaps and other off-balance-sheet instruments that resulted in a
net reduction of $3.4 billion in this cumulative asset-sensitive position.
These instruments reduced the cumulative gap at the one-year repricing period
to an asset-sensitive amount of $.7 billion, or 1.5% of total assets. The
Corporation uses off-balance-sheet instruments primarily to convert fixed-rate
long-term deposits to variable-rate deposits that generally reprice quarterly.
Alternatively, the Corporation could have acquired additional fixed-rate
investment securities or other fixed-rate interest-earning assets of $3.4
billion to accomplish this objective. Correspondingly, the Corporation also
would have had to acquire a comparable amount of wholesale funds in order to
fund these additional interest-earning assets. By using off-balance-sheet
instruments to manage interest rate risk, the effect is a smaller, more
efficient balance sheet, with a lower wholesale funding requirement and a
higher return on assets and net interest margin with a comparable level of net
interest revenue and return on common shareholders' equity.
27
<PAGE> 29
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY GAP AT JUNE 30, 1996
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 $ 1,258 $ - $ - $ - $ - $ - $ 1,258
Trading account securities 112 - - - - - 112
Securities 2,272 81 438 1,187 904 2,083 6,965
Loans 6,830 9,526 3,274 1,458 3,892 2,376 27,356
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $10,472 $ 9,607 $3,712 $2,645 $4,796 $ 4,459 $35,691
Funds supporting interest-
earning assets:
Interest-bearing deposits $ 5,898 $ 6,347 $3,002 $1,889 $2,355 $ 3,707 $23,198
Other borrowed funds 2,678 454 510 - - 119 3,761
Notes and debentures (with original
maturities over one year) - - - 5 740 1,226 1,971
Noninterest-bearing liabilities 963 187 280 135 - 5,196 6,761
- ----------------------------------------------------------------------------------------------------------------------------------
Total funds supporting
interest-earning assets $ 9,539 $ 6,988 $3,792 $2,029 $3,095 $10,248 $35,691
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal $ 933 $ 2,619 $ (80) $ 616 $1,701 $(5,789) $ -
- ----------------------------------------------------------------------------------------------------------------------------------
Off-balance-sheet instruments $(2,451) $(1,814) $ 120 $ 710 $2,630 $ 805 $ -
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(1,518) $ 805 $ 40 $1,326 $4,331 $(4,984) $ -
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $(1,518) $ (713) $ (673) $ 653 $4,984 $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage
of total assets (3.5)% (1.7)% (1.6)% 1.5% 11.7%
- ----------------------------------------------------------------------------------------------------------------------------------
</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, repricing and withdrawal patterns of certain assets and
liabilities.
Off-balance-sheet risk
The Corporation offers off-balance-sheet financial instruments to enable its
customers to meet their financing objectives and manage their interest- and
currency-rate risk. Supplying these instruments provides the Corporation with
an ongoing source of fee revenue. The Corporation also enters into these
transactions to manage its own risks arising from movements in interest and
currency rates and as part of its proprietary trading and funding activities.
These off-balance-sheet instruments are subject to credit and market risk.
Credit risk is limited to the estimated aggregate replacement cost of contracts
in a gain position, should counterparties fail to perform under the terms of
those contracts and any underlying collateral proves to be of no value. Credit
risk is managed by subjecting the counterparties to the Corporation's credit
approval and monitoring policies and procedures. Counterparty limits are
monitored on an ongoing basis. Credit risk is often further mitigated by
contractual agreements to net replacement cost gains and losses on multiple
transactions with the same counterparty through the use of master netting
agreements. Market risk arises from changes in the market value of contracts as
a result of the fluctuations in interest and currency rates. The Corporation
limits its exposure to market risk by entering into generally matching or
offsetting positions and by establishing and monitoring limits on unmatched
positions. Position limits are set by the Finance Committee and approved by the
Office of the Chairman and the Executive Committee of the board of directors.
Portfolio outstandings are monitored against such limits by senior managers and
compliance staff independent of line areas.
28
<PAGE> 30
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
Managing interest rate risk with off-balance-sheet instruments
The Corporation uses off-balance-sheet instruments, primarily interest rate
swaps, in managing its overall interest rate exposure. The following
off-balance-sheet instruments have been approved by the Corporation for
managing the overall Corporate interest rate exposure: interest rate swaps;
caps and floors; financial futures; forward rate agreements; and financial
options. Their usage for speculative purposes is not permitted outside of those
areas designated as trading and controlled with specific authorizations and
limits. These instruments provide the Corporation flexibility in adjusting its
interest rate risk position without exposure to principal risk and funding
requirements. The Corporation primarily uses non-leveraged generic and index
amortizing swaps to accomplish its objectives. Generic swaps involve the
exchange of fixed and variable interest rates based on underlying contractual
notional amounts. Index amortizing swaps involve the exchange of fixed and
variable interest rates; however, their notional amount and maturities vary
based on certain underlying indices. The Corporation's off-balance-sheet
instruments used to manage its interest rate risk are shown in the table on the
following page. Additional information regarding these contracts is presented
in note 20 in the Corporation's 1995 Annual Report on Form 10-K.
29
<PAGE> 31
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK AT JUNE 30, 1996
Total at
June 30,
(notional amounts in millions) 1996 1997 1998 1999 2000 2001+ 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps: (a)
Notional amount $265 $217 $ 15 $ - $ - $400 $ 897
Weighted average rate:
Receive 5.57% 6.23% 5.22% - - 6.32% 6.06%
Pay 5.46% 5.48% 5.49% - - 5.43% 5.45%
Receive fixed/pay floating
indexed amortizing swaps: (b)
Notional value $137 $571 $886 $1,552 $126 $383 $3,655
Weighted average rate:
Receive 5.60% 6.71% 6.00% 5.74% 7.14% 7.14% 6.14%
Pay 5.50% 5.49% 5.53% 5.55% 5.49% 5.49% 5.52%
Pay fixed/receive floating
generic swaps: (a)
Notional amount $ 1 $103 $ 16 $ 2 $ - $ 15 $ 137
Weighted average rate:
Receive 5.36% 5.49% 2.03% 6.54% - 5.52% 5.09%
Pay 7.60% 6.29% 5.29% 8.41% - 6.63% 6.24%
Other products (c) $ 8 $ - $ 4 $ 2 $ 63 $ 15 $ 92
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $411 $891 $921 $1,556 $189 $813 $4,781
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic swaps' notional amounts and lives are not based on interest rate
indices.
(b) Amortizing swaps' notional amounts and lives change, based on certain
interest rate indices. Generally, as rates fall, the notional amounts
decline more rapidly and, as rates increase, notional amounts decline
more slowly.
(c) Average rates are not meaningful for these products.
The gross notional amount of off-balance-sheet products used to manage the
Corporation's interest rate risk was $4.8 billion at June 30, 1996, a decrease
of $.8 billion from $5.6 billion at March 31, 1996. The reduction in these
instruments resulted from maturities. This gross notional amount, which is
presented in the table above, must be viewed in the context of the
Corporation's overall interest rate risk management activities in order to
assess its impact on the net interest margin. As discussed on page 27, these
off-balance-sheet instruments modified the Corporation's asset-sensitive
position, including the modification of the cumulative asset-sensitive position
at the one-year repricing period, of $4.1 billion, before the utilization of
these instruments, to a cumulative one-year asset-sensitive position of $.7
billion at June 30, 1996.
30
<PAGE> 32
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
The following table presents the gross notional amounts of off-balance-sheet
instruments used to manage interest rate risk, identified by the underlying
rate-sensitive instruments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
June 30,
(notional amounts in millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Instruments associated with deposits $3,786 $ 7,911
Instruments associated with other liabilities 422 670
Instruments associated with loans 573 1,718
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $4,781 $10,299
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation entered into these off-balance-sheet instruments to reduce the
natural interest rate risk embedded in its assets and liabilities. The interest
received and interest paid are recorded on an accrual basis in interest revenue
and interest expense associated with the underlying assets and liabilities. The
net differential resulted in interest revenue of $8 million and $13 million in
the second quarter and first half of 1996, compared with interest expense of $3
million in the second quarter and first half of 1995.
In response to tactical asset/liability management considerations, the
Corporation terminated $4.4 billion of interest rate swaps in the first quarter
of 1996. Both pay and receive fixed-rate generic swaps were terminated. The
terminated swaps included $3 billion that were associated with deposits,
specifically money market accounts, CWI accounts and retail savings
certificates, and $1.4 billion that were associated with loans. These
terminations resulted in net deferred gains of $15 million. These gains will be
amortized over the remaining periods of the original hedges, which are between
one and three years. The Corporation amortized $3 million of these gains into
net interest revenue in the first half of 1996.
The estimated unrealized fair value of the Corporation's interest rate
management off-balance-sheet instruments at June 30, 1996, was a negative $104
million, compared with a negative $72 million at March 31, 1996. This decrease
was consistent with the increase in long-term interest rates during the second
quarter of 1996, which had the corresponding effect of increasing the fair
value of on-balance-sheet core deposits. These values should be viewed in the
context of the overall financial structure of the Corporation, including the
aggregate net position of all on- and off-balance-sheet instruments.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR INTEREST RATE RISK MANAGEMENT PURPOSES
- ----------------------------------------------------------------------------------------------------------------------------------
June 30,
(notional amounts in millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate agreements:(a)
Interest rate swaps $4,689 $9,570
Options, caps and floors purchased (b) 84 474
Futures contracts 8 5
Forward rate agreements - 250
Other products 89 32
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited
to the cost of replacing a contract in a gain position, on which a
counterparty may default. Credit risk associated with interest rate
agreements was $4 million at June 30, 1996, and $15 million at
June 30, 1995.
(b) At June 30, 1996 and 1995, there were no options, caps or floors written.
31
<PAGE> 33
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- ---------------------------------------------------------------------------
Off-balance-sheet instruments used for trading activities
The Corporation offers off-balance-sheet financial instruments, primarily
foreign exchange contracts, currency and interest rate option contracts,
interest rate swaps and interest rate caps and floors, to enable customers to
meet their financing objectives and to manage their interest- and currency-rate
risk. Supplying these instruments provides the Corporation with fee revenue.
The Corporation also uses such instruments, as well as futures and forward
contracts, in connection with its proprietary trading account activities. All
of these instruments are carried at market value with realized and unrealized
gains and losses included in foreign currency and securities trading revenue.
In the second quarter and first half of 1996, the Corporation recorded $19
million and $39 million of fee revenue from these activities, primarily from
foreign exchange contracts entered into on behalf of customers, compared with
$25 million and $49 million in the second quarter and first half of 1995. The
total notional values of these contracts were $39 billion at June 30, 1996, and
$37 billion at June 30, 1995, and are included on the off-balance-sheet
instruments used for trading activities table below.
The Corporation has established trading limits and related monitoring
procedures to control trading risk. These limits are reviewed and approved by
the Office of the Chairman and the Executive Committee of the board of
directors. All limits are monitored for compliance by departmental compliance
staff and by the Corporation's Internal Audit department. Exceptions to limits
would be reported to the Office of the Chairman and, in certain instances, to
the Audit Committee of the board of directors.
The financial risk associated with trading positions is managed by assigning
position limits and stop loss guidance amounts to individual activities.
Position limits are assigned to each family of financial instruments eligible
for trading such that the aggregate value at risk in these activities at any
point in time will not exceed a specified limit given a significant market
movement. The extent of market movement deemed to be significant is based upon
an analysis of the historical volatility of individual instruments that would
cover 95% of likely daily market movements. Using the Corporation's
methodology, which considers such factors as changes in interest rates, spreads
and options volatility, the aggregate value at risk for trading activities was
less than $1 million at June 30, 1996.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------------------
June 30,
(notional amounts in millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency contracts:(a)
Commitments to purchase $11,690 $12,691
Commitments to sell 11,718 12,833
Foreign currency and other option contracts written 359 107
Foreign currency and other option contracts purchased 418 126
Interest rate agreements:(a)
Interest rate swaps 6,624 3,758
Options, caps and floors purchased 3,295 3,118
Options, caps and floors written 3,422 3,177
Futures and forward contracts 988 1,450
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited
to the cost of replacing a contract in a gain position, on which a
counterparty may default. Credit risk associated with these instruments
was $297 million at June 30, 1996, and $474 million at June 30, 1995.
32
<PAGE> 34
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1996 1996 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $130 $177 $167 $183 $199
Acquired property, net of the OREO reserve 73 73 69 78 77
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets (a) $203 $250 $236 $261 $276
- ----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .47% .66% .60% .65% .72%
Total nonperforming assets as a percentage of
total loans and net acquired property .74% .93% .85% .93% .99%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
Nonperforming assets is a term used to describe assets on which revenue
recognition has been discontinued or is restricted. Nonperforming assets
include both nonperforming loans and acquired property, primarily other real
estate owned (OREO) acquired in connection with the collection effort on loans.
Nonperforming assets do not include the segregated assets acquired in the
December 1992 Meritor retail office acquisition. Nonperforming loans include
both nonaccrual and "troubled debt" restructured loans. Past-due commercial
loans are those that are contractually past due 90 days or more, but are not on
nonaccrual status because they are well-secured and in the process of
collection. Past-due consumer loans, excluding consumer mortgages, are
generally not classified as nonaccrual, but are charged off on a formula basis
upon reaching various stages of delinquency. Additional information regarding
the Corporation's practices for placing assets on nonaccrual status is
presented in the "Nonperforming assets" discussion and in note 1 in the
Corporation's 1995 Annual Report on Form 10-K.
At June 30, 1996, nonperforming assets totaled $203 million, a decrease of $47
million, or 19%, from March 31, 1996, and are at their lowest level since 1982.
This decrease resulted from lower nonperforming loans due to the partial sale
and repayment of commercial loans to an engineering/construction company, as
well as credit losses, repayments and returns to accrual status. Total
nonperforming assets decreased $73 million compared with June 30, 1995,
primarily as a result of the same factors responsible for the second quarter
decrease. The ratio of nonperforming assets to total loans and net acquired
property at June 30, 1996, was .74%, compared with .93% at March 31, 1996, and
.99% at June 30, 1995. This ratio, which can be expected to vary over time with
changes in the economy, has been lower than 1% for two years.
A loan is considered impaired when, based upon current information and events,
it is probable that the Corporation will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
At June 30, 1996, the Corporation's impaired loans totaled $71 million and
consisted of nonaccrual and restructured commercial and financial, and
commercial real estate loans. Included in these impaired loans were $13
million, which had a related impairment reserve of $2 million, and $58 million
that did not have a related impairment reserve as a result of interest payments
applied to reduce principal or credit losses previously taken on these loans.
Average impaired loans during the second quarter of 1996 were $86 million.
During the quarter, the Corporation recognized $3 million of interest revenue
on impaired loans, all of which was recognized using the cash basis method of
income recognition.
33
<PAGE> 35
<TABLE>
<CAPTION>
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS (a) JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1996 1996 1995 1995 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic nonaccrual loans:
Commercial and financial $ 31 $ 69 $ 65 $ 87 $ 92
Commercial real estate 39 52 29 31 39
Consumer credit:
Consumer mortgage 58 53 61 62 59
Other consumer credit 1 2 2 2 2
- --------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 129 176 157 182 192
- --------------------------------------------------------------------------------------------------------------------------------
Domestic restructured loans:
Commercial and financial - - - - 4
Commercial real estate 1 1 10 1 3
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic restructured loans 1 1 10 1 7
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (b) 130 177 167 183 199
- --------------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 84 86 87 99 98
Reserve for real estate acquired (11) (13) (18) (21) (21)
- --------------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of reserve 73 73 69 78 77
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $203 $250 $236 $261 $276
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective loan portfolio
segments:
Domestic commercial and financial loans and leases .26% .58% .55% .78% .87%
Domestic commercial real estate loans 2.48 3.61 2.55 2.12 2.80
Domestic consumer mortgage loans .73 .67 .68 .68 .66
Total loans .47 .66 .60 .65 .72
Nonperforming assets as a percentage of
total loans and net acquired property .74 .93 .85 .93 .99
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes $51 million, $104 million, $81 million, $103 million and $113
million, respectively, of loans with both principal and interest less than
90 days past due but placed on nonaccrual status by management discretion.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS FOR THE THREE MONTHS ENDED JUNE 30 (a)
Domestic
----------------------------------------- Total
Commercial Commercial Consumer -----------------
(in millions) & Financial Real Estate Credit 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans at beginning of period $69 $53 $55 $177 $156
Additions 10 1 13 24 75
Payments (b) (41) (2) (4) (47) (13)
Return to accrual status - (5) (1) (6) (9)
Credit losses (7) - (1) (8) (7)
Transfers to acquired property - (7) (3) (10) (3)
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at June 30 $31 $40 $59 $130 $199
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes interest applied to principal and sales.
34
<PAGE> 36
<TABLE>
<CAPTION>
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS FOR THE SIX MONTHS ENDED JUNE 30 (a)
Domestic
----------------------------------------- Total
Commercial Commercial Consumer -----------------
(in millions) & Financial Real Estate Credit 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans at beginning of period $65 $39 $63 $167 $151
Additions 23 36 18 77 130
Payments (b) (43) (6) (9) (58) (50)
Return to accrual status - (14) (3) (17) (12)
Credit losses (14) (8) (4) (26) (14)
Transfers to acquired property - (7) (6) (13) (6)
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at June 30 $31 $40 $59 $130 $199
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes interest applied to principal and sales.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL NONPERFORMING LOAN DATA (a) June 30,
(dollar amounts in millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Contractual balance of nonperforming loans $172 $260
Book balance 130 199
Book balance as a percentage of contractual balance 75% 77%
Interest receipts applied to reduce principal
Second quarter $ 2 $ 1
Year-to-date 3 3
Interest receipts recognized in interest revenue
Second quarter 3 4
Year-to-date 6 6
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
Acquired property totaled $73 million at June 30, 1996, and March 31, 1996, and
$77 million at June 30, 1995. The decrease from June 30, 1995, resulted from
sales.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Three months ended Six months ended
June 30, June 30,
(in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Acquired property at beginning of period,
net of the OREO reserve $73 $ 86 $ 69 $ 87
Foreclosures 11 4 15 10
Sales (7) (15) (11) (22)
Write-downs, credit losses, OREO provision and other (4) 2 - 2
- --------------------------------------------------------------------------------------------------------------------------------
Acquired property at end of period, net of the OREO reserve (a) $73 $ 77 $ 73 $ 77
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
The Corporation recognizes any estimated potential decline in the value of OREO
between appraisal dates on a property-by-property basis through periodic
additions to the OREO reserve. Write-downs charged against this reserve are
taken when OREO is sold at a loss or upon the receipt of appraisals that
indicate a deterioration in the fair value of the property. Activity in the
Corporation's OREO reserve is presented in the table on the following page.
35
<PAGE> 37
<TABLE>
<CAPTION>
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) Three months ended Six months ended
June 30, June 30,
(in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $13 $26 $18 $29
Write-downs on real estate acquired (2) (2) (3) (2)
Provision - (3) (4) (6)
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $11 $21 $11 $21
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1996 1996 1995 1995 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 35 $ 36 $ 34 $ 32 $ 32
Ratio (a) .44% .46% .38% .35% .36%
Credit card 35 (b) 24 (b) 13 (b) 56 54
Ratio (a) 1.64% 1.21% .66% 2.01% 1.96%
Student - government guaranteed 30 37 44 39 32
Ratio (a) 2.00% 2.53% 3.11% 2.78% 2.36%
Other consumer 1 1 1 1 1
Ratio (a) .13% .13% .09% .07% .08%
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer $101 $ 98 $ 92 $ 128 $ 119
Ratio (a) .80% .79% .68% .87% .82%
- --------------------------------------------------------------------------------------------------------------------------------
Commercial 7 7 6 6 6
Total past-due loans $108 $105 $ 98 $134 $125
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 90 days past due as a percentage of quarter-end loan balances.
(b) Excludes past due CornerStone(sm) credit card loans included in the
accelerated resolution portfolio.
36
<PAGE> 38
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Mellon Bank Corporation (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(dollar amounts in millions) 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets Cash and due from banks $ 2,765 $ 2,342 $ 2,218
Interest-bearing deposits with banks 810 553 540
Federal funds sold and securities under resale agreements 291 225 257
Other money market investments 157 82 36
Trading account securities 112 62 267
Securities available for sale 4,450 2,913 1,953
Investment securities (approximate fair value
of $2,481, $2,554 and $3,136) 2,515 2,519 3,133
Loans, net of unearned discount of $59, $44 and $58 27,356 27,690 27,765
Reserve for credit losses (467) (471) (583)
Customers' acceptance liability 251 263 236
Premises and equipment 556 556 554
Acquired property, net of reserves of $11, $18 and $21 73 69 77
Goodwill and other intangibles 906 958 997
Mortgage servicing rights and purchased
credit card relationships 734 682 432
Other assets 2,260 2,203 2,134
----------------------------------------------------------------------------------------------------------------
Total assets $42,769 $40,646 $40,016
----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 8,506 $ 6,458 $ 5,908
Interest-bearing deposits in domestic offices 18,752 18,412 17,651
Interest-bearing deposits in foreign offices 4,446 4,391 3,248
----------------------------------------------------------------------------------------------------------------
Total deposits 31,704 29,261 26,807
Federal funds purchased and securities under
repurchase agreements 1,801 1,591 2,985
U.S. Treasury tax and loan demand notes 604 290 802
Term federal funds purchased 560 905 411
Short-term bank notes 330 1,057 961
Commercial paper 187 284 128
Other funds borrowed 279 190 361
Acceptances outstanding 251 263 236
Other liabilities 1,315 1,337 1,379
Notes and debentures (with original maturities over one year) 1,971 1,443 1,868
----------------------------------------------------------------------------------------------------------------
Total liabilities 39,002 36,621 35,938
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Preferred stock 435 435 435
equity Common shareholders' equity:
Common stock - $.50 par value
Authorized - 200,000,000 shares
Issued - 147,165,480 shares 74 74 74
Additional paid-in capital 1,855 1,850 1,843
Retained earnings 2,297 2,118 1,950
Net unrealized gain (loss) on assets
available for sale, net of tax (30) 18 (21)
Treasury stock of 17,096,369; 9,978,407 and 4,812,259 shares, at cost (864) (470) (203)
-----------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 3,332 3,590 3,643
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,767 4,025 4,078
----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $42,769 $40,646 $40,016
----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
37
<PAGE> 39
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
Mellon Bank Corporation (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
----------------------------
JUNE 30, June 30,
(in millions, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees of $48, $35, $24, $24, $24, $20 and $19) $1,116 $1,192
Interest-bearing deposits with banks 19 15
Federal funds sold and securities under resale agreements 13 19
Other money market investments 3 1
Trading account securities 4 9
Securities 195 155
------------------------------------------------------------------------------------------------------------
Total interest revenue 1,350 1,391
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 332 322
Deposits in foreign offices 102 103
Federal funds purchased and securities under repurchase agreements 53 62
Short-term bank notes 21 20
Other short-term borrowings 45 53
Notes and debentures 62 57
------------------------------------------------------------------------------------------------------------
Total interest expense 615 617
- --------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 735 774
revenue Provision for credit losses 50 40
------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for losses 685 734
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment management fees 489 444
revenue Cash management and deposit transaction charges 101 95
Mortgage servicing fees 85 50
Credit card fees 63 41
Foreign currency and securities trading 41 49
Other income 198 125
------------------------------------------------------------------------------------------------------------
Total fee revenue 977 804
Gains on sales of securities 1 -
------------------------------------------------------------------------------------------------------------
Total noninterest revenue 978 804
- --------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 532 469
expense Net occupancy expense 106 99
Professional, legal and other purchased services 97 88
Equipment expense 71 68
Business development 68 70
Amortization of mortgage servicing rights and purchased
credit card relationships 55 26
Amortization of goodwill and other intangible assets 49 48
Communications expense 47 42
FDIC assessment and regulatory examination fees 3 30
Other expense 81 67
Net revenue from acquired property (9) (12)
-------------------------------------------------------------------------------------------------------------
Total operating expense 1,100 995
- --------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes 563 543
Provision for income taxes 205 201
------------------------------------------------------------------------------------------------------------
Net income 358 342
Dividends on preferred stock 20 20
------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 338 $ 322
------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Per common share Primary net income $ 2.50 $ 2.17
Fully diluted net income $ 2.50 $ 2.16
------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
38
<PAGE> 40
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
1996 1996 1995 1995 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$550 $566 $610 $623 $609
10 9 11 10 8
7 6 7 8 8
1 2 1 - 1
2 2 4 6 3
107 88 87 80 77
- --------------------------------------------------------------------------------------------------------------------------------
677 673 720 727 706
- --------------------------------------------------------------------------------------------------------------------------------
165 167 172 169 169
51 51 65 58 51
26 27 31 32 33
7 14 16 14 14
22 23 26 30 25
34 28 28 32 29
- --------------------------------------------------------------------------------------------------------------------------------
305 310 338 335 321
- --------------------------------------------------------------------------------------------------------------------------------
372 363 382 392 385
25 25 35 30 20
- --------------------------------------------------------------------------------------------------------------------------------
347 338 347 362 365
- --------------------------------------------------------------------------------------------------------------------------------
248 241 229 233 225
52 49 47 49 48
44 41 40 32 25
30 33 28 21 22
20 21 18 24 25
80 118 82 63 60
- --------------------------------------------------------------------------------------------------------------------------------
474 503 444 422 405
- 1 6 - 1
- --------------------------------------------------------------------------------------------------------------------------------
474 504 450 422 406
- --------------------------------------------------------------------------------------------------------------------------------
255 277 248 240 229
50 56 52 54 48
50 47 51 47 50
36 35 40 35 34
35 33 33 33 37
27 28 25 17 13
24 25 24 24 24
24 23 22 22 20
2 1 - 1 15
38 43 36 36 38
(1) (8) (5) (3) (8)
- ---------------------------------------------------------------------------------------------------------------------------------
540 560 526 506 500
- --------------------------------------------------------------------------------------------------------------------------------
281 282 271 278 271
102 103 97 103 99
- --------------------------------------------------------------------------------------------------------------------------------
179 179 174 175 172
10 10 10 9 10
- --------------------------------------------------------------------------------------------------------------------------------
$ 169 $ 169 $ 164 $ 166 $ 162
- --------------------------------------------------------------------------------------------------------------------------------
$1.26 $1.24 $1.18 $1.15 $1.09
$1.26 $1.24 $1.16 $1.14 $1.09
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 41
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(in millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM Net income $358 $342
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of goodwill and other intangible assets 49 48
Amortization of mortgage servicing rights and
purchased credit card relationships 55 26
Depreciation and other amortization 51 53
Deferred income tax expense 30 79
Provision for credit losses 50 40
Provision for real estate acquired and other losses (4) (4)
Net gains on dispositions of acquired property (5) (5)
Net increase in accrued interest receivable (5) (35)
Net increase in trading account securities (47) (196)
Net increase (decrease) in accrued interest payable,
net of amounts prepaid (5) 33
Net (increase) decrease in residential mortgages held for sale 160 (388)
Net decrease in other operating activities (149) (425)
---------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 538 (432)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Net increase in term deposits and other money
INVESTING ACTIVITIES market investments (332) (99)
Net (increase) decrease in federal funds sold and securities
under resale agreements (66) 126
Funds invested in securities available for sale (5,167) (2,863)
Proceeds from sales of securities available for sale 378 1,484
Proceeds from maturities of securities available for sale 3,262 1,356
Funds invested in investment securities (213) (16)
Proceeds from maturities of investment securities 214 124
Net increase in credit card receivables (256) (219)
Home equity lines of credit securitized 650 -
Net principal disbursed on loans to customers (707) (523)
Loan portfolio purchases (186) (277)
Proceeds from the sales of loan portfolios 601 251
Purchases of premises and equipment (60) (39)
Proceeds from sales of acquired property 16 28
Net increase in other investing activities (80) (65)
-----------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,946) (732)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
40
<PAGE> 42
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(in millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM Net increase (decrease) in transaction and savings deposits 113 (672)
FINANCING ACTIVITIES Net increase (decrease) in customer term deposits 2,330 (91)
Net increase in federal funds purchased and
securities under repurchase agreements 210 962
Net increase (decrease) in short-term bank notes (727) 761
Net increase (decrease) in term federal funds purchased (345) 78
Net increase in U.S. Treasury tax and loan demand notes 314 235
Net decrease in commercial paper (97) (50)
Repurchase and repayments of longer-term debt (21) (28)
Net proceeds from issuance of longer-term debt 549 327
Proceeds from issuance of common stock 24 31
Dividends paid on common and preferred stock (174) (178)
Repurchase of common stock and warrants related
to the 1993 TBC acquisition - (213)
Repurchase of common stock for employee benefit purposes (192) (106)
Repurchase of common stock - other (249) -
Redemption of preferred stock - (155)
Net increase in other financing activities 89 188
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,824 1,089
Effect of foreign currency exchange rates 7 8
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND Net increase (decrease) in cash and due from banks 423 (67)
DUE FROM BANKS Cash and due from banks at beginning of period 2,342 2,285
-----------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $2,765 $2,218
-----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL Interest paid $ 620 $ 584
DISCLOSURES Net income taxes paid 161 72
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MELLON Bank Corporation (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(dollar amounts in millions, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholders' equity Balance at beginning of period $4,025 $4,122
Net income 358 342
Dividends on preferred stock:
Series I (7) (7)
Series J (4) (4)
Series K (9) (9)
Dividends on common stock at $1.15 per share in 1996
and $.95 per share in 1995 (154) (140)
Repurchase of common stock for employee benefit purposes and
the dividend reinvestment and common stock purchase plan (192) (106)
Repurchase of warrants - (54)
Repurchase of common stock-related to the 1993 TBC acquisition - (159)
Repurchase of common stock - other (249) -
Common stock issued under dividend reinvestment and
common stock purchase plan 8 7
Exercise of stock options 29 37
Unrealized net gain (loss) on assets classified as available for sale (48) 34
Other 10 15
-----------------------------------------------------------------------------------------------------
Balance at end of period $3,767 $4,078
-----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
41
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 -- Basis of presentation
The unaudited consolidated financial statements of the Corporation are prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements should be read in conjunction with
the Corporation's 1995 Annual Report on Form 10-K. In the opinion of
management, all normal recurring adjustments necessary for a fair presentation
of the financial position and results of operations for the periods have been
included.
Note 2 -- Adoption of Financial Accounting Standards
On January 1, 1996, the Corporation adopted the Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," and FAS No. 123, "Accounting for
Stock-Based Compensation." FAS No. 121 establishes guidelines for recognition
of impairment losses related to long-lived assets and certain intangibles and
related goodwill for both assets to be held and used as well as assets held for
disposition. This statement excludes financial instruments, long-term customer
relationships of financial institutions, mortgage and other servicing rights
and deferred tax assets. The adoption of FAS No. 121 was immaterial to the
Corporation's financial position and results of operations. FAS No. 123
establishes a fair value-based method of accounting for stock-based
compensation plans. Under FAS No. 123, entities are permitted to expense the
estimated fair value of employee stock options or to continue to measure
compensation cost for these plans using the intrinsic value accounting method
contained in APB Opinion No. 25. The Corporation will continue to use the
intrinsic value method of accounting for stock-based compensation plans and
will provide pro forma disclosures of the fair value-based method in its 1996
annual report.
Note 3 -- Foreign currency and securities trading revenue
The Corporation's trading activities involve a variety of financial
instruments, including U.S. government securities, municipal securities and
money market securities, as well as off-balance-sheet instruments. The majority
of the Corporation's trading revenue is earned by structuring and executing
off-balance-sheet instruments for customers. The resulting risks are limited by
entering into generally matching or offsetting positions. The Corporation also
enters into positions in interest rate, foreign exchange and debt instruments
based upon expectations of future market conditions. Unmatched positions are
monitored through established limits. To maximize net trading revenues, the
market-making and proprietary positions are managed together by product.
The results of the Corporation's foreign currency and securities trading
activities are presented, by class of financial instrument, in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
(in millions) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts $19 $24 $38 $48
Debt instruments 1 - 2 -
Futures contracts - 1 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $20 $25 $41 $49
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recognized an unrealized gain of less than $1 million at
June 30, 1996, and June 30, 1995, related to securities held in the
trading portfolio.
42
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
Note 4 -- Supplemental information to the Consolidated Statement of Cash Flows
Noncash investing and financing transactions that appropriately were not
reflected in the Consolidated Statement of Cash Flows are listed below.
<TABLE>
<CAPTION>
Six months ended
June 30,
(in millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfers to real estate acquired $15 $10
Net transfers to segregated assets 6 12
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5 -- Securities
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1996 June 30, 1995
------------------------------------------ ------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 285 $ - $ - $ 285 $ 237 $ - $ - $ 237
U.S. agency mortgage-backed 2,027 7 43 1,991 516 1 12 505
Other U.S. agency 2,068 3 - 2,071 1,128 - 1 1,127
- --------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 4,380 10 43 4,347 1,881 1 13 1,869
Obligations of states and
political subdivisions 23 - - 23 1 - - 1
Other mortgage-backed 6 - - 6 8 - - 8
Other securities 63 11 - 74 71 5 1 75
- --------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $4,472 $21 $43 $4,450 $1,961 $ 6 $14 $1,953
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Gross realized gains were $1 million in the first half of 1996 and 1995.
Gross realized losses were less than $1 million in the first half of 1996 and
$1 million in the first half of 1995. Proceeds from the sale of securities
available for sale totaled $378 million and $1,484 million in the first half of
1996 and 1995, respectively.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1996 June 30, 1995
----------------------------------------- ------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair
(in millions) COST GAINS LOSSES VALUE cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 25 $1 $ 1 $ 25 $ 29 $ 1 $ - $ 30
U.S. agency mortgage-backed 2,404 3 38 2,369 2,920 22 22 2,920
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 2,429 4 39 2,394 2,949 23 22 2,950
Obligations of states and
political subdivisions - - - - 56 1 - 57
Other mortgage-backed 33 1 - 34 45 1 1 45
Other securities 53 - - 53 83 1 - 84
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $2,515 $5 $39 $2,481 $3,133 $26 $23 $3,136
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Note 6 -- Other assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prepaid expense:
Pension $ 288 $ 290 $ 265
Other 64 65 60
Interest receivable 249 244 234
Accounts receivable 284 196 206
Receivables related to
off-balance-sheet instruments 299 388 479
Assets held for accelerated resolution 52 82 -
Segregated assets, net of reserve (a) 22 24 57
Other 1,002 914 833
- ----------------------------------------------------------------------------------------------------------------------------------
Total other assets $2,260 $2,203 $2,134
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Additional information regarding segregated assets is presented
in note 8 in the Corporation's 1995 Annual Report on Form 10-K.
Note 7 -- Preferred stock
The following table summarizes the Corporation's preferred stock outstanding.
Each series of preferred stock has a par value of $1.00 per share. At June 30,
1996, the Corporation had 50,000,000 shares of preferred stock authorized. A
detailed description of the Corporation's outstanding preferred stock is
provided in note 12 in the Corporation's 1995 Annual Report on Form 10-K.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at
Liquidation ----------------------------------
(dollar amounts in millions, preference Shares Shares JUNE 30, Dec. 31, June 30,
except per share amounts) per share authorized issued 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
9.60% preferred stock (Series I) $25.00 6,000,000 6,000,000 $145 $145 $145
8.50% preferred stock (Series J) 25.00 4,000,000 4,000,000 97 97 97
8.20% Preferred stock (Series K) 25.00 8,000,000 8,000,000 193 193 193
- ----------------------------------------------------------------------------------------------------------------------------------
Total preferred stock $435 $435 $435
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 8 -- Legal proceedings
A discussion of legal actions and proceedings against the Corporation and its
subsidiaries is presented in Part II, Item 1, of this Form 10-Q.
44
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 9 -- Computation of primary and fully diluted net income per common share
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
(dollar amounts in millions, except per June 30, June 30,
share amounts; common shares in thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER COMMON SHARE
Net income applicable to common stock $169 $162 $338 $322
- ----------------------------------------------------------------------------------------------------------------------------------
Stock and stock equivalents (average shares):
Common shares outstanding 131,350 145,465 133,010 146,185
Other common stock equivalents, net of shares assumed
to be repurchased under the treasury stock method:
Stock options 1,879 1,929 1,859 1,672
Warrants - 661 - 541
- ----------------------------------------------------------------------------------------------------------------------------------
Total stock and stock equivalents (a) 133,229 148,055 134,869 148,398
- ----------------------------------------------------------------------------------------------------------------------------------
Primary net income per common share (b) $1.26 $1.09 $2.50 $2.17
- ----------------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED NET INCOME PER COMMON SHARE
Net income applicable to common stock (c) $169 $162 $338 $322
- ----------------------------------------------------------------------------------------------------------------------------------
Stock, stock equivalents and potentially
dilutive items (average shares):
Common shares outstanding 131,350 145,465 133,010 146,185
Other common stock equivalents, net of shares assumed
to be repurchased under the treasury stock method:
Stock options 1,962 1,929 2,002 2,083
Warrants - 768 - 889
Common shares issuable upon conversion of
7-1/4% Convertible Subordinated Capital Notes 101 129 106 131
- ----------------------------------------------------------------------------------------------------------------------------------
Total 133,413 148,291 135,118 149,288
- ----------------------------------------------------------------------------------------------------------------------------------
Fully diluted net income per common share (b) $1.26 $1.09 $2.50 $2.16
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At June 30, 1996, common stock and stock equivalents totaled 132.0
million shares.
(b) Calculated based on unrounded numbers.
(c) The after-tax benefit of interest expense on assumed conversion of the
7-1/4% Convertible Subordinated Capital Notes was less than $1 million
for all periods shown.
45
<PAGE> 47
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- -----------------------------------------------------------------------------------------------------------------------------------
Six months ended
--------------------------------------------------
JUNE 30, 1996 June 30, 1995
AVERAGE AVERAGE Average Average
(dollar amounts in millions) BALANCE YIELDS/RATES balance yields/rates
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets Interest-earning assets:
Interest-bearing deposits with banks $ 729 5.23% $ 491 6.30%
Federal funds sold and securities under
resale agreements 481 5.46 667 5.77
Other money market investments 128 4.82 39 5.73
Trading account securities 160 5.67 268 7.20
Securities:
U.S. Treasury and agency securities (a) 5,778 6.57 4,535 6.54
Obligations of states and political
subdivisions (a) 55 8.40 67 7.62
Other (a) 164 5.89 210 5.90
Loans, net of unearned discount (a) 26,949 8.36 26,922 8.96
-------- -------
Total interest-earning assets 34,444 7.92% 33,199 8.51%
Cash and due from banks 2,779 2,128
Customers' acceptance liability 258 194
Premises and equipment 558 555
Net acquired property 71 85
Other assets (a) 3,846 3,622
Reserve for credit losses (473) (606)
-----------------------------------------------------------------------------------------------------------------
Total assets $41,483 $39,177
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities Interest-bearing liabilities:
and Deposits in domestic offices:
shareholders' Demand $ 1,424 2.38% $ 1,960 2.04%
equity Money market and other savings accounts 9,646 2.83 8,654 3.04
Retail savings certificates 6,410 4.90 6,817 4.95
Other time deposits 822 5.58 201 4.17
Deposits in foreign offices 3,958 5.20 3,534 5.88
------- -------
Total interest-bearing deposits 22,260 3.92 21,166 4.05
Federal funds purchased and securities under
repurchase agreements 1,997 5.37 2,103 5.96
Short-term bank notes 700 5.89 627 6.41
Term federal funds purchased 644 5.62 498 6.07
U.S. Treasury tax and loan demand notes 286 5.18 504 5.70
Commercial paper 238 5.42 259 5.96
Other funds borrowed 276 9.96 375 8.90
Notes and debentures (with original maturities over one year) 1,763 7.08 1,612 7.16
------- -------
Total interest-bearing liabilities 28,164 4.39% 27,144 4.59%
Total noninterest-bearing deposits 7,852 6,042
Acceptances outstanding 258 194
Other liabilities 1,370 1,602
-----------------------------------------------------------------------------------------------------------------
Total liabilities 37,644 34,982
-----------------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 3,839 4,195
-----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $41,483 $39,177
- -----------------------------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.92% 8.51%
Cost of funds supporting interest-earning assets 3.60% 3.76%
-----------------------------------------------------------------------------------------------------------------
Net interest margin:
Taxable equivalent basis 4.32% 4.75%
Without taxable equivalent increments 4.29% 4.71%
-----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts and yields exclude adjustments to fair value
required by FAS No. 115.
Note: Average rates are annualized and calculated on a
taxable equivalent basis, at tax rates
46
<PAGE> 48
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1996 March 31, 1996 Dec. 31, 1995 Sept. 30, 1995 June 30, 1995
AVERAGE AVERAGE Average Average Average Average Average Average Average Average
BALANCE YIELDS/RATES balance yields/rates balance yields/rates balance yields/rates balance yields/rates
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 765 5.11% $ 693 5.36% $ 660 6.28% $ 621 6.23% $ 552 6.33%
490 5.52 473 5.40 449 5.77 613 5.28 578 5.79
132 4.65 124 5.00 97 5.03 52 3.97 35 6.71
181 6.05 138 5.17 283 5.86 363 6.26 220 6.65
6,478 6.48 5,074 6.68 4,926 6.55 4,681 6.48 4,429 6.59
48 8.61 62 8.24 62 8.01 59 7.67 64 7.67
157 5.74 171 6.02 187 10.48 202 6.12 207 5.91
26,819 8.27 27,078 8.44 27,778 8.74 27,804 8.92 27,124 9.03
- ------- ------- ------- ------- -------
35,070 7.81% 33,813 8.03% 34,442 8.33% 34,395 8.43% 33,209 8.58%
2,802 2,755 2,533 2,554 2,147
271 245 275 253 198
561 556 557 553 554
75 68 74 78 83
3,817 3,880 3,842 3,727 3,826
(469) (477) (567) (586) (606)
- ---------------------------------------------------------------------------------------------------------------------------------
$42,127 $40,840 $41,156 $40,974 $39,411
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1,241 2.45% $ 1,608 2.33% $ 1,866 1.79% $ 1,881 1.87% $ 1,924 2.13%
9,746 2.72 9,546 2.94 8,909 3.30 8,724 3.26 8,606 3.16
6,413 4.83 6,408 4.97 6,508 5.11 6,594 5.18 6,807 5.15
1,091 5.35 553 6.03 414 5.13 232 4.83 194 5.92
4,038 5.12 3,878 5.29 4,480 5.74 4,034 5.69 3,452 5.94
- ------- ------- ------- ------- -------
22,529 3.86 21,993 3.98 22,177 4.23 21,465 4.20 20,983 4.19
1,959 5.31 2,035 5.42 2,098 5.81 2,207 5.76 2,208 6.06
439 5.93 961 5.87 1,102 5.82 897 6.38 892 6.40
655 5.43 632 5.82 838 5.90 738 5.95 487 6.23
269 5.14 303 5.21 209 5.68 387 5.69 437 5.86
227 5.33 249 5.51 241 5.74 145 5.76 249 6.02
293 9.61 259 10.37 318 8.34 511 8.57 337 8.77
1,971 7.03 1,554 7.14 1,646 6.96 1,809 6.91 1,643 7.13
- ------- ------- ------- ------- -------
28,342 4.34% 27,986 4.45% 28,629 4.68% 28,159 4.72% 27,236 4.73%
8,420 7,281 6,769 6,952 6,117
271 245 275 253 198
1,301 1,442 1,423 1,508 1,658
- ---------------------------------------------------------------------------------------------------------------------------------
38,334 36,954 37,096 36,872 35,209
- ---------------------------------------------------------------------------------------------------------------------------------
3,793 3,886 4,060 4,102 4,202
- ---------------------------------------------------------------------------------------------------------------------------------
$42,127 $40,840 $41,156 $40,974 $39,411
- ---------------------------------------------------------------------------------------------------------------------------------
7.81% 8.03% 8.33% 8.43% 8.58%
3.51% 3.68% 3.90% 3.87% 3.89%
- ---------------------------------------------------------------------------------------------------------------------------------
4.30% 4.35% 4.43% 4.56% 4.69%
4.27% 4.32% 4.40% 4.53% 4.66%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
approximating 35%, using dollar amounts in thousands and actual number of days
in the periods and are before the effect of reserve requirements. Loan fees, as
well as nonaccrual loans and their related income effect, have been included in
the calculation of average interest yields/rates.
47
<PAGE> 49
SELECTED STATISTICAL INFORMATION
- --------------------------------------------------------------------------------
DEPOSITS
<TABLE>
<CAPTION>
Mellon Bank Corporation (and its subsidiaries)
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1996 1996 1995 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deposits in domestic offices:
Interest-bearing:
Demand, money market and
other savings accounts $10,755 $11,816 $11,294 $10,663 $10,682
Retail savings certificates 6,507 6,353 6,450 6,520 6,730
Other time deposits 1,490 425 668 227 239
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 18,752 18,594 18,412 17,410 17,651
Noninterest-bearing 8,506 7,978 6,458 6,524 5,908
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 27,258 26,572 24,870 23,934 23,559
Deposits in foreign offices 4,446 3,326 4,391 5,377 3,248
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits $31,704 $29,898 $29,261 $29,311 $26,807
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings.
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust
and other activities. Because of the complex nature of some of these actions
and proceedings, it may be a number of years before such matters ultimately are
resolved. After consultation with legal counsel, management believes that the
aggregate liability, if any, resulting from such pending and threatened actions
and proceedings will not have a material adverse effect on the Corporation's
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Corporation's annual meeting of shareholders held on April 16, 1996, for
which proxies were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), the following matters were
voted upon by shareholders.
1. The election of six directors for a term expiring in 1999:
<TABLE>
<CAPTION>
Name of Director Votes For Votes Withheld
---------------- --------- --------------
<S> <C> <C>
J. W. Connolly 115,326,172 549,925
Charles A. Corry 115,283,160 592,937
Pemberton Hutchinson 115,277,141 598,956
Rotan E. Lee 115,289,171 586,926
Robert Mehrabian 115,262,178 613,919
Wesley W. von Schack 115,300,883 575,214
</TABLE>
The election of one director for a term expiring in 1997:
<TABLE>
<CAPTION>
Name of Director Votes For Votes Withheld
---------------- --------- --------------
<S> <C> <C>
Howard Stein 115,170,590 705,507
</TABLE>
48
<PAGE> 50
PART II - OTHER INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
2. Approval of the amendment and restatement of the Corporation's
Long-Term Profit Incentive Plan (1981):
<TABLE>
<S> <C>
For: 97,793,350
Against: 17,209,011
Abstain: 852,729
Broker Non-Votes: 21,007
</TABLE>
3. Ratification of KPMG Peat Marwick LLP as independent public
accountants of the Corporation for the year 1996:
<TABLE>
<S> <C>
For: 115,307,796
Against: 313,283
Abstain: 255,018
</TABLE>
Abstentions are not counted for voting purposes under Pennsylvania law, the
jurisdiction of the Corporation's incorporation. However, for purposes of
determining the minimum number of affirmative votes required for approval of
Item 2 under the Exchange Act, as amended, the aggregate number of shares voted
"For," "Against" or "Abstain" were counted, thus giving an abstention the same
legal effect as a vote "Against" the proposal. Broker "Non-Votes" were not
voted on Item 2 and were not counted in determining the number of affirmative
votes required for its approval.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<S> <C>
10.1 Mellon Bank Corporation Long-Term Profit Incentive Plan
(1996). Method of Filing: Previously filed as Annex A to
Mellon Bank Corporation's Notice of Annual Meeting of
Shareholders and Proxy Statement dated March 7, 1996 (File No.
1-7410).
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends (parent Corporation).
12.2 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends (Mellon Bank Corporation and its subsidiaries).
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed.
</TABLE>
(b) Reports on Form 8-K
During the second quarter of 1996, the Corporation filed the following
Current Reports on Form 8-K:
(1) A report dated April 16, 1996, which included, under Item 7,
the Corporation's press release regarding first quarter 1996
financial results.
(2) A report dated May 21, 1996, which included, under Items 5 and
7, the Corporation's press release announcing the Corporation's
5 million share common stock repurchase program.
49
<PAGE> 51
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MELLON BANK CORPORATION
(Registrant)
Date: August 9, 1996 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)
50
<PAGE> 52
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Business Mellon Bank Corporation is a multibank holding company
of the incorporated under the laws of Pennsylvania in August 1971 and
Corporation registered under the Federal Bank Holding Company Act of 1956, as
amended. Its principal direct subsidiaries are Mellon Bank, N.A.,
The Boston Company, Inc., Mellon Bank (DE) National Association,
Mellon Bank (MD), Mellon PSFS (NJ) National Association and a
number of companies known as Mellon Financial Services
Corporation. The Corporation also owns a federal savings bank
headquartered in New Jersey, Mellon Bank, F.S.B. The Dreyfus
Corporation, one of the nation's largest mutual fund companies,
is a wholly owned subsidiary of Mellon Bank, N.A. The
Corporation's banking subsidiaries engage in retail financial
services, commercial banking, trust and investment management
services, residential real estate loan financing, mortgage
servicing, mutual fund activities and various securities-related
activities. The Mellon Financial Services Corporations, through
their subsidiaries and joint ventures, provide a broad range of
bank-related services -- including equipment leasing, commercial
loan financing, stock transfer services, cash management and
numerous trust and investment management services. The
Corporation's principal executive office is located at One Mellon
Bank Center, 500 Grant Street, Pittsburgh, PA 15258-0001
(Telephone: (412) 234-5000).
Exchange Mellon Bank Corporation's common, Series I preferred, Series J
listing preferred and Series K preferred stocks are traded on the New
York Stock Exchange. The trading symbols are MEL (common stock),
MEL Pr I, MEL Pr J and MEL Pr K. The Transfer Agent and Registrar
is ChaseMellon Shareholder Services, 85 Challenger Road, Overpeck
Centre, Ridgefield Park, NJ 07660-9940.
Dividend Subject to approval of the board of directors, dividends are paid
payments 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,
Reinvestment registered holders of Mellon Bank Corporation's common stock may
and Common purchase additional common shares at the market value for such
Stock Pur- shares through reinvestment of common dividends and/or optional
chase Plan 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
Corporation's Stock Transfer Agent.
Phone Corporate Communications/
contacts Media Relations 1(412) 236-1264 Employee communications and media inquiries.
Dividend Reinvestment Plan 1(800) 205-7699 Enrollment/Prospectus for Dividend Reinvestment.
Publication Requests 1(800) 879-4816 Requests for the Annual Report or quarterly information.
Stock Transfer Agent 1(800) 205-7699 Questions regarding specific shareholder accounts.
Investor Relations 1(412) 234-5601 General questions regarding the Corporation's financial
performance and securities.
Shareholder Quarterly earnings news releases are available to shareholders
Publications upon request. To receive Mellon's quarterly earnings news
releases, please write to the Secretary of the Corporation, 1820
One Mellon Bank Center, Pittsburgh, PA 15258-0001, or call
ChaseMellon Shareholder Services at 1(800) 879-4816. Quarterly
earnings and other news releases can be faxed to you by calling
Company News on Call at 1(800) 758-5804. This electronic,
menu-driven system will request a six-digit code (552187) and
will allow you to request specific releases to be sent to your
fax machine. Additional Mellon information also can be accessed
on its Web site at http://www.mellon.com/, and Dreyfus
information can be accessed at http://www.dreyfus.com/.
</TABLE>
51
<PAGE> 53
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------
<S> <C>
10.1 Mellon Bank Corporation Long-Term Profit Incentive Plan (1996) Method of
Filing: Previously filed as Annex A to Mellon Bank Corporation's Notice of
Annual Meeting of Shareholders and Proxy Statement dated March 7, 1996 (File
No. 1-7410).
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends (parent Corporation).
12.2 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends (Mellon Bank
Corporation and its subsidiaries).
27.1 Financial Data Schedule, which is submitted
electronically to the Securities and
Exchange Commission for information only and
not filed.
</TABLE>
52
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Mellon Bank Corporation (parent Corporation) (a)
- -----------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes and equity in
undistributed net income (loss) of subsidiaries $ 86,324 $ 94,441 $179,539 $186,331
Fixed charges: interest expense, one-third of
rental expense net of income from subleases,
and amortization of debt issuance costs 26,055 24,427 49,550 48,930
- -----------------------------------------------------------------------------------------------------------
Total earnings (as defined) $112,379 $118,868 $229,089 $235,261
- -----------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ 15,471 $ 15,470 $ 30,943 $ 31,190
- -----------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 4.31 4.87 4.62 4.81
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends 2.71 2.98 2.85 2.94
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) The parent Corporation ratios include the accounts of Mellon Bank
Corporation (the "Corporation") and Mellon Financial Company, a wholly owned
subsidiary of the Corporation that functions as a financing entity for the
Corporation and its subsidiaries by issuing commercial paper and other debt
guaranteed by the Corporation. Because these ratios exclude from earnings
the equity in undistributed net income (loss) of subsidiaries, these ratios
vary with the payment of dividends by such subsidiaries.
(b) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
<PAGE> 1
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Mellon Bank Corporation (and its subsidiaries)
- ------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes $280,918 $271,053 $ 562,911 $ 542,951
Fixed charges: interest expense (excluding
interest on deposits), one-third of rental
expense net of income from subleases, and
amortization of debt issuance costs 100,074 112,650 203,370 214,640
- ------------------------------------------------------------------------------------------------------------
Total earnings (as defined), excluding
interest on deposits 380,992 383,703 766,281 757,591
Interest on deposits 216,442 219,405 433,922 424,636
- ------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $597,434 $603,108 $1,200,203 $1,182,227
- ------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (a) $ 15,471 $ 15,470 $ 30,943 $ 31,190
- ------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.81 3.41 3.77 3.53
Including interest on deposits 1.89 1.82 1.88 1.85
Ratio of earnings (as defined) to combined
fixed charges and preferred stock dividends:
Excluding interest on deposits 3.30 2.99 3.27 3.08
Including interest on deposits 1.80 1.74 1.80 1.76
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Preferred stock dividend requirements represent the pretax amounts
required to cover preferred stock dividends.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,765
<INT-BEARING-DEPOSITS> 810
<FED-FUNDS-SOLD> 291
<TRADING-ASSETS> 112
<INVESTMENTS-HELD-FOR-SALE> 4,450
<INVESTMENTS-CARRYING> 2,515
<INVESTMENTS-MARKET> 2,481
<LOANS> 27,356
<ALLOWANCE> (467)
<TOTAL-ASSETS> 42,769
<DEPOSITS> 31,704
<SHORT-TERM> 3,761
<LIABILITIES-OTHER> 1,566
<LONG-TERM> 1,971
<COMMON> 74
0
435
<OTHER-SE> 3,258
<TOTAL-LIABILITIES-AND-EQUITY> 42,769
<INTEREST-LOAN> 1,116
<INTEREST-INVEST> 195
<INTEREST-OTHER> 35
<INTEREST-TOTAL> 1,350
<INTEREST-DEPOSIT> 434
<INTEREST-EXPENSE> 615
<INTEREST-INCOME-NET> 735
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 1,100
<INCOME-PRETAX> 563
<INCOME-PRE-EXTRAORDINARY> 563
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.50
<YIELD-ACTUAL> 4.32
<LOANS-NON> 130
<LOANS-PAST> 108
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 471
<CHARGE-OFFS> 87
<RECOVERIES> (33)
<ALLOWANCE-CLOSE> 467
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
