<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 SEPTEMBER 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-7410
MELLON BANK CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code -- (412) 234-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class September 30, 1997
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Common Stock, $.50 par value 254,577,782
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<PAGE> 2
TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
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Page No.
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Part I - Financial Information
Financial Highlights 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2) 3
Financial Statements (Item 1):
Consolidated Balance Sheet 44
Consolidated Income Statement 45
Consolidated Income Statement - Five Quarter Trend 46
Consolidated Statement of Cash Flows 47
Consolidated Statement of Changes in Shareholders' Equity 48
Notes to Financial Statements (includes Item 3) 49
Selected Statistical Information:
Deposits 55
Selected Key Data 55
Part II - Other Information
Legal Proceedings (Item 1) 56
Exhibits and Reports on Form 8-K (Item 6) 56
Signature 58
Corporate Information 59
Index to Exhibits 60
Cautionary Statement
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This Quarterly Report on Form 10-Q contains statements relating to future
results of the Corporation that are considered "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those expressed or implied as a
result of certain risks and uncertainties, including, but not limited to,
changes in political and economic conditions, interest rate fluctuations,
competitive product and pricing pressures within the Corporation's markets,
equity and fixed income market fluctuations, personal and corporate customers'
bankruptcies, inflation, acquisitions and integrations of acquired businesses,
technological change, changes in law, changes in fiscal, monetary, regulatory
and tax policies, monetary fluctuations, success in gaining regulatory
approvals when required as well as other risks and uncertainties detailed from
time to time in the filings of the Corporation with the Securities and Exchange
Commission.
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<TABLE>
<CAPTION>
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FINANCIAL HIGHLIGHTS Quarter ended Nine months ended
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(dollar amounts in millions, SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
except per share amounts) 1997 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C>
PER COMMON SHARE
Net income-fully diluted $ .73 $ .71 $ .66 (a) $ 2.13 $ 1.91 (a)
Dividends paid .33 .33 .30 (a) .96 .875 (a)
Closing common stock price 54.75 45.125 29.63 (a) 54.75 29.63 (a)
Book value at period-end 14.08 13.42 13.13 (a) 14.08 13.13 (a)
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Net income $ 195 $ 190 $ 181 $ 576 $ 539
Net income applicable to common stock 191 186 172 559 510
Dividends paid on common stock 85 85 78 247 232
Average common shares and equivalents
outstanding - fully diluted (in thousands) 260,682 259,816 263,834 (a) 262,037 268,244 (a)
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KEY PERFORMANCE MEASURES
Return on average common
shareholders' equity (annualized) 21.6% 21.9% 20.6% 21.5% 20.2%
Return on average assets (annualized) 1.81 1.79 1.71 1.81 1.72
Fee revenue as a percentage
of total revenue (FTE) 63 59 56 61 57
Efficiency ratio (b) 65 62 63 63 64
Efficiency ratio excluding amortization
of intangibles and trust-preferred securities expense 62 59 60 60 61
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TANGIBLE OPERATING RESULTS (c)
Tangible earnings per common
share-fully diluted $ .80 $ .79 $ .72 (a) $2.36 $2.11 (a)
Tangible net income applicable
to common stock 211 206 190 620 565
Return on tangible common
shareholders' equity (annualized) 37.6% 37.7% 31.2% 37.2% 30.8%
Return on tangible assets (annualized) 2.05 2.04 1.92 2.06 1.94
Tangible book value per common share
at period-end $8.90 $8.66 $8.58 (a) $8.90 $8.58 (a)
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</TABLE>
<TABLE>
<CAPTION>
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SEPT. 30, June 30, Sept. 30,
1997 1997 1996
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<S> <C> <C> <C>
BALANCES
Loans $28,279 $28,144 $28,229
Total assets 43,465 43,712 43,676
Deposits 30,189 31,326 32,555
Common shareholders' equity 3,585 3,377 3,399
Market capitalization 13,938 11,353 7,668
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CAPITAL RATIOS
Common shareholders' equity to assets 8.25% 7.72% 7.78%
Tier I capital 8.08 7.94 6.74
Total (Tier I plus Tier II) capital 13.24 13.24 11.26
Leverage capital 8.37 8.20 6.68
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</TABLE>
(a) Restated to reflect the two-for-one common stock split distributed on June
2, 1997.
(b) See page 23 for the definition of this ratio.
(c) See page 5 for the definition of tangible operating results.
NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS.
2
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT FINANCIAL EVENTS
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Acquisition of Buck Consultants, Inc.
On July 1, 1997, the Corporation acquired Buck Consultants, Inc. (Buck), a
leading global benefits consulting firm. Buck is headquartered in New York and
has 63 offices in 16 countries. Buck provides a broad array of pension and
health and welfare actuarial services, employee benefit, compensation and human
resources consulting and administrative services, and total benefits
outsourcing to approximately 5,000 clients, ranging from large multinational
corporations to small businesses. Buck reported total revenues of approximately
$240 million for the fiscal year ended March 31, 1997. Including the full-year
impact of revenues from a late 1996 acquisition, Buck's annual revenues would
have totaled approximately $270 million. The Corporation issued approximately
3.5 million shares of common stock in connection with this acquisition. These
shares were repurchased in the second quarter of 1997.
Pending Acquisition of 1st Business Corporation
On April 14, 1997, the Corporation announced that it had reached a definitive
agreement to acquire 1st Business Corporation and its principal subsidiary, 1st
Business Bank, a full-service commercial bank serving midsize business firms in
southern California. 1st Business Corporation is privately owned. With
approximately $1.1 billion in assets, including approximately $500 million in
loans and lease finance assets, 1st Business Bank is a state-chartered bank
with headquarters in Los Angeles. 1st Business Bank serves approximately 1,700
business customers in the manufacturing, wholesale trade and service
industries. 1st Business Bank also provides personal banking services to
professionals, entrepreneurs, and owners and officers of its business clients.
The Corporation will purchase 1st Business Corporation with stock. To the
extent that common stock is issued in this transaction, the Corporation has
authorized the repurchase of an equivalent number of common shares. Other terms
of the agreement were not disclosed. 1st Business Bank will operate as a
separate entity under the name Mellon 1st Business Bank. Having received all
required regulatory approvals, the transaction is expected to close early in
1998, subject to certain closing conditions.
Pending Acquisition of Pacific Brokerage Services, Inc.
On August 25, 1997, the Corporation announced that it had reached a definitive
agreement to acquire Pacific Brokerage Services, Inc. (PBS), a self-clearing
deep discount broker and member of the New York Stock Exchange. PBS is
registered as a broker/dealer in all 50 states with headquarters in Los Angeles
and additional offices in Beverly Hills, New York and Chicago. PBS provides
services to more than 100,000 individual investors nationwide of which a
significant portion is conducted via the Internet. The Corporation will
purchase PBS for cash currently on hand. Other terms of the agreement were not
disclosed. PBS will be renamed Dreyfus Brokerage Services, Inc. Its Internet
address is http://www.tradepbs.com. The transaction is expected to close in
November 1997, subject to regulatory approvals and certain closing conditions.
3
<PAGE> 5
OVERVIEW
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The Corporation reported record third quarter 1997 fully diluted earnings per
common share of $.73, an increase of 12%, compared with $.66 in the third
quarter of 1996. Earnings per common share totaled $.71 in the second quarter
of 1997. Net income applicable to common stock was $191 million in the third
quarter of 1997, compared with $172 million in the third quarter of 1996 and
$186 million in the second quarter of 1997.
Annualized return on common shareholders' equity and return on assets were
21.6% and 1.81%, respectively, in the third quarter of 1997, compared with
20.6% and 1.71%, respectively, in the third quarter of 1996 and 21.9% and
1.79%, respectively, in the second quarter of 1997.
Annualized return on tangible common shareholders' equity and return on
tangible assets were 37.6% and 2.05%, respectively, in the third quarter of
1997, compared with 31.2% and 1.92%, respectively, in the third quarter of 1996
and 37.7% and 2.04%, respectively, in the second quarter of 1997. Fully diluted
tangible earnings per common share in the third quarter of 1997 were $.80,
compared with $.72 in the third quarter of 1996 and $.79 in the second quarter
of 1997.
Net interest revenue was $366 million in the third quarter of 1997, down $6
million compared with $372 million in the prior-year period and down $4 million
from $370 million in the second quarter of 1997. Fee revenue was $635 million
in the third quarter of 1997, up $159 million compared with $476 million in the
third quarter of 1996 and up $95 million compared with $540 million in the
second quarter of 1997. The increase in fee revenue, compared with the
prior-year periods, was primarily attributable to higher trust and investment
fees resulting from the Buck acquisition on July 1, 1997, new business and an
increase in the market value of assets under management. Excluding the Buck
acquisition, fee revenue increased $82 million, or 17%, compared with the
prior-year period and $18 million, or 3%, compared with the second quarter of
1997, resulting from growth in most fee-based businesses.
Operating expense before net revenue from acquired property and trust-preferred
securities expense for the third quarter of 1997 was $651 million, up $114
million from $537 million in the third quarter of 1996 and up $80 million from
$571 million in the second quarter of 1997. These increases resulted primarily
from the Buck acquisition and business growth.
Credit quality expense was $24 million in the third quarter of 1997, compared
with $24 million in the third quarter of 1996 and $22 million in the second
quarter of 1997. Net credit losses were $31 million in the third quarter of
1997, down $3 million compared with the prior-year period and down $1 million
from the second quarter of 1997.
Nonperforming assets totaled $175 million at September 30, 1997, compared with
$162 million at June 30, 1997, and $209 million at September 30, 1996. The
Corporation's ratio of nonperforming assets to total loans and net acquired
property was .62% at September 30, 1997. This ratio has been less than 1% for
13 consecutive quarters.
The Corporation's ratio of common shareholders' equity to assets was 8.25% at
September 30, 1997. The Tier I, Total and Leverage capital ratios were 8.08%,
13.24% and 8.37%, respectively, at September 30, 1997, well in excess of the
ratios required to maintain well-capitalized status.
For the first nine months of 1997, the Corporation reported fully diluted
earnings per common share of $2.13 and net income applicable to common stock of
$559 million, compared with $1.91 per common share and $510 million for the
first nine months of 1996. Annualized return on common shareholders' equity and
return on assets were 21.5% and 1.81%, respectively, in the first nine months
of 1997, compared with 20.2% and 1.72%, respectively, in the first nine months
of 1996.
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. The
pooling of interests method does not result in the recording of goodwill or
intangibles. Since goodwill and intangible amortization expense does not
result in a cash expense, the economic value to shareholders under either
accounting method is essentially the same. Results, excluding the impact of
intangibles, are shown in the table below.
<TABLE>
<CAPTION>
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Quarter ended Nine months ended
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(dollar amounts in millions, SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
ratios annualized) 1997 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C>
Net income applicable to common stock $ 191 $ 186 $ 172 $ 559 $ 510
After tax impact of amortization of
intangibles from purchase acquisitions 20 20 18 61 55
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Tangible net income applicable to
common stock $ 211 $ 206 $ 190 $ 620 $ 565
Tangible earnings per common
share - fully diluted $ .80 $ .79 $ .72 (a) $ 2.36 $ 2.11(a)
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Average common equity $ 3,520 $ 3,393 $ 3,327 $ 3,468 $ 3,371
Average goodwill and other
identified intangibles 1,291 1,206 898 1,240 923
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Average tangible common equity $ 2,229 $ 2,187 $ 2,429 $ 2,228 $ 2,448
Return on tangible common equity 37.6% 37.7% 31.2% 37.2% 30.8%
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Average total assets $42,879 $42,413 $42,461 $42,496 $41,804
Average tangible assets $41,588 $41,207 $41,563 $41,256 $40,881
Return on tangible assets 2.05% 2.04% 1.92% 2.06% 1.94%
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</TABLE>
(a) Restated to reflect the two-for-one common stock split distributed on June
2, 1997.
5
<PAGE> 7
BUSINESS SECTORS
<TABLE>
<CAPTION>
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FOR THE THREE MONTHS ENDED SEPTEMBER 30,
Consumer Corporate/Institutional
(dollar amounts in millions, Fee Services Banking Services Fee Services Banking Services
averages in billions) 1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $181 $164 $ 272 $ 290 $404 $275 $ 132 $ 107
Credit quality expense (revenue) - - 26 25 - - (1) 1
Operating expense 132 116 167 167 297 213 61 38
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Income before taxes 49 48 79 98 107 62 72 68
Income taxes 19 19 28 37 41 25 26 25
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Net income $ 30 $ 29 $ 51 $ 61 $ 66 $ 37 $ 46 $ 43
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Tangible net income $ 31 $ 30 $ 60 $ 71 $ 72 $ 42 $ 50 $ 45
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Average assets $2.4 $2.2 $19.8 $21.5 $2.0 $1.4 $16.9 $14.9
Average common equity $0.3 $0.3 $ 1.0 $ 1.0 $0.7 $0.6 $ 1.3 $ 1.3
Average Tier I preferred equity $ - $ - $ 0.1 $ - $ - $ - $ 0.4 $ -
Return on common
shareholders' equity (a) 37% 40% 20% 23% 39% 26% 14% 13%
Return on assets (a) NM NM 1.02% 1.15% NM NM 1.07% 1.16%
Pretax operating margin 27% 30% 29% 34% 26% 23% 55% 64%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 28% 30% 34% 38% 28% 25% 64% 66%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 72% 69% 56% 53% 72% 74% 37% 34%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
<TABLE>
<CAPTION>
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FOR THE NINE MONTHS ENDED SEPTEMBER 30,
Consumer Corporate/Institutional
(dollar amounts in millions, Fee Services Banking Services Fee Services Banking Services
averages in billions) 1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $518 $475 $ 842 $ 876 $1,021 $809 $ 383 $ 313
Credit quality expense (revenue) 1 1 84 73 - - (2) 1
Operating expense 385 353 496 516 746 633 179 116
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Income before taxes 132 121 262 287 275 176 206 196
Income taxes 52 49 93 107 107 69 76 70
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Net income $ 80 $ 72 $ 169 $ 180 $ 168 $107 $ 130 $ 126
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Tangible net income $ 83 $ 75 $ 197 $ 210 $ 186 $125 $ 142 $ 130
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Average assets $ 2.2 $2.0 $20.0 $21.2 $ 1.8 $1.6 $16.7 $14.5
Average common equity $ 0.3 $0.3 $ 1.0 $ 1.1 $ 0.6 $0.5 $ 1.3 $ 1.3
Average Tier I preferred equity $ - $ - $ 0.1 $ - $ - $ - $ 0.4 $ -
Return on common
shareholders' equity (a) 36% 36% 22% 23% 35% 26% 14% 13%
Return on assets (a) NM NM 1.13% 1.14% NM NM 1.04% 1.16%
Pretax operating margin 26% 25% 31% 33% 27% 22% 54% 63%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 26% 26% 36% 37% 29% 24% 64% 64%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 73% 74% 54% 55% 71% 76% 37% 36%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
6
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<TABLE>
<CAPTION>
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
$ 989 $ 836 $ 2 $ 3 $ 15 $ 14 $1,006 $ 853
25 26 (1) (2) - - 24 24
657 534 1 1 13 2 671 537
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307 276 2 4 2 12 311 292
114 106 1 1 1 4 116 111
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$ 193 $ 170 $ 1 $ 3 $ 1 $ 8 $ 195 $ 181
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$ 213 $ 188 $ 1 $ 3 $ 1 $ 8 $ 215 $ 199
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$41.1 $40.0 $ 0.2 $ 0.3 $ 1.6 $ 2.2 $ 42.9 $42.5
$ 3.3 $ 3.2 $ - $ - $ 0.2 $ 0.1 $ 3.5 $ 3.3
$ 0.5 $ - $ - $ - $ 0.7 $ 0.4 $ 1.2 $ 0.4
23% 21% NM NM NM NM 22% 21%
1.85% 1.71% NM NM NM NM 1.81% 1.71%
31% 33% NM NM NM NM 31% 34%
35% 36% NM NM NM NM 35% 37%
63% 61% NM NM NM NM 62% 60%
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</TABLE>
<TABLE>
<CAPTION>
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Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
$2,764 $2,473 $ 15 $ 11 $ 55 $ 93 $2,834 $2,577
83 75 (10) (10) (5) - 68 65
1,806 1,618 3 4 37 24 1,846 1,646
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875 780 22 17 23 69 920 866
328 295 7 6 9 26 344 327
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$ 547 $ 485 $ 15 $ 11 $ 14 $ 43 $ 576 $ 539
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$ 608 $ 540 $ 15 $ 11 $ 14 $ 43 $ 637 $ 594
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$ 40.7 $ 39.3 $0.2 $0.3 $1.6 $2.2 $ 42.5 $ 41.8
$ 3.2 $ 3.2 $ - $ - $0.3 $0.2 $ 3.5 $ 3.4
$ 0.5 $ - $ - $ - $0.7 $0.4 $ 1.2 $ 0.4
23% 21% NM NM NM NM 22% 20%
1.80% 1.65% NM NM NM NM 1.81% 1.72%
32% 32% NM NM NM NM 32% 34%
36% 34% NM NM NM NM 37% 36%
61% 63% NM NM NM NM 60% 61%
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</TABLE>
7
<PAGE> 9
BUSINESS SECTORS (CONTINUED)
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Note: The tables on the previous pages and discussion that follows present the
operating results of the Corporation's major business sectors, analyzed on an
internal management reporting basis. Amounts are presented on a taxable
equivalent basis. Capital is allocated quarterly using the federal regulatory
guidelines as a basis, coupled with management's judgment regarding the risks
inherent in the individual lines of business. The capital allocations may not
be representative of the capital levels that would be required if these sectors
were nonaffiliated business units.
The business sector results for 1997 and 1996 have been restated to reflect a
refinement in methodology that better reflects the Corporation's current
organizational structure. The changes are as follows: The mortgage banking
business line has been moved from the Consumer Banking Services sector and
divided into two separate components. The residential business line, including
mortgage origination and servicing, has been moved to the Consumer Fee Services
sector while the commercial mortgage origination and servicing business line
has been moved to the Corporate/Institutional Fee Services sector. Also, the
Network Services business line, which primarily encompasses ATM network
processing and merchant card processing, has been moved from the Consumer
Banking Services sector to the Corporate/Institutional Fee Services sector. In
addition, the business sector results for the first nine months of 1997 reflect
some minor refinements of capital among the sectors. These changes did not
significantly impact the business sector results.
Income before taxes for the Corporation's core sectors was $307 million in the
third quarter of 1997, an increase of $31 million, or 11%, compared with the
prior-year quarter. This increase resulted from a $153 million increase in
revenue, including $77 million of fee revenue from Buck, partially offset by a
$123 million increase in operating expense, primarily due to acquisitions.
Income before taxes for the core sectors in the first nine months of 1997
totaled $875 million, an increase of $95 million, or 12%, compared with the
prior-year period. This improvement resulted from increased revenue, including
the impact from acquisitions, partially offset by higher operating expense and
slightly higher credit quality expense. Return on common shareholders' equity
for the core sectors was 23% in both the third quarter and first nine months of
1997, compared with 21% in both the third quarter and first nine months of
1996. Return on assets was 1.85% and 1.80% in the third quarter and first nine
months of 1997, compared with 1.71% and 1.65% in the third quarter and first
nine months of 1996.
Consumer Fee Services
Consumer Fee Services includes private asset management services, retail mutual
funds and residential mortgage loan origination and servicing. Income before
taxes for the Consumer Fee sector was $49 million in the third quarter of 1997,
up $1 million from the prior-year period. Income before taxes for the first
nine months of 1997 was $132 million, an increase of $11 million, or 10%,
compared with $121 million in the first nine months of 1996. This increase
resulted from higher private asset management fee revenue and higher mortgage
servicing fees. This sector provided strong returns, as the annualized return
on common shareholders' equity was 37% and 36% in the third quarter and first
nine months of 1997, respectively, compared with 40% and 36% in the third
quarter and first nine months of 1996.
Consumer Banking Services
Consumer Banking Services includes consumer lending and deposit products,
business banking, credit card and jumbo residential mortgage lending. Income
before taxes for this sector totaled $79 million in the third quarter of 1997,
compared with $98 million in the third quarter of 1996, a decrease of 20%.
Revenue decreased $18 million, compared with the prior-year period, primarily
as a result of a decrease in credit card net interest and fee revenue
reflecting the sale of the AAA credit card portfolio in November 1996 and lower
fee revenue from the securitized credit card
8
<PAGE> 10
BUSINESS SECTORS (CONTINUED)
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portfolio, due in part to higher credit losses in this portfolio. Operating
expense was unchanged at $167 million due to lower expenses resulting from the
sale of the AAA credit card portfolio offset by trust-preferred securities
expense. Income before taxes for the first nine months of 1997 was $262
million, a decrease of $25 million compared with the first nine months of 1996.
The decrease in revenue primarily resulted from lower credit card revenue
partially offset by higher electronic tax return filing fees. The increase in
credit quality expense primarily resulted from a higher level of credit card
losses in the first nine months of 1997 compared with the prior-year period.
The decrease in operating expense resulted from the sale of the AAA credit card
portfolio as well as $6 million of expense related to the reconfiguration of
the retail delivery system recorded in the first quarter of 1996 partially
offset by trust-preferred securities expense. The annualized return on common
shareholders' equity for this sector was 20% and 22% in the third quarter and
first nine months of 1997, compared with 23% in both the third quarter and
first nine months of 1996.
Corporate/Institutional Fee Services
Corporate/Institutional Fee Services includes institutional asset and
institutional mutual fund management and administration, institutional trust
and custody, securities lending, foreign exchange, cash management, stock
transfer, commercial mortgage loan origination and servicing, corporate trust,
network services, benefits consulting and administrative services and services
for defined contribution plans. Income before taxes for this sector was $107
million in the third quarter of 1997, an increase of $45 million, or 71%,
compared with the third quarter of 1996. Revenue increased $129 million
primarily due to the Buck Consultants, Inc. acquisition, higher institutional
asset management fees, increased institutional trust fees, including an
increase in securities lending revenue, higher cash management fees, higher
foreign exchange fees as well as higher mutual fund management and
administration fees. Partially offsetting this increase was a decline in fee
revenue resulting from the formation of the CIBC Mellon Trust Company joint
venture, now accounted for on an equity basis. Operating expense increased $84
million due to the Buck Consultants, Inc. acquisition, higher transaction
volumes and technology investments, partially offset by lower expenses
resulting from the CIBC Mellon Trust Company joint venture. Income before taxes
for the first nine months of 1997 was $275 million, an increase of $99 million
compared with the first nine months of 1996. The increase resulted primarily
from the same factors responsible for the third quarter increase. This sector
provided excellent returns as annualized return on common shareholders' equity
for this sector was 39% and 35% in the third quarter and first nine months of
1997, compared with 26% in both the third quarter and first nine months of
1996.
Corporate/Institutional Banking Services
Corporate/Institutional Banking Services includes large corporate and middle
market lending, asset-based lending, lease financing, commercial real estate
lending, insurance premium financing, securities underwriting and trading, and
international banking. Income before taxes for the Corporate/Institutional
Banking Services sector was $72 million for the third quarter of 1997, an
increase of $4 million, or 5%, from the third quarter of 1996. Revenue
increased $25 million primarily as a result of higher revenue resulting from
the lease financing acquisitions. Operating expense increased $23 million as a
result of the lease financing acquisitions and trust-preferred securities
expense. Income before taxes in the first nine months of 1997 was $206 million,
an increase of $10 million, compared with the first nine months of 1996,
primarily reflecting the same factors responsible for the third quarter
increase. Also contributing to the increase was higher syndication management
fees. The annualized return on common shareholders' equity for this sector was
14% in both the third quarter and first nine months of 1997, compared with 13%
in both the third quarter and first nine months of 1996.
Real Estate Workout
Real Estate Workout includes commercial real estate recovery and mortgage
banking recovery operations. Income before taxes for Real Estate Workout was $2
million and $22 million in the third quarter and first nine months of 1997,
9
<PAGE> 11
BUSINESS SECTORS (CONTINUED)
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compared with $4 million and $17 million in the third quarter and first nine
months of 1996. The results in both periods reflect net revenue from acquired
property and the improved credit quality of the Real Estate Workout portfolio.
Other
The Other sector's pretax income for the third quarter and first nine months of
1997 was $2 million and $23 million, compared with $12 million and $69 million
in the third quarter and first nine months of 1996. Revenue for the third
quarter and first nine months of 1997 reflects earnings on the use of proceeds
from the trust-preferred securities and earnings on capital above that required
for the core sectors. Revenue for the third quarter of 1996 reflects earnings
on excess capital not required in the lines of business. Revenue for the first
nine months of 1996 also includes the $28 million gain on the securitization of
home equity loans and a $13 million gain on the partial sale of an equity
interest. Credit quality revenue for the first nine months of 1997 represents
loan recoveries from loans to lesser developed countries. Operating expense for
the third quarter and first nine months of 1997 includes $10 million and $31
million of trust-preferred securities expense, respectively, while the first
nine months of 1996 includes the $18 million charge resulting from the
retirement enhancement program.
The following tables distribute net income and return on average common
shareholders' equity for the Corporation's core sectors between customers
serviced and products offered.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Customers serviced
-----------------------------------------
Total
Total Corporate/
FOR THE THREE MONTHS ENDED SEPTEMBER 30, Consumer Institutional
(dollar amounts in millions) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $81 $ 90 $112 $ 80
Return on average common
shareholders' equity (a) 24% 27% 22% 17%
- ---------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Net income $249 $252 $298 $233
Return on average common
shareholders' equity (a) 25% 26% 21% 17%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Services provided
-----------------------------------------
Total Total
FOR THE THREE MONTHS ENDED SEPTEMBER 30, Fee Banking
(dollar amounts in millions) 1997 1996 1997 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 96 $ 66 $ 97 $104
Return on average common
shareholders' equity (a) 38% 31% 16% 18%
- ---------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Net income $248 $179 $299 $306
Return on average common
shareholders' equity (a) 35% 29% 17% 18%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
10
<PAGE> 12
BUSINESS SECTORS (CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
Consumer Corporate/Institutional
Fee Services Banking Services Fee Services Banking Services
(dollar amounts in millions, SEPT. 30, June 30, SEPT. 30, June 30, SEPT. 30, June 30, SEPT. 30, June 30,
averages in billions) 1997 1997 1997 1997 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $181 $171 $ 272 $ 271 $ 404 $ 321 $ 132 $ 125
Credit quality expense (revenue) - - 26 30 - - (1) (2)
Operating expense 132 125 167 164 297 227 61 60
- --------------------------------------------------------------------------------------------------------------------------------
Income before taxes 49 46 79 77 107 94 72 67
Income taxes 19 18 28 27 41 37 26 25
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 30 $ 28 $ 51 $ 50 $ 66 $ 57 $ 46 $ 42
- --------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 31 $ 29 $ 60 $ 59 $ 72 $ 63 $ 50 $ 46
- --------------------------------------------------------------------------------------------------------------------------------
Average assets $2.4 $2.2 $ 19.8 $ 19.8 $ 2.0 $ 1.7 $16.9 $17.0
Average common equity $0.3 $0.3 $ 1.0 $ 1.0 $ 0.7 $ 0.6 $ 1.3 $ 1.3
Average Tier I preferred equity $ - $ - $ 0.1 $ 0.1 $ - $ - $ 0.4 $ 0.4
Return on common
shareholders' equity (a) 37% 38% 20% 20% 39% 36% 14% 13%
Return on assets (a) NM NM 1.02% 1.01% NM NM 1.07% 1.01%
Pretax operating margin 27% 27% 29% 29% 26% 29% 55% 54%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 28% 28% 34% 34% 28% 31% 64% 64%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 72% 72% 56% 55% 72% 69% 37% 38%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
SEPT. 30, June 30, SEPT. 30, June 30, SEPT. 30, June 30, SEPT. 30, June 30,
1997 1997 1997 1997 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 989 $ 888 $ 2 $ 5 $ 15 $ 22 $1,006 $ 915
Credit quality expense (revenue) 25 28 (1) (6) - - 24 22
Operating expense 657 576 1 1 13 13 671 590
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 307 284 2 10 2 9 311 303
Income taxes 114 107 1 3 1 3 116 113
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 193 $ 177 $ 1 $ 7 $ 1 $ 6 $ 195 $ 190
- ----------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 213 $ 197 $ 1 $ 7 $ 1 $ 6 $ 215 $ 210
- ----------------------------------------------------------------------------------------------------------------------------------
Average assets $41.1 $40.7 $ 0.2 $0.2 $1.6 $ 1.5 $ 42.9 $42.4
Average common equity $ 3.3 $ 3.2 $ - $ - $0.2 $ 0.2 $ 3.5 $ 3.4
Average Tier I preferred equity $ 0.5 $ 0.5 $ - $ - $0.7 $ 0.7 $ 1.2 $ 1.2
Return on common
shareholders' equity (a) 23% 22% NM NM NM NM 22% 22%
Return on assets (a) 1.85% 1.75% NM NM NM NM 1.81% 1.79%
Pretax operating margin 31% 32% NM NM NM NM 31% 33%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 35% 36% NM NM NM NM 35% 38%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities
expense 63% 61% NM NM NM NM 62% 59%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
NM - Not meaningful.
11
<PAGE> 13
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Customers serviced
-----------------------------------------------------
Total
Total Corporate/
Consumer Institutional
FOR THE THREE MONTHS ENDED SEPT. 30, June 30, SEPT. 30, June 30,
(dollar amounts in millions) 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $81 $78 $112 $99
Return on average common
shareholders' equity (a) 24% 24% 22% 21%
- ---------------------------------------------------------------------------------------------------------------
(a) Annualized.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Services provided
-----------------------------------------------------
Total Total
Fee Banking
FOR THE THREE MONTHS ENDED SEPT. 30, June 30, SEPT. 30, June 30,
(dollar amounts in millions) 1997 1997 1997 1997
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $96 $85 $97 $92
Return on average common
shareholders' equity (a) 38% 36% 16% 16%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
Income before taxes for the total core sectors was $307 million in the third
quarter of 1997, an increase of $23 million, or 8%, compared with $284 million
in the second quarter of 1997. This increase resulted primarily from higher
trust and investment management revenue, higher foreign currency fee revenue
and higher gains on the disposition of assets.
Income before taxes in the Consumer Fee Services sector increased $3 million in
the third quarter of 1997 compared with the second quarter of 1997, due
primarily to higher private asset management fee revenue.
The $2 million increase in income before taxes in the Consumer Banking Services
sector primarily resulted from lower credit quality expense due to the lower
level of credit card losses in the third quarter of 1997.
Corporate/Institutional Fee Services income before taxes in the third quarter
of 1997 compared with the second quarter of 1997 increased $13 million
primarily due to higher trust and investment management revenue and higher
foreign currency fee revenue.
Corporate/Institutional Banking Services income before taxes increased $5
million in the third quarter of 1997 compared with the second quarter of 1997,
primarily due to higher gains on asset dispositions.
Income before taxes for Real Estate Workout decreased $8 million in the third
quarter of 1997 compared with the second quarter of 1997 primarily due to lower
credit quality revenue as the Corporation experienced lower gains on the sale
of OREO and lower net credit loss recoveries as well as lower net interest
revenue due to reduced asset levels and lower interest recoveries.
12
<PAGE> 14
NET INTEREST REVENUE
- --------------------------------------------------------------------------------
Net interest revenue, on a fully taxable equivalent basis, for the third
quarter of 1997 totaled $369 million, compared with $374 million in the third
quarter of 1996 and $371 million in the second quarter of 1997. The net
interest margin was 4.24% in the third quarter of 1997, compared with 4.20% in
the third quarter of 1996 and 4.29% in the second quarter of 1997.
The $5 million decrease in fully taxable equivalent net interest revenue in the
third quarter of 1997, compared with the third quarter of 1996, resulted from
the effect of the November 1996 sale of a $770 million American Automobile
Association (AAA) credit card portfolio, the funding costs related to the
repurchase of common stock and the December 1996 $500 million insurance premium
finance securitization. Primarily offsetting these factors was $1.6 billion of
leases acquired in the Mellon US Leasing and Mellon First United Leasing
acquisitions in 1996 and the use of the proceeds from the $1 billion of
trust-preferred securities issued in December 1996. The cost of the
trust-preferred securities is reported in operating expense. Net interest
revenue was virtually unchanged compared with the second quarter of 1997.
Excluding the effect of the loan securitizations and the equity repurchases,
net interest revenue and the net interest margin for the third quarter and
first nine months of 1997 would have been approximately $425 million and 4.60%
and $1,276 million and 4.65%, respectively, compared with approximately $415
million and 4.46% and $1,230 million and 4.54%, respectively, in the third
quarter and first nine months of 1996.
Net interest revenue and the net interest margin, on a taxable equivalent
basis, were $1,113 million and 4.30% in the first nine months of 1997, compared
with $1,114 million and 4.28% in the first nine months of 1996. The decrease in
net interest revenue in the first nine months of 1997, compared with the
prior-year period, principally resulted from the sale of the AAA credit card
portfolio, the insurance premium finance securitization, funding costs related
to the repurchase of common stock and lower loan fees. Primarily offsetting
these factors were the lease financing acquisitions and the use of proceeds
from the $1 billion of trust preferred securities.
13
<PAGE> 15
NET INTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- -----------------------------------------------------------------------------------------------------------------------------------
Nine months ended
--------------------------------------------------
SEPT. 30, 1997 Sept. 30, 1996
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 $ 534 5.04% $ 701 5.25%
Federal funds sold and securities under
resale agreements 483 5.43 576 5.44
Other money market investments 98 5.24 140 5.64
Trading account securities 181 5.58 163 5.31
Securities:
U.S. Treasury and agency securities (a) 5,545 6.77 5,989 6.55
Obligations of states and political
subdivisions (a) 42 7.77 44 8.48
Other (a) 110 6.57 157 6.28
Loans, net of unearned discount (a) 27,599 8.22 27,029 8.30
-------- --------
Total interest-earning assets 34,592 7.87 34,799 7.86
Cash and due from banks 2,783 2,803
Premises and equipment 585 558
Customers' acceptance liability 277 259
Net acquired property 73 72
Other assets (a) 4,700 3,803
Reserve for credit losses (518) (471)
-----------------------------------------------------------------------------------------------------
Total assets $42,492 $41,823
- -----------------------------------------------------------------------------------------------------------------------
Liabilities, Interest-bearing liabilities:
trust-preferred Deposits in domestic offices:
securities and Demand $ 230 1.81% $ 1,033 1.77%
shareholders' Money market and other savings accounts 10,018 2.83 9,849 2.84
equity Retail savings certificates 7,049 4.98 6,466 4.87
Other time deposits 1,898 5.61 1,289 5.46
Deposits in foreign offices 2,657 4.87 3,900 5.16
-------- --------
Total interest-bearing deposits 21,852 4.00 22,537 3.93
Federal funds purchased and securities under
repurchase agreements 1,345 5.45 1,870 5.31
Term federal funds purchased 589 5.67 677 5.69
U.S. Treasury tax and loan demand notes 490 5.32 308 5.16
Commercial paper 69 5.36 230 5.42
Short-term bank notes 115 6.18 605 5.86
Other funds borrowed 377 8.25 275 9.76
Notes and debentures (with original maturities over one year) 2,689 6.97 1,877 7.06
-------- --------
Total interest-bearing liabilities 27,526 4.49 28,379 4.39
Total noninterest-bearing deposits 8,396 8,055
Acceptances outstanding 277 258
Other liabilities (a) 1,628 1,306
---------------------------------------------------------------------------------------------------
Total liabilities 37,827 37,998
---------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 990 -
---------------------------------------------------------------------------------------------------
Shareholders' equity (a) 3,675 3,825
---------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $42,492 $41,823
- ---------------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.87% 7.86%
Cost of funds supporting interest-earning assets 3.57 3.58
-----------------------------------------------------------------------------------------------------------------
Net interest margin:
Taxable equivalent basis 4.30% 4.28%
Without taxable equivalent increments 4.27 4.25
-----------------------------------------------------------------------------------------------------------------
</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 approximating
35%, using
14
<PAGE> 16
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended
- -----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, 1997 June 30, 1997 March 31, 1997 Dec. 31, 1996 Sept. 30, 1996
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>
$ 496 5.14% $ 547 4.89% $ 562 5.09% $ 609 5.53% $ 646 5.28%
601 5.59 438 5.28 407 5.34 517 5.32 762 5.42
134 5.73 96 5.36 63 4.00 146 3.19 165 6.88
171 5.44 210 5.69 161 5.58 96 6.19 169 4.65
5,315 6.74 5,470 6.84 5,855 6.72 6,033 6.50 6,406 6.52
29 7.63 47 7.68 51 7.93 22 8.80 23 8.85
109 5.92 107 7.45 113 6.36 141 12.29 143 7.18
27,583 8.18 27,810 8.27 27,403 8.21 27,907 8.28 27,190 8.20
-------- -------- -------- -------- --------
34,438 7.84 34,725 7.93 34,615 7.85 35,471 7.88 35,504 7.75
2,875 2,798 2,674 2,721 2,852
601 581 573 566 557
315 255 260 231 260
71 72 75 77 74
5,057 4,523 4,513 4,048 3,714
(512) (517) (526) (476) (465)
- -----------------------------------------------------------------------------------------------------------------------------------
$42,845 $42,437 $42,184 $42,638 $42,496
- -----------------------------------------------------------------------------------------------------------------------------------
$ 231 2.50% $ 228 1.49% $ 227 1.42% $ 226 2.20% $ 260 1.97%
9,840 2.84 10,010 2.87 10,209 2.77 10,190 2.75 10,252 2.70
7,336 5.06 7,081 4.98 6,723 4.88 6,716 4.89 6,575 4.81
1,710 5.77 1,767 5.71 2,223 5.41 3,188 5.36 2,211 5.38
2,425 4.88 2,737 4.90 2,814 4.83 3,365 5.05 3,786 5.09
--------- --------- --------- --------- ---------
21,542 4.05 21,823 4.02 22,196 3.92 23,685 4.03 23,084 3.94
1,163 5.58 1,457 5.62 1,417 5.16 1,452 5.36 1,619 5.18
570 5.86 724 5.67 471 5.46 668 5.25 744 5.80
467 5.40 596 5.39 408 5.11 220 5.20 352 5.14
58 5.45 67 5.38 82 5.28 180 5.42 214 5.42
199 6.52 69 5.81 76 5.61 197 5.57 417 5.79
435 8.19 378 8.28 318 8.30 289 10.25 274 9.37
2,832 6.83 2,716 7.01 2,517 7.10 2,519 7.01 2,102 7.02
--------- --------- --------- --------- ---------
27,266 4.56 27,830 4.54 27,485 4.38 29,210 4.47 28,806 4.39
8,807 8,290 8,084 7,884 8,458
315 255 260 231 259
1,776 1,470 1,632 1,362 1,176
- -----------------------------------------------------------------------------------------------------------------------------------
38,164 37,845 37,461 38,687 38,699
- -----------------------------------------------------------------------------------------------------------------------------------
990 990 990 129 -
- -----------------------------------------------------------------------------------------------------------------------------------
3,691 3,602 3,733 3,822 3,797
- -----------------------------------------------------------------------------------------------------------------------------------
$42,845 $42,437 $42,184 $42,638 $42,496
- -----------------------------------------------------------------------------------------------------------------------------------
7.84% 7.93% 7.85% 7.88% 7.75%
3.60 3.64 3.48 3.68 3.55
- -----------------------------------------------------------------------------------------------------------------------------------
4.24% 4.29% 4.37% 4.20% 4.20%
4.22 4.27 4.34 4.17 4.17
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
15
<PAGE> 17
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended Nine months ended
--------------------------------------- ------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1997 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for credit losses $25 $25 $25 $75 $75
Net revenue from acquired property (1) (3) (1) (7) (10)
- -------------------------------------------------------------------------------------------------------------------------
Credit quality expense $24 $22 $24 $68 $65
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Credit quality expense, defined as the provision for credit losses less the net
revenue from acquired property, was unchanged in the third quarter of 1997,
compared with the third quarter of 1996.
A summary of the Corporation's net credit losses is presented on the following
page. The $3 million decrease in net credit losses, compared with the third
quarter of 1996, primarily resulted from a $12 million decrease in credit card
net credit losses, partially offset by lower commercial and financial
recoveries. The decrease in credit card net credit losses resulted from the
sale of the AAA credit card portfolio and lower losses in the Cornerstone(sm)
portfolio. Net credit losses decreased by $1 million compared with the second
quarter of 1997 as lower credit card net credit losses were primarily offset by
higher commercial losses. At September 30, 1997, the CornerStone(sm) credit card
portfolio had total outstandings of $501 million, compared with $539 million at
June 30, 1997, and $631 million at December 31, 1996.
The $7 million increase in net credit losses in the first nine months of 1997,
compared with the first nine months of 1996, resulted from an increase in
commercial and financial and credit card net credit losses partially offset by
lower commercial real estate net credit losses and higher international loan
recoveries. The lower level of credit card net credit losses in 1996 resulted
from a lower level of delinquencies in the CornerStone(sm) portfolio following
the creation of the accelerated resolution portfolio in December 1995. The net
carrying value of the accelerated resolution portfolio at September 30, 1997,
was zero, compared with $9 million at June 30, 1997, and $30 million at
December 31, 1996.
The Corporation maintains a credit loss reserve that, in management's judgment,
is adequate to absorb future losses inherent in the loan portfolio. Management
establishes the credit loss reserve using a documented loan loss assessment
process that estimates loss potential in the portfolio as a whole. For further
information regarding the methodology used in determining the adequacy of the
reserve, see the "Reserve for credit losses and review of net credit losses"
discussion in the Corporation's 1996 Annual Report to Shareholders. The reserve
for credit losses totaled $505 million at September 30, 1997, compared with
$525 million at December 31, 1996, and $478 million at September 30, 1996. The
$27 million increase in the reserve for credit losses from September 30, 1996,
reflects the additional fourth quarter 1996 credit loss provision related to
the credit card portfolio.
The ratio of the loan loss reserve to nonperforming loans at September 30,
1997, was 485%, compared with 556% at year-end 1996 and 364% at September 30,
1996. This ratio is not the result of a target or objective, but rather is an
outcome of two interrelated but separate processes: the establishment of an
appropriate loan loss reserve level for the portfolio as a whole, including but
not limited to the nonperforming component in the portfolio; and the
classification of certain assets as nonperforming in accordance with
established accounting, regulatory and management policies. The ratio can vary
significantly over time as the credit quality characteristics of the entire
loan portfolio change. This ratio also can vary with shifts in loan portfolio
mix. The increase in this ratio from September 30, 1996, primarily resulted
from a decrease in the level of nonperforming loans.
16
<PAGE> 18
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY (a) Quarter ended Nine months ended
-------------------------------------------- ------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(dollar amounts in millions) 1997 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of period $511 $518 $467 $525 $471
Reserve acquired in acquisition - - 20 - 20
Credit losses:
Domestic:
Commercial and financial (3) (1) (2) (13) (17)
Commercial real estate (1) - (4) (2) (12)
Consumer credit:
Credit cards (29) (33) (42) (95) (92)
Consumer mortgage (1) (1) (1) (2) (5)
Other consumer credit (6) (6) (5) (18) (15)
Lease finance assets (1) (2) - (3) -
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic credit losses (41) (43) (54) (133) (141)
- --------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial 2 2 8 8 20
Commercial real estate 2 2 4 7 11
Consumer credit:
Credit cards 3 3 4 8 11
Consumer mortgage 1 1 1 2 3
Other consumer credit 2 1 3 6 7
Lease finance assets - 2 - 2 -
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic 10 11 20 33 52
International - - - 5 1
- --------------------------------------------------------------------------------------------------------------------------------
Total recoveries 10 11 20 38 53
- --------------------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Domestic:
Commercial and financial (1) 1 6 (5) 3
Commercial real estate 1 2 - 5 (1)
Consumer credit:
Credit cards (26) (30) (38) (87) (81)
Consumer mortgage - - - - (2)
Other consumer credit (4) (5) (2) (12) (8)
Lease finance assets (1) - - (1) -
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic (31) (32) (34) (100) (89)
International - - - 5 1
- --------------------------------------------------------------------------------------------------------------------------------
Total net credit losses (31) (32) (34) (95) (88)
Provision for credit losses 25 25 25 75 75
- --------------------------------------------------------------------------------------------------------------------------------
Reserve at end of period $505 $511 $478 $505 $478
- --------------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.78% 1.82% 1.69% 1.78% 1.69%
- --------------------------------------------------------------------------------------------------------------------------------
Annualized net credit losses
to average loans .45% .46% .50% .46% .44%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the reserve and net credit losses on segregated assets.
17
<PAGE> 19
NONINTEREST REVENUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended Nine months ended
-------------------------------------------- ----------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1997 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fee revenue:
Trust and investment revenue:
Investment management:
Mutual fund $ 97 $ 90 $ 85 $ 274 $ 252
Private asset 47 42 36 131 109
Institutional asset 45 41 34 123 103
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment management revenue 189 173 155 528 464
Administration/custody/consulting:
Mutual fund 34 33 26 97 79
Private asset 4 4 3 12 9
Institutional trust 94 73 62 233 183
Benefits consulting 54 - - 54 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total administration/custody/consulting
revenue 186 110 91 396 271
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 375 283 246 924 735
Cash management and deposit transaction charges 62 59 54 177 155
Mortgage servicing fees 53 53 46 157 131
Foreign currency and securities trading revenue 32 25 20 82 61
Credit card fees 24 25 29 73 92
Information services fees 7 13 14 33 34
Other 82 82 67 265 245
- ----------------------------------------------------------------------------------------------------------------------------------
Total fee revenue 635 540 476 1,711 1,453
Gains on sale of securities - - - - 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue $635 $540 $476 $1,711 $1,454
- ----------------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of total revenue (FTE) 63% 59% 56% 61% 57%
Trust and investment fee revenue
as a percentage of total revenue (FTE) 37% 31% 29% 33% 29%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fee revenue increased $159 million, or 33%, in the third quarter of 1997,
compared with the prior-year period. Excluding $77 million of revenue resulting
from the Buck acquisition, fee revenue increased $82 million, or 17%, compared
with the prior-year period. The increase in fee revenue, excluding Buck,
resulted primarily from a $53 million increase in trust and investment fees, a
$12 million increase in foreign currency and securities trading revenue, an $8
million increase in cash management and deposit transaction charges, and a $7
million increase in mortgage servicing fees partially offset by lower
information services and credit card fees.
Total trust and investment fee revenue
The $129 million, or 52%, increase in trust and investment fee revenue in the
third quarter of 1997, compared with the prior-year period, reflects $54
million of benefits consulting fees and $22 million of institutional trust fees
resulting from the Buck acquisition. Excluding the fees resulting from the Buck
acquisition, trust and investment fees increased $53 million, or 21%, compared
with the third quarter of 1996.
The $34 million increase in investment management revenue resulted from a $12
million, or 15%, increase in mutual fund management revenue, an $11 million, or
28%, increase in private asset management revenue and an $11 million, or 32%,
increase in institutional asset management revenue. These increases resulted
from new business and an increase in the market value of assets under
management. Mutual fund management fees are discussed further on the following
pages.
18
<PAGE> 20
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
As shown in the table below, the market value of trust assets under management
was $299 billion at September 30, 1997, a $13 billion increase from $286
billion at June 30, 1997. This increase resulted from new business and a
general market increase. The equity and fixed income markets both recorded
strong performances during the third quarter. At September 30, 1997, compared
to June 30, 1997, the S&P 500 index increased 7.0% while the Lehman Brothers
Long-Term Government Bond Index increased 5.8%.
- --------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT IN WHOLLY OWNED AND AFFILIATED
COMPANIES
<TABLE>
<CAPTION>
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in billions) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mutual funds managed-proprietary:
Taxable money market funds:
Institutions $ 32 $ 30 $ 27 $ 27 $ 26
Individuals 9 9 10 9 10
Equity funds 22 19 16 15 14
Tax-exempt bond funds 17 17 16 17 17
Tax-exempt money market funds 7 7 8 7 7
Fixed-income funds 5 4 4 5 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total proprietary mutual funds managed 92 86 81 80 79
Mutual funds managed-nonproprietary 10 8 7 7 6
- ----------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund assets $102 $ 94 $ 88 $ 87 $ 85
Private asset 34 33 28 28 26
Institutional asset (a) 163 159 143 141 133
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $299 $286 $259 $256 $244
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes assets managed at Pareto Partners of $21 billion at September 30,
1997, $23 billion at June 30, 1997, $21 billion at March 31, 1997, $20
billion at December 31, 1996, and $18 billion at September 30, 1996. Prior
to March 31, 1997, these assets were not included in the disclosures of the
Corporation's total assets under management following the sale of a portion
of the Corporation's ownership of Pareto Partners in the second quarter of
1996. The Corporation has had a 30% equity interest in Pareto Partners
since the second quarter of 1996.
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 third quarter of 1997 were
$91 billion, up $6 billion from $85 billion in the second quarter of 1997 and
up $11 billion from $80 billion in the third quarter of 1996. The increase from
the prior-year period primarily resulted from an increase in equity funds which
averaged $21 billion for the third quarter of 1997 and had a period-end total
of $22 billion at September 30, 1997. Average proprietary funds managed at
Dreyfus, compared with the second quarter of 1997, reflect a $4 billion
increase in average equity funds and a $3 billion increase in average
institutional taxable money market funds.
19
<PAGE> 21
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MANAGED MUTUAL FUND FEE REVENUE Quarter ended Nine months ended
--------------------------------------- -------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1997 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed mutual fund fees $106 $99 $94 $303 $279
Less: Fees waived and fund expense
reimbursements 9 9 9 29 27
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $ 97 $90 $85 $274 $252
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees by fund category:
Proprietary funds:
Taxable money market funds:
Institutions $ 18 $16 $15 $ 49 $ 43
Individuals 9 9 9 27 29
Equity funds 30 26 21 80 60
Tax-exempt bond funds 24 24 25 72 75
Tax-exempt money market funds 7 7 7 21 21
Fixed income funds 6 6 5 17 17
- ----------------------------------------------------------------------------------------------------------------------------------
Total proprietary fund fees 94 88 82 266 245
Nonproprietary fund management fees 3 2 3 8 7
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $ 97 $90 $85 $274 $252
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Administration/custody/consulting fee revenue increased $95 million in the
third quarter of 1997, compared with the third quarter of 1996, and included
$54 million of benefits consulting fees and $22 million of institutional trust
fees resulting from the Buck acquisition. Institutional trust fees, excluding
the $22 million of fees resulting from the Buck acquisition, increased $10
million, or 17%, while mutual fund administration/custody revenue increased $8
million, or 26%. These increases resulted primarily from new business and
higher transaction volumes.
In April 1997, the Corporation announced its intention to sell its Corporate
Trust business. On July 30, 1997, the Corporation signed a definitive agreement
to sell this business to Chase Manhattan Bank. This business generated $26
million of revenue in 1996 including approximately $16 million of fee revenue.
The sale is not expected to materially affect the Corporation's earnings and
will not affect the Corporation's other trust businesses. It is anticipated
that this transaction will be completed in the fourth quarter of 1997.
The market value of assets under administration/custody, shown in the table
below, was $1,488 billion at September 30, 1997, an increase of $182 billion
compared with $1,306 billion at June 30, 1997. This increase resulted from a
higher level of assets administered by CIBC-Mellon Global Securities Services,
a 50% owned joint venture, as well as new business, the Buck acquisition and a
general market increase.
- --------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY IN WHOLLY OWNED AND
AFFILIATED COMPANIES
<TABLE>
<CAPTION>
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in billions) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust $1,396 (a) $1,213 (a) $ 976 $ 962 $819
Mutual fund 60 63 58 57 60
Private asset 32 30 27 27 26
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $1,488 $1,306 $1,061 $1,046 $905
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $246 billion of assets at September 30, 1997, and $150 billion of
assets at June 30, 1997, administered by CIBC-Mellon Global Securities
Services, a 50% owned joint venture.
20
<PAGE> 22
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Cash management and deposit transaction charges
The $8 million, or 15%, increase in cash management and deposit transaction
charges in the third quarter of 1997, compared with the prior-year period,
primarily resulted from higher volumes of business in customer receivables,
payables and treasury management products.
Mortgage servicing fees
The $7 million, or 16%, increase in mortgage servicing fees in the third
quarter of 1997, compared with the prior-year period, resulted from a higher
level of mortgage servicing rights acquired through portfolio acquisitions. At
September 30, 1997, the Corporation's total servicing portfolio was $82
billion, comprised of $64 billion of residential and $18 billion of commercial
servicing. At September 30, 1996, the total servicing portfolio was $58
billion, comprised of $50 billion of residential and $8 billion of commercial
servicing. On July 14, 1997, the Corporation acquired the servicing rights to
$7.9 billion of commercial securitized transactions and certain other special
transactions. As a result of this acquisition, the Corporation became the
second largest servicer of commercial mortgages in the nation.
Foreign currency and securities trading revenue
The $12 million, or 70%, increase in foreign currency and securities trading
revenue in the third quarter of 1997, compared with the prior-year period, was
attributable to higher foreign exchange fees earned as a result of higher
levels of market volatility and customer activity, primarily in the
Corporation's global custody business.
Credit card fees
The $5 million, or 20%, decrease in credit card fee revenue in the third
quarter of 1997, compared with the third quarter of 1996, resulted from the
sale of the AAA credit card portfolio in November 1996 and lower fee revenue
from the securitized credit card portfolio, due in part to higher credit losses
in this portfolio. Additional information on the effect of the credit card
securitization is presented in the table on the following page.
Information services fees
The $7 million, or 55%, decrease in information services fee revenue, compared
with the third quarter of 1996, primarily resulted from the July 8, 1997, sale
of 50% of the Corporation's interest in the R-M Trust Company to the Canadian
Imperial Bank of Commerce (CIBC) and the subsequent formation of a joint
venture named CIBC Mellon Trust Company. The R-M Trust Company offered transfer
agency, trustee and related services to Canadian and international
organizations. The Corporation accounts for its interest in CIBC Mellon Trust
Company under the equity method of accounting with net results recorded as
information services fee revenue. The R-M Trust Company reported information
services fee revenue of approximately $12 million in the first half of 1997.
Other fee revenue
Other fee revenue was $82 million in the third quarter of 1997, an increase of
$15 million compared with the third quarter of 1996. This increase resulted
from a $6 million increase in servicing fee revenue from the insurance premium
finance loan securitization and a net $5 million increase resulting from the
realization of lease residuals and the sale of equity securities and other
assets. Other fee revenue in the third quarter of 1997 also included $1 million
of fees resulting from Buck. Additional information on the effect of the loan
securitization is presented in the table on page 23.
21
<PAGE> 23
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Third quarter 1997 compared with second quarter 1997
Fee revenue increased $95 million in the third quarter of 1997, compared with
the second quarter of 1997. This increase resulted from fees relating to the
Buck acquisition, as well as higher trust and investment fees and higher
foreign currency and securities trading revenue.
Year-to-date 1997 compared with year-to-date 1996
Fee revenue totaled $1,711 million in the first nine months of 1997, a $258
million increase compared with the prior-year period, primarily resulting from
the same factors responsible for the third quarter 1997 increase as compared to
the prior-year period. Partially offsetting this increase was the $28 million
gain on the home equity loan securitization that was recorded in other fee
revenue during the first quarter of 1996.
LOAN SECURITIZATIONS
- --------------------------------------------------------------------------------
The Corporation securitized $950 million of credit card receivables in November
1995, $650 million of home equity loans in March 1996 and $500 million of
insurance premium finance loans in December 1996. Securitizations are an
effective way to diversify funding sources and manage the size of the balance
sheet. The Corporation no longer recognizes net interest revenue on the
securitized portfolios; however, the decrease in net interest revenue is
substantially offset by increased servicing fee revenue and lower net credit
losses. The Corporation continues to service the securitized loans. For
analytical purposes, the impact of the securitizations is shown below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SECURITIZED CREDIT CARD RECEIVABLES Quarter ended Nine months ended
------------------------------------------- ---------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1997 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lower net interest revenue $ 20 $ 22 $ 21 $ 65 $ 67
Lower net credit losses 14 15 12 43 34
Higher fee revenue 6 6 8 21 31
Lower loans - average 950 950 950 950 950
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SECURITIZED HOME EQUITY LOANS Quarter ended Nine months ended
-------------------------------------------- ---------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1997 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lower net interest revenue $ 6 $ 6 $ 6 $ 18 $ 12
Higher fee revenue 3 3 4 10 7
Lower loans - average 650 650 650 650 441
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 24
LOAN SECURITIZATIONS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SECURITIZED INSURANCE PREMIUM Quarter ended Nine months ended
-------------------------------------------- ---------------------------
FINANCE LOANS SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1997 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lower net interest revenue $ 7 $ 7 $ - $ 21 $ -
Higher fee revenue 6 7 - 20 -
Lower loans - average 500 500 - 500 -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPERATING EXPENSE
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
------------------------------------- ----------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(dollar amounts in millions) 1997 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Staff expense $344 $276 $256 $ 888 $ 788
Net occupancy expense 55 54 50 161 156
Professional, legal and other purchased services 55 46 48 147 145
Business development 36 38 35 111 103
Equipment expense 38 36 35 110 106
Amortization of mortgage servicing assets
and purchased credit card relationships 29 28 27 85 82
Amortization of goodwill and other intangible assets 25 27 24 79 73
Communications expense 25 25 24 76 71
Other expense 44 41 38 130 122
- --------------------------------------------------------------------------------------------------------------------------------
Operating expense before net revenue from acquired
property and trust-preferred securities expense 651 571 537 1,787 1,646
Trust-preferred securities expense 20 19 - 59 -
Net revenue from acquired property (1) (3) (1) (7) (10)
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expense $670 $587 $536 $1,839 $1,636
- --------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 27,300 25,500 24,500 26,000 24,500
- --------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 65% 62% 63% 63% 64%
Efficiency ratio excluding amortization of goodwill
and other intangible assets 62% 59% 60% 60% 61%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before net revenue from acquired property and
trust-preferred securities expense, as a percentage of revenue, computed on
a taxable equivalent basis, excluding gains on the sale of securities.
Operating expense before net revenue from acquired property and trust-preferred
securities expense increased $114 million, or 21%, in the third quarter of 1997
compared with the prior-year period, primarily resulting from the Buck and
leasing acquisitions.
Staff expense increased $88 million compared with the third quarter of 1996,
primarily from the Buck and leasing acquisitions, as well as an increase in
incentive expense.
The Buck and leasing acquisitions impacted virtually all other expense
categories, compared with the third quarter of 1996. The $20 million of
trust-preferred securities expense resulted from the issuance of $1 billion of
these securities in December 1996. The proceeds from these securities were used
to fund interest-earning assets. See note 13 in the Corporation's 1996 Annual
Report to Shareholders for a further discussion of these securities.
23
<PAGE> 25
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
Operating expense before net revenue from acquired property and trust-preferred
securities expense increased $80 million in the third quarter of 1997, compared
with the second quarter of 1997. This increase primarily resulted from higher
staff and professional, legal and other purchased services expenses. The
increase in staff expense primarily resulted from the Buck acquisition and
higher incentive expense. The increase in professional, legal and other
purchased services resulted from an increase in consulting expense and the Buck
acquisition.
The Corporation sold 50% of its interest in the R-M Trust Company on July 8,
1997. As a result of this transaction, the Corporation accounts for its
remaining interest under the equity method of accounting. The net results from
this joint venture were recorded as information services fee revenue. The R-M
Trust Company recorded operating expense of approximately $12 million in the
first half of 1997, primarily in staff expense.
The $141 million increase in operating expense before net revenue from acquired
property and trust-preferred securities expense in the first nine months of
1997, compared with the first nine months of 1996, primarily resulted from the
same factors responsible for the third quarter 1997 increase as compared to the
prior-year period. Also impacting this comparison were charges recorded in the
first quarter of 1996 of $18 million for the Corporation's retirement
enhancement program and $6 million related to the reconfiguration of the retail
delivery system.
In early 1996, the Corporation formed a Year 2000 project team to identify
software systems and computer-related devices that require modification for the
year 2000. A project plan has been developed with goals and target dates. The
Corporation's business areas are in various stages of this project plan. The
Corporation has incurred expenses throughout 1997 related to this project and
will continue to incur expenses over the next 27 months. These expenses are not
expected to materially impact operating results in any one period with a
significant portion of these expenses represented by existing staff that has
been redeployed to this project. The Corporation could be negatively affected
by the year 2000 date change to the extent that third parties or other
unaffiliated entities have not successfully addressed the year 2000 issues.
24
<PAGE> 26
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------
SEPT. 30, June 30, Sept. 30,
(average balances in millions) 1997 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,231 $ 1,081 $ 1,573
Trading account securities 171 210 169
Securities 5,469 5,600 6,538
Loans 27,596 27,806 27,170
- ------------------------------------------------------------------------------------------------------------
Total interest-earning assets 34,467 34,697 35,450
Noninterest-earning assets 8,924 8,233 7,476
Reserve for credit losses (512) (517) (465)
- -------------------------------------------------------------------------------------------------------------
Total assets $42,879 $42,413 $42,461
- ------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $34,993 $33,965 $31,647
Wholesale and purchased funds 7,886 8,448 10,814
- ------------------------------------------------------------------------------------------------------------
Funds supporting total assets $42,879 $42,413 $42,461
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in the Corporation's average interest-earning assets in the third
quarter of 1997, compared with the third quarter of 1996, reflects a $1,069
million decrease in average securities and a $342 million decrease in average
money market investments, partially offset by a $426 million increase in loans.
The decrease in average securities reflects a reduction in deposits with
pledging requirements in the third quarter of 1997, compared with the
prior-year period. Average loans increased as a result of the lease financing
acquisitions and loan growth, partially offset by the AAA credit card sale and
the insurance premium finance loan securitization.
Core funds, which are considered to be the most stable sources of funding, are
defined principally as money market and other savings deposits, savings
certificates, demand deposits, shareholders' equity, notes and debentures with
original maturities over one year, and trust-preferred securities. Core funds
primarily support core assets, which consist of loans, net of the reserve and
noninterest-earning assets. Average core assets increased $1,827 million in the
third quarter of 1997 from the prior-year period, reflecting a higher level of
noninterest-earning assets and higher loan levels. The increase in
noninterest-earning assets includes a higher level of goodwill resulting from
the lease financing and Buck acquisitions and a higher level of mortgage
servicing assets. Average core funds increased $3,346 million in the third
quarter of 1997 from the prior-year period, primarily reflecting the issuance
of the trust-preferred securities in December 1996, and higher levels of notes
and debentures and corporate and retail deposits. Core funds averaged 97% of
core assets in the third quarter of 1997, up from 96% in the second quarter of
1997 and 93% in the third quarter of 1996.
Wholesale and purchased funds are defined as negotiable certificates of
deposit, deposits in foreign offices, federal funds purchased and securities
under repurchase agreements, U.S. Treasury tax and loan demand notes,
short-term bank notes, other time deposits, commercial paper and other funds
borrowed. Average wholesale and purchased funds decreased $2,928 million
compared with the prior-year period, primarily reflecting a decrease in
deposits in foreign offices, federal funds purchased and securities under
repurchase agreements, other time deposits, noninterest-bearing and
interest-bearing negotiable certificates of deposit and short-term bank notes.
As a percentage of total average assets, average wholesale and purchased funds
decreased to 18% in the third quarter of 1997 compared with 20% in the second
quarter of 1997 and 25% in the third quarter of 1996.
25
<PAGE> 27
COMPOSITION OF LOAN PORTFOLIO
- --------------------------------------------------------------------------------
The loan portfolio increased $50 million at September 30, 1997, compared with
September 30, 1996, as increases in consumer mortgages, international loans and
domestic lease financings were primarily offset by the November 1996 sale of
$770 million of AAA credit card loans and the December 1996 $500 million
insurance premium finance securitization. At September 30, 1997, the
composition of the loan portfolio was 57% commercial and 43% consumer.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $10,259 (a) $10,796 $10,518 $10,196 $10,747
Commercial real estate 1,599 (b) 1,671 1,598 1,534 1,564
Consumer credit:
Consumer mortgage 8,318 7,870 7,672 7,772 7,629
Credit card 1,104 1,161 1,197 1,296 2,071
Other consumer credit 2,785 2,590 2,756 2,640 2,668
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 12,207 11,621 11,625 11,708 12,368
Lease finance assets 2,502 2,512 2,477 2,533 2,285
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 26,567 26,600 26,218 25,971 26,964
INTERNATIONAL LOANS 1,712 1,544 1,307 1,422 1,265
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount (c) $28,279 $28,144 $27,525 $27,393 $28,229
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $7 million of loans subject to the FDIC loss-sharing arrangement.
(b) Includes $30 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 decreased
by $488 million, or 5%, at September 30, 1997, compared to September 30, 1996,
primarily as a result of the $500 million insurance premium finance
securitization and a decrease in corporate/institutional loans. These decreases
were partially offset by increases in middle market lending and business
banking. Commercial and financial loans represented 36% of the total loan
portfolio at September 30, 1997, and 38% at September 30, 1996. At September
30, 1997, nonperforming domestic commercial and financial loans were .22% of
total domestic commercial and financial loans, compared with .28% at September
30, 1996. This ratio has been less than 1% for 18 consecutive quarters.
Commercial real estate
The Corporation's $1,599 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 $507 million of owner-occupied and other loans. Owner-occupied and other
loans are loans that are secured by real estate, however, the commercial
property is not being relied upon as the primary source of repayment. The
commercial real estate loan portfolio includes $30 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. This loss-sharing
arrangement remains in effect through December 31, 1997. Domestic commercial
real estate loans increased by $35 million, or 2%, at September 30, 1997,
compared with September 30, 1996. The increase resulted primarily from new loan
originations partially offset by paydowns. Domestic commercial real estate
loans were 6% of total loans at September 30, 1997, unchanged from
26
<PAGE> 28
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
September 30, 1996. Nonperforming commercial real estate loans were .90% of
total domestic commercial real estate loans at September 30, 1997, compared
with 2.15% at September 30, 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS Percent of
Sept. 30, total loans
(in millions) 1997 outstanding
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial mortgage and construction loans $1,062 4%
Owner-occupied and other loans 507 2
FDIC loss share loans 30 -
- ---------------------------------------------------------------------------------------------------------
Total $1,599 6%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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 September 30, 1997, this
portfolio totaled $8,318 million, a $689 million, or 9%, increase from
September 30, 1996. This increase resulted from an increase in the one- to
four-family residential mortgage warehouse portfolio and growth in fixed-term
home equity loans.
Jumbo mortgages are variable rate residential mortgages that range from
$250,000 to $3 million. These loans totaled $3.5 billion at September 30,
1997, unchanged from September 30, 1996.
Loans secured by one- to four-family residential mortgages increased
approximately $555 million to $2.3 billion and fixed-term home equity loans
increased approximately $150 million to $1.9 billion. Home equity revolving
credit line loans were $644 million at September 30, 1997, an increase of
approximately $30 million from September 30, 1996. Nonperforming consumer
mortgages were .62% and .68% of total consumer mortgages at September 30, 1997,
and September 30, 1996, respectively.
Credit card
At September 30, 1997, credit card loans totaled $1,104 million, a $967 million,
or 47%, decrease from September 30, 1996. This decrease primarily resulted from
the November 1996 $770 million AAA credit card sale and a reduction in the
CornerStone(sm) portfolio. Credit card loans are charged off after reaching 180
days delinquent and as such are not placed on nonperforming status prior to
charge-off. The ratio of credit card loans 90 days or more past due to total
credit card loans was 2.19% at September 30, 1997, compared with 2.04% at June
30, 1997, and 1.84% at September 30, 1996. The past-due ratios at September 30,
1997, and June 30, 1997, reflect the change in the mix of the portfolio
following the AAA sale. The CornerStone(sm) credit card portfolio was 45% of
total credit cards at September 30, 1997, compared with 32% at September 30,
1996. The CornerStone(sm) credit card product has historically experienced a
higher past-due ratio and a higher level of credit losses than the Corporation's
other credit card loans. At September 30, 1997, the CornerStone(sm) portfolio
totaled $501 million, compared with $539 million at June 30, 1997, and $672
million at September 30, 1996.
Other consumer credit
Other consumer credit, which principally consists of student loans, installment
loans and unsecured personal credit lines, was $2,785 million at September 30,
1997, an increase of $117 million from September 30, 1996. Other
27
<PAGE> 29
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
consumer credit loans are both secured and unsecured and, in the case of
student loans, are government guaranteed. Student loans comprised approximately
59% of this portfolio at September 30, 1997.
Lease finance assets
Lease finance assets totaled $2,502 million at September 30, 1997, an increase
of $217 million compared with September 30, 1996, primarily resulting from the
Mellon First United Leasing $150 million lease financing acquisition. Lease
finance assets represented 9% of the total loan portfolio at September 30,
1997, up from 8% at September 30, 1996. Nonperforming leases were .43% of total
leases at September 30, 1997, compared with .62% at September 30, 1996.
International loans
Loans to international borrowers totaled $1,712 million at September 30, 1997,
up 35% from $1,265 million at September 30, 1996, primarily due to increased
activity with large corporate customers and foreign banks. There were no
nonperforming international loans at September 30, 1997.
Assets held for accelerated resolution
In December 1995, the Corporation segregated $193 million of CornerStone(sm)
credit card loans, which had a history of delinquency, into an accelerated
resolution portfolio. Interest and principal receipts, fees and loan loss
recoveries on loans in this portfolio were applied to reduce the carrying value
of this portfolio. The net carrying value of the accelerated resolution
portfolio was zero at September 30, 1997, compared with $9 million at June 30,
1997, and $40 million at September 30, 1996. This portfolio was in other assets
on the Corporation's balance sheet.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT
CREDIT RISK
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
September 30,
(in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $31,088 (a) $25,039
Standby letters of credit and foreign guarantees 3,800 (b) 3,570
Commercial letters of credit 85 85
Residential mortgage loans serviced with recourse 117 130
Custodian securities lent with indemnification
against broker default of return of securities 26,987 20,690
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Approximately 30% of these commitments are scheduled to expire within one
year, and approximately 87% are scheduled to expire within five years.
(b) Net of participations and cash collateral totaling $456 million.
28
<PAGE> 30
CAPITAL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA
(dollar amounts in millions, SEPT. 30, June 30, Dec. 31, Sept. 30,
except per share amounts) 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shareholders' equity $3,585 $3,377 $3,456 $3,399
Common shareholders' equity to assets ratio 8.25% 7.72% 8.11% 7.78%
Tangible common shareholders' equity $2,265 $2,180 $2,218 $2,221
Tangible common equity to assets ratio (a) 5.37% 5.13% 5.36% 5.22%
Total shareholders' equity $3,778 $3,570 $3,746 $3,834
Total shareholders' equity to assets ratio 8.69% 8.17% 8.79% 8.78%
Tier I capital ratio 8.08 7.94 8.38 6.74
Total (Tier I plus Tier II) capital ratio 13.24 13.24 13.58 11.26
Leverage capital ratio 8.37 8.20 8.31 6.68
Book value per common share $14.08 $13.42 $13.43 (b) $13.13 (b)
Tangible book value per common share 8.90 8.66 8.62 (b) 8.58 (b)
Closing common stock price 54.75 45.125 35.50 (b) 29.63 (b)
Market capitalization 13,938 11,353 9,134 7,668
Common shares outstanding (000) 254,578 251,599 257,294 (b) 258,830 (b)
- -------------------------------------------------------------------------------------------------------------------------
</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.
(b) Restated to reflect the two-for-one common stock split distributed on
June 2, 1997.
The increase in common shareholders' equity at September 30, 1997, compared
with June 30, 1997, and September 30, 1996, reflects earnings retention and
common shares issued in the Buck acquisition, partially offset by common stock
repurchases. The decrease in total shareholders' equity from September 30,
1996, resulted from the December 1996 redemption of the $150 million Series I
preferred stock and the February 1997 redemption of the $100 million Series J
preferred stock.
The Corporation's average level of treasury stock was approximately $245
million higher in the third quarter of 1997 compared with the third quarter of
1996. After giving effect to funding the higher level of treasury stock,
valued at a short-term funding rate, the lower share count increased earnings
per share 1% while ongoing business growth increased earnings per share 11%.
On July 15, 1997, the Corporation announced that its board of directors
authorized the repurchase of up to 6 million additional shares of common stock.
The board of directors also authorized the repurchase of an equivalent number
of common shares that will be issued in connection with the acquisition of 1st
Business Corporation. During the third quarter of 1997, the Corporation
repurchased approximately 2.3 million shares of common stock that will be used
as part of the shares to be issued for this acquisition.
During the third quarter of 1997, the Corporation issued approximately 3.5
million shares of common stock in connection with the Buck acquisition. These
shares were repurchased in the second quarter of 1997. Since the beginning of
1995, the Corporation has repurchased approximately 58 million common shares,
prior to any reissuances, as well as warrants for 9 million shares of common
stock.
29
<PAGE> 31
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON SHARES OUTSTANDING
- --------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER YEAR TO DATE Full Year
(in millions) 1997 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning shares outstanding 251.6 257.3 274.4
Shares issued for stock-based benefit plans and dividend reinvestment plan 1.8 4.7 4.5
Shares issued for Buck Consultants, Inc. acquisition 3.5 3.5 -
Shares repurchased (2.3) (10.9) (a) (21.6)
- --------------------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 254.6 254.6 257.3
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of approximately $470 million or an average price of $43.10
per share.
Tier I and Total capital ratios are expressed as a percentage of risk-adjusted
assets, which include various credit risk-weighted percentages of
on-balance-sheet assets, as well as off-balance-sheet exposures. The Leverage
capital ratio evaluates capital adequacy on the basis of the ratio of Tier I
capital to quarterly average total assets as reported on the Corporation's
regulatory financial statements, net of the loan loss reserve, goodwill and
certain other intangibles.
Federal regulators use a capital-based supervisory system for all insured
financial institutions. If a financial institution's capital ratios decline
below predetermined levels, it would become subject to a series of increasingly
restrictive regulatory actions. The system categorizes a financial
institution's capital position into one of five categories ranging from
well-capitalized to critically undercapitalized. For an institution to qualify
as well-capitalized, its Tier I, Total and Leverage capital ratios must be at
least 6%, 10% and 5%, respectively. All of the Corporation's banking
subsidiaries qualified as well-capitalized at September 30, 1997. The
Corporation intends to maintain the ratios of its banking subsidiaries above
the well-capitalized levels. By maintaining ratios above the regulatory
well-capitalized guidelines, the Corporation's banking subsidiaries receive the
benefit of lower FDIC deposit insurance assessments.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS September 30,
(dollar amounts in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier I capital:
Common shareholders' equity (a) $3,561 $ 3,419
Qualifying preferred stock 193 435
Trust-preferred securities (b) 990 -
Other items (20) (9)
Goodwill and certain other intangibles (1,248) (1,086)
- --------------------------------------------------------------------------------------------------------
Total Tier I capital 3,476 2,759
Tier II capital 2,223 1,853
- -------------------------------------------------------------------------------------------------------
Total qualifying capital $ 5,699 $ 4,612
- -------------------------------------------------------------------------------------------------------
Risk-adjusted assets:
On-balance-sheet $28,919 $28,523
Off-balance-sheet 14,108 12,420
- -------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $43,027 $40,943
- -------------------------------------------------------------------------------------------------------
Average assets-leverage capital basis $41,513 $41,300
- -------------------------------------------------------------------------------------------------------
Tier I capital ratio (c) 8.08% 6.74%
Total capital ratio (c) 13.24 11.26
Leverage capital ratio (c) 8.37 6.68
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) In accordance with regulatory guidelines, $24 million of unrealized gains
and $20 million of unrealized losses, net of tax, on assets classified as
available for sale at September 30, 1997 and 1996, respectively, have been
excluded.
(b) The amount of trust-preferred securities that qualifies as Tier I capital
is subject to the same regulatory limit of 25% of total Tier I capital that
is applied to cumulative perpetual preferred stocks.
(c) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3%, respectively, while the ratios required to maintain
well-capitalized status are 6%, 10% and 5%, respectively.
30
<PAGE> 32
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
The increase in the Corporation's regulatory capital ratios, compared with
September 30, 1996, reflects the issuance of $1 billion of trust-preferred
securities in December 1996 following the decision by the Federal Reserve that
accorded these securities Tier I capital status. The trust-preferred securities
are not included as a component of total shareholders' equity on the
Corporation's balance sheet.
In 1996, the regulatory agencies adopted a proposal to incorporate market risk
into the risk-based capital guidelines. This amendment requires any bank or
bank holding company whose trading activity is the lesser of 10% or more of its
total assets, or $1 billion or greater, to measure its exposure to market risk
using its own internal value-at-risk model and to hold capital in support of
that exposure. This amendment was effective January 1, 1997, with mandatory
compliance by January 1, 1998. The Corporation anticipates that this
requirement will have a minimal impact on its risk-based capital ratios.
When computing Tier I capital, the Corporation deducts all goodwill and certain
other identified intangibles acquired subsequent to February 19, 1992, except
mortgage servicing assets and purchased credit card relationships.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $1,229 $1,089 $1,110 $1,040
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The $189 million increase in goodwill at September 30, 1997, compared with
September 30, 1996, resulted from a $165 million increase related to the Buck
acquisition and an $84 million increase related to the Mellon First United
Leasing acquisition, partially offset by $70 million of amortization. The
annual amortization of goodwill for the full years 1998 through 2002 is
expected to be approximately $76 million, $75 million, $75 million, $72 million
and $70 million, respectively. The after-tax impact of the annual amortization
of goodwill for the full years 1998 through 2002 is expected to be
approximately $64 million, $64 million, $63 million, $61 million and $59
million, respectively. The levels of goodwill and purchased core deposit
intangibles are expected to increase by approximately $335 million following
the Pacific Brokerage Services, Inc. and 1st Business Corporation acquisitions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchased core deposit intangibles $71 $ 76 $ 88 $ 93
Covenants not to compete - - 6 10
Other identified intangibles 20 32 34 35
- ---------------------------------------------------------------------------------------------------------
Total purchased core deposit
and other identified intangibles $91 $108 $128 $138
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in purchased core deposit and other identified intangibles from
September 30, 1996, resulted from amortization and the sale of 50% of the R-M
Trust Company. The annual amortization of purchased core deposit and other
identified intangibles for the full years 1998 through 2002 is expected to be
approximately $24 million, $24 million, $13 million, $7 million and $5 million,
respectively. The after-tax impact of the annual amortization of these items
for the full years 1998 through 2002 is anticipated to be approximately $16
million, $16 million, $8 million, $4 million and $3 million, respectively.
31
<PAGE> 33
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1997 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage servicing assets $1,002 $960 $745 $701
Purchased credit card relationships 24 26 29 81
- -----------------------------------------------------------------------------------------------------------
Total mortgage servicing assets and
purchased credit card relationships $1,026 $986 $774 $782
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation capitalized $71 million and $88 million in the third quarters
of 1997 and 1996, respectively, of servicing assets in connection with both
mortgage servicing portfolio purchases and loan originations. Mortgage
servicing assets are amortized in proportion to estimated net servicing income
over the estimated life of the servicing portfolio. Amortization expense
totaled $27 million and $24 million in the third quarters of 1997 and 1996,
respectively. The estimated fair value of capitalized mortgage servicing
assets was $1.1 billion at September 30, 1997. The $57 million decrease in
purchased credit card relationships from September 30, 1996, resulted from the
AAA credit card sale in November 1996 and amortization.
On January 1, 1997, FAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," became effective. FAS
No. 125 establishes the criteria for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. FAS No. 125
supersedes several accounting standards including FAS No. 122, "Accounting for
Mortgage Servicing Rights." The adoption of FAS No. 125 was immaterial to the
Corporation's financial position and results of operations.
LIQUIDITY AND DIVIDENDS
- --------------------------------------------------------------------------------
The Corporation's liquidity management objective is to maintain the ability to
meet commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms, including during
periods of market or financial stress. The Corporation's overall approach to
liquidity management is to ensure that sources of liquidity are sufficient in
amount and diversity to accommodate changes in loan demand and core funding
routinely without a material adverse impact on net income. The Corporation's
liquidity position is managed by maintaining adequate levels of liquid assets,
such as money market assets and securities available for sale. Additional
liquidity is available through the Corporation's ability to participate or sell
commercial loans and to securitize selected loan portfolios. The Corporation
also has a $300 million revolving credit agreement, with three years remaining
until maturity, and a $25 million backup line of credit to provide support
facilities for its commercial paper borrowings and for general corporate
purposes.
As shown in the Consolidated Statement of Cash Flows, cash and due from banks
increased by $186 million during the first nine months of 1997 to $3,032
million at September 30, 1997. The increase reflected $407 million of net cash
provided by operating activities and $169 million of net cash provided by
investing activities, partially offset by $406 million of net cash used in
financing activities. Net cash provided by investing activities principally
reflected proceeds from the sale of loan portfolios and a decrease in
securities available for sale, partially offset by loan growth. Net cash used
in financing activities primarily reflected a decrease in customer term
deposits and the repurchase of common stock, partially offset by an increase in
short-term borrowings.
32
<PAGE> 34
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
There were no contractual maturities of the Corporation's long-term debt during
the third quarter of 1997. Contractual maturities of parent term debt will
total $200 million in the remainder of 1997, all of which is due in December
1997. Contractual maturities of long-term debt will total $119 million in
1998, including $12 million relating to parent term debt. At September 30,
1997, the Corporation's senior debt and Mellon Bank, N.A.'s subordinated debt
were rated "A2" by Moody's and "A" by Standard & Poor's. On August 1, 1997,
Standard & Poor's revised its ratings outlook on the Corporation and its
affiliates to positive from stable.
The Corporation paid $247 million in common stock dividends in the first nine
months of 1997, compared with $232 million in the prior-year period. In
addition, the Corporation paid $14 million in preferred stock dividends during
the first nine months of 1997 and recorded $3 million of issue costs as
preferred stock dividends in connection with the redemption of the Series J
preferred stock. The common dividend payout ratio was 44% in the third quarter
of 1997, compared with 45% in the third quarter of 1996. On a tangible earnings
per common share basis, the common dividend payout ratio was 40% in the third
quarter of 1997 and 41% in the third quarter of 1996. Based upon shares
outstanding at September 30, 1997, and the current quarterly common dividend
rate of $.33 per share, annualized dividend requirements for the common and
preferred stock are expected to be approximately $350 million.
The parent Corporation's principal sources of cash are interest and dividends
from its subsidiaries. There are, however, certain limitations on the payment
of dividends to the parent Corporation by its national bank subsidiaries. For a
discussion of these limitations, see note 21 in the Corporation's 1996 Annual
Report to Shareholders. Under the more restrictive limitation, the
Corporation's national and state member bank subsidiaries can, without prior
regulatory approval, declare dividends subsequent to September 30, 1997, of
approximately $655 million, less any dividends declared and plus or minus net
profits or losses, as defined, between October 1, 1997, and the date of any
such dividend declaration. The national bank subsidiaries declared dividends to
the parent Corporation of $200 million in the first nine months of 1997, $400
million in 1996 and $501 million in 1995. Dividends paid to the parent
Corporation by nonbank subsidiaries totaled $119 million in the first nine
months of 1997, $21 million in 1996 and $30 million in 1995. In addition,
Mellon Bank, N.A. and The Boston Company returned $200 million and $150
million, respectively, of capital to the parent Corporation in 1996.
INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------------------------------------
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest revenue and on the net present
value of the Corporation's assets, liabilities and off-balance-sheet
instruments. Interest rate risk is measured using net interest margin
simulation and asset/liability net present value sensitivity analyses.
Simulation tools serve as the primary means to gauge interest rate exposure.
The net present value sensitivity analysis is the means by which the
Corporation's long-term interest rate exposure is evaluated. These analyses
provide a full understanding of the range of potential impacts on net interest
revenue and portfolio equity caused by interest rate movements.
Modeling techniques that are used to estimate the impact of changes in interest
rates on the net interest margin are a more relevant method of measuring
interest rate risk than the less sophisticated interest rate sensitivity gap
table shown on page 35. 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
33
<PAGE> 35
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
interest rates on the mix of assets and liabilities may cause actual results to
differ from simulated results. In addition, certain financial instruments
provide customers a certain degree of "optionality." For instance, customers
have migrated from lower cost deposit products to higher cost products. Also,
customers may choose to refinance fixed rate loans when interest rates
decrease. While the Corporation's simulation analysis considers these factors,
the extent to which customers utilize the ability to exercise their financial
options may cause actual results to differ from the simulation. Guidelines used
by the Corporation for assuming interest rate risk are presented in the
"Interest rate sensitivity analysis" section on page 46 of the 1996 Annual
Report to Shareholders.
The table below illustrates the simulation analysis of the impact of a 50, 100
or 200 basis point upward or downward movement in interest rates on net
interest revenue, earnings per share and return on common shareholders' equity.
This analysis was done assuming that interest-earning asset levels at September
30, 1997, remained constant, that the level of loan fees remains unchanged, and
excludes the impact of interest receipts on nonperforming loans. The impact of
the rate movements was developed by simulating the effect of rates changing
over a six-month period from the September 30, 1997 levels and remaining at
those levels thereafter.
- --------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
Movements in interest rates from September 30, 1997 rates
- --------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
------------------------------- -----------------------------
compared with September 30, 1997: +50bp +100bp +200bp -50bp -100bp -200bp
------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest revenue increase (decrease) (.5)% (1.1)% (2.7)% .4% .6% .5%
Earnings per share increase (decrease) $(.02) $(.04) $(.09) $.02 $.02 $.02
Return on common equity increase (decrease) (14) bp (27) bp (69) bp 11 bp 15 bp 13 bp
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The anticipated impact on net interest revenue under all scenarios is
consistent with the Corporation's cumulative liability-sensitive gap position
at the one-year repricing period as shown in the interest rate sensitivity gap
table on page 35.
The interest rate sensitivity gap table shows the repricing characteristics of
the Corporation's interest-earning assets and supporting funds at September 30,
1997. The data are based on contractual repricing or maturities and, where
applicable, management's assumptions as to the estimated repricing
characteristics of certain assets and supporting funds. At September 30, 1997,
the Corporation had a liability-sensitive interest rate risk position at the
one-year repricing period. Generally, a liability-sensitive gap indicates that
rising interest rates could negatively affect net interest revenue, and falling
rates could positively affect net interest revenue. Assets and liabilities with
similar contractual repricing characteristics, however, may not reprice to the
same degree. As a result, the Corporation's static interest rate sensitivity
gap position does not necessarily predict the impact of changes in general
levels of interest rates on net interest revenue.
The measurement of interest rate risk is meaningful only when all related on-
and off-balance-sheet items are aggregated and the net positions are
identified. Financial instruments that the Corporation uses to manage interest
rate sensitivity include: U.S. government and federal agency securities,
municipal securities, mortgage-backed securities, fixed rate wholesale term
funding, interest rate swaps, caps and floors, financial futures and financial
options. The cumulative gap at the one-year repricing period, before the
utilization of off-balance-sheet instruments, was asset-sensitive $3.6 billion,
or 8.2% of total assets, at September 30, 1997. However, because the
Corporation did not want to accept the level of interest rate risk presented by
its naturally asset-sensitive
34
<PAGE> 36
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
balance sheet, it entered into interest rate swaps and other off-balance-sheet
instruments that resulted in a net reduction of $3.8 billion in this cumulative
asset sensitive position. These instruments reduced the cumulative gap at the
one-year repricing period to a liability-sensitive amount of $.2 billion, or
.4% of total assets. Alternatively, the Corporation could have acquired
additional fixed rate investment securities or other fixed rate
interest-earning assets of $3.8 billion to accomplish this objective.
Correspondingly, the Corporation also would have had to acquire a comparable
amount of wholesale funds to fund these additional interest-earning assets. By
using off-balance-sheet instruments to manage interest rate risk, the effect is
a smaller, more efficient balance sheet, with a lower wholesale funding
requirement and a higher return on assets and net interest margin with a
comparable level of net interest revenue and return on common shareholders'
equity.
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY GAP AT SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Repricing period
--------------------------------------------------------------
0-30 31-90 91-180 181-365 Over 1
(dollar amounts in millions) days days days days year Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets $9,780 $9,046 $3,186 $2,298 $10,450 $34,760
Funds supporting
interest-earning assets 7,337 8,242 2,318 2,862 14,001 34,760
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal $2,443 $ 804 $ 868 $ (564) $(3,551) $ -
Off-balance-sheet instruments (1,534) (2,565) (223) 577 3,745 -
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 909 $(1,761) $ 645 $ 13 $ 194 $ -
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ 909 $ (852) $ (207) $ (194) $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage
of total assets 2.1% (2.0)% (.5)% (.4)%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Repricing periods are based upon contractual maturities, where
applicable, as well as the Corporation's historical experience of the
impact of interest rate fluctuations on the prepayment, repricing and
withdrawal patterns of certain assets and liabilities.
Off-balance-sheet risk
The Corporation offers off-balance-sheet financial instruments to enable its
customers to meet their financing objectives and manage their interest- and
currency-rate risk. Supplying these instruments provides the Corporation with
an ongoing source of fee revenue. The Corporation also enters into these
transactions to manage its own risks arising from movements in interest and
currency rates and as part of its proprietary trading and funding activities.
These off-balance-sheet instruments are subject to credit and market risk.
Credit risk is limited to the estimated aggregate replacement cost of contracts
in a gain position should counterparties fail to perform under the terms of
those contracts and any underlying collateral proves to be of no value. The
Corporation manages credit risk by dealing only with approved counterparties
under specific credit limits and by monitoring the amount of outstanding
contracts by customer and in the aggregate against such limits. Counterparty
limits are monitored on an ongoing basis. Credit risk is often further
mitigated by contractual agreements to net replacement cost gains and losses on
multiple transactions with the same counterparty through the use of master
netting agreements. Market risk arises from changes in the market value of
contracts as a result of the fluctuations in interest and currency rates. The
Corporation limits its exposure to market risk by entering into generally
matching or offsetting positions and by establishing and monitoring limits on
unmatched positions. Position limits are set by the Finance Committee and
approved by the Office of The Chairman and the Executive Committee of the board
of directors. Portfolio outstandings are monitored against such limits by
senior managers and compliance staff independent of line areas.
35
<PAGE> 37
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. Interest rate swaps,
caps and floors, financial futures and financial options have been approved by
the Corporation for managing the overall corporate interest rate exposure.
Their usage for speculative purposes is not permitted outside of those areas
designated as trading and controlled with specific authorizations and limits.
These instruments provide the Corporation flexibility in adjusting its interest
rate risk position without exposure to principal risk and funding requirements.
The Corporation primarily uses interest rate swaps, including index amortizing
swaps and swaptions to accomplish its objectives.
Interest rate swaps involve the exchange of fixed and variable interest
payments based upon a contractual notional amount. In an index amortizing swap,
the notional amount will vary based upon an underlying index. Generally, as
rates fall, the notional amounts decline more rapidly and, as rates increase,
notional amounts decline more slowly. Callable swaps are generic swaps with a
call option at the option of the counterparty. Callable swaps' notional amounts
are not based on interest rate indices, but call options will be exercised or
not exercised on the basis of market interest rates. The callable swaps entered
into by the Corporation are subject to call options in August 1998, November
1998 and February 1999, at the option of the counterparty. If after a specified
time period the call options are not exercised, the swaps will remain
outstanding until their contractual maturity date. The 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 23 in the Corporation's 1996 Annual Report to
Shareholders.
36
<PAGE> 38
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
Sept. 30,
(notional amounts in millions) 1997 1998 1999 2000 2001 2002+ 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps: (a)
Notional amount $135 $ 29 $ - $ - $ - $ 700 $ 864
Weighted average rate:
Receive 6.16% 4.63% - - - 6.62% 6.48%
Pay 5.72% 4.49% - - - 5.83% 5.77%
Receive fixed/pay floating
indexed amortizing swaps:
Notional value $ 65 $208 $1,798 $242 $199 $ 493 $3,005
Weighted average rate:
Receive 7.12% 6.34% 5.70% 6.25% 6.31% 7.06% 6.08%
Pay 5.84% 5.83% 5.82% 5.83% 5.83% 5.84% 5.82%
Receive fixed/pay floating
callable swaps: (b)
Notional value $ - $ - $1,050 $ - $ - $ - $1,050
Weighted average rate:
Receive - - 6.88% - - - 6.88%
Pay - - 5.17% - - - 5.17%
Pay fixed/receive floating
generic swaps: (a)
Notional amount $ 1 $415 $ 203 $ - $ - $ 15 $ 634
Weighted average rate:
Receive 7.52% 5.59% 5.74% - - 5.80% 5.65%
Pay 8.20% 5.90% 6.20% - - 6.62% 6.02%
Other products (c) $261 $ 11 $ - $ 40 $ - $ - $ 312
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $462 $663 $3,051 $282 $199 $1,208 $5,865
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic swaps' notional amounts and lives are not based on interest rate
indices.
(b) Expected maturity dates, based upon interest rates at September 30, 1997,
are shown in this table.
(c) Average rates are not meaningful for these products.
The gross notional amount of off-balance-sheet products used to manage the
Corporation's interest rate risk was $5.9 billion at September 30, 1997, a
decrease of $183 million from $6.0 billion at June 30, 1997. 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
to assess its impact on the net interest margin. As discussed on pages 34 and
35, these off-balance-sheet instruments modified the Corporation's
asset-sensitive position, including the modification of the cumulative
asset-sensitive position at the one-year repricing period, of $3.6 billion,
before the utilization of these instruments, to a cumulative one-year
liability-sensitive position of $.2 billion at September 30, 1997.
37
<PAGE> 39
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>
- -------------------------------------------------------------------------------------------------
September 30,
(in millions) 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Instruments associated with deposits $3,300 $4,604
Instruments associated with other liabilities 720 414
Instruments associated with loans 1,845 584
- -------------------------------------------------------------------------------------------------
Total notional amount $5,865 $5,602
- -------------------------------------------------------------------------------------------------
</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 net interest revenue of $5 million and $18 million
in the third quarter and first nine months of 1997, compared with interest
revenue of $6 million and $19 million in the third quarter and first nine
months of 1996.
In response to tactical asset/liability management considerations, the
Corporation terminated $200 million of pay fixed rate generic interest rate
swaps in the first quarter of 1997. These terminations resulted in a net
deferred loss of less than $1 million. This loss will be amortized over the two
years remaining on the original hedge. The Corporation amortized less than $1
million and $2 million of termination gains into net interest revenue in the
third quarter and first nine months of 1997, respectively, resulting from
terminations in the first quarter of 1997 and full year 1996. No contracts were
terminated during the third quarter of 1997.
The Corporation has also entered into off-balance-sheet contracts to manage
risks other than the interest rate risks described above. During the third
quarter of 1997, the Corporation entered into $950 million of interest rate
floor contracts and $300 million of interest rate swap contracts as protection
against prepayment risk in its mortgage servicing portfolio. The interest rate
floor contracts mature in five years and have a floor weighted average strike
rate of 5.61%. The interest rate swap contracts have an initial maturity of 10
years and a receive fixed weighted average rate of 6.49%. These contracts
reduce value impairment risk of the Corporation's mortgage servicing rights due
to a decrease in interest rates. Realized gains/losses and cash settlements on
these contracts will be deferred and included as an adjustment to the carrying
value of the related mortgage servicing rights and amortized over the same
period as the mortgage servicing rights. There were no deferrals at September
30, 1997.
The estimated unrealized fair value of the Corporation's off-balance-sheet
instruments issued or held for purposes other than trading at September 30,
1997, was a positive $7 million, compared with a negative $46 million at June
30, 1997. This increase in market value was consistent with the decrease in
interest rates during the third quarter of 1997, which had the corresponding
effect of decreasing the fair value of on-balance-sheet core deposits. Also
impacting the market value was the positive fair value of the interest rate
floors and swaps entered into in the third quarter of 1997 to hedge against
value impairment of the Corporation's mortgage servicing rights.
38
<PAGE> 40
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS ISSUED OR HELD FOR PURPOSES OTHER THAN TRADING (a)
- ------------------------------------------------------------------------------------------------------
September 30,
(notional amounts in millions) 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate agreements:
Interest rate swaps $5,553 $5,499
Options, caps and floors purchased (b) 40 84
Futures and forward contracts 272 19
Interest rate floors and swaps associated
with mortgage servicing rights 1,250 -
Other products 175 81
- ------------------------------------------------------------------------------------------------------
</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
$27 million at September 30, 1997, and $3 million at September 30, 1996.
(b) At September 30, 1997 and 1996, there were no options, caps or floors
written.
Off-balance-sheet instruments used for trading activities
The Corporation offers off-balance-sheet financial instruments 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 enters into these transactions 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 third quarter and
first nine months of 1997, the Corporation recorded $30 million and $77 million
of fee revenue from these activities, primarily from foreign exchange contracts
entered into on behalf of customers, compared with $20 million and $59 million
in the third quarter and first nine months of 1996. The total notional values
of these contracts were $45 billion at September 30, 1997, and $35 billion at
September 30, 1996, and are included on the off-balance-sheet instruments used
for trading activities table on the following page.
The Corporation has established trading limits and related monitoring
procedures to control trading risk. These limits are approved by the Office of
The Chairman and reviewed by the Executive Committee of the board of directors.
All limits are monitored for compliance by departmental compliance staff and by
the Corporation's Internal Audit department. Exceptions to limits would be
reported to the Office of The Chairman and, in certain instances, to the Audit
Committee of the board of directors.
The financial risk associated with trading positions is managed by assigning
position limits and stop loss guidance amounts to individual activities.
Position limits are assigned to each family of financial instruments eligible
for trading such that the aggregate value at risk in these activities at any
point in time will not exceed a specified limit given a significant market
movement. The extent of market movement deemed to be significant is based upon
an analysis of the historical volatility of individual instruments that would
cover 95% of likely daily market movements. Using the Corporation's
methodology, which considers such factors as changes in interest rates, spreads
and options volatility, the aggregate value at risk for trading activities was
less than $2 million at September 30, 1997.
39
<PAGE> 41
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
- ---------------------------------------------------------------------------------------------------------
September 30,
(notional amounts in millions) 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency contracts:
Commitments to purchase $14,284 $11,031
Commitments to sell 14,435 11,110
Foreign currency and other option contracts written 885 415
Foreign currency and other option contracts purchased 937 423
Interest rate agreements:
Interest rate swaps 5,142 6,556
Options, caps and floors purchased 1,690 2,241
Options, caps and floors written 1,824 2,300
Futures and forward contracts 6,230 1,147
- ---------------------------------------------------------------------------------------------------------
</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
$411 million at September 30, 1997, and $253 million at September 30, 1996.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(dollar amounts in millions) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $104 $ 90 $ 95 $ 94 $131
Acquired property, net of the OREO reserve 71 72 75 80 78
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets (a) $175 $162 $170 $174 $209
- ----------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .37% .32% .35% .35% .46%
Total nonperforming assets as a percentage of
total loans and net acquired property .62% .57% .62% .63% .74%
- ----------------------------------------------------------------------------------------------------------------------------
</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 $18 million of segregated assets, net
of $4 million of reserves, acquired in the December 1992 Meritor retail office
acquisition. The loss-sharing arrangement with the FDIC is in effect through
December 31, 1997. Beginning in 1998, any segregated assets will be
reclassified as nonaccrual loans or OREO, as appropriate. In addition, any
reserves will be added to the reserve for credit losses. Additional information
regarding segregated assets is presented in note 8 in the Corporation's 1996
Annual Report to Shareholders. Nonperforming loans include both nonaccrual and
"troubled debt" restructured loans. Past-due commercial loans are those that
are contractually past due 90 days or more but are not on nonaccrual status
because they are well secured and in the process of collection. Past-due
consumer loans, excluding consumer mortgages, are generally not classified as
nonaccrual but are charged off on a formula basis upon reaching various stages
of delinquency. Additional information regarding the Corporation's practices
for placing assets on nonaccrual status is presented in the "Nonperforming
assets" discussion and in note 1 in the Corporation's 1996 Annual Report to
Shareholders.
At September 30, 1997, nonperforming assets totaled $175 million, an increase
of $13 million, or 8%, from June 30, 1997, primarily as a result of an increase
in commercial and financial nonperforming loans. Nonperforming assets decreased
$34 million, or 16%, compared with September 30, 1996, primarily as a result of
the repayment of commercial real estate loans and a $7 million decrease in
acquired property as well as other repayments, returns to accrual status and
credit losses. The ratio of nonperforming assets to total loans and net
40
<PAGE> 42
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
acquired property was .62% at September 30, 1997, compared with .57% at June
30, 1997, and .74% at September 30, 1996. This ratio, which can be expected to
vary over time with changes in the economy, has been lower than 1% for 13
consecutive quarters.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS (a) SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(dollar amounts in millions) 1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic nonaccrual loans:
Commercial and financial $ 20 $ 11 $ 18 $ 21 $ 30
Commercial real estate 14 9 14 16 34
Consumer credit:
Consumer mortgage 52 54 52 50 52
Other consumer credit 5 5 5 1 1
Lease finance assets 11 9 6 6 14
- --------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 102 88 95 94 131
Restructured loans 2 2 - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (b) 104 90 95 94 131
- --------------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 76 77 80 86 88
Reserve for real estate acquired (9) (9) (9) (10) (10)
- ---------------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 67 68 71 76 78
Other assets acquired 4 4 4 4 -
- --------------------------------------------------------------------------------------------------------------------------------
Total acquired property 71 72 75 80 78
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $175 $162 $170 $174 $209
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective
loan portfolio segments:
Domestic commercial and financial loans .22% .12% .17% .21% .28%
Domestic commercial real estate loans .90 .55 .87 1.03 2.15
Domestic consumer mortgage loans .62 .68 .68 .65 .68
Domestic lease finance assets .43 .37 .27 .23 .62
Total loans .37 .32 .35 .35 .46
Nonperforming assets as a percentage of
total loans and net acquired property .62 .57 .62 .63 .74
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes $23 million, $10 million, $17 million, $13 million and $49
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 SEPTEMBER 30 (a)
Domestic
----------------------------------------------------------
Lease Total
Commercial Commercial Consumer Finance -----------------
(in millions) & Financial Real Estate Credit Assets 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of period $13 $ 9 $59 $ 9 $90 $130
Acquired From USL Capital - - - - - 10
Additions 14 6 10 5 35 40
Payments (b) (2) - (7) - (9) (35)
Return to accrual status - - (3) (1) (4) (5)
Credit losses (3) (1) (1) (1) (6) (8)
Transfers to acquired property - - (1) (1) (2) (1)
- ------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at September 30 $22 $14 $57 $11 $104 $131
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes interest applied to principal and sales.
41
<PAGE> 43
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS FOR THE NINE MONTHS ENDED SEPTEMBER 30 (a)
Domestic
---------------------------------------------------------------
Lease Total
Commercial Commercial Consumer Finance -----------------
(in millions) & Financial Real Estate Credit Assets 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of period $21 $16 $51 $ 6 $ 94 $167
Acquired from USL Capital - - - - - 10
Additions 65 10 34 14 123 117
Payments (b) (50) (6) (15) (3) (74) (93)
Return to accrual status - (4) (8) (3) (15) (22)
Credit losses (14) (2) (2) (2) (20) (34)
Transfers to acquired property - - (3) (1) (4) (14)
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at September 30 $22 $14 $57 $11 $104 $131
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes interest applied to principal and sales.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
ADDITIONAL NONPERFORMING LOAN DATA (a) September 30,
(dollar amounts in millions) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Book balance $104 $131
Contractual balance 120 157
Book balance as a percentage of contractual balance 86% 83%
Interest receipts applied to reduce principal:
Third quarter $ 1 $ -
Year-to-date 1 3
Interest receipts recognized in interest revenue:
Third quarter 1 3
Year-to-date 6 9
- ------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
A loan is considered impaired, as defined by FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," when based upon current information and
events, it is probable that the Corporation will be unable to collect all
principal and interest amounts due according to the contractual terms of the
loan agreement. Additional information regarding impairment is presented in
note 1 in the Corporation's 1996 Annual Report to Shareholders.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS Three months ended
September 30,
(dollar amounts in millions) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans (a) $36 $64
Average impaired loans 34 65
Interest revenue recognized on impaired loans (b) 1 3
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $22 million and $10 million of impaired loans with a related
impairment reserve of $4 million and $2 million at September 30, 1997, and
September 30, 1996, respectively.
(b) All income was recognized using the cash basis method of income recognition.
Acquired property totaled $71 million at September 30, 1997, $72 million at
June 30, 1997, and $78 million at September 30, 1996.
42
<PAGE> 44
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Three months ended Nine months ended
September 30, September 30,
(in millions) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OREO at beginning of period, net of the OREO reserve $68 $73 $76 $69
Foreclosures 2 4 7 19
Sales (5) (2) (18) (13)
Write-downs, losses, OREO provision and other 2 3 2 3
- --------------------------------------------------------------------------------------------------------------------------------
OREO at end of period, net of the OREO reserve 67 78 67 78
Other acquired assets 4 - 4 -
- --------------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve (a) $71 $78 $71 $78
- --------------------------------------------------------------------------------------------------------------------------------
</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 below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) Three months ended Nine months ended
September 30, September 30,
(in millions) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $9 $11 $10 $18
Write-downs on real estate acquired - (1) - (4)
Provision - - (1) (4)
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $9 $10 $ 9 $10
- --------------------------------------------------------------------------------------------------------------------------------
</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. All
loans in this table are well secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(dollar amounts in millions) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 32 $ 38 $ 37 $ 35 $ 35
Ratio (a) .38% .48% .48% .45% .45%
Credit card (b) 24 24 27 29 38
Ratio (a) 2.19% 2.04% 2.25% 2.24% 1.84%
Student - government guaranteed 42 38 40 47 50
Ratio (a) 2.55% 2.46% 2.52% 3.01% 3.23%
Other consumer 1 2 1 2 1
Ratio (a) .13% .15% .13% .18% .13%
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer 99 102 105 113 124
Ratio (a) .81% .88% .91% .97% 1.00%
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial (c) 17 9 12 10 8
- ----------------------------------------------------------------------------------------------------------------------------------
Total past-due loans $116 $111 $117 $123 $ 132
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 90 days or more past due as a percentage of quarter-end loan balances.
(b) Excludes past due CornerStone(sm) credit card loans included in the
accelerated resolution portfolio.
(c) Includes lease finance assets.
43
<PAGE> 45
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(dollar amounts in millions) 1997 1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets Cash and due from banks $ 3,032 $ 3,447 $ 2,846 $ 3,128
Interest-bearing deposits with banks 512 466 419 708
Federal funds sold and securities under resale agreements 219 674 460 358
Other money market investments 140 120 113 70
Trading account securities 88 112 84 51
Securities available for sale 3,354 3,333 4,111 4,113
Investment securities (approximate fair value
of $2,195, $2,257, $2,365 and $2,410) 2,168 2,249 2,375 2,439
Loans, net of unearned discount of $50, $48, $57 and $60 28,279 28,144 27,393 28,229
Reserve for credit losses (505) (511) (525) (478)
--------- --------- ---------- -------
Net loans 27,774 27,633 26,868 27,751
Customers' acceptance liability 307 300 238 223
Premises and equipment 589 581 569 560
Goodwill and other intangibles 1,320 1,197 1,238 1,178
Mortgage servicing assets and purchased
credit card relationships 1,026 986 774 782
Acquired property, net of reserves of $9, $9, $10 and $10 71 72 80 78
Other assets 2,865 2,542 2,421 2,237
----------------------------------------------------------------------------------------------------------------
Total assets $43,465 $43,712 $42,596 $43,676
----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 8,562 $ 9,483 $ 8,692 $ 9,337
Interest-bearing deposits in domestic offices 18,900 19,431 19,965 20,169
Interest-bearing deposits in foreign offices 2,727 2,412 2,717 3,049
----------------------------------------------------------------------------------------------------------------
Total deposits 30,189 31,326 31,374 32,555
Federal funds purchased and securities under
repurchase agreements 1,870 790 742 906
U.S. Treasury tax and loan demand notes 632 908 474 754
Term federal funds purchased 433 829 481 787
Short-term bank notes 185 63 135 357
Commercial paper 56 58 122 170
Other funds borrowed 328 351 293 230
Acceptances outstanding 307 300 238 223
Other liabilities 1,883 1,568 1,483 1,341
Notes and debentures (with original maturities over one year) 2,814 2,959 2,518 2,519
----------------------------------------------------------------------------------------------------------------
Total liabilities 38,697 39,152 37,860 39,842
- --------------------------------------------------------------------------------------------------------------------------------
Trust- Guaranteed preferred beneficial interests
preferred in Corporation's junior subordinated
securities deferrable interest debentures 990 990 990 -
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Preferred stock 193 193 290 435
equity Common shareholders' equity:
Common stock - $.50 par value
Authorized - 400,000,000 shares
Issued - 294,330,960 (a); 294,330,960 (a); 147,165,480 and
147,165,480 shares 147 147 74 74
Additional paid-in capital 1,810 1,812 1,866 1,858
Retained earnings 2,770 2,664 2,480 2,390
Net unrealized gain (loss) on assets available for sale,
net of tax 24 2 (1) (20)
Treasury stock of 39,753,178 (a); 42,732,010 (a); 18,518,290;
and 17,750,459 shares, at cost (1,166) (1,248) (963) (903)
----------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 3,585 3,377 3,456 3,399
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,778 3,570 3,746 3,834
----------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities
and shareholders' equity $43,465 $43,712 $42,596 $43,676
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the two-for-one stock split distributed on
June 2, 1997.
See accompanying Notes to Financial Statements.
44
<PAGE> 46
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------
Nine months ended
-------------------------
SEPT. 30, Sept. 30,
(in millions, except per share amounts) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees of $58 and $72) $1,691 $1,674
Interest-bearing deposits with banks 20 28
Federal funds sold and securities under resale agreements 20 23
Other money market investments 4 6
Trading account securities 7 6
Securities 289 303
--------------------------------------------------------------------------------------------------------
Total interest revenue 2,031 2,040
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 557 512
Deposits in foreign offices 97 151
Federal funds purchased and securities under repurchase agreements 55 74
Other short-term borrowings 76 97
Notes and debentures 140 99
--------------------------------------------------------------------------------------------------------
Total interest expense 925 933
- ----------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 1,106 1,107
revenue Provision for credit losses 75 75
--------------------------------------------------------------------------------------------------------
Net interest revenue after provision for losses 1,031 1,032
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fees 924 735
revenue Cash management and deposit transaction charges 177 155
Mortgage servicing fees 157 131
Foreign currency and securities trading 82 61
Credit card fees 73 92
Information services fees 33 34
Other income 265 245
--------------------------------------------------------------------------------------------------------
Total fee revenue 1,711 1,453
Gains on sales of securities - 1
--------------------------------------------------------------------------------------------------------
Total noninterest revenue 1,711 1,454
- ----------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 888 788
expense Net occupancy expense 161 156
Professional, legal and other purchased services 147 145
Business development 111 103
Equipment expense 110 106
Amortization of mortgage servicing assets and purchased credit card relationships 85 82
Amortization of goodwill and other intangible assets 79 73
Communications expense 76 71
Other expense 130 122
Trust-preferred securities expense 59 -
Net revenue from acquired property (7) (10)
---------------------------------------------------------------------------------------------------------
Total operating expense 1,839 1,636
- ----------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes 903 850
Provision for income taxes 327 311
--------------------------------------------------------------------------------------------------------
Net income 576 539
Dividends on preferred stock 17 29
--------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 559 $ 510
- ----------------------------------------------------------------------------------------------------------------------------
Per common Primary net income $ 2.14 $ 1.91 (a)
share Fully diluted net income $ 2.13 $ 1.91 (a)
--------------------------------------------------------------------------------------------------------
</TABLE>
(a) Restated to reflect the two-for-one common stock split
distributed on June 2, 1997.
See accompanying Notes to Financial Statements.
45
<PAGE> 47
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- ------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions, except per share amounts) 1997 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees
of $22, $19, $17, $24 and $24) $567 $571 $553 $579 $558
Interest-bearing deposits with banks 6 7 7 8 9
Federal funds sold and securities under
resale agreements 9 6 5 7 10
Other money market investments 2 1 1 1 3
Trading account securities 2 3 2 1 2
Securities 94 96 99 103 108
------------------------------------------------------------------------------------------------------------
Total interest revenue 680 684 667 699 690
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 190 186 181 197 180
Deposits in foreign offices 30 33 34 43 49
Federal funds purchased and securities
under repurchase agreements 17 20 18 20 21
Other short-term borrowings 28 28 20 24 31
Notes and debentures 49 47 44 44 37
------------------------------------------------------------------------------------------------------------
Total interest expense 314 314 297 328 318
- ------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 366 370 370 371 372
revenue Provision for credit losses 25 25 25 80 25
------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for losses 341 345 345 291 347
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fees 375 283 266 259 246
revenue Cash management and deposit transaction charges 62 59 56 56 54
Mortgage servicing fees 53 53 51 49 46
Foreign currency and securities trading 32 25 25 19 20
Credit card fees 24 25 24 28 29
Information services fees 7 13 13 16 14
Gain on sale of credit card portfolio - - - 57 -
Other income 82 82 101 82 67
------------------------------------------------------------------------------------------------------------
Total fee revenue 635 540 536 566 476
Gains on sales of securities - - - 3 -
------------------------------------------------------------------------------------------------------------
Total noninterest revenue 635 540 536 569 476
- ------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 344 276 268 267 256
expense Net occupancy expense 55 54 52 49 50
Professional, legal and other purchased services 55 46 46 50 48
Business development 36 38 37 34 35
Equipment expense 38 36 36 39 35
Amortization of mortgage servicing assets
and purchased credit card relationships 29 28 28 25 27
Amortization of goodwill and other intangible assets 25 27 27 27 24
Communications expense 25 25 26 25 24
Other expense 44 41 45 43 38
Trust-preferred securities expense 20 19 20 3 -
Net revenue from acquired property (1) (3) (3) (3) (1)
-------------------------------------------------------------------------------------------------------------
Total operating expense 670 587 582 559 536
- ------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes 306 298 299 301 287
Provision for income taxes 111 108 108 107 106
------------------------------------------------------------------------------------------------------------
Net income 195 190 191 194 181
Dividends on preferred stock 4 4 9 15 9
------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $191 $186 $182 $179 $172
- ------------------------------------------------------------------------------------------------------------------------------
Per common Primary net income $.73 $.72 $.69 (a) $.68 (a) $.66 (a)
share Fully diluted net income $.73 $.71 $.69 (a) $.67 (a) $.66 (a)
-------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Restated to reflect the two-for-one common stock split
distributed on June 2, 1997.
See accompanying Notes to Financial Statements.
46
<PAGE> 48
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net income $576 $539
operating activities Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill and other intangible assets 79 73
Amortization of mortgage servicing assets and
purchased credit card relationships 85 82
Depreciation and other amortization 81 78
Deferred income tax expense 56 58
Provision for credit losses 75 75
Provision for real estate acquired and other losses 4 (3)
Net gains on dispositions of acquired property (8) (7)
Net decrease in accrued interest receivable - 10
Net decrease in trading account securities 4 16
Net (decrease) increase in accrued interest payable,
net of amounts prepaid (16) 12
Net (increase) decrease in residential mortgages held for sale (580) 336
Net decrease (increase) in other operating activities 51 (92)
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 407 1,177
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in term deposits and other money
investing activities market investments (120) (143)
Net decrease (increase) in federal funds sold and securities
under resale agreements 241 (133)
Funds invested in securities available for sale (4,428) (10,604)
Proceeds from sales of securities available for sale 1,305 948
Proceeds from maturities of securities available for sale 3,916 8,502
Funds invested in investment securities (23) (215)
Proceeds from maturities of investment securities 228 289
Net decrease (increase) in credit card receivables 105 (246)
Home equity lines of credit securitized - 650
Net principal disbursed on loans to customers (1,292) (591)
Loan portfolio purchases (55) (216)
Proceeds from the sales of loan portfolios 854 845
Purchases of premises and equipment (85) (90)
Proceeds from sales of acquired property 27 20
Cash paid in purchase of Buck Consultants, Inc. (42) -
Cash paid in purchase of leases from USL Capital - (1,688)
Increase in mortgage servicing assets and purchased credit
card relationships (337) (182)
Net increase in other investing activities (125) (81)
------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 169 (2,935)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
47
<PAGE> 49
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net increase in transaction and savings deposits 864 777
financing activities Net (decrease) increase in customer term deposits (2,049) 2,517
Net increase (decrease) in federal funds purchased and
securities under repurchase agreements 1,128 (685)
Net increase (decrease) in short-term bank notes 50 (700)
Net decrease in term federal funds purchased (48) (118)
Net increase in U.S. Treasury tax and loan demand notes 158 464
Net decrease in commercial paper (66) (114)
Repurchase and repayments of longer-term debt (9) (23)
Net proceeds from issuance of longer-term debt 305 1,099
Proceeds from issuance of common stock 65 36
Dividends paid on common and preferred stock (264) (261)
Repurchase of common stock for employee benefit purposes - (192)
Repurchase of common stock - other (470) (306)
Redemption of preferred stock (97) -
Net increase in other financing activities 27 40
-----------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (406) 2,534
Effect of foreign currency exchange rates 16 10
- --------------------------------------------------------------------------------------------------------------------------------
Change in cash and Net increase in cash and due from banks 186 786
due from banks Cash and due from banks at beginning of period 2,846 2,342
-----------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $3,032 $3,128
-----------------------------------------------------------------------------------------------------
Supplemental Interest paid $ 941 $ 921
disclosures Net income taxes paid 247 233
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(dollar amounts in millions, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholders' equity Balance at beginning of period $3,746 $4,025
Net income 576 539
Dividends on common stock at $.96 per share in 1997
and $.875 per share in 1996 (247) (232)
Dividends on preferred stock:
Series I - (11)
Series J (5) (6)
Series K (12) (12)
Common stock issued under dividend reinvestment and
common stock purchase plan 16 13
Common stock issued in connection with the Buck Consultants,
Inc. acquisition 143 -
Series J preferred stock redemption (97) -
Exercise of stock options 86 39
Repurchase of common stock for employee benefit purposes and
the dividend reinvestment and common stock purchase plan - (192)
Repurchase of common stock - other (470) (306)
Net unrealized gain (loss) on assets available for sale, net of tax 25 (38)
Other 17 15
-----------------------------------------------------------------------------------------------------
Balance at end of period $3,778 $3,834
-----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
48
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 -- Basis of presentation
The unaudited consolidated financial statements of the Corporation are prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements should be read in conjunction with
the Corporation's 1996 Annual Report on Form 10-K. In the opinion of
management, all normal recurring adjustments necessary for a fair presentation
of the financial position and results of operations for the periods have been
included.
Note 2 -- Adoption of Financial Accounting Standards
On January 1, 1997, FAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," became effective. FAS No.
125 establishes the criteria for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. FAS No. 125
supersedes several accounting standards including FAS No. 122, "Accounting for
Mortgage Servicing Rights." The adoption of FAS No. 125 was immaterial to the
Corporation's financial position and results of operations.
In February 1997, the Financial Accounting Standards Board issued FAS No. 128,
"Earnings per Share." This statement simplifies the computation of earnings per
share (EPS) and makes the U.S. standard for computing EPS more comparable with
the EPS standards of other countries. The Corporation currently presents EPS as
computed under APB Opinion No. 15. Opinion No. 15 requires entities with
complex capital structures to present both primary and fully diluted EPS.
Primary EPS is based on common shares outstanding and securities that are
common stock equivalents. Fully diluted EPS is based on common shares
outstanding and all potential issuances of common stock that would reduce EPS.
FAS No. 128 supersedes Opinion No. 15 and requires that basic EPS and diluted
EPS be presented. Basic EPS will be based on only the weighted average number
of common shares outstanding during the period, without considering any
dilutive items. Diluted EPS under FAS No. 128 will be essentially the same as
fully diluted EPS under Opinion No. 15, with some minor computational
differences. Under FAS No. 128, basic and diluted earnings per share would
have been $2.18 and $2.14, respectively, for the nine months ended September
30, 1997, and $1.94 and $1.92, respectively, for the nine months ended
September 30, 1996. Actual primary and fully diluted earnings per share amounts
for the nine months ended September 30, 1997, were $2.14 and $2.13,
respectively, compared with $1.91 and $1.91, respectively, for the nine months
ended September 30, 1996. This statement is effective for financial statements
for both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted.
In February 1997, the Financial Accounting Standards Board issued FAS No. 129,
"Disclosure of Information about Capital Structure." FAS No. 129 summarizes
previously issued disclosure guidance contained within APB Opinions No. 10 and
15, as well as FAS No. 47. There will be no changes to the Corporation's
disclosures pursuant to the adoption of FAS No. 129. This statement is
effective for financial statements for periods ending after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. This statement is effective in 1998.
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement requires reporting of certain information about operating segments in
complete sets of financial statements and in condensed financial statements of
interim periods issued to shareholders. This statement is effective in 1998.
49
<PAGE> 51
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 2 -- Adoption of Financial Accounting Standards (continued)
On January 28, 1997, the Securities and Exchange Commission adopted rules to
clarify and expand existing disclosure requirements about derivatives and other
financial instruments as well as derivative commodity instruments. These rules
require enhanced disclosure of accounting policies for derivative financial
instruments and derivative commodity instruments. These rules also expand
existing disclosure requirements to include quantitative and qualitative
information about market risk inherent in market risk sensitive instruments.
Accounting policy disclosures are required in the first quarterly report filed
for a period ended after June 15, 1997. Following are the Corporation's
derivative accounting policy disclosures.
Off-balance-sheet instruments issued or held for purposes other than trading
The Corporation enters into interest rate swaps, interest rate caps and floors,
financial futures and financial options primarily to manage its sensitivity to
interest rate risk. This is accomplished by using these instruments to offset
the inherent price or interest rate risk of specific on-balance-sheet assets or
liabilities. The Corporation uses interest rate floor contracts and interest
rate swap contracts to hedge against value impairment of its mortgage servicing
rights (MSRs) resulting from a decrease in interest rates. The Corporation also
uses total return swaps to offset the inherent market value risk of investments
in start-up mutual funds. All of these instruments are designated as hedges on
the trade date and are highly correlated with the financial instrument being
hedged. High correlation is achieved if the following conditions hold true: The
hedge instrument and the financial instrument being hedged are both of the same
currency and fixed rate; the hedge instrument is structurally similar to the
instrument being hedged; or a mathematical correlation analysis is performed
and correlation has been found to be high. Hedge correlation of interest rate
or market value risk management positions is reviewed periodically. If a hedged
instrument is sold or matures, or correlation criteria are no longer met, the
risk management position is no longer accounted for as a hedge. Under these
circumstances, the accumulated change in market value of the hedge is
recognized in current income to the extent that the hedge results have not been
offset by the effects of interest rate or price changes of the hedged item.
Tactical asset/liability management considerations require the Corporation to
periodically terminate hedge instruments. Any deferred gain or loss resulting
from the termination is amortized to income/expense of the corresponding hedged
instrument over the remaining period of the original hedge or hedged
instrument.
The Corporation also enters into off-balance-sheet contracts to hedge
anticipated transactions. If it is determined that an anticipated transaction
that has been hedged will not occur, the results of the hedge will be
recognized currently in the income category where the original anticipated
transaction was to be reported.
Interest revenue or interest expense on hedge transactions is accrued over the
term of the agreement as an adjustment to the yield or cost of the related
asset or liability. Transaction fees are deferred and amortized to interest
revenue or interest expense over the term of the agreement. Realized gains and
losses are deferred and amortized over the life of the hedged transaction as
interest revenue or interest expense, and any unamortized amounts are
recognized as income or loss at the time of disposition of the assets or
liabilities being hedged. Amounts payable to or receivable from counterparties
are included in other liabilities or other assets. The fair values of interest
rate swaps, caps and floors, financial futures and financial options used for
purposes other than trading are not recognized in the financial statements.
Realized gains/losses and cash settlements on instruments associated with MSRs
are deferred and included as an adjustment to the carrying value of the MSRs.
These amounts are amortized over the same period as the MSRs. Changes in fair
value of total return swaps are recognized in net unrealized gain/loss on
assets available for sale within shareholders' equity.
50
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 2 -- Adoption of Financial Accounting Standards (continued)
Off-balance-sheet instruments used for trading activities
The Corporation enters into foreign exchange contracts, futures and forward
contracts, currency and interest rate option contracts, interest rate swaps and
interest rate caps and floors to accommodate customers and for its proprietary
trading activities. Realized and unrealized changes in the fair value of these
instruments are recognized in the Income Statement in foreign currency and
securities trading revenue in the period in which the changes occur. Interest
revenue and expense on instruments held for trading activities are included in
the Income Statement as part of net interest revenue. The fair value of
contracts in gain positions is reported on the Balance Sheet in other assets
and the fair value of contracts in loss positions is reported in other
liabilities.
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 ended Nine months ended
September 30, September 30,
(in millions) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts $29 $18 $74 $56
Debt instruments 2 - 5 2
Interest rate contracts 1 1 3 1
Futures contracts - 1 - 2
- ---------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $32 $20 $82 $61
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recognized an unrealized loss of less than $1 million at
September 30, 1997, and September 30, 1996, related to securities held in
the trading portfolio.
51
<PAGE> 53
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 4 -- Supplemental information to the Consolidated Statement of Cash
Flows
Noncash investing and financing transactions that, appropriately, are not
reflected in the Consolidated Statement of Cash Flows are listed below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(in millions) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net transfers to real estate acquired $ 7 $ 19
Net transfers to segregated assets 12 11
Purchase of business equipment financing unit of USL Capital Corporation:
Fair value of noncash assets acquired - 1,708
Liabilities assumed - (20)
--------
Net cash paid - 1,688
Purchase of Buck Consultants, Inc.:
Fair value of noncash assets acquired 357 -
Liabilities assumed (172) -
Mellon common stock issued, from treasury (143) -
------
Net cash paid 42 -
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5 -- 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.
52
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 6 -- Securities
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- ----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 September 30, 1996
------------------------------------------ ------------------------------------------
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 $ 184 $ - $- $ 184 $ 282 $ - $ 1 $ 281
U.S. agency mortgage-backed 2,156 30 2 2,184 1,985 8 37 1,956
Other U.S. agency 942 1 - 943 1,776 2 - 1,778
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 3,282 31 2 3,311 4,043 10 38 4,015
Obligations of states and
political subdivisions 26 - - 26 23 - - 23
Other mortgage-backed 3 - - 3 5 - - 5
Other securities 14 - - 14 58 12 - 70
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $3,325 $31 $2 $3,354 $4,129 $22 $38 $4,113
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Gross realized gains were less than $1 million in the first nine months
of 1997. Gross realized gains were $1 million in the first nine months
of 1996. Gross realized losses were less than $1 million in the first
nine months of 1997 and the first nine months of 1996.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 September 30, 1996
----------------------------------------- ------------------------------------------
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 $ 37 $ 4 $- $ 41 $ 27 $1 $ 1 $ 27
U.S. agency mortgage-backed 2,041 25 2 2,064 2,328 4 33 2,299
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 2,078 29 2 2,105 2,355 5 34 2,326
Other mortgage-backed 25 - - 25 31 - - 31
Other securities 65 - - 65 53 - - 53
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $2,168 $29 $2 $2,195 $2,439 $5 $34 $2,410
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 7 -- Other assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid expense:
Pension $ 375 $ 327 $ 307 $ 300
Other 72 62 67 58
Interest receivable 235 242 235 234
Accounts receivable 365 221 283 242
Receivables related to
off-balance-sheet instruments 405 365 329 254
Assets held for accelerated resolution - 9 30 40
Segregated assets, net of reserve (a) 18 4 10 18
Other 1,395 1,312 1,160 1,091
- ----------------------------------------------------------------------------------------------------------------------------------
Total other assets $2,865 $2,542 $2,421 $2,237
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Additional information regarding segregated assets is presented in note
8 in the Corporation's 1996 Annual Report to Shareholders.
53
<PAGE> 55
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 8 -- 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 and
liquidation preference of $25 per share. The Corporation has authorized 50
million shares of preferred stock. A detailed description of the Corporation's
outstanding preferred stock is provided in note 14 in the Corporation's 1996
Annual Report to Shareholders.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at
---------------------------------------------------
Shares Shares SEPT. 30, June 30, Dec. 31, Sept. 30,
(dollar amounts in millions) authorized issued 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
8.20% preferred stock (Series K) 8,000,000 8,000,000 $193 $193 $193 $193
8.50% preferred stock (Series J) - - - - 97 97
9.60% preferred stock (Series I) - - - - - 145
- ----------------------------------------------------------------------------------------------------------------------------------
Total preferred stock $193 $193 $290 $435
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 9 -- Computation of primary and fully diluted net income per
common share (a)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
------------------------------------- ------------------------
(dollar amounts in millions, except per SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
share amounts; common shares in thousands) 1997 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRIMARY NET INCOME PER COMMON SHARE
Net income applicable to common stock $191 $186 $172 $559 $510
- ------------------------------------------------------------------------------------------------------------------------------
Stock and stock equivalents (average shares):
Common shares outstanding 255,081 254,508 259,474 (b) 255,852 263,822 (b)
Stock options 5,129 4,863 3,722 (b) 5,090 3,716 (b)
- ------------------------------------------------------------------------------------------------------------------------------
Total stock and stock equivalents 260,210 259,371 263,196 (b) 260,942 267,538 (b)
- ------------------------------------------------------------------------------------------------------------------------------
Primary net income per common share $ .73 $ .72 $ .66 (b) $2.14 $1.91 (b)
- ------------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED NET INCOME PER COMMON SHARE
Net income applicable to common stock (c) $191 $186 $172 $559 $510
- ------------------------------------------------------------------------------------------------------------------------------
Stock, stock equivalents and potentially
dilutive items (average shares):
Common shares outstanding 255,081 254,508 259,474 (b) 255,852 263,822 (b)
Stock options 5,505 5,204 4,162 (b) 6,064 4,216 (b)
Common shares issuable upon conversion of
7-1/4% Convertible Subordinated Capital Notes 96 104 198 (b) 121 206 (b)
- ------------------------------------------------------------------------------------------------------------------------------
Total 260,682 259,816 263,834 (b) 262,037 268,244 (b)
- ------------------------------------------------------------------------------------------------------------------------------
Fully diluted net income per common share $ .73 $ .71 $ .66 (b) $2.13 $1.91 (b)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on unrounded numbers.
(b) Restated to reflect the two-for-one common stock split distributed on June
2, 1997.
(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.
54
<PAGE> 56
SELECTED STATISTICAL INFORMATION
- --------------------------------------------------------------------------------
DEPOSITS
<TABLE>
<CAPTION>
Mellon Bank Corporation (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1997 1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deposits in domestic offices:
Interest-bearing:
Demand, money market and
other savings accounts $10,082 $10,385 $10,605 $10,605 $10,414
Retail savings certificates 7,476 7,253 6,742 6,660 6,637
Other time deposits 1,342 1,793 1,540 2,700 3,118
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 18,900 19,431 18,887 19,965 20,169
Noninterest-bearing 8,562 9,483 8,371 8,692 9,337
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 27,462 28,914 27,258 28,657 29,506
Deposits in foreign offices 2,727 2,412 2,678 2,717 3,049
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits $30,189 $31,326 $29,936 $31,374 $32,555
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SELECTED KEY DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Quarter ended
(dollar amounts in millions, ------------------------------------------------------------------------------
except per share amounts, SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
common shares in thousands) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income per common share (a) $ .73 $ .71 $ .69 (b) $ .67 (b) $ .66 (b)
Tangible net income per
common share (a)(c) $ .80 $ .79 $ .77 (b) $ .75 (b) $ .72 (b)
Net income applicable to
common stock $ 191 $ 186 $ 182 $ 179 $ 172
Tangible net income applicable
to common stock (c) $ 211 $ 206 $ 203 $ 200 $ 190
Return on common shareholders'
equity (d) 21.6% 21.9% 21.2% 20.9% 20.6%
Return on tangible common
shareholders' equity (c)(d) 37.6% 37.7% 36.3% 36.6% 31.2%
Return on assets (d) 1.81% 1.79% 1.83% 1.80% 1.71%
Return on tangible assets (c)(d) 2.05% 2.04% 2.09% 2.06% 1.92%
Common equity to assets 8.25% 7.72% 8.33% 8.11% 7.78%
Tangible common equity to assets (c) 5.37% 5.13% 5.60% 5.36% 5.22%
Fee revenue as a percentage of
total revenue (FTE) 63% 59% 59% 58% (e) 56%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 62% 59% 59% 60% (e) 60%
Average common shares and
equivalents outstanding (a) 260,682 259,816 263,204 (b) 263,412 (b) 263,834 (b)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Fully diluted.
(b) Restated to reflect the two-for-one common stock split distributed on June
2, 1997.
(c) Excludes the after-tax impact of the amortization of goodwill and other
identified intangibles resulting from accounting for business combinations
under the purchase method of accounting.
(d) Annualized.
(e) Excludes the gain on the sale of the AAA credit card portfolio.
Note: All calculations are based on unrounded numbers.
55
<PAGE> 57
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings.
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust
and other activities. Because of the complex nature of some of these actions
and proceedings, it may be a number of years before such matters ultimately are
resolved. After consultation with legal counsel, management believes that the
aggregate liability, if any, resulting from such pending and threatened actions
and proceedings will not have a material adverse effect on the Corporation's
financial condition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Restated Articles of Incorporation of Mellon Bank Corporation, as
amended and restated as of September 2, 1993.
3.2 Statement Affecting Series B Preferred Stock, $1.00 Par Value.
3.3 Statement Affecting Series D Preferred Stock, $1.00 Par Value.
3.4 Statement Affecting Series H Preferred Stock, $1.00 Par Value.
3.5 Statement Affecting Series I Preferred Stock, $1.00 Par Value.
3.6 Statement Affecting Series J Preferred Stock, $1.00 Par Value.
3.7 Amendment of April 16, 1997 to Mellon Bank Corporation's Restated
Articles of Incorporation.
3.8 Amendment of September 26, 1997 to Mellon Bank Corporation's
Restated Articles of Incorporation.
3.9 Mellon Bank Corporation's By-Laws, as amended, effective September
16, 1997.
10.1 Mellon Bank Optional Life Insurance Plan, effective January 1,
1993, as amended effective September 16, 1997.
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.
56
<PAGE> 58
PART II - OTHER INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
During the third quarter of 1997, the Corporation filed the following
Current Reports on Form 8-K:
(1) A report dated July 1, 1997, which included, under Items 5 and
7, the Corporation's press release announcing the completion of
its acquisition of Buck Consultants, Inc., a leading global
benefits consulting firm.
(2) A report dated July 15, 1997, which included, under Items 5 and
7, the Corporation's press release regarding second quarter
1997 and first six months 1997 results of operations, as well
as the Corporation's announcement of a 6 million common share
repurchase program.
(3) A report dated August 25, 1997, which included, under Items 5
and 7, the Corporation's press release announcing a definitive
agreement to acquire Pacific Brokerage Services, Inc., a
self-clearing deep discount broker and member of the New York
Stock Exchange.
57
<PAGE> 59
- --------------------------------------------------------------------------------
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: November 10, 1997 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)
58
<PAGE> 60
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Business Mellon Bank Corporation is a multibank holding company
of the incorporated under the laws of Pennsylvania in August 1971
Corporation and registered under the Federal Bank Holding Company Act of
1956, as amended. Its principal direct subsidiaries are
Mellon Bank, N.A., The Boston Company, Inc., Mellon Bank (DE)
National Association, Mellon Bank (MD) National Association,
Buck Consultants, Inc. and a number of companies known as
Mellon Financial Services Corporation. Mellon also owns a
federal savings bank headquartered in Pennsylvania, Mellon
Bank, F.S.B. The Dreyfus Corporation, one of the nation's
largest mutual fund companies, is a wholly owned subsidiary
of Mellon Bank, N.A. Mellon's banking subsidiaries engage in
retail financial services, commercial banking, trust and
investment management services, residential real estate loan
financing, mortgage servicing, equipment leasing, mutual fund
activities and various securities-related activities. Buck
Consultants, Inc., a leading global benefits consulting firm,
provides a broad array of pension and health and welfare
actuarial services, employee benefit, compensation and human
resources consulting and administrative services and total
benefits outsourcing. 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. Mellon's principal executive office is
located at One Mellon Bank Center, 500 Grant Street,
Pittsburgh, PA 15258-0001 (Telephone: (412) 234-5000).
Exchange Mellon's common and Series K preferred stocks are traded on
listing the New York Stock Exchange. The trading symbols are MEL
(common stock) and MEL Pr K. Our Transfer Agent and Registrar
is ChaseMellon Shareholder Services, P.O. Box 590, Ridgefield
Park, NJ 07660-9940.
Dividend Subject to approval of the board of directors, dividends are
payments paid on Mellon's common and preferred stocks on or about the
15th day of February, May, August and November.
Direct Stock Mellon's Direct Stock Purchase and Dividend Reinvestment Plan
Purchase and promotes long-term ownership in Mellon by offering you a
Dividend simple, cost-effective method to purchase shares of common
Reinvestment stock directly from Mellon; a way to increase your Mellon
Plan holdings by reinvesting your cash dividends; and the
opportunity for you to purchase additional shares of Mellon
common stock by making optional cash investments. Plan
details are in a Prospectus, which may be obtained from
ChaseMellon Shareholder Services.
<TABLE>
<S> <C> <C> <C>
Phone Corporate Communications/
contacts Media Relations 1 (412) 236-1264 Media inquiries
Investor Relations 1 (412) 234-5601 Questions regarding the Corporation's financial
performance
ChaseMellon 1 (800) 205-7699 Questions regarding stock holdings,
Shareholder Services certificate replacement/transfer,
dividends, address changes, Direct Stock
Purchase and Dividend Reinvestment Plan;
requests for Mellon's annual report or
quarterly information
</TABLE>
Shareholder Quarterly earnings and other news releases can be obtained by
Publications fax by calling Company News on Call at 1 800 758-5804 and
entering a six-digit code (552187). Copies of Mellon's
filings with the Securities and Exchange Commission on Form
10-K, 10-Q and 8-K may be obtained by sending a written
request to Mellon's Secretary at 1820 One Mellon Bank Center,
Pittsburgh, PA 15258-0001.
Internet Mellon: http://www.mellon.com
Dreyfus: http://www.dreyfus.com
Buck: http://www.buckconsultants.com
59
<PAGE> 61
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Mellon Previously filed as Exhibit 3.1 to
Bank Corporation, as amended and restated the Quarterly Report on Form 10-Q
as of September 2, 1993. (File No. 1-7410) for the quarter
ended September 30, 1993, and
incorporated herein by reference.
3.2 Statement Affecting Series B Preferred Previously filed as Exhibit 3.2 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1993, and
incorporated herein by reference.
3.3 Statement Affecting Series D Preferred Previously filed as Exhibit 3.3 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1994, and
incorporated herein by reference.
3.4 Statement Affecting Series H Preferred Previously filed as Exhibit 3.1 to
Stock, $1.00 Par Value. the Quarterly Report on Form 10-Q
(File No. 1-7410) for the quarter
ended March 31, 1995, and
incorporated herein by reference.
3.5 Statement Affecting Series I Preferred Previously filed as Exhibit 3.5 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1996, and
incorporated herein by reference.
3.6 Statement Affecting Series J Preferred Previously filed as Exhibit 3.6 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1996, and
incorporated herein by reference.
</TABLE>
60
<PAGE> 62
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.7 Amendment of April 16, 1997 to Mellon Previously filed as Exhibit 3.7 to
Bank Corporation's Restated Articles of the Quarterly Report on Form 10-Q
Incorporation. (File No. 1-7410) for the quarter
ended June 30, 1997, and
incorporated herein by reference.
3.8 Amendment of September 26, 1997 to Mellon Previously filed as Exhibit 4.3 to
Bank Corporation's Restated Articles of Registration Statement on
Incorporation. Form S-3 (Registration
No. 333-38213) and incorporated
herein by reference.
3.9 Mellon Bank Corporation's By-Laws, as amended, Previously filed as Exhibit 4.4 to
effective September 16, 1997. Registration Statement on
Form S-3 (Registration
No. 333-38213) and incorporated
herein by reference.
10.1 Mellon Bank Optional Life Insurance Plan, Filed herewith.
effective January 1, 1993, as amended effective
September 16, 1997.
12.1 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
(parent Corporation).
12.2 Computation of Ratio of Earnings to Fixed Filed herewith.
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 Submitted herewith.
electronically to the Securities and Exchange
Commission for information only and not filed.
</TABLE>
61
<PAGE> 1
Exhibit 10.1
MELLON BANK
OPTIONAL LIFE INSURANCE PLAN
EFFECTIVE JANUARY 1, 1993
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Preamble 1
Article I 1
Definitions 1
1.1 Affiliates 1
1.2 Base Salary 1
1.3 Beneficiary 1
1.4 Board 1
1.5 Change in Control 1
1.6 Code 1
1.7 Committee 1
1.8 Company 1
1.9 Coverage Adjustment Date 2
1.10 Credited Interest 2
1.11 Disability 2
1.12 Economic Benefit 2
1.13 Effective Date 2
1.14 Eligible Employee 2
1.15 Employee 2
1.16 Human Resources Committee 2
1.17 Insurance Company 2
1.18 Net Cumulative Premiums 2
1.19 Participant 2
1.20 Participation Agreement 3
1.21 Plan 3
1.22 Plan Year 3
1.23 Policy 3
1.24 Retirement 3
1.25 Subsidiary 3
1.26 Years of Service 3
ARTICLE II 3
Participation 3
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
2.1 Participation 3
2.2 Insurability 3
2.3 Commencement of Coverage 3
2.4 Increases in Coverage 4
2.5 Declining Coverage 4
2.6 Ceasing Participation 4
ARTICLE III 5
Life Insurance Coverage 5
3.1 Amount of Insurance 5
3.2 Disability 5
3.3 Insurance Contract 5
3.4 Interests in Cash Value 6
3.5 Policy Withdrawals and Loans 7
3.6 Surrender or Cancellation of Policy 7
3.7 Continuation of Split Dollar Policy or Release 7
of Collateral Assignment after Retirement
3.8 Assignment 8
3.9 Payment of Premiums and Contributions 8
3.10 Form of Death Benefit 8
ARTICLE IV 8
Option to Retain Insurance Policy on Termination of Employment 8
--------------------------------------------------------------
ARTICLE V 9
Option to Retain Insurance Policy in Certain Events 9
---------------------------------------------------
5.1 Option to Retain Policy 9
5.2 Elimination of Coverage 9
5.3 Change in Control 9
ARTICLE VI 10
Beneficiary Designation 10
6.1 Designation of Beneficiary 10
6.2 Failure to Designate Beneficiary 10
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE VII 11
Administration 11
7.1 Administration 11
7.2 Powers and Duties 11
7.3 Procedures 12
7.4 Establishment of Rules 12
7.5 Limitation of Liability 13
7.6 Compensation and Insurance 13
7.7 Removal and Resignation 13
7.8 Claims Procedure 13
ARTICLE VIII 13
Amendment and Termination of Plan 13
ARTICLE IX 14
Miscellaneous 14
9.1 Restriction on Assignment 14
9.2 Tax Liability and Withholding 14
9.3 ERISA Plan 14
9.4 Employment Not Guaranteed 14
9.5 Protective Provisions 14
9.6 Gender, Singular & Plural 14
9.7 Captions 15
9.8 Validity 15
9.9 Notices and Elections 15
9.10 Applicable Law 15
9.11 Waiver of Breach 15
9.12 Benefit 15
</TABLE>
<PAGE> 5
MELLON BANK
OPTIONAL LIFE INSURANCE PLAN
PREAMBLE
The purpose of this Mellon Bank Optional Life Insurance Plan (the
"Plan") is to provide optional life insurance coverage for eligible key
executive employees of Mellon Bank, N.A. (the "Company") and its Affiliates.
The Plan will be effective as of January 1, 1993.
ARTICLE I
DEFINITIONS
When used herein, the following words shall have the following meanings
unless the content clearly indicates otherwise:
1.1 Affiliates. "Affiliates" means Mellon Bank Corporation and its
Subsidiaries.
1.2 Base Salary. "Base Salary" means an active Employee's annual base
salary as of the last Coverage Adjustment Date preceding his death. Annual base
salary excludes all bonuses, incentive and supplemental compensation and other
payments and benefits, except fixed base salary.
1.3 Beneficiary. "Beneficiary" means the person or persons designated as
such in accordance with Article VI.
1.4 Board. "Board" means the Board of Directors of Mellon Bank Corporation
or any committee thereof acting within the scope of its authority.
1.5 Change in Control. "Change in Control" shall have the meaning set
forth in Section 5.3.
1.6 Code. "Code" means the Internal Revenue Code of 1986, as it may be
amended from time to time. ----
1.7 Committee. "Committee" means the Corporate Benefits Committee of
Mellon Bank Corporation appointed to administer the Plan pursuant to Article
VII.
1.8 Company. "Company" means Mellon Bank, N.A. and , whenever applicable,
its Affiliates.
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<PAGE> 6
1.9 Coverage Adjustment Date. "Coverage Adjustment Date" means the
date during each year, selected by the Committee from time to time in its
discretion, on which changes or increases in coverage will take effect.
1.10 Credited Interest. "Credited Interest" means interest on the Net
Cumulative Premiums paid by the Company on a Policy at the annual rate credited
from time to time on the Policy by the insurance company less one hundred (100)
basis points, which shall be credited to the Company following the
Participant's Retirement or termination of employment with the Company.
1.11 Disability. "Disability" means a condition that qualifies as a
disability under the Mellon Bank Group Long-Term Disability Plan.
1.12 Economic Benefit. "Economic Benefit" means the value of the
economic benefit of life insurance coverage under this Plan for income tax
purposes, determined based on revenue rulings issued by the Internal Revenue
Service and other applicable authorities.
1.13 Effective Date. "Effective Date" means January 1, 1993.
1.14 Eligible Employee. "Eligible Employee" means an Employee who is a
Senior Vice President or above and is designated by the Human Resources
Committee to participate in the Plan.
1.15 Employee. "Employee" means any person employed by the Company or
its Affiliates on a regular full-time salaried basis, including officers of the
Company.
1.16 Human Resources Committee. "Human Resources Committee" means the
Human Resources Committee of the Board.
1.17 Insurance Company. "Insurance Company" means an insurance company
selected by the Company to provide coverage for Participants pursuant to the
terms of the Plan.
1.18 Net Cumulative Premiums. "Net Cumulative Premiums" means premiums
paid by the Company on a Policy net of (i) reimbursements or contributions to
premiums on the Policy made by a Participant and (ii) any withdrawals or loans
from cash value of the Policy made to the Company.
1.19 Participant. "Participant" means an Eligible Employee who has
completed the underwriting requirements of the Insurance Company and who is
notified by the Company that he is participating in the Plan in accordance with
the provisions of Article II.
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<PAGE> 7
1.20 Participation Agreement. "Participation Agreement" means a
written agreement between the Company and the Participant under which the
Participant agrees to participate in the Plan pursuant to Section 2.1.
1.21 Plan. "Plan" means this Optional Life Insurance Plan as set forth
in this document and as the same may be amended, administered or interpreted
from time to time.
1.22 Plan Year. "Plan Year" means the calendar year.
1.23 Policy. "Policy" means a life insurance policy providing coverage
under the Plan.
1.24 Retirement. "Retirement" means termination of a Participant's
employment with the Company or its affiliates for reasons other than death or
Disability after the Participant has either (i) attained age fifty-five (55)
and completed at least five (5) Years of Service or (ii) attained age
sixty-five (65) and completed at least one (1) Year of Service.
1.25 Subsidiary. "Subsidiary" means a corporation the majority of the
outstanding stock of which is owned directly or indirectly by Mellon Bank
Corporation.
1.26 Years of Service. "Years of Service" means a Participant's actual
years of service, unless otherwise determined by the Human Resources Committee.
ARTICLE II
PARTICIPATION
2.1 Participation. Any Eligible Employee may enroll in the plan by
completing a Participation Agreement, the underwriting requirements of the
Insurance Company and any other enrollment steps required by the Company for
coverage to begin. An Eligible Employee shall become a Participant in the Plan
when he has been notified in writing that his participation is approved by the
Company. During a leave of absence, coverage will remain in effect for a
maximum of ninety (90) days.
2.2 Insurability. Eligible Employees are not automatically entitled to
all insurance coverage offered under the Plan. Each Eligible Employee will be
covered up to the amount of guarantee issue determined by the Insurance
Company, but must satisfy the Insurance Company's requirements for obtaining
additional insurance before he becomes covered for additional amounts under the
Plan.
2.3 Commencement of Coverage. Subject to the limitations of Sections
2.1 and 2.2, (i) an Employee who is an Eligible Employee on January 1, 1993
will be covered under the Plan
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<PAGE> 8
as of January 1, 1993, and (ii) any other Eligible Employee will be covered
under the Plan when coverage is approved by the Insurance Company.
2.4 Increases in Coverage. When a Participant's Base Salary is
increased, the amount of his life insurance coverage under this Plan will
increase on the next Coverage Adjustment Date, except as provided in this
Section 2.4. Any such increase in coverage or any increase in the level of
optional coverage (one, two or three times Base Salary) will not take effect
until such additional coverage is approved by the Insurance Company, and a
Participant may be required to satisfy the Insurance Company's requirements for
obtaining additional insurance before he becomes covered for an additional
amount of life insurance coverage under the Plan. A Participant's coverage
under the Plan will be limited to the coverage issued by the Insurance Company.
2.5 Declining Coverage. An Eligible Employee may decline coverage
under the Plan. However, any such Eligible Employee will be required to satisfy
the insurance company's requirements for obtaining insurance before he may
become covered under the Plan at a later date.
2.6 Ceasing Participation. If a Participant ceases participation in
the Plan, the Participant may elect, in writing received by the Company not
later than sixty (60) days after his ceasing participation in the Plan, to
retain the Policy providing his life insurance coverage then in effect under
this Plan and obtain release of the collateral assignment in favor of the
Company by paying the Company an amount equal to the Net Cumulative Premiums
paid by the Company on the Policy plus Credited Interest thereon, if any, after
the Participant's ceasing participation in the Plan. Payment must be made in
cash as a lump sum or by borrowing or withdrawing cash value from the policy. A
Participant's life insurance coverage under this Plan will remain in effect
during this sixty (60) day period. A Participant who retains a Policy will
cease to be covered under this Plan and will thereafter be required to pay all
future premiums on the Policy.
If the Participant does not elect to purchase the Company's interest
in the Policy, all incidents of ownership of the policy held by the Participant
shall be transferred to the Company. In such event the Company will pay the
Participant an amount equal to the Participant's interest in the cash value in
the Policy. At the time the Participant purchases the Company's interest in the
Policy, or the Participant's incidents of ownership are transferred to the
Company, the Company shall have no further legal or equitable obligations of
any kind to the Participant under this Plan.
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<PAGE> 9
ARTICLE III
LIFE INSURANCE COVERAGE
3.1 Amount of Insurance. The amount of life insurance coverage which
will be payable to the Beneficiary designated by the Participant will be
determined based on the employment status of the Participant with the Company
at the time of his death. The amounts of life insurance coverage under this
Plan are as follows:
(a) During Employment. While employed with the Company, a
Participant may elect to maintain optional life insurance coverage equal to one
(1), two (2) or three (3) times his Base Salary. The Participant must file an
election for optional life insurance coverage in accordance with procedures and
timing requirements established by the Committee. Any changes in the level of
optional coverage will occur once a year on the Coverage Adjustment Date and
will not take effect until coverage is approved by the insurance company. The
Company will be entitled to the balance of the death benefit.
(b) After Retirement. After Retirement from the Company, a
Participant will have life insurance coverage equal to the death benefit
payable under the Policy less an amount payable to the Company equal to (i) the
Net Cumulative Premiums paid by the Company on the Policy plus (ii) Credited
Interest thereon after the Participant's Retirement.
(c) Limitation on Amount of Coverage. The amount of life insurance
coverage under the Plan will be limited to the amount of coverage issued by the
Insurance Company on the Participant under this Plan.
3.2 Disability. If a Participant suffers a Disability, the
Participant's life insurance coverage may be continued by the Participant
during the period of Disability until the Participant reaches age sixty-five
(65) or begins to receive benefits under the Mellon Bank Retirement Plan,
whichever is sooner. The Participant must continue to make contributions for
this coverage in the same manner as an active employee. When a disabled
Participant who continues coverage under the Plan reaches age sixty-five (65)
or begins to receive benefits under the Mellon Bank Retirement Plan, whichever
is sooner, the Participant will continue to have life insurance coverage as if
he had retired from employment with the Company. A Participant who suffers a
Disability before he is eligible for Retirement and elects not to continue his
life insurance coverage will be subject to the provisions of this Plan which
apply upon termination of employment.
3.3 Insurance Contract. To provide the insurance coverage under the
Plan, the Company shall acquire one or more insurance policies ("Policies") on
the life of each Participant. Except as otherwise specifically provided, the
Participant will be the owner and hold all the incidents of ownership in each
Policy for which he is designated the owner pursuant to a split dollar life
insurance agreement entered into by the Participant and the Company under this
Plan.
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<PAGE> 10
In consideration of the Company's payment of premiums on the Policy
pursuant to Section 3.9 of this Plan, the Participant will assign rights in
cash value and death benefits under the Policy to the Company as collateral
under a form of collateral assignment consistent with the terms of the Plan.
The Participant may specify in writing to the Company the Beneficiary
or Beneficiaries for his life insurance coverage under this Plan. Upon receipt
of a written request from the Participant, the Company will immediately take
such action as shall be necessary to implement such Beneficiary designation.
Any death benefits under Policies on the life of the Participant owned by the
Company that exceed the amount payable to the Participant's Beneficiary under
this Plan shall be payable to the Company.
3.4 Interests in Cash Value. The respective interests of the Company
and the Participant in the cash value of Policies which are owned by the
Participant shall be as follows:
(a) During Employment.
(i) Company's Interest in Cash Value During Employment. While the
Participant is employed with the Company, the Company's interest in the cash
value of any Policy shall be limited to the lesser of the cash value of the
Policy or the Net Cumulative Premiums paid by the Company on the Policy. The
Company shall also be entitled to increases in cash value in an amount equal to
any mortality or other expenses incurred for the benefit of the Company which
are charged against cash value of the Policy, and any such charges shall, in
turn, be deducted from the Company's interest in cash value of the Policy.
(ii) Participant's Interest in Cash Value During Employment. While
the Participant is employed with the Company, the Participant's interest in the
cash value of any Policy shall be the balance of the cash value of the Policy in
excess of the Company's interest in cash value pursuant to Section 3.4(a)(i)
above. The Participant shall at all times be 100% vested in the Participant's
interest in cash value under a Policy.
(b) After Retirement.
(i) Company's Interest in Cash Value After Retirement. The
Company's interest in the cash value of any Policy after a Participant's
Retirement will be equal to the Net Cumulative Premiums paid by the Company on
the Policy plus Credited Interest thereon after the Participant's Retirement.
Any withdrawals of cash value from the policy by the Company will reduce the
Company's interest in the cash value of the policy. The Company shall also be
entitled to increases in cash value in an amount equal to any mortality or other
expenses incurred for the benefit of the Company which are charged against cash
value of the Policy, and any such charges shall, in turn, be deducted from the
Company's interest in cash value of the Policy.
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<PAGE> 11
(ii) Participant's Interest in Cash Value After Retirement. After
a Participant's Retirement, the Participant's interest in the cash value of any
Policy shall be the balance of the cash value of the Policy in excess of the
Company's interest in cash value pursuant to Section 3.4(b)(i) above.
3.5 Policy Withdrawals and Loans.
(a) Policy Withdrawals and Loans by Company. The Company shall have
the right to make withdrawals of cash value or prepaid premiums or obtain loans
from any policy which is owned by a Participant at any time up to the Net
Cumulative Premiums paid by the Company on the Policy plus Credited Interest
thereon after the Participant's Retirement, without the prior written consent of
the Participant. The Company's death benefit under any Policy shall be reduced
by withdrawals (and the unpaid principal and interest of any loans) under the
Policy taken by the Company.
(b) Policy Withdrawals and Loans by Participant. A Participant
shall have no right to make withdrawals or obtain loans from any Policy before
his Retirement. After his Retirement, if the Company releases its collateral
assignment on the Policy, a Participant shall have the right to make withdrawals
of his interest in the cash value of any Policy (or obtain loans from the
Participant's interest in the cash value of any Policy, provided interest is
paid on such loans on an annual basis). The Participant's death benefit under
any Policy shall be reduced by withdrawals (and the unpaid principal and
interest on any loans) under the Policy taken by the Participant.
3.6 Surrender or Cancellation of Policy. In the event of the
surrender or cancellation of a Policy which is owned by a Participant, the
Participant shall be entitled to receive a portion of the cash surrender value
equal to his interest in the cash value of the Policy, unless the Company
substitutes another Policy which is satisfactory to the Participant. The
balance of the cash surrender value, if any, shall belong to the Company.
3.7 Continuation of Split Dollar Policy or Release of Collateral
Assignment After Retirement. At its option, the Company may (a) continue the
life insurance coverage for the Participant after his Retirement in the same
form and subject to the same terms and provisions of this Plan as if he
remained employed with the Company, except that the total amount of coverage
for the Participant will be the amount specified in Section 3.1(b), or (b)
withdraw its Net Cumulative Premiums paid on the Policy (plus Credited Interest
thereon after Retirement) at any time following the Participant's Retirement.
In the event the Company elects the latter, the Company shall release its
collateral assignment on the Policy.
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<PAGE> 12
3.8 Assignment. A Participant may assign, revocably or irrevocably, to
one or more individuals or trustees all or any part of his right, title, claim,
interest, benefit and all other incidents of ownership which he may have in any
Policies providing his life insurance coverage under this Plan, provided that
any such assignment shall be subject to Section 9.1 and the other terms of the
Plan. Such assignee shall then have all rights and obligations which have been
assigned and otherwise are the Participant's under this Plan. In the event that
there has been such an assignment, the term Employee or Participant shall mean
the Employee's or Participant's assignee (or any subsequent assignee) as the
context requires, in connection with ownership, actions, elections, or other
events concerning life insurance coverage on the Participant.
3.9 Payment of Premiums and Contributions.
(a) During Employment. While a Participant is employed with the
Company, the Participant will be required each year to pay for optional life
insurance coverage at such rates as the Committee may establish from time to
time. The cost for this coverage will depend on the Participant's age and amount
of coverage and may depend on insurance rating. The Company will pay the balance
of the premiums.
(b) After Retirement. Any premiums for life insurance coverage
under this Plan following a Participant's Retirement will be paid by the
Participant. The Company will not be required to pay any premiums following a
Participant's Retirement.
3.10 Form of Death Benefit. All death benefits payable on behalf of a
Participant under this Plan will be in the form of a lump sum death benefit
paid directly from the life insurance company to the Participant's Beneficiary
under a collateral assignment split dollar life insurance program.
ARTICLE IV
OPTION TO RETAIN INSURANCE POLICY ON TERMINATION OF EMPLOYMENT
If a Participant terminates employment with the Company before
Retirement, the Participant may elect, in writing received by the Company not
later than sixty (60) days after his termination of employment, to retain the
Policy providing his life insurance coverage then in effect under this Plan and
obtain release of the collateral assignment in favor of the Company by paying
the Company an amount equal to the Net Cumulative Premiums paid by the Company
on the Policy plus Credited Interest thereon after the Participant's
termination of employment with the Company. Payment must be made in cash as a
lump sum or by borrowing or withdrawing cash value from the Policy. A
Participant's life insurance coverage under this Plan will remain in effect
during this sixty (60) day period. A Participant who retains a Policy will
cease to be covered under this Plan and will thereafter be required to pay all
future premiums on the Policy.
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<PAGE> 13
If the Participant does not elect to purchase the Company's interest
in the Policy, all incidents of ownership of the Policy held by the Participant
shall be transferred to the Company. In such event the Company will pay the
Participant an amount equal to the Participant's interest in the case value in
the Policy. At the time the Participant purchases the Company's interests in
the Policy, or the Participant's incidents of ownership are transferred to the
Company, the Company shall have no further legal or equitable obligations of
any kind to the Participant under this Plan.
ARTICLE V
OPTION TO RETAIN INSURANCE POLICY IN CERTAIN EVENTS
5.1 Option to Retain Policy. The Participant may elect, in writing
received by the Company not later than sixty (60) days after the Participant
receives written notice from the Company of an event described in Section 5.2,
to retain the Policy providing his life insurance coverage then in effect under
this Plan for an amount equal to the Net Cumulative Premiums paid by the
Company on the Policy plus Credited Interest thereon after the Participant's
Retirement. A Participant who purchases a Policy will cease to be covered
under this Plan and will thereafter be required to pay all future premiums on
the Policy.
5.2 Elimination of Coverage. Any Participant whose coverage is
eliminated pursuant to Article VIII of this Plan (without being replaced with
an equivalent amount of coverage under another plan of the Company) shall have
the option pursuant to Section 5.1 to purchase the Policy providing his life
insurance coverage in effect under this Plan immediately prior to the
elimination of such coverage.
5.3 Change in Control. For purposes of this Plan the term "Change in
Control" shall mean:
(a) the occurrence with respect to Mellon Bank Corporation ("MBC")
of a "control transaction", as such term is defined in Section 2542 of the
Pennsylvania Business Corporation Law of 1988 as of August 15, 1989; or
(b) approval by the stockholders of MBC of (i) any merger or
consolidation of MBC in which the holders of voting stock of MBC immediately
before the merger or consolidation will not own fifty percent (50%) or more of
the voting shares of the continuing or surviving corporation immediately after
such merger or consolidation, or (ii) any sale, lease or exchange or other
transfer (in one transaction or a series of related transactions) of all or
substantially all the assets of MBC; or
(c) a change of twenty-five percent (25%) (rounded to the next
whole person) in the membership of the Board of Directors of MBC within a
twelve (12) month period, unless
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<PAGE> 14
the election or nomination for election by stockholders of each new director
within such period was approved by the vote of eighty-five percent (85%)
(rounded to the next whole person) of the directors then still in office who
were in office at the beginning of the twelve (12) month period.
Notwithstanding any other provision of this Plan, without the written
consent of the Participant (or Beneficiary of a deceased Participant) affected
thereby, the Company may not amend or terminate this Plan, except to comply
with legal requirements:
(a) for a period of twenty-four (24) months following a Change in
Control; or
(b) at any time thereafter, in any manner which affects any
Participant (or Beneficiary of a deceased Participant) who receives payments of
benefits under this Plan or has a termination of employment for any reason at
any time during the period of twenty-four (24) months following the Change in
Control.
ARTICLE VI
BENEFICIARY DESIGNATION
6.1 Designation of Beneficiary. Each Participant (or his assignee in
the case of an assignment of the Participant's life insurance coverage pursuant
to Section 3.5 of this Plan) shall have the right to designate a Beneficiary or
Beneficiaries to whom payment of the Participant's death benefit under this
Plan shall be made in the event of the Participant's death. Such designation
shall be made on a form prescribed by and delivered to the Company. Except
where such designation is irrevocable, the Participant shall have the right to
change or revoke any such designation from time to time by filing a new
designation or notice of revocation with the Company, and no notice to any
Beneficiary nor consent by any Beneficiary shall be required to effect any such
change or revocation.
6.2 Failure to Designate Beneficiary. If a Participant shall fail to
designate a Beneficiary before his demise, or if no designated Beneficiary
survives the Participant, the Committee shall direct the Company to make
payment under this Plan to the executor or administrator for the Participant's
estate.
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ARTICLE VII
ADMINISTRATION
7.1 Administrator. Except as hereinafter provided, the Committee shall
be responsible for the administrative responsibilities hereinafter described
with respect to the Plan. Whenever any action is required or permitted to be
taken in the administration of the Plan, such action shall be taken by the
Committee unless the Committee's power is expressly limited herein or by
operation of law. The Committee shall be the Plan "Administrator" (as such term
is defined in Section 3(16)(A) of ERISA). The Committee may delegate its duties
and responsibilities as it, in its sole discretion, deems necessary or
appropriate to the execution of such duties and responsibilities. The Committee
as a whole or any of its members may serve in more than one capacity with
respect to the Plan.
7.2 Powers and Duties. The Committee, or its delegates, shall maintain
and keep (or cause to be maintained and kept) such records as are necessary for
the efficient operation of the Plan or as may be required by any applicable
law, regulation, or ruling and shall provide for the preparation and filing of
such forms, reports, information, and documents as may be required to be filed
with any governmental agency or department and with the Plan's Participants
and/or other Beneficiaries.
Except to the extent expressly reserved to the Company or the Board,
the Committee shall have all powers necessary to carry out the administrative
provisions of the Plan and to satisfy the requirements of any applicable law or
laws. These powers shall include, by way of illustration and not limitation,
the exclusive powers and discretionary authority necessary to:
(a) construe and interpret the Plan; decide all questions of
eligibility; decide all questions of fact relating to claims for benefits; and
determine the amount, time, manner, method, and mode of payment of any benefits
hereunder;
(b) direct the Company and/or the trustee of any trust established
at the discretion of the Company to provide for the payment of benefits under
the Plan, concerning the amount, time, manner, method, and mode of payment of
any benefits hereunder;
(c) prescribe procedures to be followed and forms to be used by
Participants and/or other persons in filing applications or elections;
(d) prepare and distribute, in such manner as may be required by
law or as the Committee deems appropriate, information explaining the Plan;
provided, however, that no such explanation shall contravene the terms of this
Plan or increase the rights of any Participant or Beneficiary or the
liabilities of the Company;
-11-
<PAGE> 16
(e) require from the Company and Participants such information as
shall be necessary for the proper administration of the Plan;
(f) appoint and retain individuals to assist in the administration
and construction of the Plan, including such legal, clerical, accounting, and
actuarial services as it may require or as may be required by any applicable
law or laws; and
(g) perform all functions otherwise imposed upon a plan
administrator by ERISA which are not expressly reserved to the Company or the
Board, including, but not limited to, those supplemental duties and
responsibilities described in the "Mellon Bank Corporation Corporate Benefits
Committee Charter and Summary of Operations" approved by the Board on September
17, 1991 (the "CBC" Charter).
Without intending to limit the generality of the foregoing, the
Committee shall have the power to amend the Plan, in whole or in part, in order
to comply with applicable law; provided, however, that no such amendment may
increase the duties and obligations of the Company without its consent. Except
as provided in the preceding sentence or unless directed by the Human Resources
Committee of the Board or otherwise required by law, the Committee shall have
no power to adopt, amend, or terminate the Plan, said powers being exclusively
reserved to the Human Resources Committee of the Board.
7.3 Procedures. The Committee shall be organized and conduct its
business with respect to the Plan in accordance with the organizational and
procedural rules set forth in the CBC Charter.
Notwithstanding the foregoing, if any member of the Committee shall be
a Participant hereunder, then in any matters affecting any member of the
Committee in his individual capacity as a Participant hereunder, separate and
apart from his status as a member of the group of Participants, such interested
member shall have no authority to vote in the determination of such matters as
a member of the Committee, but the Committee shall determine such matter as if
said interested member were not a member of the Committee; provided, however,
that this shall not be deemed to take from said interested member any of his
rights hereunder as a Participant. If the remaining members of the Committee
should be unable to agree on any matter so affecting an interested member
because of an equal division of voting, the Human Resources Committee of the
Board shall appoint a temporary member of the Committee in order to create an
odd number of voting members.
7.4 Establishment of Rules. The Committee shall have specific
authority in its sole discretion to construe and interpret the terms of the
Plan related to its powers and duties, and to the extent that the terms of the
Plan are incomplete, the Committee shall have authority to establish such rules
or regulations related to its powers and duties as it may deem necessary and
proper to carry out the intent of the Company as to the purposes of the Plan.
-12-
<PAGE> 17
7.5 Limitation of Liability. The Board, the members of the Committee,
and any officer, employee, or agent of the Company shall not incur any
liability individually or on behalf of any other individuals or on behalf of
the Company for any act, or failure to act, made in good faith in relation to
the Plan. No bond or other security shall be required of any such individual
solely on account of any individual's power to direct the Company to make the
payments required hereunder.
7.6 Compensation and Insurance. Members of the Committee shall serve
without compensation for their services as such. Expenses incurred by members
of the Committee in the performance of their duties as herein provided, and the
compensation and expenses of persons retained or employed by the Committee for
services rendered in connection with the Plan shall, upon approval by the
Committee, be paid or reimbursed by the Company.
The Company shall indemnify and/or maintain and keep in force
insurance in such form and amount as may be necessary in order to protect the
members of the Committee, their delegates and appointees (other than persons
who are independent of the Company and are rendering services to the Committee
or to or with respect to the Plan) from any claim, loss, damage, liability, and
expense (including costs and attorneys' fees) arising from their acts or
failures to act with respect to the Plan, except where such actions or failures
to act involve willful misconduct or gross negligence.
7.7 Removal and Resignation. Any member of the Committee may resign
and the Company may remove any member of the Committee in accordance with the
procedures established by the CBC Charter. The Committee shall remain fully
operative pending the filling of any vacancies, the remaining committee members
having full authority to administer the Plan.
7.8 Claims Procedure. The right of any Participant or Beneficiary to
receive a benefit hereunder and the amount of such benefit shall be determined
in accordance with the procedures for determination of benefit claims
established and maintained by the Committee in compliance with the requirements
of Section 503 of ERISA; which separate procedures, entitled Procedures for
Determination of Benefit Claims, are incorporated herein by this reference.
ARTICLE VIII
Amendment and Termination of Plan
Subject to the limitations of Article V, the Human Resources Committee
of the Board may at any time amend or terminate the Plan in whole or in part.
Except as provided below or in Article V, the Company is not obligated to
continue any benefit, any insurance or any insurance policy after such action.
Written notice of any amendment or termination of the Plan shall be given to
each affected Participant in the Plan.
-13-
<PAGE> 18
ARTICLE IX
Miscellaneous
9.1 Restriction on Assignment. The Participant may assign all or any
part of his right, title, claim, interest, benefit and all other incidents of
ownership which he may have in any life insurance coverage under this Plan,
provided that any such assignment shall be subject to the terms of the Plan.
9.2 Tax Liability and Withholding. A Participant may have income for
federal, state or local income tax purposes by reason of the Economic Benefit
of his insurance coverage provided by the Company under this Plan, both while
he is employed with the Company and after his Retirement or termination of
employment. The Participant and any Beneficiary shall make appropriate
arrangements with the Company for the satisfaction of any federal, state or
local income tax withholding requirements and Social Security or other employee
tax requirements applicable to the provision of benefits under this Plan. If no
other arrangements are made, the Company may provide, at its discretion, for
such withholding and tax payments as may be required.
9.3 ERISA Plan. This Plan is covered by Title I of the Employee
Retirement Income Security Act of 1974 ("ERISA") as a welfare benefit plan. The
Company is the "named fiduciary" of the Plan for purposes of Section 402(a)(2)
of ERISA.
9.4 Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Employee any right to be retained in employment with the Company.
9.5 Protective Provisions. Each Participant shall cooperate with the
Company by furnishing any and all information requested by the Company in order
to facilitate the payment of benefits hereunder, taking such physical
examinations as the Company may deem necessary and taking such other relevant
action as may be requested by the Company. If a Participant refuses so to
cooperate, the Company shall have no further obligation to the Participant or
his Beneficiary under the Plan. If a Participant makes any material
misstatement of information or nondisclosure of medical history, then no
benefits will be payable hereunder to such Participant's Beneficiary, provided,
that in the Company's sole discretion, benefits may be payable in an amount
reduced to compensate the Company for any loss, cost, damage or expense
suffered or incurred by the Company as a result in any way of any such action,
misstatement or nondisclosure.
9.6 Gender, Singular & Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the identity
or the person or persons
-14-
<PAGE> 19
may require. As the context may require, the singular may be read as the plural
and the plural as the singular.
9.7 Captions. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
9.8 Validity. In the event any provision of this Plan is held invalid,
void or unenforceable, the same shall not affect, in any respect whatsoever,
the validity of any other provisions of this Plan, and this Plan shall be
deemed to be modified to the least extent possible to make it valid and
enforceable in its entirety.
9.9 Notices and Elections. Any notice or election required or
permitted to be given to the Company or the Committee under the Plan shall be
sufficient if in writing and hand delivered, or sent by registered or certified
mail, to the principal office of the Company, directed to the attention of the
Human Resources Department of the Company. Such notice or election shall be
deemed given as of the date of delivery or, if delivery is made by mail, as of
the date shown on the postmark on the receipt for registration or
certification.
9.10 Applicable Law. This Plan shall be construed, regulated and
administered in accordance with the laws of the Commonwealth of Pennsylvania,
except insofar as state law is preempted by ERISA.
9.11 Waiver of Breach. The waiver by the Company of any provision of
this Plan shall not operate or be construed as a waiver of any subsequent
breach by the Participant.
9.12 Benefit. The rights and obligations of the Company under this
Plan shall inure to the benefit of, and shall be binding upon, the successors
and assigns of the Company.
Amended effective September 16, 1997
-15-
<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
Mellon Bank Corporation (parent Corporation) (a)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(dollar amounts in thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes and equity in
undistributed net income (loss) of subsidiaries $173,207 $ 87,277 $224,735 $266,816
Fixed charges: interest expense, one-third of
rental expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 44,193 25,960 131,627 75,510
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $217,400 $113,237 $356,362 $342,326
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ 6,432 $ 15,474 $ 26,281 $ 46,417
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 4.92 4.36 2.71 4.53
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends 4.29 2.73 2.26 2.81
- ----------------------------------------------------------------------------------------------------------------------------------
</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, and Mellon Capital I and Mellon
Capital II, special purpose business trusts formed by the Corporation, that
exist solely to issue Capital Securities. Because these ratios exclude from
earnings the equity in undistributed net income (loss) of subsidiaries,
these ratios vary with the payment of dividends by such subsidiaries.
(b) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
62
<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
Mellon Bank Corporation (and its subsidiaries)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(dollar amounts in thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes $306,338 $287,015 $ 902,752 $ 849,926
Fixed charges: interest expense (excluding
interest on deposits), one-third of rental
expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 125,520 99,856 365,105 303,226
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined), excluding
interest on deposits 431,858 386,871 1,267,857 1,153,152
Interest on deposits 220,143 228,789 653,686 662,711
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $652,001 $615,660 $1,921,543 $1,815,863
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (a) $ 6,432 $ 15,474 $ 26,281 $ 46,417
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.44 3.87 3.47 3.80
Including interest on deposits 1.89 1.87 1.89 1.88
Ratio of earnings (as defined) to combined
fixed charges and preferred stock dividends:
Excluding interest on deposits 3.27 3.35 3.24 3.30
Including interest on deposits 1.85 1.79 1.84 1.79
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
63
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,032
<INT-BEARING-DEPOSITS> 512
<FED-FUNDS-SOLD> 219
<TRADING-ASSETS> 88
<INVESTMENTS-HELD-FOR-SALE> 3,354
<INVESTMENTS-CARRYING> 2,168
<INVESTMENTS-MARKET> 2,195
<LOANS> 28,279
<ALLOWANCE> 505
<TOTAL-ASSETS> 43,465
<DEPOSITS> 30,189
<SHORT-TERM> 3,504
<LIABILITIES-OTHER> 2,190
<LONG-TERM> 2,814
990<F1>
193
<COMMON> 147
<OTHER-SE> 3,438
<TOTAL-LIABILITIES-AND-EQUITY> 43,465<F1>
<INTEREST-LOAN> 1,691
<INTEREST-INVEST> 289
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 2,031
<INTEREST-DEPOSIT> 654
<INTEREST-EXPENSE> 925
<INTEREST-INCOME-NET> 1,106
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,839
<INCOME-PRETAX> 903
<INCOME-PRE-EXTRAORDINARY> 903
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 576
<EPS-PRIMARY> 2.14<F2>
<EPS-DILUTED> 2.13<F2>
<YIELD-ACTUAL> 4.30
<LOANS-NON> 102
<LOANS-PAST> 116
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 525
<CHARGE-OFFS> 133
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 505
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>This tag includes $990 million of Guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures.
<F2>A two-for-one common stock split was distributed to shareholders of record on
June 2, 1997. Prior Financial Data Schedules have not been restated for this
recapitalization.
</FN>
</TABLE>
